This is an archived article that was published on sltrib.com in 2011, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.
A Utah company that produces Yellow Pages directories has defaulted on its debt amid accusations it shorted advertisers by secretly cutting the number of books it distributed locally and in other areas of the country.
Ziplocal of Orem (formerly Phone Directories Co., or PDC Pages), is facing two lawsuits from advertisers alleging that in some cases the company cut back on the number of printed copies by more than 50 percent, even though it was collecting advertising payments from businesses based on the understanding that an entire local market would be covered. Former employees and a former distributor, internal company documents and an industry database generally support claims in the lawsuits in federal and state court in Utah.
In an Aug. 4 regulatory filing, a Canadian company, Yellow Media Inc., said the Utah company had defaulted on its debts and was restructuring. CEO Olivier Vincent is no longer with Ziplocal, but company officials declined to provide details of his departure.
Through an outside public relations firm, the officials declined interview requests. But in a written response to questions, they acknowledged that the company was passing through "difficult economic times." They added that Ziplocal is "vigorously defending" itself from the allegations of fraud and breach of contract in the two proposed class action lawsuits, but declined to answer specific questions.
Directory success • The events of late are a swift plunge for the successful company that started in Utah and spread its operations nationwide.
Marc Bingham founded Phone Directories Co. in 1971 and eventually published directories in 18 states and Canada. He sold his Canadian operations to a private equity firm, HM Capital of Dallas, in 2005, and in 2007 also sold the U.S. operations based in Utah to the same firm. Mike Bynum, a founder and former officer of Yellow Pages publisher TransWestern Publishing of San Diego, became CEO.
By 2010, Phone Directories Co. was renamed Ziplocal and was publishing 160 directories across the United States. It appeared to be successful despite the economic downturn and challenges posed by Internet search engines such as Google, to which increasing numbers of people turned to find local goods and services.
Yellow Pages ads are priced by size of the ad, the number of copies of the printed book that are distributed in a given area and the possible return on investment for the advertiser.
In June 2008, a Ziplocal representative pitched Jones Heating & Air Conditioning of West Valley City with a "Value Story" that included a map of Salt Lake County showing the distribution area. The pitch said "PDC Delivers Over 400,000 directories"to every household and business within that map, according to a lawsuit filed in Utah County.
The next year, Jones Heating & Air Conditioning again bought an ad. This time, 455,000 books were to be delivered.
But those distribution figures were fiction, according to the lawsuit filed in 4th District Court in Provo in November of last year, a fact it says was concealed from sales agents, managers and customers.
"Specifically, the promised distribution dropped from 444,000 to 200,000 during 2009-10," the lawsuit says. "This despite the fact that the sales and advertising revenue for the Salt Lake Valley directory more than doubled during this same period."
There were no directories distributed west of 2700 West, the key area for Jones Heating's customers, the suit alleges, while in some other areas of Utah, entire cities, towns and counties did not get books.
A company spreadsheet that was sent to employees in 2010 after accusations of lower-than-expected distributions surfaced in Alaska was provided to The Tribune. It shows a 33 percent decrease in distribution in the Salt Lake City area from 2008 to 2009, from 380,000 copies to 256,500. Numbers submitted to the Yellow Pages Association (now called the Local Search Association) for a database of directories showed that from 2008 to 2010 Ziplocal's Salt Lake area distribution dropped 42 percent.
A Tribune analysis of both sources shows that most areas around the country saw declines in distribution after 2008, from modest numbers to drastic drops.
Flagstaff, Ariz., was off 40 percent; Santa Rosa and Rohert Park, Calif., down 78 percent; Milford-Orange, Conn., 38 percent; Burley-Rupert, Idaho, 55 percent; and Casper, Wyo., 58 percent, according to the company spreadsheet.
Distribution dispute • An attorney who filed the state court lawsuit, Lynn P. Heward of Robert J. Debry and Associates, declined to discuss the case, as did Dan Larsen of Snell & Wilmer, attorney for Ziplocal.
But last week Larsen was in court where he argued that the case should be dismissed because the contract signed by Jones Heating says Ziplocal does not guarantee 100 percent delivery and that any pitches about distribution numbers or the coverage area made by salespeople are not binding if they are not specified in the contract.
"Employees and agents can't make any promises outside the contract," said Larsen.
Don Dalton, another attorney representing Jones Heating & Air Conditioning, said the contract language does not mean Ziplocal could short areas by more than 50 percent. "It was not dropping by a couple of percentage points, it was plummeting," Dalton told Judge Claudia Laycock, who said she will decide soon whether to allow the lawsuit to continue.
For Monique Bushnell, changing distribution figures at the last minute after a sales campaign was in her mind unethical and possibly illegal.
Bushnell worked for the company from 2004 to 2009 as sales manager for three books in Oregon and Washington. She declined to be interviewed, but in a hearing in August 2010 before a Washington state administrative law judge, Bushnell said she quit because of the drop in the number of printed books after the sales campaign had ended.
"The day before the book was to go to print, the company decided to cut the book count down to 35,000 as opposed to the 90,000 we had [in] previous years, [which] I had gone out and represented all year long to every business owner and every chamber in the market," Bushnell said, according to a recording of the hearing to determine whether she was entitled to unemployment benefits.
The judge rule against Bushnell, saying the standard advertising contract businesses signed appeared to allow Ziplocal to trim distribution.
Bynum, the former CEO and vice president of sales, did not return phone calls seeking comment for this story but he participated in Bushnell's hearing. He told the judge that almost no one had complained about the distribution reduction.
"We don't have a standard answer [to advertiser queries] because it has not been a problem," Bynum said. "But … if we've had we [would] handle them on an individual basis, including a reduction in billing or a refund or any number of normal customer solutions."
Bushnell said many businesses simply did not know how many books had been cut. Others familiar with the operation say many business owners didn't ask for figures, assuming there would be promised coverage.
Providing a map and a distribution figures to prospective advertisers is standard industry practice, according to Hugh Riddle, a part owner of phone directories in New Mexico and vice president of Directory Plus of Durango, Colo., who said he has been in the Yellow Pages business since 1968.
Neg Norton, president of the Local Search Association, agreed. "I would also hope that if there was some sort of material change in distribution that would affect the advertiser there would be some disclosure around that before the directory printed. I think that would be the right thing to do."
Silent phones • Troy Neerings, president of Neerings Plumbing & Heating of South Salt Lake, said he purchased ads for a number of years from Ziplocal but had not followed up to see if distribution promises were kept.
Neerings said he "absolutely" would have expected a refund if the number of books distributed had dropped.
"On the other hand, they don't put down on the contract what their distributions are. Suddenly that becomes obvious. That should very much be in the contract."
Gundi Jones of Jones Heating said she understood that a special telephone number would be printed in the Ziplocal directory that would ring at the business and also enable her to track the number of sales calls the ad generated.
Instead, the phone didn't ring and the company experienced a drastic drop in revenue, some of which was likely attributable to the recession, Jones said.
"When the phone didn't ring and didn't ring, we became concerned," she said. "So my son got the telephone book out and called that number that was offered as a tracking number, and you know what? The number led nowhere. It didn't even ring."
For his part, Steven Phillips contracted to distribute books in Alaska for Ziplocal in 2009. He said he has 25 years of experience distributing books for 17 publishers in different parts of the nation. He bid for the Ziplocal job based on the numbers of books the company said it was going to distribute. But as printing and distribution got closer, the numbers kept dropping, Phillips said in an interview.
In Anchorage, they dropped from about 150,000 to 103,000, and the publication date was pushed from summer into late fall, with a company official saying Ziplocal was trying to make financial targets in order to qualify for a bonus from its owners, according to Phillips.
"In the back of my mind I said they were shorting all their advertisers and they're shorting me, too, and at some point this is going to come to a head," he said.
Alarmed, he flew to Dallas and asked to see Peter Brodsky, a partner at HM Capital, to inform him that Ziplocal was committing what Phillips believed was fraud. Brodsky declined to see him but eventually Phillips said he met with company attorneys, who took information from him.
Phillips returned to Alaska and met with advertisers to tell them what he knew. In addition, his allegations sparked a news report on an Anchorage television station, and he filed a complaint with the state Attorney General's Office, which has not acted.
His activities brought a lawsuit by Ziplocal in state court in Texas that accused him of damaging the company with false claims. In its written responses to questions, Ziplocal said that while working for the company, "Phillips kept on trying to renegotiate his work price, delivered late and did not fulfill his obligations toward Ziplocal. There is a long-standing history of misconduct and aggressive behavior, which forced Ziplocal to obtain a restraining order."
Phillips said his disputes with Ziplocal were an attempt to recover the money for which he had contracted before distribution cuts lowered his earnings and because he believed advertisers had been defrauded.
In addition to Phillips, five former sales employees were interviewed for this story, including several managers. All asked they not be identified by name for fear the company would sue them, but they each independently backed up allegations in the lawsuits.
Two said they were pressured to sign nondisclosure agreements after Phillips' Alaska allegations were aired. One said the agreements were signed "under duress" and were designed to "zip the lip." Another said he saw company figures that showed the number of books printed were lowered after sales campaigns had concluded.
New owner • In January of last year, Canpages, the Canadian Yellow Pages company Marc Bingham had sold to HM Capital, announced a North American partnership with Utah-based Phone Directories Co. that would have a combined 1,400 employees and revenue of $180 million. With the partnership, PDC assumed the name of Ziplocal.
Then in March 2010, Yellow Media Inc., owner of Yellow Pages Group of Canada, announced it was buying Canpages from HM Capital and other investors for $225 million. In addition, it contributed its U.S. operations, YPG Directories, to Ziplocal and took a 35 percent ownership in the company.
However, a few weeks ago Yellow Media said in a news release that it had a net loss in the quarter that ended June 30, primarily because of its investment with Ziplocal, which had defaulted on its debts. It put its losses from the Ziplocal investment at $50.5 million.
Facing challenges • In its written response to questions about its financial situation, Ziplocal said it was "moving forward and focusing on our core markets and products" despite the tough economic climate and the challenges to the Yellow Pages industry.
"The directory business is an industry in transition, and we are working to evolve along with it. Ziplocal is working closely with its investors and capital funding partners to resolve any financial issues."
O Find The Tribune's analysis of Ziplocal's distribution of Yellow Pages books from 2008-2010 at http://bit.ly/TribZiplocal