Exhibit 99.2
OPERATING AND FINANCIAL REVIEW AND PROSPECTS AT AND FOR
THE THREE AND NINE MONTHS ENDED 31 DECEMBER 2002
References to "we", "us", "our", "Yell", and the "Yell Group" are to Yell
Finance B.V., a company incorporated with limited liability under the law of the
Netherlands, and its consolidated subsidiaries, except as otherwise indicated;
and with respect to periods prior to 22 June 2001, these terms also refer to
Yellow Pages and Yellow Book businesses and companies acquired from British
Telecommunications plc ("BT"). References to "McLeod" or "Yellow Book West" are
to McLeodUSA Media Group, Inc. and its subsidiaries acquired on 16 April 2002.
The following information should be read in conjunction with the unaudited
financial information for the Yell Group as of and for the three and nine months
ended 31 December 2002. The attached financial information has been prepared in
accordance with accounting principles generally accepted in the United Kingdom
("UK GAAP"). UK GAAP differs in certain important respects from accounting
principles generally accepted in the United States ("US GAAP").
The following discussion compares our aggregated results for the predecessor
period from 1 April to 22 June 2001 and the successor period from 22 June to 31
December 2001 with our consolidated successor results for the nine months ended
31 December 2002. The predecessor combined results of the Yell Group for the
periods up to and including 22 June 2001 represent an aggregation of the
historical results of the Yellow Pages and Yellow Book businesses and companies,
as if the Yell Group had been formed as a discrete operation throughout those
periods. The successor consolidated results of the Yell Group represent a
consolidation of the financial information of Yell Finance B.V. and its
subsidiaries after the acquisition.
INTRODUCTION
The Yell Group is the leading provider of classified directory advertising and
associated products and services in the United Kingdom and a leading independent
provider of classified directory advertising in the United States.
The Yell Purchase from BT
The Yell Group has operated as an independent group since 22 June 2001, the date
the businesses and companies comprising the Yell Group were purchased from BT.
The purchase has had a significant effect on the financial results for the
periods following the purchase. In particular, we borrowed (pound)2,099.0
million to fund the purchase, which has led to a significant increase in
interest payable. The (pound)1,235.9 million increase in goodwill has given rise
to a significant increase in the amortisation charge. Taking into account the
increased goodwill amortisation and the increased interest charge, including the
non-cash accrual of interest payable to certain investors, we have reported net
losses for periods following the purchase.
The Yellow Book West Acquisition
On 16 April 2002, we acquired McLeod, one of the largest independent directory
publishers in the United States, for $600.0 million ((pound)417.0 million) plus
expenses giving rise to $482.8 million ((pound)335.5 million) of goodwill. The
results of operations of McLeod, which we now refer to as Yellow Book West, are
included in our results from the date of acquisition on 16 April 2002.
The acquisition of Yellow Book West doubled our geographic footprint to
approximately 520 markets in 38 states and Washington, DC. We believe that the
integration of Yellow Book West into the Yell Group will allow us to continue,
over time, to improve our sales force utilisation and management in contiguous
1
or overlapping markets, achieve significant cost savings through an improvement
in volume discounts for general expenses, such as paper, pre-press costs and
printing, transfer the strengths and best practices of both Yell and Yellow Book
East and provide a more attractive and broader base for high-value national
advertisers. Yell has already begun during the first nine months of the
financial year to see benefits of the acquisition, particularly with respect to
cost savings, but we expect that most of the benefits will arise in later
periods.
Although our US operations operate under one management team and we are in the
process of integrating all of our US operations, some operational and financial
information is currently presented separately for the Yellow Book East, formerly
Yellow Book, and Yellow Book West geographic regions to highlight the effect of
the Yellow Book West operations on the comparative presentations and discussions
of financial and operational information. As a result of the integration between
Yellow Book East and Yellow Book West, we expect to report all of our US
operations as one business from the start of the 2004 financial year.
The Acquisition of National Directory Company
On 31 December 2002, we acquired National Directory Company ("NDC"), a leading
independent publisher of Yellow Pages in the Southwestern United States, for
$69.0 million ((pound)42.9 million). The acquisition resulted in goodwill of
$48.2 million ((pound)30.0 million). The amount of goodwill reflects
management's preliminary determination of the fair values to be recorded on that
date. The results of a fuller evaluation of fair values and differences in
accounting policies between NDC and Yell Group in the last quarter of the 2003
financial year is likely to require management to adjust the amount of goodwill
in future periods. The acquisition gives us a significant profile in the
service-based markets in which NDC operates. Following the Yellow Book West
acquisition earlier in 2002, the NDC acquisition means that we have a US
presence in 40 states and Washington, DC.
2
SUMMARY RESULTS
THREE MONTHS ENDED 31 NINE MONTHS ENDED
DECEMBER 31 DECEMBER
--------------------------- --------------------------------------
2001 2002 CHANGE 2001(1) 2002 CHANGE
(%) AGGREGATED (%)
((POUND)IN MILLIONS) ((POUND)IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------
Group turnover 202.7 256.2 26.4% 598.0 787.1 31.6%
Cost of sales (95.0) (119.1) 25.4% (253.9) (352.9) 39.0%
---------------------------- --------------------------------------
Gross profit 107.7 137.1 27.3% 344.1 434.2 26.2%
Distribution costs (5.4) (8.1) 50.0% (16.5) (25.6) 55.2%
Administrative costs (78.0) (90.8) 16.4% (221.4) (279.5) 26.2%
---------------------------- --------------------------------------
OPERATING PROFIT BEFORE
EXCEPTIONAL ITEMS 24.3 38.2 57.2% 109.2 144.1 32.0%
Exceptional administrative
costs - - (3.0) (15.0) 400.0%
---------------------------- --------------------------------------
OPERATING PROFIT 24.3 38.2 57.2% 106.2 129.1 21.6%
==============================================================================================================================
Gross profit margin (%) 53.1% 53.5% 57.5% 55.2%
EBITDA(2) 50.7 69.1 36.3% 170.9 219.7 28.6%
Adjusted EBITDA(3) 50.7 69.1 36.3% 173.9 234.7 35.0%
Adjusted EBITDA margin (%) 25.0% 27.0% 29.1% 29.8%
Cash inflow from operations 45.8 79.0 72.5% 132.8 222.9 67.8%
excluding exceptional
items, less capital
expenditures
Cash conversion (%)(4) 90.3% 114.3% 76.4% 95.0%
- ----------------
(1) Includes the predecessor results through 22 June 2001 and the
successor results through 31 December 2001 as analysed in the
accompanying unaudited financial information.
(2) EBITDA comprises total operating profit, before depreciation and
amortisation. The EBITDA disclosed here is not necessarily comparable
to EBITDA disclosed by other companies because EBITDA is not
uniformly defined. We believe that EBITDA is a relevant measure used
by companies to assess performance which attempts to eliminate
variances caused by the effects of differences in taxation, the
amount and types of capital employed and depreciation and
amortisation policies. EBITDA should not be considered by investors
as an alternative to group operating profit or profit on ordinary
activities before taxation, as an indicator of operating performance
or as an alternative to cash flow from operating activities. See
"Group Operating Profit, EBITDA and Adjusted EBITDA".
(3) Adjusted EBITDA comprises EBITDA as described above adjusted to
exclude the expenses of the withdrawn initial public offering of
(pound)15.0 million in the nine months ended 31 December 2002 (2001 -
(pound)nil). Further, EBITDA has been adjusted to exclude the
expenses of the management incentive plan of (pound)3.0 million in
the nine months ended 31 December 2001 as the plan was terminated as
part of the Yell Purchase. Adjusted EBITDA is not a measure of
financial performance under UK GAAP. However we believe it is a
relevant measurement with which to assess our underlying performance.
(4) Cash conversion represents cash inflow from operations, excluding
exceptional items, less capital expenditures as a percentage of
Adjusted EBITDA. We believe cash conversion is a relevant measure
used by companies to assess performance as it gives a relative
measure of the efficiency with which EBITDA is converted into cash.
Cash conversion should not be considered by investors as an
alternative to group operating profit or profit on ordinary
activities before taxation, as an indicator of operating performance
or as an alternative to cash flow from operating activities. See
"Group Operating Profit, EBITDA and Adjusted EBITDA".
3
YELL GROUP OPERATIONAL INFORMATION
NINE MONTHS ENDED
31 DECEMBER
-----------------------------
2001 2002
AGGREGATED
---------------- ------------
UK printed directories
Unique advertisers (units) (1)............................................ 321,320 332,103
Number of directories published (units)................................... 62 67
Unique advertiser retention rate (%) (2).................................. 80 79
Turnover per unique advertiser ((pound)).................................. 1,184 1,221
US printed directories (Yellow Book East)(3)
Unique advertisers (units) (1) ........................................... 102,332 116,629
Number of directories published (units)................................... 192 180
Unique advertiser retention rate (%) (2) ................................. 70 70
Turnover per unique advertiser ($)........................................ 2,614 2,696
US printed directories (Yellow Book West)
Unique advertisers (units) (1) ........................................... - 185,800
Number of directories published (units)................................... - 204
Unique advertiser retention rate (%) (2).................................. - 72
Turnover per unique advertiser ($)(4)..................................... - 1,292
Other UK products and services
Yell.com page impressions for December (in millions) (5).................. 22 30
- -----------------
(1) Number of unique advertisers in printed directories that were
recognised for revenue purposes and have been billed. Unique
advertisers are counted only once regardless of the number of
advertisements they purchase or the number of directories in which
they advertise.
(2) Proportion of unique advertisers that have renewed their advertising
from the preceding publication. In the United Kingdom, this measure
excludes national and key accounts where retention is very high. In
the United States this measure is based on unique directory
advertisers. In 2002 we improved our systems and methodology for
determining retention rates in the United Kingdom. Although we have
not restated the rates disclosed for the prior period, we believe
that had we continued using the previous methodology the retention
rate for the first nine months of this financial year would be
closely comparable to the rate disclosed for the same period in the
prior financial year.
(3) Data for unique advertisers and turnover per unique advertiser differ
from previously reported numbers following further integration of our
Yellow Book East information systems which eliminated duplication in
calculating the number of unique advertisers. This restatement has
had no effect on the Group's reported earnings.
(4) The financial results of Yellow Book West have been included in the
Yell Group's results from the date of its acquisition on 16 April
2002. Operational information for Yellow Book West is provided for
the period from 16 April 2002, with the exception of turnover per
unique advertiser which is based on the full nine months from 1 April
2002.
(5) A file or a combination of files sent to a user as a result of that
user's request being received by the server.
4
TURNOVER
THREE MONTHS ENDED 31 NINE MONTHS ENDED
DECEMBER 31 DECEMBER
------------------------- --------------------------------
2001 2002 CHANGE 2001 (1) 2002 CHANGE
(%) AGGREGATED (%)
((POUND)IN MILLIONS) ((POUND)IN MILLIONS)
- ------------------------------------------- ------------------------- ---------- -------------------------------- ------------
UK printed directories:
Yellow Pages 110.1 118.9 8.0% 370.6 396.7 7.0%
Business Pages - - 10.0 8.7 -13.0%
------------- ----------- --------------------- ----------
Total UK printed directories 110.1 118.9 8.0% 380.6 405.4 6.5%
US printed directories
------------- ----------- --------------------- ----------
Yellow Book East at constant
exchange rates (2) 81.5 85.0 4.3% 186.7 219.6 17.6%
Exchange impact (2) - (6.9) - (14.7)
------------- ----------- --------------------- ----------
Yellow Book East 81.5 78.1 -4.2% 186.7 204.9 9.7%
Yellow Book West - 47.6 - 145.4
------------- ----------- --------------------- ----------
Total US printed directories 81.5 125.7 54.2% 186.7 350.3 87.6%
Other UK products and services 11.1 11.6 4.5% 30.7 31.4 2.3%
------------- ----------- --------------------- ----------
GROUP TURNOVER 202.7 256.2 26.4% 598.0 787.1 31.6%
=========================================== ============= =========== ========== ===================== ========== ============
- -----------------
(1) Includes the predecessor results through 22 June 2001 and the
successor results through 31 December 2001.
(2) Constant exchange rates state current year results at the same
exchange rate as that used to translate the previous year's results
for the corresponding period. Exchange impact is the difference
between the results reported at constant exchange rate and the actual
results reported using current year exchange rates.
Group
Total Group turnover during the nine months increased by (pound)189.1 million,
or 31.6%, compared to the same period last year, reflecting the Yellow Book West
acquisition and increased turnover during the nine month period from UK printed
directories and Yellow Book East.(1)
Excluding the turnover from Yellow Book West, total Group turnover increased by
(pound)43.7 million, or 7.3%. This increase includes the negative exchange-rate
effect of the stronger pound sterling on Yellow Book East's reported turnover.
If Yellow Book East's turnover was included at prior year exchange rates, then
total Group turnover (excluding Yellow Book West) would have grown by
(pound)58.4 million or 9.8%.
- -----------------------------
1 Throughout this report, unless otherwise indicated, references to
"for the nine months" or the "nine-month period" are to the nine
months ended 31 December 2002 and references to "last year" or the
"prior period" are to the corresponding period in the previous
financial year.
5
UK printed directories
Yellow Pages turnover for the nine months increased by 7.0%, or (pound)26.1
million, despite the new price cap(2) of RPI minus 6% which was in effect for
the period.
This growth was the result of:
o a further increase in the number of unique advertisers, from 321,320
to 332,103, as a result of the continued success of our first-year
advertiser discount programmes and our ability to retain 79% of
existing customers. We attracted 71,466 new advertisers in the first
nine months and are on track to meet our target of 100,000 new
advertisers this financial year for the third successive year;
o continuing strong advertiser yield driven by a 19.4% take-up by
unique advertisers of colour advertising and initiatives such as
"Move Up" and "Move In". "Move Up" offers discounts to advertisers
trading up to larger advertisements, and "Move In", in addition to
attracting additional customers, has provided additional turnover as
compared to our previous programme by offering first-year advertisers
discounts to take out larger advertisements. As a result, turnover
per unique advertiser rose to (pound)1,221 from (pound)1,184 after
the impact of price reductions;
In addition, we introduced five new directories through rescoping or redefining
the geographic coverage of some of our directories, which we believe will allow
us to attract new advertisers and additional advertising by aligning the
geographic coverage of our directories more closely to the target market areas
of our advertisers.
We will seek to continue to increase volumes and yield in the United Kingdom by
pursuing innovative product initiatives. For example, the national roll-out of
new offers to advertisers renewing for the first time to encourage retention
began in October 2002.
For the full nine-month period Business Pages directories experienced a
(pound)1.3 million decrease in turnover as compared to the prior period. No
Business Pages directories were published in the third quarter. We have plans to
address the reduction in sales in Business Pages.
US printed directories
Turnover from US printed directories almost doubled to (pound)350.3 million from
(pound)186.7 million, reflecting a strong performance by Yellow Book East and
the inclusion of Yellow Book West for the first time.
- --------------------------
2 Pursuant to undertakings given to the UK Secretary of State for Trade
and Industry in July 1996, we were required to cap the change in
advertising rates charged through 31 December 2001 in our UK printed
consumer classified directories by the UK Retail Price Index ("RPI")
minus 2%. Effective from January 2002, we are required to cap the
change in rates charged for advertising sold after that date in our
UK printed consumer classified directories at RPI minus 6% for an
expected period of four years from January 2002. During the nine
months ended 31 December 2002, the average price of advertising in
our Yellow Pages directories decreased by 4.4%, as compared to the
same period of the prior year. We are not subject to any regulatory
price constraints in the United States. The relevant price cap
applied to approximately 62% and 50% of our Group turnover in the
nine months ended 31 December 2001 and 2002, respectively.
6
Yellow Book East. Yellow Book East grew turnover by 9.7% as reported in pounds
sterling from (pound)186.7 million to (pound)204.9 million. The results were
affected by a weakening US dollar, which had a negative impact of (pound)14.7
million. On a constant US dollar basis, Yellow Book East turnover grew by
(pound)32.9 million ($46.9 million), or 17.6%, comprising:
o same-market growth(3) of 6.8% in the nine months, excluding
the Manhattan directory which was directly affected by
September 11, which contributed (pound)11.2 million ($16.0
million), or 35%, of the growth. Same-market growth
including this directory was 5.7%. Three other directories
contiguous to Manhattan, which were published in the first
half of the financial year, were also affected by reduced
cross-selling into Manhattan following September 11;
o the strong performance of three new launches and two books
in their first year following prototype publication last
year, which together contributed (pound)12.6 million ($18.0
million), or 39%, of the growth;
o an additional (pound)6.3 million ($9.0 million) in
revenues, or 19%, of the growth from rescopes which could
not be included in same-market growth as the original
directories did not cover materially the same geographic
scope;
o the planned movement of books, as previously reported,
primarily from the third quarter to the second quarter, so
as to achieve a smoother production schedule had a
(pound)1.8 million ($2.5 million) positive net effect in
the nine month period, but had a negative (pound)7.7
million ($11.0 million) effect in the third quarter; and
o first time publication of certain directories following
their acquisition contributed an additional (pound)1.0
million ($1.4 million).
The 14.0% increase in the number of unique advertisers from 102,332 to 116,629
reflects same-market growth and new launches, as well as the rescheduling of
books. Average turnover per unique advertiser grew 3.1% from $2,614 to $2,696.
Yellow Book West. Turnover from the acquired McLeod operations was (pound)145.4
million for the period from its acquisition on 16 April 2002 through 31 December
2002. Same-market growth during this period for the Yellow Book West directories
was 2.1%. Yellow Book West's contribution to Yell's turnover during the period
was still largely the result of sales made by the McLeod sales organisation
prior to or shortly after the McLeod acquisition by Yell. The results therefore
do not reflect the benefit of integration with the Yellow Book East sales
organisation, which we do not expect to come through before the first quarter of
the 2004 financial year.
- -----------------------
3 Same-market growth is derived by comparing the turnover from
directories (including rescoped directories) that we published in a
period with turnover from these same directories or predecessor
directories covering substantially the same geographic area published
in the previous publishing cycle, which is not necessarily the same
period in the prior financial year. Rescoped directories are
directories where we redefined the geographic boundaries covered by
one or more directories, which could include replacing one directory
with multiple directories or combining multiple directories into
fewer directories.
7
Other UK products and services
Turnover from other products and services during the nine months increased by
(pound)0.7 million, or 2.3% compared to last year. This was due primarily to
growth in Yell.com, our online directory service, which grew from (pound)10.6
million in the prior year to (pound)14.8 million during the nine months ended 31
December 2002. Growth in Yell.com more than offset a decline in turnover from
Talking Pages and Yell Data.
COST OF SALES
THREE MONTHS ENDED 31 NINE MONTHS ENDED
DECEMBER 31 DECEMBER
------------------------- -----------------------------
2001 2002 CHANGE 2001(1) 2002 CHANGE
(%) AGGREGATED (%)
((POUND)IN MILLIONS) ((POUND)IN MILLIONS)
- ----------------------------------------- ------------------------- ------------ ----------------------------- ------------
UK printed directories:
Yellow Pages 43.7 46.7 6.9% 131.8 141.3 7.2%
Business Pages - - 3.4 2.9 -14.7%
------------ ------------ ---------------- ------------
Total UK printed directories 43.7 46.7 6.9% 135.2 144.2 6.7%
US printed directories
------------ ------------ ---------------- ------------
Yellow Book East at
constant exchange rates (2) 45.7 45.8 0.2% 105.6 122.8 16.3%
Exchange impact(2) - (3.7) - (8.1)
------------ ------------ ---------------- ------------
Yellow Book East 45.7 42.1 -7.9% 105.6 114.7 8.6%
Yellow Book West - 25.0 - 81.9
------------ ------------ ---------------- ------------
Total US printed directories 45.7 67.1 46.8% 105.6 196.6 86.2%
Other UK products and services 5.6 5.3 -5.4% 13.1 12.1 -7.6%
------------ ------------ ---------------- ------------
Total cost of sales 95.0 119.1 25.4% 253.9 352.9 39.0%
========================================= ============ ============ ============ ================ ============ ============
- ----------------
(1) Includes the predecessor results through 22 June 2001 and the
successor results through 31 December 2001.
(2) Constant exchange rates state current year results at the same
exchange rate as that used to translate the previous year's results
for the equivalent period. Exchange impact is the difference between
the results reported at constant exchange rate and the actual results
reported using current year exchange rates.
Our cost of sales consists principally of costs associated with the publication
of directories, including advertising sales, paper, printing and pre-press
production, as well as bad debt expense. The principal components of advertising
sales costs, which represent a significant portion of our cost of sales, are
employee costs of the sales force, including salaries, benefits and commissions,
and associated direct costs.
In general, we recognise the cost of sales for each directory on completion of
delivery of that directory.
Total cost of sales during the nine months increased by (pound)99.0 million
compared to last year. The acquisition of McLeod accounts for (pound)81.9
million of the increase.
The (pound)9.0 million, or 6.7%, increase in cost of sales for UK printed
directories reflected higher advertisement volumes and increases in printing and
production costs associated with the introduction of colour into our Yellow
Pages directories. As a percentage of turnover from UK printed directories, cost
of sales for UK printed directories was 35.6%, as compared to 35.5% for the
corresponding period in the prior financial year.
The (pound)9.1 million, or 8.6%, increase in cost of sales for Yellow Book East
directories was due to increased selling costs associated with revenue growth
and a reclassification of certain administrative costs to align policies across
8
the Yell Group. Yellow Book East's cost of sales for the third quarter as
reported in pounds sterling was positively affected by a weakening US dollar,
which had an impact of (pound)8.1 million. Cost of sales for Yellow Book East
directories as a percentage of related turnover was 56.0%, as compared to 56.6%
for the corresponding period in the prior financial year.
We continue to realise synergies arising from the Yellow Book West acquisition,
particularly in paper and printing and binding costs where we have achieved
estimated savings to date of approximately (pound)4.7 million ($7.2 million).
Cost of sales for other products and services during the nine months ended 31
December 2002 was (pound)1.0 million lower than during the same period in the
prior year.
Our consolidated bad debt expense was (pound)44.7 million or 5.7% of Group
turnover in the nine month period as compared to (pound)32.3 million or 5.4%
last year. The (pound)12.4 million increase is mainly due to the acquisition of
Yellow Book West. The charge for UK bad debts was 4.3% of UK printed directories
and other products and services turnover compared to a 4.0% charge last year.
The US bad debt expense was 7.4% of US printed directories turnover as compared
to 8.4% last year. Historically, the US bad debt expense as a percentage of
turnover has been higher than in the United Kingdom due to different market
dynamics.
GROSS PROFIT AND GROSS PROFIT MARGIN
THREE MONTHS ENDED 31 NINE MONTHS ENDED
DECEMBER 31 DECEMBER
------------------------- ------------------------------
2001 2002 CHANGE 2001(1) 2002 CHANGE
(%) AGGREGATED (%)
((POUND)IN MILLIONS) ((POUND)IN MILLIONS)
- ------------------------------------------- ------------ ------------ ---------- ------------------- ---------- --------------
UK printed directories:
Yellow Pages 66.4 72.2 8.7% 238.8 255.4 7.0%
Business Pages - - 6.6 5.8 -12.1%
------------ ------------ ------------------- ----------
Total UK printed directories 66.4 72.2 8.7% 245.4 261.2 6.4%
US printed directories
------------ ------------ ------------------- ----------
Yellow Book East at
constant exchange rates (2) 35.8 38.0 6.1% 81.1 95.3 17.5%
Exchange impact (2) - (2.0) - (5.1)
------------ ------------ ------------------- ----------
Yellow Book East 35.8 36.0 0.6% 81.1 90.2 11.2%
Yellow Book West - 22.6 - 63.5
------------ ------------ ------------------- ----------
Total US printed directories 35.8 58.6 63.7% 81.1 153.7 89.5%
Other UK products and services 5.5 6.3 14.5% 17.6 19.3 9.7%
------------ ------------ ------------------- ----------
GROSS PROFIT 107.7 137.1 27.3% 344.1 434.2 26.2%
=========================================== ============ ============ ========== =================== ========== ==============
GROSS PROFIT MARGIN (%)
Yellow Pages 60.3 60.7 64.4 64.4
Business Pages - - 66.0 66.7
Yellow Book East 43.9 46.1 43.4 44.0
Yellow Book West - 47.5 - 43.7
Other UK products and services 49.5 54.3 57.3 61.5
GROUP TOTAL (%) 53.1 53.5 57.5 55.2
=========================================== ============ ============ ========== =================== ========== ==============
- -----------------
(1) Includes the predecessor results through 22 June 2001 and the
successor results through 31 December 2001.
(2) Constant exchange rates state current year results at the same
exchange rate as that used to translate the previous year's results
for the equivalent period. Exchange impact is the difference between
the results reported at constant exchange rate and the actual results
reported using current year exchange rates.
9
The decrease in gross profit as a percentage of Group turnover from 57.5% last
year to 55.2% in the current period reflected principally the changing
geographic mix of our operations resulting from the increased contribution of
our US business.
Our printed directories business in the United Kingdom, which we view as more
developed and which covers substantially all of the United Kingdom, has
historically had higher gross profit margins than those in the United States.
During the period over 51% of our turnover came from our UK printed directories
business, compared to over 63% last year.
In the United States, the different market dynamics and the younger portfolio
result in lower gross profit margins and our Group gross profit margin reflects
this effect and will continue to reflect it to the extent our US operations
continue to form an increasing portion of the geographical mix of our business.
We do however expect our gross profit margin to increase over time as we
increase our focus on enhancing our operating efficiencies and organic growth in
the United States, and we believe there will be opportunities to improve our US
gross profit margins as our US operations become more established.
DISTRIBUTION COSTS AND ADMINISTRATIVE COSTS
Our distribution costs consist mainly of amounts payable to third-party delivery
companies with which we contract for the delivery of our printed directories.
These costs vary principally due to the number of directories delivered in a
financial period. Our distribution costs related to a directory are recognised
when the directory is delivered.
We incurred distribution costs of (pound)25.6 million during the nine month
period (3.3% of Group turnover) compared to (pound)16.5 million (2.8% of Group
turnover) last year. Approximately (pound)9 million of this increase is due to
the inclusion of Yellow Book West, which has historically incurred distribution
costs at a higher percentage of its turnover than the UK and Yellow Book East
businesses.
Our administrative costs consist principally of amortisation and depreciation,
advertising, promotion and marketing expenses, administrative staff expenses,
information technology costs and staff training. Advertising, promotion and
marketing costs represent our most significant discretionary expenses.
Administrative costs increased by (pound)58.1 million, or 26.2%, from
(pound)221.4 million last year to (pound)279.5 million in the current period.
The increase was largely due to:
o a (pound)24.3 million increase in the amortisation of goodwill following
the Yell Purchase and Yellow Book West acquisition; and
o the expensing of(pound)15.0 million of costs incurred for the withdrawn
initial public offering of our parent company; offset by
o a(pound)3.0 million reduction in US management incentive scheme costs for
a scheme that was terminated on 22 June 2001.
Excluding the effect of these items, administrative expenses increased by
(pound)21.8 million or 10.0%.
10
The inclusion of Yellow Book West, excluding amortisation expenses, accounted
for (pound)35.6 million of this increase. This was partially offset by lower
administrative expenses in Yellow Book East due to the reclassification of
certain administrative costs as costs of sales to align policies across the Yell
Group - as referred to above.
We expect UK administrative expenses to increase in the last quarter, compared
to the level in each of the first three quarters due to heavier planned
marketing expenditure.
GROUP OPERATING PROFIT, EBITDA AND ADJUSTED EBITDA
THREE MONTHS ENDED 31 NINE MONTHS ENDED
DECEMBER 31 DECEMBER
------------------------- ------------------------------
2001 2002 CHANGE 2001(1) 2002 CHANGE
(%) AGGREGATED (%)
((POUND)IN MILLIONS) ((POUND)IN MILLIONS)
- ------------------------------------------- ------------------------- ---------- ------------------------------ ------------
GROUP OPERATING PROFIT 24.3 38.2 57.2% 106.2 129.1 21.6%
Goodwill amortisation 21.2 25.0 17.9% 49.4 73.7 49.2%
Depreciation 5.2 5.9 13.5% 15.3 16.9 10.5%
----------- ------------- ------------------- ----------
EBITDA 50.7 69.1 36.3% 170.9 219.7 28.6%
=========== ============= =================== ==========
UK operations 34.3 40.7 18.7% 148.7 165.9 11.6%
----------- ------------- ------------------- ----------
Yellow Book East at 16.4 23.2 41.5% 25.2 49.1 94.8%
constant exchange rates (2)
Exchange impact (2) - (2.0) - (3.7)
----------- ------------- ------------------- ----------
Yellow Book East 16.4 21.2 29.3% 25.2 45.4 80.2%
Yellow Book West - 7.2 - 23.4
Exceptional items - - (3.0) (15.0) 400.0%
GROUP EBITDA 50.7 69.1 36.3% 170.9 219.7 28.6%
============ ============ =================== ==========
UK operations 34.3 40.7 18.7% 148.7 165.9 11.6%
Yellow Book East 16.4 21.2 29.3% 25.2 45.4 80.2%
Yellow Book West - 7.2 - 23.4
ADJUSTED EBITDA 50.7 69.1 36.3% 173.9 234.7 35.0%
============ ============ =================== ==========
ADJUSTED EBITDA MARGIN (%)
UK operations 28.3 31.2 36.2 38.0
Yellow Book East 20.1 27.1 13.5 22.2
Yellow Book West - 15.1 - 16.1
Group total 25.0 27.0 29.1 29.8
- -----------------
(1) Includes the predecessor results through 22 June 2001 and the
successor results through 31 December 2001.
(2) Constant exchange rates state current year results at the same
exchange rate as that used to translate the previous year's results
for the equivalent period. Exchange impact is the difference between
the results reported at constant exchange rate and the actual results
reported using current year exchange rates.
The increase in operating profit reflects the acquisition of Yellow Book West
and the growth in earnings of our other printed directories businesses, offset
in part by the increased goodwill amortisation and the costs associated with the
withdrawn initial public offering.
EBITDA, which we calculated by excluding from our operating profit the effect of
the goodwill amortisation and depreciation, increased by 28.6% in the nine month
period compared to last year, and Adjusted EBITDA, which we calculate by further
excluding the costs associated with the withdrawn initial public offering of our
parent company and, in the prior year, the costs of the terminated US management
incentive scheme, increased by 35.0% in the same period compared to the prior
year.
11
The acquisition of McLeod was the most important factor leading to growth in
Adjusted EBITDA, followed by increases attributable to Yellow Book East and the
UK operations. Excluding the Adjusted EBITDA from Yellow Book West, our Group
Adjusted EBITDA increased by (pound)37.4 million, or 21.5%.
EBITDA growth from the UK operations reflects growth in earnings of our
directories and the move into profitability of Yell.com, which were offset in
part by a decline in other products. Yell.com reported EBITDA of (pound)0.2
million for the nine month period as compared to a loss of (pound)8.2 million
last year.
Adjusted EBITDA from Yellow Book East for the nine month period increased by
(pound)20.2 million compared to last year. The Adjusted EBITDA margin for Yellow
Book East increased to 22.2% from 13.5% last year, as we focussed on increasing
the benefit and yield from our prior directory investments. We increased the
profitability of our directories by leveraging off our existing operations and
administrative cost base to yield additional turnover from our directories
without a corresponding increase in costs. The increases in Adjusted EBITDA and
related margins also reflected the absence of the costs of prototype launches
and of one-off costs of running parallel pre-press activities during migration
to a new supplier which were incurred in the previous period.
NET INTEREST PAYABLE
Net interest expense in the nine month period was (pound)182.1 million compared
to (pound)115.8 million last year. The increase was primarily due to increased
borrowings in connection with the Yell Purchase and Yellow Book West
acquisition. Net interest expense comprised (pound)105.6 million of net interest
paid or to be paid within a six-month period, (pound)62.6 million of cash
interest rolled-up into our long term debt and (pound)13.9 million of amortised
financing costs.
TAX ON PROFIT ON ORDINARY ACTIVITIES
Taxation of (pound)11.3 million incurred during the period from 1 April to 22
June 2001 primarily arose as UK corporation tax on the results of our UK
operations. Taxation of (pound)5.6 million for the nine months ended 31 December
2002 and (pound)3.1 million during the period from 22 June to 31 December 2001
includes the effect of treating goodwill amortisation as a non-allowable charge
for purposes of determining UK corporation tax. Our future taxation charge will
depend on our taxable income in the United Kingdom and United States.
NET PROFIT (LOSS)
Our net loss of (pound)58.6 million for the nine month period and net loss of
(pound)24.0 million last year are significantly affected by the amortisation of
goodwill arising from the purchase of the Yell Group from BT and the capital
structure put in place at the time of the purchase. We believe Adjusted EBITDA
as discussed above, and cashflow from operating activities as discussed below,
are more relevant measures than net profit (loss) in determining our ability to
make interest payments and scheduled debt repayments.
LIQUIDITY AND CAPITAL RESOURCES
Apart from significant acquisitions which we have funded through a combination
of borrowings, cash from contributions from our sponsors and cashflows from
operations, we fund our existing business largely from cash flows generated from
our operations. In addition, we have access to a (pound)100.0 million revolving
12
credit facility as part of the senior credit facilities, of which (pound)2.0
million had been drawn down at 31 December 2002.
Cash Flows
COMBINED CONSOLIDATED
(PREDECESSOR) (SUCCESSOR)
----------------------------------------------------------
THREE MONTHS ENDED 1 APRIL TO 22 JUNE TO NINE MONTHS ENDED
31 DECEMBER 22 JUNE 2001 31 DECEMBER 31 DECEMBER
---------- ------------ ----------- ------------
2001 2002 2001 2002
((POUND) IN MILLIONS)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash inflow from operating activities 49.6 75.6 37.6 106.4 221.5
Net cash outflow from returns on (19.3) (33.6) (8.8) (105.2) (113.6)
investments and servicing of finance
Taxation (0.1) (2.7) - (0.4) (10.3)
Net cash outflow for capital expenditure and (4.1) (46.6) (16.9) (1,912.1) (478.2)
acquisitions
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash inflow (outflow) before financing 26.1 (7.3) 11.9 (1,911.3) (380.6)
Net cash (outflow) inflow from financing - (79.1) 12.4 2,002.3 303.3
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 26.1 (86.4) 24.3 91.0 (77.3)
==================================================================================================================================
Our net cash inflow from operating activities for the nine months ended 31
December 2002 was (pound)221.5 million, compared with an inflow of (pound)144.0
million last year. The inclusion of Yellow Book West contributed to (pound)29.8
million of the increase in cash flow.
The remaining improvement was driven by improved profitability and collections
of accounts receivable in the United States and the United Kingdom. Yellow Book
West is now also able to take full advantage of normal credit terms as compared
to earlier when it was required to adhere to early payment terms following the
Chapter 11 filing of McLeodUSA, its former parent company, which had a one-off
benefit to cash flows in the period. Net cash inflow from operating activities
for the nine month period included (pound)13 million of expenses paid for the
parent company's withdrawn initial public offering. We expect to pay an
additional (pound)2 million to settle all bills related to the parent company's
withdrawn initial public offering.
We expect the level of cash generation from the United States to slow down in
the last quarter of the financial year, as a result of increases in working
capital associated with higher expected turnover. The maturing of our
directories portfolio also contributed to the strong net cash inflow, as fewer
new launches than in the previous period had a positive impact on working
capital.
Net cash outflow from returns on investments and servicing of finance for the
nine month period principally comprises net interest payments of (pound)97.5
million, fees of (pound)11.8 million paid to acquire financing for the
acquisition of McLeod, and fees of (pound)4.3 million paid to refinance our
bridge loan.
Net cash outflow for capital expenditures and financial investment comprises
capital expenditure on fixed assets and purchases of subsidiary undertakings,
net of cash acquired. Capital expenditure was (pound)11.6 million compared to
(pound)22.9 million last year which included a one-off (pound)11.7 million paid
for assets transferred from BT.
On 22 June 2001, the successor Yell Group purchased the predecessor Yell Group
from BT. The cash amounts paid on that date totalled (pound)1,922.0 million. We
13
made another acquisition in the United States for (pound)6.5 million ($9.3
million) in a separate transaction on 29 June 2001.
On 16 April 2002 we purchased McLeod for $600.0 million ((pound)417.0 million)
plus expenses of $25.0 million ((pound)17.4 million). We financed the McLeod
acquisition through $250.0 million ((pound)173.7 million) of senior bank
financing and a $250.0 million ((pound)173.7 million) bridge facility together
with $88.4 million ((pound)61.4 million) of additional funds in the form of
equity and subordinated non-cash pay loans from our existing investors and $37.3
million ((pound)25.9 million) of unrestricted cash from our available cash
balances. As a result, our overall borrowings before the offset of finance costs
increased by approximately (pound)408 million.
On 12 November 2002, we repaid the $250 million borrowed under the bridge
facility. We funded this repayment through $123.5 million of increased
borrowings under term loans and the balance from our cash on hand. As a result
of this refinancing, we paid fees of (pound)4.3 million in the third quarter and
have included within our interest charge approximately (pound)8.5 million for
the fees associated with the bridge loan.
On 31 December 2002 we purchased NDC for $69 million ((pound)42.9 million). We
financed the NDC acquisition through operating cashflows within the group. We
utilised (pound)2.0 million of the revolving credit facility to fund operational
expenses after using cash on hand to fund the NDC acquisition.
We made principal repayments on 30 September 2002, totalling (pound)26.4
million.
Capital Resources
At 31 December 2002, we had cash of (pound)21.8 million.
We expect that any significant acquisitions or other significant expenditures,
including those related to the development of our online services, would in the
future be financed through any one or more of operating cash flow, credit
facilities and the issue of new debt and equity securities.
14
We had net debt of (pound)2,368.7 million at 31 December 2002 as detailed in the
table below.
((POUND) IN MILLIONS)
Long-term loans and other borrowings
Term Loan A 574.5
Term Loan B 175.0
Term Loan C 240.7
Term Loan D 155.2
Senior Sterling Notes due 2011 250.0
Senior Dollar Notes due 2011 124.2
Senior Discount Dollar Notes due 2011 112.1
Subordinated shareholder loan 797.4
Revolving facility 2.0
Other 1.3
-------------------
Total debt 2,432.4
Unamortised financing costs (41.9)
Cash at bank (21.8)
-------------------
NET DEBT AT END OF THE PERIOD 2,368.7
===================
We are required to satisfy interest and principal payments on our borrowings as
they become due. To the extent we are not able to fund any principal payment at
maturity or any interest payment when due from cash flow from operations, we
would be required to refinance this indebtedness pursuant to credit facilities
and/or the issue of new debt and equity securities into the capital markets. Any
failure to raise additional funds necessary to achieve this would result in
default under our debt covenants. We anticipate that we will have to refinance
in part the repayment of the senior notes at maturity. No one has guaranteed our
obligations under the senior notes or has any obligation to provide additional
equity financing to us.
The terms of the senior credit facilities require us to maintain specified
consolidated financial ratios for senior debt to Earnings before Interest, Tax,
Depreciation and Amortisation ("EBITDA", as defined in the senior credit
facilities), cash flow to total debt service, EBITDA (as defined in the senior
credit facilities) to net cash interest payable and total net debt to EBITDA (as
defined in the senior credit facilities) and to observe capital expenditure
limits for each financial year. Certain of these financial ratios have to be
prepared for the preceding 12-month period and reported to the providers of the
senior credit facilities on a quarterly basis. We have reported that we
maintained the financial ratios for the quarter ended 31 December 2002 in
compliance with these debt covenants.
OTHER MATTERS
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements other than employee incentive
arrangements that are triggered upon a change in ownership and the interest rate
hedges discussed below.
Market-related Risks
Interest is payable under our senior credit facilities at a variable rate. We
could, therefore, be adversely affected if interest rates were to rise
significantly. Under the senior credit facilities, we are required to hedge at
least 50% of the variable-rate indebtedness under the senior credit facilities
for a duration of two years. We have hedged at 31 December 2002 some 90% of the
15
indebtedness under the senior credit facilities for nine months using interest
rate swaps and 50% for the following 18 months. At 31 December 2002, we had
(pound)23.9 million net unrecognised losses on these instruments that will be
recognised when the interest is paid.
All of these instruments are entered into for hedging purposes and, under UK
GAAP, gains and losses on these instruments are deferred and only recognised in
income when the underlying transaction is recorded. Such instruments have not
been designated and do not qualify for hedge accounting under Statement of
Financial Accounting Standards No 133 "Accounting for Derivative Instruments and
Hedging Activities" for US GAAP.
All significant cash inflows and outflows associated with our operations in the
United Kingdom are denominated in pounds sterling, and all significant cash
inflows and outflows associated with our operations in the United States are
denominated in dollars. However, our financial information is presented in
pounds sterling, and changes in the exchange rate between the dollar and the
pound sterling will affect the translation of the results of our US operations
into pounds sterling. We do not currently intend to hedge any foreign exchange
rate risk relating to dollar-denominated notes, although we will continue to
review this practice. The dilution of our earnings reported in pounds sterling
as a result of the weakening of the US dollar is partially offset by a natural
hedging within the Group as a result of us having a significant amount of debt
denominated in US dollars.
At 31 December 2002, we had (pound)581.2 million of borrowings denominated in
dollars and (pound)1,252.6 million of borrowings that accrue interest at
variable rates, before taking into account hedging arrangements. As of 31
December 2002, taking into account the hedging arrangements, if the annualised
variable interest rates had been 1.0% higher or lower with no change in exchange
rates, our interest charge would vary by approximately (pound)0.3 million per
quarter higher or lower, respectively, taking into account our hedging
arrangements, or (pound)3.1 million per quarter higher or lower, respectively,
without taking into account hedging arrangements. Further, taking into account
our US dollar-denominated liabilities, if the average dollar/pound sterling
exchange rate during the nine months had been $1.68 to (pound)1.00, for example,
instead of $1.528 to (pound)1.00, the approximate rate effective for the nine
months ended 31 December 2002, then our interest charge for the nine month
period would have been approximately (pound)3.1 million lower.
Recent US GAAP Accounting Pronouncements
In June 2001 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No 141 "Business Combinations" ("SFAS 141"),
which supersedes APB Opinion No 16 "Business Combinations" and Statement of
Financial Accounting Standards No 38 "Accounting for Pre-acquisition
Contingencies of Purchased Enterprises". SFAS 141 addresses financial accounting
and reporting for business combinations and requires that all business
combinations within the scope of SFAS 141 be accounted for using only the
purchase method. SFAS 141 is required to be applied for all business
combinations initiated after 30 June 2001. Adoption of this statement did not
have a material impact on the Group's financial condition or results of
operations.
Also in June 2001, the FASB issued Statement of Financial Accounting Standards
No 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 requires
the discontinuance of goodwill amortisation. In addition, SFAS 142 includes
certain provisions regarding the reclassification of certain existing recognised
intangibles as goodwill, reassessment of the useful lives of existing recognised
intangibles, reclassification of certain intangibles out of previously reported
16
goodwill and the testing for impairment of existing goodwill and other
intangibles. The Yell Group adopted the Standard on 1 April 2002, and the
effects of the adoption are presented in the notes to the financial information
for Yell Group plc. Upon adoption the Yell Group completed its impairment tests
of goodwill as of 1 April 2002 and determined that the goodwill balances were
not impaired. Also upon adoption the Yell Group evaluated its depreciable
intangible assets and determined that their remaining useful lives were
appropriate.
In August 2001, the FASB issued Statement of Financial Accounting Standards No
143 "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated retirement costs.
Adoption of this statement did not have a material impact on the Group's
financial condition or results of operations.
Also in August 2001, the FASB issued Statement of Financial Accounting Standards
No 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). The objectives of SFAS 144 are to address significant issues relating to
the implementation of Statement of Financial Accounting Standards No 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121") and to develop a single accounting model based on
the framework established in SFAS 121, for long-lived assets to be disposed of
by sale. The standard requires that long-lived assets that are to be disposed of
by sale be measured at the lower of book value or fair value less cost to sell.
Additionally, the standard expands the scope of discontinued operations to
include all components of any entity with operations that can be distinguished
from the rest of the entity and will be eliminated from the ongoing operations
of the entity in a disposal transaction. Adoption of this statement did not have
a material impact on the Group's financial condition or results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards No
145 "Recission of FASB Statements No 4, 44 and 64, Amendment of FASB Statement
No 13 and Technical Corrections" ("SFAS 145"). This standard will require gains
and losses from extinguishment of debt to be classified as extraordinary items
only if they meet the criteria of unusual and infrequent in Opinion 30
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". Any gain or loss on extinguishment will be recorded in
the most appropriate line item to which it relates within net income before
extraordinary items. SFAS 145 is effective for fiscal years beginning after 15
May 2002; however, certain sections are effective for transactions occurring
after 15 May 2002.
In July 2002, the FASB issued Statement of Financial Accounting Standards No 146
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146").
This standard will require companies to recognise costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. This statement is effective for fiscal
years beginning after 31 December 2002. The Group does not expect the adoption
of this standard to have a material effect on its financial statements.
In December 2002, the FASB issued Financial Accounting Standards No 148
"Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS
148"). This Statement amends SFAS 123 to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of SFAS 123 to require prominent disclosure about the
17
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. Finally, SFAS 148 amends APB
Opinion No 28 Interim Financial Reporting, to require disclosure about those
effects in interim financial information. SFAS 148 is effective for fiscal years
beginning after 15 December 2002. The Group does not expect the adoption of
SFAS 148 to have a material impact on its financial position, earnings or cash
flows as it does not currently intend to adopt SFAS 123.
Critical Accounting Policies
In general, our accounting policies are consistent with those generally adopted
by others operating within the same industry in the United Kingdom. Our
accounting policies are set out in our audited financial statements contained
within the Form 20-F filed with the US Securities and Exchange Commission
("SEC") on 19 July 2002. A discussion of the most significant policies that
require our management to make subjective and complex judgements or to consider
matters that are inherently uncertain are also contained in that document.
Consolidated Results of Our Parent Company
We have included certain combined and consolidated financial information of our
parent company, Yell Group plc and its subsidiaries, as an appendix to the
condensed combined and consolidated financial information of Yell Finance B.V.,
in order to highlight differences between what our parent company would report
using UK presentational conventions and what we would report using US reporting
conventions and to satisfy the requirements of our parent company to produce a
UK GAAP to US GAAP reconciliation.
This report contains forward-looking statements. These statements appear in a
number of places in this report and include statements regarding our intentions,
beliefs or current expectations concerning, among other things, our results of
operations, financial condition, liquidity, prospects, growth, strategies, new
products (such as colour advertising), the level of new directory launches,
revenue and cost synergies and the markets in which we operate.
Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward-looking
statements as a result of various factors. You should read the section entitled
"Risk Factors" in our annual report on Form 20-F filed with the SEC on 19 July
2002 for a discussion of some of these factors. We undertake no obligation to
publicly update or revise any forward-looking statements, except as may be
required by law.
18