<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ------------ to -----------
Commission File Number 001-13875
ADVANCED COMMUNICATIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0549396
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
390 S. WOODS MILL RD, SUITE 150 63017
ST. LOUIS, MISSOURI (Zip Code)
(Address of principal executive offices)
(314) 205-8668
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months, and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
As of August 10, 1998, the registrant had 19,615,865 shares of common stock,
$.0001 par value, outstanding.
<PAGE> 2
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
--------------------
Advanced Communications Group, Inc. and Subsidiaries
-----------------------------------------------------
Consolidated Statements of Operations for the Three Months Ended
----------------------------------------------------------------
June 30, 1998 and 1997
----------------------
(Unaudited)
<CAPTION>
Three Months Ended
----------------------------------------------------------------
Actual Pro Forma <F1> Actual
(In thousands, except per share data) June 30, 1998 June 30, 1997 June 30, 1997
------------- -------------- -------------
<S> <C> <C> <C>
REVENUES:
Telecommunications $ 15,206 $ 12,392 $ --
Directory 12,809 10,892 --
---------- ---------- ---------
Total revenue 28,015 23,284 --
OPERATING COSTS:
Cost of services 17,281 12,638 376
Selling, general and administrative
Expenses 8,631 7,592
Depreciation and amortization 2,563 2,270 2
---------- ---------- ---------
Income (loss) from operations (460) 784 (378)
OTHER INCOME (EXPENSE):
Interest expense (276) (300) (68)
Equity in loss of KINNET (121) (241) --
Other 316 126 --
---------- ---------- ---------
Income (loss) before income taxes (541) 369 (446)
Income tax expense 490 854 --
---------- ---------- ---------
Net income (loss) $ (1,031) $ (485) $ (446)
========== ========== =========
Basic and diluted earnings (loss) per share $ (.05) $ (.02) $ (.05)
========== ========== =========
Weighted average shares outstanding 19,615,865 20,518,612 8,223,222
========== ========== =========
See accompanying notes to consolidated financial statements.
<F1> The Company completed its initial public offering on February 18, 1998,
concurrently with the acquisition of 9 operating companies and a 49%
interest in another company. The pro forma results were prepared
giving effect to the offering and the acquisitions as if they had
occurred on January 1, 1997.
</TABLE>
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<TABLE>
Advanced Communications Group, Inc. and Subsidiaries
----------------------------------------------------
Consolidated Statements of Operations for the Six Months Ended
--------------------------------------------------------------
June 30, 1998 and 1997
---------------------
(Unaudited)
<CAPTION>
Six Months Ended
-------------------------------------------------------------------
Pro Forma <F1> Pro Forma <F1> Actual <F2> Actual <F2>
(In thousands, except per share data) June 30, 1998 June 30,1997 June 30, 1998 June 30, 1997
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Telecommunications $ 28,972 $ 23,446 $ 21,757 $ --
Directory 31,238 27,366 21,992 --
---------- ---------- ---------- ---------
Total revenue 60,210 50,812 43,749 --
OPERATING COSTS:
Cost of services 34,232 26,692 24,928 --
Selling, general and administrative
expenses 18,935 16,387 14,594 646
Depreciation and amortization 4,907 4,563 3,765 2
Stock-based compensation 1,760 -- 1,760 --
---------- ---------- ---------- ---------
Income (loss) from operations 376 3,170 (1,298) (648)
OTHER INCOME (EXPENSE):
Interest expense (668) (652) (558) (68)
Equity in loss of KINNET (275) (495) (189) --
Other 375 171 346 --
---------- ---------- ---------- ---------
Income (loss) before income taxes (192) 2,194 (1,699) (716)
Income tax expense 1,438 2,419 456 --
---------- ---------- ---------- ---------
Net income (loss) $ (1,630) $ (225) $ (2,155) $ (716)
========== ========== ========== =========
Basic and diluted earnings (loss) per share $ (.08) $ (.01) $ (.12) $ (.09)
========== ========== ========== =========
Weighted average shares outstanding 19,615,865 20,072,254 17,450,119 8,223,222
========== ========== ========== =========
See accompanying notes to consolidated financial statements.
<F1> The Company completed its initial public offering on February 18, 1998,
concurrently with the acquisition of 9 operating companies and a 49%
interest in another company. The pro forma results were prepared
giving effect to the offering and the acquisitions as if they had
occurred on January 1, 1997.
<F2> Actual results include the operations of the parent company for the
entire six month period and the results of the acquired operating
companies only for the period February 18, 1998 to June 30, 1998.
</TABLE>
3
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<TABLE>
Advanced Communications Group, Inc. and Subsidiaries
----------------------------------------------------
Consolidated Balance Sheets
---------------------------
<CAPTION>
(In thousands, except share data) (Unaudited)
June 30, Dec. 31,
1998 1997
<S> ----------- --------
Assets <C> <C>
- ------
Current assets:
Cash and cash equivalents $ 10,058 $ --
Accounts receivable, net 24,526 --
Deferred costs 2,684 --
Prepaid expenses and other current assets 1,168 --
--------- --------
Total current assets 38,436 --
--------- --------
Property, plant and equipment, net 6,957 6
Intangible assets, net 107,728 --
Equity investment in KINNET 17,852 --
Other noncurrent assets 2,051 2,689
--------- --------
Total other assets 134,588 2,695
--------- --------
$ 173,024 $ 2,695
========= ========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 16,711 $ 2,098
Current maturities of long-term debt 1,293 3,141
Other current liabilities 2,209 --
--------- --------
Total current liabilities 20,213 5,239
Long-term obligations:
Long-term debt (related party) 17,233 --
Other noncurrent liabilities 94 --
--------- --------
Total liabilities 37,540 5,239
--------- --------
Stockholders' equity:
Preferred Stock, Series A Redeemable Convertible: 1,122 --
20,000,000 authorized; 142,857 shares issued;
$2,000 liquidation preference
Common stock, $.0001 par value: 180,000,000 authorized;
19,615,865 and 11,624,920 shares issued, respectively 2 --
Additional paid-in capital 140,374 1,315
Retained earnings (accumulated deficit) (6,014) (3,859)
--------- --------
Total stockholders' equity 135,484 (2,544)
--------- --------
$ 173,024 $ 2,695
========= ========
See accompanying notes to consolidated financial statements.
</TABLE>
4
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<TABLE>
Advanced Communications Group, Inc. and Subsidiaries
----------------------------------------------------
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
----------------------------------
(In thousands) 1998 1997
---------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,155) $ (716)
Adjustments to reconcile net earnings to net cash:
Depreciation and amortization 3,765 2
Stock-based compensation expense 1,760 --
Equity in loss of KINNET 189 --
Change in assets and liabilities:
Decrease (increase) in:
Accounts receivable, net (5,095) (4)
Deferred costs 1,942 --
Prepaid expenses and other current assets 274 --
Other assets, net (3,001) (443)
Increase (decrease) in:
Accounts payable and accrued liabilities 1,133 479
--------- -------
Net cash used in operating activities (1,188) (682)
--------- -------
Cash flows from investing activities:
Cash paid for businesses acquired, net of $828 cash acquired (83,277) --
Additions to property, plant and equipment, net (3,864) --
--------- -------
Net cash used in investing activities (87,141) --
--------- -------
Cash flows from financing activities:
Borrowings of long-term debt 2,886 652
Repayment of long-term debt (4,399) --
Proceeds from common stock offering, net of offering costs 99,900 --
--------- -------
Net cash provided by financing activities 98,387 652
--------- -------
Net increase (decrease) in cash and cash equivalents 10,058 (30)
Cash and cash equivalents-beginning of period -- 33
--------- -------
Cash and cash equivalents-end of period $ 10,058 $ 3
========= =======
See accompanying notes to consolidated financial statements.
</TABLE>
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Advanced Communications Group, Inc. and Subsidiaries
----------------------------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
Six Months Ended June 30, 1998 and 1997
---------------------------------------
(Unaudited)
1. INTERIM RESULTS
The financial statements contained herein are unaudited. In the
opinion of management, these financial statements reflect all adjustments,
consisting only of normal recurring adjustments, which are necessary for fair
presentation of the results of the interim periods presented. Reference is
made to the footnotes to the consolidated financial statements contained in
the Company's Annual Report on Form 10-K for the year ended December 31,
1997, filed with the Securities and Exchange Commission.
2. BASIS OF PRESENTATION
Advanced Communications Group, Inc. ("ACG" or "Company"), a Delaware
corporation, is a regional competitive local exchange carrier ("CLEC") that
provides a portfolio of telecommunications services to business and
residential customers in fourteen mid-America states and publishes yellow
page directories in selected markets in California, Oklahoma and Texas.
ACG completed its initial public offering ("IPO") of its common stock,
par value $.0001 per share ("Common Stock") on February 18, 1998. Cash
proceeds from the offering, net of offering costs, were $99.9 million. Of
this amount, $84.1 million was used to pay the cash portion of the purchase
price of the Acquired Companies, $3.6 million was used to retire debt of the
Company and the Acquired Companies, and $1.75 million was paid to a
stockholder for a five-year non-compete agreement. In connection with the
IPO, the Company simultaneously acquired all of the outstanding capital stock
of Great Western Directories, Inc. ("Great Western"), Valu-Line of Longview,
Inc. ("Valu-Line"), Feist Long Distance Service, Inc. ("Feist"), FirsTel,
Inc. ("FirsTel") and Tele-Systems, Inc. ("Tele-Systems"), substantially all
of the assets of Long Distance Management II, Inc. ("LDM II"), Long Distance
Management of Kansas, Inc. ("LDM of Kansas"), The Switchboard of Oklahoma
City, Inc. ("Switchboard"), and National Telecom, a proprietorship, and 49%
of the outstanding capital stock of KIN Network, Inc. ("KINNET")
(collectively "Acquisitions" or "Acquired Companies").
Prior to February 1998, ACG had not conducted any operations other than
those relating to the IPO and the Acquisitions. Consequently, the actual
financial statements included herein relate only to the parent company prior
to February 18, 1998, but include the results of the Acquired Companies for
the period February 18, 1998 to June 30, 1998. Certain pro forma operating
information is presented for comparative purposes as if the IPO and the
Acquisitions had occurred on January 1, 1997. The pro forma financial
information does not purport to represent the Company's results of operations
that would have actually occurred if the IPO and the Acquisitions had in fact
occurred on the date stated above. Since the Acquired Companies were not
under common control or management, historical combined results of operations
may not be comparable to, or indicative of, future performance. The pro forma
Consolidated Statements of Operations reflect the historical results of
operations of the Acquired Companies and were
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<PAGE> 7
derived from the respective Acquired Companies' financial statements. All
intercompany accounts have been eliminated in consolidation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents - For purposes of reporting cash flows, cash
equivalents include highly-liquid investments purchased with a maturity of
three months or less.
Property, plant and equipment -- Property, plant and equipment are
stated at cost, less accumulated depreciation. Depreciation is computed using
the straight-line or an accelerated method over the respective lives of the
assets. The estimated useful lives of the assets range from 3 to 31 years.
Intangible assets from business acquisitions -- Intangible assets
resulting from the cost of businesses acquired exceeding the fair value of
net assets acquired consist principally of the customer lists and goodwill.
The value of customer lists and their estimated useful lives were determined
using independent appraisals. Customer lists and goodwill are amortized on a
straight-line basis over their estimated useful lives ranging from 5 to 10
years and 25 to 40 years, respectively. For the three months and six months
ended June 30, 1998, amortization expense relating to intangible assets was
$2,141,000 and $3,112,000, respectively.
Deferred costs -- At December 31, 1997, the Company had deferred
certain legal, accounting, appraisal and other costs incurred in connection
with the Acquisitions and the IPO. At December 31, 1997, deferred acquisition
costs amounted to approximately $929,000 and deferred offering costs amounted
to $1,756,800. When the Acquisitions were completed, deferred acquisition
costs were included in the determination of excess purchase price. Deferred
offering costs were charged to additional paid-in capital upon the closing of
the IPO.
Deferred line acquisition costs include the direct costs incurred in
connection with establishing local access line service for customers and are
being amortized on a straight-line basis over the estimated life of the
average customer local service contract. Deferred line acquisition costs are
included in other assets.
Income taxes -- Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the carrying
amounts of existing assets and liabilities for financial reporting purposes
and for income tax purposes. The Company's effective tax rate is
substantially higher than statutory tax rates principally because
amortization of certain intangible assets is not deductible for tax purposes.
Revenue recognition -- Directory revenues are derived from the sale of
advertising space in telephone directories and are recognized on the date
that the directory is published and substantially delivered. If the estimate
of total directory costs exceeds advertising revenues for a specific region's
telephone directory, a provision is made for the entire amount of such
estimated loss. Directory costs are deferred until the date that the
directory is published and substantially delivered. Directory costs include
all direct costs related to the publishing of a region's telephone directory,
such as publishing and
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distribution expenses and commissions on sales, other sales expenses and
depreciation and amortization. General and administrative costs are charged
to expense as incurred.
Costs incurred with the expansion into new markets include all direct
costs related to the publishing of a first-year telephone directory
(prototype directory). Advertising space in prototype directories is
generally provided to advertisers at no cost; therefore, no advertising
revenues are derived from prototype directories. Because the future economic
benefit of the direct costs related to prototype directories cannot be
determined, such direct costs are charged to expense as incurred. The Company
had no prototype directories for the periods ended June 30, 1998 and 1997.
Telecommunications revenues are recognized when long-distance, local
and 800 services are provided. Billings made in advance for local services
are deferred until earned.
Net earnings (loss) per share -- The Company has adopted the provisions
of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", which replaces the presentation of primary earnings per share and
fully diluted earnings per share with a presentation of basic earnings per
share ("Basic EPS") and diluted earnings per share ("Diluted EPS"). Basic EPS
excludes dilution and is determined by dividing income available to common
stockholders by the weighted average number of common shares outstanding
during the period. 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 of net loss the dilutive impact
of outstanding stock options, stock warrants and other common stock
equivalents are anti-dilutive and are therefore not considered in calculating
Diluted EPS.
Use of estimates -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Fair value of financial instruments--The Company'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 interest rates on its notes payable and capital lease
obligations represent fair market rates, and therefore their carrying value
approximates fair value.
Comprehensive Income -- The Company has adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," as
of the first quarter of 1998. SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components, however it
has no impact on the Company's net income or stockholders' equity. For the
quarters ended June 30, 1998 and 1997, the Company 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.
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<PAGE> 9
4. ACQUISITIONS
Concurrent with and as a condition to the closing of the IPO, the
Company acquired all of the outstanding capital stock of Great Western,
Valu-Line, Feist Long Distance, FirsTel and Tele-Systems, substantially all
of the assets of LDM II and LDM of Kansas, Switchboard and National Telecom,
and 49% of the outstanding capital stock of KINNET pursuant to the terms of
the Acquisitions. The Acquisitions are accounted for using the purchase
method of accounting with the parent company being treated as the accounting
acquirer. The interest in KINNET is accounted for under the equity method of
accounting.
The consideration paid for the Acquisitions included (i) cash, (ii)
Common Stock, (iii) promissory notes, and (iv) options and warrants to
purchase shares of Common Stock. For accounting purposes, in determining the
amount to be recorded as the purchase price attributable to the shares of
Common Stock issued for the Acquisitions, the value of such shares was
determined to be $38.0 million, which represents a discount of twenty percent
due to restrictions on the sale and transferability of the shares issued.
The following table sets forth for accounting purposes the fair value of
consideration paid with respect to the Acquisitions and the assets acquired.
The purchase price allocation has not been finalized due to the effect of
certain tax considerations of the acquired companies and the valuation of
consideration paid in the form of options and warrants.
<TABLE>
<CAPTION>
(In thousands)
Consideration Paid for Acquired Companies:
<S> <C>
Cash $ 84,135
Common Stock 37,896
Notes Payable 17,350
Options and Warrants 361
--------
Total Purchase Price $139,742
========
Assets Acquired:
Net working capital $ 9,829
Property and equipment 3,941
Customer Lists 44,900
Goodwill 81,072
--------
Total Assets Acquired $139,742
========
</TABLE>
The promissory notes issued in the Acquisitions consist of (i) $15.0
million in notes payable two years from the closing of the Acquisitions and
bearing an annual rate of interest of five percent (5%), which notes may be
prepaid at any time and are subordinated to the Company's senior debt, (ii)
$2.0 million in notes convertible into shares of Common Stock at $14.00 per
share, payable two years from the closing of the Acquisitions and bearing an
annual rate of interest of ten percent (10%), which notes may be prepaid at
any time and are subordinated to the Company's senior debt, and (iii) a
$350,000 promissory note payable in three equal annual installments on each
anniversary and bearing an annual interest rate of seven percent (7%), which
note may be prepaid at any time.
The following pro forma information presents results of operations as
if the Acquisitions 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 future results of the combined companies.
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Pro forma information (In Thousands):
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1997 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Total revenues $89,292 $50,812 $60,210
Net income (loss) $(5,577) $ (225) $(1,630)
Earnings (loss) per share $ (.28) $ (.01) $ (.08)
</TABLE>
5. SUBSEQUENT EVENT
In August 1998, the Company entered into a $25.0 million revolving
credit facility with a bank. The credit facility will be used for working
capital, capital expenditures and general corporate purposes. Borrowings
under the facility are limited to 85% of eligible accounts receivable and
interest is due at LIBOR plus 1.5% or the bank's base rate plus .5%. The
credit facility expires on August 6, 1999.
6. NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
establishes standards for reporting information about operating segments in
annual financial statements and requires that enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. The Company will adopt the statement for its year end 1998
financial statements. The Company is currently evaluating the impact that the
statement will have on its reportable segments. Adoption of this statement
will have no impact on the Company's net income, financial position or cash
flows.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", ("SFAS 132"). This statement requires additional
pension related disclosures. Adoption of this statement will have no impact
on the Company's net income, financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants
(AICPA), issued Statement of Position 98-1 (SOP 98-1), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This SOP
is effective for financial statements for fiscal years beginning after
December 15, 1998, with earlier application encouraged. The Company currently
accounts for its software costs generally in accordance with this SOP.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." This SOP provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. The Company is
in compliance with this SOP.
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Item 2. - Management's Discussion and Analysis of Results of Operations and
-----------------------------------------------------------------
Financial Condition
-------------------
The statements contained in this Report that are not historical facts
(including statements as to the Company's plans, beliefs or expectations) are
forward-looking statements within the meaning of the federal securities laws
that involve certain risks and uncertainties. Management wishes to caution
the reader that these forward-looking statements such as the Company's plans
to transition its resale customers to its own switch-based facilities, the
Company's belief that it will be able to achieve higher margins on its own
facilities-based local telecommunications services, the Company's
expectations that it will be able to meet its short-term working capital and
capital requirements from cash provided by operations and its existing credit
facilities, and the potential effects of the year 2000 issues, are plans and
predictions regarding future events and circumstances. Actual events or
results may differ materially as a result of risks facing the Company. For a
detailed discussion of those risks, reference is made to the statement under
"Risk Factors", in the Company's Registration Statement on Form S-1,
Securities Act File Number 333-37671 filed with the Securities and Exchange
Commission on February 12, 1998.
Results of Operations
General
The following table sets forth, for the periods presented, certain
actual and pro forma information relating to the operations of the Company,
expressed as a percentage of revenues, excluding stock-based compensation
expense:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- ------------------------------
Actual Pro Forma Pro Forma Pro Forma
June 30, 1998 June 30, 1997 June 30,1998 June 30,1997
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Telecom revenues 54.3% 53.2% 48.1% 46.1%
Directory revenues 45.7 46.8 51.9 53.9
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Cost of services 61.7 54.3 56.9 52.5
Selling, general and administrative
expenses 30.8 32.6 31.5 32.3
Depreciation and amortization 9.1 9.7 8.1 9.0
----- ----- ----- -----
Income (loss) from operations (1.6) 3.4 3.5 6.2
===== ===== ===== =====
</TABLE>
Prior to February 1998, ACG had not conducted any operations other than
those relating to the IPO and the Acquisitions. Consequently, the actual
financial statements included herein relate only to the parent company prior
to February 18, 1998, but include the results of the Acquired Companies for
the period February 18, 1998 to June 30, 1998. Certain pro forma operating
information is presented for comparative purposes as if the IPO and the
Acquisitions had occurred on January 1, 1997. The pro forma operating
information does not purport to represent the results of operations of the
Company that would have actually occurred if the IPO and the Acquisitions had
in fact occurred on the date stated above. Since the Acquired Companies were
not under common control or management, historical combined
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results of operations may not be comparable to, or indicative of, future
performance. The pro forma Consolidated Statements of Operations reflect the
historical results of operations of the Acquired Companies and were derived
from the respective Acquired Companies' financial statements.
Results of operations for the three months ended June 30, 1998, compared to
the pro forma results for the three months ended June 30, 1997
Revenues for the three months ended June 30, 1998, increased 20.3% to
$28.0 million from $23.3 million in the second quarter of 1997. Revenues
from telecommunication services were $15.2 million, or 54.3% of total
revenues, compared to $12.4 million and 53.2% of pro forma total revenue in
1997. Revenues form the telecommunications segment increased 22.7% over the
comparable quarter of 1997 and 10.5% over the sequential quarter of 1998. The
increase in telecommunications revenue is due to increased local service
revenue as the Company implemented aggressive sales and marketing of local
services in addition to long-distance services. The Company did not provide
any local service in the second quarter of 1997, compared to second quarter
1998 local service revenue of $3.4 million. Local service revenue for the
second quarter of 1998, increased 55.8% over first quarter 1998 pro forma
local service revenue of $2.2 million. In the three months ended June 30,
1998, the Company installed approximately 18,300 local access lines. At June
30, 1998, the Company had 45,242 local access lines in service.
Directory revenues increased 17.6% to $12.8 million from pro forma
$10.9 million in the 1997 second quarter. Directory revenues were 45.7% of
total revenue in the second quarter of 1998, a decrease from 46.8% of total
revenue in the 1997 second quarter. The Company distributed six directories
in both the second quarter of 1998 and 1997. Approximately $.6 million of the
increase is due to higher advertising revenue from recurring directories, and
approximately $1.3 million of the increase is due to the net impact of the
timing of the distribution of certain directories. The Company does not
recognize revenue from a directory until a directory is substantially
delivered.
Cost of services for the three months ended June 30, 1998, increased to
$17.3 million from pro forma $12.6 million in the second quarter of 1997, an
increase of 36.7%. Cost of services as a percentage of total revenues was
61.7% in 1998 compared to 54.3% in 1997. The increase is due primarily to
increased costs of providing local and long distance services.
Telecommunication cost of service was $11.6 million, or 76.4% of
telecommunications revenues for the three months ended June 30, 1998, compared
to pro forma cost of telecommunications services of $7.4 million, or 60.4% of
pro forma telecommunication revenues, in the second quarter of 1997. The
higher cost of providing telecommunications service in gross dollars is due to
the increase in local service revenue and increased long distance usage. The
increase in operating costs of the telecommunication segment as a percentage
of telecommunication revenues in 1998 is due to higher volume of lower margin
local service and also due to lower gross margins from long distance. In
response to competition for long distance service, the Company reduced prices
thereby lowering gross margin on long distance service. When the Company
deploys its own local switching facilities, the Company expects to transition
its resale customers to its own switch-based facilities. The Company
believes that it will be able to achieve higher gross margins by providing
telecommunications services on its own network than it can currently obtain
by reselling the services of the incumbent providers. The lower gross margin
of the telecommunications segment in the second quarter of 1998 is partially
offset by higher gross margins of the directory publications
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segment. The cost of directory in the second quarter of 1998 was $5.7
million, or 44.2% of directory revenue, compared to directory costs of $5.2
million, or 47.3% of directory revenue, in the second quarter of 1997. The
lower cost of directory services as a percentage of sales is due to
incremental advertising revenues from recurring directories exceeding the
incremental cost associated with those revenues.
Selling, general and administrative expenses for the second quarter
ended June 30, 1998, increased to $8.6 million from pro forma $7.6 million in
1997. The increase is due primarily to the direct costs associated with the
higher sales volume. As a percentage of total revenues, selling and
administrative expenses were 30.8% in 1998, and 32.6% in 1997. The decrease
in the expense rate is due to economies of scale realized for general and
administrative costs as a result of the higher sales volume. The Company
expects that its selling, general and administrative costs will continue to
increase as the Company undertakes more aggressive sales and marketing
programs to develop its businesses.
Depreciation and amortization was approximately $2.6 million in the
second quarter of 1998, an increase of $.3 million from pro forma
depreciation and amortization of $2.3 million in 1997. Depreciation and
amortization includes approximately $2.0 million of amortization relating to
intangible assets resulting from the Acquisitions in both periods. The Company
expects that its depreciation and amortization will continue to increase as
the Company implements its strategy of installing its own network and
facilities.
Interest expense for the second quarter was approximately $.3 million
in both 1998 and on a pro forma basis in 1997. The interest is primarily on
debt to related parties issued as consideration for certain of the Acquired
Companies.
Income tax expense was $.5 million in the second quarter of 1998
compared to pro forma income taxes of $.9 million in 1997. The decrease is
due to lower taxable income in 1998 than in 1997. The Company's effective
tax rate is substantially higher than statutory tax rates principally because
amortization of certain intangible assets is not deductible for tax purposes.
Net loss was $1.0 million, or $.05 per share, in the three months ended
June 30, 1998, compared to pro forma net loss of $.5 million, or $.02 per
share in 1997 second quarter. The decrease is primarily due to higher volume
of lower margin local service and lower margins from long distance service
discussed above.
Earnings before interest, taxes, depreciation, amortization, equity
interest in KINNET and stock-based compensation expense (EBITDA) decreased
to $2.4 million for the three months ended June 30, 1998, from pro forma
EBITDA of $3.2 million in the second quarter of 1997. EBITDA is a measure
commonly used in the telecommunications industry and is presented to assist
in an understanding of the Company's operating results and is not intended to
represent cash flow or results of operations in accordance with generally
accepted accounting principals. EBITDA is not necessarily comparable to
other similarly titled measures
13
<PAGE> 14
Pro forma results of operations for the six months ended June 30, 1998,
compared to the six months ended June 30, 1997
Pro forma revenues for the six months ended June 30, 1998, increased
18.5% to $60.2 million from $50.8 million in the first six months of 1997.
Pro forma revenues from telecommunication services were $29.0 million, or
48.1% of pro forma total revenues, compared to $23.4 million and 46.1% of
total revenues in 1997. The increase in telecommunications revenues is due
to increased local service revenue as the Company implemented aggressive
sales and marketing of local services in addition to long distance services.
The Company did not provide any local service in the first quarter of 1997,
compared to the first half of 1998 pro forma local service revenue of $5.5
million. At June 30, 1998 the Company had approximately 45,000 local access
lines in service.
Pro forma directory revenues increased 14.1% to $31.2 million from
$27.4 million in the first six months of 1997. The Company distributed
eleven directories in both the first half of 1998 and 1997. Approximately
$1.7 million of the increase is due to higher advertising revenue from
recurring directories, and approximately $2.1 million of the increase is due
to the net impact of the timing of the distribution of certain directories.
The Company does not recognize revenue from a directory until a directory is
substantially delivered.
Pro forma cost of services for the six months ended June 30, 1998,
increased to $34.2 million from $26.7 million in 1997, an increase of 28.2%.
Pro forma cost of services as a percentage of pro forma total revenues was
56.9% in 1998 compared to 52.5% in 1997. The higher cost percentage in the
first half of 1998 is due to the telecommunications segment.
Telecommunication cost of service was $20.6 million, or 70.9% of
telecommunications revenues for the six months ended June 30, 1998, compared
to pro forma cost of telecommunications services of $14.5 million, or 61.9%
of pro forma telecommunication revenues, in the first half of 1997. The
higher cost of providing telecommunications service in gross dollars is due
to the increase in local service revenue and increased long distance usage.
The increase in operating costs of the telecommunication segment as a
percentage of telecommunication revenues in 1998 is due to higher volume of
lower margin local service and also due to lower gross margins from long
distance. When the Company deploys its own local switching facilities, the
Company expects to transition its resale customers to its own switch-based
facilities. The Company believes that it will be able to achieve higher
gross margins by providing telecommunications services on its own network
than it can currently obtain by reselling the services of the incumbent
providers. The lower gross margin of the telecommunications segment in the
first six months of 1998 is partially offset by higher gross margins of the
directory segment. The cost of directory services in the six months ended
June 30, 1998 was $13.7 million, or 43.8% of directory revenue, compared to
directory costs of $12.2 million, or 44.5% of directory revenue, in the
comparable period of 1997. The lower cost of directory services as a
percentage of sales is due to incremental advertising revenues from recurring
directories exceeding the incremental cost associated with those revenues.
Pro forma selling, general and administrative expenses for the six
month period ended June 30, 1998, increased to $18.9 million from $16.4
million in the same period of 1997. The increase is due primarily to the
direct costs associated with the higher sales volume. As a percentage of
total revenues, pro forma selling and administrative costs were 31.5% in
1998, and 32.3% in 1997. The decrease in the expense rate is due to
economies of scale associated with the Company's higher sales volume. The
Company expects that its selling, general and administrative costs will
increase as the Company undertakes more aggressive sales and marketing
programs to develop its businesses.
14
<PAGE> 15
Pro forma depreciation and amortization was approximately $4.9 million
in the six months ended June 30, 1998, compared to $4.6 million in the first
six months of 1997. Pro forma depreciation and amortization includes
approximately $4.0 million of amortization relating to intangible assets
resulting from the Acquisitions in both periods. The Company expects that its
depreciation and amortization will continue to increase as the Company
implements its strategy of installing its own network and facilities.
Stock-based compensation of $1.8 million was expensed in the six months
ended June 30, 1998, relating to 300,000 stock options issued in December
1997. The options vested equally over a three-month period beginning on the
date of the grant. This amount represents the remaining two thirds of the
total compensation expense expected to be realized based on the estimated
fair market value of the options on the date of the grant. Stock-based
compensation expense of $.8 million was recognized in the fourth quarter of
1997.
Pro forma interest expense was approximately $.7 million in both the
first six months of 1998 and 1997. The interest is primarily on debt to
related parties issued as consideration for certain of the Acquired
Companies.
Pro forma income tax expense was $1.4 million in the first half of 1998
compared to $2.4 million in 1997. The decrease is due to lower taxable
income in the first half of 1998 than in the first half of 1997. The
Company's effective tax rate is substantially higher than statutory tax rates
principally because amortization of certain intangible assets is not
deductible for tax purposes.
Pro forma net loss was $1.6 million, or $.08 per share, in the six
months ended June 30, 1998, compared to pro forma net loss of $.2 million,
or $.01 per share in the first half of 1997. The increase in net loss is due
primarily to the stock-based compensation expense of $1.8 million. Excluding
this item, net loss for the six months ended June 30, 1998, would have been
$.6 million, or $.03 per share. The increase in net loss excluding the
stock-based compensation expense is due to the higher cost of providing local
service and lower margins from the Company's long distance service.
Pro forma earnings before interest, taxes, depreciation, amortization,
equity interest in KINNET and stock-based compensation expense (EBITDA) was
$7.4 million for the six months ended June 30, 1998, a decrease from $7.9
million for the six months ended June 30, 1997. The decrease is primarily
due to lower earnings from the telecommunications operations in 1998, offset
partially by higher earnings from the Company directory publishing segment.
EBITDA is a measure commonly used in the telecommunications industry and is
presented to assist in an understanding of the Company's operating results
and is not intended to represent cash flow or results of operations in
accordance with generally accepted accounting principles.
Actual period ended June 30, 1998
The Company did not complete the Acquisitions until February 18, 1998,
therefore, actual results include only the activity of the Acquired Companies
from February 18, 1998 to June 30, 1998. For the period ended June 30, 1998,
actual loss from operations was $1.3 million and net loss was $2.2 million.
Excluding the stock-based compensation of $1.8 million, the Company had
income from operations of
15
<PAGE> 16
$.5 million and a net loss of $.4 million. The Company had no operating
revenue in 1997 and was engaged principally in activities relating to the
IPO.
Liquidity and Capital Resources
The Company's working capital at June 30, 1998 was $18.2 million and
its ratio of current assets to current liabilities was 1.9 to 1.0.
On February 18, 1998, the Company completed its initial public offering
and simultaneously acquired 9 operating companies and a 49% interest in
another company. Cash proceeds from the offering, net of offering costs,
were $99.9 million. Of this amount, $84.1 million was used to pay the cash
portion of the purchase price of the acquired companies, $3.6 million was
used to retire debt of the Company and the Acquired Companies, and $1.75
million was paid to a stockholder of the Company for a five-year non-compete
agreement. Stockholders of the Acquired Companies that became executive
officers or directors of the Company upon the consummation of the
Acquisitions received approximately $35.6 million of the cash purchase price
paid for the Acquisitions.
On August 6, 1998, the Company entered into a $25.0 million revolving
credit facility with a bank. The credit facility will be used for working
capital, capital expenditures and general corporate purposes. Borrowings
under the facility are limited to 85% of eligible accounts receivable and
interest is due at LIBOR plus 1.5% or the bank's base rate plus .5%. The
credit facility expires on August 6, 1999.
The Company expects that it will be able to meet its short-term working
capital and capital requirements from cash provided by operations and funds
available under its revolving credit facility. The Company continues to
evaluate other financing alternatives in order to finance its investment in
network facilities and other growth strategies.
YEAR 2000 ISSUE
The year 2000 issue is a matter of world-wide concern for carriers and
affects many aspects of telecommunications technology, including the computer
systems and software applications that are essential for network administration
and operations. A significant portion of the voice and data networking and
network management devices have date-sensitive processing in them which affect
network administration and operations functions such as service activation,
service assurance and billing processes.
The Company and its vendors have evaluated the year 2000 readiness of
the Company's computer systems and software applications. Certain of the
Company's key processing systems have recently been implemented and the
vendors of such systems have represented to the Company that the systems are
compliant with year 2000 issues without any modification and the Company will
require confirmation of year 2000 compliance in its future requests for
proposals from equipment and software vendors. Other legacy computer systems
and software that are currently in use are not currently compliant with year
2000 issues; however, the Company had previously planned on replacing such
systems in late 1998 for general business reasons other than the year 2000
issue. The failure of the Company's computer systems and software applications
to accommodate the year 2000 could have a material adverse effect on the
Company's business, financial condition, results of operation and cash flow.
Further, if the networks and systems of the ILECs, IXCs and others on
whose services the Company depends and with whom the Company's networks and
systems must interface are not year 2000 functional, it could have a material
adverse effect on the operation of the Company's networks and, as a result,
have a material adverse effect on the Company. Most major domestic carriers
have announced that they expect all of their network and support systems to be
year 2000 functional by mid 1999. However, other domestic and international
carriers may not be year 2000 functional. The Company plans to participate in
the interoperability testing processes being put in place by industry
organizations and the Company intends to continue to monitor the performance
of its accounting, information and processing systems and software
applications and those of its third-party constituents to identify and resolve
any year 2000 issues. To the extent necessary, the Company may need to
replace, upgrade or reprogram certain systems and software applications to
ensure that all of the Company's computer systems and software applications
and all of its interoperability applications are year 2000 functional.
However, based on current information, the Company does not believe that it
will incur costs for any replacement, upgrade or reprogramming of its existing
computer systems or software applications to resolve any year 2000 issues that
will be materially in excess of those currently budgeted.
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
-----------------
Prior to the closing of ACG's initial public offering ("IPO") and ACG's
acquisition of Great Western Directories, Inc. ("Great Western"), Richard
O'Neal, the principal shareholder of Great Western and a current director of
ACG, expressed disagreement with the effect of the reverse stock split
involving ACG's predecessor (to be effected in connection with the
consummation of the IPO) on certain warrants that had been issued to the
stockholders of Great Western at the time of the execution of the initial
acquisition agreement between ACG and Great Western (the "Warrants").
Consolidated Partners Founding Fund ("CPFF"), a stockholder of ACG's
predecessor (as well as a stockholder of ACG after the consummation of the
IPO) and Mr. O'Neal executed a written agreement dated February 11, 1998
agreeing to engage in good faith negotiations after the Offering to determine
the type and amount of any consideration appropriately payable by CPFF to the
holders of the Warrants. The written agreement further provided that if CFPP
and Mr. O'Neal could not reach a negotiated settlement within
16
<PAGE> 17
forty-five days after the closing of the IPO, the matter would be referred to
binding arbitration and the cost of such arbitration would be borne by CPFF.
CPFF agreed not to effect any distribution of ACG common stock to its
interest owners prior to the resolution of these matters.
No resolution was reached between Mr. O'Neal and CPFF within 45 days
following the consummation of the IPO and the matter has been referred to
arbitration. This matter was scheduled for arbitration on May 21, 1998,
however, the Company understands that pursuant to a court order, arbitration
of this matter has been stayed pending a determination by the court of whether
the agreement is binding and enforceable.
In the event of a ruling or determination adverse to CPFF, any payment
which may be required by such a ruling or determination will be made solely by
CPFF. Such a payment will not involve the assets of the Company or the
issuance of additional Common Stock or Common Stock equivalents. However, such
a payment may be construed for accounting purposes as a capital contribution
by CPFF and deemed a payment by the Company of additional consideration for
the Great Western acquisition. This would increase the goodwill associated
with the Great Western acquisition and the related amortization charges.
On May 14, 1998, Plaintiff Brenda A. Baldwin ("Plaintiff") filed a
three count Complaint against Great Western Directories, Inc. ("Great Western")
and Richard O'Neal ("O'Neal"), President of Great Western, Plaintiff alleges
that, pursuant to a decree of divorce, she received 31.25 shares of common
stock of Great Western, representing 2.5% of the issued and outstanding stock
of Great Western prior to January 10, 1997. Plaintiff alleges that she sold
her stock to Great Western on January 10, 1997, for $225,000 as a result of
certain misrepresentations and omissions by O'Neal, including a representation
that Great Western was struggling financially and its prospects for the future
were poor. Plaintiff also alleges that prior to the sale of her shares,
Mr. O'Neal was aware of negotiations between Great Western and Advanced
Communications Corp. regarding the sale of all of the shares of Great Western
to Advanced Communications Corp. and that he failed to disclose this
information.
Shortly after the sale by Plaintiff, Great Western reissued the
Plaintiff's shares to Plaintiff's former husband, Ron Baldwin. Mr. Baldwin,
who already has an ownership interest in the company, paid $225,000 for the
shares.
On June 16, 1997, the shareholders of Great Western entered into a stock
purchase agreement with Advanced Communications Corp. pursuant to which they
agreed to sell all of the issued and outstanding shares of Great Western. The
stock purchase agreement was restated on October 6, 1997. On February 12, 1998,
Advanced Communications Group, Inc., successor to Advanced Communications
Corp., completed an initial public offering and subsequently acquired all of
the issued and outstanding shares of Great Western pursuant to the restated
stock purchase agreement. Plaintiff alleges that had she not sold her shares,
she would have received consideration of approximately $2,350,000.
Count I of the Complaint alleges that Great Western and O'Neal violated
Section 10b of the Securities Act of 1934 and Rule 10b-5 by reason of the
alleged misrepresentations and omissions described above. Count II of the
Complaint is a claim under the Texas securities laws based upon the alleged
misrepresentations and omissions described above. Count III of the Compalint
is a common law fraud claim also based on the alleged misrepresentations and
omissions described above. Plaintiff seeks actual and punitive damages in an
unspecified amount, as well as costs and attorneys' fees.
Great Western and O'Neal have filed an answer denying the substantive
allegations of Plaintiff's Complaint and denying any liability to Plaintiff.
Preliminary discovery has taken place in the form of a production of documents
by the parties.
17
<PAGE> 18
Item 6. - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit 3.1 - Restated Certificate of Incorporation
as Amended
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 1998, the company filed a Report on
Forma 8-K dated May 5, 1998 - Item 2 (Acquisition or Disposition of Assets)
which contained the following financial statements:
ADVANCED COMMUNICATIONS GROUP, INC. FINANCIAL STATEMENTS
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1996 and 1997
Consolidated Statements of Operations for the period from inception (June 1,
1996) through December 31, 1996 and the year ended December 31, 1997
Consolidated Statements of Changes in Stockholders' Deficit for the period
from inception (June 1, 1996) December 31, 1996 and the year ended
December 31, 1997.
Consolidated Statements of Cash Flows for the period from inception (June 1,
1996) through December 31, 1996 and year ended December 31, 1997
Notes to Consolidated Financial Statements
GREAT WESTERN DIRECTORIES, INC. FINANCIAL STATEMENTS
Report of Independent Auditors
Balance Sheets as of December 31, 1996 and December 31, 1997
Statements of Operations for the year ended January 31, 1996, and the two
years ended December 31, 1997
18
<PAGE> 19
Statements of Stockholders' Equity for the year ended January 31, 1996, the
11 months ended December 31, 1996 and the year ended December 31, 1997
Statements of Cash Flows for the year ended January 31, 1996, and the two
years ended December 31, 1997
Notes to Financial Statements
VALU-LINE OF LONGVIEW, INC. FINANCIAL STATEMENTS
Report of Independent Auditors
Combined Balance Sheets as of December 31, 1996 and 1997
Combined Statements of Income for the three years ended December 31, 1995,
1996 and 1997
Combined Statements of Stockholders' Equity for the three years ended
December 31, 1995, 1996 and 1997
Combined Statements of Cash Flows for the three years ended December 31,
1995, 1996 and 1997
Notes to Combined Financial Statements
FEIST LONG DISTANCE SERVICE, INC. FINANCIAL STATEMENTS
Report of Independent Auditors
Balance Sheets as of December 31, 1996 and 1997
Statements of Operations for the two years ended December 31, 1997
Statements of Stockholders' Equity for the two years ended December 31, 1997
Statements of Cash Flows for the two years ended December 31, 1997
Notes to Financial Statements
FIRSTEL, INC. FINANCIAL STATEMENTS
Report of Independent Auditors
Balance Sheets as of December 31, 1996 and 1997
Statements of Operations for the three years ended December 31, 1997
Statements of Stockholders' Deficit for the three years ended December 31,
1997
Statements of Cash Flows for the three years ended December 31, 1997
Notes to Financial Statements
KIN NETWORK, INC. FINANCIAL STATEMENTS
Reports of Independent Auditors
Balance Sheets as of December 31, 1996 and 1997
Statements of Operations for the two years ended December 31, 1997
Statements of Stockholders' Equity for the two years ended December 31, 1997
Statements of Cash Flows for the two years ended December 31, 1997
Notes to Financial Statements
19
<PAGE> 20
ADVANCED COMMUNICATIONS GROUP, INC. UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS
Basis of Presentation of Unaudited Pro Forma Combined Financial Statements
Unaudited Pro Forma Combined Balance Sheet as of December 31, 1997
Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1996
Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1997
Notes to Pro Forma Combined Financial Statements
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Advanced Communications Group, Inc.
(Registrant)
Date: August 14, 1998 /s/ Richard Anthony
-------------------
Richard Anthony
President and Chief Executive Officer
Date: August 14, 1998 /s/ William H. Zimmer III
-------------------------
William H. Zimmer
Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
20
<PAGE> 1
PAGE 1
State of Delaware
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED
CERTIFICATE OF "ADVANCED COMMUNICATIONS GROUP, INC.", FILED IN THIS OFFICE
ON THE NINTH DAY OF OCTOBER, A.D. 1997, AT 3:10 O'CLOCK P.M.
/s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
2802188 8100 AUTHENTICATION: 8900125
981043068 DATE: 02-03-98
<PAGE> 2
RESTATED CERTIFICATE OF INCORPORATION
OF
ADVANCED COMMUNICATIONS GROUP, INC.
The name of the corporation is Advanced Communications Group, Inc.
(the "Corporation"). The name of the Corporation as originally incorporated
was New ACG, Inc. The original certificate of incorporation of the
Corporation was filed with the Secretary of State of the State of Delaware
(the "Secretary of State") on September 29, 1997 and amended by an instrument
filed with the Secretary of State on October 9, 1997 to change the
Corporation's name to Advanced Communications Group, Inc. This Restated
Certificate of Incorporation amends and restates the Corporation's original
certificate of incorporation, and amended, and was duly adopted in accordance
with Section 241 and Section 245 of the General Corporation Law of the State
of Delaware. The Corporation certifies that it has not authorized the issuance
of any of its stock or received any payment therefor.
ARTICLE I
---------
The name of the Corporation is Advanced Communications Group, Inc.
ARTICLE II
----------
The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, County of New Castle,
Wilmington, Delaware 19801. The name of the Corporation's registered agent at
such address is The Corporation Trust Company.
ARTICLE III
-----------
The purpose of the Corporation shall be to engage in any lawful act
or activity for which corporations may be organized and incorporated under the
General Corporation Law of the State of Delaware.
ARTICLE IV
----------
Section 1. Authorized Capital. The Corporation shall be authorized to
------------------
issue two hundred million (200,000,000) shares of capital stock, of which
one hundred eighty million (180,000,000) shares shall be shares of Common
Stock, $.0001 par value per share ("Common Stock"), and twenty million
(20,000,000) shares shall be shares of Preferred Stock, $.0001 par value
per share ("Preferred Stock").
Section 2. Preferred Stock. The Board of Directors is hereby expressly
---------------
authorized, subject to any limitations prescribed by applicable law, to provide
from time to time for the issuance of shares of Preferred Stock in one or more
series, and to determine the number of shares of each series and to fix for
each series of Preferred Stock such voting powers, full or limited or no voting
powers, and such designations, preferences and relative, participating,
optional or other special rights, and such qualifications, limitations or
restrictions thereof, as shall be stated and expressed in the
<PAGE> 3
resolution or resolutions adopted by the Board of Directors or a duly
authorized committee thereof providing for the issue of such series.
The authority of the Board of Directors with respect to each series
shall include, but not be limited to, determination of the following:
(a) the designated number of shares of such series, which
may subsequently be increased or decreased (but not below the number
of shares of that series then outstanding) by resolution of the Board
of Directors, without the consent of the holders of any outstanding
shares of Common Stock or Preferred Stock, and the distinctive
designation thereof;
(b) the voting powers, full or limited, if any, of the
shares of such series;
(c) the rights in respect of dividends on the shares of
such series, whether dividends shall be cumulative and, if so, from
which date or dates and the relative rights of priority, if any, of
payment of dividends on shares of such series and any limitations,
restrictions or conditions on the payment of dividends;
(d) the terms and conditions (including the price or prices
which may vary under different conditions and at different redemption
dates), if any, upon which all or any part of the shares of such series
may be redeemed, and any limitations, restrictions or conditions on
such redemption;
(e) the terms, if any, upon which the shares of such series
shall be convertible into or exchangeable for shares of any other
class, classes, or series, or other securities, whether or not issued
by the Corporation;
(f) the relative amounts, and the relative rights or
priority, if any, or payment in respect to shares of such series, which
the holders of the shares of such series shall be entitled to receive
upon liquidation, dissolution or winding up of the Corporation;
(g) the terms, if any, of any purchase, retirement or
sinking fund to be provided for the shares of such series;
(h) the restrictions, limitations and conditions, if any,
upon issuance of indebtedness and shares of the same series or of any
other class or series of the Corporation during the period any shares
of such series are outstanding; and
-2-
<PAGE> 4
(i) any other preferences and relative, participating,
optional or other rights or limitations not inconsistent with
applicable law, the provisions of this ARTICLE IV or any resolution of
the Board of Directors, or a duly authorized committee thereof,
pursuant thereto.
Section 3. Reacquired Stock. Subject to the requirements of applicable
----------------
law, shares of any series of Preferred Stock which have been redeemed or
converted, or which have been issued and reacquired in any manner, and retired
shall have the status of authorized and unissued shares of Preferred Stock and
may be reissued by the Board of Directors as shares of the same or any other
series of Preferred Stock.
Section 4. No Preemptive Rights. No holder of any shares of Common
--------------------
Stock or series of Preferred Stock, or any other security, option, warrant or
right issued by the Corporation, shall have any preemptive rights to subscribe
to any additional shares of Common Stock or any series of Preferred Stock, or
any other security, option, warrant or right issued by the Corporation, or any
security convertible into any series of Common Stock or Preferred Stock, or
any other security, option, warrant or right when now or hereinafter authorized
or issued by the Corporation, provided, however, subject to the rights of any
-------- -------
holder of Common Stock or any series of Preferred Stock, that pursuant to a
resolution or resolutions adopted by the Board of Directors, or any duly
authorized committee thereof, the Corporation may issue and dispose of any
securities (including, without limitation, Common Stock and Preferred Stock)
convertible into or carrying options, warrants or other rights to purchase or
otherwise acquire any other security or securities of the Corporation to such
persons or other entities and upon such terms and for such consideration as
the Board of Directors may determine and as may be permitted by applicable law,
without offering any such securities, either in whole or in part, to the
existing holders of any security of the Corporation.
Section 5. Exclusive Rights of Common Stock. Subject to the rights of
--------------------------------
the holders of any series of Preferred Stock, and except as otherwise provided
by law, the Common Stock shall have the exclusive right to vote for the
election of directors of the Corporation (each a "Director") and for all other
purposes. The number of authorized shares of Common Stock and Preferred Stock
may be increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority in voting
power of the stock of the Corporation entitled to vote thereon irrespective of
the provisions of Section 242(b)(2) of the General Corporation Law of the
State of Delaware (or any successor provision thereto), and no vote of the
holders of either the Common Stock or the Preferred Stock voting separately
as a class shall be required therefor.
Section 6. Voting Rights of Common Stock. Each outstanding share of
-----------------------------
Common Stock shall entitle the holder thereof to one vote on each matter
properly submitted to the stockholders of the Corporation for their vote,
consent, waiver, release or other action.
-3-
<PAGE> 5
Section 7. Record Holders. The Corporation shall be entitled to treat
--------------
the person in whose name any share of its stock is registered in the records
of the Corporation, or with any agent of the Corporation employed as the stock
transfer agent of the Corporation, as the owner thereof for all purposes, and
the Corporation shall not be bound to recognize any equitable or other claim
to, or interest in, such share on the part of any other person or entity,
whether or not the Corporation shall have notice of such claim, except as
expressly provided by applicable law.
ARTICLE V
---------
Section 1. Annual Meetings of Stockholders. The annual meetings of
-------------------------------
stockholders of the Corporation (each a "Stockholder" and collectively,
"Stockholders") shall be held on such date and at such place and time as may
be fixed by resolution of the Board of Directors.
Section 2. Calling of Special Meetings of Stockholders. Subject to the
-------------------------------------------
rights of the holders of any series of Preferred Stock, and to the requirements
of applicable law, special meetings of Stockholders may be called only by
either (a) the Chairman of the Board of Directors, or (b) by the Board of
Directors pursuant to a resolution adopted by a majority of the total number
of Directors which the Corporation would have if there were no vacancies or
unfilled newly-created directorships (the "Whole Board").
Notwithstanding any other provisions of this Restated Certificate of
Incorporation, and notwithstanding that a lesser percentage may be permitted
from time to time by applicable law, no provision of this Section 2 of
ARTICLE V may be altered, amended or repealed in any respect, nor may any
provision inconsistent therewith be adopted, unless such alteration, amendment,
repeal or adoption is approved by the affirmative vote of the holders of at
least 80 percent of the combined voting power of the then outstanding shares
of the Corporation's stock entitled to vote generally in the election of
Directors ("Voting Stock"), voting together as a single class.
Section 3. Chairman of Stockholder Meetings. Each annual and special
--------------------------------
meeting of Stockholders shall be presided over by a Chairman, who shall have
the exclusive authority to, among other things, determine (a) whether business
and nominations have been properly brought before such meetings, and (b) the
order in which business and nominations properly brought before such meeting
shall be considered. The Chairman of each annual and special meeting shall be
the Chairman of the Board of Directors, or such person as shall be appointed
by the resolution approved by the majority of the Board of Directors.
Notwithstanding any other provisions of this Restated Certificate of
Incorporation, and notwithstanding that a lesser percentage may be permitted
from time to time by applicable law, no provision of this Section 3 of
ARTICLE V may be altered, amended or repealed in any respect, nor may any
provision inconsistent therewith be adopted, unless such alteration,
amendment, repeal
-4-
<PAGE> 6
or adoption is approved by the affirmative vote of the holders of at least
80 percent of the combined voting power of the outstanding shares of Voting
Stock, voting together as a single class.
Section 4. Notice of Stockholder Business and Nominations.
----------------------------------------------
(a) Annual Meetings of Stockholders.
-------------------------------
(i) Nominations of persons for election to the Board
of Directors and the proposal of business to be considered by the
Stockholders may be made at an annual meeting of Stockholders (A)
pursuant to the Corporation's notice of meeting, (B) by or at the
direction of the Board of Directors or (C) by any Stockholder who was
a Stockholder of record at the time of giving of notice provided for
in this Section, who is entitled to vote at the meeting and who
complies with the notice procedures set forth in this Section.
(ii) For nominations or other business to be properly
brought before an annual meeting by a Stockholder pursuant to Section
4(a)(i)(C) of this ARTICLE V, the Stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation and such
other business must otherwise be a proper matter for Stockholder action.
To be timely, a Stockholder's notice shall be delivered to the Secretary
at the principal executive offices of the Corporation not later than the
close of business on the 60th day nor earlier than the close of business
on the 90th day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that the date of
-------- -------
the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, notice by the Stockholder to be timely
must be so delivered not earlier than the close of business on the 90th
day prior to such annual meeting and not later than the close of
business on the later of the 60th day prior to such annual meeting or
the tenth day following the day on which public announcement of the
date of such meeting is first made by the Corporation. In no event
shall the public announcement of an adjournment of an annual meeting
commence a new time period for the giving of a Stockholder's notice as
described above. Such Stockholder's notice shall set forth:
(A) as to each person whom the Stockholder
proposes to nominate for election or reelection as a Director
all information relating to such person that is required to
be disclosed in solicitations of proxies for election of
Directors in an election contest, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and
Rule 14a-11 thereunder (including
-5-
<PAGE> 7
such person's written consent to being named in the proxy
statement as a nominee and to serving as a Director if
elected);
(B) as to any other business that the
Stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before
the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such
Stockholder and the beneficial owner, if any, on whose behalf
the proposal is made; and
(C) as to the Stockholder giving the notice
and the beneficial owner, if any, on whose behalf the
nomination or proposal is made (1) the name and address of
such Stockholder, as they appear on the Corporation's books,
and of such beneficial owner, (2) the class and number of
shares of the Corporation which are owned beneficially and of
record by such shareholder and such beneficial owner, and (3)
whether the proponent intends (or is part of a group which
intends) to solicit proxies from other stockholders in
support of such nomination or proposal.
(iii) Notwithstanding anything in the second sentence
of Section 4(a)(ii) of this ARTICLE V to the contrary, in the event that
the number of Directors to be elected to the Board of Directors is
increased and there is no public announcement by the Corporation naming
all of the nominees for Director or specifying the size of the
increased Board of Directors at least 70 days prior to the first
anniversary of the preceding year's annual meeting, a Stockholder's
notice required by this Section shall also be considered timely, but
only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of
business on the tenth day following the day on which such public
announcement is first made by the Corporation.
(b) Special Meetings of Stockholders. Only such business
--------------------------------
shall be conducted at a special meeting of Stockholders as shall have been
brought before the meeting pursuant to the Corporation's notice of meeting.
Nominations of persons for election to the Board of Directors may be made
at a special meeting of Stockholders at which Directors are to be elected
pursuant to the Corporation's notice of meeting (a) by or at the direction
of the Board of Directors or (b) provided that the Board of Directors has
determined that Directors shall be elected at such meeting, by any
Stockholder who is a Stockholder of record at the time of giving of notice
provided for in this Section 4, who shall be entitled to vote at the meeting
and who complies with the notice procedures set forth in this Section 4.
In the event the Corporation calls a special meeting of Stockholders for the
purpose of electing one or
-6-
<PAGE> 8
more Directors to the Board of Directors, any such Stockholder may nominate
a person or persons (as the case may be), for election to such position(s)
as specified in the Corporation's notice of meeting, if the Stockholder's
notice required by Section 4(a)(ii) of this ARTICLE V shall be delivered
to the Secretary at the principal executive offices of the Corporation not
earlier than the close of business on the 90th day prior to such special
meeting and not later than the close of business on the later of the 60th
day prior to such special meeting or the tenth day following the day on
which public announcement is first made of the date of the special meeting
and of the nominees proposed by the Board of Directors to be elected at such
meeting. In no event shall the public announcement of an adjournment of a
special meeting commence a new time period for the giving of a Stockholder's
notice as described above.
(c) General.
-------
(i) Only such persons who are nominated in
accordance with the procedures set forth in this Section 4 shall be
eligible to serve as Directors and only such business shall be
conducted at a meeting of Stockholders as shall have been brought
before the meeting in accordance with the procedures set forth in this
Section 4. Except as otherwise provided by applicable law, the
Chairman of the meeting shall have the power and duty to determine
whether a nomination or any business proposed to be brought before the
meeting was made or proposed, as the case may be, in accordance with
procedures set forth in this Section 4 and, if any proposed
nomination or business is not in compliance with this Section 4, to
declare that such defective proposal or nomination shall be disregarded.
(ii) For purposes of this Section 4, "public
announcement" shall mean disclosure in a press release reported by the
Dow Jones News Service, Associated Press or comparable national news
service or in a document publicly filed by the Corporation with the
Securities and Exchange Commission pursuant to Section 13, 14 or 15(d)
of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of
this Section 4, a Stockholder shall also comply with all applicable
requirements of the Exchange Act and the rules and regulations
thereunder with respect to the matters set forth in this Section 4.
Nothing in this Section 4 shall be deemed to affect any rights.
(A) of Stockholders to request inclusion of
proposals in the Corporation's proxy statement pursuant to
Rule 14a-8 under the Exchange Act; or
-7-
<PAGE> 9
(B) of the holders of any series of Preferred
Stock to elect Directors under specified circumstances.
Notwithstanding any other provisions of this Restated Certificate of
Incorporation, and notwithstanding that a lesser percentage may be permitted
from time to time by applicable law, no provision of this Section 4 of
ARTICLE V may be altered, amended or repealed in any respect, nor may any
provision inconsistent therewith be adopted, unless such alteration, amendment,
repeal or adoption is approved by the affirmative vote of the holders of at
least 80 percent of the combined voting power of the then outstanding shares
of Voting Stock, voting together as a single class.
Section 5. Election of Directors
---------------------
(a) Method of Election. Election of Directors at all
------------------
meetings of the Stockholders at which Directors are to be elected need not
be by written ballot and instead may be made by voice vote.
(b) Required Vote. At all meetings of Stockholders at which
-------------
Directors are to be elected, a plurality of the combined voting power of the
then outstanding shares of Voting Stock cast thereat shall elect Directors.
Each share of Common Stock shall be entitled to one vote, in person or by
proxy. Each share of any series of Preferred Stock shall be entitled to that
number of votes as designated by the Board of Directors in the resolution
establishing such issuance or series. Cumulative voting for the election of
Directors is expressly not permitted.
Section 6. Elections Other Than For Directors.
----------------------------------
(a) Method of Voting. Unless and except to the extent that
----------------
the By-Laws of the Corporation shall so require, all voting by Stockholders,
except the election of Directors of the Corporation, need not be by written
ballot and instead may be made by voice vote.
(b) Required Vote. Subject to the rights of holders of
-------------
any series of Preferred Stock, and except as otherwise provided by law,
applicable stock exchange rules or this Restated Certificate of
Incorporation, in all matters other than the election of Directors, the
affirmative vote of a majority of the shares present in person or
represented by proxy at the meeting and entitled to vote on the matter shall
be the act of the Stockholders.
Section 7. Inspectors of Elections; Opening and Closing the Pools. To
------------------------------------------------------
the extent required by applicable law, the Board of Directors by resolution
shall appoint one or more inspectors, which inspector or inspectors may include
individuals who serve the Corporation in other capacities,
-8-
<PAGE> 10
including, without limitation, as officers, employees, agents or
representatives, to act at the meetings of Stockholders and make a written
report thereof. One or more persons may be designated as alternate inspectors
to replace any inspector who fails to act. If no inspector or alternate has
been appointed to act or is able to act at a meeting of Stockholders, the
Chairman of the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before discharging his or her duties, shall take and
sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability. The inspectors
shall have the duties prescribed by law.
The Chairman of the meeting shall fix and announce at the meeting the
date and time of the opening and the closing of the polls for each matter upon
which the Stockholders will vote at a meeting.
Section 8. Stockholder Inspection of Corporate Records. Except as
-------------------------------------------
otherwise provided by applicable law, the Board of Directors shall have the
power to determine from time to time whether and, if allowed, under what
conditions, circumstances and regulations the books and records of the
Corporation shall be open to inspection by the Stockholders, and the
Stockholders' ability to inspect any of the books and records or any other
document of the Corporation are and shall be restricted or limited according
to the determination of the Board of Directors.
Section 9. No Stockholder Action by Written Consent. Subject to the
----------------------------------------
rights of the holders of any series of Preferred Stock, any action required or
permitted to be taken by the Stockholders must be effected at a duly called
annual or special meeting of Stockholders and may not be effected without such
a meeting by any consent in writing by such holders.
Notwithstanding any other provisions of this Restated Certificate of
Incorporation, and notwithstanding that a lesser percentage may be permitted
from time to time by applicable law, no provision of this Section 9 of
ARTICLE V may be altered, amended or repealed in any respect, nor may any
provision inconsistent therewith be adopted, unless such alteration, amendment,
repeal or adoption is approved by the affirmative vote of the holders of at
least 80 percent of the combined voting power of the then outstanding shares
of Voting Stock, voting together as a single class.
Notwithstanding any other provision of this Restated Certificate of
Incorporation, Section 9 of ARTICLE V shall only become effective upon the
consummation of the Corporation's initial underwritten public offering of its
Voting Stock.
-9-
<PAGE> 11
ARTICLE VI
----------
Section 1. Corporate Governance. The business and affairs of the
--------------------
Corporation shall be managed by or under the direction of its Board of
Directors.
Section 2. Number. Subject to the rights of the holders of any series
------
of Preferred Stock, the number of Directors constituting the Whole Board of
Directors shall not be less than three nor more than twelve. Subject to the
rights of the holders of any series of Preferred Stock, the number of Directors
shall be fixed from time to time exclusively pursuant to a resolution adopted
by a majority of the Whole Board.
Section 3. Qualifications.
--------------
(a) No person shall be nominated for election, nor elected,
as a Director of the Corporation if such person (i) has attained the age of
80 as of such nomination or election, or (ii) will attain the age of 80
prior to the expiration of the term of office he is being nominated or
elected for.
(b) No person may be a Director of the Corporation after
conviction of any offense under applicable law punishable by a term of
imprisonment exceeding one year or by death during the period after such
conviction that such person in connection with such conviction is
incarcerated, on parole, subject to court order or supervision, or subject
to supervision of any agency of a state or the federal government.
Section 4. Tenure. Commencing with the first annual meeting of
------
Stockholders, the Directors, other than those who may be elected by the holders
of any series of Preferred Stock, shall be divided, with respect to the time
for which they severally hold office, into three classes, as nearly equal in
number as is reasonably possible, with the term of office of the first class to
expire at the second annual meeting of Stockholders, the term of office of the
second class to expire at the third annual meeting of Stockholders and the term
of office of the third class to expire at the fourth annual meeting of
Stockholders, with each Director to hold office until his or her successor
shall have been duly elected and qualified. At each annual meeting of
Stockholders, commencing with the second annual meeting, (i) Directors elected
to succeed those Directors whose terms then expire shall be elected for a term
of office to expire at the third succeeding annual meeting of Stockholders
after their election, with each Director to hold office until his or her
successor shall have been duly elected and qualified, and (ii) if authorized
by a resolution of the Board of Directors, Directors may be elected to fill
any vacancy on the Board of Directors, regardless of how such vacancy shall
have been created.
Section 5. Vacancies. Subject to applicable law and the rights of the
---------
holders of any series of Preferred Stock, vacancies resulting from death,
resignation, retirement, disqualification,
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<PAGE> 12
removal from office or other cause, and newly created directorships resulting
from any increase in the authorized number of Directors, may be filled by the
affirmative vote of a majority of the remaining Directors, though less than a
quorum of the Board of Directors, and Directors so chosen shall hold office
for a term expiring at the annual meeting of Stockholders at which the term of
office of the class to which they have been elected expires and until such
Director's successor shall have been duly elected and qualified. No decrease
in the number of authorized Directors constituting the Whole Board shall
shorten the term of any incumbent Director.
Section 6. Removal. Subject to the rights of the holders of any series
-------
of Preferred Stock, any Director, or the entire Board of Directors, may be
removed from office at any time, but only for cause and only by the affirmative
vote of the holders of at least 80 percent of the combined voting power of the
then outstanding shares of Voting Stock, voting together as a single class.
Section 7. Rights of Classes Separately to Elect Directors.
-----------------------------------------------
Notwithstanding anything else contained in this Restated Certificate of
Incorporation, whenever holders of any one or more series of Preferred Stock
shall have the right, voting separately by class, classes or series, to elect
Directors at any annual or special meeting of Stockholders, the election, term
of office, filling of vacancies and other features of such directorships shall
be governed by the provisions of this Restated Certificate of Incorporation,
including any applicable resolutions of the Board of Directors adopted pursuant
to ARTICLE IV hereof. Directors so elected shall not be divided into classes
and shall be elected by such holders annually unless expressly provided
otherwise by those provisions or resolutions, and, during the prescribed terms
of office of those Directors, the Board of Directors shall consist of a number
of Directors equal to the number of those Directors plus the number of Directors
determined as provided in Section 2 of ARTICLE VI.
Section 8. Amendment. Notwithstanding any other provisions of this
---------
Restated Certificate of Incorporation, and notwithstanding that a lesser
percentage may be permitted from time to time by applicable law, no provision
of this ARTICLE VI may be altered, amended or repealed in any respect, nor
may any provision inconsistent therewith be adopted, unless such alteration,
amendment, repeal or adoption is approved by the affirmative vote of the
holders of at least 80 percent of the combined voting power of the then
outstanding shares of Voting Stock, voting together as a single class.
ARTICLE VII
-----------
Section 1. Director Amendment of By-Laws. In furtherance and not in
-----------------------------
limitation of the powers conferred by applicable law, the Board of Directors is
expressly authorized and empowered to make, alter, amend and repeal any or all
of the provisions of the By-Laws of the Corporation by a majority vote at any
regular or special meeting of the Board of Directors or by written consent.
-11-
<PAGE> 13
Section 2. Stockholder Amendment of By-Laws. Stockholders shall have
--------------------------------
the power to make, alter, amend and repeal the By-Laws of the Corporation by
the affirmative vote of the holders of at least 80 percent of the combined
voting power of the then outstanding shares of Voting Stock, voting together
as a single class.
ARTICLE VIII
------------
Section 1. Elimination of Certain Liability of Directors. A Director of
---------------------------------------------
the Corporation shall not be personally liable to the Corporation or its
Stockholders for monetary damages for breach of fiduciary duty as a Director,
except for liability (i) for any breach of the Director's duty of loyalty to
the Corporation 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 General Corporation Law of the State of
Delaware, or (iv) for any transaction from which the Director derived an
improper personal benefit. No amendment, alteration or repeal of, nor the
adoption of any provision inconsistent with, any provision of this Section 1
of ARTICLE VIII, which shall in any manner increase the actual or potential
liability of any Director of the Corporation, shall apply to or have any
effect on the liability or alleged liability of any such Director for or with
respect to actions or omissions of such Director occurring prior to such
amendment, alteration, repeal or adoption.
Section 2. Indemnification and Insurance.
-----------------------------
(a) Right to Indemnification. Each person who was or is
------------------------
made a party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he
or she, or a person of whom he or she is the legal representative, is or
was a Director or officer of the Corporation or, while a Director or officer
of the Corporation, is or was serving at the request of the Corporation as
a Director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such proceeding
is alleged action in an official capacity as a Director, officer, employee
or agent or in any other capacity while serving as a Director, officer,
employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the General Corporation Law
of the State of Delaware, as the same exists or may hereafter be amended,
against all expense, liability and loss (including attorneys' fees,
judgments, fines, amounts paid or to be paid in settlement, and excise taxes
or penalties arising under the Employee Retirement Income Security Act of
1974) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has
ceased to be a Director or officer and shall inure to the benefit of his or
her heirs, executors and administrators; provided, however, that, except
-------- -------
as provided in paragraph (b) hereof, the Corporation shall indemnify any
such person seeking indemnification in connection with a proceeding (or part
-12-
<PAGE> 14
thereof) initiated by such person only if such proceeding (or part thereof)
was authorized by the Board of Directors. The right to indemnification
conferred in this Section shall be a contract right and shall include the
right to be paid by the Corporation the expenses incurred in defending any
such proceeding in advance of its final disposition; provided, however,
-------- -------
that, if the General Corporation Law of the State of Delaware requires, the
payment of such expenses incurred by a Director or officer in his or her
capacity as a Director or officer (and not in any other capacity in which
service was or is rendered by such person while a Director or officer,
including, without limitation, service to an employee benefit plan) in
advance of the final disposition of a proceeding, shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such
Director or officer, to repay all amounts so advanced if it shall ultimately
be determined that such Director or officer is not entitled to be indemnified
under this Section or otherwise. The Corporation may, by action of the Board
of Directors, provide indemnification to employees and agents of the
Corporation with the same scope and effect as the foregoing indemnification
of Directors and officers.
(b) Right of Claimant to Bring Suit. If a claim under
-------------------------------
paragraph (a) of this Section is not paid in full by the Corporation within
30 days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, if successful in whole or in
part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. It shall be a defense to any such action (other
than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the
required undertaking, if any is required, has been tendered to the
Corporation) that the claimant has not met the standards of conduct which
make it permissible under the General Corporation Law of the State of
Delaware for the Corporation to indemnify the claimant for the amount
claimed, but the burden of proving such defense shall be on the
Corporation. Neither the failure of the Corporation (including its Board
of Directors, independent legal counsel, or its Stockholders) to have made a
determination prior to the commencement of such action that indemnification
of the claimant is proper in the circumstances because he or she has met
the applicable standard of conduct set forth in the General Corporation Law
of the State of Delaware, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
Stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
(c) Non-Exclusivity of Rights. The right to indemnification
-------------------------
and the payment of expenses incurred in defending a proceeding in advance
of its final disposition conferred in this Section shall not be exclusive of
any other right which any person may have or hereafter acquire under any
statute, provision of this Restated Certificate of Incorporation,
-13-
<PAGE> 15
By-Laws, agreement, vote of Stockholders or disinterested Directors of
the Corporation or otherwise.
(d) Insurance. The Corporation may maintain insurance, at
---------
its expense, to protect itself and any Director, officer, employee or agent
of the Corporation or another corporation, partnership, joint venture, trust
or other enterprise against any such expense, liability or loss, whether or
not the Corporation would have the power to indemnify such person against
such expense, liability or loss under the General Corporation Law of the
State of Delaware.
(e) Amendment. No amendment, alteration or repeal of, nor
---------
the adoption of any provision inconsistent with, any provision of Section 2
of ARTICLE VIII, which shall in any manner increase the actual or potential
liability of any Director of the Corporation shall apply to or have any
effect on the liability or alleged liability of any such Director for or
with respect to actions or omissions of such Director occurring prior to
such amendment, alteration, repeal or adoption.
Section 3. Amendment. Notwithstanding any other provisions of this
---------
Restated Certificate of Incorporation, and notwithstanding that a lesser
percentage may be permitted from time to time by applicable law, no provision
of this ARTICLE VIII may be altered, amended or repealed in any respect, nor
may any provision inconsistent therewith be adopted, unless such alteration,
repeal or adoption is approved by the affirmative vote of the holders of at
least 80 percent of the combined voting power of the then outstanding shares of
Voting Stock, voting together as a single class.
ARTICLE IX
----------
The Corporation reserves the right at any time from time to time to
amend, alter, change or repeal any provision contained in this Restated
Certificate of Incorporation, and any other provisions authorized by the laws
of the State of Delaware at the time in force may be added or inserted, in
the manner now or hereafter prescribed by applicable law; and all rights,
preferences and privileges of whatsoever nature conferred upon Stockholders,
Directors or any other persons whomsoever by and pursuant to this Restated
Certificate of Incorporation in its present form or as hereafter amended are
granted subject to the right reserved in this ARTICLE IX.
-14-
<PAGE> 16
IN WITNESS WHEREOF, the Corporation has caused this Restated
Certificate of Incorporation to be signed by Rod K. Cutsinger, its Chairman
of the Board, President and Chief Executive Officer, this 9th day of
October, 1997.
By: /s/ Rod K. Cutsinger
------------------------------------
Rod K. Cutsinger
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<PAGE> 17
PAGE 1
State of Delaware
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "ADVANCED COMMUNICATIONS GROUP, INC.", FILED IN THIS OFFICE
ON THE SEVENTEENTH DAY OF FEBRUARY, A.D. 1998, AT 12:30 O'CLOCK P.M.
[SEAL] /s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
2802188 8100 AUTHENTICATION: 8923656
981060557 DATE: 02-17-98
<PAGE> 18
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
Advanced Communications Group, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Company"), DOES HEREBY CERTIFY:
FIRST: That pursuant to Section 242(b) of the General Corporation Law
of the State of Delaware ("GCL"), the directors of the Company duly and
unanimously adopted resolutions proposing the amendment of the Restated
Certificate of Incorporation of the Company filed October 9, 1997 (the
"Restated Certificate"), declaring such amendment to be advisable and
submitting such amendment to the sole stockholder for consideration, and the
sole shareholder of the Company approved such resolutions by written consent
pursuant to Section 228 of the GCL. The resolutions setting forth the
amendment are as follows:
RESOLVED, that the Restated Certificate be amended by
changing Article VI, Section 3, by deleting the word "twelve" and
substituting the word "fourteen", and further
RESOLVED, that Article VI, Section 4, of the Restated
Certificate be amended by deleting such section and replacing it in
its entirety by the following:
Section 4. Tenure. Effective upon the due consummation
------
of the Corporation's initial underwritten public
offering of its Voting Stock, the Directors, other
than those who may be elected by the holder of any
series of Preferred Stock, shall be divided, with
respect to the time for which they severally hold
office, into three classes, as nearly equal in
number as is reasonably possible, with the term of
office of the first class to expire at the next
annual meeting of Stockholders thereafter, the
term of office of the second class to expire at
the second annual meeting of Stockholders thereafter
and the term of office of the third class to
expire at the third annual meeting of Stockholders
thereafter, with each Director to hold office
until his or her successor shall have been duly
elected and qualified. At each annual meeting of
Stockholders, commencing with such first annual
meeting after such
<PAGE> 19
initial underwritten public offering (i) Directors
elected to succeed those Directors whose terms
then expire shall be elected for a term of office
to expire at the third succeeding annual meeting
of Stockholders after their election, with each
Director to hold office until his or her successor
shall have been duly elected and qualified, and
(ii) if authorized by a resolution of the Board
of Directors, Directors may be elected to fill
any vacancy on the Board of Directors, regardless
of how such vacancy shall have been created.
SECOND: That said amendment was duly proposed and adopted in
accordance with the provisions of Sections 242 and 228 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this certificate to be
signed by William H. Zimmer III, its Executive Vice President, as of the
17th day of February, 1998.
Advanced Communications Group, Inc.
By: /s/ William H. Zimmer III
------------------------------------
Name: William H. Zimmer III
Title: Executive Vice President
-2-
<PAGE> 20
PAGE 1
State of Delaware
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
DESIGNATION OF "ADVANCED COMMUNICATIONS GROUP, INC.", FILED IN THIS OFFICE
ON THE SEVENTEENTH DAY OF FEBRUARY, A.D. 1998, AT 12:31 O'CLOCK P.M.
[SEAL] /s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
2802188 8100 AUTHENTICATION: 8923706
981065598 DATE: 02-17-98
<PAGE> 21
CERTIFICATE OF DESIGNATIONS
OF
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
OF
ADVANCED COMMUNICATIONS GROUP, INC.
Advanced Communications Group, Inc., a Delaware corporation (the
"Corporation"), does hereby certify that the following resolution was duly
adopted on February 11, 1998 by the Board of Directors of the Corporation
(the "Board of Directors") at a meeting duly convened and held pursuant to
authority conferred upon the Board of Directors by the provisions of the
Certificate of Incorporation of the Corporation that authorize the issuance
of up to 20,000,000 shares of preferred stock, par value $.0001 per share
("Preferred Stock"):
BE IT RESOLVED, that the Issuance of a series of Preferred Stock of
Advanced Communications Group, Inc. (the "Corporation") is hereby
authorized, and the designation, powers, preferences and relative,
participating, optional and other special rights and qualifications,
limitations and restrictions thereof, of the shares of said series,
in addition to those set forth in the Certificate of Incorporation of
the Corporation, are hereby fixed as follows:
SECTION 1. DESIGNATION. The distinctive serial designation of said
series shall be "Series A Redeemable Convertible Preferred Stock"
(hereinafter called "Series A"). Each share of Series A shall be
identical in all respects with all other shares of Series A.
SECTION 2. NUMBER OF SHARES. The number of shares in Series A shall
be 142,857, which number may from time to time be increased (but
not in excess of the total number of authorized shares of Preferred
Stock) or decreased (but not below the number of shares of Series A
then outstanding) by the Board of Directors. Shares of Series A
that are redeemed, purchased or otherwise acquired by the
Corporation or converted into Common Stock shall be cancelled and
shall revert to authorized but unissued shares of Preferred Stock
undesignated as to series.
SECTION 3. DEFINITIONS. As used herein with respect to Series A,
the following terms shall have the following meanings:
(a) The term "junior stock" shall mean the Common Stock and any
other class or series of stock of the Corporation hereafter
authorized over which Series A has preference or priority in
the distribution of assets on any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation.
(b) The term "parity stock" shall mean any other class or series
of stock of the Corporation hereafter authorized which ranks
on a parity with Series A in the distribution of assets on any
voluntary or involuntary liquidation, dissolution or winding
up of the Corporation.
(c) The term "senior stock" shall mean any other class or series
of stock of the Corporation hereafter authorized which ranks
ahead of the Series A in the distribution of assets on any
voluntary or involuntary liquidation, dissolution or winding
up of the Corporation.
(d) The term "business day" shall mean each Monday, Tuesday,
Wednesday, Thursday or Friday on which banking institutions
in New York City are not authorized or obligated by law or
executive order to close.
SECTION 4. DIVIDENDS. The holders of shares of Series A shall not be
entitled to receive, nor shall the Board of Directors declare,
dividends on the shares of Series A.
SECTION 5. LIQUIDATION RIGHTS. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs
of the Corporation, then, before any distribution of payment shall
be made to the holders of any junior stock, but after all
distributions and payments shall be made to the holders of senior
stock, the holders of shares of Series A shall be entitled to be
paid in full an amount equal to $14.00 per share (the "Liquidation
Amount").
<PAGE> 22
If upon any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation, the assets
distributable to the holders of Series A and the holders of all
parity stock shall be insufficient to permit the payment in full to
such holders of all preferential amounts payable to them, then the
entire assets of the Corporation then distributable, after
distribution of amounts payable with respect to the senior stock,
shall be distributed ratably among the holders of Series A and the
holders of all parity stock in proportion to the respective amounts
that would be payable on a per share basis if such assets were
sufficient to permit payment in full of all preferential amounts.
If the Liquidation Amount shall have been paid in full to each
holder of Series A, the remaining assets of the Corporation shall
be distributed among the holders of junior stock, according to
their respective rights and preferences and in each case according
to their respective numbers of shares.
For the purposes of this Section 5, the consolidation or merger of
the Corporation with any other corporations shall not be deemed to
constitute a voluntary or involuntary liquidation, dissolution or
winding up of the Corporation.
SECTION 6. REDEMPTION. If, by February 18, 1999, the Corporation
and Northwestern Public Service Company, a Delaware corporation,
have not entered into the written Strategic Alliance Agreement
contemplated by the letter agreement among the Corporation,
Northwestern Public Service Company and Northwestern Growth
Corporation dated January 15, 1998, then the Corporation, at the
option of the Board of Directors, may redeem in whole the shares of
Series A upon notice given as hereinafter specified, at a
redemption price per share equal to 62.5% of the Liquidation Amount.
If, by March 18, 1999, the Corporation shall not have mailed notice
of the redemption of all shares of Series A as provided below, then
the Corporation's right to redeem the Series A shall thereupon
expire.
Notice of every redemption of shares of Series A shall be mailed
by first class mail, postage prepaid, addressed to the holders of
record of the shares to be redeemed at their respective last
addresses as they shall appear on the books of the Corporation.
Such mailing shall be at least five days and not more than 30 days
prior to the date fixed for redemption. Any notice which is mailed
in the manner herein provided shall be conclusively presumed to
have been duly given, whether or not the stockholder receives such
notice, and failure duly to give such notice by mail, or any defect
in such notice, to any holder of shares of Series A designated for
redemption shall not affect the validity of the proceedings for the
redemption of any other shares of Series A.
If notice of redemption shall have been duly given, and if on or
before the redemption date specified therein all funds necessary
for such redemption shall have been set aside by the Corporation,
separate and apart from its other funds, in trust for the pro rata
benefits of the holders of the shares called for redemption, so as
to be and continue to be available therefor, then, notwithstanding
that any certificate for shares so called for redemption shall not
have been surrendered for cancellation, on and after such
redemption date, all shares so called for redemption shall no
longer be deemed outstanding and all rights with respect to such
shares shall forthwith on such redemption date cease and terminate,
except only the right of the holders thereof to receive the amount
payable on redemption thereof, without interest. Any funds so
deposited and unclaimed at the end of three years from such
redemption dates shall, to the extent permitted by law, be released
or repaid to the Corporation, after which time the holders of the
shares so called for redemption shall look only to the Corporation
for payment thereof.
SECTION 7. CONVERSION RIGHTS. Each holder of shares of Series A
shall have the right, at such holder's option, to convert such
shares into shares of Common Stock of the Corporation at any time
following August 15, 1999, on and subject to the following terms
and conditions:
(a) Each share of Series A shall be convertible at the principal
office of the Corporation and at such other office or offices,
if any, as the Board of Directors may designate, into such
number of fully paid and non-assessable shares (calculated as
to each conversion to the
2
<PAGE> 23
nearest 1/100th of a share) of Common Stock of the
Corporation, as shall be determined by dividing the
Liquidation Amount by the "conversion price"; provided,
however, that the conversion price shall be adjusted in
certain instances as provided in paragraph (d) below. The
conversion price is initially the Liquidation Amount.
(b) In order to convert shares of Series A into Common Stock the
holder thereof shall surrender at the office or offices
hereinabove mentioned the certificate or certificates
thereafter, duly endorsed or assigned to the Corporation or
in blank, and give written notice to the Corporation at said
office or offices that such holder elects to convert such
shares. No payment or adjustment shall be made upon any
conversion on account of any unpaid or accrued dividends on
account of any dividends on the Common Stock issued upon
conversion.
Shares of Series A shall be deemed to have been converted
immediately prior to the close of business on the day of the
surrender of the certificates for such shares for conversion
in accordance with the foregoing provisions, and the person
or persons entitled to receive the Common Stock issuable upon
such conversion shall be treated for all purposes at the
record holder or holders of such Common Stock at such time.
As promptly as practicable on or after the conversion date,
the Corporation shall issue and shall deliver at such office
a certificate or certificates for the number of full shares
of Common Stock issuable upon such conversion, together with
payments in lieu of any fraction of a share, as hereinafter
provided, to the person or persons entitled to receive the
same.
(c) No fractional shares of Common Stock shall be issued upon
conversion of shares of Series A, but, instead of any fraction
of a share which would otherwise be issuable, the
Corporation shall pay cash in respect of such fraction in an
amount equal to the same fraction of the Closing Price (as
defined below) on the date in which the certificate or
certificates for such shares were duly surrendered for
conversion, or, if such date is not a Trading Day (as defined
below), on the next Trading Day.
(d) The conversion price shall be deemed to be proportionately
adjusted from time to time as follows:
(i) In case the Corporation shall (A) pay a dividend
or make a distribution on its outstanding Common Stock in
shares of its capital stock, (B) subdivide its outstanding
Common Stock into a greater number of shares, (C) combine
its outstanding Common Stock into a smaller number of
shares or (D) issue by reclassification of its Common Stock
(whether pursuant to a merger or consolidation or otherwise)
any other shares of the Corporation, the holder of any
shares of Series A surrendered for conversion after the
record date fixed by the Board of Directors for such
dividend, distribution, subdivision, combination or
reclassification shall be entitled to receive the aggregate
number and kind of shares of capital stock of the
Corporation which, if such shares of Series A had been
converted immediately prior to such record date at the
conversion price then in effect, such holder would have been
entitled to receive by virtue of such dividend, distribution,
subdivision, combination or reclassification; and the
conversion price shall be deemed to have been adjusted
after such record date to apply to such aggregate number
and kind of shares. Such adjustment shall be made whenever
any of the events listed above shall occur.
(ii) In case the Corporation shall fix a record date
for issuing to all holders of Common Stock rights or
warrants expiring within 45 days entitling them to subscribe
for or purchase Common Stock at a price per share less than
the current market price per share (as determined pursuant
to clause (iv) below) on such record date, the conversion
price in effect from and after such record shall be reduced
so that it shall be equal to the price determined by
multiplying the conversion price in effect immediately prior
to such record date by a fraction, of which the numerators
shall be the number of shares of Common Stock outstanding
on such record date plus the number
3
<PAGE> 24
of shares of Common Stock which the aggregate offering price
of the total number of shares of Common Stock so offered for
subscription or purchase would purchase at such current
market price and of which the denominator shall be the
number of shares of Common Stock outstanding on such record
date plus the number of additional shares of Common Stock so
offered for subscription or purchase. For the purpose of
this clause (ii), the issuance of rights or warrants to
subscribe for or purchase securities convertible into
Common Stock shall be deemed to be the issuance of rights
or warrants to purchase the Common Stock into which such
securities are convertible at an aggregate offering price
equal to the aggregate offering price of such securities plus
the minimum aggregate amount (if any) payable upon
conversion of such securities into Common Stock. Such
adjustment shall be made successively whenever such a record
date is fixed. In case such rights or warrants are not
issued after such a record date has been fixed, the
conversion price shall be readjusted to the conversion
price which would have been in effect if such record date
had not been fixed.
(iii) In case the Corporation shall fix a record date
for the distribution to all holders of Common Stock
(whether pursuant to a merger or consolidation or otherwise)
of assets (excluing cash dividends out of retained
earnings), or rights to subscribe (excluding those referred
to in clause (ii) above), then in each such case the
conversion price in effect from and after such record date
shall be adjusted so that the same shall be equal to the
price determined by multiplying the conversion price in
effect immediately prior to such record date by a fraction,
of which the numerator shall be the current market price
per share (determined as provided in clause (iv) below) of
the Common Stock on such record date less the fair market
value (as determined by the Board of Directors, whose
determination in good faith shall be conclusive) of the
portion of the evidences of indebtedness or assets so
distributed or of such rights to subscribe applicable to
one share of Common Stock and of which the denominator
shall be such current market price per share of Common
Stock. Such adjustment shall be made whenever any such a
record date is fixed. In case such distribution is not
made after such a record date has been fixed, the conversion
price shall be readjusted to the conversion price which
would have been in effect if such record date had not been
fixed.
(iv) For the purpose of any computation under
clauses (ii) and (iii) above, the current market price per
share of Common Stock on any date shall be deemed to be the
average of the daily Closing Prices for 30 consecutive
Trading Days selected by the Corporation commencing not
less than 10 nor more than 45 Trading Days before the date
in question.
(v) In case the Corporation shall be a party to any
transaction (including, without limitation, a merger,
consolidation, sale of all or substantially all of the
Corporation's assets, liquidation or recapitalization of
the Common Stock, but excluding any transaction to which
clauses (i), (ii) or (iii) above applies) in which the
previously outstanding Common Stock shall be changed into
or exchanged for different securities of the Corporation or
common stock or other securities of another corporation or
interests in a noncorporate entity or other property
(including cash) or any combination of any of the foregoing,
then, as a condition of the consummation of such transaction,
lawful and adequate provision shall be made so that each
holder of shares of Series A shall be entitled, upon
conversion, to an amount per share of Series A equal to
(A) the aggregate amount of stock, securities, cash or any
other property (payable in kind), as the case may be, into
which or for which each share of Common Stock is changed
or exchanged, times (B) the number of shares of Common Stock
into which a share of Series A is convertible immediately
prior to the consummation of such transaction.
4
<PAGE> 25
(vi) In any case in which this subsection (d) shall
require that an adjustment as a result of any event become
effective from and after a record date, the Corporation may
elect to defer until after the occurrence of such event (A)
issuing to the holder of any shares of Series A converted
after such record date and before the occurrence of such
event the additional shares of Common Stock issuable upon
such conversion over and above the shares issuable on the
basis of the conversion price in effect immediately prior to
adjustment and (B) paying to such holder any amount in cash
in lieu of a fractional share of Common Stock pursuant to
subsection (c) above. In lieu of the shares of the Issuance
of which is deferred pursuant to item (A) above, the
Corporation shall issue or cause one of its transfer agents
to issue due bills or other appropriate evidence of the
right to receive such shares.
(vii) Any adjustment in the conversion price otherwise
required by this Section 7 to be made may be postponed until
the date of the next adjustment otherwise required to be
grade if such adjustment (together with any other adjustments
postponed pursuant to this paragraph (vii) and not
theretofore made) would not require an increase or decrease
of more than 1% in such price. All calculations under this
subsection (d) shall be made to the nearest cent or to the
nearest 1/100th of a share, as the case may be.
(viii) In case at any time, as a result of an
adjustment made pursuant to paragraph (i) above, the holder
of any shares of Series A thereafter surrendered for
conversion shall become entitled to receive any shares of
capital stock of the Corporation other than Common Stock,
thereafter the number of such other shares so receivable
upon conversion of such shares of Series A shall be subject
to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with
respect to the Common Stock contained in paragraphs (i) to
(vii), inclusive, above, and the other provisions of this
subsection (d) with respect to the Common Stock shall apply
on like terms to any such other shares.
(ix) The Board of Directors may in its discretion
make such reductions in the conversion price, in addition to
those required by this subsection (d), as shall be
determined by the Board of Directors to be advisable in
order to avoid taxation so far as practicable of any
dividend of stock or stock rights or any event treated as
such for Federal income tax purposes to the recipients.
The Board of Directors shall have the power to resolve any
ambiguity or correct any error in this subsection (d), and
its action in so doing shall be final and conclusive.
(e) Whenever the conversion price is adjusted as herein provided:
(i) The Corporation shall compute the adjusted
conversion price in accordance with this Section 7 and shall
cause to be prepared a certificate signed by the
Corporation's treasurer setting forth the adjusted conversion
price and showing in reasonable detail the facts upon which
such adjustment is based, and such certificate shall
forthwith be filed with each transfer agent for the shares
of Series A; and
(ii) A notice stating that the conversion price has
been adjusted and setting forth the adjusted convertible
price shall, as soon as practicable, be mailed to the holders
of record of outstanding shares of Series a.
(f) In case:
(i) The Corporation shall declare a dividend or
other distribution on its Common Stock payable otherwise than
in cash out of retained earnings or in obligations to pay
cash out of retained earnings; or
(ii) The Corporation shall authorize the issuance to
the holders of its Common Stock of rights or warrants
entitling them to subscribe for or purchase any shares of
capital stock or any class or any other subscription rights
or warrants; or
5
<PAGE> 26
(iii) Of any reclassification of the capital stock of
the Corporation (other than a subdivision or combination of
its outstanding shares of Common stock), or of any
consolidation or merger to which the Corporation is a party
and for which approval of any stockholders of the
Corporation is required, or of the sale, transfer or other
disposition of all or substantially all of the assets of
the Corporation; or
(iv) Of the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation;
then the Corporation shall cause to be filed with each transfer
agent for the shares of Series A and shall cause to be mailed
to the holders of record of the outstanding shares of Series A,
at least 20 days (or 10 days in any case specified in
clause (i) or (ii) above) prior to the applicable record or
effective date hereinafter specified, a notice stating (x) the
date as of which the holders of record of Common Stock to be
entitled to such dividend, distribution, rights or warrants
are to be determined, or (y) the date on which such
reclassification, consolidation, merger, sale, transfer,
disposition, liquidation, dissolution or winding up is
expected to become effective, and the date as of which it is
expected that holders of record of Common Stock shall be
entitled to exchange their shares for securities, each or other
property deliverable upon such reclassification, consolidation,
merger, sale, transfer, disposition, liquidation, dissolution
or winding up. Failure to give notice as required by this
subsection (i), at any defect therein, shall not affect the
legality or validity of any such dividend, distribution,
right, warrant, reclassification, consolidation, merger, sale,
transfer, disposition, liquidation, dissolution or winding up,
or the vote on any action margin authorizing such.
(g) The Corporation shall at all times reserve and keep available,
free from preemptive rights, out of its authorized but
unissued Common Stock, for the purpose of issuance upon
conversion of shares of Series A, the full number of shares of
Common Stock then deliverable upon the conversion of all
shares of Series A then outstanding.
(h) The Corporation will pay any and all taxes that may be payable
in respect of the issuance or delivery of shares of Common
Stock on conversion of shares of Series A pursuant hereto. The
Corporation shall not, however, be required to pay any tax
which may be payable in respect of any transfer involved in
the issuance and delivery of shares of Common Stock in a name
other than that in which the shares of Series A so converted
were registered, and no such issuance or delivery shall be
made unless and until the person requesting such issuance has
paid to the Corporation the amount of any such tax or has
established to the satisfaction of the Corporation that such
tax has been paid.
(i) For the purpose of this Section 7, the term "Common Stock"
shall include any stock of any class or series of the
Corporation which has no preference or priority in the
payment of dividends or in the distribution of assets in the
event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation and which is not
subject to redemption by the Corporation. However, shares
issuable upon conversion of shares of Series A shall include
only shares of the class designated as Common Stock as of the
original date of issuance of shares of Series A or shares of
the Corporation of any classes or series resulting from any
reclassification or reclassifications thereof and which have
no preference or priority in the payment of dividends or in
the distribution of assets in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Corporation and which are not subject to redemption by the
Corporation, provided that if at any time there shall be more
than one such resulting class or series, the shares of each
such class and series then so issuable shall be substantially
in the proposition which the total number of shares of such
class and series resulting from all such reclassifications
bears to the total number of shares of all such classes and
series resulting from all such reclassifications.
6
<PAGE> 27
(j) As used in this Section 7, the term "Closing Price" on any
day shall mean the reported last sale price per share of
Common Stock regular way on such day or, in case no such sale
takes place on such day, the average of the reported closing
bid and asked prices regular way, in each case on the New York
Stock Exchange, or, if the Common Stock is not listed or
admitted to trading on such Exchange, on the American Stock
Exchange, or, if the Common Stock is not listed or adjusted
to trading on such Exchange, on the principal national
securities exchange on which the Common Stock is listed or
admitted to trading, or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, the
average of the closing bid and asked prices in the
over-the-counter market as reported by the National
Association of Securities Dealers' Automated Quotation System,
or, if not so reported, as reported by the National Quotation
Bureau, Incorporated, or any successor thereof, or, if not
so reported, the average of the closing bid and asked prices
as furnished by any member of the National Association of
Securities Dealers, Inc. selected from time to time by the
Corporation for that purpose; or, in all other cases, the
value established by the Board of Directors in good faith;
and the term "Trading Day" shall report a day on which the
principal national securities exchange or which the Common
Stock is listed or admitted to trading is open for the
transaction of business or, if the Common Stock is not listed
or admitted to trading on any national securities exchange,
a Monday, Tuesday, Wednesday, Thursday, or Friday on which
banking institutions in New York City are not authorized or
obligated by law or executive order to close.
(k) The certificate of any independent firm of public accountants
of recognized standing selected by the Board of Directors shall
be presumptive evidence of the correctness of any computation
made under this Section 7.
SECTION 8. NO VOTING RIGHTS. The holders of Series A shall be
entitled to no votes per share, except as otherwise required by law
or by the Corporation's certificate of incorporation.
SECTION 9. LIMITED TRANSFERABILITY OF SERIES A. Until the earlier
to occur of (i) March 18, 1999, or (ii) the executive and delivery
of the written Strategic Alliance Agreement referenced in Section 6
above, the Series A and the rights represented thereby are not
transferable -- regardless of whether such transfer occurs by
foreclosure or grade of a lien, pledge, or other security interest
therein, other political act, operation of law, or otherwise. Any
attempt to transfer an interest in any shares of Series A in
violation of the foregoing is void.
SECTION 10. OTHER RIGHTS. The shares of Series A shall not have any
powers, preferences on relative, participating, optional or other
special rights, or qualifications, limitations or restrictions
thereof, other than as set forth herein.
IN WITNESS WHEREOF, Advanced Communications Group, Inc. has caused this
certificate to be signed by its undersigned duly authorized officer this 17th
day of February, 1998.
ADVANCED COMMUNICATIONS GROUP, INC.
By: /s/ William H. Zimmer III
------------------------------------
William H. Zimmer III
Executive Vice President
7
<PAGE> 1
<TABLE>
Advanced Communications Group, Inc. and Subsidiaries
----------------------------------------------------
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- ------------------------------------------
(In thousands, except per share amounts) Actual Pro Forma Pro Forma Actual
--------- --------- --------------------------- ----------
June 30, June 30, June 30, June 30, June 30,
1998 1997 1998 1997 1998
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Earnings Per Share:
- -------------------
Average number of common shares outstanding 19,616 20,519 19,616 20,072 17,450
Assumed exercise of options
(treasury stock method) 941 941 1,001 1,001 1,001
-------- -------- -------- -------- --------
Shares for diluted computation 20,557 21,460 20,617 21,073 18,451
======== ======== ======== ======== ========
Net income (loss) earnings $ (1,031) $ (485) $ (1,630) $ (225) $ (2,155)
======== ======== ======== ======== ========
Basic earnings per share $ (.05) $ (.02) $ (.08) $ (.01) $ (.12)
======== ======== ======== ======== ========
Diluted earnings per share $ (.05) $ (.02) $ (.08) $ (.01) $ (.12)
======== ======== ======== ======== ========
</TABLE>
Note: The effect of the assumed conversion of the note payable and
preferred stock have not been included in the computation of
diluted earnings per share for the period after issuance
because to do so would have been anti-dilutive for the periods
presented. The effect of the assumed exercise of options is
included in the computation in accordance with Staff Accounting
Bulletin 98.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information on extracted from SEC
Form 10-Q for the quarterly period ended June 30, 1998, and is qualified
in its entirety by reference to such statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 10,058
<SECURITIES> 0
<RECEIVABLES> 34,787
<ALLOWANCES> 10,261
<INVENTORY> 0
<CURRENT-ASSETS> 38,436
<PP&E> 13,454
<DEPRECIATION> 6,497
<TOTAL-ASSETS> 173,024
<CURRENT-LIABILITIES> 20,213
<BONDS> 0
<COMMON> 2
1,122
0
<OTHER-SE> 134,632
<TOTAL-LIABILITY-AND-EQUITY> 173,024
<SALES> 43,749
<TOTAL-REVENUES> 43,749
<CGS> 45,047
<TOTAL-COSTS> 45,047
<OTHER-EXPENSES> (157)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 558
<INCOME-PRETAX> (1,699)
<INCOME-TAX> 456
<INCOME-CONTINUING> (2,155)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,155)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
