<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 1998
REGISTRATION NO. 333-37671
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ADVANCED COMMUNICATIONS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
Delaware 4813 76-0549396
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
<TABLE>
<S> <C>
Richard P. Anthony
390 South Woods Mill Road, Suite 150 390 South Woods Mill Road, Suite 150
St. Louis, Missouri 63017 St. Louis, Missouri 63017
(314) 469-9488 (314) 469-9488
Facsimile: (314) 530-9432 Facsimile: (314) 530-9432
(Address, including zip code, and telephone number, including (Name, address, including zip code, and telephone number,
area code, of Registrant's principal executive offices) including area code, of agent for service)
</TABLE>
Copies to:
<TABLE>
<S> <C>
Edgar J. Marston III Stephen P. Farrell
Bracewell & Patterson, L.L.P. Morgan, Lewis & Bockius LLP
711 Louisianna Street, Suite 2900 101 Park Avenue
Houston, Texas 77002-2781 New York, New York 10178-0060
(713) 223-2900 (212) 309-6000
Facsimile: (713) 221-1212 Facsimile: (212) 309-6273
</TABLE>
<PAGE>
8,000,000 SHARES
[ACG Advanced
Communications
Group LOGO]
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by
Advanced Communications Group, Inc. ("ACG" or the "Company").
Prior to this offering (the "Offering"), there has been no public
market for the Common Stock. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price. The
Common Stock has been approved for listing on the New York Stock Exchange
under the symbol "ADG."
SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...................... $ 14.00 $ 0.98 $ 13.02
- -----------------------------------------------------------------------------
Total.......................... $112,000,000 $7,840,000 $104,160,000
- -----------------------------------------------------------------------------
Total Assuming Full Exercise
of
Over-Allotment Option (3) ... $128,800,000 $9,016,000 $119,784,000
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting."
(2) Before deducting expenses estimated at $4,075,000, which are payable
by the Company.
(3) Assuming exercise in full of the 30-day option granted by the Company
to the Underwriters to purchase up to 1,200,000 additional shares, on
the same terms, solely to cover over-allotments. See "Underwriting."
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters,
and subject to their right to reject orders in whole or in part. It is
expected that delivery of the Common Stock will be made in New York City on
or about February 18, 1998.
PAINEWEBBER INCORPORATED CIBC OPPENHEIMER
THE DATE OF THIS PROSPECTUS IS FEBRUARY 12, 1998.
<PAGE>
INSIDE COVER GATEFOLD GRAPHIC:
[Map of United States delineating ACG's current and planned service area
along with corporate headquarters, operating companies' headquarters, home
sales offices, telecom sales offices and switch locations. Further blowout of
map details KINNET's fiber optic network (existing and future fiber routes
owned and the location of Tandem switches).]
<PAGE>
[ACG Advanced
Communications
Group LOGO]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVERALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
Concurrently with the closing of the Offering made hereby (the
"Offering"), ACG plans to acquire, in related transactions, six
telecommunications service providers, one yellow page publisher, two
telephone equipment sales and maintenance companies, a predecessor organized
in 1996 under the same name, and a 49% interest in a company owning a fiber
optic network (collectively, the "Acquisitions"). See "The Company." Unless
otherwise indicated by the context, references herein to (i) "ACG" refer
collectively to Advanced Communications Group, Inc. and its predecessor, and
(ii) the "Company" refer collectively to the entities acquired in the
Acquisitions other than the interest in the fiber optic network company
(collectively, the "Acquired Companies"), ACG and its predecessor company.
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, which
appear elsewhere in this Prospectus. Prospective investors should carefully
consider the factors set forth herein under the caption "Risk Factors" and
are urged to read this Prospectus in its entirety. This Prospectus contains
certain forward-looking statements with respect to the Company's expectations
regarding its business after it has consummated the Acquisitions. These
forward-looking statements are subject to certain risks and uncertainties
which may cause actual results to differ significantly from such
forward-looking statements. See "Risk Factors." Unless otherwise indicated,
the information and share and per share data in this Prospectus (i) give
effect to the Acquisitions, (ii) assume the Underwriters' over-allotment
option is not exercised and (iii) give effect to a reverse stock split of
approximately one-for-2.645 of the outstanding capital stock of ACG's
predecessor prior to the closing of the Offering.
THE COMPANY
The Company was founded to create a regional competitive local exchange
carrier ("CLEC") that provides an integrated portfolio of telecommunications
services principally to business customers in selected service areas of
Southwestern Bell Telephone Company and U S WEST Communications, Inc. (the
"Region"). The Company offers long distance, local, Internet access and
cellular service primarily in Kansas, Minnesota, Nebraska, North Dakota,
Oklahoma, South Dakota and Texas and publishes yellow page directories
covering certain markets in Oklahoma and Texas. The Company seeks to offer a
bundle of "one stop" integrated telecommunications services tailored to its
customers' specific requirements and billed on a single monthly invoice. As
of November 30, 1997, the Company provided telecommunications services to
almost 35,000 business customers and over 10,000 residential customers in
small to mid-sized markets. The Company has recently experienced substantial
growth in its base of local customers. The Company's local customer access
lines in service grew from approximately 1,000 at June 30, 1997 to
approximately 11,000 at September 30, 1997, and approximately 17,500 at
November 30, 1997. In the fiscal year ended December 31, 1996, the Company
had pro forma combined revenues of $85.4 million and EBITDA of $11.5 million.
For the nine months ended September 30, 1997, the Company had pro forma
combined revenues of $69.1 million and EBITDA of $8.5 million.
The Company owns and operates six digital tandem switches in Kansas,
Oklahoma, South Dakota and Texas. It also owns a 49% interest in KIN Network
Inc. ("KINNET"), the owner or operator of an approximately 880-route mile
fiber optic network and a Northern Telecom DMS 500 switch in Kansas. KINNET
currently has one of the largest fiber optic networks in the state of Kansas.
As part of the KINNET transaction, the Company made a $10.0 million direct
cash investment in KINNET, $5.0 million of which KINNET has agreed to apply
to the buildout in 1998 and 1999 of a 537-mile, $21.5 million network
extension from Wichita, Kansas to the greater Kansas City metropolitan area,
with a leg to Tulsa, Oklahoma, that will provide self-healing redundancy to
its fiber optic network. KINNET has advised the Company that it expects to
finance the balance of the expansion with loan proceeds from the Rural
Telephone Finance Cooperative.
The Company is also an independent publisher of yellow page directories,
and in the twelve months ended November 30, 1997 published approximately 3.1
million copies of its yellow page directories covering 20 markets in Oklahoma
and Texas. These directories contained advertisements for approximately
46,000 business customers. The Company anticipates expanding its yellow page
operations into additional markets in the Region. The Company believes that
the advertisers in its yellow page directories provide a significant
opportunity to cross-sell its bundle of telecommunications services through
the Company's direct sales force of approximately 255 persons, including
approximately 40 telemarketers, as
3
<PAGE>
of November 30, 1997. Through a strategic relationship with Feist
Publications, Inc., an affiliate of one of the Acquired Companies, the
Company also has the opportunity to cross-sell its telecommunications
services to an additional 29,000 yellow page advertising customers.
ACG is pursuing a growth strategy that it believes will enable it to
minimize its initial capital expenditures relative to many other CLECs that
constructed facilities-based networks at a very early stage in their
development. The Company currently utilizes its own network facilities
combined with the leased network facilities of several long distance
providers and incumbent local exchange carriers ("ILECs") within the Region,
including Southwestern Bell Telephone Company ("Southwestern Bell") and U S
WEST Communications, Inc. ("U S WEST"). By reselling the local service of
Southwestern Bell and U S WEST, the Company has achieved a rapid penetration
of the local telephone markets in Wichita, Kansas and Sioux Falls, South
Dakota, although the Company's local service revenues to date have not been
material. Ultimately, the Company will only construct significant local
network infrastructure in those markets where a critical mass of customers
makes it economically justifiable to do so.
The Company has executed comprehensive local exchange resale agreements
with Southwestern Bell, U S WEST and affiliates of Sprint Corporation
("Sprint") and GTE Corporation ("GTE") covering eight states within the
Region. Additionally, the Company has entered into agreements with several
interexchange carriers to provide "off-net" switching and network
transmission services for its long distance traffic. The Company has also
entered into agreements to resell cellular service in selected areas in the
Region. These agreements allow the Company initially to offer a bundle of
telecommunications services without the necessity of substantial expenditures
for the construction of network facilities.
The Telecommunications Act of 1996 has created significant opportunities
for telecommunications service providers, particularly regional CLECs.
According to publicly available estimates, in 1996 total revenues from local
and long distance telecommunications services in the United States were
approximately $192.0 billion, of which approximately $107.0 billion were
derived from local exchange services and approximately $85.0 billion from
long distance services. In recent years, these telecommunications service
revenues have grown approximately 6% per year. Although the U.S. long
distance and local exchange industries are dominated by a few companies,
including AT&T Corp. ("AT&T"), MCI Communications Corporation ("MCI") (which
has entered into a merger agreement to be acquired by WorldCom, Inc.),
Sprint, WorldCom, Inc. ("WorldCom") and the Regional Bell Operating Companies
("RBOCs"), there are over 5,000 additional providers of long distance, local
and other telecommunications-related services. In many of the small to
mid-sized cities that are the Company's primary target markets, there are
independent telecommunications companies which have significant market
penetration, many of which the Company believes represent attractive
acquisition candidates.
The Company believes that it has significant opportunities to increase its
revenues and reduce elements of its cost structure that were not available to
the Acquired Companies prior to the Acquisitions and the Offering. The
Company's new senior management team brings extensive prior CLEC, ILEC and
public company experience, and its members have held senior operational,
strategic planning, financial and sales positions with their prior employers.
The Company intends to leverage this extensive management experience in the
centralizing of selected areas of operations where it can benefit from its
larger size such as the purchasing of minutes over its leased network and
consolidating its management information, selling and other administrative
functions. The Company also intends to permit the strong management teams of
the Acquired Companies to conduct the customer sensitive aspects of their
operations on a decentralized basis. In order to increase the revenues
provided by its existing customer base, the Company plans to train its sales
force to cross-sell all of the Company's services, with an increased emphasis
on selling local services. The Company believes that a personalized approach
to sales and customer service will enhance its ability to attract and retain
customers who desire the convenience of a fully integrated product offering.
To further enhance its marketing efforts, the Company intends to establish
the "ACG" brand name through co-branding with the established names of the
Acquired Companies.
4
<PAGE>
BUSINESS STRATEGY
The Company's objective is to become a leading provider of integrated
telecommunications services primarily to businesses in Kansas, Minnesota,
Nebraska, North Dakota, Oklahoma, South Dakota and Texas and a significant
provider of such services in Arkansas, Colorado and Montana. The Company
believes that it can achieve its goal of becoming a leading
telecommunications service provider in its target markets by adhering to the
following five-fold strategy:
o Plan Smart -- Focus on small and medium-sized businesses and residential
customers and select vertical market segments in small to mid-sized cities
in the Region. The Company believes that competition from other CLECs and
ILECs is less intense in these areas because, in many cases, the ILECs
have reduced their efforts to serve and defend these territories in
response to the competitive threat in their major market cities. In
addition, by focusing its sales efforts in territories served by ILEC
central offices where collocation is a viable economic alternative, the
Company can build a loyal customer base through the resale of local
services prior to committing to build the infrastructure necessary to
support facilities-based local service.
o Sell Smart --
- Sell into established customer relationships by marketing local
telephone services to the Company's existing yellow page and long
distance customers. Because the Company only recently began to offer
additional telecommunications services to its long distance customers,
only a small portion of these customers has been targeted to subscribe
to the Company's local, Internet access or cellular services. In
addition, the Company has not yet offered its bundle of
telecommunications services to the approximately 75,000 yellow page
customers to which it has access. The Company therefore believes that it
has a substantial reservoir of prospective business customers that is
already familiar with some aspects of the Company's services.
- Bundle services to bring value to the Company's customers, increase
total revenue per customer, reduce selling costs and minimize customer
churn. The Company currently bundles and bills local, long distance, and
cellular services and believes it can enhance its overall margins by
combining its yellow page and Internet services with these traditional
telecommunications services.
- Offer enhanced services that have less competition and higher margin
potential, such as high speed data transport, Internet access, Web Page
design and support, and integrated voice, data and video communications
services.
o Build Smart -- Predicate growth strategies on the recognition that network
capacity is increasingly becoming a commodity. By first focusing on
acquiring customers through resale of local, long distance, cellular and
Internet services, the Company believes that it can secure customer
relationships, produce a consistent revenue stream, and evolve an economic
strategy for serving customers. The Company's serving strategy includes
not only developing network facilities to directly serve customers, but
also enhancing its operational support system ("OSS") to provide network
monitoring and control, flow through provisioning, customer care, and
enhanced billing functionality. During 1998, the Company will resell the
network facilities of ILECs to provide local service to its customers.
During 1999 and thereafter, the Company will continue to focus on
reselling local service, while at the same time implementing a substantial
effort to acquire unbundled loops and local fiber. By interconnecting with
the ILEC in the central office and acquiring unbundled loops, the Company
should be able to reduce its cost of providing service and capture the
additional revenue paid by interexchange carriers ("IXCs") for local
access. The Company should also be able to further reduce its local and
long distance costs by acquiring rights to local and intercity fiber and
other high bandwidth capacity within the Region. By adding its own circuit
and packet switches to this bandwidth, the Company can add value, offer
new products, and better control the quality of service. Finally, where
economically advantageous, the Company intends to construct fiber and
other network facilities.
o Grow Smart --
- Increase the Company's sales force to rapidly market the Company's
services in all targeted service areas and thereafter to expand into
other areas within the Region. The Company recognizes it has an
opportunity to expand its yellow page base into other market areas as
well as to expand its
5
<PAGE>
service offering with World Pages, a specialized Web site development
and hosting service to which ACG has the exclusive marketing rights in
its service area.
- Evaluate attractive acquisition candidates in the Region. The Company
initially intends to target leading local companies whose customers can
be added to the Company's existing network without significant
expenditures for infrastructure additions. By aggregating the traffic of
several companies onto its existing network, the Company expects to
increase the utilization of equipment, consolidate its buying power and
increase its ability to negotiate more attractive contracts with
third-party suppliers of network services.
- Pursue the formation of additional strategic alliances with other yellow
page publishers, utility companies, cooperatives and others in order to
create marketing alliances that give the Company access to large, stable
customer bases in its market areas to which it can sell its bundle of
telecommunications services. The Company currently has a five-year
strategic relationship with Feist Publications, Inc. ("FPI"), a 20-year
publisher of yellow page directories in 15 markets in the Region. The
Company's telecommunications sales force will have access to FPI's
29,000 yellow page advertisers in the Region. Through one of the
Acquired Companies' purchase of PAM COMM, a division of PAM Oil, Inc.,
the Company has another strategic relationship that will allow it to
solicit PAM Oil, Inc.'s approximately 15,000 business customers
primarily in Idaho, Minnesota, Montana, North Dakota and South Dakota.
Finally, the Company and Northwestern Public Service Company
("Northwestern") have entered into an agreement regarding the possible
creation of a strategic alliance that would permit ACG to market its
telecommunications services to that utility's approximately 100,000
electric and natural gas business and residential customers in South
Dakota and Nebraska. Under the terms of this agreement, which will be
consummated contemporaneously with the closing of the Offering, ACG will
issue 142,857 shares of its Series A Redeemable Convertible Preferred
Stock with an aggregate liquidation preference of $2 million to a
subsidiary of Northwestern in exchange for, among other things,
Northwestern's commitment to negotiate in good faith a strategic
alliance upon commercially reasonable terms. See "The Company --
Strategic Relationships" and "Description of Capital Stock."
o Serve Smart -- Provide not only the highest quality customer service but
also become an industry leader in the deployment of innovative technology
and services. The Company believes that by prudently using new technology
and by offering new services, especially enhanced data applications, it
can become a low cost provider, maintain high value for its customers and
differentiate itself from other commodity providers. These services will
include data transport services such as frame relay, transparent LAN,
Internet content, and other packet-based integrated multimedia services.
Certain members of the Company's senior management team have considerable
experience in developing and deploying these services.
See the "Glossary" elsewhere in this Prospectus for the definition of
certain technical and other terms generally associated with the
telecommunications industry or the Offering.
6
<PAGE>
THE OFFERING
Common Stock Offered by the
Company ...................... 8,000,000
Common Stock to be Outstanding
after the Offering(1) ........ 19,624,920
Use of Proceeds ............... To pay the cash portion of the purchase
price for the Acquired Companies ($73.3
million), to make a direct cash investment
in KINNET, a fiber optic network company
($10.0 million), to repay indebtedness of
ACG and the Acquired Companies ($5.5
million), to make a one-time payment to the
founder of ACG for entering into a five-year
non-competition agreement ($1.75 million),
and for general corporate purposes,
including capital expenditures,
infrastructure buildout and acquisitions.
Shareholders of the Acquired Companies who
will become executive officers or directors
of the Company upon consummation of the
Acquisitions will receive approximately
$35.6 million of the cash purchase price
paid in the Acquisitions. See "Use of
Proceeds."
New York Stock Exchange Symbol ADG
- ------------
(1) The number of shares to be outstanding on completion of the Offering
consists of (i) 8,232,276 shares issued to the founders and consultants
of the Company, (ii) 3,392,644 shares to be issued in the Acquisitions
and (iii) the 8,000,000 shares being offered hereby. Such share number
does not include an aggregate of 4,185,775 shares subject to warrants or
options having exercise prices ranging from $2.50 to the initial public
offering price granted or to be granted under the Company's 1997 Stock
Awards Plan ("Plan"), the Company's 1997 Nonqualified Stock Option Plan
for Non-Employee Directors (the "Directors' Plan") or otherwise issued
prior to or contemporaneously with the consummation of the Offering and
the Acquisitions or issuable upon the conversion of convertible notes and
preferred stock. See "Certain Transactions -- Organization of the
Company" and "--The Acquisitions" and "Management -- Option Grants."
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. See "Risk Factors" beginning immediately after this Prospectus Summary
for information that should be considered by prospective investors. Such risk
factors include an absence of combined operating history of ACG and the
Acquired Companies; risks of integrating numerous separate companies; ability
to manage growth; capital requirements; recent results and anticipated future
quarterly losses; dependence on successful cross-selling of existing and new
customer bases; risks related to local service strategy; dependence on
development of billing, customer service and management information systems;
technology risks; limited technical staff; competition; implications of the
Telecommunications Act and other regulation; recently initiated litigation
against an Acquired Company; dependence on third-party long distance
carriers; dependence on incumbent local exchange carriers; dependence on key
personnel; new management team; control by existing management and
stockholders; terms of the Acquisitions; certain interests of management in
the Acquisitions and other transactions; risks of expansion into additional
yellow page markets; risks related to acquisitions; potential effect of
shares eligible for future sale on price of Common Stock; no prior market and
possible volatility of stock price; immediate and substantial dilution;
anti-takeover effects of certain charter provisions, Delaware law and a
standstill agreement; and no dividends.
7
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ACG will acquire the Acquired Companies, its predecessor and its interest
in KINNET, a fiber optic network company, concurrently with and as a
condition to the consummation of the Offering. The following summary of
unaudited pro forma combined financial data presents certain data for the
Company, which gives effect to the Acquisitions on an historical basis and
certain pro forma adjustments to the historical financial statements, as
adjusted to give effect to the Offering and the application of the proceeds
therefrom. See "Selected Financial Data" and the Unaudited Pro Forma Combined
Financial Statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PRO FORMA COMBINED(1)
-------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C>
Revenues
Telecommunications services.................. $ 41,090 $ 33,455
Yellow page publishing....................... 44,324 35,624
----------------- ------------------
Total revenues............................. 85,414 69,079
Gross profit.................................. 32,216 27,103
Operating income.............................. 5,250 3,931
Other income and expense, net(2).............. 4,605 (985)
Net income(3)................................. 3,703 168
Accretion of preferred stock(4)............... 112 16
----------------- ------------------
Net income available to common stockholders... $ 3,591 $ 152
================= ==================
Net income per share available to common
stockholders................................. $ 0.18 $ 0.01
================= ==================
Shares used in computing pro forma net income
per share(5)................................. 20,190,864 20,190,864
================= ==================
OTHER DATA:
Cash provided by operating activities ........ $ 9,037 $ 5,893
Cash used in investing activities ............ (711) (579)
Cash used in financing activities ............ (7,482) (4,470)
EBITDA(6)..................................... $ 11,527 $ 8,523
<CAPTION>
As of September 30, 1997
-------------------------------------
Pro
Forma
Combined(1) As Adjusted(7)
----------------- ------------------
BALANCE SHEET DATA:
<S> <C> <C>
Cash and cash equivalents..................... $ 554 $ 11,862
Working capital (deficit) .................... (73,532) 25,275
Total assets.................................. 153,393 166,954
Total debt, including current portion......... 21,507 17,350
Stockholders' equity.......................... $ 36,535 $ 138,911
<CAPTION>
As of
September 30,
1997
------------------
OPERATING DATA:
<S> <C>
Telecommunications services
Number of customers .............................................. 40,749
Markets ......................................................... 54
Local access lines ............................................... 11,248
Route miles (of fiber)(8) ........................................ 880
Direct sales force, including 23 telemarketers ................... 76
Total employees ................................................. 250
Yellow page publishing
Number of advertising customers(9) ............................... 50,000
Markets(9) ....................................................... 23
Direct sales force, including 19 telemarketers ................... 169
Total employees ................................................. 311
</TABLE>
(Footnotes on following page)
8
<PAGE>
- ------------
(1) The pro forma statements of operations data and the pro forma balance
sheet data assume that the Acquisitions were closed on January 1, 1996
and September 30, 1997, respectively, and are not necessarily
indicative of the results the Company would have achieved had these
events actually then occurred or of the Company's future results. The
pro forma combined financial information (i) is based on preliminary
estimates, available information and certain assumptions that
management deems appropriate and (ii) should be read in conjunction
with the other financial statements and notes thereto included
elsewhere in this Prospectus. The pro forma combined revenues are all
attributable to the Acquired Companies.
(2) Other income for the year ended December 31, 1996, includes a $6.3
million litigation settlement received by Great Western Directories,
Inc.
(3) Assumes that all income is subject to a corporate tax rate of 40% and
that all goodwill amortization is non-deductible for income tax
purposes.
(4) Represents accretion of the excess of the liquidation preference over
the carrying value of the Preferred Stock. See Note 3 of Notes to Pro
Forma Combined Financial Statements.
(5) Includes (i) the 8,232,276 shares outstanding immediately prior to the
Offering, (ii) 3,392,644 shares issued in the Acquisitions, (iii)
7,230,601 shares sold in the Offering necessary to generate all net
proceeds other than those that are unallocated and available for
general corporate purposes (see "Use of Proceeds") and (iv) 1,335,343
shares representing the incremental effect of options and warrants on
shares outstanding.
(6) EBITDA as used in this Prospectus consists of earnings (loss) before
interest, income taxes, depreciation and amortization and less equity
in earnings (loss) of a minority owned affiliate and less the portion
of other income and expense (net) attributable to the $6.3 million
litigation settlement received by Great Western Directories, Inc. in
1996. The Company has included EBITDA data because it is a measure
commonly used in the telecommunications industry. EBITDA is not a
measure of financial performance determined under generally accepted
accounting principles, should not be considered as an alternative to
net income as a measure of performance or to cash flows as a measure of
liquidity, and is not necessarily comparable to similarly titled
measures of other companies.
(7) As adjusted to reflect the closing of the Offering and the application
of the proceeds of the Offering to pay the consideration for the
Acquisitions and to retire $4.2 million of indebtedness. The balance of
the net proceeds of the Offering have been recorded as cash.
(8) Owned or operated by KINNET, of which the Company owns 49%.
(9) For the 12 months ended September 30, 1997, including approximately
4,000 customers in three markets in California.
9
<PAGE>
Summary Individual Company Financial Data
The following table presents historical summary income statement data and
EBITDA (as previously defined) for the Acquired Companies and KINNET (see
"The Company") for the three most recent fiscal years as well as the most
recent interim period and comparative period of the prior year, as
applicable. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Certain Acquired Companies."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED,(1) SEPTEMBER 30,(1)
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Great Western Directories, Inc.
Revenues..................................... $29,407 $36,469 $44,324 $33,463 $35,624
Gross profit................................. 11,402 16,673 22,707 18,181 18,766
EBITDA....................................... 969 4,308 8,037 6,814 6,345
Valu-Line of Longview, Inc. and Related
Companies
Revenues..................................... 13,417 13,330 11,181 8,623 9,058
Gross profit................................. 6,243 5,121 4,326 3,414 3,589
EBITDA....................................... 2,947 2,034 1,646 1,431 1,177
FirsTel, Inc.
Revenues..................................... 4,079 7,838 10,355 7,659 9,488
Gross profit................................. 914 2,298 3,041 2,308 2,422
EBITDA....................................... (81) 820 1,177 960 690
Feist Long Distance Service, Inc.
Revenues..................................... 5,712 7,923 10,028 7,416 8,965
Gross profit................................. 1,834 2,176 2,937 2,189 2,779
EBITDA....................................... 162 174 702 654 518
Other Acquired Companies(2)
Revenues..................................... 3,940 6,997 7,798 5,950 5,944
Gross profit................................. 1,395 2,798 3,021 2,548 2,891
EBITDA....................................... 350 648 591 733 1,255
KIN Network, Inc.(3)
Revenues..................................... 3,550 6,497 8,553 6,031 8,796
Gross profit(4).............................. (600) 1,578 3,783 2,655 4,203
EBITDA....................................... (1,407) 514 2,353 1,566 2,408
Net loss..................................... (2,883) (2,055) (792) (712) (297)
</TABLE>
- ------------
(1) The historical summary income statement data for (i) all fiscal years
for Great Western Directories, Inc., Valu-Line of Longview, Inc., and
KIN Network, Inc., (ii) for fiscal years 1995 and 1996 for FirsTel,
Inc., and (iii) for fiscal year 1996 for Feist Long Distance, Inc., are
derived from the audited financial statements of such companies
included elsewhere herein. The historical summary income statement data
for the other fiscal years and nine month periods for such Acquired
Companies, all information regarding EBITDA and all information for the
Other Acquired Companies, is unaudited. The fiscal years of Long
Distance Management II, Inc. ended on June 30, 1995, 1996 and 1997, and
the fiscal years of Long Distance Management of Kansas, Inc. ended on
March 31, 1995, 1996 and 1997. Rather than information for their fiscal
years, financial information for these two Other Acquired Companies is
included for the twelve months ended December 31, 1994, 1995 and 1996
and the nine months ended September 30, 1996 and 1997. The fiscal years
of Great Western Directories, Inc. ended on January 31, 1995 and 1996
and December 31, 1996. Consequently the data for Great Western for the
fiscal years ended January 31, 1996 and December 31, 1996 both include
the month of January 1996. Except for those three Acquired Companies,
all of the Acquired Companies, KINNET and ACG have fiscal years ending
on December 31.
(2) Includes Long Distance Management II, Inc., Long Distance Management of
Kansas, Inc., The Switchboard of Oklahoma City, Inc., Tele-Systems,
Inc. and National Telecom, a proprietorship.
(3) The Company will own 49% of the outstanding voting stock of KINNET, and
hence KINNET's net income or loss will be included in the Company's
financial statements using the equity method of accounting. Such
amounts included in the Company's pro forma combined financial
statements for the fiscal year ended December 31, 1996 and the nine
months ended September 30, 1996 and 1997 were $(388,000), $(349,000)
and $(146,000), respectively.
(4) KIN Network, Inc. has historically included depreciation and
amortization not in gross profit, but as a separate item in the
calculation of income (loss) from operations. The Acquired Companies
have presented depreciation and amortization expenses as an element of
gross profit, and for consistency of presentation, in the text of this
Prospectus and the pro forma financial statements, KINNET's
depreciation and amortization expense is included in the calculation of
gross profit. As presented in its historical financial statements
included herein, the gross profit of KINNET for fiscal 1994, 1995 and
1996, and for the nine months ended September 30, 1996 and 1997, was
(in thousands) $1,100, $3,402, $5,689, $3,976, and $5,800,
respectively.
10
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the factors set forth
herein and are urged to read this Prospectus in its entirety. This Prospectus
contains certain forward-looking statements with respect to the Company's
expectations regarding its business after it has consummated the
Acquisitions. These forward-looking statements are subject to certain risks
and uncertainties which may cause actual results to differ significantly from
such forward-looking statements.
ABSENCE OF COMBINED OPERATING HISTORY OF ACG AND THE ACQUIRED COMPANIES;
RISKS OF INTEGRATING NUMEROUS SEPARATE COMPANIES
ACG was incorporated in Delaware in September 1997 as a subsidiary of its
predecessor, which had been incorporated in June 1996. ACG has conducted no
operations other than in connection with the Offering and the Acquisitions.
See "The Company." The Acquired Companies have continued to operate
subsequent to September 30, 1997, and prior to the consummation of the
Offering as separate, independent businesses. Consequently, the combined and
pro forma combined financial information herein may not be indicative of what
the Company's operating results and financial condition would have been for
the periods presented had the Acquisitions taken place on the dates
indicated. Until the Company establishes centralized accounting, management
information and other administrative systems, it will rely on the separate
systems of the Acquired Companies. The success of the Company will depend, in
part, on the extent to which it is able to centralize these functions,
eliminate the unnecessary duplication of other functions and otherwise
integrate the Acquired Companies and any additional businesses the Company
may acquire into a cohesive, efficient enterprise. Some or all of the
Acquired Companies' systems, hardware and software may be incompatible with
those of other Acquired Companies. The Company's senior management has been
assembled only recently, and there can be no assurance that it will be able
to manage successfully the combined entity or implement effectively the
Company's operating, internal growth or acquisition strategies (including
acquisitions that may occur after the Offering). In addition, the yellow
pages business is different from the Company's telecommunication businesses,
and the Company is not aware of any significant telecommunications company,
other than the RBOCs and other local exchange carriers and competitive local
exchange carriers, that has integrated a yellow pages business with a
telecommunications business. Furthermore, telecommunications providers
generally experience higher customer and employee turnover during and after
an acquisition. The integration of the systems of the Acquired Companies will
entail significant costs and delays can be expected. The failure of the
Company to integrate the Acquired Companies successfully would have a
material adverse effect on the Company's business, financial condition,
results of operations and cash flows and the value of the Common Stock.
ABILITY TO MANAGE GROWTH
The Company's strategy is to expand primarily by internal growth as well
as by acquisition. Therefore the expansion and development of the Company's
business will depend not only on the Company's ability to, among other
things, successfully implement its sales and marketing strategy, evaluate
markets, install facilities, obtain any required government authorizations,
initially negotiate arrangements for the resale of local services with
incumbent local exchange carriers, implement interconnection to, and
co-location with, facilities owned by incumbent local exchange carriers and
obtain appropriately priced unbundled network elements and wholesale services
from the incumbent local exchange carriers, but also on its ability to
identify, evaluate, negotiate and consummate acquisitions successfully, all
in a timely manner, at reasonable costs and on satisfactory terms and
conditions. Future growth may place a significant strain on the Company's
administrative, operational and financial resources. The Company's ability to
manage its growth successfully will require the Company to centralize and
enhance its operational, management, financial and information systems and
controls and to hire and retain qualified sales, marketing, administrative,
operating and technical personnel. There can be no assurance that the Company
will be able to do so. In addition, as the Company expands into its targeted
markets, there will be additional demands on the customer support, sales,
marketing and administrative resources and the network
11
<PAGE>
infrastructures of the Acquired Companies, which have not been integrated.
The Company's inability to implement its growth strategy successfully or to
manage its growth effectively could have a material adverse effect on the
Company's business, results of operations and financial condition and the
value of the Common Stock.
CAPITAL REQUIREMENTS
The Company anticipates the expenditure of approximately $22.0 million
during calendar year 1998 for the acquisition of additional circuit and
packet switches, the leasing of bulk fiber optic capacity from others and the
purchase of other capital assets. In order to fund these expenditures, the
Company intends to utilize internally generated funds and borrowings under
the Company's proposed credit facility and may use a portion of the net
proceeds of the Offering allocated to general corporate purposes. With
respect to the Company's proposed credit facility, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Certain Acquired Companies -- Pro Forma Combined Results of Operations -- Pro
Forma Combined Liquidity and Capital Resources." If the Company is successful
in growing its local telecommunications services business or effecting
acquisitions, it will have materially increased capital requirements in
calendar year 1999 and beyond. In order to fund these capital requirements,
the Company will be required to raise substantial funds from external sources
through public or private debt and equity financings. However, in the event
that the Company's plans or assumptions change or prove to be inaccurate, the
Company may be required to seek additional capital sooner than currently
anticipated. There can be no assurance that financing will be available or
that if financing is available, that it will be available on terms and
conditions acceptable to the Company.
RECENT RESULTS AND ANTICIPATED FUTURE QUARTERLY LOSSES
The following table sets forth certain pro forma combined results of
operations data of the Company for the three months ended September 30, 1996
and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1997
-------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Revenue
Telecommunications services................ $ 9,015 $11,918
Yellow page publishing..................... 8,060 8,258
-------- ---------
Total.................................... 17,075 20,176
Cost of services........................... 9,393 12,202
Depreciation and amortization.............. 1,465 1,460
-------- ---------
Gross profit............................... 6,217 6,514
Selling, general and administrative
expenses.................................. 5,321 7,418
-------- ---------
Income (loss) from operations.............. $ 896 $ (904)
======== =========
</TABLE>
The Company's results of operations for the three months ended September
30, 1997 reflect operating expenses for ACG that were not present in the
third quarter of 1996 because ACG commenced operations in June 1996. The
results of operations for the third quarter of 1997 also reflect the
additional expenses associated with repositioning the Company to implement
its CLEC strategy, including an expanded marketing staff and the lower
margins associated with the resale of local service. Preliminary indications
are that the Company's pro forma combined results of operations for the three
months ended December 31, 1997 will reflect a loss from operations in excess
of that incurred in the three months ended September 30, 1997. The Company
expects that while pro forma telecommunications revenue for the three months
ended December 31, 1997 will be greater than in the three months ended
September 30, 1997, yellow page publishing revenue will be down slightly. The
subsequent year's edition of a directory which had been published and
distributed in the fourth quarter of 1996 was published but not distributed
until January 1998. Accordingly, the anticipated revenue of approximately
$2.7 million and related
12
<PAGE>
expense of approximately $1.5 million from that directory will be recognized
in the first quarter of 1998 rather than the fourth quarter of 1997. The
Company expects that it will incur losses from operations over at least the
next several quarters as it continues to implement its CLEC strategy.
In addition, the Company expects that in the fourth quarter of 1997, it
will incur a compensation charge of approximately $1.0 million related to the
employment of the Company's new senior management team.
DEPENDENCE ON SUCCESSFUL CROSS-SELLING OF EXISTING AND NEW CUSTOMER BASES
The Company intends to expand its revenue base through the marketing of
its bundled telecommunication services to, among others, the aggregate of
approximately 75,000 advertisers in its yellow page directories and the
yellow page directories published by FPI, the approximately 15,000 business
customers of PAM Oil, Inc. and, if a mutually acceptable strategic alliance
can be negotiated, the approximately 100,000 electric and natural gas
customers of Northwestern. This cross-selling strategy presents risks that,
singularly or in any combination, could adversely affect the Company's
business, financial condition, results of operations and cash flows and the
value of the Common Stock. These risks include the possible adverse effects
of a failure to coordinate and integrate the sales programs of the Acquired
Companies, a failure to train its sales force effectively to market its
bundled products, a failure to develop compensation and incentive programs
needed to appropriately motivate its sales force, a failure to develop and
implement a sales program and organize a sales force to market the Company's
bundled telecommunications services to yellow page and other customers who do
not at present purchase the Company's telecommunications services, a failure
to develop integrated accounting and management information systems for ACG
and the Acquired Companies and any companies that are acquired in the future,
a failure to convert long distance customers into local service customers and
other unanticipated problems that might arise in connection with the
implementation of any new marketing strategy. Any of the foregoing problems
could have a material adverse effect on the Company's business, results of
operations and financial condition and the value of the Common Stock.
RISKS RELATED TO LOCAL SERVICES STRATEGY
The local dial tone services market has only recently been opened to
competition through the passage of the Telecommunications Act of 1996 (the
"Telecommunications Act") and subsequent state and Federal regulatory actions
designed to implement the Telecommunications Act. Regulatory bodies have not
completed all actions expected to be needed to implement local service
competition, and there is little experience under those decisions that have
been made to date. The Company has begun to act as a CLEC only recently and
on a small scale, through the resale of the ILEC's networks, and has limited
experience in this market. The revenues generated to date from local services
have not been material. At the time the Company determines to cease simple
resale of local services in some of its markets and provide those services
with its own switches and either leased unbundled loops or its own fiber
optic facilities, the Company will be required to make significant operating
and capital investments in order to implement that phase of its local service
strategy and will have to acquire rights-of-way, easements, conduits, other
equipment and facilities and permits. There are numerous operating
complexities associated with providing local services. The Company will be
required to develop new services and systems and will need to develop new
marketing initiatives and train its sales force in connection with selling
these services. The Company will face significant competition from ILECs,
including the RBOCs, whose core business is providing local dial tone
service. The RBOCs, who currently are the dominant providers of local
services in their markets, are expected to mount a significant competitive
response to new entrants such as the Company in their markets. Further, each
of the RBOCs may expand outside of its historical markets into the market
areas of other RBOCs. The Company also will face significant competitive
product and pricing pressures from other ILECs and from other firms seeking
to compete in the local services market. Many of these competitors, including
all of the RBOCs and many CLECs, have far greater experience and operational,
administrative and financial resources than the Company. A recent Eighth
Circuit Court of
13
<PAGE>
Appeals decision, which invalidated the pricing discounts for such services
which had been prescribed by the FCC under the Telecommunications Act, adds
uncertainty to the marketplace and could also have an adverse effect on the
Company's business, financial condition, results of operations and cash flows
and the value of the Common Stock.
The Company also expects that the addition of resold local service to its
bundle of telecommunications services will have an adverse impact on its
gross margin because the gross margin on the resale of local services through
an ILEC's facilities is lower than the gross margin on most of the Company's
existing business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Certain Acquired Companies--Overview
of the Acquired Companies' Sources of Revenue and Expenses."
DEPENDENCE ON DEVELOPMENT OF BILLING, CUSTOMER SERVICE AND MANAGEMENT
INFORMATION SYSTEMS; TECHNOLOGY RISKS
Sophisticated information and processing systems are vital to the
Company's operations and growth and its ability to monitor costs, render
single monthly invoices for bundled services, process customer orders,
provide customer service and achieve operating efficiencies. As the Company
commences providing dial tone and switched local access services in future
years, the need for further enhanced billing and information systems will
increase significantly and the Company will have significant additional
requirements for data interface with RBOCs. Additionally, any subsequent
acquisitions will place additional burdens on the Company's accounting,
information and other systems.
While the Company believes that its software applications are year 2000
compliant, there can be no assurance until the year 2000 occurs that all
systems will then actually function adequately. Further, if the software
applications of local exchange carriers, long distance carriers or others on
whose services the Company depends are not year 2000 compliant resulting in
any loss of such services, it could have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows
and the value of the Common Stock.
Unanticipated problems in any of the above areas, or the Company's
inability to implement solutions in a timely manner or to upgrade existing
systems as necessary, could have a material adverse impact on the ability of
the Company to reach its objectives and on its financial condition, results
of operations and cash flows and the value of the Common Stock.
In addition to its accounting and information systems, the
telecommunications industry generally is subject to rapid and significant
changes in technology. While the Company believes that for the foreseeable
future these changes will not materially hinder the Company's ability to
acquire necessary technologies, the effect of technological changes on the
business of the Company cannot be predicted. There can be no assurance that
technological developments in telecommunications will not have a material
adverse effect on the Company's business, financial condition, results of
operations and cash flows and the value of the Common Stock.
LIMITED TECHNICAL STAFF
The telecommunications industry is highly technical and the Company's
success in designing and operating local and long distance networks and their
components, such as switches, is dependent upon the quality of the Company's
technical support capabilities. While the Acquired Companies have technical
personnel on staff and the Company intends to expand its in-house technical
capabilities following the Offering, the Company also intends to engage
outside technical consultants and vendors rather than rely solely upon its
in-house expertise. The Company's technical personnel will coordinate and
supervise outside consultants and vendors, which may include KINI, L.C., the
entity that provides management services to KINNET. See "Management." While
the Company will attempt to select consultants and vendors that have the
technical expertise to provide in a timely manner the services required to
design, construct and maintain the Company's network and all additions
thereto, a failure by any consultant or vendor to perform in the anticipated
manner could have a material adverse effect upon the Company's business,
financial condition, results of operations and cash flows and the value of
the Common Stock
14
<PAGE>
because the Company could experience customer dissatisfaction and possible
defection and could be forced to contract with other consultants and vendors
and thereby incur time delays or additional costs.
COMPETITION
The telecommunications industry is highly competitive. The Company
competes with long distance carriers in the provision of long distance
services. The United States long distance market includes approximately 1,000
service providers, but is dominated by four major competitors: AT&T, MCI,
Sprint and WorldCom (the "Dominant Long Distance Carriers"). The Company also
faces intense competition from ILECs, including Southwestern Bell and U S
WEST, two of the RBOCs which currently dominate their local
telecommunications markets in the Region, and independently owned
telecommunications companies. Other ILECs and CLECs with which the Company
does not now compete may initiate service or make acquisitions in the Region.
Other competitors of the Company may include cable television companies,
competitive access providers, microwave and satellite carriers and private
networks owned by large end users. In addition, the Company competes with
RBOCs and other ILECs, numerous direct marketers and telemarketers, equipment
vendors and installers and telecommunications management companies with
respect to certain portions of its business. Many of the Company's existing
and potential competitors have financial and other resources far greater than
those of the Company. Many of the Company's competitors may have lower
overhead and because of their ownership of fiber optic transmission networks
have substantially lower cost of service than the Company. Consequently,
these competitors may be able to provide their services at lower rates than
the Company.
The long distance telecommunications industry has relatively insignificant
barriers to entry, numerous entities competing for the same customers and a
high average churn rate, as customers frequently change long distance
providers in response to the offering of lower rates or promotional
incentives by competitors. As procompetitive regulatory initiatives are
implemented, the RBOCs will become competitors in the long distance
telecommunications industry and various other participants in the long
distance telecommunications industry, including one or more of the Dominant
Long Distance Carriers, also will seek to compete in the local switched
services market. The Company believes that the principal competitive factors
affecting its telecommunications market share are pricing, accurate billing
of a bundle of services on a single invoice, quality of service and customer
dissatisfaction with the services provided by the existing carrier. The
ability of the Company to compete effectively will depend upon its ability to
maintain high quality, market-driven services at prices generally equal to or
below those charged by its competitors. While customers may be willing to pay
to some extent for superior service, the Company believes that to maintain
its competitive posture, it must be in a position to reduce its prices in
order to meet reductions in rates, if any, by others. Any such reductions
could adversely affect the Company's business, financial condition, results
of operations and cash flows and the value of the Common Stock, and the
Company's numerous competitors with greater financial resources may be better
postured to withstand the effects of such reductions. See "Business --
Competition." The Company generally prices its services at a discount to the
primary carrier or carriers in each of its target markets. The Company has
experienced, and expects to continue to experience, declining revenue per
minute in all of its markets as a result of increased competition, although
due to technological innovation and substantial available transmission
capacity, transmission costs in the telecommunications industry often have
declined at a more rapid rate than prices. There can be no assurance that
this relationship will continue. Industry observers predict that, early in
the next decade, telephone charges will no longer be based on the distance a
call is carried. As a consequence, the Company could experience a substantial
reduction in its margins on long distance calls which, absent a significant
increase in billable minutes carried or charges for additional services,
would have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows and the value of the Common
Stock.
Local access telephone services offered by the Company compete principally
with the services offered by the local ILEC. ILECs have long-standing
relationships with their customers and have the potential to subsidize
competitive services with revenues from services they offer in which
competition is less intense. In addition, if ILECs expand their toll free
calling areas, traffic which might otherwise have been carried by the Company
as long distance traffic may be carried by the Company as local traffic, or
carried by the other carrier rather than by the Company.
15
<PAGE>
The Company faces competition in the markets in which it operates from one
or more CLECs that own and operate fiber optic networks, in many cases in
conjunction with the local cable television operator. Each of the Dominant
Long Distance Carriers has indicated its intention to offer local
telecommunications services, either directly or in conjunction with other
competitive access providers or cable television operators. There can be no
assurance that these firms, and others, will not enter the small and
mid-sized markets where the Company currently focuses its sales efforts.
The Company believes that the market for wireless telecommunications
services is likely to expand significantly as equipment costs and service
rates continue to decline, equipment becomes more convenient and functional,
and wireless services become more diverse. The Company has only a very small
participation in the wireless services market, and as that market expands the
Company will face increasing competition. The Company also believes that
providers of wireless services increasingly will offer, in addition to
products that supplement customers' landline communications (similar to
cellular telephone services in use today), wireline replacement products that
may result in wireless services becoming customers' primary mode of
communication. The Company anticipates that in the future there could
potentially be several wireless competitors in each of its current or target
markets, including cellular and personal communication services providers.
The Company primarily competes in the markets in which it currently
distributes yellow pages with Southwestern Bell. In expanding its yellow page
business into other service areas in the Region, the Company will face
competition from Southwestern Bell, U S WEST and other publishers of existing
directories in the Region. Many of these competitors, including all of the
RBOCs and many other ILECs, have greater financial, operational and
administrative resources than the Company.
IMPLICATIONS OF TELECOMMUNICATIONS ACT AND OTHER REGULATION
The Company's telecommunications services are subject to varying degrees
of federal, state and local regulation. The FCC exercises jurisdiction over
all telecommunications service providers to the extent such services involve
the provision, origination and termination of jurisdictionally interstate or
international telecommunications, including the resale of long distance
services and the provision of local access services necessary to connect
callers to long distance carriers. The state regulatory commissions retain
jurisdiction over services to the extent such services involve the provision,
origination and termination of jurisdictionally intrastate
telecommunications. The Company, as a provider of resale and switch-based
local and long distance telecommunications services, files tariffs with the
FCC and relevant state authorities for local, interstate and international
service on an ongoing basis. Challenges to these tariffs by third parties
could cause the Company to incur substantial legal and administrative
expenses. Additionally, the Company expects that, as its business expands and
as more procompetitive regulatory initiatives pertaining to the local
telecommunications services industry are implemented, it will offer increased
intrastate services which will be subject to state regulation. In its
provision of local telecommunications services, the Company currently is not
subject to price-cap or rate-of-return regulation, nor is it currently
required to obtain FCC authorization for installation or operation of the
facilities used by the Company in providing its domestic interstate services.
The Company believes that the Telecommunications Act and state legislative
and regulatory initiatives have substantially reduced the barriers to local
exchange competition. These initiatives include requirements that the RBOCs
negotiate with entities such as the Company to provide interconnection to the
existing local telephone network, to allow the purchase, at cost-based rates,
of access to unbundled network elements, to establish dialing parity, to
obtain access to rights-of-way and to resell services offered by the ILECs.
See "Business -- Regulation." The Company's plans to provide local switched
services are dependent, among other things, upon obtaining favorable
interconnection agreements with local exchange carriers. In August 1996, the
FCC adopted the Interconnection Decision to implement the interconnection,
resale and number portability provisions of the Telecommunications Act. In
October 1996, the U.S. Eighth Circuit Court of Appeals stayed the
effectiveness of certain portions of the Interconnection Decision, including
provisions establishing a pricing methodology and a procedure permitting new
entrants to "pick and choose" among various provisions of existing
interconnection agreements. Although the judicial stay of the Interconnection
Decision did not prevent the Company
16
<PAGE>
from attempting to negotiate interconnection agreements with local exchange
carriers, it did create uncertainty about the rules governing pricing, terms
and conditions of interconnection agreements, and could make negotiating such
agreements more difficult and protracted. Although the FCC applied
unsuccessfully to the U.S. Supreme Court to vacate the judicial stay, on July
18, 1997, the U.S. Eighth Circuit Court of Appeals issued an opinion which,
among other things, held that the stay had expired. The decision also
invalidated key elements of the Interconnection Decision and stated that the
law grants the state commissions, not the FCC, the authority to determine
rates involved in the implementation of the local competition provisions of
the Telecommunications Act. More specifically, the court overturned the FCC's
pricing guidelines, the "pick and choose" rule, and some portions of the FCC
unbundling rules, including the requirement that ILECs recombine network
elements that are purchased by CLECs on an unbundled basis. The court upheld,
however, the FCC's view of the network elements that ILECs must unbundle,
found that nothing in the Telecommunications Act requires a CLEC to own or
control a telecommunications network before being able to purchase unbundled
elements, and affirmed certain other aspects of the Interconnection Decision.
Several interexchange carriers (including AT&T, MCI and Sprint) filed
petitions for rehearing with the Eighth Circuit requesting the court to
reinstate certain of the FCC rules found unlawful, while various ILECs filed
petitions of their own regarding aspects of the court's decision that they
found objectionable. On October 14, 1997, the court denied the petitions of
the interexchange carriers, granted those of the ILECs, and vacated an
additional FCC rule established in the Interconnection Decision that, it
held, would have the effect of permitting a CLEC access to an ILEC's network
elements on a bundled as well as an unbundled basis. The court's decision
thereby prevented CLECs from acquiring bundled network elements at cost-based
rates and made only unbundled elements available at those rates. In a
separate decision on August 22, 1997, the Eighth Circuit held that the FCC
exceeded the scope of its jurisdiction by issuing rules concerning dialing
parity that affect essentially intrastate services and local, interstate
calls within a single local access and transport area ("LATA"). The FCC,
AT&T, MCI, Sprint, WorldCom and a large number of CLECs and others filed
petitions for certiorari requesting the United States Supreme Court to
overturn both of the Eighth Circuit's decisions. The petitions asserted,
among other things, that the Eighth Circuit erred in finding the FCC lacked
jurisdiction to promulgate rules implementing the local competition pricing
provisions of the Telecommunications Act of 1996 and in rejecting the "pick
and choose" provisions of the FCC's rules. On January 26, 1998, the United
States Supreme Court granted the petitions for certiorari filed by the FCC,
various IXCs, CLECs and others challenging the Eighth Circuit's decision. In
addition, the Supreme Court granted conditional petitions for certiorari
filed by the ILECs that, among other things, challenged the Eighth Circuit's
decisions to uphold FCC rules that would give new competitors cost-based
access to ILECs' unbundled network elements. These petitions have been
consolidated, and one hour of oral argument has been allotted during the
Supreme Court's next term. There can be no assurance that the Company will be
able to obtain and maintain resale and interconnection agreements on terms
acceptable to the Company.
In early July 1997, the parent company of Southwestern Bell ("SBC")
initiated litigation in the United States District Court, Northern District
of Texas (Wichita Falls) (the "Court") challenging the constitutionality of
Sections 271 through 275 of the Telecommunications Act on four grounds,
including a denial of First Amendment free speech rights. On December 31,
1997, the Court granted SBC's motion. The Court found that Sections 271-275
of the Telecommunications Act of 1996 (the "Special Provisions") constitute a
"bill of attainder" and are therefore unconstitutional. The Court's decision
is considered to be controversial by many, and the United States Department
of Justice has joined AT&T, MCI and Sprint in asking the Court for a stay of
the decision's effectiveness pending the filing of an appeal to the United
States Court of Appeals for the Fifth Circuit. MCI has since filed a notice
of appeal with the Fifth Circuit urging that it overturn the Court's
decision. In the meantime, the Court has approved a December 30, 1997 request
by Bell Atlantic Corporation ("Bell Atlantic") that it be covered by the
effect of the December 31 ruling. The Court has also rejected the request of
Ameritech Corporation ("Ameritech") to join the case, on grounds that it was
filed after the ruling. On February 11, 1998, the Court stayed its order,
pending the appeal. See "Business -- Regulation -- Federal Regulations."
The Telecommunications Act provides the ILECs with new competitive
opportunities. That Act removes previous restrictions concerning the
provision of long distance service by the RBOCs and also
17
<PAGE>
provides them with increased pricing flexibility. Under the
Telecommunications Act, the RBOCs will, upon the satisfaction of certain
conditions, be able to offer long distance services that would enable them to
duplicate the "one-stop" integrated telecommunications approach that the
Company intends to use. There can be no assurance that the anticipated
increased competition will not have a material adverse effect on the
Company's business, results of operation and financial condition and the
value of the Common Stock. The Telecommunications Act provides that rates
charged by ILECs for interconnection to their network are to be
nondiscriminatory and based upon the cost of providing such interconnection,
and may include a "reasonable profit," which terms are subject to
interpretation by regulatory authorities. If the ILECs, particularly the
RBOCs, charge alternative providers such as the Company unreasonably high
fees for interconnection to their networks or significantly lower their rates
for access and private line services or offer significant volume and term
discount pricing options to their customers, the Company could be at a
significant competitive disadvantage.
Effective January 1, 1998 ILECs became entitled to charge subscriber
interexchange carrier charges ("PICC") upon switching a customer's service
from one provider to another. At the present time, the Company expects to pay
a blended rate of approximately $5.00 per business and residential customer
as a PICC charge. Unless all interexchange carriers elect to pass these
charges along to their customers, those carriers that elect to absorb the
PICC charge will enjoy a competitive advantage over those that attempt to
pass the charge along to their customers. The Company believes that larger
carriers will be better able to absorb the PICC charges over the short term,
and hence will enjoy a competitive advantage until market conditions drive
the cost of the PICC charge to lower levels. The Company will determine
whether to absorb or pass along the PICC charge once it assesses the action
taken by its competitors.
Absorption of the PICC charge would increase the Company's cost of providing
telecommunication services and consequently would adversely impact the
Company's results of operations and cash flows and could adversely affect the
value of the Common Stock.
The Company believes that, with two exceptions in Arkansas and Missouri,
it is in substantial compliance with all material laws, rules and regulations
governing its operations and has obtained, or is in the process of obtaining,
all licenses and approvals necessary or appropriate to conduct its operations
following the Offering; however changes in existing laws and regulations, or
any failure or significant delay in obtaining necessary regulatory approvals,
could have a material adverse effect on the Company's business, results of
operations, financial condition and cash flows and the value of the Common
Stock. Statutes and regulations which may become applicable to the Company as
it expands could require the Company to alter methods of operations at costs
which could be substantial, or otherwise limit the types of services offered
by the Company. See Notes to Combined Financial Statements of Valu-Line of
Longview, Inc. and Related Companies and Notes to Financial Statements of
Feist Long Distance Service, Inc. for information relating to two of the
Acquired Companies conducting long distance telephone operations in Arkansas
and Missouri without a permit.
The telecommunications industry is undergoing dynamic change and
regulatory responses to such change could be sweeping. Larger, more
established telecommunications companies may promote legislation or
regulations which could adversely affect the Company's ability to offer its
services to its targeted customers or to carry out its business plans. There
can be no assurance that the Company will be able to comply with additional
applicable laws, regulations and licensing requirements or have sufficient
resources to take advantage of the opportunities which may arise from this
dynamic regulatory environment. See "Business -- Regulation."
RECENTLY INSTITUTED LITIGATION AGAINST AN ACQUIRED COMPANY
In early February 1998, Valu-Line of Longview, Inc. ("Valu-Line") was
served with a petition by four plaintiffs (including the lawyer filing the
suit) which alleged, among other things, that Valu-Line billed the plaintiffs
for services never provided and intentionally "bumped up" the actual time of
services used by plaintiffs in order to increase Valu-Line's charges to them.
The plaintiffs purported to bring the suit as a class action and alleged
violations of the Texas Deceptive Trade Practices Act, fraud, breach of
contract, negligence and gross negligence. They sought damages in an
unspecified amount, further damages under the Deceptive Trade Practices Act
(which could be as much as triple the actual damages), interest, attorney's
fees and such other relief to which they may have been entitled. The petition
contained no
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details with respect to Valu-Line's alleged conduct. While representatives of
Valu-Line advised ACG that they believe Valu-Line's billing practices have
and do conform generally to industry standards and FCC rate filings and that
the plaintiffs' allegations were without merit. Valu-Line, in order to avoid
protracted litigation, entered into a settlement, a nominal portion of which
will be paid by the Company, and an agreed confidential dismissal with
prejudice, with the four named plaintiffs prior to the certification of the
suit as a class action. The former stockholders of Valu-Line have agreed,
severally, to indemnify the Company for a period of six months after the
closing of the Offering against liabilities, costs and expenses, including
legal fees, relating to similar claims which others may bring in the future.
In order to fund this indemnity obligation, the former stockholders have
deposited in escrow an aggregate of 71,428 shares of Common Stock, and their
obligation is limited to the value of those shares.
DEPENDENCE ON THIRD-PARTY LONG DISTANCE CARRIERS
The Company is dependent on certain major long distance carriers to
transmit its customers' long distance telephone calls. The Company has
agreements with such long distance carriers that provide it with access to
such carriers' networks for transmission of its customers' calls. Although
the Company believes that it currently has sufficient access to transmission
facilities and long distance networks and believes that its relationships
with its carriers are generally satisfactory, any increase in the rates
charged by carriers or their unwillingness to provide service to the Company
would materially adversely affect the Company's business, financial
condition, results of operations and cash flows and the value of the Common
Stock. Failure to obtain continuing access to such facilities and networks
also would have a material adverse effect on the Company, including possibly
requiring the Company to significantly curtail or cease its long distance
operations. In addition, the Company's long distance service operations
require that its switching facilities and its carriers' long distance
networks operate on a continuous basis. It is not atypical for long distance
carriers and switching facilities to experience periodic service
interruptions and equipment failures. It is possible that the Company's
switching facilities and its carriers' long distance networks may from time
to time experience service interruptions or equipment failures resulting in
material delays which would adversely affect consumer confidence as well as
the Company's business operations and reputation, which might ultimately
affect the value of the Common Stock.
DEPENDENCE ON INCUMBENT LOCAL EXCHANGE CARRIERS
The Company intends to obtain the local telephone services of ILECs on a
wholesale basis and resell that service to end users, particularly in the
early stages of its local telephone service business. To the extent that the
Company resells the local services of an ILEC, the Company and its customers
will be subject to the quality of service, equipment failures and service
interruptions of those carriers, all of which could redound to the Company's
detriment. Even if the Company ultimately constructs its own local network
facilities, it will be dependent on ILEC's for provision of local telephone
service through access to local loops, termination service and, in some
markets, central office switches.
The Company is also dependent on ILECs to provide access service for the
origination and termination of its toll long distance traffic and
interexchange private lines. Historically those access charges have made up a
significant percentage of the overall cost of providing long distance
service. On May 7, 1997, the FCC adopted changes to its interstate access
rules that, among other things, will reduce per-minute access charges and
substitute new per-line flat rate monthly charges. The FCC also approved
reductions in overall access rates, and established new rules to recover
subsidies to support universal service and other public policies. The impact
of these changes on the Company or its competitors is not yet clear. The
Company could be adversely affected if it does not experience access cost
reductions proportionally equivalent to those of its competitors. See
"Business --Regulation."
In addition, the Company's plans to provide local telephone service are
heavily dependent upon implementation of provisions of the Telecommunications
Act. The Telecommunications Act preempted state and local laws to the extent
that those laws prohibited local telephone competition, and imposed a variety
of new duties on ILECs intended to advance such competition, including the
duty to negotiate in good faith with competitors requesting interconnection
to an ILEC's network. However, negotiations with ILECs have sometimes
involved considerable delays and the resulting negotiated agreements may not
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necessarily be obtained on terms and conditions that are acceptable to the
Company. In such instances, the Company may petition the proper state
regulatory agency to arbitrate disputed issues. There can be no assurance
that the Company will be able to negotiate acceptable new interconnection
agreements with ILECs or that if state regulatory authorities impose terms
and conditions on the parties in arbitration, such terms will be acceptable
to the Company.
Any successful effort by the ILECs to deny or substantially limit the
Company's access to their network elements or wholesale services would have a
material adverse effect on the Company's ability to provide local telephone
services which could ultimately have a material adverse effect on its
business, financial condition, results of operations and cash flows and the
value of the Common Stock. Although the Telecommunications Act imposes
interconnection obligations on ILECs, there can be no assurance that the
Company will be able to obtain access to such network elements or services at
rates, and on terms and conditions, that permit the Company to offer local
services at rates that are both profitable and competitive. In order to
provide switched based local service, the Company must negotiate satisfactory
interconnect agreements with Southwestern Bell, U S WEST and other ILECs. The
forms of such agreements currently in use do not provide for all material
terms for the resale of local services or access to the unbundled network
elements. Some of such terms may be affected by pending legal proceedings
regarding FCC regulatory requirements. Many issues relevant to the terms and
conditions by which competitors may use an ILEC's network and wholesale
services remain to be resolved. For example, Southwestern Bell, U S WEST and
certain other ILECs have taken the position that when a carrier seeking to
provide local service obtains all necessary elements (loops and switches)
from the ILEC in a combined form, the ILEC retains the right to receive the
access revenues associated with service to the customers served on that
basis. See "Business -- Regulation."
DEPENDENCE ON KEY PERSONNEL; NEW MANAGEMENT TEAM
The efforts of a small number of key management and operating personnel
will largely determine the Company's success. The Company's operations depend
on the continuing efforts of its executive officers and the senior management
of the Acquired Companies. Because the Company is a holding company with no
previous operating experience and is seeking to consolidate numerous separate
businesses, it is particularly vulnerable to the loss of one or more members
of management in the near term. In addition, the Company likely will depend
on the senior management of any significant business it acquires in the
future. The Company's business, financial condition, results of operations
and cash flows and the value of the Common Stock could be affected adversely
if any of these persons does not continue in his or her management role after
joining the Company and the Company is unable to attract and retain qualified
replacements. As competition in the telecommunications business has
increased, it has become increasingly difficult and expensive to attract and
retain management personnel. The success of the Company's growth strategy, as
well as the Company's current operations, will depend, in part, on the extent
to which the Company is able to retain, recruit and train qualified personnel
who meet the Company's standards of conduct and service to its customers. The
Company's senior management team has been assembled only recently, and the
Company is currently seeking to augment that team with additional personnel.
There can be no assurance that the management team can function effectively
to implement the Company's business plans. See "Management."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
On closing of the Acquisitions and the Offering, Consolidation Partners
Founding Fund, L.L.C. ("CPFF"), the executive officers and directors of the
Company and former owners of the Acquired Companies and KINNET will own in
the aggregate approximately 56.7% of the outstanding Common Stock. Promptly
after the Offering, CPFF intends to distribute to its owners all shares of
Common Stock owned by it. As a result of such distribution, Consolidation
Partners, L.L.C. ("Consolidation Partners"), a limited liability company
owned by Rod K. Cutsinger, a director of the Company, his wife and two adult
children, will own approximately 26.7% of the then outstanding shares of
Common Stock.
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TERMS OF THE ACQUISITIONS
For accounting purposes, the aggregate purchase price of the Acquisitions
is estimated to be $139.5 million, an excess of $122.8 million (including
$0.6 million of deferred acquisition costs incurred by ACG) over the book
value of the net assets acquired of $17.3 million. This excess purchase price
of $122.8 million can be attributed to several factors, including the
customer lists of the Acquired Companies, the benefits to be gained from
switching existing and future traffic to KINNET, the ability to cross-sell
telecommunications services through established yellow page directories, and
the future operating synergies hoped to be realized from consolidating nine
entities into one. Of the excess, $105.8 million relates to the Acquired
Companies and $17.0 million relates to the assets of KINNET. The excess of
the respective purchase prices over the fair value of tangible net assets
acquired have been preliminarily classified as intangible assets. The final
allocation to identifiable tangible and intangible assets, including customer
lists and goodwill, and the useful lives for the amortization of the various
asset classifications will be based upon the results of an appraisal by an
independent third party which is expected to be completed prior to the
release of the Company's audited financial statements for 1997. The portion
of the purchase prices not allocated to identifiable tangible and intangible
assets will be recorded as goodwill. Until the independent appraisal is
completed, the intangible assets will be amortized over a period of 25 years.
After receipt of the appraisal, the tangible and intangible assets and the
goodwill attributable to the Acquisitions will be amortized over the useful
lives determined by the independent appraiser. Accordingly, if the
appraiser's composite amortization period is less than 25 years, the
Company's annual charge for depreciation and amortization will be increased,
perhaps significantly, over the preliminary amount reflected in the Company's
pro forma combined financial statements. See "The Company -- Summary of Terms
of the Acquisitions" and the Pro Forma Combined Financial Statements.
CERTAIN INTERESTS OF MANAGEMENT IN THE ACQUISITIONS AND OTHER TRANSACTIONS
Several shareholders of certain of the Acquired Companies will become
executive officers or directors of the Company upon the consummation of the
Acquisitions. These shareholders will receive a portion of the consideration
in the Acquisitions consisting of, in the aggregate, 837,878 shares of Common
Stock, $35.6 million in cash, $11.7 million in subordinated promissory notes,
$0.6 million in convertible subordinated notes, and 293,513 five-year
non-transferrable warrants to purchase Common Stock at the initial public
offering price. Certain of these shareholders, in connection with the
execution of the agreement pursuant to which their Acquired Company will be
acquired, received ten-year non-transferrable warrants to purchase an
aggregate of 756,078 shares of Common Stock at $6.61 per share. Certain of
these shareholders will also have employment agreements with the Company. See
"The Company -- Summary of Terms of the Acquisitions" and "Certain
Transactions -- The Acquisitions."
A corporation in which an executive officer and director of the Company is
an officer, director and 50% shareholder has provided high quality yellow
page colorizing services and licensed World Pages to Great Western
Directories, Inc. In addition, KINI, L.C. (a majority of which is owned by
the shareholders of Liberty Cellular, Inc. ("Liberty"), which is the former
sole stockholder and current 51% stockholder of KINNET) has provided certain
management services to KINNET, and Feist Long Distance Service, Inc. has
transported traffic on KINNET's network. These arrangements, which the
Company considers reasonable under the circumstances, are expected to
continue after the Acquisitions, under the terms described in "Certain
Transactions -- Other Transactions," and the Company intends, where practical
and economic, to transport additional long distance traffic over the KINNET
network. Except as noted herein, any future transactions with directors,
officers, employees or affiliates of the Company are expected to be minimal
and will, in any case, be approved in advance by a majority of the Board of
Directors, including a majority of disinterested members of the Board of
Directors.
RISKS OF EXPANSION INTO ADDITIONAL YELLOW PAGE MARKETS
The Company's strategy to expand into additional yellow page markets
carries certain risks in addition to those of its expansion plans generally.
To enter a new yellow page market, the Company will typically be required to
increase its sales force if it hopes to communicate effectively with its
prospective new customers. When the Company first expands into a yellow page
market, it often seeks to attract its
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targeted customers by producing and publishing a full-scale initial directory
with minimal or no charges for advertising space. Thus for a first directory
in a new market, the Company may have substantial expenses, depending on the
size of the directory and the market, with insignificant offsetting revenues.
Additionally, when the Company enters a new market it has no prior first-hand
credit experience with its advertising customers, and therefore typically has
higher bad debt risk for the first directory in which advertising space is
sold. Further, many of the Company's yellow page advertisers pay for their
advertisements in installments over terms of twelve months. In connection
with the acquisition of one of the Acquired Companies, the Company has agreed
not to publish a yellow page directory in Oklahoma City or its metropolitan
area until after the fifth anniversary date of the acquisition of Feist Long
Distance Service, Inc.
RISKS RELATED TO ACQUISITIONS
A portion of the Company's future growth is expected to come through the
acquisition of companies engaged in the various aspects of the
telecommunications and yellow page publishing businesses. Other companies,
including existing publicly owned telecommunications companies, which have
objectives similar to those of the Company, may be actively evaluating the
same companies that would otherwise be targeted for acquisition by the
Company. A number of these acquiring companies may have greater resources
than the Company to finance acquisition opportunities and might be willing to
pay higher prices than the Company. Further, as competition for acquisitions
increases, the prices for the companies to be acquired are likely to increase
as well. Consequently, the Company may encounter significant difficulties in
its efforts to achieve growth through acquisitions. Its acquisition strategy
presents risks that, singularly or in any combination, could materially
adversely affect the Company's business, financial condition, results of
operations and cash flows and the value of the Common Stock. These risks
include the possibility of an adverse effect on existing operations of the
Company from the diversion of management attention and resources to
acquisitions, the possible loss of acquired customer bases and key personnel
and the contingent and latent risks associated with the past operations of
and other unanticipated problems arising in the acquired businesses. Customer
dissatisfaction or performance problems of a single acquired company could
have an adverse effect on the reputation of the Company generally and render
the Company's sales and marketing initiatives ineffective. Whether the
Company's acquisition strategy is successful will depend on the extent to
which it is able to acquire, successfully integrate and profitably manage
additional businesses, and no assurance can be given that the Company's
strategy will succeed.
The Company may use Common Stock, cash, notes or other consideration to
effect future acquisitions. The extent to which the Company will be able or
willing to use the Common Stock for this purpose will be dependent on its
market value from time to time and the willingness of potential sellers to
accept the Common Stock as payment. To the extent the Company is unable or
unwilling to use its Common Stock to make future acquisitions, its ability to
grow may be limited by the extent to which it is able to raise capital for
this purpose, as well as to expand existing operations, through debt or
additional equity financings. Significant incurrences of debt for
acquisitions or other purposes would increase the Company's leverage and
could adversely affect its business, financial condition, results of
operations and cash flows and the value of the Common Stock. See
"Management's Discussion and Analysis of Combined Financial Condition and
Results of Operations of Certain Acquired Companies -- Pro Forma Combined
Results of Operations -- Pro Forma Liquidity and Capital Resources."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
On closing of the Acquisitions and the Offering, 19,624,920 shares of
Common Stock will be outstanding. The 8,000,000 shares sold in the Offering
(other than shares that may be purchased by affiliates of the Company) will
be freely tradable. Substantially all of the remaining shares outstanding may
be resold publicly only following their effective registration under the
Securities Act of 1933, as amended (the "Securities Act"), or pursuant to an
available exemption (such as that provided by Rule 144 following a one or two
year holding period from the registration requirements of the Securities
Act). The holders of these shares have certain rights to require the Company
to file a registration statement with respect to their shares in the future
under the Securities Act (see "Shares Eligible for Future Sale"), but
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may not exercise such registration rights for a period of one year following
the closing of the Acquisitions. Sales made pursuant to Rule 144 must comply
with its applicable volume limitations and other requirements.
On closing of the Offering, the Company also will have outstanding
convertible notes, preferred stock and options and warrants to purchase up to
a total of 4,185,775 shares of Common Stock.
The Company has agreed not to offer or sell any shares of Common Stock for
a period of 180 days following the date of this Prospectus, subject to
certain exceptions, without the prior written consent of PaineWebber
Incorporated, provided that the Company may issue shares of Common Stock in
acquisitions if such Common Stock is subject to similar lock-up provisions.
The Company's directors, its executive officers and substantially all of the
stockholders of ACG prior to the Acquisitons, including CPFF, have agreed not
to offer or sell any shares for a period of one year following the date of
this Prospectus (the "Lock-up Period"), subject to certain exceptions,
without the prior written consent of PaineWebber Incorporated. Further, all
persons who acquire shares of Common Stock in connection with the
Acquisitions (other than the acquisition of ACG's predecessor) have agreed
with the Company, subject to certain exceptions, not to offer or sell such
shares during the Lock-Up Period, and the Company has agreed not to waive or
amend these agreements without the prior written consent of PaineWebber
Incorporated. In addition, Rod K. Cutsinger, a director and the largest
stockholder of the Company, has agreed not to offer or sell any of his shares
during a period ending 18 months after the closing of the Offering, subject
to certain exceptions, without the prior written consent of PaineWebber
Incorporated. See "Underwriting."
The effect, if any, of the availability for sale, or sale, of shares of
Common Stock will have on the market price of the Common Stock prevailing
from time to time is unpredictable, and no assurance can be given that the
effect will not be adverse.
NO PRIOR MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, no public market for the Common Stock has existed,
and the initial public offering price, which has been determined by
negotiation between the Company and representatives of the Underwriters, may
not be indicative of the price at which the Common Stock will trade after the
Offering. See "Underwriting." The Common Stock has been approved for listing
on the New York Stock Exchange, Inc., subject to official notice of issuance;
however, no assurance can be given that an active trading market for the
Common Stock will develop or, if developed, continue after the Offering. The
market price of the Common Stock after the Offering may be subject to
significant fluctuations from time to time in response to numerous factors,
including variations in the reported financial results of the Company,
actions and recommendations of securities analysts, and changing conditions
in the economy in general or in the Company's industry in particular. In
addition, the stock markets experience significant price and volume
volatility from time to time which may affect the market price of the Common
Stock for reasons unrelated to the Company's performance at that time.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering (i) will experience immediate,
substantial dilution in the net tangible book value of their stock of $13.33
per share (see "Dilution") and (ii) may experience further dilution in that
value from issuances of Common Stock in connection with future acquisitions.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS, DELAWARE LAW AND A
STANDSTILL AGREEMENT
The terms of the Company's Restated Certificate of Incorporation, as well
as the concentration of ownership of the Common Stock and the Company's
ability to issue up to 20,000,000 "blank check" shares of preferred stock may
have the effect of discouraging proposals by third parties to acquire a
controlling interest in the Company, which could deprive stockholders of the
opportunity to consider an offer to acquire their shares at a premium price
to them. These provisions include (i) a classified Board of Directors, (ii)
the ability of the Board of Directors to establish a sinking fund for the
purchase or redemption of shares, fix the number of directors within a
certain range and fill vacancies on the Board
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of Directors, and (iii) restrictions on the ability of stockholders to call
special meetings, act by written consent or amend the foregoing provisions.
In addition, under certain conditions Section 203 of the DGCL would impose a
three-year moratorium on certain business combinations between the Company
and an "interested stockholder" (in general, a stockholder owning 15% or more
of a corporation's outstanding voting stock). The existence of such
provisions may have a depressive effect on the market price of the Common
Stock in certain situations. While the Company has not adopted a
stockholders' rights plan, the Company has the power to do so under Delaware
law. See "Description of Capital Stock -- Provisions Having Possible
Anti-Takeover Effect."
In addition, Rod K. Cutsinger, a director and the Company's largest
stockholder, intends to enter into a three-year standstill agreement with the
Company pursuant to which he will agree not to acquire any additional shares
of Common Stock except from the Company pursuant to stock dividends or splits
or option or benefit plans, solicit proxies in opposition to nominees for
directors proposed by the board, vote any of his shares of Common Stock in
opposition to the recommendation of the disinterested members of ACG's board
of directors regarding the election or removal of directors and matters
relating to a possible change in control of the Company or take certain other
proscribed actions. See "Description of Capital Stock -- Standstill
Agreement."
NO DIVIDENDS
The Company intends to retain all of its earnings, if any, to finance the
expansion of its business and for general corporate purposes and does not
anticipate paying any cash dividends on its Common Stock for the foreseeable
future. In addition, the Company's proposed credit facility may contain
certain significant restrictions on the ability of the Company to pay
dividends. See "Dividend Policy" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Certain Acquired Companies
- -- Pro Forma Combined Results of Operations -- Pro Forma Liquidity and
Capital Resources."
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THE COMPANY
ACG: ACG was founded to create a regional CLEC that provides an integrated
portfolio of telecommunications services principally to business customers.
The Company offers long distance, local, Internet access and cellular
services, primarily in Kansas, Minnesota, Nebraska, North Dakota, Oklahoma,
South Dakota and Texas and to a lesser extent in Arkansas, Colorado and
Montana. As of November 30, 1997, the Company provided telecommunications
services to almost 35,000 business customers and over 10,000 residential
customers, typically located in mid-sized to smaller markets. The Company is
also an independent publisher of yellow page directories. As of November 30,
1997, the Company had approximately 255 direct sales personnel, including
approximately 40 telemarketing personnel. The Company is entering into these
businesses concurrently with the Offering by acquiring the nine Acquired
Companies, its predecessor and its interest in KINNET. The Company had pro
forma combined revenues of $85.4 million and EBITDA of $11.5 million in the
fiscal year ended December 31, 1996. See "Certain Transactions --
Organizational Transactions" and "--The Acquisitions." The following is a
description of the operating companies involved in the Acquisitions:
GREAT WESTERN: Great Western Directories, Inc. ("Great Western"), founded
in 1984 and headquartered in Amarillo, Texas, produces and distributes
approximately 3.1 million yellow page directories annually covering 20
service areas in Oklahoma and Texas, and also publishes three yellow page
directories in California. During the twelve months ended November 30, 1997,
Great Western published 20 yellow page directories covering markets in the
Region that contained advertisements for approximately 46,000 primarily small
to mid-sized business customers. Great Western's revenues and EBITDA for the
fiscal year ended December 31, 1996 were $44.3 million and $8.0 million,
respectively.
VALU-LINE: Valu-Line of Longview, Inc. ("Valu-Line"), headquartered in
Longview, Texas, was founded in 1983. Valu-Line owns and operates a Harris
2020 LX digital tandem and local switch located in Dallas, Texas, and as of
November 30, 1997, provided long distance services to approximately 9,200
customers in Arkansas, Louisiana, Oklahoma and Texas. Valu-Line has recently
received authorization to provide local telephone service in Texas, and as of
November 30, 1997, provided local service to approximately 2,250 access lines
on a resale basis through Southwestern Bell to customers in North and East
Texas. Valu-Line's revenues and EBITDA for the fiscal year ended December 31,
1996 were $11.2 million and $1.6 million, respectively.
FIRSTEL: FirsTel, Inc. ("FirsTel") headquartered in Sioux Falls, South
Dakota, was founded in 1993. FirsTel owns and operates a switch center in
Sioux Falls that includes three linked Harris 2020 digital tandem switches
and, as of November 30, 1997, provided bundled telecommunications service to
approximately 9,400 customers in Colorado, Idaho, Iowa, Minnesota, Montana,
Nebraska, North Dakota, South Dakota and Wyoming. As of November 30, 1997,
FirsTel provided local service to approximately 5,800 access lines on a
resale basis through U S WEST to customers in North Dakota and South Dakota.
FirsTel has recently secured authorization to provide local service in
Minnesota, Nebraska and Wyoming and has an application pending to provide
local service in Iowa. FirsTel began offering cellular service on a resale
basis in South Dakota in February 1997 and had approximately 2,200 cellular
subscribers as of November 30, 1997. FirsTel's revenues and EBITDA for the
fiscal year ended December 31, 1996 were $10.4 million and $1.2 million,
respectively. In early September 1997, FirsTel contracted to acquire two
small telecommunications companies in South Dakota whose combined revenues
for the fiscal year ended December 31, 1996 were $1.7 million.
FEIST LONG DISTANCE: Feist Long Distance Service, Inc. ("Feist Long
Distance"), headquartered in Wichita, Kansas, was founded in 1992 by the
stockholders of Feist Publications, Inc., a yellow page publisher that has
been in business for 20 years. Feist Long Distance owns and operates a
Northern Telecom DMS 250 digital tandem switch located in Wichita, Kansas,
and as of November 30, 1997, provided primarily long distance services to
approximately 15,000 customers in Colorado, Kansas, Nebraska, Oklahoma and
Texas. Feist Long Distance received authorization in March 1997 to provide
local telephone service in Kansas. As of November 30, 1997, Feist Long
Distance provided local service to approximately 9,400 access lines on a
resale basis through Southwestern Bell to customers primarily in the Wichita,
Kansas metropolitan area. Feist Long Distance's revenues and EBITDA for the
fiscal year ended December 31, 1996 were $10.0 million and $0.7 million,
respectively.
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OTHER ACQUIRED COMPANIES: The Other Acquired Companies (Long Distance
Management II, Inc., Long Distance Management of Kansas, Inc., The
Switchboard of Oklahoma City, Inc., Tele-Systems, Inc. and National Telecom,
a proprietorship) include three other small long distance companies and two
telephone equipment sales and service companies. One of the Other Acquired
Companies owns and operates a Stromberg Carlson digital tandem switch located
in Oklahoma City, Oklahoma. As of November 30, 1997, the Other Acquired
Companies provided long distance service to approximately 8,800 customers and
also provided telephone equipment and related maintenance services to over
2,800 customers in the Wichita, Kansas market. The Other Acquired Companies'
combined revenues and EBITDA for their most recent fiscal years were $7.8
million and $0.6 million, respectively.
KINNET: KINNET, headquartered in Salina, Kansas, owns or operates an
approximately 880-route mile fiber optic network in Kansas that connects 105
Kansas communities. KINNET sells private line services of DS0, DS1 and DS3
capacity to interexchange carriers, cellular carriers, independent local
telephone companies, business and governmental accounts and others, including
Feist Long Distance. KINNET currently has one of the largest fiber optic
networks in the state of Kansas. KINNET also operates a Northern Telecom DMS
500 digital tandem and local switch located near the center of its fiber
optic network in Moundridge, Kansas capable of handling both long distance
and local services. In 1996, KINNET provided 104 million minutes of equal
access time or 1+ dialing service for approximately 18 independent local
telephone companies in Kansas. ACG will account for its 49% ownership
interest in KINNET by using the equity method of accounting. KINNET's
revenues and EBITDA for the fiscal year ended December 31, 1996 were $8.6
million and $2.4 million, respectively.
As part of the consideration in the KINNET transaction, the Company issued
714,286 shares of Common Stock to the existing stockholder of KINNET, and it
also made a $10.0 million direct cash investment in KINNET, $5.0 million of
which KINNET has agreed to apply to the buildout in 1998 and 1999 of a
537-mile, $21.5 million network extension from Wichita, Kansas to the greater
Kansas City metropolitan area, with a leg to Tulsa, Oklahoma that will
provide self-healing redundancy to its fiber optic network. KINNET has
advised the Company that it expects to finance the balance of the expansion
with proceeds from the Rural Telephone Finance Cooperative ("RTFC").
STRATEGIC RELATIONSHIPS: The Company has a strategic relationship with
Feist Publications, Inc. During the twelve months ended November 30, 1997,
FPI sold advertisements in its yellow page directories published during the
period to approximately 29,000 business customers in Kansas, Texas and
Oklahoma. FPI has agreed, for a period of five years, to provide the Company
access to its advertising customers and to provide eight information pages in
the front of its directories with instructions on how to subscribe to the
Company's services as well as free advertising space in each of FPI's 15
yellow page directories that are currently in publication. FPI has reserved
the right to terminate this agreement if the Company commences the
publication of a yellow page directory in any market served by FPI.
One of the Acquired Companies recently purchased PAM COMM, a division of
PAM Oil, Inc. ("PAM Oil"). Such company and PAM Oil, a distributor of
automobile parts, oil and lubricants primarily in Idaho, Minnesota, Montana,
North Dakota and South Dakota, have entered into a strategic arrangement.
Under this arrangement, the Company is authorized to solicit the
telecommunications business of PAM Oil's approximately 15,000 business
customers, comprised of automobile dealers, parts suppliers and others. PAM
Oil has agreed to use its telemarketing staff to solicit and refer
telecommunications leads to the Company and to permit the Company to include
telecommunications inserts in PAM Oil's monthly billing statements to its
customers. The Company has agreed to pay PAM Oil a commission of 1% per month
on most telecommunications revenues attributable to PAM Oil's customers.
The Company and Northwestern have entered into an agreement (the
"Agreement") regarding the possible creation of a strategic alliance that
would permit ACG to market its telecommunications services to that utility's
approximately 100,000 electric and natural gas business and residential
customers in South Dakota and Nebraska. Under the terms of the Agreement,
which will be consummated contemporaneously with the Closing of the Offering,
ACG will issue a number of shares of its Series A Redeemable Convertible
Preferred Stock ("Preferred Stock") with an aggregate liquidation preference
of $2 million to Northwestern Growth Corporation ("NGC"), a wholly-owned
subsidiary of Northwestern, in exchange
26
<PAGE>
for, among other things, Northwestern's commitment to negotiate in good faith
a strategic alliance upon commercially reasonable terms ("Northwestern
Alliance"). Pursuant to the proposed Northwestern Alliance, ACG would have
the exclusive right to market its telecommunications services to the
customers of Northwestern and to have access to Northwestern's rights-of-way
for the purpose of laying fiber optic cables. Subject to existing contractual
commitments, ACG would also have the right to supply all of Northwestern's
telecommunications services on competitive terms. Northwestern would
cooperate with ACG in soliciting Northwestern's customers and receive a
percentage of the telecommunications revenues generated by ACG sales to such
customers. The Agreement contains a three-year standstill agreement by
Northwestern and NGC with respect to ACG containing customary terms and
conditions, regarding, among other things, mergers and acquisitions, tender
offers, proxy contests, joining groups or encouraging others with respect to
such matters.
The Preferred Stock becomes convertible into shares of Common Stock at the
initial public offering price eighteen months after the consummation of this
Offering, does not pay any dividends and is not entitled to vote in the
election of directors. If the Northwestern Alliance has not been signed by
the first anniversary date of the closing of the Offering, ACG can redeem the
shares of Preferred Stock as an entirety for $1.25 million on or prior to the
thirteenth monthly anniversary of the closing.
SUMMARY OF TERMS OF THE ACQUISITIONS
ACG has entered into definitive acquisition agreements to acquire each of
the Acquired Companies, its predecessor and its interest in KINNET. The
aggregate consideration to be paid by ACG in the Acquisitions consists of
approximately $73.3 million in cash to stockholders of the Acquired
Companies, $10.0 million as a direct cash investment in KINNET, a fiber optic
network company, promissory notes in the aggregate principal amount of $17.4
million, 3,392,644 shares of Common Stock, warrants issued in June 1997 to
purchase 756,078 shares of Common Stock exercisable at $6.61 per share, and
options or warrants to be issued at the closing to purchase 598,500 shares of
Common Stock exercisable at the initial public offering price and 38,635
shares of Common Stock exercisable at one-third of the initial public
offering price. Up to $50,000 in value of additional shares of Common Stock
(computed at the initial public offering price) may be issued in connection
with the acquisition of FirsTel if a company recently acquired by FirsTel
reaches certain customer targets by August 31, 1998. Further, prior to the
closing of the Acquisitions, certain of the Acquired Companies that are S
Corporations will make cash distributions to their stockholders in amounts
generally equal either to the undistributed retained earnings of the S
Corporations, or the income tax due on those amounts, subject to certain
limitations. Had these distributions been made at September 30, 1997, they
would have been approximately $1.9 million, in addition to the approximately
$3.1 million that had been distributed prior to that date. To the extent
these Acquired Companies have additional earnings after September 30, 1997,
the amounts of these distributions will increase. Additionally, ACG will also
acquire from the stockholders of Feist Long Distance and FirsTel, together
with the stock of those companies, approximately $0.7 million and $1.0
million, respectively, of notes owed by those corporations to certain of
their stockholders. See "Certain Transactions -- The Acquisitions."
27
<PAGE>
The following table sets forth certain summary information relating to the
acquisition of the Acquired Companies and the interest in KINNET, including
the consideration payable, anticipated debt of the Acquired Companies and
estimated cash distributions by S Corporations. See "The Company" and the
separate financial statements for certain of the Acquired Companies and
KINNET listed below included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
CONSIDERATION
---------------------------------------------------
ANTICIPATED
ACQUIRED NUMBER OF DEBT OF ESTIMATED
COMPANIES SHARES OF ACQUIRED S CORPORATION
AND KINNET(1) COMMON STOCK(2) CASH NOTES OTHER COMPANIES(3)DISTRIBUTIONS(4)
- -------------- --------------- ------------ ------------ ------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Great Western . 714,286 $55,000 $15,000(5) (6) $ -- $1,318
Valu-Line...... 371,429(7) 6,600 -- -- 1,506 195
FirsTel........ 792,643 5,000 2,000(8) (9) 147(10) 22
Feist Long
Distance...... 714,286 1,500(11) -- -- 17 343
Other Acquired
Companies..... 85,714 5,236 350(12) (13) 437 61
KINNET......... 714,286(14) 10,000(14) -- -- N/A N/A
--------------- ------------ ------------ ------- ------------- --------------
Total........ 3,392,644 $83,336 $17,350 $2,107 $1,939
=============== ============ ============ ======= ============= ==============
</TABLE>
- ------------
(1) In each case represents the acquisition of all of the stock or
substantially all of the assets, except KINNET, where the Company is
acquiring 49% of outstanding capital stock.
(2) The definitive agreements with respect to the various Acquisitions
provide that the number of shares of Common Stock to be issued in
each Acquisition shall be calculated by dividing the initial public
offering price into the following dollar amounts: Great Western --
$10.0 million; Valu-Line -- $5.2 million; FirsTel -- $11.1 million;
Feist Long Distance -- $10.0 million; Other Acquired Companies --
$1.2 million; and KINNET -- $10.0 million.
(3) Includes long term debt outstanding as of September 30, 1997 and a
payable with respect to S Corporation distributions, all of which are
anticipated to be paid out of the net proceeds of the Offering. Does
not include approximately $1.7 million of notes owed to stockholders
of Feist Long Distance and FirsTel which will be acquired by ACG in
the Acquisitions.
(4) These S Corporation distributions are estimated as of September 30,
1997, and are shown net of $3.1 million of distributions made by the
Acquired Companies during the first nine months of fiscal 1997.
(5) Notes mature on the second anniversary date of the closing of the
Acquisitions, bear interest at 5% per annum, payable annually, and
are subordinated to the first $50.0 million of outstanding bank debt.
(6) Includes non-transferable ten-year warrants to purchase 756,078
shares of Common Stock exercisable at $6.61 per share granted in June
1997 and 500,000 non-transferrable five-year warrants to purchase
Common Stock at the initial public offering price issued at the
closing of the Acquisitions. See "Certain Transactions -- Other
Organizational Matters" for additional information regarding these
warrants.
(7) Includes 20,000 shares of Common Stock placed into escrow for one
year, all or a portion of which will be returned to the Company if
Valu-Line incurs any liability for providing intrastate long distance
services to customers in Arkansas without the requisite permit and
71,428 shares of Common Stock placed into escrow for six months, all
or a portion of which may be returned to the Company to indemnify it
if certain liabilities described under "Risk Factors -- Recently
Instituted Litigation Against an Acquired Company" arise.
(8) Notes are convertible into Common Stock at the initial public
offering price, mature on the second anniversary date of the closing
of the Acquisitions, bear interest at 10% per annum, payable
annually, and are subordinated to the first $50.0 million of
outstanding bank debt.
(9) Includes 50,000 non-transferrable five-year warrants to purchase
Common Stock at the initial public offering price issued at the
closing of the Acquisitions.
(10) Includes obligations of $101,000 incurred by FirsTel in connection
with two acquisitions it made in September 1997 which will be paid
out of the proceeds of the Offering.
(11) In connection with the extension of the termination date of the
acquisition agreement relating to Feist Long Distance from January
31, 1998 to February 20, 1998, the Feist shareholders agreed to
reduce the cash component of the consideration payable to them by
$3.5 million in exchange for the Company's covenant not to commence
publication of a yellow page directory in Oklahoma City or its
metropolitan area until after the fifth anniversary of the
acquisition.
(12) Note bears interest at 7% per annum, and is payable in three equal
installments plus accrued interest, payable on the first three
anniversary dates of the closing of the Acquisitions.
(13) Includes 12,500 ten-year options and 36,000 ten-year warrants to
purchase Common Stock exercisable at the initial public offering
price and 38,635 ten-year options to purchase Common Stock at
one-third of the initial public offering price. These 38,635 options
vest as an entirety at the end of the 37th month following the
closing of the Acquisitions, may be put back to the Company for
$155,000 during the 38th month following the closing of the
Acquisitions, and are subject to cancellation if the terms of certain
employment and non-competition agreements are violated. A stockholder
of one of the Other Acquired Companies may receive up to 12,500
additional ten-year options to purchase Common Stock at the initial
public offering price if his company meets certain financial tests
subsequent to the closing.
(14) The shares are being issued to the stockholder of KINNET, and the
$10.0 million cash component is a direct cash investment in KINNET.
28
<PAGE>
The consideration being paid by ACG in the Acquisitions was determined by
arm's length negotiations between representatives of ACG and each of the
respective companies. The closing of each Acquisition is subject to customary
conditions. These conditions include, among others, the accuracy on the
closing date of the Acquisitions of the representations and warranties made
by their principal stockholders and ACG; the performance of each of their
respective covenants included in the agreements relating to the Acquisitions;
and the nonexistence of a material adverse change in the results of
operations, financial condition or business of each of the companies being
acquired.
Each agreement relating to an Acquisition may be terminated, under certain
circumstances, prior to the closing of the Offering (i) by the mutual consent
of the boards of directors of ACG and the relevant company being acquired;
(ii) if this Offering and the acquisition of that company are not closed by
February 20, 1998; (iii) by ACG if the schedules to the acquisition agreement
are amended to reflect a material adverse change; or (iv) if a material
breach or default under the agreement by one party occurs and is not waived.
No assurance can be given that the conditions to the closing of all the
Acquisitions will be satisfied or waived or that each Acquisition will close.
For information regarding the employment agreements to be entered into by
certain officers of certain of the Acquired Companies (which include
covenants not to compete), see "Management -- Employment Agreements."
29
<PAGE>
DIVIDEND POLICY
It is the Company's current intention to retain its earnings, if any, to
finance the expansion of its business and for general corporate purposes and
the Company expects that it will not pay any dividends for the foreseeable
future. Any future dividends will be at the discretion of the Board of
Directors after taking into account various factors, including, among others,
the Company's financial condition, results of operations, cash flows from
operations, current and anticipated cash needs, general business conditions,
the income tax laws then in effect, the requirements of Delaware law, the
restrictions that may be imposed by the Company's proposed $25.0 million
revolving credit facility to finance the Company's working capital
requirements, any restrictions that may be imposed by the Company's future
indebtedness and such other factors as the Board of Directors deems relevant.
The proposed credit facility may place limitations on the payment of
dividends (except for dividends payable in Common Stock and certain preferred
stock). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Certain Acquired Companies -- Pro Forma Results of
Operations -- Pro Forma Liquidity and Capital Resources."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered hereby, after deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company, are estimated to be
approximately $100.6 million (approximately $116.3 million if the
Underwriters exercise their over-allotment option in full). Of those net
proceeds, $73.3 million will be used to pay the aggregate cash portion of the
purchase price for the Acquired Companies, $10.0 million will be used to make
a direct cash investment in KINNET, a fiber optic network company, and the
remaining net proceeds will be used for (i) the repayment of outstanding
principal amount of indebtedness and certain other payables of the Acquired
Companies (approximately $2.3 million as of September 30, 1997 and the date
of this Prospectus), (ii) the repayment of outstanding principal amount of
indebtedness of ACG to CPFF (approximately $1.7 million and $3.2 million,
respectively, as of September 30, 1997 and the date of this Prospectus);
(iii) a one-time payment to Rod K. Cutsinger, the founder of ACG, as
consideration for a five-year non-competition agreement ($1.75 million); and
(iv) general corporate purposes, including capital expenditures,
infrastructure buildout and acquisitions. Shareholders of the Acquired
Companies who will become executive officers or directors of the Company upon
the consummation of the Acquisitions will receive approximately $35.6 million
of the cash purchase price paid in the Acquisitions. See "Certain
Transactions -- The Acquisitions" and "--Organization of the Company."
The indebtedness of the Acquired Companies to be repaid from the proceeds
of the Offering (some of which has been guaranteed by stockholders of the
Acquired Companies) bears interest at rates ranging from 5.75% to 18.6% per
annum. Such indebtedness would otherwise mature at various dates through
August 2005. The indebtedness of ACG to CPFF bears interest at 8% per annum
and is payable on the earlier of the effectuation of an initial public
offering by ACG or December 31, 1998.
30
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1997, the cash,
short-term debt and current maturities of long-term obligations and
capitalization of (i) ACG and its predecessor on an actual basis, (ii) the
Company on a pro forma combined basis to give effect to the Acquisitions and
the issuance of shares of Preferred Stock to Northwestern, and (iii) the
Company on a pro forma combined basis to give effect to the Acquisitions and
the issuance of shares of Preferred Stock to Northwestern, as further
adjusted to give effect to the Offering and the application of the estimated
net proceeds therefrom. See "Use of Proceeds." This table should be read in
conjunction with the Unaudited Pro Forma Financial Statements of the Company
and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------
COMPANY
COMPANY PRO FORMA
PRO AS
ACG FORMA ADJUSTED
--------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C><C> <C>
Cash............................................................ $ --$ 554 $ 11,862
========= ========== ===========
Short-term debt and current maturities of long-term
obligations:
8% promissory note payable to CPFF (1)........................ $ 1,856 $ 1,856 $ --
Other(2)...................................................... -- 1,102 117
Obligation for cash portion of consideration for Acquisitions .. -- 83,336 --
Long-term debt:
Long-term debt of Acquired Companies, less current
maturities................................................... -- 1,316 --
5% Subordinated Promissory Notes(3)........................... -- 15,000 15,000
10% Convertible Subordinated Notes(4)......................... -- 2,000 2,000
7% Note, less current maturities(5)........................... -- 233 233
Stockholders' equity:
Preferred Stock: $0.0001 par value, 20,000,000 shares
authorized: no shares of Series A issued and outstanding,
ACG and Company pro forma; 142,857 shares issued and
outstanding, Company pro forma as adjusted(6)................ -- -- 1,122
Common Stock: $0.0001 par value, 180,000,000 shares
authorized: 8,232,276 shares issued and outstanding, ACG;
11,624,920 shares issued and outstanding, Company pro forma;
19,624,920 shares issued and outstanding, Company pro forma
as adjusted(7)............................................... 1
Additional paid-in capital.................................... 47 38,798 140,051
Retained earnings............................................. (2,263) (2,263) (2,263)
--------- ---------- -----------
Total stockholders' equity (deficit) ........................ (2,216) 36,535 138,911
--------- ---------- -----------
Total debt and capitalization............................... $ (360) $141,378 $156,261
========= ========== ===========
</TABLE>
- ------------
(1) As of January 12, 1998, this amount has increased to $3.2 million.
(2) Includes $985,000 in current portion of long-term debt of the Acquired
Companies and $117,000 in current maturities of a 7% Note.
(3) Notes mature on the second anniversary date of the closing of the
Acquisitions and are subordinated to the first $50.0 million of
outstanding bank debt.
(4) Notes are convertible into Common Stock at the initial public offering
price, mature on the second anniversary date of the closing of the
Acquisitions and are subordinated to the first $50.0 million of
outstanding bank debt.
(5) Note is payable in three annual installments on the first, second and
third anniversary dates of the closing of the Acquisitions.
(6) The Preferred Stock has an aggregate liquidation preference of $2.0
million, is convertible into 142,857 shares of Common Stock at the
initial public offering price 18 months after the consummation of the
initial public offering and is redeemable, at the option of the
Company, for $1.25 million in the 13th month after the initial public
offering if no strategic alliance has been entered into. The Preferred
Stock has been assigned a value of $1,122,000 representing the
estimated fair value on the date of grant based on an imputed market
interest rate of 10%. See "The Company -- Strategic Relationships."
(7) Excludes an aggregate of 4,185,775 shares of Common Stock issuable upon
the exercise of options granted pursuant to the Plan, the Directors'
Plan or otherwise issuable upon the exercise of options, warrants or
convertible notes and preferred stock issued prior to or
contemporaneously with the consummation of the Offering and the
Acquisitions at exercise prices ranging from $2.50 to the initial
public offering price. See "Management -- 1997 Stock Awards Plan."
31
<PAGE>
DILUTION
The pro forma net tangible book value deficit of the Company as of
September 30, 1997 was approximately $86.4 million, or approximately $7.43
per share, after giving effect to the Acquisitions. The pro forma net
tangible book value per share represents the Company's pro forma net tangible
assets as of September 30, 1997, divided by the number of shares to be
outstanding after giving effect to the Acquisitions. After giving effect to
the sale of the 8,000,000 shares offered hereby at the initial public
offering price of $14.00 per share and deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company, the Company's pro forma net tangible book value as of September 30,
1997 would have been approximately $13.2 million or approximately $0.67 per
share. This represents an immediate increase in pro forma net tangible book
value of approximately $8.10 per share to existing stockholders and an
immediate dilution of approximately $13.33 per share to new investors
purchasing shares in the Offering. The following table illustrates this pro
forma dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per share......................... $14.00
Pro forma net tangible book value per share before the
Offering...................................................... $(7.43)
Increase in pro forma net tangible value per share
attributable
to new investors ............................................. 8.10
---------
Pro forma net tangible book value per share after the Offering . 0.67
--------
Dilution per share to new investors............................. $13.33
========
</TABLE>
The following table sets forth on a pro forma basis as of September 30,
1997 (after giving effect to the Acquisitions), the number of shares of
Common Stock purchased from the Company, the total consideration to the
Company and the average price per share paid to the Company by existing
stockholders and the new investors purchasing shares from the Company in the
Offering (before deducting underwriting discounts and commissions and
estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------------- ------------------- PRICE
NUMBER PERCENT AMOUNT(2) PER SHARE
--------------- --------- ------------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Existing
stockholders......... 11,624,920(1) 59.2% $(85,529) $(7.36)
New investors......... 8,000,000 40.8 112,000 14.00
--------------- --------- ------------------- -----------
Total............... 19,624,920 100% $ 26,471
=============== ========= ===================
</TABLE>
- ------------
(1) Shares purchased by existing stockholders include shares outstanding on
September 30, 1997 plus 3,392,644 shares issued in the Acquisitions.
(2) Total consideration paid by existing stockholders represents the sum of
(i) total common stock value and additional paid in capital of the
Acquired Companies and ACG as set forth under the caption "Historical
Basis Combined" on ACG's pro forma balance sheet, less (ii) cash paid
in the Acquisitions of $83,336,000, less (iii) S Corporation
distributions of $1,939,000, plus (iv) notes payable to existing
stockholders of the Acquired Companies acquired by ACG of $1,699,000.
32
<PAGE>
SELECTED FINANCIAL DATA
ACG will effect the Acquisitions concurrently with and as a condition to
the consummation of the Offering. For financial statement presentation
purposes, ACG has been identified as the "accounting acquiror." The following
selected financial data for ACG as of December 31, 1996 and for the period
from inception to December 31, 1996, has been derived from the audited
financial statements of ACG. The selected historical financial data for ACG
as of and for the nine months ended September 30, 1997 have been derived from
unaudited financial statements of ACG which have been prepared on the same
basis as the audited financial statements and, in the opinion of ACG, reflect
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of such data. The selected unaudited pro forma
combined financial data for the Company as of September 30, 1997, and for the
year ended December 31, 1996 and the nine months ended September 30, 1996 and
1997, are as adjusted for (i) the effects of the Acquisitions; (ii) the
effects of certain pro forma adjustments to the historical financial
statements and (iii) the consummation of the Offering and the application of
the net proceeds therefrom as set forth under "Use of Proceeds" and recording
the balance as cash. See the Unaudited Pro Forma Combined Financial
Statements and the notes thereto and the historical financial statements and
the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 6, 1996)
THROUGH NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
ACG
Revenues................................................ $ -- $ --
Selling, general and administrative expenses ........... 649 1,462
Net loss................................................ 659 1,604
Net loss per share ..................................... $ 0.08 $ 0.19
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
THE COMPANY
PRO FORMA COMBINED(1)
Revenues
Telecommunications services........................... $41,090 $33,455
Yellow page publishing................................ 44,324 35,624
----------------- ------------------
Total revenues...................................... 85,414 69,079
Cost of services........................................ 47,087 37,637
Depreciation and amortization(2)........................ 6,111 4,339
----------------- ------------------
Gross profit............................................ 32,216 27,103
Selling, general and administrative expenses ........... 26,966 23,172
----------------- ------------------
Operating income........................................ 5,250 3,931
Other income and expense, net(3)........................ 6,448 253
Interest expense........................................ (774) (581)
Equity in earnings (loss) of KINNET..................... (1,069) (657)
----------------- ------------------
Income before tax....................................... 9,855 2,946
----------------- ------------------
Net income(4)........................................... $ 3,703 $ 168
================= ==================
Accretion of preferred stock(5)......................... 112 16
----------------- ------------------
Net income available to common stockholders ........... $ 3,591 $ 152
================= ==================
Net income per share available to common stockholders . $ 0.18 $ 0.01
================= ==================
Shares used in computing pro forma net income per
share(6)............................................... 20,190,864 20,190,864
================= ==================
Cash provided by operating activities................... $ 9,037 $ 5,893
Cash used in investing activities....................... (711) (579)
Cash used in financing activities....................... (7,482) (4,470)
EBITDA (7) ............................................. $11,527 $ 8,523
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
THE COMPANY
ACG SEPTEMBER 30, 1997
------------------------------- -----------------------
DECEMBER 31, SEPTEMBER 30, AS
1996 1997 PRO FORMA ADJUSTED
-------------- --------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 33 $ -- $ 554 $ 11,862
Working capital (deficit) .......... (689) (3,407) (73,532) 25,275
Total assets........................ 92 1,191 153,393 166,954
Total debt, including current
portion............................ 575 1,856 21,507 17,350
Stockholders' equity................ (632) (2,216) 36,535 138,911
</TABLE>
- ------------
(1) The pro forma statements of operations data and the pro forma balance
sheet data assume that the Acquisitions were closed on January 1, 1996
and September 30, 1997, respectively, and are not necessarily
indicative of the results the Company would have obtained had these
events actually then occurred or of the Company's future results. The
pro forma combined financial information (i) is based on preliminary
estimates, available information and certain assumptions that
management deems appropriate and (ii) should be read in conjunction
with the other financial statements and notes thereto included
elsewhere in this Prospectus. The pro forma combined revenues are all
attributable to the Acquired Companies.
(2) Includes $4.2 million and $3.2 million of amortization for the twelve
months ended December 31, 1996 and the nine months ended September 30,
1997, respectively, on the estimated $105.8 million of goodwill to be
recorded as a result of the Acquisitions computed on the basis
described in Notes to the Unaudited Pro Forma Combined Financial
Statements.
(3) Other income for the year ended December 31, 1996 includes a $6.3
million litigation settlement received by Great Western.
(4) Assumes that all income is subject to a corporate tax rate of 40% and
that all intangible asset amortization is non-deductible for income tax
purposes.
(5) Represents accretion of the excess of the liquidation preference over
the carrying value of the Preferred Stock.
(6) Includes (i) the 8,232,276 shares outstanding immediately prior to the
Offering, (ii) 3,392,644 shares issued in the Acquisitions, (iii)
7,230,601 of the shares sold in the Offering necessary to generate all
net proceeds other than those unallocated and available for general
corporate purposes (see "Use of Proceeds") and (iv) 1,335,343 shares
representing the incremental effect of options and warrants on shares
outstanding.
(7) EBITDA as used in this Prospectus consists of earnings (loss) before
interest, income taxes, depreciation and amortization and less equity
in earnings (loss) of a minority owned affiliate and less the portion
of other income and expense (net) attributable to the $6.3 million
litigation settlement received by Great Western in 1996. The Company
has included EBITDA data because it is a measure commonly used in the
telecommunications industry. EBITDA is not a measure of financial
performance determined under generally accepted accounting principles,
should not be considered as an alternative to net income as a measure
of performance or to cash flows as a measure of liquidity, and is not
necessarily comparable to similarly titled measures of other companies.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CERTAIN ACQUIRED COMPANIES
The following discussion should be read in conjunction with the financial
statements, the notes thereto and the other financial data included elsewhere
in this Prospectus. The following discussion contains certain forward-looking
statements with respect to the Company's expectations regarding its business
after it has consummated the Acquisitions. These forward-looking statements
are subject to certain risks and uncertainties which may cause actual results
to differ significantly from such forward-looking statements. See "Risk
Factors."
OVERVIEW OF THE ACQUIRED COMPANIES' SOURCES OF REVENUES AND EXPENSES
The Acquired Companies derive their revenues primarily from the provision
of telecommunications services in the Region and the sale of advertising
space in yellow page directories serving market areas in two states in the
Region and California.
Telecommunications Services Revenues and Price Declines. The Acquired
Companies' telecommunications services principally include long distance and
local services, Internet access, cellular service and other enhanced
services. Their telecommunications revenues are derived principally from
minutes of long distance telecommunications traffic carried. As discussed
under " -- Pro Forma Combined Results of Operations," the domestic revenue
per minute and domestic cost per minute have declined steadily over the last
several years, while the domestic billable minutes of use attributable to the
Acquired Companies' combined long distance operations have increased
substantially over the same period.
The Acquired Companies generally price their long distance services at a
discount to the primary carrier or carriers in each of their markets. The
Acquired Companies have generally experienced and expect to continue to
experience declining revenue per minute in all of their markets as a result
of increased competition; nevertheless, due to technological innovation and
substantial available transmission capacity, transmission costs in the
telecommunications industry have often declined at a more rapid rate than
prices. There can be no assurance that this relationship will continue.
Industry observers predict that, early in the next decade, telephone charges
will no longer be based on the distance a call is carried. As a consequence,
the Company could experience a substantial reduction in its margins on long
distance calls which, absent a significant increase in billable minutes of
traffic carried or charges for additional services, would have a material
adverse effect on the Company's financial position and results of operations
and could have a material adverse effect on the price of the Common Stock.
Local service revenues, which are currently not material but which the
Company expects to increase in future periods, represent the resale at a
discount of the local carrier services provided primarily by Southwestern
Bell and U S WEST. In most of the Acquired Companies' market areas, local
service is sold on a flat monthly fee basis. Certain of the Acquired
Companies have recently commenced reselling cellular service in a limited
portion of the Region, and the revenues generated to date from these
activities have not been material.
Yellow Page Publishing Revenues. Yellow page publishing revenues are
attributable to the sale of advertising space in the directories that serve
its 17 market areas in Texas, three market areas in Oklahoma and six market
areas in California. Revenues are recognized when each directory is
published. Great Western has decided to discontinue three of its directories
in California, which produced revenues of $2.3 million in fiscal 1996.
Because of the timing of the discontinuation, $1.4 million of these revenues
will not recur in 1997, and none of them will recur in 1998. While Great
Western's yellow page business is not seasonal, five of its directories which
have for the last several years accounted for approximately one-third of its
annual revenue are published in the first quarter. The gross margin on these
directories is generally significantly higher than that in several
directories published in the fourth quarter. Consequently, Great Western's
gross margin and gross profit in the first quarter are higher than those in
subsequent quarters. Directories are typically published annually in each
market area. Increases in revenues have generally been attributable to
increases in the number and size of advertisements in the directories.
35
<PAGE>
When Great Western expands into a new yellow page market, it typically
seeks to attract its targeted customers by producing and publishing a full
scale initial directory in which it gives away advertising space. Thus on a
first directory in a new market (the "prototype year"), Great Western may
have substantial expenses, depending on the size of the market, with little
or no offsetting revenues. During the last three fiscal years, the expenses
associated with the first publication of a directory in a market have ranged
from approximately $500,000 to $2.0 million, depending on the size of the
market. Great Western sells advertising in the second directory in a market
(the "first sold year"), after the advertisers have had an opportunity to
experience the reception of the new yellow page directory and their
advertisements in the marketplace. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Certain Acquired
Companies -- Great Western Directories, Inc." Great Western usually is able
to sell advertising space in the directory for the first sold year to
approximately 65% of the advertisers who received free space in the prototype
directory. In a new market, however, Great Western has no prior first-hand
credit experience with its advertising customers, and therefore usually has
disproportionate bad debt expense with respect to the directory for the first
sold year, and it typically records a provision for bad debts of 20% with
respect to that directory, versus its overall allowance of 10% for current
receivables. Once in a market, Great Western may seek to increase its
geographic coverage by expanding outward from its initial service area.
Cost of Services -- Telecommunications Services. The Acquired Companies
have an extensive network that connects a number of cities in the Region and
upon which they can transmit their customers' long distance calls. These
"on-net" facilities include the Acquired Companies' switches, a web of leased
access trunks that connect those switches to the local exchange carrier's
switches, DS1 and DS3 lines that connect certain high volume customers to the
Acquired Companies' switches and leased lines from other long-haul carriers.
Once a long distance call reaches one of the Acquired Comanies' switches, it
can be routed over that Acquired Companies' network or, if the Acquired
Company does not have an "on-net" connection, over the network of another
long-haul carrier from which the Acquired Company purchases access. The bulk
of the Acquired Companies' "off-net" termination services are provided by
large long distance companies with long haul transmission capabilities. See
"Business -- Network Facilities and Carrier Agreements."
Because of its ownership interest in KINNET, the Company expects to
consolidate some of its traffic in KINNET's area of operations on the KINNET
network after the Offering. Further, the Company expects that after the
Offering it will obtain pricing reductions from KINNET with respect to the
traffic that the Company consolidates on the KINNET network.
The Acquired Companies' cost of long distance services comprises the costs
associated with acquiring switched transmission and leased line capacity.
Switched transmission capacity is acquired on a per-minute basis (with volume
discounts) and is, therefore, a variable cost. Virtually all calls carried by
the Acquired Companies must be originated or terminated over another
carrier's facilities and access charges must be paid to utilize those
facilities. Termination, origination and access charges on calls are paid by
the Acquired Companies to ILECs. Leased transmission capacity is typically
acquired on a fixed cost basis, generally involving fixed monthly payments
regardless of usage levels. Accordingly, once certain volume levels are
reached, leased line capacity is more cost effective than switched
transmission capacity. Following the Offering, the Company expects to be able
to obtain better pricing because of the substantial number of minutes of
traffic generated by the Acquired Companies on a combined basis. Although the
Acquired Companies have entered into four take-or-pay agreements with other
carriers in order to maximize volume discounts, since their inception the
minimum usage levels under these contracts have been met, and the Acquired
Companies have not incurred any obligation to make cash payments in lieu of
usage under these agreements. See "Business -- Network Facilities and Carrier
Agreements."
At present the Acquired Companies provide local services by reselling the
local services of other local exchange carriers at a discount from the prices
charged by those carriers to individual customers. The cost of providing such
services depends on the rates which the Acquired Companies can negotiate from
those carriers.
36
<PAGE>
Cost of Services -- Yellow Page Publishing. The principal components of
cost of service relate to sales commissions, paper and publishing costs,
colorizing advertisements and delivery expenses. The introduction of a new
directory of significant size in one of the cities in the Region would
increase the Company's aggregate yellow page cost of services. Great Western
has in the last year lowered its printing costs by switching from a single
printing supplier to a competitive bidding process among several suppliers.
Great Western contracts with third parties for printing and delivering its
directories and routinely purchases its paper requirements from third party
suppliers. The colorizing of advertisements in its yellow page directories is
provided by a company in which an executive officer and director of the
Company is an officer, director and significant stockholder. See "Certain
Transactions -- Other Matters."
Selling, General Administrative Expenses. The Acquired Companies have
historically sold their telecommunications services primarily through
commissioned sales personnel, advertising, internal and external marketers
and agents. Selling expenses have, therefore, primarily consisted of
advertising and promotion costs, salaries and commissions of employees,
expenses related to the provision of customer service and, to a lesser
extent, commissions paid to agents. Great Western has historically sold
advertising space in its yellow page directories through commissioned sales
personnel. Hence selling expenses for the Great Western's yellow pages
business consists primarily of employee salaries and commissions. After the
Offering, the Company expects its total selling expenses to increase as it
increases its sales staff to expand its marketing efforts. Great Western has
historically included its selling expenses in cost of services.
In anticipation of the commencement of operating activities and of the
Offering, the Company has been assembling its senior management team, which
it expects to continue to augment, which is resulting in an increase in
general and administrative expenses. General and administrative expenses will
increase substantially subsequent to the Offering, as the Company publishes
additional yellow page directories, expands its customer service and sales
staffs, implements billing, financial reporting and other management
information systems and network management systems and incurs organizational
expenses relating to entering additional markets. Such expenses will be
incurred in advance of anticipated related revenues.
GREAT WESTERN DIRECTORIES, INC.
The following table sets forth for Great Western selected statement of
operations data and such data as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
YEAR ENDED JANUARY 31, DECEMBER 31, SEPTEMBER 30,
--------------------------------------- ------------------- ---------------------------------------
1995 1996(1) 1996(1) 1996 1997
------------------- ------------------- ------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $29,407 100.0% $36,469 100.0% $44,324 100.0% $33,463 100.0% $35,624 100.0%
Cost of services .... 17,733 60.3% 19,568 53.7% 21,394 48.3% 15,111 45.2% 16,690 46.8%
Depreciation and
amortization........ 272 0.9% 228 0.6% 223 0.5% 171 0.5% 168 0.5%
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Gross profit......... 11,402 38.8% 16,673 45.7% 22,707 51.2% 18,181 54.3% 18,766 52.7%
Selling, general and
administrative
expenses............ 10,785 36.7% 12,661 34.7% 14,987 33.8% 11,606 34.7% 12,647 35.5%
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Income from
operations.......... 617 2.1% 4,012 11.0% 7,720 17.4% 6,575 19.6% 6,119 17.2%
</TABLE>
- ------------
(1) The fiscal years of Great Western Directories, Inc. ended on January
31, 1995 and 1996 and December 31, 1996. Consequently the data for
Great Western for the fiscal years ended January 31, 1996 and December
31, 1996 both include the month of January 1996.
Great Western results for the nine months ended September 30, 1996 compared
to the nine months ended September 30, 1997.
Revenues. Revenues increased $2.1 million, or 6.5%, from $33.5 million for
the nine months ended September 30, 1996 to $35.6 million for the nine months
ended September 30, 1997. This improvement resulted primarily from a $1.2
million increase in sales of advertising space in the Tulsa, Oklahoma
37
<PAGE>
directory, due to increased numbers of customers. The Tulsa directory was in
its second year of revenue publication after its prototype publication in
fiscal 1995. In addition, there were increases in sales of advertising space
in directories of $0.2 million in each of the established Texas markets of
Amarillo and Humble, $0.1 million in each of the established markets of
Lawton, Oklahoma and Temple, Arlington, Clear Lake and Baytown, Texas, and
$0.4 million in the established markets of Enid, Oklahoma and Denton, Grand
Prairie, Killeen, Northeast Tarrant County, Pasadena and
Pearland/Friendswood, Texas. These gains were partially offset by decreases
in sales of advertising space of $0.3 million in the established California
markets of Santa Cruz, Napa and Vallejo.
Gross profit. Gross profit increased $0.6 million, or 3.2%, from $18.2
million for the nine months ended September 30, 1996 to $18.8 million for the
nine months ended September 30, 1997. Gross margin decreased from 54.3% for
the nine months ended September 30, 1996 to 52.7% for the nine months ended
September 30, 1997. While certain variable costs of services, such as
commissions, increased at a more rapid rate than revenues, due primarily to
temporary changes in commission payment methodology, certain other costs of
services, such as printing and distribution, which fluctuate with the number
of directories published, remained flat due to a competitive bidding process
that resulted in the use of alternative printing facilities and delivery
services.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.0 million, or 9.0%, from $11.6 million
for the nine months ended September 30, 1996 to $12.6 million for the nine
months ended September 30, 1997. As a percentage of revenues, selling,
general and administrative expenses increased from 34.7% for the nine months
ended September 30, 1996 to 35.5% for the nine months ended September 30,
1997 due to an increase in salaries and payroll taxes of $0.9 million, which
includes an increase in executive compensation in the amount of approximately
$600,000, a substantial portion of which will not recur after the
Acquisitions and the Offering. As a percentage of revenues, salaries and
payroll taxes increased from 13.9% for the nine months ended September 30,
1996 to 15.6% for the nine months ended September 30, 1997.
Great Western results for the fiscal year ended January 31, 1996 compared
to the fiscal year ended December 31, 1996.
Revenues. Revenues increased $7.8 million, or 21.5%, from $36.5 million
for the fiscal year ended January 31, 1996 to $44.3 million for the fiscal
year ended December 31, 1996, primarily as a result of the first publication
for revenue of the Tulsa, Oklahoma directory in February 1996, which resulted
in sales of advertising space of $7.4 million. This increase was partially
offset by a $0.5 million charge from the settlement of litigation in Sonoma
County, California, and a $0.6 million decrease in sales of advertising space
of the combined California markets. An additional $1.6 million in revenue
growth was the result of successful marketing efforts in the remaining, more
mature markets.
Gross profit. Gross profit increased $6.0 million, or 36.2%, from $16.7
million for the fiscal year ended January 31, 1996 to $22.7 million for the
fiscal year ended December 31, 1996. Gross margin increased from 45.7% for
the fiscal year ended January 31, 1996 to 51.2% for the fiscal year ended
December 31, 1996 due primarily to the gross profit contribution of the first
sold year of the Tulsa, Oklahoma directory, a highly profitable market. Also,
certain costs of services did not increase proportionately with revenues due
to a competitive bidding process that resulted in the use of alternative
printing facilities. In addition, Great Western was able to take advantage of
an overall decrease in paper prices.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $2.3 million, or 18.4%, from $12.7 million
for the fiscal year ended January 31, 1996 to $15.0 million for the fiscal
year ended December 31, 1996. As a percentage of revenues, selling, general
and administrative expenses decreased from 34.7% for the fiscal year ended
January 31, 1996 to 33.8% for the fiscal year ended December 31, 1996 as a
result of the impact of the revenues from the first sold year of the Tulsa,
Oklahoma directory. While the sales for the first publication for revenue of
the Tulsa directory were included in the fiscal year ended December 31, 1996,
the associated general and administrative expenses were included in the
fiscal year ended January 31, 1996. General and administrative expenses
related to
38
<PAGE>
a given directory are generally incurred prior to the generation and
recognition of revenues and costs of services. As a percentage of revenues,
bad debt expense increased from 8.9% for the fiscal year ended January 31,
1996 to 10.5% for the fiscal year ended December 31, 1996 due to a 20%
provision, or $1.3 million, related to the first sold year of the Tulsa,
Oklahoma directory, partially offset by lower bad debt provisions for
maturing markets.
Great Western results for the fiscal year ended January 31, 1995 compared
to the fiscal year ended January 31, 1996.
Revenues. Revenues increased $7.1 million, or 24.0%, from $29.4 million
for fiscal year ended January 31, 1995 to $36.5 million for fiscal year ended
January 31, 1996 as a result of the first sold publications of the Irving and
Fort Worth, Texas, directories in November 1995 which resulted in combined
sales of $3.6 million. In addition, the Lawton, Oklahoma directory was
published for 1995 in February 1995 and for 1996 in January 1996;
consequently fiscal year ended January 31, 1996 includes $2.7 million revenue
for both directories, while fiscal year ended January 31, 1995 includes no
revenues related to Lawton, Oklahoma. These increases are partially offset by
an $0.8 million decrease in sales of advertising space in the combined
California markets. An additional $1.6 million in revenue growth was the
result of successful marketing efforts in the remaining, more mature markets.
Gross profit. Gross profit increased $5.3 million, or 46.2%, from $11.4
million for fiscal year ended January 31, 1995 to $16.7 million for fiscal
year ended January 31, 1996. Gross margin increased from 38.8% for fiscal
year ended January 31, 1995 to 45.7% for fiscal year ended January 31, 1996
as a result of three prototype directories published in fiscal year ended
January 31, 1995 that made significant contributions to gross profit in
fiscal year ended January 31, 1996 during their second year of publication
but resulted in only minimal revenues in their prototype year of fiscal year
ended January 31, 1995 to offset the related cost of services of $4.3
million.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.9 million, or 17.4%, from $10.8 million
for fiscal year ended January 31, 1995 to $12.7 million for fiscal year ended
January 31, 1996. As a percentage of revenues, selling, general and
administrative expenses decreased from 36.7% for fiscal year ended January
31, 1995 to 34.7% for fiscal year ended January 31, 1996 as a result of the
impact of the revenues from the first sold years of the Irving and Fort
Worth, Texas directories. In order to support the anticipated increase in
volume, Great Western's infrastructure was enhanced during fiscal year ended
January 31, 1995, when the Irving and Fort Worth, Texas directories were
prototyped. As a percentage of revenues, bad debt expense decreased from 9.9%
for fiscal year ended January 31, 1995 to 8.9% fiscal year ended January 31,
1996 due to lower bad debt provisions for maturing markets, based on improved
collection experience in those markets, partially offset by provisions for
the first sold directories in Irving and Fort Worth, Texas.
Great Western liquidity and capital resources
Great Western follows a policy of extending three to twelve month terms to
its customers. Accounts receivable consist of current balances that are less
than one year (approximately 70% of total receivables) and prior year
balances with aging of more than one year but less than two years. This aging
is consistent with Great Western's general customer profile which is
comprised of small businesses that tend to have a higher failure rate. Using
historical collection rates, Great Western records an allowance for doubtful
accounts based on 10% of sales for current receivables plus 92.5% of all
receivables that are older than one year. The allowance covering prior year
balances is adjusted quarterly to reflect write-offs of balances maturing
beyond two years, new provisions for balances maturing into the prior year
category, and for collections. Great Western believes this method of
providing an allowance which is substantially equivalent to the receivable
itself results in a reasonable estimate of future cash realization.
Great Western generated $5.1 million in net cash from operating activities
for the nine months ended September 30, 1997. Net cash used in investing
activities was approximately $0.3 million, principally for purchases of
property and equipment. Net cash used in financing activities was $4.2
million, representing repayments of long term debt, and cash dividends.
39
<PAGE>
At September 30, 1997, working capital was $13.0 million and there was no
debt.
Great Western generated $5.9 million in net cash from operating activities
in the fiscal year ended December 31, 1996. Net cash used in investing
activities in the fiscal year ended December 31, 1996 was approximately $0.3
million, principally for the purchase of property and equipment. Net cash
used in financing activities in the fiscal year ended December 31, 1996 was
$5.0 million, primarily for repayments of long-term debt and notes payable.
At December 31, 1996, working capital was $11.5 million and total debt was
$1.8 million.
Great Western used $3.0 million in net cash from operating activities for
the fiscal year ended January 31, 1996. Net cash used in investing activities
was approximately $0.1 million principally for purchases of property and
equipment. Net cash provided by financing activities was $2.7 million,
primarily from net borrowings under a bank line of credit and advances under
long-term debt.
At January 31, 1996, working capital was $7.1 million and total debt was
$7.7 million.
VALU-LINE OF LONGVIEW, INC.
The following table sets forth for Valu-Line selected statement of
operations data and such data as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------- -------------------------------------
1994 1995 1996 1996 1997
------------------- ------------------- ------------------- ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $13,417 100.0% $13,330 100.0% $11,181 100.0% $8,623 100.0% $9,058 100.0%
Cost of services .... 6,775 50.5% 7,491 56.2% 6,036 54.0% 4,593 53.3% 5,070 56.0%
Depreciation and
amortization........ 399 3.0% 718 5.4% 819 7.3% 616 7.1% 399 4.4%
--------- -------- --------- -------- --------- -------- -------- -------- -------- --------
Gross profit......... 6,243 46.5% 5,121 38.4% 4,326 38.7% 3,414 39.6% 3,589 39.6%
Selling, general and
administrative
expenses............ 3,725 27.7% 3,898 29.2% 3,571 32.0% 2,659 30.8% 2,875 31.7%
--------- -------- --------- -------- --------- -------- -------- -------- -------- --------
Income from
operations.......... 2,518 18.8% 1,223 9.2% 755 6.7% 755 8.8% 714 7.9%
</TABLE>
Valu-Line results for the nine months ended September 30, 1996 compared
to the nine months ended September 30, 1997.
Revenues. Revenues increased $0.4 million, or 5.0%, from $8.6 million for
the nine months ended September 30, 1996 to $9.0 million for the nine months
ended September 30, 1997. A decrease in domestic long distance revenue was
more than offset by the effects of adding international long distance service
to the revenue base. Revenues for the first nine months of 1997 include sales
of local telephone service and non-contract international traffic, which were
not offered by Valu-Line in the first nine months of 1996. For domestic long
distance traffic, total billed minutes increased slightly from 59.6 million
for the nine months ended September 30, 1996 to 59.9 million for the nine
months ended September 30, 1997, while the average revenue per domestic
billable minute decreased by 9.8%. During the first nine months of 1997,
international long distance service included 3.8 million minutes at an
average price per minute of more than twice the domestic long distance rate.
Gross profit. Gross profit increased $0.2 million, or 5.1%, from $3.4
million for the nine months ended September 30, 1996 to $3.6 million for the
nine months ended September 30, 1997. Gross margin remained at 39.6% for each
of the nine month periods ended September 30 due to scheduled decreases in
depreciation expense of equipment under accelerated depreciation methods,
offset by higher cost of service. For domestic long distance traffic, average
cost per billable minute decreased 18.1% between the periods. However, the
average cost per billable international minute was over four times the cost
per billable minute for domestic traffic.
40
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.2 million, or 8.1%, from $2.7 million
for the nine months ended September 30, 1996 to $2.9 million for the nine
months ended September 30, 1997. As a percentage of revenues, selling,
general and administrative expenses increased from 30.8% for the nine months
ended September 30, 1996 to 31.7% for the nine months ended September 30,
1997 primarily because of salary and administrative costs incurred to rebuild
a segment of the sales team. Several employees resigned from Valu-Line in
late 1995 and, accordingly, their salaries and related costs are not included
in the nine months ended September 30, 1996. Replacements for the sales team
were hired during 1996 with the result of a higher level of salaries and
related expenses reflected in the nine months ended September 30, 1997.
Valu-Line results for the fiscal year ended December 31, 1995 compared
to the fiscal year ended December 31, 1996.
Revenues. Revenues declined $2.1 million, or 16.1%, from $13.3 million for
fiscal 1995 to $11.2 million for fiscal 1996 due to a decrease in the volume
of business long distance accounts. This resulted from technical difficulties
experienced during a transition from a larger, more technically complex
switching system which caused a temporary erosion of Valu-Line's customer
base. For domestic long distance traffic, total billed minutes decreased from
99.6 million for fiscal 1995 to 79.5 million for fiscal 1996, while average
revenue per billable minute increased 3.2%.
Gross profit. Gross profit decreased $0.8 million, or 15.5%, from $5.1
million for fiscal 1995 to $4.3 million for fiscal 1996. Gross margin
increased from 38.4% for fiscal 1995 to 38.7% for fiscal 1996 as Valu-Line
instituted a program to recycle surplus dialer equipment. Subsequent to the
transition to the new switching system, new customers were supplied with
refurbished dialer equipment recovered from previous subscribers. The cost of
refurbishing dialer equipment is significantly less than the cost to purchase
new dialers. These savings were partially offset by an increase in the
average cost of service per minute resulting from the additional cost
associated with carrying Longview area traffic to the new switch in Dallas.
For domestic long distance traffic, average cost per billable minute
increased 6.1%.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $0.3 million, or 8.4%, from $3.9 million
for fiscal 1995 to $3.6 million for fiscal 1996. As a percentage of revenues,
selling, general and administrative expenses increased from 29.2% for fiscal
1995 to 32.0% for fiscal 1996, primarily as a result of costs incurred to
accommodate customers' service needs resulting from technical problems
encountered upon the installation of the new switch. For periods generally
ranging from one to four months, Valu-Line customers became temporary
subscribers to other long distance carriers because of the technical problems
associated with the new switch. Valu-Line reimbursed those customers for the
difference between the tariffed rates charged by other carriers and
Valu-Line's contracted rates as an inducement to return to Valu-Line.
Valu-Line results for the fiscal year ended December 31, 1994 compared
to the fiscal year ended December 31, 1995.
Revenues. Revenues decreased $0.1 million, or 0.6%, from $13.4 million for
fiscal 1994 to $13.3 million for fiscal 1995, primarily due to new
competition. In order to maintain its existing customers and to attract new
business, Valu-Line reduced its rate structures in fiscal 1995. For domestic
long distance traffic, total billed minutes increased from 92.8 million for
fiscal 1994 to 99.6 million for fiscal 1995, while average revenue per
billable minute decreased 6.0%.
Gross profit. Gross profit decreased $1.1 million, or 18.0%, from $6.2
million for fiscal 1994 to $5.1 million for fiscal 1995. Gross margin
decreased from 46.5% for fiscal 1994 to 38.4% for fiscal 1995 as a result of
a one-time charge incurred to change the dialing patterns of all its dialers
in accordance with industry requirements. For domestic long distance traffic,
average cost per billable minute increased 4.9%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.2 million, or 4.6%, from $3.7 million
for fiscal 1994 to $3.9 million for fiscal 1995. As a percentage of revenues,
selling, general and administrative expenses increased from 27.7% for fiscal
1994 to 29.2% for fiscal 1995 as a result of costs associated with the
unsuccessful launch of a new sales office in Houston and costs incurred in
preparation for the switch transition.
41
<PAGE>
Valu-Line liquidity and capital resources
Valu-Line generated $0.7 million in net cash from operating activities for
the nine months ended September 30, 1997. Net cash used in financing
activities was $0.7 million, representing $0.3 million in net repayments of
long term debt and $0.5 million in distributions to shareholders, net of $0.1
million provided by proceeds from long term debt.
At September 30, 1997, Valu-Line had working capital of $0.3 million and
total debt outstanding of $1.5 million. Valu-Line has historically funded its
operations with cash from operations and borrowings from lenders.
Valu-Line generated $1.5 million in net cash from operating activities in
fiscal 1996. Net cash used in investing activities was approximately $0.1
million, which was primarily used for capital expenditures. Net cash used in
financing activities was $1.4 million, of which $0.8 million was distributed
to shareholders and $0.6 million was used to repay long-term debt, capital
leases and other notes payable.
As of December 31, 1996, Valu-Line had a working capital deficit of $0.1
million and total debt outstanding of $1.7 million.
Valu-Line generated $2.2 million in net cash from operating activities in
fiscal 1995. Net cash used in investing activities was approximately $2.4
million, which was primarily used for capital expenditures. Net cash provided
by financing activities was $0.3 million, of which $2.1 million was provided
by proceeds from long-term debt and other notes payable, net of $1.3 million
distributed to shareholders and $0.5 million was used to repay long-term
debt, capital leases and other notes payable.
See "Business-Regulation--State Regulation" for information regarding
Valu-Line's conducting intrastate long distance telephone operations in
Arkansas without a permit for approximately the last six years.
FIRSTEL, INC.
The following table sets forth for FirsTel selected operating data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------- -------------------------------------
1994 1995 1996 1996 1997
------------------ ------------------ ------------------- ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $4,079 100.0% $7,838 100.0% $10,355 100.0% $7,659 100.0% $9,488 100.0%
Cost of services .... 3,040 74.5% 5,334 68.1% 7,066 68.2% 5,168 67.5% 6,864 72.3%
Depreciation and
amortization........ 125 3.1% 206 2.6% 248 2.4% 183 2.4% 202 2.1%
-------- -------- -------- -------- --------- -------- -------- -------- -------- --------
Gross profit......... 914 22.4% 2,298 29.3% 3,041 29.3% 2,308 30.1% 2,422 25.5%
Selling, general and
administrative
expenses............ 1,155 28.3% 1,726 22.0% 2,147 20.7% 1,558 20.3% 1,969 20.7%
-------- -------- -------- -------- --------- -------- -------- -------- -------- --------
Income (loss) from
operations.......... (241) (5.9)% 573 7.3% 894 8.6% 750 9.8% 453 4.8%
</TABLE>
FirsTel results for the nine months ended September 30, 1996 compared
to the nine months ended September 30, 1997.
Revenues. Revenues increased $1.8 million, or 23.9%, from $7.7 million for
the nine months ended September 30, 1996 to $9.5 million for the nine months
ended September 30, 1997 primarily due to increased sales of long distance
services, partially offset by competitive pricing. For long distance traffic,
total billed minutes increased from 49.3 million for the nine months ended
September 30, 1996 to 62.9 million for the nine months ended September 30,
1997, while average revenue per billable minute decreased 6.9%.
Gross profit. Gross profit increased $0.1 million, or 4.9%, from $2.3
million for the nine months ended September 30, 1996 to $2.4 million for the
nine months ended September 30, 1997. Gross margin
42
<PAGE>
decreased from 30.1% for the nine months ended September 30, 1996 to 25.5%
for the nine months ended September 30, 1997 as a result of competitive
pricing strategies and low margins on the start up of cellular and local
sales. For long distance traffic, average cost per billable minute decreased
14.5%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.4 million, or 26.4%, from $1.6 million
for the nine months ended September 30, 1996 to $2.0 million for the nine
months ended September 30, 1997. As a percentage of revenues, selling,
general and administrative expenses increased slightly from 20.3% for the
nine months ended September 30, 1996 to 20.8% for the nine months ended
September 30, 1997 as a result of increases in sales support expenses. Most
of these increases were due to costs associated with preparing for the
provision of cellular and local services prior to revenues being generated
from these services.
FirsTel results for the fiscal year ended December 31, 1995 compared
to the fiscal year ended December 31, 1996.
Revenues. Revenues increased $2.6 million, or 32.1%, from $7.8 million for
fiscal 1995 to $10.4 million for fiscal 1996, primarily due to expansion into
new markets and a larger sales force. For long distance traffic, total billed
minutes increased from 48.3 million for fiscal 1995 to 67.9 million for
fiscal 1996, while average revenue per billable minute decreased 8.1%.
Gross profit. Gross profit increased $0.7 million, or 32.3%, from $2.3
million for fiscal 1995 to $3.0 million for fiscal 1996. Gross margin
remained stable at 29.4% for fiscal 1995 and fiscal 1996. For long distance
traffic, average cost per billable minute decreased 5.6%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.4 million, or 24.4%, from $1.7 million
for fiscal 1995 to $2.1 million for fiscal 1996. As a percentage of revenues,
selling, general and administrative expenses decreased from 22.0% for fiscal
1995 to 20.7% for fiscal 1996 as a result of reduced selling expenses. In
1995, sales personnel were paid base salaries; whereas, in 1996 sales
personnel were compensated on a straight commission basis.
FirsTel results for fiscal year ended December 31, 1994 compared
to fiscal year ended December 31, 1995.
Revenues. Revenues increased $3.7 million, or 92.2%, from $4.1 million for
fiscal 1994 to $7.8 million for fiscal 1995. Although FirsTel was founded in
1993, its initial launch of an effective sales force and a comprehensive
marketing effort occurred during fiscal 1994. Accordingly, fiscal 1995 was
the first year to reflect a full year of benefit from the sales and marketing
programs. For long distance traffic, total billed minutes increased from 24.1
million for fiscal 1994 to 48.3 million for fiscal 1995, while average
revenue per billable minute decreased 4.1%.
Gross profit. Gross profit increased $1.4 million, or 151.4%, from $0.9
million for fiscal 1994 to $2.3 million for fiscal 1995. Gross margin
increased from 22.4% for fiscal 1994 to 29.3% for fiscal 1995 as a result of
a reduction in line costs per minute, and more efficient use of the network
and switching facilities. For long distance traffic, average cost per
billable minute decreased 3.7%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.5 million, or 49.4%, from $1.2 million
for fiscal 1994 to $1.7 million for fiscal 1995. As a percentage of revenues,
selling, general and administrative expenses decreased from 28.3% for fiscal
1994 to 22.0% for fiscal 1995 as a result of increased revenues without a
corresponding increase in expenses.
FirsTel liquidity and capital resources
FirsTel generated $0.5 million in net cash from operating activities for
the nine months ended September 30, 1997. Net cash used in investing
activities was approximately $0.2 million, representing equipment purchases.
Net cash used in financing activities was $0.4 million, representing
reductions in capitalized leases and distributions to stockholders, offset by
the proceeds from a debt offering.
At September 30, 1997, FirsTel had a working capital deficit of $0.9
million and $1.2 million of total debt outstanding, including $1.0 million of
notes payable to stockholders which will be acquired by ACG.
43
<PAGE>
FirsTel has historically funded its operations with cash flow from operations
and loans from stockholders. FirsTel maintains a revolving line of credit
with a local bank in the amount of $0.8 million for the financing of
receivables and unbilled services. As of September 30, 1997 there was an
outstanding balance of $0.1 million on the line of credit.
FirsTel generated $0.9 million in net cash from operating activities in
fiscal 1996. Net cash used in investing activities was approximately $0.1
million, of which $0.2 million was used for purchasing equipment. Net cash
used in financing activities was $0.8 million, primarily for reduction in
long-term debt.
As of December 31, 1996, FirsTel had a working capital deficit of $1.1
million and total debt outstanding of $1.4 million.
FirsTel generated $0.4 million in net cash from operating activities in
fiscal 1995. Net cash used in investing activities was approximately $0.5
million, of which $0.4 million was used for purchases of property and
equipment. Net cash provided by financing activities was $0.1 million, of
which $0.5 million represented proceeds from long term borrowings, net of
$0.2 million in principal payments on long-term debt and $0.2 million in
distributions to stockholders.
FEIST LONG DISTANCE, INC.
The following table sets forth for Feist Long Distance selected statement
of operations data and such data as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------- -------------------------------------
1994 1995 1996 1996 1997
------------------ ------------------ ------------------- ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $5,712 100.0% $7,923 100.0% $10,028 100.0% $7,416 100.0% $8,965 100.0%
Cost of services .... 3,623 63.4% 5,469 69.0% 6,854 68.3% 5,057 68.2% 6,044 67.4%
Depreciation and
amortization........ 255 4.5% 278 3.5% 237 2.4% 170 2.3% 142 1.6%
-------- -------- -------- -------- --------- -------- -------- -------- -------- --------
Gross profit......... 1,834 32.1% 2,176 27.5% 2,937 29.3% 2,189 29.5% 2,779 31.0%
Selling, general and
administrative
expenses............ 1,553 27.2% 2,201 27.8% 2,469 24.6% 1,706 23.0% 2,404 26.8%
-------- -------- -------- -------- --------- -------- -------- -------- -------- --------
Income (loss) from
operations.......... 281 4.9% (25) (0.3)% 467 4.7% 482 6.5% 375 4.2%
</TABLE>
Feist Long Distance results for the nine months ended September 30, 1996
compared
to the nine months ended September 30, 1997.
Revenues. Revenues increased $1.6 million, or 20.9%, from $7.4 million for
the nine months ended September 30, 1996 to $9.0 million for the nine months
ended September 30, 1997 primarily due to a larger customer base. However,
for the nine months ended September 30, 1997 Feist experienced a slower rate
of growth than experienced in prior periods due to a change in advertising
strategy. For long distance traffic, total billed minutes increased from 49.8
million for the nine months ended September 30, 1996 to 66.1 million for the
nine months ended September 30, 1997, while average revenue per billable
minute decreased 6.9%.
Gross profit. Gross profit increased $0.6 million, or 27.0%, from $2.2
million for the nine months ended September 30, 1996 to $2.8 million for the
nine months ended September 30, 1997. Gross margin increased from 29.5% for
the nine months ended September 30, 1996 to 31.0% for the nine months ended
September 30, 1997 as a result of an increase in lower-cost "on-net" traffic
and decrease in higher cost "off-net" resold traffic, as well as declining
fiber lease rates and access charges. For long distance traffic, average cost
per billable minute decreased 15.3%.
44
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.7 million, or 40.9%, from $1.7 million
for the nine months ended September 30, 1996 to $2.4 million for the nine
months ended September 30, 1997. As a percentage of revenues, selling,
general and administrative expenses increased from 23.0% for the nine months
ended September 30, 1996 to 26.8% for the nine months ended September 30,
1997 as Feist Long Distance added selling and administrative personnel in
anticipation of providing local service.
Feist Long Distance results for the fiscal year ended December 31, 1995
compared
to the fiscal year ended December 31, 1996.
Revenues. Revenues increased $2.1 million, or 26.6%, from $7.9 million for
fiscal 1995 to $10.0 million for fiscal 1996, due to successful marketing
efforts to obtain new small business customers in the long distance market.
For long distance traffic, total billed minutes increased from 50.9 million
for fiscal 1995 to 71.3 million for fiscal 1996, while average revenue per
billable minute decreased 7.1%.
Gross profit. Gross profit increased $0.7 million, or 35.0%, from $2.2
million for fiscal 1995 to $2.9 million for fiscal 1996. Gross margin
increased from 27.5% for fiscal 1995 to 29.3% for fiscal 1996 as a result of
an increase in lower-cost "on-net" traffic as compared to higher cost
"off-net" resold traffic, as well as declining fiber lease rates and access
charges. For long distance traffic, average cost per billable minute
decreased 9.4%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.3 million, or 12.2%, from $2.2 million
for fiscal 1995 to $2.5 million for fiscal 1996. As a percentage of revenues,
selling, general and administrative expenses decreased from 27.8% for fiscal
1995 to 24.6% for fiscal 1996 as management improved the efficiency of
administrative and clerical personnel through higher levels of automation.
Feist Long Distance results for the fiscal year ended December 31, 1994
compared
to the fiscal year ended December 31, 1995.
Revenues. Revenues increased $2.2 million, or 38.7%, from $5.7 million for
fiscal 1994 to $7.9 million for fiscal 1995, due to the penetration of new
markets in Oklahoma, Nebraska, Missouri and Texas utilizing agents and
telemarketing. For long distance traffic, total billed minutes increased from
35.1 million for fiscal 1994 to 50.9 million for fiscal 1995, while average
revenue per billable minute decreased 4.8%.
Gross profit. Gross profit increased $0.4 million, or 18.6%, from $1.8
million for fiscal 1994 to $2.2 million for fiscal 1995. Gross margin
decreased from 32.1% for fiscal 1994 to 27.5% for fiscal 1995 as a result of
an expansion into areas served by independent telephone companies which
impose higher access charges than areas served by RBOCs, and the costs
associated with utilizing purchased facilities in those new areas. For long
distance traffic, average cost per billable minute increased 3.7%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.6 million, or 41.7%, from $1.6 million
for fiscal 1994 to $2.2 million for fiscal 1995. As a percentage of revenues,
selling, general and administrative expenses slightly increased from 27.2%
for fiscal year 1994 to 27.8% for fiscal year 1995.
Feist Long Distance liquidity and capital resources
Feist Long Distance generated $0.4 million in net cash from operating
activities for the nine months ended September 30, 1997. Net cash used in
investing activities was approximately $0.1 million, principally for
equipment purchases. Net cash used in financing activities was $0.2 million,
representing repayment of long-term debt.
At September 30, 1997, Feist Long Distance had current assets
approximately equal to current liabilities and $0.7 million of total debt
outstanding which amount is due to shareholders and will be acquired by ACG.
45
<PAGE>
Feist Long Distance generated $0.3 million in net cash from operating
activities in fiscal 1996. Net cash used in investing activities was
approximately $0.1 million, which was primarily used to purchase equipment.
Net cash used in financing activities was $0.2 million, which was used to
repay long term debt.
As of December 31, 1996, Feist Long Distance had a working capital deficit
of $0.3 million and total debt outstanding of $0.8 million.
Feist Long Distance used $0.3 million in net cash from operating
activities in fiscal 1995. Net cash used in investing activities was
approximately $0.1 million, which was primarily used for the purchase of
equipment. Net cash generated from financing activities was $0.4 million,
which represented net proceeds from the issuance of long term debt.
As of December 31, 1995, Feist Long Distance had a working capital deficit
of $0.8 million and total debt outstanding of $1.1 million.
KIN NETWORK, INC.
The following table sets forth for KINNET selected statement of operations
data and such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------ -------------------------------------
1994 1995 1996 1996 1997
-------------------- -------------------- ------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $ 3,550 100.0% $ 6,497 100.0% $8,553 100.0% $6,031 100.0% $8,796 100.0%
Cost of services .... 2,450 69.0% 3,094 47.6% 2,864 33.5% 2,055 34.1% 2,996 34.1%
Depreciation and
amortization(1)..... 1,700 47.9% 1,825 28.1% 1,906 22.3% 1,321 21.9% 1,597 18.2%
--------- --------- --------- --------- -------- -------- -------- -------- -------- --------
Gross profit(1)...... (600) (16.9)% 1,578 24.3% 3,783 44.2% 2,655 44.0% 4,203 47.7%
Selling, general and
administrative
expenses............ 2,533 71.4% 2,930 45.1% 3,417 40.0% 2,479 41.1% 3,466 39.4%
--------- --------- --------- --------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations.......... (3,133) (88.3)% (1,352) (20.8)% 366 4.3% 176 2.9% 737 8.4%
</TABLE>
- ------------
(1) KINNET has historically included depreciation and amortization in
neither gross profit nor selling, general and administrative expenses,
but as a separate item in the calculation of income (loss) from
operations. The Acquired Companies have historically recorded
depreciation and amortization expense as an element of gross profit,
and for consistency of presentation, in the text of this Prospectus and
the pro forma financial statements, KINNET's depreciation and
amortization expense is included in the calculation of gross profit. As
presented in KINNET's historical financial statements included herein,
its gross profit for fiscal 1994, 1995 and 1996, and for the nine
months ended September 30, 1996 and 1997, was (in thousands) $1,100,
$3,402, $5,689, $3,976, and $5,800, respectively.
The Company is acquiring 49% of the outstanding voting stock of KINNET,
and hence KINNET's results of operations are included in the Company's
financial statements on the equity method of accounting. Such amounts
included in the Company's pro forma combined financial statements for the
fiscal year ended December 31, 1996 and the nine months ended September 30,
1996 and 1997 were $(388,000), $(349,000) and $(146,000), respectively.
KINNET results for the nine months ended September 30, 1996 compared
to the nine months ended September 30, 1997.
Revenues. Revenues increased $2.8 million, or 45.8%, from $6.0 million for
the nine months ended September 30, 1996 to $8.8 million for the nine months
ended September 30, 1997. This increase in revenues occurred primarily
because of an increase in the volume of traffic as a result of continued
successful marketing efforts. Incremental customers gains included two
resellers, two equal access subscribers and 79 new private line customers.
For long distance traffic, total billed minutes increased from 11.6 million
for the nine months ended September 30, 1996 to 16.9 million for the nine
months ended September 30, 1997, while average revenue per billable minute
decreased 19.3%.
46
<PAGE>
Gross profit. Gross profit increased $1.5 million, or 58.3%, from $2.7
million for the nine months ended September 30, 1996 to $4.2 million for the
nine months ended September 30, 1997. Gross margin increased from 44.0% for
the nine months ended September 30, 1996 to 47.7% for the nine months ended
September 30, 1997 as a result of network efficiencies, volume discounts and
negotiated lower rates. For long distance traffic, average cost per billable
minute decreased 4.7%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.0 million, or 39.8%, from $2.5 million
for the nine months ended September 30, 1996 to $3.5 million for the nine
months ended September 30, 1997. As a percentage of revenues, selling,
general and administrative expenses decreased from 41.1% for the nine months
ended September 30, 1996 to 39.4% for the nine months ended September 30,
1997 as KINNET was able to take advantage of economies of scale.
KINNET results for the fiscal year ended December 31, 1995 compared
to the fiscal year ended December 31, 1996.
Revenues. Revenues increased $2.1 million, or 31.6%, from $6.5 million for
fiscal 1995 to $8.6 million for fiscal 1996. The largest contribution to the
increase came from wholesale long distance services which increased from $0.5
million in fiscal 1995 to $1.4 million in fiscal 1996. KINNET experienced
significant revenue gains in its other major product lines with private line
revenues and equal access revenues increasing 44% and 31%, respectively.
Increases in revenues for all product lines are attributable to increases in
volumes resulting from successful marketing efforts. For long distance
traffic, total billed minutes increased from 10.2 million for fiscal 1995 to
15.9 million for fiscal 1996, while average revenue per billable minute
increased 37.3%.
Gross profit. Gross profit increased $2.2 million, or 139.7%, from $1.6
million for fiscal 1995 to $3.8 million for fiscal 1996. Gross margin
increased from 24.3% for fiscal 1995 to 44.2% for fiscal 1996 as the
Company's product mix shifted to a greater proportion of equal access
service, which is a higher margin product. For long distance traffic, average
cost per billable minute decreased 11.3%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.5 million, or 16.6%, from $2.9 million
for fiscal 1995 to $3.4 million for fiscal 1996. As a percentage of revenues,
selling, general and administrative expenses decreased from 45.1% for fiscal
1995 to 40.0% for fiscal 1996 as a result of efficiencies achieved on
maintenance of the fiber system and economies of scale achieved in
administrative operations.
KINNET results for the fiscal year ended December 31, 1994 compared
to the fiscal year ended December 31, 1995.
Revenues. Revenues increased $2.9 million, or 83.0%, from $3.6 million for
fiscal 1994 to $6.5 million for fiscal 1995. The largest contribution to the
increase came from equal access revenues which more than doubled in fiscal
1995 to a total of $3.0 million. Thirteen independent telephone companies
were utilizing KINNET's access tandem switch by the end of fiscal 1995 with
three more in the process of conversion. For long distance traffic, total
billed minutes increased from 3.0 million for fiscal 1994 to 10.2 million for
fiscal 1995, while average revenue per billable minute increased 38.1%.
Gross profit. Gross profit increased $2.2 million, from a loss of $0.6
million for fiscal 1994 to profit of $1.6 million for fiscal 1995. Gross
margin increased from (16.9)% for fiscal 1994 to 24.3% for fiscal 1995 as the
company's product mix shifted to a greater proportion of equal access
service, which is a higher margin product. For long distance traffic, average
cost per billable minute increased 9.3%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.4 million, or 15.7%, from $2.5 million
for fiscal 1994 to $2.9 million for fiscal 1995. As a percentage of revenues,
selling, general and administrative expenses decreased from 71.4% for fiscal
1994 to 45.1% for fiscal 1995 as KINNET achieved significant economies of
scale in customer support and administration.
KINNET liquidity and capital resources
KINNET generated $4.3 million in net cash from operating activities for
the nine months ended September 30, 1997. Net cash used in investing
activities was approximately $5.8 million for additions to
47
<PAGE>
property, plant and equipment. Net cash generated in financing activities was
$2.0 million of which $3.9 million was received from KINNET's parent for
utilizing the income tax benefit of an operating loss carryover, and $0.3
million was received from the return of Rural Telephone Finance Cooperative
capital certificates, net of $2.0 million in principal payments on long-term
debt.
At September 30, 1997, KINNET had a working capital deficit of $2.2
million and $29.5 million of total debt outstanding. KINNET has historically
funded its operations with cash flow from operations and debt from lenders.
KINNET generated $0.5 million in net cash from operating activities in
fiscal 1996. Net cash used in investing activities was approximately $1.5
million, which was primarily used for additions to property, plant and
equipment. Net cash provided by financing activities was $1.4 million, of
which $3.5 million was received from KINNET's parent for utilizing the income
tax benefit of an operating loss carryover and for contributions of capital,
and $0.4 million was received from the return of Rural Telephone Finance
Cooperative capital certificates, net of $2.5 million principal repayments on
long-term debt.
As of December 31, 1996, KINNET had working capital of $1.2 million and
total debt outstanding of $31.7 million.
KINNET used $1.9 million in net cash from operating activities in fiscal
1995. Net cash used in investing activities was approximately $0.7 million,
which was primarily used for additions to property, plant and equipment. Net
cash provided by financing activities was $3.7 million, of which $6.0 million
represented a capital contribution from Liberty Cellular, Inc., net of $2.3
million principal repayments on long-term debt.
As of December 31, 1995, KINNET had working capital of $0.6 million and
total debt of $34.2 million.
PRO FORMA COMBINED RESULTS OF OPERATIONS
The following discussion of the Company's pro forma combined results of
operations for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1996 and 1997 should be read in conjunction with the pro
forma financial statements included elsewhere herein.
The following table sets forth certain pro forma combined results of
operations data of the Company and such results as a percentage of pro forma
combined revenues:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED(1) NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------- ---------------------------------------
1995(1) 1996(1) 1996 1997
------------------- ------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Telecommunications services . $37,772 50.9% $41,090 48.1% $29,648 47.0% $33,455 48.4%
Yellow page publishing....... 36,469 49.1% 44,324 51.9% 33,463 53.0% 35,624 51.6%
--------- -------- --------- -------- --------- -------- --------- --------
Total........................ 74,241 100.0% 85,414 100.0% 63,111 100.0% 69,079 100.0%
Cost of services.............. 43,005 57.9% 47,087 55.1% 33,322 52.8% 37,637 54.5%
Depreciation and
amortization................. 5,975 8.0% 6,111 7.2% 4,521 7.2% 4,339 6.3%
--------- -------- --------- -------- --------- -------- --------- --------
Gross profit.................. 25,261 34.0% 32,216 37.7% 25,268 40.0% 27,103 39.2%
Selling, general and
administrative expenses...... 23,243 31.3% 26,966 31.6% 19,323 30.6% 23,172 33.5%
--------- -------- --------- -------- --------- -------- --------- --------
Income from operations........ 2,018 2.7% 5,250 6.1% 5,945 9.4% 3,931 5.7%
</TABLE>
- ------------
(1) All of the Acquired Companies and ACG, except Great Western Directories
(for fiscal 1995), Long Distance Management of Kansas, Inc. ("LDM
Kansas") and Long Distance Management II, Inc. ("LDM II") have fiscal
years which end on December 31. The combined data above for the fiscal
years ended December 31, 1995 and 1996 includes data for LDM Kansas and
LDM II for the twelve month periods then ended. The combined data above
also includes Great Western's fiscal year ended January 31, 1996 for
the combined fiscal year ended 1995. Because of the change in Great
Western's fiscal year, revenues for the month of January 1996 are
included both in fiscal 1995 and fiscal 1996.
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Pro forma combined results for the nine months ended September 30, 1996
compared to the nine months ended September 30, 1997.
Pro forma revenues. Revenues increased $6.0 million, or 9.5%, from $63.1
million for the nine months ended September 30, 1996 to $69.1 million for the
nine months ended September 30, 1997. Telecommunications services revenue
increased $3.9 million, or 12.8%, from $29.6 million for the nine months
ended September 30, 1996 to $33.5 million for the nine months ended September
30, 1997 as a result of an overall increase in traffic for all of the
Acquired Companies except Valu-Line, whose domestic long distance minutes
were relatively flat. For long distance traffic, total domestic billed
minutes increased 13.7% from 192.2 million for the nine months ended
September 30, 1996 to 222.6 million for the nine months ended September 30,
1997, while average revenue per domestic billable minute decreased 7.4% from
$0.1422 to $0.1317. Yellow page publishing revenue increased $2.2 million, or
6.5%, from $33.5 million for the nine months ended September 30, 1996 to
$35.6 million for the nine months ended September 30, 1997 primarily as a
result of increased sales of advertising space in the directory in Tulsa,
Oklahoma and in other established markets. See "Risk Factors -- Recent
Results and Anticipated Future Quarterly Losses."
Pro forma gross profit. Gross profit increased $1.8 million, or 7.3%, from
$25.3 million for the nine months ended September 30, 1996 to $27.1 million
for the nine months ended September 30, 1997. As a percentage of revenue,
gross margin decreased from 40.0% to 39.2% for the nine months ended
September 30, 1996 and 1997. Telecommunications services gross profit
increased $1.2 million, or 13.2%, from $9.1 million for the nine months ended
September 30, 1996 to $10.3 million for the nine months ended September 30,
1997. Telecommunications services gross margin increased from 30.5% for the
nine months ended September 30, 1996 to 30.8% for the nine months ended
September 30, 1997 as a result of a scheduled decrease in depreciation
expense on equipment. For domestic long distance traffic, average cost per
billable minute decreased 10.7% from $0.0856 for the nine months ended
September 30, 1996 to $0.0786 for the nine months ended September 30, 1997.
Yellow page publishing gross profit increased $0.6 million, or 3.6%, from
$16.2 million for the nine months ended September 30, 1996 to $16.8 million
for the nine months ended September 30, 1997. Yellow page publishing gross
margin declined from 48.5% for the nine months ended September 30, 1996, to
47.2% for the nine months ended September 30, 1997, due to certain variable
costs of services, such as commissions, increasing at a more rapid rate than
revenues, resulting from temporary changes in commission payment methodology
and certain other costs of services, such as printing and distribution.
Pro forma combined results for fiscal 1995 compared to fiscal 1996.
Pro forma revenues. Revenues increased $11.2 million, or 15.0%, from $74.2
million for fiscal 1995 to $85.4 million for fiscal 1996. Telecommunications
services revenue increased $3.3 million, or 8.8%, from $37.8 million for
fiscal 1995 to $41.1 million for fiscal 1996 primarily as a result of
successful marketing efforts and expansion into new markets. These gains were
partially offset by a decrease in the volume of commercial long distance
accounts at Valu-Line resulting from technical difficulties experienced
during an equipment change. For long distance traffic, total domestic billed
minutes increased 10.9% from 238.3 million for fiscal 1995 to 264.3 million
for fiscal 1996, while average revenue per domestic billable minute decreased
3.4% from $0.1458 to $0.1409. Yellow page publishing revenue increased $7.8
million, or 21.5% from $36.5 million for fiscal 1995 to $44.3 million for
fiscal 1996 primarily as a result of the first publication for revenue of the
Tulsa, Oklahoma directory in February 1996.
Pro forma gross profit. Gross profit increased $6.9 million, or 27.5%,
from $25.3 million for fiscal 1995 to $32.2 million for fiscal 1996. Gross
margin increased from 34.0% for fiscal 1995 to 37.7% for fiscal 1996.
Telecommunications services gross profit increased $0.9 million, or 8.0%,
from $11.2 million for fiscal 1995 to $12.1 million for fiscal 1996.
Telecommunications services gross margin decreased from 29.7% for fiscal 1995
to 29.5% for fiscal 1996 as a result of changes in product mix to lower
margin, higher cost services and implementation of a program to recycle
surplus equipment. For long distance traffic, average cost per domestic
billable minute decreased 1.7% from $0.0858 for fiscal 1995 to $0.0843 for
fiscal 1996. Yellow page publishing gross profit increased $6.0 million, or
42.6%, from $14.1 million for fiscal 1995 to $20.1 million for fiscal 1996.
Yellow page publishing gross margin increased from 38.5% for fiscal 1995 to
45.3% for fiscal 1996 due primarily to the gross profit contribution of the
first sold year of the
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Tulsa, Oklahoma directory, a highly profitable market. Also, certain costs of
services did not increase proportionately with revenues due to a competitive
bidding process for printing. In addition, Great Western was able to take
advantage of an overall decrease in paper prices.
Pro forma combined liquidity and capital resources
The Company has obtained a commitment letter from CIBC, Inc. ("Lender"),
as lender, and Canadian Royal Bank of Commerce ("Agent"), as agent (each an
affiliate of CIBC Oppenheimer, one of the Representatives of the Underwriters
in this Offering), for a $25.0 million senior secured revolving credit
facility (the "Facility"). The commitment is subject to the preparation,
execution and delivery of a definitive Credit Agreement incorporating
substantially the terms set forth in the term sheet. The amount actually
available to the Company under the Facility will be subject to a borrowing
base equal to 85% of the face value of the eligible accounts receivable of
the Company and its subsidiaries. The obligations of the Company under the
Facility will be guaranteed by each subsidiary of the Company, and will be
secured by a first priority lien on or pledge of (a) accounts receivable of
the Company and each of the Company's subsidiaries, (b) stock of each of the
Company's subsidiaries, and (c) a negative pledge of all other assets of the
Company and the Company's subsidiaries.
All loans advanced under the Facility will mature within one year. Amounts
advanced under the Facility will accrue interest at a floating rate based
upon, at the Company's option, either LIBOR plus a margin of 1.50% or the
Agent's base rate (but not less than the Federal Funds rate plus 0.5% per
annum) plus a margin of 0.5%. The Facility will require the payment of an
upfront fee equal to 1% of the amount committed, a quarterly unused
commitment fee equal to 0.5% of the undrawn balance available under the
Facility, and an annual administrative fee. The Company intends to use the
proceeds of the Facility for working capital, capital expenditures, and
general corporate purposes.
The Facility will include restrictive covenants that are customary for
this type of facility and for comparable companies that have recently
completed an initial public offering, including without limitation the
maintenance of a minimum interest coverage ratio of 3:00 to 1:00 and
restrictions on (a) the incurrence of additional indebtedness, (b) granting
liens, (c) making loans, investments, and advances, (d) entering into
mergers, consolidations, and sales of assets, (e) making capital expenditures
in excess of, in the aggregate, $25 million, and (e) acquiring additional
subsidiaries without the prior consent of the Lender. In addition, the
Facility will prohibit the declaration or payment by Company of dividends or
similar distributions to stockholders.
The obligation of the Lender to make any advances under the Facility will
be subject to the satisfaction of certain conditions precedent that are
customary for this type of facility and for comparable companies that have
recently completed an initial public offering, including without limitation
the successful completion of this Offering and receipt of all required payoff
letters and evidence of related lien releases in connection with certain
indebtedness of the subsidiaries of the Company.
The $17.0 million of notes issued to stockholders of Great Western and
FirsTel in the Acquisitions will be subordinated to the first $50.0 million
of outstanding bank debt.
The Company expects to expend approximately $25.0 million in 1998 to fund
the acquisition of additional circuit and packet switches, the leasing of
bulk fiber optic capacity from others and the purchase of other capital
assets. See "Risk Factors -- Capital Requirements."
The Company generated $5.9 million in net cash from operating activities
for the nine months ended September 30, 1997. Net cash used in investing
activities was approximately $0.6 million, principally for property and
equipment purchases. Net cash used in financing activities was $4.5 million,
representing $3.8 million in principal payments on long-term debt, capital
leases and other notes payable and $1.1 million in dividends and
distributions to shareholders, net of $0.4 million of proceeds from long-term
debt and other notes payable.
At September 30, 1997, the Company had working capital, as adjusted, of
$25.3 million and total debt outstanding of $17.4 million.
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The Company generated $9.0 million in net cash from operating activities
in the fiscal year ended December 31, 1996. Net cash used in investing
activities in the fiscal year ended December 31, 1996 was approximately $0.7
million, principally for property and equipment purchases, net of proceeds
from the sale of equipment. Net cash used in financing activities was $7.5
million, representing $6.5 million in principal payments on long-term debt,
capital leases and other notes payable and $1.2 million in dividends and
distributions to shareholders, net of $0.3 million of proceeds from long-term
debt and other notes payable and $0.1 million net purchases of treasury
stock.
At December 31, 1996, working capital was $10.7 million and total debt
outstanding was $6.3 million.
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INDUSTRY BACKGROUND AND OVERVIEW
GENERAL
The present U.S. telecommunications marketplace was shaped principally by
the court-directed divestiture (the "Divestiture") of the Bell System in
1984. In connection with the Divestiture, the United States was divided into
194 local regions known as Local Access Transport Areas ("LATAs") and the
Bell System was separated into a long distance carrier, AT&T, to provide long
distance services, and seven RBOCs, including Southwestern Bell and U S WEST,
to provide local telecommunications services. Long distance services involve
the carriage of telecommunications traffic between LATAs (interexchange).
Local services involve the carriage of telecommunications traffic within
LATAs (local exchange) and the provision of local network access to the long
distance carriers by the local exchange carriers ("LECs"), including the
RBOCs and independent entities, thereby allowing long distance traffic to
reach end users in a LATA (local access).
Both local and long distance telephony are switched services, meaning that
a customer's call travels over the public switched telephone network with
millions of possible routes and is switched (i.e., routed) to its intended
destination by a telecommunications service provider, such as the Company,
based on dialing information provided by the caller. A letter of
authorization from a customer permits a service provider to instruct the ILEC
to tag all calls from that customer with the service provider's
identification code. This code enables the service provider to bill such
customer directly for its local and long distance services. A second type of
telephony service is "dedicated" or non-switched service, which generally
involves the provision of service between two fixed points, such as between
two branch offices of a corporation or between a long distance carrier's
points of presence ("POPs") and the customer's private branch exchange
("PBX").
The long distance and local telecommunications markets are currently
undergoing substantial changes, including fundamental changes resulting from
the February 8, 1996 enactment of the Telecommunications Act, and the Company
believes that it is well positioned to take advantage of these developments.
LONG DISTANCE SERVICES
Until 1984, AT&T largely monopolized local and long distance telephone
services in the United States. Technological and regulatory developments
gradually enabled others to compete with AT&T in the long distance market.
Since the Divestiture in 1984, competition in the long distance market has
increased, service levels have improved, product offerings have increased and
prices for long distance services have generally declined, all of which has
resulted in increased consumer demand and significant market growth for long
distance services. One component of this growth has been the advent of a
number of long distance resellers (including some of the Acquired Companies),
which emerged as a result of procompetitive regulatory initiatives fostered
by the Divestiture. Typically, a reseller of long distance services enters
into interconnect agreements with one or more major long distance carriers
that allow the reseller to channel its customers' traffic over the major
carriers' networks at rates more favorable than those generally available to
individual customers.
A long distance telephone call between two LATAs consists of three
segments. Starting with the originating customer, the call is transmitted
along the ILEC's local network to a long distance carrier's POP in the
originating customer's LATA. At the POP, the call is sent along the long
distance carrier's network to the long distance carrier's POP in the LATA in
which the terminating customer is located. The call is then sent from this
POP along another local network to the terminating customer. Long distance
carriers provide only the connection between the two local networks, and pay
access charges for switched calls to both the originating and terminating
ILEC for traffic obtained from or terminated on their respective local
networks.
LOCAL SERVICES
While the Divestiture facilitated competition in the long distance segment
of the telecommunications market, each ILEC initially enjoyed a monopoly in
the provision of local telecommunications services in
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its respective service area. In the mid-1980s, however, there was a surge of
construction activity by entities building their own local networks and
providing local access and dedicated services designed to allow users to
bypass a portion of a particular ILEC's local network. The competitive access
providers ("CAPs") were the first providers of these access services and the
first competitors in the local telecommunications services market. The demand
for alternative local telecommunications services providers in the past has
been driven in large part by the significant charges levied by the ILECs
against the long distance carriers for access to such ILECs' local networks
(access charges). Access charges typically represent approximately 40% to 45%
of long distance carriers' long distance revenue. The CAPs' local networks
typically consist of fiber optic-based facilities connecting long distance
carriers' POPs within a metropolitan area, connecting end users (primarily
large businesses and government agencies) with long distance carriers' POPs
and connecting different locations of a particular customer. CAPs take
advantage of the substantial capacity and economies of scale inherent in
their networks to offer customers service that is generally less expensive
and of higher quality than that obtained from the ILECs. As CAPs have grown,
regulators in some states and at the federal level have issued rulings which
favored competition and allowed CAPs to offer a number of new services.
Several CAPs have emerged into full-fledged CLECs capable of providing an
entire range of switch-based local and long distance telephony services. The
Company believes that the trend toward increased competition and deregulation
of the telecommunications industry is continuing and accelerating.
The market for local exchange services consists of a number of distinct
service components. These service components are defined by specific
regulatory tariff classifications including: (i) local network services,
which generally include basic dial tone, enhanced calling features and data
services (dedicated point-to-point and frame relay service); (ii) network
access services, which consist of access provided by ILECs to long distance
network carriers; (iii) short-haul long distance network services, which
include intraLATA long distance calls; and (iv) other varied services,
including the publication of white page and yellow page telephone
directories. According to publicly available sources, the 1996 aggregate
revenues of all ILECs were approximately $107.0 billion. Until recently,
there was virtually no competition in the local exchange markets.
Since the Divestiture in 1984, several factors have served to promote
competition in the local exchange market, including: (i) rapidly growing
customer demand for an alternative to the ILECs monopoly, spurred partly by
the development of competitive activities in the long distance market; (ii)
advances in the technology for transmission of data and video, which require
significant capacity and reliability levels; (iii) the development of fiber
optics and digital electronic technology, which reduced network construction
costs while increasing transmission speeds, capacity and reliability as
compared to traditional copper-based networks; (iv) the significant access
charges interexchange carriers are required to pay to ILECs to access the
ILECs' networks; and (v) a willingness on the part of legislators to enact
and regulators to enforce legislation and regulations permitting and
promoting competition in the local exchange market. In particular, the
Telecommunications Act requires all ILECs to "unbundle" their local network
offerings and allow other providers of telecommunications services to
interconnect with their facilities and equipment. Most significantly, the
incumbent local exchange carriers will be required to complete local calls
originated by the Company's customers and switched by the Company and to
deliver inbound local calls to the Company for termination to its customers,
assuring customers of unimpaired local calling ability. The Company expects
that it will be able to obtain access to incumbent carrier local "loop"
facilities (the transmission lines connecting customers' premises to the
public switched telephone network) on an unbundled basis at reasonable rates.
In addition, ILECs are obligated to provide local number portability and
dialing parity upon request and make their local services available for
resale by competitors. ILECs also are required to allow competitors
non-discriminatory access to local exchange carrier pole attachments, conduit
space and other rights-of-way. Moreover, states may not erect "barriers to
entry" of local competition, although they may regulate such competition. The
Company believes that, as a result of continued regulatory and technological
changes and competitive trends, competitive local telecommunications
companies have substantial opportunities for growth.
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BUSINESS
THE COMPANY
The Company was founded to create a regional CLEC that provides an
integrated portfolio of telecommunications services principally to business
customers in selected service areas of Southwestern Bell Telephone Company
and U S WEST Communications, Inc. The Company offers long distance, local,
Internet access and cellular service primarily in Kansas, Minnesota,
Nebraska, North Dakota, Oklahoma, South Dakota and Texas and publishes yellow
page directories covering certain markets in Oklahoma and Texas. The Company
seeks to offer a bundle of "one stop" integrated telecommunications services
tailored to its customers' specific requirements and billed on a single
monthly invoice. As of November 30, 1997, the Company provided
telecommunications services to almost 35,000 business customers and over
10,000 residential customers in small to mid-sized markets. The Company has
recently experienced substantial growth in its base of local customers. The
Company's local customer access lines in service grew from approximately
1,000 at June 30, 1997 to approximately 11,000 at September 30, 1997 and
approximately 17,500 at November 30, 1997. In the fiscal year ended December
31, 1996, the Company had pro forma combined revenues of $85.4 million and
EBITDA of $11.5 million. For the nine months ended September 30, 1997, the
Company had pro forma combined revenues of $69.1 million and EBITDA of $8.5
million.
The Company owns and operates six digital tandem switches in Kansas,
Oklahoma, South Dakota and Texas. It also owns a 49% interest in KINNET, the
owner or operator of an approximately 880-route mile fiber optic network and
a Northern Telecom DMS 500 switch in Kansas. KINNET currently has one of the
largest fiber optic networks in the state of Kansas. As part of the KINNET
transaction, the Company made a $10.0 million direct cash investment in
KINNET, $5.0 million of which KINNET has agreed to apply to the buildout in
1998 and 1999 of a 537-mile, $21.5 million network extension from Wichita,
Kansas to the greater Kansas City metropolitan area, with a leg to Tulsa,
Oklahoma, that will provide self-healing redundancy to its fiber optic
network. KINNET has advised the Company that it expects to finance the
balance of the expansion with loan proceeds from the RTFC.
The Company is also an independent publisher of yellow page directories,
and in the twelve months ended November 30, 1997 published approximately 3.1
million copies of its yellow page directories covering 20 markets in Oklahoma
and Texas. These directories contained advertisements for approximately
46,000 business customers. The Company anticipates expanding its yellow page
operations into additional markets in the Region. The Company believes that
the advertisers in its yellow page directories provide a significant
opportunity to cross-sell its bundle of telecommunications services through
its direct sales force of approximately 255 persons, including approximately
40 telemarketers, as of November 30, 1997. Through a strategic relationship
with Feist Publications, Inc., an affiliate of one of the Acquired Companies,
the Company also has the opportunity to cross-sell its telecommunications
services to an additional 29,000 yellow page advertising customers.
The Company is pursuing a growth strategy that it believes will enable it
to minimize its initial capital expenditures relative to many other CLECs
that constructed facilities-based networks at a very early stage in their
development. The Company currently utilizes its own network facilities
combined with the leased network facilities of several long distance
providers and ILECs within the Region, including Southwestern Bell and U S
WEST. By reselling the local service of Southwestern Bell and U S WEST, the
Company has achieved a rapid penetration of the local telephone markets in
Wichita, Kansas and Sioux Falls, South Dakota. Ultimately, the Company will
only construct significant local network infrastructure in those markets
where a critical mass of customers makes it economically justifiable to do
so.
The Company has executed comprehensive local exchange resale agreements
with Southwestern Bell, U S WEST and affiliates of Sprint and GTE covering
eight states within the Region. Additionally, the Company has entered into
agreements with several interexchange carriers to provide "off-net" switching
and network transmission services for its long distance traffic. The Company
has also entered into agreements to resell cellular service in selected areas
in the Region. These agreements allow the Company initially to offer a bundle
of telecommunications services without the necessity of substantial
expenditures for the construction of network facilities.
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The Telecommunications Act of 1996 has created significant opportunities
for telecommunications service providers, particularly regional CLECs.
According to publicly available estimates, in 1996 total revenues from local
and long distance telecommunications services in the United States were
approximately $192.0 billion, of which approximately $107.0 billion were
derived from local exchange services and approximately $85.0 billion from
long distance services. In recent years, these telecommunications service
revenues have grown approximately 6% per year. Although the U.S. long
distance and local exchange industries are dominated by a few companies,
including AT&T, MCI (which has entered into a merger agreement to be acquired
by WorldCom), Sprint, WorldCom and the RBOCs, there are over 5,000 additional
providers of long distance, local and other telecommunications-related
services. In many of the small to mid-sized cities that are the Company's
primary target markets, there are independent telecommunications companies
which have significant market penetration, many of which the Company believes
represent attractive acquisition candidates.
The Company believes that it has significant opportunities to increase its
revenues and reduce elements of its cost structure that were not available to
the Acquired Companies prior to the Acquisitions and the Offering. The
Company's new senior management team brings extensive prior CLEC, ILEC and
public company experience, and its members have held senior operational,
strategic planning, financial and sales positions with their prior employers.
The Company intends to leverage this extensive management experience in the
centralizing of selected areas of operations where it can benefit from its
larger size such as the purchasing of minutes over its leased network and
consolidating its management information, selling and other administrative
functions. The Company also intends to permit the strong management teams of
the Acquired Companies to conduct the customer sensitive aspects of their
operations on a decentralized basis. In order to increase the revenues
provided by its existing customer base, the Company plans to train its sales
force to cross-sell all of the Company's services, with an increased emphasis
on selling local services. The Company believes that a personalized approach
to sales and customer service will enhance its ability to attract and retain
customers who desire the convenience of a fully integrated product offering.
To further enhance its marketing efforts, the Company intends to establish
the "ACG" brand name through co-branding with the established names of the
Acquired Companies.
BUSINESS STRATEGY
The Company's objective is to become a leading provider of integrated
telecommunications services primarily to businesses in Kansas, Minnesota,
Nebraska, North Dakota, Oklahoma, South Dakota and Texas and a significant
provider of such services in Arkansas, Colorado and Montana. The Company
believes that it can achieve its goal of becoming a leading
telecommunications service provider in its target markets by adhering to the
following five-fold strategy:
o Plan Smart -- Focus on small and medium-sized businesses and residential
customers and select vertical market segments in small to mid-sized cities
in the Region. The Company believes that competition from other CLECs and
ILECs is less intense in these areas because, in many cases, the ILECs
have reduced their efforts to serve and defend these territories in
response to the competitive threat in their major market cities. In
addition, by focusing its sales efforts in territories served by ILEC
central offices where collocation is a viable economic alternative, the
Company can build a loyal customer base through the resale of local
services prior to committing to build the infrastructure necessary to
support facilities-based local service.
o Sell Smart --
- Sell into established customer relationships by marketing local
telephone services to the Company's existing yellow page and long
distance customers. Because the Company only recently began to offer
additional telecommunications services to its long distance customers,
only a small portion of these customers has been targeted to subscribe
to the Company's local, Internet access or cellular services. In
addition, the Company has not yet offered its bundle of
telecommunications services to the approximately 75,000 yellow page
customers to which it has access. The Company therefore believes that it
has a substantial reservoir of prospective business customers that is
already familiar with some aspects of the Company's services.
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- Bundle services to bring value to the Company's customers, increase
total revenue per customer, reduce selling costs and minimize customer
churn. The Company currently bundles and bills local, long distance, and
cellular services and believes it can enhance its overall margins by
combining its yellow page and Internet services with these traditional
telecommunications services.
- Offer enhanced services that have less competition and higher margin
potential, such as high speed data transport, Internet access, Web Page
design and support, and integrated voice, data and video communications
services.
o Build Smart -- Predicate growth strategies on the recognition that network
capacity is increasingly becoming a commodity. By first focusing on
acquiring customers through resale of local, long distance, cellular and
Internet services, the Company believes that it can secure customer
relationships, produce a consistent revenue stream, and evolve an economic
strategy for serving customers. The Company's serving strategy includes
not only developing network facilities to directly serve customers, but
also enhancing its OSS to provide network monitoring and control, flow
through provisioning, customer care, and enhanced billing functionality.
During 1998, the Company will resell the network facilities of ILECs to
provide local service to its customers. During 1999 and thereafter, the
Company will continue to focus on reselling local service, while at the
same time implementing a substantial effort to acquire unbundled loops and
local fiber. By interconnecting with the ILEC in the central office and
acquiring unbundled loops, the Company should be able to reduce its cost
of providing service and capture the additional revenue paid by IXCs for
local access. The Company should also be able to further reduce its local
and long distance costs by acquiring rights to local and intercity fiber
and other high bandwidth capacity within the Region. By adding its own
circuit and packet switches to this bandwidth, the Company can add value,
offer new products, and better control the quality of service. Finally,
where economically advantageous, the Company intends to construct fiber
and other network facilities.
o Grow Smart --
- Increase the Company's sales force to rapidly market the Company's
services in all targeted service areas and thereafter to expand into
other areas within the Region. The Company recognizes it has an
opportunity to expand its yellow page base into other market areas as
well as to expand its service offering with World Pages, a specialized
Web site development and hosting service to which ACG has the exclusive
marketing rights in its service area.
- Evaluate attractive acquisition candidates in the Region. The Company
initially intends to target leading local companies whose customers can
be added to the Company's existing network without significant
expenditures for infrastructure additions. By aggregating the traffic of
several companies onto its existing network, the Company expects to
increase the utilization of equipment, consolidate its buying power and
increase its ability to negotiate more attractive contracts with
third-party suppliers of network services.
- Pursue the formation of additional strategic alliances with other yellow
page publishers, utility companies, cooperatives and others in order to
create marketing alliances that give the Company access to large, stable
customer bases in its market areas to which it can sell its bundle of
telecommunications services. The Company currently has a five-year
strategic relationship with FPI, a 20-year publisher of yellow page
directories in 15 markets in the Region. The Company's
telecommunications sales force will have access to FPI's 29,000 yellow
page advertisers in the Region. Because of one of the Acquired
Companies' purchase of PAM COMM, a division of PAM Oil, Inc., the
Company has another strategic relationship that will allow it to solicit
PAM Oil, Inc.'s approximately 15,000 business customers primarily in
Idaho, Minnesota, Montana, North Dakota and South Dakota. Finally, the
Company and Northwestern have entered into an agreement regarding the
possible creation of a strategic alliance that would permit ACG to
market its telecommunications services to that utility's approximately
100,000 electric and natural gas business and residential customers in
South Dakota and Nebraska. See "The Company -- Strategic Relationships."
o Serve Smart -- Provide not only the highest quality customer service but
also become an industry leader in the deployment of innovative technology
and services. The Company believes that by prudently
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using new technology and by offering new services, especially enhanced
data applications, it can become a low cost provider, maintain high value
for its customers and differentiate itself from other commodity providers.
These services will include data transport services such as frame relay,
transparent LAN, Internet content, and other packet-based integrated
multimedia services. Certain members of the Company's senior management
team have considerable experience in developing and deploying these
services.
PRODUCTS AND SERVICES
The Company primarily provides retail telecommunications services
principally to business customers in the Region. Currently, the Company
offers long distance, local, Internet access, cellular and other enhanced
services to customers primarily in Kansas, Minnesota, Nebraska, North Dakota,
Oklahoma, South Dakota and Texas and to a lesser extent in Arkansas, Colorado
and Montana. The Company currently provides its local services on a resale
basis through Southwestern Bell and U S WEST. The Company's other services
include private lines, and the sale, installation and service of telephone
equipment. The Company also publishes yellow page directories serving 23
market areas in Texas, Oklahoma and California.
Long Distance. The Company offers a full range of retail long distance
services, including traditional switched and private line long distance, toll
free (800/888), and operator services, to almost 35,000 business and over
10,000 residential customers. The Company's long distance service is
generally accessed from the customer's location using "1+" dialing, and the
Company primarily targets business customers because of the greater volume
and relatively higher profitability of their business. Residential customers
are desirable, however, because they frequently use the Company's network
during off-peak hours. High volume customers may lease dedicated access lines
in order to reduce their costs of service. Toll-free services are utilized by
customers who have a substantial number of incoming long distance calls.
Local Services. In early 1997, the Company began to resell the local
exchange services primarily of Southwestern Bell and U S WEST. At November
30, 1997, the Company was providing approximately 17,500 local access lines
to customers in Kansas, North Dakota, South Dakota and Texas and was
authorized to resell local service in four other states in the Region. The
Company plans to promptly seek authorization to resell such services in the
remainder of the Region. Once the Company generates a critical mass of
customers in a market area and outstanding regulatory issues are resolved,
the Company may expand its facilities to provide local service over its own
network, supplemented by other local exchange carriers' unbundled facilities.
Cellular Services. As of November 30, 1997 the Company provided cellular
service on a resale basis to more than 2,200 customers in Iowa, Nebraska,
North Dakota and South Dakota.
Telephone Equipment and Maintenance Services. The Company sells and
installs customer premise equipment such as telephones, office switchboard
systems and, to a lesser extent, PBXs, manufactured by Toshiba America
Information Systems, Panasonic, Inc., Harris Corporation and others. As of
November 30, 1997, the Company serviced over 2,800 customers in the Wichita,
Kansas market. The Company intends to offer these services in additional
markets in the future, with the goals of enhancing and supporting the
Company's sale of local and long distance services and facilitating customer
retention.
Wholesale Services. The Company currently resells leased line capacity to
other carriers and owns a 49% interest in KINNET, the owner or operator of an
approximately 880-route mile fiber optic network in Kansas. The Company's
investment in KINNET is accounted for on the equity method of accounting. See
"--Network Facilities and Carrier Agreements -- KINNET."
Yellow Page Publishing. During the twelve months ended November 30, 1997,
the Company produced and distributed an aggregate of approximately 3.1
million copies of 20 annual yellow page telephone directories in Oklahoma and
Texas, including many of the Company's target telecommunications markets.
These locations served include: Alvin/Friendswood/Pearland, Amarillo,
Arlington, Baytown, Clear Lake City, Denton, Fort Worth, Grand Prairie,
Humble/Kingwood, Irving, Killeen, Lufkin/Nacodoches, Northeast Tarrant
County, Pasadena, Temple/Belton, Waco, and Wichita Falls, Texas; Enid, Lawton
and Tulsa, Oklahoma. The Company has published six annual yellow page
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directories in California, including Monterey Peninsula-Salinas, Santa Cruz
and Palo Alto, California. The Company will not continue to publish the other
three directories in California after 1997. The Company is at present
evaluating the publication of additional yellow page directories covering
other portions of the Region, but is contractually prohibited from publishing
a yellow page directory in Oklahoma City or its metropolitan area until after
the fifth anniversary date of the acquisition of Feist Long Distance. The
start-up costs associated with the development of a new directory for a
typical population center are substantial. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Certain Acquired
Companies -- Great Western Directories, Inc." Great Western derives its
revenue primarily from the sale of advertising space in its directories. It
contracts with third parties for the printing of its directories. The Company
believes that the telephone directories provide valuable marketing
opportunities for its bundle of telecommunications services. The Company
intends to utilize Great Western's sales force of approximately 170 direct
sales personnel, including approximately 20 telemarketers, to sell both
advertising space in Great Western's telephone directories and the Company's
telecommunications services.
Enhanced Services. The Company believes that it can significantly increase
its revenues and margins and reduce customer churn by offering enhanced
telecommunications services to its customers. By buying bandwidth in bulk and
acquiring rights to fiber, the Company believes that it can use its own
switching resources to provide multiple services to each individual customer
while at the same time enabling many customers to use the same network
resources simultaneously. In addition, these network resources can be
monitored and controlled effectively from a central location. This efficiency
creates value for the customers and enhanced profitability potential for the
Company. The Company intends to further develop and offer the following
enhanced services:
o Transparent LAN Service -using leased and acquired high bandwidth
networks the Company will provide business customers seamless native
speed point-to-point Ethernet, Token Ring, or other high speed transport
service.
o Fast Packet Service -using its switches and unbundled local loops, tail
circuits, and its intercity capacity, the Company will offer customers
Frame Relay, ATM and other packet services for local point-to-point
connections, intercity connections, or access to national and
international packet switched networks.
o Internet Access -in conjunction with one or more highly qualified
Internet service providers ("ISPs"), the Company will offer Internet
access as a bundled service to its business and residential customers.
The Company may seek to acquire an ISP and thereby provide Internet
content as well as access.
o Web Hosting and Enhanced Internet Business Services -- Great Western is
currently marketing World Pages, a specialized Web Page service, to its
yellow pages customers in its target markets. World Pages provides an
opportunity not only to provide customers with Web page design and
support, but also to expand into Web based advertising and electronic
commerce. The Company will aggressively enhance and market its Web based
product offerings with World Pages as a cornerstone of that service.
o Integrated Communications Services -by early 1999, the Company intends
to market a new type of integrated telecommunications service to small
and medium-sized businesses in the Region. The Company intends to use
advanced packet switching technology to integrate voice, data, and
multimedia onto one network. This service will feature full LAN support
using virtual LAN technology, telephone and video over LAN, local
calling, long distance calling, Internet access, LAN to LAN access for
E-commerce as well as help desk and software upgrade service. Customer
assistance will be expedited with "reach through" technology for
downloading software and trouble resolution. Through central software
management, applications "metering" (paying only for the number of
applications in use) and similar arrangements with software vendors, the
Company expects to enhance the profitability of its integrated
communications services. Full help desk services will be available under
various billing plans as will off-line storage, data image retrieval and
similar services. The foregoing services may be offered in conjunction
with strategic partners.
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o Specialize Vertical Market Applications -because the Company's markets
include many smaller communities, the Company will use its intercity
capabilities to deliver integrated solutions to specially targeted
institutions and businesses. The Company will leverage its expertise in
telephony, data, and network management by partnering or acquiring
companies with specific solutions with high demand in a given market
segment. For example, the Company may seek to partner with a company
offering tele-medicine and records management software by jointly
marketing these services in its serving area. The Company will develop
and support these products through a centralized group.
NETWORK FACILITIES AND CARRIER AGREEMENTS
On-Net. The Company has an extensive communications network within the
Region and upon which the Company can transmit its customer's long distance
calls. The Company's "on-net" facilities consist of (i) the Company's
switches, (ii) leased access trunks that connect the Company's switches to
the ILEC central offices, (iii) leased lines that connect the Company's high
volume business customers directly to its switches, and (iv) leased lines and
access trunks that connect the Company's switches to certain points of
presence and central offices in the Region. Once a long distance call reaches
one of the Company's switches, it can be routed "on-net" over the Company's
network of leased lines to a point of presence in the city of its
destination; or, if the Company does not have an "on-net" connection, the
call can be routed over the network of another carrier from which the Company
purchases access, generally on a usage basis, for the transmission of the
calls on that carrier's system. Transmissions on facilities owned by others
are referred to as "off-net" transmissions.
To provide its services, the Company offers various types of dedicated
fiber optic lines that operate at different speeds and handle varying amounts
of traffic to provide appropriate solutions to its customers' needs.
o DS-0 -- A dedicated line service that meets the requirements of everyday
business communications, with transmission capacity of up to 64 kilobits
of bandwidth per second (a voice grade equivalent circuit). This service
offers a basic low capacity dedicated digital channel for connecting
telephones, fax machines, personal computers and other telecommunications
equipment.
o T-1 or DS-1 -- A high speed channel typically linking high volume
customer locations to ILECs or other customer locations. Used for voice
transmissions as well as the interconnection of local area networks, T-1
or DS-1 service accommodates transmission speeds of up to 1.544 megabits
per second, the equivalent of 24 DS-0 circuits. The Company offers this
high-capacity service for customers who need a larger communications
pipeline.
o DS-3 -- This service provides a very high capacity digital channel with
transmission capacity of 45 megabits per second, which is equivalent to
28 DS-1 circuits or 672 DS-0 circuits. This is a digital service used by
ILECs for central office connections and by some large commercial users
to link multiple sites.
The Company owns and operates six digital switches: one Harris 2020LX
digital tandem and local switch located in Dallas, Texas; three Harris 2020
digital tandem switches located in Sioux Falls, South Dakota; one Northern
Telecom DMS 250 digital tandem switch located in Wichita, Kansas; and one
Stromberg Carlson digital tandem switch located in Oklahoma City, Oklahoma.
Furthermore, KINNET owns a Northern Telecom DMS 500 with local and long
distance switching capability located in Moundridge, Kansas.
Following the Offering the Company believes that it can enhance the
functionality and reduce the costs of its "on-net" facilities by (i)
centralizing network management in a single location, (ii) connecting its
various switches with leased high capacity fiber optic cables to increase
least cost routing flexibility, (iii) installing digital access cross
connects or other types of nodes that permit the Company to access local
exchange carriers' switches without installing a switch and (iv) leveraging
the higher traffic volume of the Acquired Companies to secure rate reductions
on the cost of usage-based leased lines because of materially increased
traffic volume available for transmission over such leased lines.
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Off-net. MCI and WorldCom provide the majority of the Company's long
distance "off-net" transmission services. The Company has two off-net carrier
agreements with one of the Dominant Long Distance Carriers that expire in
February 1998 and September 1999 and provide for minimum monthly commitments
of $225,000 and $200,000, respectively. If the minimum usage level is not
met, an additional amount is due, although the aggregate will not exceed the
monthly minimum. Since the inception of the agreements, the minimum usage
levels under these contracts have been met and the Company has not incurred
any cash payments in lieu of minimum usage requirements under these
contracts. The Company's contracts with these companies contain terms and
conditions that are customary in the industry, do not impose unusual burdens
and can be readily replaced upon comparable terms and conditions by
arrangements with other carriers.
FirstTel entered into a long distance resale agreement with Total Network
Services in July 1996 with an initial term of 24 months. This agreement
provides for a minimum monthly payment obligation of $75,000, rising to
$100,000 per month in the last six months of the agreement. The minimum usage
levels under this contract prior to October 1, 1997 have been waived and
subsequent levels have been reduced to $25,000 per month to the end of the
contract. Through an acquisition, FirsTel has also recently assumed a
take-or-pay contract with WorldCom with a $25,000 per month minimum through
July 1999. The Company has no other take-or-pay contracts.
The Company believes that the aggregate traffic volume of the Acquired
Companies will enable the Company to negotiate more favorable "off-net"
carrier agreements than any individual Acquired Company could negotiate based
upon its individual traffic volume.
KINNET. The Company owns 49% of the outstanding capital stock of KINNET,
the owner or operator of an approximately 880-route mile fiber optic network
in Kansas. KINNET is a carriers' carrier and currently serves 26 counties,
105 communities and over 60,000 end users in Kansas. It also sells private
line services of DS-1 and DS-3 capacity to interexchange carriers, cellular
telephone carriers, independent local telephone companies, business and
government accounts and other long distance telephone service providers such
as the Company. KINNET operates a Northern Telecom DMS 500 switch located in
Moundridge, Kansas. In 1996, this switch provided approximately 104 million
minutes of equal access time or "1+" dialing services for approximately 18
independent local telephone companies in Kansas. KINNET also provides
wholesale termination services for other long distance telephone companies.
Feist Long Distance, one of the Acquired Companies, intends to transfer its
entire customer base of switched long distance minutes to the KINNET switch
after the Offering. KINNET has agreed to apply $5.0 million of the $10.0
million direct cash investment by the Company to the buildout in 1998 and
1999 of a 537-mile, $21.5 million network extension from Wichita, Kansas to
the greater Kansas City metropolitan area with a leg to Tulsa, Oklahoma that
will provide self-healing redundancy to its fiber optic network. KINNET has
advised the Company that it expects to finance the balance of the expansion
with loan proceeds from the RTFC. In 1996, the KINNET network operated at
99.9% reliability. The network is regularly tested and serviced and is
monitored 24 hours per day.
The remaining 51% of KINNET is owned by Liberty, and the shares owned by
Liberty and ACG are subject to a 10-year stockholders' agreement. Under that
agreement ACG is entitled to elect four directors and Liberty is entitled to
elect five directors. After the Offering, KINI, L.C. will continue to manage
KINNET pursuant to a management agreement. KINI, L.C. is owned by, among
others, independent Kansas telephone companies that are significant customers
of KINNET. E. Clarke Garnett, President of KINNET, KINI, L.C. and Liberty,
has agreed to become a director of ACG effective upon the Offering.
SALES AND MARKETING
The Company intends to focus its sales efforts primarily on business
customers in the Region. The Company's marketing strategy is built upon the
belief that small to mid-sized business customers prefer one supplier for all
of their telecommunications services. The Company believes that it can
effectively compete for business customers based upon price, accurate billing
of a bundle of services on a single invoice, quality of service, and existing
relationships with yellow page advertisers of the Company or one of its
strategic partners. The Company's management believes that high quality
training is a prerequisite
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for customer focused selling and superior customer service, and as a result
the Company intends to initiate an intensive training program for each member
of the Company's sales force.
Sales and marketing of the Company's telecommunications services were
conducted, as of November 30, 1997, by approximately 85 direct sales
personnel including approximately 20 telemarketers. As of the same date,
advertising space in the Company's yellow page directories was sold by Great
Western's direct sales force of approximately 170 persons, including
approximately 20 telemarketers, which the Company plans to train to
cross-sell the Company's telecommunications services in conjunction with the
sale of advertising space in its directories. The Company intends in 1998 to
increase its direct sales force by approximately 150 new direct sales
personnel as well as expand its staff of telemarketers. Additional directory
sales personnel will be needed to expand into new markets and also to call on
existing customers, since the marketing of telecommunications services will
increase the length of time of each sales call. The Company's expanded direct
sales force will focus on increasing revenues from existing business
customers by offering an integrated bundle of telecommunications services and
emphasizing the marketing of competitive local service to customers who have
not previously been offered this service.
The Company believes the addition of Great Western's sales force in
selling telecommunications services will greatly enhance the Company's sales
and marketing efforts. It will provide the Company with an immediate presence
in Great Western's markets where it does not yet provide integrated
telecommunications services, but where the Company expects to do so in the
future. The Company's sales force will begin marketing telecommunications
services to existing directory customers in Great Western's current markets,
and as Great Western enters new markets, the sales force will jointly market
directory advertising and telecommunications services. The directories will
contain detailed descriptions of the Company's services, and instructions on
how to order the Company's bundle of services. In effect, the directories
will serve as advertising for the Company's telecommunications services. The
Company believes that directories are commonly used sources of information
that will provide the Company with a long-term marketing presence in the
businesses and residences that receive and review the Great Western
directories.
In addition to the field marketing sales force in the Region, the Company
plans to develop a small group of highly experienced and technologically
proficient major accounts sales persons and sales engineers. This group will
market more complex solutions, including enhanced services, to targeted large
customers in the Region. The Company believes that in this way it can
continue the focus of its local sales forces on the primary target segment of
small and mid-sized businesses while at the same time availing itself of the
opportunity to serve specific large customers.
COMPETITION
Telecommunications
The telecommunications industry is highly competitive. The Company
competes primarily on the basis of pricing, accurate billing of a bundle of
services on a single invoice, quality of service and customer dissatisfaction
with the service provided by existing carriers. The ability of the Company to
compete effectively will depend on its ability to maintain high quality
services at prices generally equal to or below those charged by its
competitors. In particular, price competition in the long distance market has
generally been intense and is expected to increase. Many of the Company's
competitors (such as the Dominant Long Distance Carriers on an interLATA
basis and Southwestern Bell and U S WEST on an intraLATA basis) have
substantially greater financial, personnel, technical, marketing and other
resources, significantly larger numbers of established customers and more
prominent name recognition than the Company and utilize extensive
transmission networks. Certain of the Company's competitors may have lower
overhead cost structures and, consequently, may be able to provide their
services at lower rates than the Company. In addition, the Company will also
increasingly face competition in the long distance market from local exchange
carriers, switchless resellers and satellite carriers and may eventually
compete with public utilities and cable companies. In particular, RBOCs such
as Southwestern Bell and U S WEST are now allowed to provide interLATA long
distance services outside their home regions, as well as interLATA mobile
services within their regions. They will be allowed to provide interLATA long
distance
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services within their regions after meeting certain requirements of the
Telecommunications Act intended to foster opportunities for local telephone
competition. The RBOCs already have extensive fiber optic cable, switching,
and other network facilities in their respective regions that can be used for
their long distance services.
The Company's principal competitor for local exchange services will be the
ILEC in each particular market, including either Southwestern Bell or U S
WEST in virtually all of the Company's initial market areas. The ILECs will
enjoy substantial competitive advantages arising from their historical
monopoly position in the local telephone market, including their preexisting
customer relationship with all or virtually all end users. Furthermore, the
Company will be highly dependent on the competing ILEC for local network
facilities and wholesale services required in order for the Company to
assemble its own local retail products. The Company will also face
competition from CLECs, some of whom have already established local
operations in the Company's target markets.
The Company generally prices its services at a discount to the primary
carrier (or carriers) in each of its target markets. The Company has
experienced, and expects to continue experiencing, declining revenue per
minute in many of its markets as a result of increased competition, although
due to technological innovation and substantial available transmission
capacity, transmission costs in the industry have historically declined at a
more rapid rate than prices. There can be no assurance that this cost trend
will continue. Some industry observers have predicted that, early in the next
decade, telephone charges will no longer be based on the distance a call is
carried and hence the Company's results of operations may be adversely
affected. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Certain Acquired Companies -- Overview of the
Acquired Companies Sources of Revenues and Expenses."
Large long distance carriers, such as some of the Dominant Long Distance
Carriers, have begun to offer both local and long distance telecommunications
services. In addition, ILECs are expected to compete in each other's markets
in some cases. For example, in the future RBOCs may provide local services
within their respective geographic regions in competition with independent
telephone companies, as well as outside their regions. Wireless
telecommunications providers may develop into effective substitutes for
wireline local telephone service. Certain long distance companies are also
considering using this strategy. In addition, if local access carriers expand
their toll free calling areas, traffic which might otherwise have been
carried by the Company as long distance traffic may be carried by the Company
as local traffic, or carried by the other carrier. Utilities companies are
also entering into the telecommunications business. The Company also competes
with numerous direct marketers and telemarketers and equipment vendors and
installers with respect to certain portions of its business.
Yellow Page Directories
Great Western competes for advertising dollars to finance the publication
of its yellow pages directories with the RBOCs, other ILECs and independent
publishers of yellow page directories, many of whom have substantially
greater resources than the Company. Based upon independent surveys, Great
Western believes that between 40% and 60% of the users of yellow page
directories in most of its market areas generally use Great Western's
publications when they consult yellow page directories. The Company believes
that Great Western is among the four largest publishers of independent yellow
page directories in the United States. Southwestern Bell is Great Western's
principal competitor in its market areas.
REGULATION
Overview. The Company's services are subject to federal, state and local
regulation. The Company, through its wholly owned subsidiaries, holds various
federal and state regulatory authorizations. The FCC exercises jurisdiction
over telecommunications common carriers to the extent they provide, originate
or terminate interstate or international communications. The FCC also
establishes rules and has other authority over certain issues related to
local telephone competition. State regulatory commissions retain jurisdiction
over telecommunications carriers to the extent they provide, originate or
terminate intrastate
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communications. Local governments may require the Company to obtain licenses,
permits or franchises in order to use the public rights-of-way necessary to
install and operate portions of its networks.
Federal Regulation. The Company is categorized as a non-dominant carrier
by the FCC, and as a result is subject to relatively limited regulation of
its interstate and international services. Certain general policies and rules
apply (such as a current requirement for the filing of tariffs, which may be
eliminated for domestic interstate service), as well as certain reporting
requirements, but the Company's rates and practices are not routinely
reviewed. Each of ACG and the Acquired Companies engaged in providing long
distance telephone services has obtained or is seeking all authority required
by the FCC to conduct its international long distance business and expects to
have all authority, the lack of which would be material, prior to the
consummation of the Offering. As a non-dominant carrier, the Company may
install and operate wireline facilities for the transmission of domestic
interstate communications without prior FCC authorization.
The FCC also imposes prior approval requirements on transfers of control
of regulated companies and assignments of operating authorizations. The FCC
has the authority generally to condition, modify, cancel, terminate or revoke
operating authority for failure to comply with federal laws or the rules,
regulations and policies of the FCC. Fines or other penalties also may be
imposed for such violations. There can be no assurance that the FCC or third
parties will not raise issues with regard to the Company's compliance with
applicable laws and regulations.
Under the Communications Act of 1934 as amended, and the rules,
regulations and policies of the FCC, the Company is required to provide its
services pursuant to just, reasonable and non-discriminatory rates and
practices. This includes the requirement that the Company's rates for
interexchange service to rural and high cost areas be no higher than those
charged to urban areas and that the same rates for the same interstate
interexchange services be applied in every state in which the Company offers
such communications services. In addition, as a communications common carrier
engaged in the provision of interstate communications, the Company is
required to pay annual regulatory fees to the FCC (in an amount based on its
proportionate share of gross interstate revenues), provide Telecommunications
Relay Service ("TRS") for the hearing and speech impaired in its operating
areas (either directly, through designees, or in concert with other
carriers), and make annual contributions to the TRS Fund (also based upon the
Company's share of gross interstate revenues) and, in the near future, the
Universal Service Fund.
The FCC also regulates the interstate access rates charged by ILECs for
the origination and termination of interstate long distance traffic. Those
access rates make up a significant portion of the cost of providing long
distance service. The FCC has recently announced changes to its interstate
access rules that will result in restructuring of the access charge system
and changes in access charge rate levels. These changes will reduce
per-minute access charges and substitute new per-line flat-rate monthly
charges. These actions are expected to reduce access rates, and hence the
cost of providing long distance service, especially to business customers.
However, the full impact of the FCC's new decisions will not be known until
those decisions are implemented over the next several years, during which
time parties may ask the FCC to reconsider its decision. AT&T has committed
to reduce its long distance rates to reflect access cost reductions, and
other competitors of the Company are likely to make similar reductions. In
such event, the Company may need to reduce its rates in response to
competitive pressures. In a related proceeding, the FCC has adopted changes
to the methodology by which access has been used in part to subsidize
universal telephone service and other public policy goals.
The Telecommunications Act also gives the FCC a substantial role in
establishing rules for the implementation of local telephone competition. The
Telecommunications Act imposes a variety of new duties on ILECs in order to
promote competition in local exchange and access services, and the FCC has
authority to develop rules to implement these duties. Some smaller
independent ILECs may seek suspension or modification of these obligations,
and some companies serving rural areas are exempt from them.
In that regard, on August 8, 1996, the FCC adopted the Interconnection
Decision to implement the interconnection, resale and number portability
provisions of the Telecommunications Act. The Intercon-
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nection Decision established rules pursuant to which ILECs would interconnect
their networks with the networks of CLECs on the basis of reasonable and
non-discriminatory rates. The Interconnection Decision also established rules
governing the rights of CLECs to obtain and use elements of the ILECs'
networks at cost-based rates either to supplement or substitute for
alternative local network facilities that the CLECs would otherwise be
required to install. In addition, the Interconnection Decision sets rules
governing a CLEC's access to wholesale versions of the ILECs' retail local
services for resale. The ILECs were required to establish administrative
support systems so that these services and functionalities could be made
available to other carriers on a nondiscriminatory basis. The Interconnection
Decision also created rules to deal with reciprocal compensation for the
transport and termination of local telecommunications, non-discriminatory
access to rights of way, and related matters. A related FCC order adopted the
same day established rules implementing the Telecommunications Act with
respect to local and toll dialing parity among competitors; nondiscriminatory
access to telephone numbers, operator services, directory assistance and
listings, network information; and reform of numbering administration.
Some of these rules have yet to be implemented, while others have been
struck down on appeal. The Telecommunications Act provides that ILECs and
other carriers will attempt to negotiate interconnection agreements pursuant
to the rules developed by the FCC. Where those negotiations are not
successful, state public utility commissions ("PUCs") act as arbitrators,
subject to the rights of the parties to seek further appeals. To date a
number of interconnection agreements have been negotiated or arbitrated, but
nevertheless important pricing and operational issues remain to be resolved
in future proceedings.
In addition, the U.S. Court of Appeals for the Eighth Circuit has
responded to appeals from the ILECs by vacating certain portions of the
Interconnection Decision, including rules governing the rates that ILECs may
charge for use of their network elements and services. The court had
initially granted a stay of certain provisions of the Interconnection
Decision, including the pricing rules and a rule that would have permitted
new entrants to "pick and choose" among various provisions of existing
interconnection agreements. All other provisions of the Interconnection
Decision and related FCC orders were to remain in effect pending resolution
of the appeal on the merits. Although the judicial stay of the
Interconnection Decision did not prevent the Company from attempting to
negotiate other interconnection agreements with local exchange carriers, it
did create uncertainty about the rules governing pricing, terms and
conditions of interconnection agreements, and could have made negotiating
such agreements more difficult and protracted. The FCC applied unsuccessfully
to the U.S. Supreme Court to vacate the judicial stay, but on July 18, 1997,
the Eighth Circuit issued an opinion which, among other things, held that the
stay had expired. The decision also invalidated key elements of the
Interconnection Decision and stated that the law grants the state
commissions, not the FCC, the authority to determine rates involved in the
implementation of the local competition provisions of the Telecommunications
Act. More specifically, the court overturned the FCC's pricing guidelines,
the "pick and choose" rule, and some portions of the FCC unbundling rules,
including the requirement that ILECs recombine network elements that are
purchased by CLECs on an unbundled basis. The court upheld, however, the
FCC's view of the network elements that ILECs must unbundle, found that
nothing in the Telecommunications Act requires a CLEC to own or control a
telecommunications network before being able to purchase unbundled elements,
and affirmed certain other aspects of the Interconnection Decision. Several
interexchange carriers (including AT&T, MCI and Sprint) filed petitions for
rehearing with the Eighth Circuit, requesting the court to reinstate certain
of the FCC rules that were found unlawful. Various ILECs filed petitions of
their own regarding aspects of the court's decision that they found
objectionable. On October 14, 1997, the court denied the petitions of the
interexchange carriers, granted those of the ILECs and struck down an
additional FCC rule established in the Interconnection Decision that, it
held, would have the effect of permitting a CLEC access to an ILEC's network
elements on a bundled as well as on an unbundled basis. The court's decision
thereby prevented CLECs from acquiring bundled network elements at cost-based
rates, and made only unbundled elements available at those rates. In a
separate decision on August 22, 1997, the Eighth Circuit held that the FCC
exceeded the scope of its jurisdiction by issuing rules concerning dialing
parity that affect essentially intrastate services and local, interstate
calls within a single LATA.
The FCC, AT&T, MCI, Sprint, WorldCom and a large number of CLECs and
others filed petitions for certiorari requesting the United States Supreme
Court to overturn both of the Eight Circuit's
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decisions. The petitions asserted, among other things, that the Eighth
Circuit erred in finding the FCC lacked jurisdiction to promulgate rules
implementing the local competition pricing provisions of the
Telecommunications Act of 1996 and in rejecting the "pick and choose"
provisions of the FCC's Rules. On January 26, 1998, the United States Supreme
Court granted the petitions for certiorari filed by the FCC, various IXCs,
CLECs and others challenging the Eighth Circuit's decision. In addition, the
Supreme Court granted conditional petitions for certiorari filed by the ILECs
that, among other things, challenged the Eighth Circuit's decisions to uphold
FCC rules that would give new competitors cost-based access to ILECs'
unbundled network elements. These petitions have been consolidated, and one
hour of oral argument has been allotted during the Supreme Court's next term.
There can be no assurance that the stricken portions of the FCC's rules will
be reinstated on appeal or on further consideration by the FCC, or that the
Company will be able to obtain interconnection agreements on terms acceptable
to the Company. There can also be no assurance that the FCC's rules will
prove sufficient, as implemented in the negotiation and arbitration process,
to permit local telephone competition to develop as a general matter. In this
latter regard, on July 2, 1997, SBC Communications Inc. ("SBC"), the parent
of Southwestern Bell, filed suit in United States District Court, Northern
District of Texas (Wichita Falls) challenging the constitutionality of the
Telecommunications Act. SBC alleged that Sections 271 through 275 of the Act,
which govern the entry by a regional holding company ("RHC") into long
distance markets and certain other lines of business, are unconstitutional in
four ways: (i) the sections deny a RHC's First Amendment free speech rights
by imposing a four-year separate subsidiary requirement for entry into
electronic publishing; (ii) the provisions violate the separation of powers
clause by revoking the legally protected monopolies that were established in
the Divestiture; (iii) the sections infringe on the equal protection clause
of the Fifth Amendment by restricting long distance entry for RBOCs and not
their competitors; and (iv) the provisions violate the "Bill of Attainder"
clause by employing legislative means to tread on judicial boundaries and
bring about a loss of civil rights and business opportunities. SBC filed a
motion for summary judgment with the Court on July 30, 1997. SBC's motion
alleged that the Act is "causing irreparable harm, including denial of
significant business opportunities, the loss of customer goodwill and
infringement of First Amendment rights."
On December 31, 1997, the Court granted SBC's motion. The Court found that
the Special Provisions constitute a "bill of attainder" and are therefore
unconstitutional because they (i) identify the Bell Operating Companies
("BOCs") as a specific group; (ii) inflict punishment on that group; and
(iii) do so without giving the BOCs the benefit of a judicial trial. The
Court devoted the bulk of its analysis to the second of these points,
concluding that (a) the Special Provisions are comparable to burdens that the
U.S. Supreme Court has historically identified as punitive (observing that
they prevent the BOCs from entering lucrative markets that are open to their
competitors, and reinstate certain restrictions on BOC activities that were
imposed by the consent decree that broke up AT&T but had long since been
removed); (b) they cannot reasonably be said to further non-punitive
legislative purposes (on grounds that they presume the BOCs' guilt for
anticompetitive conduct that has not yet taken place); and (c) the
legislative history of the Special Provisions evidences an intent to punish
the BOCs (in that the Special Provisions perpetuate constraints on the BOCs
that were imposed by the AT&T consent decree, which was crafted in response
to alleged anticompetitive conduct by AT&T and not by the BOCs themselves).
The Court saw no need to address SBC's equal protection and First Amendment
arguments.
The Court's decision is considered to be controversial by many, and the
United States Department of Justice has joined AT&T, MCI and Sprint in asking
the Court for a stay of the decision's effectiveness pending the filing of an
appeal to the United States Court of Appeals for the Fifth Circuit. MCI has
since filed a notice of appeal with the Fifth Circuit urging that it overturn
the Court's decision. In the meantime, the court has approved a December 30,
1997 request by Bell Atlantic that it be covered by the effect of the
December 31 ruling. The Court has also rejected the request of Ameritech to
join the case, on grounds that it was filed after the ruling. On February 11,
1998, the Court temporarily stayed its order, pending appeal.
The Company has executed comprehensive local exchange resale agreements
with Southwestern Bell, U S West, Sprint and GTE covering eight states in the
Region. These agreements do not completely resolve all pricing and
operational issues for the resale of local services or access to the
unbundled
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network elements. Some of such terms may be affected by legal proceedings
regarding FCC regulatory requirements, the outcome of which will apply to the
industry as a whole. However, the Company believes that these agreements
represent a reasonable initial step in the process of establishing local
service on a commercial basis.
The Company expects to negotiate similar agreements with other ILECs.
However, other carriers who have preceded the Company in the negotiation
process have expressed dissatisfaction with some of the terms of their
agreements, or with the operational support systems by which they obtain the
interconnection they require to provide local services to end users. No
assurance is possible regarding how quickly or how adequately the Company
will be able to take advantage of the opportunities created by the
Telecommunications Act. The Company could be adversely affected if the court
decision reversing some of the new FCC rules, or problems in the related
arbitration and negotiation process, result in increasing the cost of using
ILEC network elements or services, or if such actions otherwise resulted in
delays in the implementation of the Telecommunications Act.
In addition, the Company's plans to provide local telephone service are
heavily dependent upon implementation of provisions of the Telecommunications
Act. The Telecommunications Act preempted state and local laws to the extent
that they prohibited local telephone competition, and imposed a variety of
new duties on ILECs intended to advance such competition, including the duty
to negotiate in good faith with competitors requesting interconnection to an
ILEC's network. However, negotiations with ILECs have sometimes involved
considerable delays and the resulting negotiated agreements may not
necessarily be obtained on terms and conditions that are acceptable to the
Company. In such instances, the Company may petition the proper state
regulatory agency to arbitrate disputed issues. There can be no assurance
that the Company will be able to negotiate acceptable new interconnection
agreements with ILECs or that if state regulatory authorities impose terms
and conditions on the parties in arbitration, such terms will be acceptable
to the Company.
The Telecommunications Act also imposes certain duties on non-ILECs, such
as the Company. These duties include the obligation to complete calls
originated by competing carriers under reciprocal arrangements or through
mutual exchange of traffic without explicit payment; the obligation to permit
resale of their telecommunications services without unreasonable restrictions
or conditions; and the duty to provide dialing parity, number portability,
and access to rights of way. The Company does not anticipate that these
obligations will impose a material burden on its operations. However, given
that local telephone competition is still in its infancy and implementation
of the Telecommunications Act has just begun, there can be no assurance in
this regard.
The Telecommunications Act also establishes the foundation for substantial
additional competition to the Company's long distance operations through
elimination or modification of previous prohibitions on the provision of
interLATA long distance services by the RBOCs and General Telephone Operating
Companies. The RBOCs are now permitted to provide interLATA long distance
service outside those states in which they provide local exchange service
("out-of-region long distance service") upon receipt of any necessary state
or federal regulatory approvals that are otherwise applicable to the
provision of intrastate or interstate long distance service. They also are
allowed to provide long distance services for their cellular and other mobile
services within the regions in which they also provide local exchange service
("in-region service"). The RBOCs will be allowed to provide wireline
in-region service upon specific approval of the FCC and satisfaction of other
conditions, including a checklist of interconnection requirements. (Many of
these additional conditions to entry will be eliminated if the Court's
decision in the SBC case discussed above is affirmed on appeal.) The General
Telephone Operating Companies are permitted to enter the long distance market
without regard to limitations by region. The General Telephone Operating
Companies are also subject to the provisions of the Telecommunications Act
that impose interconnection and other requirements on local exchange
carriers.
The FCC has granted ILECs certain flexibility in pricing their interstate
special and switched access services. Under this pricing scheme, local
exchange carriers may establish pricing zones based on access traffic density
and charge different prices for access provided in each zone. The Company
anticipates that the FCC will grant ILECs increasing pricing flexibility as
the number of interconnection agreements and
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competitors increases. In a pending rulemaking proceeding scheduled for
completion soon, the FCC is expected to announce new and more specific
policies regarding the conditions and timing under which ILECs will be
eligible for such increased pricing flexibility. There can be no assurance
that such pricing flexibility will not place the Company at a competitive
disadvantage, either as a purchaser of access for its long distance
operations, or as a vendor of access to other carriers or end user customers.
Effective January 1, 1998, ILECs became entitled to assess PICC charges
upon switching a customer's service from one provider to another. At the
present time, the Company expects to pay a blended rate of approximately
$5.00 per business and residential customer as a PICC charge. Unless all
interexchange carriers elect to pass these charges along to their customers,
those carriers that elect to absorb the PICC charge will enjoy a competitive
advantage over those that attempt to pass the charge along to their
customers. The Company believes that larger carriers will be better able to
absorb the PICC charges over the short term, and hence will enjoy a
competitive advantage until market conditions drive the cost of the PICC
charge to lower levels. The Company will determine whether to absorb or pass
along the PICC charge once it assesses the action taken by its competitors.
Absorption of the PICC charge would increase the Company's cost of providing
telecommunication services and consequently would adversely impact the
Company's results of operations.
State Regulation. The Company is also subject to various state laws and
regulations. Most PUCs require providers such as the Company to obtain
authority from the commission prior to the initiation of service. In most
states, including Texas, Kansas, Oklahoma, North Dakota, South Dakota and
Nebraska, the Company also is required to file tariffs setting forth the
terms, conditions and prices for services that are classified as intrastate.
The Company also is required to update or amend its tariffs when it adjusts
its rates or adds new products, and is subject to various reporting and
record-keeping requirements.
Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply
with state law or the rules, regulations and policies of state regulatory
authorities. Fines or other penalties also may be imposed for such
violations. There can be no assurance that state utilities commissions or
third parties will not raise issues with regard to the Company's compliance
with applicable laws or regulations.
The Company initially will provide CLEC services in the Region through
resale of the retail local services of the respective ILECs. Certain of the
Acquired Companies have obtained CLEC certification in eight states and are
currently reselling local services in portions of Texas, Kansas, North Dakota
and South Dakota. ACG has initiated proceedings to secure regulatory
approvals for the Acquisitions, and expects to have all approvals the absence
of which would be material prior to the consummation of the Offering. The
Company intends to seek CLEC certification in other states throughout the
Region.
Many issues remain open regarding how new local telephone carriers will be
regulated at the state level. For example, although the Telecommunications
Act preempts the ability of states to forbid local service competition, it
preserves the ability of states to impose reasonable terms and conditions of
service and other regulatory requirements. However, these statutes and
related questions arising from the Telecommunications Act will be elaborated
further through rules and policy decisions made by PUCs in the process of
addressing local service competition issues.
The Company also will be heavily affected by state PUC decisions related
to the ILECs. For example, PUCs have significant responsibility under the
Telecommunications Act to oversee relationships between ILECs and their new
competitors with respect to such competitors' use of the ILECs' network
elements and wholesale local services. PUCs arbitrate interconnection
agreements between the ILECs and new competitors such as the Company when
necessary. PUCs are considering ILEC pricing issues in major proceedings now
underway. PUCs will also determine how competitors can take advantage of the
terms and conditions of interconnection agreements that ILECs reach with
other carriers. It is too early to evaluate how these matters will be
resolved, or their impact on the ability of the Company to pursue its
business plan.
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States also regulate the intrastate carrier access services of the ILECs.
The Company is required to pay such access charges to such carriers that
originate and terminate its intrastate long distance traffic. The Company
could be adversely affected by high access charges, particularly to the
extent that the ILECs do not incur the same level of costs with respect to
their own intrastate long distance services. A related issue is used by
certain ILECs, with the approval of PUCs, of extended local area calling that
converts otherwise competitive intrastate toll service to local service.
States also are or will be addressing various intraLATA dialing parity issues
that may affect competition. It is unclear whether state utility commissions
will adopt changes in their rules governing intrastate access charges similar
to those recently approved by the FCC for interstate access. The Company's
business could be adversely affected by such changes.
The Company also will be affected by how states regulate the retail prices
of the ILECs with which it competes. The Company believes that, as the degree
of intrastate competition increases, the states will offer the local exchange
carriers increasing pricing flexibility. This flexibility may present the
local exchange carriers with an opportunity to subsidize services that
compete with the Company's services with revenues generated from
non-competitive services, thereby allowing ILECs to offer competitive
services at lower prices than they otherwise could. The Company cannot
predict the extent to which this may occur or its impact on the Company's
business.
Valu-Line has been providing intrastate long distance services to
customers in Arkansas since 1992 without the requisite permit from the state
utility commission. Valu-Line has initiated steps to secure the requisite
permit for such activities and no penalties have been assessed to date. While
the Arkansas regulatory authorities have the power to require the forfeiture
of the revenues generated by Valu-Line's unlicensed intrastate activities in
Arkansas (approximately $270,000 through September 30, 1997), Valu-Line is
endeavoring to negotiate a reduced penalty. The Company is negotiating an
appropriate escrow arrangement with the stockholders of Valu-Line or a
reduction in the purchase price to cover such penalty. See also Notes to
Financial Statements of Feist Long Distance for information relating to a
potential liability of approximately $250,000 arising from the provision of
long distance services in Missouri without the requisite state permits.
Local Government Authorizations. In the event the Company determines to
construct any portion of its network, it will be required to obtain
easements, street use and construction permits and licenses or franchises to
install its network using municipal rights-of-way. In some municipalities
where the Company might elect to construct a network, it might be required to
pay license or franchise fees based on a percentage of gross revenues or on a
per linear foot basis. In many markets, the ILECs do not pay such franchise
fees or pay fees that are substantially less than those that might be
required to be paid by the Company, although the Telecommunications Act
requires that in the future such fees be applied in a competitively neutral
manner. To the extent that, notwithstanding the Telecommunications Act,
competitors do not pay the same level of fees as the Company, the Company
could be at a competitive disadvantage.
General. The telecommunications market is in a period of substantial
change and uncertainty. As the Telecommunications Act and related FCC and
state actions are implemented, new issues are likely to arise that can affect
the Company and its business plan. No assurance can be given that future
regulatory developments will not have a materially adverse impact on the
Company or on the value of the Common Stock.
RECENTLY INSTITUTED LITIGATION AGAINST AN ACQUIRED COMPANY
In early February 1998, Valu-Line was served with a petition by four
plaintiffs (including the lawyer filing the suit) which alleged, among other
things, that Valu-Line billed the plaintiffs for services never provided and
intentionally "bumped up" the actual time of services used by plaintiffs in
order to increase Valu-Line's charges to them. The plaintiffs purported to
bring the suit as a class action and alleged violations of the Texas
Deceptive Trade Practices Act, fraud, breach of contract, negligence and
gross negligence. They sought damages in an unspecified amount, further
damages under the Deceptive Trade Practices Act (which could be as much as
triple the actual damages), interest, attorney's fees and such other relief
to which they may have been entitled. The petition contained no details with
respect to
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Valu-Line's alleged conduct. While representatives of Valu-Line advised ACG
that they believe Valu-Line's billing practices have and do conform generally
to industry standards and FCC rate filings and that the plaintiffs'
allegations were without merit, Valu-Line, in order to avoid protracted
litigation, entered into a settlement, a nominal portion of which will be
paid by the Company, and an agreed confidential dismissal with prejudice,
with the four named plaintiffs prior to the certification of the suit as a
class action. The former stockholders of Valu-Line have agreed, severally, to
indemnify the Company for a period of six months after the closing of the
Offering against liabilities, costs and expenses, including legal fees,
relating to similar claims which others may bring in the future. In order to
fund this indemnity obligation, the former stockholders have deposited in
escrow an aggregate of 71,428 shares of Common Stock, and their obligation is
limited to the value of those shares.
REAL PROPERTY AND LEASES
The Company leases its corporate headquarters space in St. Louis, Missouri
from an unaffiliated third party on a month-to-month basis.
The Company owns office buildings in Amarillo and Longview, Texas and
leases office space and facilities in Dallas, Texas; Oklahoma City, Oklahoma;
Wichita, Kansas; Sioux Falls, South Dakota and several other locations. The
leases for these offices expire at various times through January 2002.
The Company may lease or purchase additional office space and switching
and other network facilities in connection with an expansion of its business.
EMPLOYEES
As of November 30, 1997, the Company had over 580 full-time employees,
none of whom is represented by a union or covered by a collective bargaining
agreement. The Company believes that its relationship with its employees is
good.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of
ACG's directors and executive officers (ages as of November 30, 1997). The
Board of Directors (the "Board") will consist of twelve directors, divided
into three classes of directors serving staggered terms. Directors and
executive officers of ACG are elected to serve until they resign or are
removed, or are otherwise disqualified to serve, or until their successors
are elected and qualified. Directors of ACG are elected at annual meetings of
the stockholders. Executive officers of ACG generally are appointed by the
Board shortly after each annual meeting of stockholders.
<TABLE>
<CAPTION>
TERM
AS
DIRECTOR
NAME AGE(1) POSITION(S) WITH COMPANY EXPIRES
---- ------ ------------------------ ----------
<S> <C> <C> <C>
Richard P. Anthony ............ 49 Chairman of the Board, President and Chief 2000
Executive Officer
James F. Cragg................. 46 Executive Vice President, Sales and Marketing and 1998
Director
William H. Zimmer III ......... 44 Executive Vice President, Chief Financial Officer, 1999
Treasurer, Secretary and Director
Richard O'Neal(2) ............. 57 President--Directory Services Group and Director 1999
Fred L. Thurman(2) ............ 47 President--Telecommunications Services Group and 2000
Director
Todd J. Feist(2) .............. 33 Vice President--Kansas/Telecommunications 1999
Services Group and Director
Rod K. Cutsinger .............. 54 Director 2000
Fentress Bracewell(2)(3)(4)(5). 76 Director 1998
E. Clarke Garnett(2)(3)(6) ... 37 Director 1999
Reginald J. Hollinger(2)(3)(4). 34 Director 2000
David M. Mitchell(2)(4)(6) ... 49 Director 1998
G. Edward Powell(6) ........... 61 Director 1998
</TABLE>
- ------------
(1) No person shall be nominated for election, nor elected, as a director
of ACG 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 for which he is being nominated or
elected.
(2) Election will become effective on the closing of the Offering, and the
biographical information set forth herein assumes the consummation of
the Offering.
(3) Member of the Nominating Committee.
(4) Member of the Compensation Committee.
(5) Member of the Audit Committee. The Company intends to promptly identify
and appoint two additional independent directors to the Board and the
Audit Committee no later than the 1998 annual meeting of stockholders
in order to satisfy the requirements of the NYSE.
(6) Elected pursuant to an agreement with ACG or certain stockholders. See
"Certain Transactions -- Voting Arrangements."
Richard P. Anthony joined ACG in November 1997 and was elected Chairman of
the Board, President and Chief Executive Officer of ACG in December 1997.
Since 1993, Mr. Anthony had been employed by Brooks Fiber Properties, Inc.
("Brooks Fiber"), a CLEC and a competitive access provider which has recently
entered into a merger agreement to be acquired by WorldCom. Mr. Anthony
joined Brooks Fiber as its seventh employee, and most recently served as
Regional President of one of the two regions of Brooks Fiber. In that
capacity he had responsibility for directing sales, construction and
operations in 25 cities, including Oklahoma City, Tulsa, Houston, Austin,
Dallas, San Antonio, Kansas City and Minneapolis. Mr. Anthony also chaired
the Brooks Fiber Service Delivery Committee which was concerned with defining
the business practices and recommending changes to the operational support
systems supporting order processing, billing, provisioning, as well as
network monitoring and asset
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administration. Earlier, from March 1993 until August 1996, Mr. Anthony was
Brooks Fiber's Senior Vice President of Marketing and Strategy. From 1991
until 1993, Mr. Anthony was Senior Vice President of Strategy, Marketing and
Network of Intermedia Communications of Florida, Inc. ("ICI"), a competitive
access provider that completed its initial public offering in 1992. From 1989
through 1990, Mr. Anthony was Director, Data Communications, of Telcom USA, a
large long distance company. From 1987, when ICI began operation, to 1989,
Mr. Anthony was Vice President of Strategy, Marketing and Sales of ICI. Mr.
Anthony had spent a number of years in the telecommunications industry prior
to that time.
James F. Cragg was elected Executive Vice President, Sales and Marketing
and Director in December 1997. Since January 1997 Mr. Cragg had been employed
by Brooks Fiber. Mr. Cragg most recently served as Acting Regional President,
Eastern Region, and also as General Manager and Regional Vice President,
Mid-America Region. In these capacities, he had responsibilities for
directing sales, construction and operations in Kansas, Minnesota, Missouri
and Tennessee. From 1995 to 1996, Mr. Cragg was Senior Vice President,
Business Markets for Snyder Communications Inc., an integrated marketing
company. In this capacity, Mr. Cragg was responsible for managing a large
outsourced sales channel (staffed by 650 sales representatives speaking 22
foreign languages) representing MCI Business to Business Sales as an agent to
MCI. From 1994 to 1995, Mr. Cragg was a Director of Sales and Marketing for
Ernst & Young. From 1983 to 1994, Mr. Cragg held various responsibilities at
MCI. His last position at MCI was Director of Sales and Service, Mid-America
Region.
William H. Zimmer III was elected Executive Vice President, Chief
Financial Officer, Treasurer Secretary and a Director of ACG in December
1997. Since 1991 Mr. Zimmer had been employed as Treasurer and Secretary of
Cincinnati Bell Inc., ("CBI"), the holding company of an incumbent local
exchange carrier. For more than nine years prior to that time, he served in a
variety of finance positions with CBI. As Secretary and Treasurer of CBI, Mr.
Zimmer was primarily responsible for that company's corporate financings,
risk management, trust asset management, cash management, corporate
investments and rating agency and exchange relationships. Mr. Zimmer has
agreed to facilitate an orderly transition of his duties at CBI by consulting
at mutually convenient times with officials of CBI through the first quarter
of 1998.
Richard O'Neal is President -- Directory Services Group and a Director of
ACG. He founded Great Western in 1984 and has served as its President since
that time. Mr. O'Neal also has served as an officer and director of several
publishing organizations such as the Yellow Page Publishers Association and
the Association of Directory Publishers, two of the largest organizations in
that industry.
Fred L. Thurman is President -- Telecommunications Services Group and a
Director of ACG. He has been President of FirsTel since April 1994. Prior to
that time he served as a consultant to FirstTel for six months. Between 1984
and 1989, Mr. Thurman provided accounting, tax and management advisory
services as a certified public accountant to Dial-Net, Inc., a long distance
telephone company, which was acquired by LDDS, Inc. in 1993. Since 1979 Mr.
Thurman has also been a partner in Thurman, Comes, Foley & Co. LLC, a public
accounting firm in Sioux Falls, South Dakota, but in the last several years
has not been active in the practice.
Todd J. Feist is Vice President -- Kansas/Telecommunications Services
Group and a Director of ACG. He has been President of Feist Long Distance
since February 2, 1996. Prior to that time he had been Network Manager for
Feist Long Distance since April 1, 1994 and before that date had been
Distribution Manager of Feist Publications, Inc. in Lubbock, Texas since
1987.
Rod K. Cutsinger has been a Director of ACG and its predecessor since the
organization of its predecessor in June 1996 and served as Chairman and Chief
Executive Officer from June 1996 until Mr. Anthony assumed those positions in
December 1997. Mr. Cutsinger, the founder of ACG, developed the Company's
initial acquisition strategy and successfully negotiated the definitive
acquisition agreements with the Acquired Companies. In early 1983 Mr.
Cutsinger founded Advanced Telecommunications Corporation ("ATC") and by the
end of that year ATC had acquired six companies and completed an initial
public offering. After selling his interest in ATC, in 1986 Mr. Cutsinger
founded American Funeral Services, Inc. ("AFS"), a publicly held death care
company headquartered in Houston, Texas. In late 1992 AFS was acquired by
Service Corporation International. Thereafter, Mr. Cutsinger founded and
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served as the principal officer of Vadacom, Inc., a switched based long
distance company headquartered in Houston, that sold substantially all its
assets in 1995. See "Certain Transactions -- Additional Background
Information." Mr. Cutsinger is also an executive officer, director and equity
interest owner of CPFF and Consolidation Partners.
Fentress Bracewell is primarily engaged in managing his personal
investments in Houston. Prior to his retirement in 1991, Mr. Bracewell was a
Senior Partner in the law firm of Bracewell & Patterson, L.L.P., having been
one of the founders of that firm in 1945. Mr. Bracewell remains a Founding
Partner and Special Counsel of Bracewell & Patterson, L.L.P., although he has
no continuing equity participation in that firm. He also serves as a director
of First Investors Financial Services, Inc., an automobile finance company.
E. Clarke Garnett has served as President of KINNET, KINI and Liberty,
(the owner of 51%, after the Offering and prior owner of 100% of the
outstanding capital stock of KINNET), since November 1996. Prior to that
time, he had served as an Executive Vice President of these three companies
since May 1994 and as Executive Director since September 1992. Between 1990
and 1992, Mr. Garnett was the General Manager, Western Region, of CommNet
Cellular, Inc.
Reginald J. Hollinger is a Managing Director and Group Head of the
Telecommunications Investment Banking Group at PaineWebber Incorporated, one
of the Representatives of the Underwriters. Mr. Hollinger serves as a member
of the Investment Banking Division's Management Committee. Prior to joining
PaineWebber in 1997, Mr. Hollinger worked at Morgan Stanley & Co.
Incorporated for eight years and was most recently a Principal focusing
exclusively on the telecommunications industry. Mr. Hollinger has a wide
range of corporate finance and mergers and acquisitions experience in the
telecommunications industry.
David M. Mitchell has been engaged primarily as an investor in the
telephone business since 1982 when he founded National Telephone Exchange of
Temple, Texas. Mr. Mitchell sold this and two other telephone companies in
1991 to U.S. Long Distance. Mr. Mitchell owned a 50% interest in Valu-Line at
the time Valu-Line was acquired by the Company.
G. Edward Powell served as Executive Vice President, Chief Financial
Officer and Director of ACG and its predecessor between July and December
1997, after having acted as a consultant to and a director of ACG's
predecessor since September 1996. Mr. Powell joined the accounting firm of
Price Waterhouse LLP in 1959 and served as managing partner of that firm's
Houston office between 1982 and his retirement in 1994. Since his retirement,
Mr. Powell has served as a director of and consultant to five emerging high
technology companies in addition to his involvement with the Company.
OTHER VICE PRESIDENTS
The following table sets forth certain information regarding other Vice
Presidents of Services Groups of ACG who are not considered executive
officers:
<TABLE>
<CAPTION>
NAME AGE VICE PRESIDENT (1)
---- --- ------------------
<S> <C> <C>
Brad Van Leur ..... 41 Marketing/Telecommunications Services Group
Donald R. Sarchet 48 Networks/Telecommunications Services Group
Bill Rhodes ....... 49 Texas/Telecommunications Services Group
Earle Brown ....... 40 Interconnect/Telecommunications Services Group
Larry Baldwin ..... 52 Operations/Directory Services Group
Mark Fields ....... 33 Finance/Directory Services Group
Max Andrews ....... 39 Marketing/Directory Services Group
</TABLE>
- ------------
(1) Election will become effective upon the closing of the Offering, and
the biographical information set forth below assumes the consummation
of the Offering.
Brad Van Leur is Vice President -- Marketing/Telecommunications Services
Group of ACG. Mr. Van Leur has been Vice President Sales & Marketing for
FirsTel since 1995, and between 1993 and 1995 served
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as FirsTel's consultant for long distance. From 1989 to 1993, he served as
regional sales manager for North Dakota, South Dakota, Minnesota, Iowa and
Nebraska for Dial Net, and in 1993 he also served as Director of Operations
in South Dakota for LDDS/WorldCom. From 1987 to 1989 he was Sales Manager for
South Dakota for Computel, a long distance and interconnect company, which
was acquired by Dial Net in 1989. From 1985 to 1987 he served in various
positions for Long Line/Teletech, a long distance company.
Donald R. Sarchet is Vice President -- Networks/Telecommunications
Services Group of ACG. Since 1992, Mr. Sarchet has been Vice President,
Network Operations of Valu-Line. Between 1989 and 1992, he served as Area
Manager -- Field Operations -- North of ATC. From 1984 to 1989, Mr. Sarchet
served in various positions with Clay Desta Digital Corporation. Clay Desta
was acquired by ATC in 1989. Prior to that time, from 1966 to 1982, Mr.
Sarchet served in various positions with Southwestern Bell, including as
Network Service Supervisor in several locations.
Bill Rhodes is Vice President -- Texas/Telecommunications Services Group.
He has been President of Valu-Line since April 1996. Prior to that time, Mr.
Rhodes was employed by Rockwell International, Inc. for more than 20 years in
various engineering, program management, marketing and business development
executive capacities.
Earle Brown is Vice President -- Interconnect/Telecommunications Services
Group. He has served as President of Tele-Systems since January 1995 and
prior to that time had served as Vice President-Operations of Tele-Systems
since November 1989.
Larry Baldwin is Vice President -- Operations/Directory Services Group.
Mr. Baldwin has served as Great Western's Executive Vice President, Secretary
and Treasurer since its inception in 1984. Prior to that time he was involved
in instant printing operations in Amarillo, Texas.
Mark Fields is Vice President -- Finance/Directory Services Group. Mr.
Fields has been Controller of Great Western since December 1994. From August
1990 until December 1994, he was a Manager with KPMG Peat Marwick LLP.
Between August 1987 and August 1990, he was a Senior Auditor for Deloitte &
Touche.
Max Andrews is Vice President -- Marketing/Directory Services Group. Mr.
Andrews, whose sales experience dates back to 1982, has been a sales manager
with Great Western since January 1994; most recently having served as the
General Sales Manager for Texas and Oklahoma. From January 1989 to December
1993, he was a district sales manager for Dun & Bradstreet/Donnelley
Information Publishing in San Diego, California.
DIRECTOR COMPENSATION
Directors of ACG who are also employees of the Company receive no
directors' fees but are eligible to receive, and have received, grants of
stock options under the Company's 1997 Stock Awards Plan. Non-employee
directors receive fees of $1,000 for each board meeting in which they
participate, are reimbursed for reasonable out-of-pocket travel expenditures
incurred and receive options to purchase shares of Common Stock pursuant to
the Directors' Plan upon election to the Board.
In October 1997 ACG adopted the Directors' Plan. The Directors' Plan
provides for the grant of stock options to non-employee directors of the
Company. The Directors' Plan is administered by the Board of Directors and
authorizes the grant of options to purchase up to 300,000 shares of Common
Stock for issuance as nonqualified options. Each director of the Company who
is not an employee of the Company or any of the Company's subsidiaries (an
"Eligible Director"), is granted options to acquire 15,000 shares of Common
Stock on the first to occur of the date of consummation of the Offering or
the date of such director's first election to the Board. Additional options
to acquire 5,000 shares of Common Stock will thereafter be awarded to each
Eligible Director on the date of the annual meeting of stockholders at which
he or she is reelected to serve an additional three-year term as a Director
of the Company. As of the date of the consummation of the Offering, each of
Messrs. Fentress Bracewell, Rod K. Cutsinger, E. Clarke Garnett, Reginald J.
Hollinger, G. Edward Powell and David M. Mitchell will be granted options to
purchase 15,000 shares of Common Stock pursuant to the Directors' Plan at the
initial public offering price. The option will vest in equal annual
installments on the first, second and third anniversaries of the consummation
of the Offering.
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EXECUTIVE COMPENSATION
Neither ACG nor its predecessor has conducted any operations other than
related to the Acquisitions and the Offering, and ACG's predecessor did not
pay any compensation prior to June 1996. The Company anticipates that during
1997 its most highly compensated executive officer and his annualized base
salary will be Mr. Rod K. Cutsinger (who served as Chairman and Chief
Executive Officer until Mr. Richard P. Anthony assumed those positions in
December 1997) -- $300,000. Mr. Cutsinger is no longer an officer or employee
of ACG. In lieu of cash compensation from the Company, Mr. G. Edward Powell
(who served as Executive Vice President and Chief Financial Officer of the
Company until Mr. William H. Zimmer III assumed the position of Executive
Vice President, Chief Financial Officer, Treasurer and Secretary in December
1997) was afforded the opportunity to purchase an aggregate of 100,000 shares
of common stock of the Company's predecessor in October 1996 and January 1997
for an aggregate cash consideration of $5,000. In addition to Messrs.
Anthony, Cragg and Zimmer, who served in their positions for a brief period
in 1997, the only other person to serve as an officer of the Company during
1997 was Brad K. Cutsinger, the son of Rod K. Cutsinger, who is no longer
employed by ACG. No executive officer of ACG's predecessor received
perquisites in 1997, the value of which exceeded the lesser of $50,000 or 10%
of the salary and bonus of such executive.
The persons expected to be the five most highly compensated executive
officers of ACG in 1998 and their expected base salaries are:
<TABLE>
<CAPTION>
EXPECTED
NAME TITLE BASE SALARY
---- ----- -----------
<S> <C> <C>
Richard P. Anthony ... Chairman of the Board, President and Chief $250,000
Executive Officer
James F. Cragg ........ Executive Vice President, Sales and 175,000
Marketing
William H. Zimmer III Executive Vice President, Chief Financial 185,000
Officer, Secretary and Treasurer
Richard O'Neal ........ President--Directory Services Group 300,000
Fred L. Thurman ....... President--Telecommunications Services 175,000
Group
</TABLE>
EMPLOYMENT AGREEMENTS
Mr. Richard P. Anthony has entered into a six-year employment agreement
with the Company providing for his employment as Chairman of the Board,
President and Chief Executive Officer of the Company at an annual base salary
of $200,000, increasing to $250,000 after February 1, 1998, with a bonus
potential equal to 50% of base salary. The agreement provides for a one time
$50,000 cash bonus that was paid in December 1997, ten-year options to
purchase 150,000 shares of Common Stock at $2.50 per share which vest three
months after the date of grant, and ten-year options to purchase 350,000
shares of Common Stock at the initial public offering price which vest in
three equal increments on the first three anniversaries of the date of grant.
The agreement also provides for the grant of options to purchase up to 75,000
shares of Common Stock each year at the current market price on the date of
grant, if certain targets set by the Compensation Committee are met. Mr.
Anthony's options vest upon (i) his death or disability, (ii) his resignation
following a change of control, or (iii) the termination of his employment
other than "with cause," as defined in his employment agreement. In the event
Mr. Anthony resigns after a change in ownership or management of the Company
which significantly alters his job responsibilities or compensation, he will
be entitled to his base salary for a period of two years. Unless either Mr.
Anthony so resigns or the Company terminates his employment "with cause," as
defined in the employment agreement, Mr. Anthony will be entitled to his base
salary for a one year period upon his termination. The employment agreement
also provides for a one year post-termination noncompetition obligation that
is extended to three years upon his voluntary resignation under circumstances
that do not involve a change in control.
Mr. James F. Cragg has entered into a six-year employment agreement with
the Company providing for his employment as Executive Vice President,
Marketing and Sales at an annual base salary of $175,000 with a bonus
potential equal to 100% of base salary. The agreement provides for a one-time
$100,000 cash bonus that was paid in December 1997, ten-year options to
purchase 150,000 shares of Common Stock at $2.50 per share which vest three
months after the date of grant, and ten-year options to purchase 275,000
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shares of Common Stock at the initial public offering price which vest in
three equal increments on the first three anniversaries of the date of grant.
The agreement also provides for the grant of options to purchase up to 50,000
shares of Common Stock each year at the current market price on the date of
grant, if certain targets set by the Compensation Committee are met. Mr.
Cragg's options vest upon (i) his death or disability, (ii) his resignation
following a change of control, or (iii) the termination of his employment
other than "with cause," as defined in his employment agreement. In the event
Mr. Cragg resigns after a change in ownership or management of the Company
which significantly alters his job responsibilities or compensation, he will
be entitled to his base salary for a period of two years. Unless either Mr.
Cragg so resigns or the Company terminates his employment "with cause," as
defined in the employment agreement, Mr. Cragg will be entitled to his base
salary for a one year period upon his termination. The employment agreement
also provides for a one year post-termination noncompetition obligation that
is extended to three years upon his voluntary resignation under circumstances
that do not involve a change in control.
Mr. William H. Zimmer III has entered into a six-year employment agreement
with the Company providing for his employment as Executive Vice President,
Chief Financial Officer, Secretary and Treasurer at an annual base salary of
$185,000, with a bonus potential equal to 50% of base salary. The agreement
provides for a one time $50,000 cash bonus that was paid in December 1997,
ten-year options to purchase 350,000 shares of Common Stock at the initial
public offering price which vest in three equal increments on the first three
anniversaries of the date of grant. The agreement also provides for the grant
of options to purchase up to 50,000 shares of Common Stock each year at the
current market price on the date of grant, if certain targets set by the
Compensation Committee are met. Mr. Zimmer's options vest upon (i) his death
or disability, (ii) his resignation following a change of control, or (iii)
the termination of his employment other than "with cause," as defined in his
employment agreement. In the event Mr. Zimmer resigns after a change in
ownership or management of the Company which significantly alters his job
responsibilities or compensation, he will be entitled to his base salary for
a period of two years. Unless either Mr. Zimmer so resigns or the Company
terminates his employment "with cause," as defined in the employment
agreement, Mr. Zimmer will be entitled to his base salary for a one year
period upon his termination. The employment agreement also provides for a one
year post-termination noncompetition obligation that is extended to three
years upon his voluntary resignation under circumstances that do not involve
a change in control.
In addition, Messrs. O'Neal, Feist and Thurman have entered into three,
five and five-year employment agreements with the respective Acquired
Companies of which they are president that provide for base salaries of
$300,000, $110,000 and $175,000, respectively, and a bonus potential ranging
from 50% to 63% of base salary. In the event that the Company terminates Mr.
O'Neal's employment other than for cause (as defined in his agreement) or in
the event that Mr. O'Neal resigns under circumstances that he reasonably
believes were contrived by Great Western to force his resignation, or after a
change in control of the Company, Mr. O'Neal shall be entitled to continue to
receive his base salary until the scheduled expiration date of his employment
agreement. Mr. Thurman shall be entitled to receive one year's salary in the
event his employer terminates him for a reason other than with cause (as
defined in his agreement) and two years' salary in the event that he resigns
following a change in control of his employer. Mr. Feist is entitled to
receive six months salary in the event his employer terminates him for a
reason other than with cause (as defined in his agreement) and one year's
salary in the event that he resigns following a change in control of his
employer. These agreements contain three-year noncompetition covenants. Mr.
Feist is also entitled to receive a bonus of $50,000 upon consummation of the
Offering.
See "Option Grants" for information relating to stock options awarded to
Messrs. O'Neal, Feist and Thurman.
1997 STOCK AWARDS PLAN
In October 1997, the Board adopted and the stockholders subsequently
approved the Plan in substitution of a substantially identical plan which its
predecessor had adopted earlier in the year. The Plan is intended to provide
key employees with an opportunity to acquire a proprietary interest in the
Company and additional incentive and reward opportunities based on the
profitable growth of the
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Company and to aid the Company in attracting and retaining outstanding
personnel. The Plan provides for the granting of options (either incentive
stock options within the meaning of Section 422(b) of the Code, or options
that do not constitute incentive stock options ("nonqualified stock
options")), restricted stock awards, stock appreciation rights, performance
awards, and phantom stock awards, or any combination thereof. The Plan covers
an aggregate of 3,500,000 shares of Common Stock (subject to certain
adjustments in the event of stock dividends, stock splits and certain other
events).
Administration. The Plan was administered by the entire Board prior to the
closing of the Offering and will be administered by the Compensation
Committee of the Board thereafter. The Compensation Committee has the power
to determine which employees will receive an award, the time or times when
such award will be made, the type of the award and the number of shares of
Common Stock to be issued under the award or the value of the award. Only
persons who at the time of the award are key employees of the Company or of
any subsidiary of the Company are eligible to receive an award under the
Plan.
Options. The Plan provides for two types of options: incentive stock
options and nonqualified stock options. The Compensation Committee will
designate the key employees to receive the options, the number of shares
subject to the options, and the terms and conditions of each option granted
under the Plan. The term of any option granted under the Plan shall be
determined by the Compensation Committee; provided, however, that the term of
any incentive stock option cannot exceed ten years from the date of the grant
and any incentive stock option granted to an employee who possesses more than
10% of the total combined voting power of all classes of stock of the Company
or of its subsidiary within the meaning of Section 422(b)(6) of the Code must
not be exercisable after the expiration of five years from the date of grant.
No option may be exercised earlier than six months from the date of grant.
The exercise price per share of Common Stock of options granted under the
Plan will be determined by the Compensation Committee; provided, however,
that an incentive stock option exercise price cannot be less than the fair
market value of a share of Common Stock on the date such option is granted
(subject to adjustments). Further, the exercise price of any incentive stock
option granted to an employee who possesses more than 10% of the total
combined voting power of all classes of stock of the Company or of its
subsidiaries within the meaning of Section 422(b)(6) of the Code must be at
least 110% of the fair market value of the share at the time such option is
granted. The exercise price of options granted under the Plan will be paid in
full in a manner prescribed by the Compensation Committee.
Restricted Stock Awards. Pursuant to a restricted stock award, shares of
Common Stock may be issued to employees without any cash payment to the
Company, except to the extent otherwise provided by the Compensation
Committee or required by law; provided, however, that such shares will be
subject to certain restrictions on the disposition thereof and certain
obligations to forfeit such shares to the Company as may be determined in the
discretion of the Compensation Committee. The restrictions on disposition may
lapse based upon (a) the Company's attainment of specific performance targets
established by the Compensation Committee that are based on (i) the price of
a share of Common Stock, (ii) the Company's earnings per share, (iii) the
Company's revenue, (iv) the revenue of a business unit of the Company
designated by the Committee, (v) the return on stockholders' equity achieved
by the Company, or (vi) the Company's pre-tax cash flow from operations, (b)
the grantee's tenure with the Company, or (c) a combination of both factors.
The Company retains custody of the shares of Common Stock issued pursuant to
a restricted stock award until the disposition restrictions lapse. An
employee may not sell, transfer, pledge, exchange, hypothecate, or otherwise
dispose of such shares until the expiration of the restriction period.
However, upon the issuance to the employee of shares of Common Stock pursuant
to a restricted stock award, except for the foregoing restrictions, such
employee will have all the rights of a stockholder of the Company with
respect to such shares, including the right to vote such shares and to
receive all dividends and other distributions paid with respect to such
shares.
Stock Appreciation Rights. A stock appreciation right permits the holder
thereof to receive an amount (in cash, Common Stock, or a combination
thereof) equal to the number of stock appreciation rights exercised by the
holder multiplied by the excess of the fair market value of Common Stock on
the exercise date over the stock appreciation rights' exercise price
(generally the fair market value of the Common Stock on the date of grant).
Stock appreciation rights may or may not be granted in connection
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with the grant of an option and no stock appreciation right may be exercised
earlier than six months from the date of grant. A stock appreciation right
may be exercised in whole or in such installments and at such time as
determined by the Compensation Committee.
Performance and Phantom Stock Awards. The Plan permits grants of
performance awards and phantom stock awards, which may be paid in cash,
Common Stock, or a combination thereof as determined by the Compensation
Committee. Performance awards granted under the Plan will have a maximum
value established by the Compensation Committee at the time of the grant. A
grantee's receipt of such amount will be contingent upon satisfaction by the
Company, or any subsidiary, division or department thereof, of future
performance conditions established by the Compensation Committee prior to the
beginning of the performance period. Such performance awards, however, are
subject to later revisions as the Compensation Committee deems appropriate to
reflect significant unforeseen events or changes. A performance award will
terminate if the grantee's employment with the Company terminates during the
applicable performance period except as otherwise provided by the
Compensation Committee at the time of grant. Phantom stock awards granted
under the Plan are awards of Common Stock or rights to receive amounts equal
to share appreciation over a specific period of time. Such awards vest over a
period of time or upon the occurrence of a specific event(s) (including,
without limitation, a change of control ) established by the Compensation
Committee, without payment of any amounts by the holder thereof (except to
the extent required by law) or satisfaction of any performance criteria or
objectives. A phantom stock award will terminate if the grantee's employment
with the Company terminates during the applicable vesting period or, if
applicable, the occurrence of a specific event(s), except as otherwise
provided by the Compensation Committee at the time of grant. In determining
the value of performance awards or phantom stock awards, the Compensation
Committee must take into account the employee's responsibility level,
performance, potential, other awards under the Plan, and other such
consideration as it deems appropriate. Such payment may be made in a lump sum
or in installments as prescribed by the Compensation Committee. Any payment
made in Common Stock will be based upon the fair market value of the Common
Stock on the payment date.
Option Grants. In mid-1997, the Board of Directors of the Company's
predecessor granted ten-year options to purchase 350,000 shares and 175,000
shares of its common stock to Messrs. G. Edward Powell and Brad K. Cutsinger,
respectively, at an exercise price of $2.50 per share. One-third of these
options vested immediately and the balance vested in equal increments on the
first and second anniversaries of the date of grant and would have been
accelerated in the event of a change in control of the Company. In mid-1997,
the Board of the Company's predecessor granted a similar option to Todd J.
Feist covering 250,000 shares of its common stock upon his employment by an
acquisition subsidiary of the Company. Prior to the consummation of the
Offering, Mr. Feist exchanged this option for a substantially identical
option to purchase 250,000 shares of Common Stock issued under the Plan.
Prior to the consummation of the Offering, Messrs. Powell and Brad Cutsinger
also exchanged their options for ten-year, fully vested warrants to purchase
a like number of shares of Common Stock at the same exercise price. In late
1997, the Company granted options to purchase an aggregate of 1,275,000
shares of Common Stock to Messrs. Richard P. Anthony, James F. Cragg and
William H. Zimmer III as described under "--Employment Agreements."
Contemporaneously with the closing of the Offering, the Board intends to
grant (i) five year options to purchase 150,000 shares, and 150,000 shares,
respectively, to Richard O'Neal and Fred L. Thurman, and (ii) an aggregate of
approximately 500,000, shares of Common Stock to the other officers and
employees of various Acquired Companies at an exercise equal to the initial
public offering price per share. These options will vest in equal increments
over three to five year periods from the date of grant.
COMPREHENSIVE REVIEW OF BENEFITS PLAN
Following the Offering, the Compensation Committee will engage a qualified
executive compensation consulting firm to evaluate the Company's overall
compensation program for officers and directors and assist that committee in
developing and implementing a program that properly motivates and rewards the
program participants in a manner that is consistent with prevailing industry
standards.
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CERTAIN TRANSACTIONS
THE ACQUISITIONS
Simultaneously with the consummation of the Offering, ACG will acquire by
merger, stock purchase or asset acquisition a 49% interest in KINNET and all
of the issued and outstanding stock (or in four cases, substantially all of
the assets) of the Acquired Companies and its predecessor, at which time each
Acquired Company and ACG's predecessor will become a wholly-owned subsidiary
of the Company. The aggregate consideration to be paid by ACG in the
Acquisitions includes approximately $83.3 million in cash, 3,392,644 shares
of Common Stock, $17.4 million in promissory notes and 1,393,213 warrants or
options to purchase Common Stock. Of the aggregate consideration, $30.8
million, $0.2 million, $3.3 million and $1.4 million in cash, will be paid to
Messrs. O'Neal, Feist, Mitchell and Thurman, respectively, 400,000, 71,429,
175,714 and 190,735 shares of Common Stock will be issued to Messrs. O'Neal,
Feist, Mitchell and Thurman, respectively; $8.4 million in subordinated notes
will be issued to Mr. O'Neal; $552,983 in convertible subordinated notes will
be issued to Mr. Thurman; and 280,000 and 13,513 five-year non-transferable
warrants to purchase Common Stock at the initial public offering price will
be issued to Mr. O'Neal and Mr. Thurman, respectively.
On June 16, 1997, ACG's predecessor issued to the five stockholders of
Great Western, as consideration for their execution of a definitive
acquisition agreement, three series of non-transferable, ten-year warrants to
purchase an aggregate of 756,078 shares of Common Stock at an exercise price
of $6.61 per share, subject to adjustment to protect against dilution. The
warrants of each series become exercisable upon the first, second and third
anniversary dates of the consummation of the Offering. Of these, Mr. O'Neal
received warrants to purchase an aggregate of 567,059 million shares of
Common Stock.
For a description of the terms of the Acquisitions, the consideration
payable and certain other matters, see "The Company -- Summary of Terms of
the Acquisitions."
OTHER ORGANIZATIONAL MATTERS
CPFF was organized in June 1996 with a five-year term for the purpose of
financing consolidating transactions identified by Rod K. Cutsinger,
including a possible transaction in the telecommunications industry. CPFF has
two classes of equity interests: Class A interests and Class B interests. The
holders of the Class A interests have no right to vote for the election and
management of CPFF, such rights having been vested in the holders of the
Class B Interests. CPFF was capitalized in September 1996 upon (i) the sale
of an aggregate of $1,520,000 in Class A interests for cash to a limited
number of investors, including $50,000 in Class A interests to G. Edward
Powell, (ii) the issuance of $350,000 in Class A interests to Rod K.
Cutsinger in exchange for his contribution of certain intangible personal
property, including business plans, confidentiality agreements,
organizational documents and economic projections relating to several
consolidating company opportunities, (iii) the issuance of $250,000 in Class
A interests to Rod K. Cutsinger in exchange for $5,000 in cash and a
promissory note in the principal amount of $245,000, (iv) the issuance of
$100,000 in Class A interests to Brad K. Cutsinger in exchange for $5,000 in
cash and a promissory note in the principal amount of $95,000 and (v) the
sale of 100% of the Class B interests to Consolidation Partners for $22,200
in cash. The promissory notes issued by Messrs. Rod and Brad Cutsinger bear
interest at 8% per annum, are payable upon the first to occur of the
consummation of the Offering or December 31, 1998 and are secured by a pledge
of the acquired interests. At November 30, 1997, the promissory note of Rod
Cutsinger had been paid in full and the balance of the promissory note of
Brad Cutsinger had declined to $22,500 as a result of the application of
salaries from CPFF to which they were otherwise entitled to the reduction of
the principal balances of these notes. CPFF used a portion of the proceeds of
its initial capitalization to make loans to ACG in the amount of $1.2 millon.
In September 1997, November 1997 and January 1998, CPFF issued an
aggregate of $1,880,000 of additional Class A Interests. At the same time,
the holders of the Class B Interests contributed an additional $18,990 to the
capital of CPFF. In consideration for the agreements of four Class A Interest
owners to subscribe and oversubscribe for certain of these Class A Interests,
Rod K. Cutsinger has agreed to transfer to such persons for nominal
consideration an aggregate of 230,418 shares of his Common Stock.
Additionally, in consideration for the subscription of three other existing
Class A Interest owners for an aggregate of $200,000 of Class A Interests,
Rod K. Cutsinger transferred to such persons for nominal consideration an
aggregate of $44,400 of his Class A Interests. CPFF used the proceeds of the
issuance of these additional Class A Interests to increase its loan to ACG to
approximately $3.2 million.
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Under the terms of the corporate regulations of CPFF, CPFF is obligated to
distribute shares in a consolidating company such as ACG as soon as
practicable after the consummation of that company's initial public offering.
Shares of Common Stock in ACG will be distributed to the holders of the Class
A and Class B Interests on a fifty-fifty basis until the holders of the Class
A Interests have received shares of Common Stock of ACG (valued at the
initial public offering price) equal to three times their aggregate
investment in CPFF, or $12.3 million. Thereafter, the balance of the shares
of Common Stock held by ACG will be distributed 25% to the holders of the
Class A Interests and 75% to the holders of the Class B Interests.
Accordingly, promptly following the Offering, CPFF will distribute shares of
Common Stock to the holders of the Class A Interests (including shares to
Messrs. Rod K. Cutsinger and G. Edward Powell) and shares of Common Stock to
Consolidation Partners in respect of its Class B Interests. Rod K. Cutsinger
and his wife own 80% of the beneficial interests of Consolidation Partners,
and the remaining interests are owned by trusts for the benefit of their
adult children, including Brad K. Cutsinger. See "Principal Stockholders."
The shares of Common Stock distributed by CPFF will be entitled to certain
registration rights and subject to certain lock-up arrangements with the
Underwriters. See "Shares Eligible for Future Sale" and "Underwriting."
Prior to the pricing of this Offering, Richard O'Neal, the principal
shareholder of Great Western expressed disagreement with the effect of the
reverse stock split 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"). CPFF
and Mr. O'Neal agreed to engage in good faith negotiations to determine the
type and amount of any consideration appropriately payable by CPFF to the
holders of the Warrants following the consummation of the Offering. If a
negotiated settlement cannot be reached within 45 days after the closing of
the Offering, the matter will be referred to binding arbitration and the cost
of such arbitration shall be borne by CPFF. CPFF agrees not to effect any
distribution of ACG common stock to its interest owners prior to the
resolution of these matters. The resolution of this matter is solely between
CPFF and the principal shareholder of Great Western. ACG shall have no
liability with respect to the resolution of this matter and no additional ACG
common shares or equivalents will be issued in connection herewith. In no
event shall any assets of ACG be used to satisfy any negotiated settlement or
arbitration award.
INITIAL CAPITALIZATION
In connection with its initial capitalization on September 17, 1996, ACG's
predecessor issued and sold an aggregate of 8,227,736 (net of subsequent
repurchases) shares of its common stock, of which 7,560,780 shares, 378,039
shares, 47,255 shares, 94,510 shares, 7,561 shares and 1,890 shares were
acquired by CPFF, Rod K. Cutsinger, Brad K. Cutsinger, Frank Bango (a former
director of ACG), G. Edward Powell and Fentress Bracewell for $1,000,
$10,000, $1,250, $2,500, $200 and $50, respectively. At the same time CPFF
agreed to loan the Company $1.2 million (increased to $3.2 million through
January 12, 1998) pursuant to an 8% promissory note payable upon the earlier
of the effectuation of an initial public offering by ACG or December 31,
1998. This promissory note, together with accrued interest thereon, will be
repaid from the net proceeds of the Offering.
Between October 14, 1996 and January 3, 1997, ACG's predecessor issued and
sold 39,694 shares of common stock at $0.05 per share, of which 37,804 shares
were sold to G. Edward Powell for an aggregate of $5,000. During the same
period, ACG's predecessor agreed to issue to eight persons for services
rendered five year warrants to purchase an aggregate of 16,256 shares of
Common Stock at the initial public offering price per share, subject to
adjustments to protect against dilution. Additionally, on May 2, 1997 ACG's
predecessor issued a ten-year non-transferrable warrant to purchase 7,560
shares of its common stock at $2.65 per share, subject to adjustment to
protect against dilution, to a consultant in consideration for services
rendered to the Company. In July 1997, the Company agreed to issue a similar
warrant to purchase 7,560 shares of Common Stock at $6.61 to another
consultant. Pursuant to agreements entered into in May and July 1997, the
Company has agreed to issue an aggregate of 4,540 shares of Common Stock,
valued at $6.61 per share, to two consultants in lieu of compensation. With
respect to certain other option and warrant grants, see "Management --1997
Stock Awards Plan --
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Option Grants." In December 1997 Rod K. Cutsinger privately placed an
aggregate of 70,882 shares of his Common Stock with Richard P. Anthony and
another investor at a price of $5.29 per share and agreed to privately place
an additional 47,256 shares of Common Stock with James F. Cragg at the same
price.
VOTING ARRANGEMENTS
In the acquisition agreement relating to the investment in KINNET, Liberty
(the former owner of 100%, and the present owner of the remaining 51%, of the
stock of KINNET) agreed, until the tenth anniversary date of the consummation
of the Offering, to be present in person or by proxy at all meetings of
stockholders of ACG for quorum purposes. Additionally, Liberty has agreed,
among other things, not to initiate or solicit stockholders to become
participants in any proxy solicitation or induce or attempt to induce others
to initiate a tender offer, exchange offer or other change in control of ACG.
ACG's Board has also agreed, subject to its fiduciary obligations, to
nominate as a director an individual designated by Liberty that is reasonably
qualified to serve on the board of directors of a publicly held corporation.
This obligation expires on the first to occur of the tenth anniversary of the
closing of the consummation of the Offering or the reduction of Liberty's
ownership of Common Stock below 100,000 shares. Mr. Rod K. Cutsinger has
agreed to vote his shares of Common Stock in favor of Liberty's designee
nominated by the Board. Mr. Garnett has been designated by Liberty as its
initial director nominee.
In the acquisition agreement relating to Valu-Line, ACG's Board, subject
to its fiduciary obligations, agreed to place David M. Mitchell on its Board
and renominate Mr. Mitchell as a director from time to time as long as he
owns at least 100,000 shares of Common Stock at the time of such
renomination.
OTHER TRANSACTIONS
Richard O'Neal is an officer, director and owner of 50% of the outstanding
voting securities of Big Stuff, Inc. ("BSI"), a corporation that markets
Internet home page development services to business customers and provides
high quality yellow page colorizing services to Great Western and other
yellow page publishers. During the two fiscal years ended January 31, 1995
and 1996 and the year ended December 31, 1996, Great Western paid BSI
approximately $94,000, $578,000 and $1.1 million, respectively, for yellow
page colorizing services. Great Western and BSI have entered into a Sales
Agreement pursuant to which BSI expects to continue to render the foregoing
services to Great Western after the Offering upon terms and conditions that
the Company considers reasonable under the circumstances. BSI has also agreed
to give Great Western the exclusive right to market World Pages in its
service areas.
KINI renders management services to KINNET pursuant to an evergreen
Management Agreement dated January 1, 1997 ("Management Agreement") which is
terminable at any time upon six months advance notice of termination. Under
the Management Agreement, KINI receives a monthly payment equal to 100% of
employee, equipment and other direct costs associated with its management of
KINNET for the period plus 15% of such amount. During the three years in the
period ended December 31, 1996, KINNET paid KINI, L.C. approximately $1.6
million, $1.9 million and $2.4 million, respectively, pursuant to the
Management Agreement. ACG does not own any outstanding voting securities of
KINI, L.C. KINI, L.C. also renders management services to Liberty under a
similar arrangement. E. Clarke Garnett is the President of KINI, KINNET and
Liberty.
Pursuant to a network services agreement, Feist Long Distance transports
traffic on KINNET's network. During the three years in the period ended
December 31, 1996, Feist Long Distance paid KINNET approximately $46,300,
$120,000 and $136,300, respectively, for such services. The Company expects
that Feist Long Distance's payments to KINNET will increase after the
Offering because Feist Long Distance intends to transfer additional traffic
to the KINNET network. The Company also intends when practicable and economic
to transport the long distance traffic of its other telecommunications
subsidiaries over the KINNET network.
ADDITIONAL BACKGROUND INFORMATION
In mid-1992, Rod K. Cutsinger formed Vadacom, Inc. ("Vadacom") as a
switch-based long distance telephone company headquartered in Houston, Texas.
In early 1995, Vadacom transferred its switch,
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computer and related billing software and customer base to Nationwide Long
Distance, Inc. ("Nationwide"), a switchless long distance reseller with a
substantial customer base, in exchange for cash, a subordinated promissory
note and an opportunity to convert the note into a substantial equity
position in Nationwide, with the expectation that an affiliate of Nationwide
would promptly conclude an initial public offering. Although Mr. Cutsinger
served as an officer and director of this affiliate for a brief period of
time, he never served as an officer or director of Nationwide. The
affiliate's anticipated public offering did not occur and the terms of the
asset sale were restructured.
In late 1995 Nationwide and its three stockholders (collectively the
"Plaintiffs") filed suit against Vadacom and Mr. Cutsinger (collectively, the
"Defendants"), alleging, that the Defendants committed fraud in connection
with the sale of Vadacom's assets to Nationwide and the anticipated initial
public offering and that Vadacom breached its representations and warranties
in its agreements with Nationwide (Nationwide Long Distance, Inc., Kim
Wilhelm, Ellen Wilhelm and Chester M. Ranger v. Vadacom, Inc. and Rod K.
Cutsinger, No. 95-051059, Dist. Ct. of Harris County, 215th Judicial District
of Texas). The Plaintiffs seek in excess of $10 million in actual damages,
punitive damages in an unspecified amount, and injunctive relief. The
Defendants believe that the claims against them are without merit. The
Defendants have filed counterclaims alleging that the Plaintiffs willfully
violated the rules and regulations of the FCC by illegally switching
customers' long distance service without their authorization, that the
Plaintiffs breached their fiduciary duties to Defendants, and that the
Plaintiffs defrauded Defendants in materially diminishing the value of the
assets sold to Nationwide by Vadacom and frustrating the consummation of a
public offering that potentially could have been substantially remunerative
to Vadacom's shareholders. The Defendants have asked the court to impose a
constructive trust over the shares of Nationwide stock owned by its three
shareholders. All activity in the case has now been stayed by reason of
Nationwide's Chapter 11 bankruptcy proceedings initiated in 1997. Mr.
Cutsinger's efforts to settle the case earlier this year were not successful.
On February 10, 1998, Nationwide filed a motion for expedited consideration
of Nationwide's application to substitute counsel in order to facilitate the
pursuit of claims against Mr. Cutsinger essentially similar to those asserted
in the Lyle Cox litigation described below.
In addition, as a result of Mr. Cutsinger's substantial ownership position
in Vadacom and Nationwide's operation of Vadacom's assets following the
acquisition, both Mr. Cutsinger and Vadacom have been sued or threatened with
suit for breach of contract claims by long distance carriers, customers and
others, for failure to pay outstanding commercial accounts, ad valorem taxes
and promissory notes and for other causes of action. Some of these claims
relate directly to the operation of Vadacom's assets following their
acquisition by Nationwide. Mr. Cutsinger believes that the claims against him
personally are without merit, and he intends to contest them vigorously.
While in the past Mr. Cutsinger has expended substantial sums of his own
money financing Vadacom's defense of these claims, he reserves the right to
cease doing so. In such event, Vadacom may seek protection from such
litigants and its creditors under applicable bankruptcy law.
In early January 1998, legal counsel for the assignee of a defaulted
promissory note issued by Vadacom in the original principal amount of
approximately $80,000 which is the subject of a pending lawsuit (Lyle Cox v.
Vadacom Inc., No. 97-25464, Dist. Ct. of Harris County, 152nd Judicial
District of Texas) wrote Mr. Cutsinger's legal counsel a letter and alleged
that Mr. Cutsinger "has transferred assets that constitute fraudulent
transfers with respect to the creditors of Vadacom, Inc. These transfers have
been to companies owned by Mr. Cutsinger and his family. One of these
companies is [ACG]". Counsel for the plaintiff states that his client intends
to either (i) place Vadacom in involuntary bankruptcy, (ii) sue Mr.
Cutsinger, his family, ACG and Consolidation Partners, or (iii) seek a
temporary injunction. Mr. Cutsinger categorically denies that any Vadacom
assets were fraudulently transferred and believes that the foregoing
allegations are wholly without merit.
SUBSEQUENT MANAGEMENT CHANGES
In September 1997, the Company initiated a search for a President and
Chief Executive Officer and a Chief Financial Officer, each with extensive
experience in the local and long distance telephone business, to succeed
Messrs. Rod K. Cutsinger, and G. Edward Powell. Accordingly, upon the
Company's hiring of Richard P. Anthony and William H. Zimmer III, Mr.
Cutsinger relinquished his position as
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Chairman and Chief Executive Officer of ACG and G. Edward Powell resigned as
Executive Vice President and Chief Financial Officer of ACG. Messrs.
Cutsinger and Powell are no longer officers or employees of ACG.
At the request of the Representatives of the Underwriters and in
consideration of the Company's payment of $1.75 million from the proceeds of
the Offering, Mr. Cutsinger intends to enter into a five-year non-competition
agreement with the Company. Under this agreement, Mr. Cutsinger will agree
not to engage in any business activity conducted by the Company as of the
date of this Prospectus in those portions of the Region in which the Company
operates at that date. See "Description of Capital Stock -- Standstill
Agreement" for information regarding a three-year standstill agreement that
Mr. Cutsinger has also entered into with the Company.
COMPANY POLICY
Except as noted herein, any future transactions with directors, officers,
employees or affiliates of the Company are anticipated to be minimal and
will, in any case, be approved in advance by a majority of the Board of
Directors, including a majority of disinterested members of the Board of
Directors.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of February 11, 1998
and as adjusted to reflect the shares of Common Stock, options and warrants
to be issued in the Acquisitions and the distribution of the 7,560,781 shares
of Common Stock owned by CPFF to the beneficial owners of CPFF's outstanding
equity interests and the sale of the shares of Common Stock in the Offering,
by (a) each of the executive officers of the Company, (b) each of the
Company's directors (including persons who will become directors upon
consummation of the Offering), (c) all executive officers and directors of
the Company as a group, and (d) each other person (or group of affiliated
persons) who is known by the Company to own beneficially 5% or more of the
Company's Common Stock. See "Certain Transactions."
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER OFFERING, AS ADJUSTED
---------------------------- ----------------------------
NAME(1) NUMBER(2) PERCENT(2)(3) NUMBER(2) PERCENT(2)(3)
------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
Richard P. Anthony ................... 197,255(4) 2.4% 197,255(4) 1.0%
James F. Cragg ....................... 197,255(5) 2.4 197,255(5) 1.0
William H. Zimmer III................. -- -- -- --
Richard O'Neal ....................... -- -- 680,000(6) 3.4
Fred L. Thurman ...................... -- -- 204,248(7) 1.0
Todd J. Feist ........................ -- -- 71,429 *
Rod K. Cutsinger ..................... 7,637,520(5)(8) 92.8 5,623,713(9) 28.7
Fentress Bracewell ................... 1,890 * 1,890 *
E. Clarke Garnett .................... -- -- 714,286(10) 3.6
Reginald J. Hollinger ................ -- -- -- --
David M. Mitchell .................... -- -- 175,714 *
G. Edward Powell ..................... 238,984(11) 2.9 238,984(11) 1.2
CPFF ................................. 7,560,781 91.8 -- --
Consolidation Partners ............... 7,560,781(12) 91.8 5,231,300 26.7
Executive officers and directors as a
group (6 persons and 12 persons,
respectively)........................ 8,164,344(13) 94.2 8,044,006(13) 39.5
</TABLE>
- ------------
* Percentage of shares beneficially owned is less than 1.0%.
(1) The address of all executive officers and directors (other than
Messrs. Cutsinger and Powell) is 390 South Woods Mill Road, Suite
150, St. Louis, Missouri 63005; the address of Messrs. Cutsinger and
Powell, CPFF and Consolidation Partners is 3355 West Alabama, Suite
580, Houston, Texas 77098.
(2) Beneficial ownership includes shares of Common Stock subject to
options, warrants, rights, conversion privileges or similar
obligations exercisable within 60 days for purposes of computing the
ownership percentage of the person or group holding such options,
warrants, rights, privileges or other obligations. Except as noted,
each stockholder has sole voting and dispositive power with respect
to all shares beneficially owned by such stockholder.
(Footnotes continued on following page)
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(3) The number of shares of Common Stock deemed outstanding after the
Offering consists of 19,624,920 shares outstanding as of February
11, 1998 (as adjusted for the shares of Common Stock issuable in the
Acquisitions and the shares of Common Stock being offered for sale
by the Company in the Offering (excluding 1,200,000 shares issuable
upon the exercise of the over-allotment option granted by the
Company to the Underwriters)).
(4) Includes 150,000 shares of Common Stock subject to stock options
issued by the Company that are exercisable within 60 days after
consummation of the Offering.
(5) Includes 47,255 shares of Common Stock that Mr. Cragg is entitled to
purchase from Mr. Cutsinger for $5.29 per share within 30 days after
the consummation of the Offering and, in the case of Mr. Cragg,
150,000 shares of Common Stock subject to stock options issued by
the Company that are exercisable within 60 days after consummation
of the Offering.
(6) A trustee for Mr. O'Neal's children owns non-transferable, ten-year
warrants to purchase 567,059 shares of Common Stock, one-third of
which warrants become exercisable on the first, second and third
anniversaries of the consummation of the Offering. Includes warrants
to purchase 280,000 shares of Common Stock at the initial public
offering price.
(7) Includes warrants to purchase 13,513 shares of Common Stock at the
initial public offering price.
(8) Includes 7,560,781 shares of Common Stock owned by CPFF. Because all
of such shares will be distributed by CPFF to the holders of its
Class A and Class B Interests after the Offering, Mr. Cutsinger
disclaims beneficial ownership of all such shares except those which
he will receive by reason of his ownership of approximately 13.6% of
the Class A Interests in CPFF and those which will be received by
Consolidation Partners by reason of its ownership of all of the
Class B Interests. Also gives effect to an agreement to transfer an
aggregate of 230,418 shares of Common Stock to four unrelated owners
of interests in CPFF.
(9) Includes 5,231,300 shares of Common Stock owned by Consolidation
Partners, a limited liability company in which Rod K. Cutsinger and
his wife beneficially own of record 80% of the interests. The
remaining interests are beneficially owned by trusts for the benefit
of the Cutsingers' two adult children, including Brad K. Cutsinger,
over which Rod K. Cutsinger has sole voting and dispositive power.
(10) Includes 714,286 shares of Common Stock owned by Liberty, the owner
of 51% of KINNET, after the Offering, as to which E. Clarke Garnett
disclaims any beneficial interest.
(11) Includes 132,314 shares of Common Stock which Mr. Powell has the
right to acquire upon the exercise of warrants which are fully
exercisable.
(12) Includes 7,560,781 shares of Common Stock owned by CPFF. Because all
of such shares will be distributed by CPFF to the holders of its
Class A and Class B Interests after the Offering, Consolidation
Partners disclaims beneficial ownership of all such shares except
those which it will receive by reason of its ownership of all of the
Class B Interests.
(13) Includes 725,827 shares of Common Stock which such persons will have
the right to acquire upon the exercise of options and warrants which
are exercisable within 60 days after consummation of the Offering.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
At the date of this Prospectus, the authorized capital stock of the
Company is 200,000,000 shares, consisting of 180,000,000 shares of Common
Stock, par value $0.0001 per share, and 20,000,000 shares of Preferred Stock,
par value $0.0001 per share ("Preferred Stock"). The following summary is
qualified in its entirety by reference to the Company's Restated Certificate
of Incorporation (the "Charter"), a copy of which is included as an exhibit
to the Registration Statement of which this Prospectus is a part.
Common Stock. The holders of Common Stock are entitled to dividends in
such amounts and at such times as may be declared by the Board of Directors
out of funds legally available therefor. See "Dividend Policy." Holders of
the Common Stock are entitled to one vote per share for the election of
directors and other corporate matters. In the event of liquidation,
dissolution or winding up of the Company, holders of Common Stock would be
entitled to share ratably in all assets of the Company available for
distribution to the holders of Common Stock. The Common Stock carries no
preemptive rights. All outstanding shares of Common Stock are, and the shares
of Common Stock to be sold by the Company in the Offering when issued will
be, duly authorized, validly issued, fully paid and nonassessable.
Preferred Stock. The Board is authorized to issue from time to time,
without stockholder authorization, in one or more designated series,
20,000,000 shares of Preferred Stock with such dividend, redemption,
conversion and exchange provisions as are provided in the particular series.
Except as by law expressly provided, or except as may be provided by
resolution of the Board, the Preferred Stock shall have no right or power to
vote on any question or in any proceeding or to be represented at, or to
receive notice of, any meeting of stockholders of the Company. The issuance
of Preferred Stock, or the perception that such an issuance might occur,
could have the effect of delaying or preventing a change in control of the
Company. No shares of preferred stock are issued or outstanding and the Board
of Directors has no present plans to issue any of the Preferred Stock other
than the Series A Redeemable Convertible Preferred Stock (the "Series A
Preferred") to be issued to NGC. See "The Company -- Strategic
Relationships." The Company will issue to NGC 142,857 shares of Series A
Preferred having an aggregate liquidation preference of $2.0 million. The
Series A Preferred (i) will be senior to the Common Stock as to liquidation,
(ii) will not be entitled to receive dividends, (iii) will become convertible
into Common Stock at the initial public offering price (subject to customary
adjustments to protect against dilution) 18 months after the consummation of
the Offering, (iv) if the Northwestern Alliance has not been signed by the
first anniversary date of the closing of the Offering, is redeemable in
whole, but not in part, at an aggregate redemption price of $1.25 million on
or prior to the thirteenth monthly anniversary of the closing of the
Offering, (v) is not entitled to vote in the election of directors or
otherwise except as required by law and (vi) may not be transferred until the
earlier of the date occurring thirteen months after the closing of the
Offering or the date of the execution and delivery of the Northwestern
Alliance.
POSSIBLE ANTI-TAKEOVER EFFECTS
General. Certain provisions of the Company's charter, as well as the
concentration of ownership of the Common Stock, and the Company's ability to
issue up to 20 million shares of "blank check" Preferred Stock and the
anticipated terms of Proposed Credit Facility, may have the effect of
discouraging a change in control of the Company, including transactions in
which stockholders might receive a premium price for their Common Stock. See
also "--Standstill Agreement."
Statutory Provisions. Section 203 ("Section 203") of the DGCL restricts
certain transactions between a corporation organized under Delaware law (or
its majority-owned subsidiaries) and any person holding 15% or more of the
corporation's outstanding voting stock, together with the affiliates or
associates of such person (an "Interested Stockholder"). Section 203
generally prohibits a publicly held Delaware corporation from engaging in the
following transactions with an Interested Stockholder, for a period of three
years from the date the stockholder becomes an Interested Stockholder (unless
certain conditions, described below, are met): (i) all mergers or
consolidations, (ii) sales, leases, exchanges or other transfers of 10% or
more of the aggregate assets of the corporation, (iii) issuances or transfers
by the corporation of any stock of the corporation which would have the
effect of increasing the Interested
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Stockholder's proportionate share of the stock of any class or series of the
corporation, (iv) any other transaction which has the effect of increasing
the proportionate share of the stock of any class or series of the
corporation which is owned by the Interested Stockholder, and (v) receipt by
the Interested Stockholder of the benefit (except proportionately as a
stockholder) of loans, advances, guarantees, pledges or other financial
benefits provided by the corporation.
The three-year ban does not apply if either the proposed transaction or
the transaction by which the Interested Stockholder became an Interested
Stockholder is approved by the board of directors of the corporation prior to
the date such stockholder becomes an Interested Stockholder. Additionally, an
Interested Stockholder may avoid the statutory restriction if, upon the
consummation of the transaction whereby such stockholder becomes an
Interested Stockholder, the stockholder owns at least 85% of the outstanding
voting stock of the corporation without regard to those shares owned by the
corporation's officers and directors or certain employee stock plans.
Business combinations are also permitted within the three-year period if
approved by the board of directors and authorized at an annual or special
meeting of stockholders, by the holders of at least 66 2/3% of the
outstanding voting stock not owned by the Interested Stockholder. In
addition, any transaction is exempt from the statutory ban if it is proposed
at a time when the corporation has proposed, and a majority of certain
continuing directors of the corporation have approved, a transaction with a
party which is not an Interested Stockholder of the corporation (or who
becomes such with board approval) if the proposed transaction involves (i)
certain mergers or consolidations involving the corporation, (ii) a sale or
other transfer of over 50% of the aggregate assets of the corporation, or
(iii) a tender or exchange offer for 50% or more of the outstanding voting
stock of the corporation.
Prior to the effective date of Section 203, a corporation, by action of
its board of directors, had the option of electing to exclude itself from the
coverage of Section 203. Since the effective date of such section, a
corporation may, at its option, exclude itself from the coverage of Section
203 by amending its certificate of incorporation or bylaws by action of its
stockholders to exempt itself from coverage, provided that such charter or
bylaw amendment shall not become effective until 12 months after the date it
is adopted. The Company has not adopted such a charter or bylaw amendment.
Charter Provisions. The Board is divided into three classes. Each class of
directors consists, as nearly as possible, of one-third of the total number
of directors constituting the entire Board. The Charter provides that,
subject to the rights of the holders of any series of Preferred Stock, the
number of directors may be fixed from time to time by resolution of the
Board, but will consist of not less than three nor more than 14 members. The
term for directors in the first class expires at the annual meeting of
stockholders to be held in 1998; the initial term for directors in the second
class expires at the annual meeting of stockholders to be held in 1999; and
the initial term for directors in the third class expires at the annual
meeting of stockholders to be held in 2000. A director of the Company may be
removed only for cause and only upon the affirmative vote of the holders of a
majority of the outstanding capital stock entitled to vote at an election of
directors.
The Charter provides that the Company may, by action of its Board, provide
for a sinking fund for the purchase or redemption of shares of any series of
Preferred Stock and specify the terms and conditions governing the operations
of any such fund. The Company does not currently have any such fund.
The Charter provides that the Board shall fix the number of directors
within the range specified by the Charter, and number of directors has been
currently fixed at 12. A stockholder may nominate directors only if written
notice is delivered to the Company by such stockholder not less than 30 days
nor more than 60 days prior to the meeting or no later than ten days after
the date of notice by the Company of such meeting if such notice is given
less than 90 days in advance of the meeting. The Charter also provides that
any newly created directorship resulting from an increase in the number of
directors or a vacancy on the Board shall be filled by vote of a majority of
the remaining directors then in office, even though less than a quorum. The
Charter also provides that special meetings of the stockholders may only be
called by the Chairman of the Board or the Board, subject to the rights of
the holders of any series of Preferred Stock, and that the stockholders may
not act by written consent. The Charter provides that certain of these
provisions of the Charter may not be amended without the approval of at least
80% of the voting power of all shares of the Company entitled to vote
generally in the election of directors, voting together as a single class.
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The foregoing provisions of the Charter and of Section 203, together with
the ability of the Board to issue Preferred Stock without further stockholder
action, could delay or frustrate the removal of incumbent directors or the
assumption of control by the holder of a large block of Common Stock even if
such removal or assumption would be beneficial, in the short term, to
stockholders of the Company. The provisions could also discourage or make
more difficult a merger, tender offer or proxy contest even if such event
would be favorable to the interests of stockholders.
LIMITATION ON DIRECTORS AND OFFICERS LIABILITY
The DGCL authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by such
legislation, directors are accountable to corporations and their stockholders
for monetary damages for conduct constituting gross negligence in the
exercise of their duty of care. Although the DGCL does not change directors'
duty of care, it enables corporations to limit available relief to equitable
remedies such as injunction or rescission. The Charter limits the liability
of the Company's directors to the Company or its stockholders (in their
capacity as directors but not in their capacity as officers) to the fullest
extent permitted by the DGCL. Specifically, directors of the Company will not
be personally liable for monetary damages for breach of a director's
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company 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 DGCL or (iv) for any
transaction from which the director derived an improper personal benefit.
The inclusion of this provision in the Charter may have the effect of
reducing the likelihood of derivative litigation against directors and may
discourage or deter stockholders or management from bringing a lawsuit
against directors for breach of their duty of care, even though such an
action, if successful, might otherwise have benefited the Company and its
stockholders.
STANDSTILL AGREEMENT
The Company and Rod K. Cutsinger intend to enter into an agreement
pursuant to which Mr. Cutsinger, among other things, will agree that, for
three years after the completion of the Offering, he will not (i) acquire any
voting securities of the Company other than the shares of Common Stock
issuable as stock dividends or splits or upon exercise of his options under
the Company's Directors' Plan, (ii) sponsor or participate in any proxy
solicitations, (iii) enter into or form voting trusts, pooling agreements or
"groups", (iv) vote any of his shares of Common Stock in opposition to the
recommendation of the disinterested members of ACG's board of directors
regarding the election or removal of directors and matters relating to a
possible change in control of the Company, or (v) directly or indirectly
assist, encourage or induce any person to bid or acquire any class of
securities that is entitled to vote for the election of directors. Mr.
Cutsinger's obligations under the standstill agreement will terminate if he
is removed from the Board or not renominated for election as a director in
2000.
TRANSFER AGENT
The Transfer Agent for the Common Stock is Continental Stock Transfer &
Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, there will be 19,624,920 shares of Common
Stock outstanding. All of the 8,000,000 shares purchased in the Offering
(9,200,000 shares if the Underwriters' over-allotment option is exercised in
full), as well as 98,006 other outstanding shares, will be freely tradeable
without registration or other restriction under the Securities Act, except
for any shares purchased by an affiliate of the Company. All of the remaining
shares of Common Stock outstanding are either subject to the resale
restrictions referred to in "Underwriting" or may be sold only pursuant to an
effective registration statement filed by the Company or pursuant to an
applicable exemption, including an exemption under Rule 144 under the
Securities Act (the "Restricted Shares"). In this regard, the remaining
11,526,914 shares of the shares of Common Stock currently outstanding or
issued in the Acquisitions will be eligible for resale pursuant to Rule 144
no later than one year following the consummation of this offering.
In general, Rule 144 provides that if a person (including an affiliate)
holds Restricted Shares (regardless of whether such person is the initial
holder or a subsequent holder of such shares), and if at least one year has
elapsed since the later of the date on which the Restricted Shares were
issued or the date that they were acquired from an affiliate, then such
person is entitled to sell within any three-month period a number of shares
that does not exceed the greater of 1% of the then outstanding shares of
Common Stock or the average weekly trading volume of such stock during the
four calendar weeks preceding the sale. After Restricted Shares are held for
two years, a person who is not deemed an "affiliate" of the Company would be
entitled to sell such shares under Rule 144 without regard to the volume
limitations described above.
The holders of substantially all the shares of Common Stock and Warrants
issuable in the Acquisitions and the reverse triangular merger of the
Company's predecessor have certain rights to require the Company (but may not
exercise such registration rights for a period of one year following the
closing of the Offering) to register sales of such shares, or shares acquired
pursuant to such warrants, under the Securities Act. If, subsequent to the
consummation of the Offering, the Company proposes to register any of its
securities under the Securities Act, such holders are entitled to notice of
such registration and to include their shares in such registration with their
expenses borne by the Company, subject to the right of an underwriter
participating in the offering to limit the number of shares included in such
registration. In addition, the holders of a majority of such shares of Common
Stock have the right to demand after one year from the closing of the
Acquisitions, subject to certain limitations, that the Company file one
registration statement covering sales of their respective shares, and the
Company is obligated to pay the expenses of such registration.
The Company's directors, its executive officers, and substantially all of
the stockholders of ACG prior to the Acquisitions, including CPFF, have
agreed that, subject to certain exceptions, during the one-year Lock-up
Period they will not, and the Company has agreed that for a period of 180
days following the date of this Prospectus it will not, without the prior
written consent of PaineWebber Incorporated, offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock, or any securities
convertible into, or exercisable or exchangeable for, Common Stock, except
that the Company may grant options under the Company's stock option and
purchase plans, and may issue shares of Common Stock (i) in connection with
acquisitions, (ii) pursuant to the exercise of options granted under the
Company's stock option and purchase plans or (iii) pursuant to the exercise
of options and warrants outstanding as of the closing of the Offering.
Further, all persons who acquire shares of Common Stock in connection with
the Acquisitions (other than the acquisition of ACG's predecessor) have
agreed with the Company, subject to certain exceptions, not to offer or sell
such shares during the Lock-Up Period, and the Company has agreed not to
waive or amend these agreements without the prior written consent of
PaineWebber Incorporated. In addition, Rod K. Cutsinger has agreed not to
offer or sell any of his shares of Common Stock for a period ending 18 months
after the closing of the Offering, subject to certain exceptions, in each
case without the prior written consent of PaineWebber Incorporated.
The effect, if any, that future market sales of shares or the availability
of shares for sale will have on the prevailing market prices for the Common
Stock cannot be predicted. Nevertheless, sales of a substantial number of
shares in the public market could adversely affect prevailing market prices
for the Common Stock.
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UNDERWRITING
The Underwriters named below, acting through PaineWebber Incorporated and
CIBC Oppenheimer (the "Representatives"), have severally agreed, subject to
the terms and conditions set forth in the Underwriting Agreement by and among
the Company and the Representatives (the "Underwriting Agreement"), to
purchase from the Company, and the Company has agreed to sell to the
Underwriters, the number of shares of Common Stock set forth opposite the
name of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ -----------
<S> <C>
PaineWebber Incorporated ............................ 3,500,000
CIBC Oppenheimer .................................... 2,340,000
ABN AMRO Chicago Corporation ........................ 150,000
Credit Lyonnaise Securities (USA) Inc. .............. 150,000
Donaldson, Lufkin & Jenrette Securities Corporation 150,000
Furman Selz LLC ..................................... 150,000
Goldman, Sachs & Co. ................................ 150,000
Morgan Stanley & Co. Incorporated ................... 150,000
SBC Warburg Dillon Read Inc. ........................ 150,000
Salomon Smith Barney Inc. ........................... 150,000
George K. Baum & Company ............................ 80,000
Fahnestock & Co. Inc. ............................... 80,000
Gerard Klauer Mattison & Co., LLC ................... 80,000
Kaufman Bros., L.P. ................................. 80,000
Ladenburg Thalmann & Co. Inc. ....................... 80,000
Brad Peery Inc. ..................................... 80,000
Ragen MacKenzie Incorporated ........................ 80,000
Sanders Morris Mundy Inc. ........................... 80,000
Sands Brothers & Co., Ltd. .......................... 80,000
Soundview Financial Group ........................... 80,000
C.E. UNTERBURG, TOWBIN .............................. 80,000
Wit Capital Corporation ............................. 80,000
-----------
Total ............................................. 8,000,000
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the Shares listed above are subject to certain
conditions. The Underwriting Agreement also provides that the Underwriters
are committed to purchase, and the Company is obligated to sell, all of the
Shares offered by this Prospectus, if any of the Shares being sold pursuant
to the Underwriting Agreement are purchased (without consideration of any
shares that may be purchased through the exercise of the Underwriters'
over-allotment option).
The Representatives have advised the Company that the Underwriters propose
to offer the Shares to the public initially at the public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $0.55 per share. The Underwriters
may allow, and such dealers may reallow, a concession to other dealers not in
excess of $0.10 per share. After the initial public offering of the Shares,
the public offering price, the concessions to selected dealers and the
reallowance to other dealers may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
additional 1,200,000 shares of Common Stock at the initial public offering
price set forth on the cover page of this Prospectus, less underwriting
discounts and commissions. The Underwriters may exercise such option only to
cover over-allotments, if any, incurred in the sale of Shares. To the extent
the Underwriters exercise such option, each of the Underwriters will become
obligated, subject to certain conditions, to purchase such percentage of such
additional shares of Common Stock as is approximately equal to the percentage
of Shares that it is obligated to purchase as shown in the table set forth
above.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
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<PAGE>
The Representatives have informed the Company that they do not intend to
confirm sales to any account over which they exercise discretionary
authority.
CIBC Oppenheimer or one of its affiliates will be the lender under the
Company's proposed credit facility, and will receive certain fees with
respect thereto. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Certain Acquired Companies -- Pro
Forma Results of Operations -- Pro Forma Liquidity and Capital Resources."
Reginald J. Hollinger, a Managing Director and Group Head of the
Telecommunications Investment Banking Group at Paine Webber Incorporated,
will become a director of the Company upon the consummation of the Offering.
See "Management."
In the past six months, Howard Kra and Edward Sorkin, who are employees of
PaineWebber Incorporated, and Ronald Ormand, who is a Managing Director of
CIBC Oppenheimer, acquired, respectively, 152,176, 28,408 and 11,363 Class A
Interests in CPFF for total consideration of $196,700, $50,000 and $20,000.
The resulting differences between the purchase price they will have
effectively paid for the shares of Common Stock they will receive from CPFF
and the value of such shares based upon the Price to Public shown on the
cover page of this prospectus are, respectively, $2,138,024, $397,712 and
$159,082, which amounts are treated by the National Association of Securities
Dealers, Inc. ("NASD") as underwriters' compensation. The shares of Common
Stock they receive will be subject to a one year restriction on sale or
disposition pursuant to the NASD's rules and regulations.
The Company's executive officers and directors and substantially all of
the stockholders of ACG prior to the Acquisitions, including CPFF, have
agreed that, subject to certain exceptions, during the one-year Lock-up
Period they will not, and the Company has agreed that for a period of 180
days following the date of this Prospectus, it will not, without the prior
written consent of PaineWebber Incorporated, offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock, or any securities
convertible into, or exerciseable or exchangeable for, Common Stock, except
that the Company may grant options under the Company's stock option and
purchase plans, and may issue shares of Common Stock (i) in connection with
acquisitions, (ii) pursuant to the exercise of options granted under the
Company's stock option and purchase plans or (iii) pursuant to the exercise
of options and warrants outstanding as of the closing of the Offering.
Further, all persons who acquire shares of Common Stock in connection with
the Acquisitions (other than the acquisition of ACG's predecessor) have
agreed with the Company not to offer or sell such shares during the Lock-Up
Period, and the Company has agreed not to waive or amend these agreements
without the prior written consent of PaineWebber Incorporated. In addition,
Rod K. Cutsinger has agreed not to offer or sell any of his shares of Common
Stock for a period ending 18 months after the closing of the Offering,
subject to certain exceptions, without the prior written consent of
PaineWebber Incorporated.
Prior to this Offering, there has been no public market for the Common
Stock of the Company. The initial public offering price was determined
pursuant to negotiations between the Company and the Representatives. Among
the factors considered in determining the initial public offering price, in
addition to prevailing market conditions, were certain financial information
of the Company, the history of, and the prospects for, the Company and the
industry in which it competes, an assessment of the Company's management, its
past and present operations, the prospects for, and timing of, future
revenues of the Company, the present state of the Company's development, and
the above factors in relation to market values and various valuation measures
of other companies engaged in activities similar to the Company. The initial
public offering price set forth on the cover page of this Prospectus should
not, however, be considered an indication of the actual value of the Common
Stock. Such price is subject to change as a result of market conditions and
other factors. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the
public market subsequent to the Offering at or above the initial public
offering price.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may
bid for or purchase Common Stock for the purpose of stabilizing its market
price. The Underwriters also may create a short
89
<PAGE>
position for the account of the Underwriters by selling more Common Stock in
connection with the Offering than they are committed to purchase from the
Company, and in such case may purchase Common Stock in the open market
following completion of the Offering to cover all or a portion of such short
position. The Underwriters may also cover all or a portion of such short
position, up to 1,200,000 shares of Common Stock, by exercising the
Underwriters' over-allotment option referred to above. In addition,
PaineWebber Incorporated, on behalf of the Underwriters, may impose "penalty
bids" under contractual arrangements with the Underwriters whereby it may
reclaim from an Underwriter (or dealer participating in the Offering) for the
account of the other Underwriters, the selling concession with respect to
Common Stock that is distributed in the Offering but subsequently purchased
for the account of the Underwriters in the open market. Any transactions
described in this paragraph may result in the maintenance of the price of the
Common Stock at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph is required,
and, if they are undertaken, they may be discontinued at any time.
The Common Stock has been approved for listing on the New York Stock
Exchange, subject to official notice of issuance.
VALIDITY OF COMMON STOCK
The validity of the Common Stock offered hereby will be passed upon for
the Company by Bracewell & Patterson, L.L.P., Houston, Texas, and for the
Underwriters by Morgan, Lewis & Bockius LLP, New York, New York. Bracewell &
Patterson, L.L.P. will receive a premium over their normal hourly billing
rates for the legal services performed by them in connection with the
Offering if the Offering is completed and will accept a substantially reduced
fee payment in the event that the Offering is not completed.
EXPERTS
The audited financial statements of Advanced Communications Group, Inc.,
Great Western Directories, Inc., Feist Long Distance Service, Inc. and
FirsTel, Inc. have been included herein and in the Registration Statement in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon authority of said
firm as experts in accounting and auditing.
The audited financial statements of Valu-Line of Longview, Inc. and
Related Companies included in this Prospectus and elsewhere in the
Registration Statement have been audited by Hein + Associates LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said report.
The audited financial statements of KIN Network, Inc. included in this
Prospectus and elsewhere in the Registration Statement as of and for the year
ended December 31, 1996 have been audited by Sartain Fischbein & Co.,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said reports. The audited financial statements of KIN
Network, Inc. included in this Prospectus and elsewhere in the Registration
Statement as of and for the years ended December 31, 1994 and 1995, have been
audited by Kennedy and Coe LLC, independent public accountants, as indicated
in their report with respect thereto, and are included herein in reliance
upon the authority of said firm as experts in giving said reports.
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements
of the Exchange Act. The Company has filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement (which term shall
include any amendments thereto) on Form S-1 under the Securities Act with
respect to the shares of Common Stock offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the
Common Stock, reference is made to the Registration Statement, including the
exhibits and schedules thereto, copies of which may be examined
90
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without charge at the Commission's principal office at 450 Fifth Street,
N.W., Washington, D.C. 20549 and the regional offices of the Commission
located at 7 World Trade Center, New York, New York 10048 and 500 West
Madison Street, 14th Floor, Chicago, Illinois 60661. Copies of such materials
may be obtained from the Public Reference Section of the Commission,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at its
public reference facilities in New York, New York and Chicago, Illinois, at
prescribed rates, or on the Internet at http://www.sec.gov. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each statement being qualified in all respects by
such reference.
Advanced Communications Group, Inc. is a Delaware corporation,
incorporated as a subsidiary of its predecessor in September 1997, with
principal executive offices located at 390 South Woods Mill Road, Suite 150,
St. Louis, Missouri 63017. The Company's telephone number at that address is
(314) 469-9488. The Company intends to furnish its stockholders annual
reports containing consolidated financial statements examined by an
independent public accounting firm.
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GLOSSARY
Access -telecommunications services that permit long distance carriers
to use local exchange facilities to originate and/or terminate long distance
service.
Access Charges -- The fees paid by long distance carriers to local
exchange carriers for originating and terminating long distance calls on
their local network.
AT&T -- AT&T Corp.
ATM -- Asynchronous Transfer Mode is a packet switching technology in
which all data is encapsulated in packets or cells of exactly the same size.
By keeping all packets the same size, packets can be switched and transported
at extremely high speeds with very low delay. Cells travel across the network
in logical paths based on network addresses as permanent virtual circuits or
switched virtual circuits. ATM is principally used for high speed backbones
public and very large private networks. Because of high bandwidths, low delay
and advances in quality of service techniques, ATM is useful for transmitting
combined voice, data, and video.
Ameritech -- Ameritech Corporation.
Bps -- Bits per second; the basic measuring unit of speed in a digital
transmission system; the number of bits that a transmission facility can
convey between a sending location and a receiving location in one second.
Backbone -- The through-portions of a transmission network, as opposed to
spurs which branch off the through-portions.
Bandwidth -- The range of frequencies that can be passed through a medium,
such as glass fibers, without distortion. The greater the bandwidth, the
greater the information-carrying capacity of such medium. For fiber optic
transmission, electronic transmitting devices determine the bandwidth, not
the fibers themselves. Bandwidth is measured in Hertz (analog) or Bps
(digital).
Bell Atlantic -- Bell Atlantic Corporation.
CAP (competitive access provider) -- A company that provides its customers
with an alternative to the local telephone company for local transport of
private line, special access and interstate transport of switched access
telecommunications services.
CLEC --A competitive local exchange carrier.
Collocation -- The ability of a CAP to connect its network to the LECs
central office. Physical collocation occurs when a CAP places its network
connection equipment inside the LEC's central offices. Virtual collocation is
an alternative to physical collocation pursuant to which the LEC permits a
CAP to connect its network to the local exchange company's central offices on
comparable terms, even though the CAP's network connection equipment is not
physically located inside the central offices.
Dedicated Lines -- Local telecommunications lines reserved for use by
particular customers, generally for connection between the customer's
location and on interexchange carrier POP.
Dialing Parity -- The ability of a competing local or toll service
provider to provide telecommunications services in such a manner that
customers have the ability to route automatically, without the use of any
access code, their telecommunications to the service provider of the
customer's designation.
Digital -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies employ
a sequence of these pulses to represent information as opposed to the
continuously variable analog signal. The precise digital numbers minimize
distortion (such as graininess or snow in the case of video transmission, or
static or other background distortion in the case of audio transmission).
DS-0, DS-1, DS-3 -- Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits
(0 and 1) transmitted per second). DS-0 service has a bit rate of 64 kilobits
per second, DS-1 service has a bit rate of 1.544 megabits per second and DS-3
service has a bit rate of 45 megabits per second.
Enhanced Network Services -- Telecommunications services providing digital
connectivity, primarily for data applications, via frame relay, ATM, or
digital interexchange private line facilities. Enhanced network services also
include applications on such networks, including Internet access and other
Internet services.
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Fast Packet Service -- Fast packet service is a transport service for
moving data or digitized voice and video across a defined network. Fast
packet services may include routed, switched or dedicated connections. It
usually refers to frame relay, ATM, or other high bandwidth data transport.
FCC -- Federal Communications Commission.
Feist Long Distance -- Feist Long Distance Service, Inc.
Fiber mile -- The number of route miles installed along a
telecommunications path multiplied by the number of fibers along that path.
FirsTel -- FirsTel, Inc.
Frame Relay -frame relay is a form of packet switching in which data or
voice is converted to packets of varying sizes and routed through a digital
network along permanent virtual circuits or logical paths between
specifically defined network addresses. Frame relay has enjoyed commercial
success as an effective means of connecting local and wide area networks,
connecting business to the Internet, and providing combined voice and data
services between remote locations.
GTE -- GTE Corporation.
General Telephone Operating Companies -- Local exchange carriers
affiliated with GTE Corporation.
Great Western -- Great Western Directories, Inc.
Hertz -- The unit for measuring the frequency with which an
electromagnetic signal cycles through the zero-value state between lowest and
highest states. One Hz (Hertz) equals one cycle per second. kHz (kilohertz)
stands for thousands of Hertz; MHz (megahertz) stands for millions of Hertz.
ILEC -- An incumbent local exchange carrier.
Interconnection -- Interconnection of facilities between or among local
exchange carriers, including potential physical collocation of one carrier's
equipment in the other carrier's premises to facilitate such interconnection.
Interconnection Decision -- The August 1996 order issued by the FCC
implementing the interconnection provisions of the Telecommunications Act.
Portions of this order have been reversed by the U.S. Eighth Circuit Court of
Appeals.
InterLATA -- Telecommunications services originating in a LATA and
terminating outside of that LATA.
IntraLATA -- Telecommunications services originating and terminating in
the same LATA.
ISP -- An Internet service provider.
KINNET -- KIN Network, Inc.
LAN (Local Area Network) -- Computers and peripherals linked together by
short distance facilities, such as wire, cable, fiber, radio signal or lasers
under a common control program. LANs are usually confined to buildings or
campuses. LANs allow users to share file, programs and messaging within the
definition of the network.
LATA (local access and transport area) -- A geographic area composed of
contiguous local exchanges, usually but not always within a single state.
There are approximately 200 LATAs in the United States.
LEC (local exchange carrier) -- A company providing local telephone
services.
Long distance carriers or IXCs (Interexchange carriers) -- Long distance
carriers provide services between local exchanges on an interstate or
intrastate basis. A long distance carrier may offer services over its own or
another carriers' facilities.
Local exchange area -- A geographic area determined by the appropriate
state regulatory authority in which calls generally are transmitted without
toll charges to the calling or called party.
Local Loop -- The local loop is that portion of the local telephone
network that connects the customer's premises to the local exchange carrier's
central office or switching center. This includes all the facilities starting
from the customer premise interface which connects to the inside wiring and
equipment at the customer premise to a terminating point within the switching
wire center.
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MCI -- MCI Communications Corporation, a corporation that has entered
into a merger agreement to be acquired by WorldCom.
Nodes -- Locations within the network housing electronic equipment and/or
switches which serve as intermediate connection points to send and receive
transmission signals.
Number portability -- The ability of an end user to change local exchange
carriers while retaining the same telephone number.
Off-net -a customer that is not physically connected to one of the
Company's networks but who is accessed through interconnection with a LEC
network.
On-net -a customer that is physically connected to one of the Company's
networks.
OSS or Operational Support System(s) -- An OSS is a combination of manual
business procedures, automated systems, and electronic interfaces which
support the delivery of telecommunications services. OSSs support functions
including customer order management, order processing, facilities
provisioning, customer care, trouble reporting and trouble ticket management,
billing, sales analysis, and product management.
Other Acquired Companies -- Long Distance Management II, Inc., Long
Distance Management of Kansas, Inc., The Switchboard of Oklahoma City, Inc.,
Tele-Systems, Inc. and National Telecom, a sole proprietorship.
Preferred Stock -- The Series A Redeemable Convertible Preferred Stock of
Advanced Communications Group, Inc.
POPs (points of presence) -- Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
Private line -- A dedicated telecommunications connection between end user
locations.
Public switched network -- That portion of a local exchange company's
network available to all users generally on a shared basis (i.e., not
dedicated to a particular user). Traffic along the public switched network is
generally switched at the local exchange company's central offices.
"PUC" or Public Utilities Commission -- A state regulatory body,
established in most states, which regulates utilities, including telephone
companies providing intrastate services.
Reciprocal compensation -- The same compensation of a new competitive
local exchange carrier for termination of a local call by the local exchange
carrier on its network, as the new competitor pays the local exchange carrier
for termination of local calls on the local exchange carrier network.
Resale -- Resale by a provider of telecommunications services (such as a
local exchange carrier) of such services to other providers or carriers on a
wholesale or a retail basis.
Route mile -- The number of miles of the telecommunications path in which
fiber optic cables are installed as it would appear on a network map.
Rural Telephone Finance Cooperative or RTFC -- A not-for-profit
association, having between 300 and 400 members, that makes loans for
telecommunications purposes to its members and others eligible for loans from
the Rural Utility Services department of the Department of Agriculture.
SBC --Parent company of Southwestern Bell.
Self-healing ring -- A self-healing ring is a network design in which the
network backbone consists of a continuous ring connecting a central hub
facility with one or more network nodes (such as customer premises). Traffic
is routed between the hub and each of the nodes simultaneously in both a
clockwise and a counterclockwise direction. In the event of a cable cut or
component failure along one of these paths, traffic will continue to flow
along the alternate path so no traffic is lost. In the event of a
catastrophic node failure, other nodes will be unaffected because traffic
will continue to flow along whichever path (primary or alternate) does not
pass through the affected node. The switch from the primary to the alternate
path will be imperceptible to most users.
Southwestern Bell -- Southwestern Bell Telephone Company.
Special access services -- The lease of private, dedicated
telecommunications lines or "circuits" along the network of a local exchange
company or a CAP, which lines or circuits run to or from the long distance
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carrier POPs. Examples of special access services are telecommunications
lines running between POPs of a single long distance carrier, from one long
distance carrier POP to the POP of another long distance carrier or from an
end user to a long distance carrier POP.
Sprint -- Sprint Corporation.
Switch -- A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process
of interconnecting circuits to form a transmission path between users.
Switched access transport services -- Transportation of switched traffic
along dedicated lines between the local exchange company central offices and
long distance carrier POPs.
Switched traffic -- Telecommunications traffic along the public switched
network. This traffic is generally switched at the local exchange company's
central offices.
Tele-Systems -- Tele-Systems, Inc.
Trunk -- A telephone circuit with a switch at both ends.
Unbundled Access -- Access to unbundled elements of a telecommunications
services provider's network, including network facilities, equipment,
features, functions and capabilities, at any technically feasible point
within such network.
U S WEST -- U S WEST Communications, Inc.
Valu-Line -- Valu-Line of Longview, Inc.
Virtual LAN -- In general virtual local area networks are logical networks
based on campus or public networks which allow users to share information,
files, and send messages amongst each other based on rules permitting access
by network address. Membership within a Virtual LAN may vary by applications,
security level or other requirement, but may transcend location,
organization, or carrier.
Web Page -- A Web page is a specific address on the Internet supporting
inquiries from Internet users. Web pages usually display to an inquiring
party sophisticated graphics, interactive text, and the ability to link and
download to additional information or data bases maintained either by the Web
page provider or another party. Web pages are used to provide company
information, advertising and to conduct electronic commerce.
WorldCom -- WorldCom, Inc.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ADVANCED COMMUNICATIONS GROUP, INC. UNAUDITED
PRO FORMA COMBINED FINANCIAL STATEMENTS
Basis of Presentation of Unaudited Pro Forma Combined Financial Statements .............. F-3
Unaudited Pro Forma Combined Balance Sheet as of September 30, 1997...................... F-4
Unaudited Pro Forma Combined Statements of Operations for the year ended
December 31, 1996 and the nine months ended September 30, 1997.......................... F-5
Notes to Pro Forma Combined Financial Statements......................................... F-7
ADVANCED COMMUNICATIONS GROUP, INC.
Report of Independent Auditors........................................................... F-13
Consolidated Balance Sheets as of December 31, 1996 and September 30, 1997 (unaudited) .. F-14
Consolidated Statements of Operations for the period from inception to December 31, 1996
and the nine months ended September 30, 1997 (unaudited)................................ F-15
Consolidated Statements of Stockholders' Deficit for the period from inception to
December 31, 1996 and the nine months ended September 30, 1997 (unaudited) ............. F-16
Consolidated Statements of Cash Flows for the period from inception to December 31, 1996
and the nine months ended September 30, 1997 (unaudited)................................ F-17
Notes to Consolidated Financial Statements............................................... F-18
GREAT WESTERN DIRECTORIES, INC. FINANCIAL STATEMENTS
Report of Independent Auditors........................................................... F-22
Balance Sheets as of January 31, 1996, December 31, 1996 and September 30, 1997
(unaudited)............................................................................. F-23
Statements of Operations for the two years ended January 31, 1995 and 1996, the year
ended December 31, 1996, and the nine months ended September 30, 1996 and 1997
(unaudited)............................................................................. F-24
Statements of Stockholders' Equity for the two years ended January 31, 1995 and 1996,
the eleven months ended December 31, 1996, and the nine months ended
September 30, 1997 (unaudited).......................................................... F-25
Statements of Cash Flows for the two years ended January 31, 1995 and 1996, the year
ended December 31, 1996, and the nine months ended September 30, 1996 and 1997
(unaudited)............................................................................. F-26
Notes to Financial Statements............................................................ F-27
VALU-LINE OF LONGVIEW, INC. FINANCIAL STATEMENTS
Report of Independent Auditors........................................................... F-32
Combined Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997
(unaudited)............................................................................. F-33
Combined Statements of Income for the three years ended December 31, 1994, 1995 and
1996, and the nine months ended September 30, 1996 and 1997 (unaudited) ................ F-34
Combined Statements of Stockholders' Equity for the three years ended December 31, 1994,
1995 and 1996, and the nine months ended September 30, 1997 (unaudited) ................ F-35
Combined Statements of Cash Flows for the three years ended December 31, 1994, 1995 and
1996, and the nine months ended September 30, 1996 and 1997 (unaudited) ................ F-36
Notes to Combined Financial Statements................................................... F-37
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<S> <C>
FEIST LONG DISTANCE SERVICE, INC. FINANCIAL STATEMENTS
Report of Independent Auditors........................................................... F-42
Balance Sheets as of December 31, 1996 and September 30, 1997 (unaudited) ............... F-43
Statements of Operations for the year ended December 31, 1996, and the nine months ended
September 30, 1996 and 1997 (unaudited)................................................. F-44
Statements of Stockholders' Equity for the year ended December 31, 1996, and the nine
months ended September 30, 1997 (unaudited)............................................. F-45
Statements of Cash Flows for the year ended December 31, 1996, and the nine months ended
September 30, 1996 and 1997 (unaudited)................................................. F-46
Notes to Financial Statements............................................................ F-47
FIRSTEL, INC. FINANCIAL STATEMENTS
Report of Independent Auditors........................................................... F-50
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997
(unaudited)............................................................................. F-51
Statements of Operations for the two years ended December 31, 1995 and 1996, and the
nine months ended September 30, 1996 and 1997 (unaudited)............................... F-52
Statements of Stockholders' Deficit for the two years ended December 31, 1995 and 1996,
and the nine months ended September 30, 1997............................................ F-53
Statements of Cash Flows for the two years ended December 31, 1995 and 1996, and the
nine months ended September 30, 1996 and 1997 (unaudited)............................... F-54
Notes to Financial Statements............................................................ F-55
KIN NETWORK, INC. FINANCIAL STATEMENTS
Reports of Independent Auditors.......................................................... F-59
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1996 and 1997
(unaudited)............................................................................. F-61
Statements of Operations for the three years ended December 31, 1994, 1995 and 1996, and
the nine months ended September 30, 1996 and 1997 (unaudited)........................... F-62
Statements of Stockholders' Equity for the three years ended December 31, 1994, 1995 and
1996, and the nine months ended September 30, 1997 (unaudited).......................... F-63
Statements of Cash Flows for the three years ended December 31, 1994, 1995 and 1996, and
the nine months ended September 30, 1996 and 1997 (unaudited)........................... F-64
Notes to Financial Statements............................................................ F-66
</TABLE>
F-2
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give
effect to the acquisitions by Advanced Communications Group, Inc.
(collectively with its predecessor, which it is acquiring in conjunction with
the acquisitions described below, "ACG") of the outstanding capital stock or,
in certain cases, the assets of Great Western Directories, Inc. ("Great
Western"), Valu-Line of Longview, Inc. and Related Companies ("Valu-Line"),
Feist Long Distance Service, Inc. ("Feist Long Distance"), FirsTel, Inc.
("FirsTel"), Long Distance Management II, Inc. and Long Distance Management
of Kansas, Inc. (collectively, "LDM"), The Switchboard of Oklahoma City, Inc.
("Switchboard"), Tele-Systems, Inc. ("Tele-Systems"), and National Telecom
("National Telecom") and ACG's acquisition of 49% of the outstanding shares
of KIN Network, Inc. ("KINNET") (Great Western, Valu-Line, Feist Long
Distance, FirsTel, LDM, Switchboard, Tele-Systems and National Telecom
collectively, the "Acquired Companies", and LDM, Switchboard, Tele-Systems
and National Telecom collectively, the "Other Acquired Companies"). These
acquisitions (the "Acquisitions") will occur concurrently with and are
conditioned upon the closing of the Offering. The Acquisitions are accounted
for using the purchase method of accounting. With respect to the
Acquisitions, ACG is identified as the accounting acquirer for financial
statement presentation purposes.
The unaudited pro forma combined balance sheet gives effect to the
Acquisitions and the Offering as if they had occurred on September 30, 1997.
The unaudited pro forma combined statements of operations for the year ended
December 31, 1996, and for the nine months ended September 30, 1997, give
effect to these transactions as if they had occurred on January 1, 1996.
The pro forma adjustments are based on estimates, available information
and certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what
ACG's financial position or results of operations would actually have been if
such transactions in fact had occurred on the dates stated above and are not
necessarily representative of ACG's financial position or results of
operations for any future period. 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 unaudited pro
forma combined financial statements should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this
Prospectus. See "Risk Factors" included elsewhere herein.
F-3
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER
GREAT FEIST LONG ACQUIRED
WESTERN VALU-LINE DISTANCE FIRSTEL COMPANIES
------- --------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............. $ 1,318 $ 313 $ 149 $ 62 $ 457
Accounts receivable................... 24,490 1,415 1,769 1,282 1,190
Less allowance...................... (9,628) (25) (143) (29 ) --
------- --------- ---------- ------- ---------
Accounts receivable, net ............. 14,862 1,390 1,626 1,253 1,190
Deferred costs........................ 2,461 -- -- -- --
Prepaid expenses and other............ 391 4 23 801 222
------- --------- ---------- ------- ---------
Total current assets................ 19,032 1,707 1,798 2,116 1,869
Property and equipment, net .......... 1,223 1,226 370 869 262
Intangible assets, net................ -- -- -- -- 65
Equity investment in KINNET........... -- -- -- -- --
Other noncurrent assets............... 19 7 -- 84 4
------- --------- ---------- ------- ---------
Total assets........................ $20,274 $2,940 $2,168 $3,069 $2,200
======= ========= ========== ======= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current maturities of long-term
debt................................. $ -- $ 424 $ 17 $ 147 $ 203
Accounts payable and accrued
expenses............................. 3,568 963 1,108 1,863 391
Current portion of notes payable to
related parties...................... -- -- 659 1,040 --
Obligation for cash portion of
consideration for the Acquisitions .. -- -- -- -- --
Other................................. 2,453 10 -- 7 --
------- --------- ---------- ------- ---------
Total current liabilities........... 6,021 1,397 1,784 3,057 594
Notes payable to related parties, net
of current maturities................ -- -- -- -- --
Long-term debt, net of current
maturities........................... -- 1,082 -- -- 234
------- --------- ---------- ------- ---------
Total liabilities................... 6,021 2,479 1,784 3,057 828
------- --------- ---------- ------- ---------
Stockholders' equity:
Preferred stock...................... -- -- -- -- --
Common stock......................... 1 3 100 1 354
Additional paid-in capital........... -- -- 939 -- --
Retained earnings.................... 14,252 458 (655) 11 1,018
------- --------- ---------- ------- ---------
Total stockholders' equity
(deficit).......................... 14,253 461 384 12 1,372
------- --------- ---------- ------- ---------
Total liabilities and stockholders'
equity............................. $20,274 $2,940 $2,168 $3,069 $2,200
======= ========= ========== ======= =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
POST
PRO FORMA ACQUISITION
HISTORICAL ADJUSTMENTS PRO ADJUSTMENTS
BASIS (SEE NOTE FORMA (SEE NOTE AS
ACG COMBINED 3) COMBINED 3) ADJUSTED
------- ---------- ----------- -------- ----------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents............. $ -- $ 2,299 $ (1,745) $ 554 $ 11,308 $ 11,862
Accounts receivable................... -- 30,146 -- 30,146 -- 30,146
Less allowance...................... -- (9,825) -- (9,825 ) -- (9,825)
------- ---------- ----------- -------- ----------- --------
Accounts receivable, net ............. -- 20,321 -- 20,321 -- 20,321
Deferred costs........................ -- 2,461 -- 2,461 -- 2,461
Prepaid expenses and other............ -- 1,441 -- 1,441 -- 1,441
------- ---------- ----------- -------- ----------- --------
Total current assets................ -- 26,522 (1,745) 24,777 11,308 36,085
Property and equipment, net .......... 7 3,957 -- 3,957 -- 3,957
Intangible assets, net................ -- 65 105,816 105,881 -- 105,881
Equity investment in KINNET........... -- -- 18,041 18,041 -- 18,041
Other noncurrent assets............... 1,184 1,298 (561) 737 2,253 2,990
------- ---------- ----------- -------- ----------- --------
Total assets........................ $ 1,191 $31,842 $121,551 $153,393 $ 13,561 $166,954
======= ========== =========== ======== =========== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current maturities of long-term
debt................................. $ -- $ 791 $ 194 $ 985 $ (985) $ --
Accounts payable and accrued
expenses............................. 1,551 9,444 101 9,545 (1,322) 8,223
Current portion of notes payable to
related parties...................... 1,856 3,555 (1,582) 1,973 (1,856) 117
Obligation for cash portion of
consideration for the Acquisitions .. -- -- 83,336 83,336 (83,336) --
Other................................. -- 2,470 -- 2,470 -- 2,470
------- ---------- ----------- -------- ----------- --------
Total current liabilities........... 3,407 16,260 82,049 98,309 (87,499) 10,810
Notes payable to related parties, net
of current maturities................ -- -- 17,233 17,233 -- 17,233
Long-term debt, net of current
maturities........................... -- 1,316 -- 1,316 (1,316) --
------- ---------- ----------- -------- ----------- --------
Total liabilities................... 3,407 17,576 99,282 116,858 (88,815) 28,043
------- ---------- ----------- -------- ----------- --------
Stockholders' equity:
Preferred stock...................... -- -- -- -- 1,122 1,122
Common stock......................... -- 459 (459) -- 1 1
Additional paid-in capital........... 47 986 37,812 38,798 101,253 140,051
Retained earnings.................... (2,263) 12,821 (15,084) (2,263) -- (2,263)
------- ---------- ----------- -------- ----------- --------
Total stockholders' equity
(deficit).......................... (2,216) 14,266 22,269 36,535 102,376 138,911
------- ---------- ----------- -------- ----------- --------
Total liabilities and stockholders'
equity............................. $ 1,191 $31,842 $121,551 $153,393 $ 13,561 $166,954
======= ========== =========== ======== =========== ========
</TABLE>
F-4
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
GREAT FEIST LONG
WESTERN VALU-LINE DISTANCE FIRSTEL
--------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications services............ $ -- $11,181 $10,028 $10,355
Yellow page publishing................. 44,324 -- -- --
--------- ----------- ------------ ---------
Total revenues....................... 44,324 11,181 10,028 10,355
Cost of services......................... 21,394 6,036 6,854 7,066
Depreciation and amortization............ 223 819 237 248
--------- ----------- ------------ ---------
Gross profit........................... 22,707 4,326 2,937 3,041
Selling, general and administrative
expenses................................ 14,987 3,572 2,470 2,147
--------- ----------- ------------ ---------
Income (loss) from operations.......... 7,720 754 467 894
Other income (expense):
Other income and expense, net.......... 6,375 73 (2) 35
Interest expense....................... (504) (186) (60) (191)
Equity in earnings (loss) of KINNET ... -- -- -- --
--------- ----------- ------------ ---------
Income (loss) before income taxes ....... 13,591 641 405 738
Provision for income taxes............... 5,295 -- -- --
--------- ----------- ------------ ---------
Net income (loss)........................ $ 8,296 $ 641 $ 405 $ 738
========= =========== ============ =========
Pro forma net income ....................
Accretion of preferred stock (2) .......
Pro forma net income available to common
stockholders ...........................
Pro forma net income per share available
to common stockholders .................
Shares used in computing pro forma
net income per share ...................
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
OTHER HISTORICAL PRO FORMA
ACQUIRED BASIS ADJUSTMENTS PRO FORMA
COMPANIES ACG(1) COMBINED (SEE NOTE 4) COMBINED
----------- -------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications services............ $7,798 -- $39,362 $ 1,728 $ 41,090
Yellow page publishing................. -- -- 44,324 -- 44,324
----------- -------- ------------ ------------- -----------
Total revenues....................... 7,798 -- 83,686 1,728 85,414
Cost of services......................... 4,693 -- 46,043 1,044 47,087
Depreciation and amortization............ 84 -- 1,611 4,500 6,111
----------- -------- ------------ ------------- -----------
Gross profit........................... 3,021 -- 36,032 (3,816) 32,216
Selling, general and administrative
expenses................................ 2,484 649 26,309 657 26,966
----------- -------- ------------ ------------- -----------
Income (loss) from operations.......... 537 (649) 9,723 (4,473) 5,250
Other income (expense):
Other income and expense, net.......... (30) -- 6,451 (3) 6,448
Interest expense....................... (44) (10) (995) 221 (774)
Equity in earnings (loss) of KINNET ... -- -- -- (1,069) (1,069)
----------- -------- ------------ ------------- -----------
Income (loss) before income taxes ....... 463 (659) 15,179 (5,324) 9,855
Provision for income taxes............... 36 -- 5,331 821 6,152
----------- -------- ------------ ------------- -----------
Net income (loss)........................ $ 427 $(659) $ 9,848 $(6,145) $ 3,703
=========== ======== ============ ============= ===========
Pro forma net income .................... 3,703
Accretion of preferred stock (2) ....... 112
-----------
Pro forma net income available to common
stockholders ........................... $ 3,591
===========
Pro forma net income per share available
to common stockholders ................. $ 0.18
===========
Shares used in computing pro forma
net income per share ................... 20,190,864
===========
</TABLE>
- ------------
(1) For the period from inception (June 6, 1996) through December 31,
1996.
(2) Represents accretion of the excess of the liquidation preference over
the carrying value of the Preferred Stock.
F-5
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
GREAT FEIST LONG
WESTERN VALU-LINE DISTANCE FIRSTEL
--------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications services............ $ -- $9,058 $8,965 $9,488
Yellow page publishing................. 35,624 -- -- --
--------- ----------- ------------ ---------
Total revenues....................... 35,624 9,058 8,965 9,488
Cost of services......................... 16,690 5,070 6,044 6,864
Depreciation and amortization............ 168 399 142 202
--------- ----------- ------------ ---------
Gross profit........................... 18,766 3,589 2,779 2,422
Selling, general and administrative
expenses................................ 12,647 2,875 2,404 1,968
--------- ----------- ------------ ---------
Income (loss) from operations.......... 6,119 714 375 454
Other income (expense):
Other income and expense, net.......... 58 64 1 34
Interest expense....................... (50) (103) (33) (116)
Equity in earnings (loss) of KINNET ... -- -- -- --
--------- ----------- ------------ ---------
Income (loss) before income taxes ....... 6,127 675 343 372
Provision for income taxes............... 2,048 -- -- --
--------- ----------- ------------ ---------
Net income (loss)........................ $ 4,079 $ 675 $ 343 $ 372
========= =========== ============ =========
Pro forma net income ....................
Accretion of preferred stock (1) .......
Pro forma net income available to common
stockholders ...........................
Pro forma net income per share available
to common stockholders .................
Shares used in computing pro forma
net income per share....................
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
OTHER HISTORICAL PRO FORMA
ACQUIRED BASIS ADJUSTMENTS PRO FORMA
COMPANIES ACG COMBINED (SEE NOTE 4) COMBINED
----------- ---------- ------------ ------------- -----------
<S> <C> <C> <C><C> <C> <C><C>
Revenues:
Telecommunications services............ $5,944 $ -- $33,455 $ -- $ 33,455
Yellow page publishing................. -- -- 35,624 -- 35,624
----------- ---------- ------------ ------------- -----------
Total revenues....................... 5,944 -- 69,079 -- 69,079
Cost of services......................... 2,969 -- 37,637 -- 37,637
Depreciation and amortization............ 84 2 997 3,342 4,339
----------- ---------- ------------ ------------- -----------
Gross profit........................... 2,891 (2) 30,445 (3,342) 27,103
Selling, general and administrative
expenses................................ 1,816 1,462 23,172 -- 23,172
----------- ---------- ------------ ------------- -----------
Income (loss) from operations.......... 1,075 (1,464) 7,273 (3,342) 3,931
Other income (expense):
Other income and expense, net.......... 96 -- 253 -- 253
Interest expense....................... (13) (140) (455) (126) (581)
Equity in earnings (loss) of KINNET ... -- -- -- (657) (657)
----------- ---------- ------------ ------------- -----------
Income (loss) before income taxes ....... 1,158 (1,604) 7,071 (4,125) 2,946
Provision for income taxes............... -- -- 2,048 730 2,778
----------- ---------- ------------ ------------- -----------
Net income (loss)........................ $1,158 $(1,604) $ 5,023 $(4,855) $ 168
=========== ========== ============ ============= ===========
Pro forma net income .................... 168
Accretion of preferred stock (1) ....... 16
-----------
Pro forma net income available to common
stockholders ........................... $ 152
===========
Pro forma net income per share available
to common stockholders ................. $ 0.01
===========
Shares used in computing pro forma
net income per share.................... 20,190,864
===========
</TABLE>
- ------------
(1) Represents accretion of the excess of the liquidation preference over
the carrying value of the Preferred Stock.
F-6
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
ACG was founded to create a regional competitive local exchange carrier
that primarily provides a portfolio of telecommunications services primarily
to business customers in selected service areas of Southwestern Bell and U S
WEST and publishes yellow page directories in selected markets in the Region.
ACG has conducted no operations to date and will consummate the Acquisitions
concurrently with and as a condition to the closing of this Offering.
The historical financial statements reflect the financial position and
results of operations of the Acquired Companies and were derived from the
respective Acquired Companies' financial statements. The acquisition of the
interest in KINNET is accounted for under the equity method of accounting,
and the information with respect to KINNET was derived from its financial
statements. The periods included in these pro forma financial statements for
the individual Acquired Companies and KINNET are for the nine months ended
September 30, 1997, and for the year ended December 31, 1996. The audited
historical financial statements included elsewhere in this Prospectus have
been included in accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 80.
2. ACQUISITION OF ACQUIRED COMPANIES:
Concurrently with and as a condition to the closing of the Offering, ACG
will acquire 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, Switchboard and National Telecom, and 49% of the
outstanding capital stock of KINNET pursuant to the Acquisitions. The
Acquisitions are accounted for using the purchase method of accounting with
ACG being treated as the accounting acquirer.
F-7
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The consideration to be paid in the Acquisitions includes (a) cash, (b)
Common Stock, (c) promissory notes, (d) a payable for reimbursement of cash
paid to purchase two companies in September 1997, and (e) options and
warrants to purchase shares of Common Stock. The number of shares of Common
Stock to be issued in the Acquisitions was determined by dividing the agreed
aggregate amount of $47.5 million by the initial public offering price of the
Common Stock. In determining the amount to be recorded for accounting
purposes for the component of the purchase price attributable to the shares
of Common Stock issuable in 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 promissory notes issued in the Acquisitions consist of (a) $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 (as
defined), (b) $2.0 million in notes convertible into shares of Common Stock
at the initial public offering price, 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 (as defined), and (c) a $350,000 promissory note payable in three
equal annual installments and bearing an annual interest rate of seven
percent (7%), which note may be prepaid at any time. Pursuant to the terms of
the notes discussed in (a) and (b) above, an event of default would exist if
the Company's senior debt (as defined) exceeds $50.0 million.
At the time the acquisition agreement with Great Western was executed, the
Company issued warrants exercisable for a total of 756,078 shares of Common
Stock. A value of $0.4 million (recorded in the table below under "Other")
has been attributed to these warrants based on a valuation performed at the
time of their issuance. In addition, the Company has agreed to issue at the
closing of the Acquisitions options and warrants which are exercisable for a
total of 637,135 shares of Common Stock. As 598,500 of these options and
warrants (including 500,000 additional warrants which will be issued to
shareholders of Great Western) are exercisable at the initial public offering
price, preliminarily no value has been attributed to them. Upon completion of
a Black-Scholes valuation, any additional value will be recorded as goodwill.
A value of $0.4 million (recorded in the table below under "Other") has been
attributed to the 38,635 other options, which are to be issued in connection
with the closing of the Acquisition of Switchboard, that are exercisable at
one-third of the initial public offering price, but which vest as an entirety
in the 37th month following the Acquisitions.
The following table sets forth the components for accounting purposes of
the consideration with respect to the Acquisitions. The total estimated
purchase price for the Acquisitions of $139.5 million and the related
allocations of the excess purchase price are based upon preliminary estimates
and are subject to certain purchase price adjustments at and following the
closing of the Acquisitions. The table does not reflect the distributions
totaling $1.9 million representing substantially all of the undistributed
earnings of the Acquired Companies that are S Corporations previously taxed
to their stockholders (or in certain cases, amounts equal to the tax payable
by the stockholders on those earnings) and distributable under the relevant
acquisition agreements as of September 30, 1997 (the "S Corporation
Distributions"). However, these amounts are reflected in the pro forma
adjustments as further described in Note 3.
<TABLE>
<CAPTION>
OPTIONS AND
WARRANTS
VALUE OF EXERCISABLE
COMMON PROMISSORY FOR COMMON
ACQUISITION CASH STOCK NOTES OTHER STOCK
- ----------------------------- --------- ---------- ------------ ------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Great Western................. $55,000 $ 8,000 $15,000 $367 1,256,078
Valu-Line..................... 6,600 4,160 -- -- --
FirsTel....................... 5,000 8,878 2,000 101 50,000
Feist Long Distance........... 1,500 8,000 -- -- --
Minority investment in
KINNET....................... 10,000 8,000 -- -- --
--------- ---------- ------------ ------- -------------
Subtotal...................... 78,100 37,038 17,000 468 1,306,078
--------- ---------- ------------ ------- -------------
OTHER ACQUIRED COMPANIES:
LDM........................... 3,475 -- -- -- --
Switchboard................... 1,631 -- -- 386 38,635
Telesystems................... -- 960 -- -- 36,000
National Telecom.............. 130 -- 350 -- 12,500
--------- ---------- ------------ ------- -------------
Subtotal.................... 5,236 960 350 386 87,135
--------- ---------- ------------ ------- -------------
Total......................... $83,336 $37,998 $17,350 $854 1,393,213
========= ========== ============ ======= =============
</TABLE>
F-8
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the estimated S Corporation Distributions of $1.9 million
which are expected to be paid to the stockholders of certain of
the Acquired Companies using $1.7 million of cash on hand and a
$0.2 million payable which will be repaid out of proceeds of the
Offering.
(b) Records the related party debt of $659,000 and $1,040,000 that
will be acquired by ACG in connection with the acquisitions of
Feist Long Distance and FirsTel, respectively, and which, as
intercompany debt, will not appear on the Company's consolidated
financial statements.
(c) Records the purchase by ACG of the outstanding capital stock or
substantially all of the assets of the Acquired Companies and the
purchase of 49% of the outstanding capital stock of KINNET, for
consideration consisting of (i) $83.3 million payable in cash,
(ii) shares of Common Stock valued for purposes of computing the
estimated purchase price for accounting purposes at $38.0 million,
(iii) promissory notes for $17.4 million, (iv) other payables for
reimbursement of cash paid to purchase two companies by FirsTel in
September 1997 amounting to $0.1 million, and (v) options or
warrants valued for purposes of computing the estimated purchase
price for accounting purposes at $0.7 million, for a total
estimated purchase price of $139.5 million. In preliminarily
determining the purchase price for accounting purposes, warrants
issued in June 1997 to shareholders of Great Western to purchase
756,078 shares of Common Stock at an exercise price of $6.61 per
share were assigned a value of $0.4 million, based on an outside
appraisal obtained in the month of issuance. No value was assigned
to the options and warrants to be issued upon the consummation of
the Offering that are exercisable at the initial public offering
price (500,000 such warrants to be issued to shareholders of Great
Western, 50,000 such warrants to be issued to shareholders of
FirsTel, 36,000 such options to be issued to shareholders of
Telesystems, and 12,500 such options to be issued to shareholders
of National Telecom). Upon completion of a Black-Scholes
valuation, any additional value will be recorded as goodwill. A
value of $0.4 million was placed on the 38,635 options to be
issued to shareholders of Switchboard upon consummation of the
Offering that are exercisable at one-third of the initial public
offering price, but which vest as an entirety at the end of the
37th month following the Acquisitions. This aggregate purchase
price will result in an excess purchase price of $122.8 million
(including $0.6 million of deferred acquisition costs incurred by
ACG) over the fair value of the net assets acquired of $17.3
million. Of this $122.8 million, $105.8 million relates to the
Acquired Companies and $17.0 million relates to KINNET. The excess
cost has been preliminarily allocated to an undifferentiated pool
of intangible assets to be amortized over a period of 25 years for
pro forma purposes. The Company intends to obtain independent
appraisals of the Acquired Companies and the 49% interest in
KINNET. Upon completion of the appraisal and in accordance with
the terms thereof, the intangible assets in the pool will be
allocated to the appropriate asset classifications, including
customer lists and goodwill. The principal stockholder of Great
Western has recently objected to the impact of the reverse stock
split on the warrants issued in June 1997 upon the execution of
the original Great Western acquisition agreement. CPFF and such
prinicpal stockholder have agreed to negotiate in good faith to
determine the type and amount of any consideration appropriately
payable by CPFF to the holders of such warrants. While any payment
will be made solely by CPFF and will not involve the assets of ACG
or the issuance of additional ACG common shares or common share
equivalents, such a payment may be construed for accounting
purposes as a capital contribution by CPFF and deemed a payment by
ACG of additional consideration for the Great Western acquisition.
This would increase the goodwill associated with the Great Western
acquisition and the related amortization charges.
(d) Records assumed cash proceeds of $112.0 million from the issuance
of shares of ACG Common Stock net of estimated offering costs of
$11.3 million including amounts deferred and payable
F-9
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
by ACG at September 30, 1997. Offering costs primarily consist of
underwriting discounts and commissions, accounting fees, legal
fees and printing expenses.
(e) Records the payment of the cash portion of the total consideration
($83.3 million).
(f) Records the payment of debt of ACG and the Acquired Companies
which is expected to be paid from the proceeds of the Offering.
(g) Records the payment of $1.75 million with respect to a five-year
noncompetition agreement between Rod K. Cutsinger and the Company
which will be amortized over its term beginning in the period in
which it is paid.
(h) Records the issuance of 142,857 shares of Series A Redeemable
Convertible Preferred Stock in consideration of an agreement
entered into with Northwestern Public Service Company to negotiate
in good faith with respect to a strategic alliance. The Preferred
Stock has an aggregate liquidation preference of $2 million, is
convertible into shares of common stock at the initial public
offering price 18 months after the consummation of the initial
public offering and is redeemable, at the option of the Company,
for $1.25 million in the 13th month after the initial public
offering if no strategic alliance has been entered into. The
Preferred Stock has been assigned a value of $1,122,000
representing the estimated fair value on the date of grant based
on an imputed market interest rate of 10%.
F-10
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the unaudited pro forma and
post-acquisition combined balance sheet adjustments at September 30, 1997 (in
thousands):
<TABLE>
<CAPTION>
(A) (B) (C)
---------- --------- ----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents . $(1,745) $ -- $ --
Accounts receivable, net .. -- -- --
Deferred costs............. -- -- --
Prepaid expenses and
other..................... -- -- --
---------- --------- ----------
Total current assets .... (1,745) -- --
Property and equipment,
net....................... -- -- --
Intangible assets, net .... -- -- 105,816
Equity investment in
KINNET ................... -- -- 18,041
Other noncurrent assets ... -- -- (561)
---------- --------- ----------
Total assets............. $(1,745) $ -- $123,296
========== ========= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current maturities of
long-term debt ........... $ 194 $ -- $ --
Accounts payable and
accrued
expenses.................. -- -- 101
Current portion of notes
payable to
related parties........... -- (1,699) 117
Obligation for cash
portion of
consideration in the
Acquisitions.............. -- -- 83,336
---------- --------- ----------
Total current
liabilities............... 194 (1,699) 83,554
Notes payable to related
parties, net
of current maturities .... -- -- 17,233
Long-term debt, net of
current
maturities................ -- -- --
---------- --------- ----------
Total liabilities........ 194 (1,699) 100,787
---------- --------- ----------
Stockholders' equity
Preferred stock ......... -- -- --
Common stock............. -- -- (459)
Additional
paid-in-capital........... -- 1,699 36,113
Retained earnings........ (1,939) -- (13,145)
---------- --------- ----------
Total stockholders' equity
(deficit)................. (1,939) 1,699 22,509
---------- --------- ----------
Total liabilities and
stockholders'
equity.................... $(1,745) $ -- $123,296
========== ========= ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
TOTAL
TOTAL POST-
PRO FORMA ACQUISITION
ADJUSTMENTS (D) (E) (F) (G) (H) ADJUSTMENTS
------------- ---------- ----------- ---------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents . $ (1,745) $100,652 $(83,336) $(4,258) $(1,750) $ -- $ 11,308
Accounts receivable, net .. -- -- -- -- -- -- --
Deferred costs............. -- -- -- -- -- -- --
Prepaid expenses and
other..................... -- -- -- -- -- -- --
------------- ---------- ----------- ---------- ---------- -------- -------------
Total current assets .... (1,745) 100,652 (83,336) (4,258) (1,750) -- 11,308
Property and equipment,
net....................... -- -- -- -- -- -- --
Intangible assets, net .... 105,816 -- -- -- -- -- --
Equity investment in
KINNET ................... 18,041 -- -- -- -- -- --
Other noncurrent assets ... (561) (619) -- -- 1,750 1,122 2,253
------------- ---------- ----------- ---------- ---------- -------- -------------
Total assets............. $121,551 $100,033 $(83,336) $(4,258) $ -- $1,122 $ 13,561
============= ========== =========== ========== ========== ======== =============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current maturities of
long-term debt ........... $ 194 $ -- $ -- $ (985) $ -- $ -- $ (985)
Accounts payable and
accrued
expenses.................. 101 (1,221) -- (101) -- -- (1,322)
Current portion of notes
payable to
related parties........... (1,582) -- -- (1,856) -- -- (1,856)
Obligation for cash
portion of
consideration in the
Acquisitions.............. 83,336 -- (83,336) -- -- -- (83,336)
------------- ---------- ----------- ---------- ---------- -------- -------------
Total current
liabilities............... 82,049 (1,221) (83,336) (2,942) -- -- (87,499)
Notes payable to related
parties, net
of current maturities .... 17,233 -- -- -- -- -- --
Long-term debt, net of
current
maturities................ -- -- -- (1,316) -- -- (1,316)
------------- ---------- ----------- ---------- ---------- -------- -------------
Total liabilities........ 99,282 (1,221) (83,336) (4,258) -- -- (88,815)
------------- ---------- ----------- ---------- ---------- -------- -------------
Stockholders' equity
Preferred stock ......... -- -- -- -- -- 1,122 1,122
Common stock............. (459) 1 -- -- -- -- 1
Additional
paid-in-capital........... 37,812 101,253 -- -- -- -- 101,253
Retained earnings........ (15,084) -- -- -- -- -- --
------------- ---------- ----------- ---------- ---------- -------- -------------
Total stockholders' equity
(deficit)................. 22,269 101,254 -- -- -- 1,122 102,376
------------- ---------- ----------- ---------- ---------- -------- -------------
Total liabilities and
stockholders'
equity.................... $121,551 $100,033 $(83,336) $(4,258) $ -- $1,122 $ 13,561
============= ========== =========== ========== ========== ======== =============
</TABLE>
F-11
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
ADJUSTMENTS:
Year Ended December 31, 1996
(a) Reflects the amortization of excess purchase price relating to the
Acquired Companies which has been preliminarily allocated to an
undifferentiated pool of intangible assets to be amortized over a
period of 25 years for pro forma purposes. The Company intends to
obtain independent appraisals of the Acquired Companies. Upon
completion of the appraisals and in accordance with the terms
thereof, the intangible assets in the pool will be allocated to
the appropriate asset classifications, including customer lists
and goodwill. These appraisals may result in changes to the
estimated useful life noted above.
(b) Reflects the equity in losses of KINNET of $388,000 and the
amortization of $681,000 of related excess purchase price which
has been recorded as intangible assets comprised of goodwill to be
amortized over 25 years.
(c) Reflects an increase of $774,000 of interest expense attributable
to debt issued as consideration for the Acquisitions, net of a
reduction of $995,000 in interest expense on debt of the Acquired
Companies which is to be repaid from the proceeds of the Offering.
(d) Reflects the revenue and expenses of two companies acquired by
FirsTel in September 1997.
(e) Reflects the incremental provisions for federal and state income
taxes relating to the other pro forma adjustments and for income
taxes on heretofore S Corporation income.
(f) Reflects the amortization of the five year, $1.1 million strategic
alliance and non-compete agreement entered into with Northwestern
Public Service Company.
F-12
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes unaudited pro forma combined statement of
operations adjustments for the year ended December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
---------- ---------- ------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues--Telecommunications
services..................... $ -- $ -- $ -- $1,728 $ -- $ -- $ 1,728
Cost of services.............. -- -- -- 1,044 -- -- 1,044
Depreciation and
amortization................. 4,233 -- -- 43 -- 224 4,500
---------- ---------- ------- -------- -------- -------- -------------
Gross profit................ (4,233) -- -- 641 -- (224) (3,816)
Selling, general and
administrative
expenses..................... -- -- -- 657 -- -- 657
---------- ---------- ------- -------- -------- -------- -------------
Income (loss) from
operations................... (4,233) -- -- (16) -- (224) (4,473)
Other income (expense):
Other income and expense,
net.......................... -- -- -- (3) -- -- (3)
Interest expense............ -- -- 221 -- -- -- 221
Equity in earnings of
KINNET....................... -- (1,069) -- -- -- -- (1,069)
---------- ---------- ------- -------- -------- -------- -------------
Income (loss) before income
taxes........................ (4,233) (1,069) 221 (19) -- (224) (5,324)
Provision for income taxes ... -- -- -- -- 821 -- 821
---------- ---------- ------- -------- -------- -------- -------------
Net income (loss)............. $(4,233) $(1,069) $221 $ (19) $(821) $(224) $(6,145)
========== ========== ======= ======== ======== ======== =============
</TABLE>
Nine Months Ended September 30, 1997
(a) Reflects the amortization of excess purchase price relating to the
Acquired Companies which has been preliminarily allocated to an
undifferentiated pool of intangible assets to be amortized over a
period of 25 years for pro forma purposes.
(b) Reflects the equity in losses of KINNET of $146,000 and the
amortization of $511,000 of related excess purchase price which
has been recorded as intangible assets comprised of goodwill to be
amortized over 25 years.
(c) Reflects an increase of $581,000 of interest expense attributable
to debt issued as consideration for the Acquisitions, net of a
reduction of $455,000 in interest expense on debt of the Acquired
Companies which is to be repaid from the proceeds of the Offering.
(d) Reflects the incremental provisions for federal and state income
taxes relating to the other pro forma adjustments and for income
taxes on heretofore S Corporation income.
(e) Reflects the amortization of the five year, $1.1 million strategic
alliance and non-competition agreement entered into with
Northwestern Public Service Company.
(f) The Company estimates it will record compensation expense of
approximately $950,000 during the fourth quarter of 1997 related
to options issued in December 1997 to two officers to purchase
300,000 shares of common stock at an exercise price of $2.50 per
share.
F-13
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes unaudited pro forma combined income
statement adjustments for the nine months ended September 30, 1997 (in
thousands):
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
---------- --------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues--
Telecommunications services . $ -- $ -- $ -- $ -- $ -- $ --
Cost of services.............. -- -- -- -- -- --
Depreciation and
amortization................. 3,174 -- -- -- 168 3,342
---------- --------- -------- -------- -------- -------------
Gross profit................ (3,174) -- -- -- (168) (3,342)
Selling, general and
administrative expenses...... -- -- -- -- -- --
---------- --------- -------- -------- -------- -------------
Income (loss) from
operations................. (3,174) -- -- -- (168) (3,342)
Other income (expense):
Other income and expense,
net........................ -- -- -- -- -- --
Interest expense............ -- -- (126) -- -- (126)
Equity in earnings of
KINNET..................... -- (657) -- -- -- (657)
---------- --------- -------- -------- -------- -------------
Income (loss) before income
taxes........................ (3,174) (657) (126) -- (168) (4,125)
Provision for income taxes ... -- -- -- 730 -- 730
---------- --------- -------- -------- -------- -------------
Net income (loss)............. $(3,174) $ (657) $(126) $(730) $(168) $(4,855)
========== ========= ======== ======== ======== =============
</TABLE>
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Advanced Communications Group, Inc.
We have audited the accompanying consolidated balance sheet of Advanced
Communications Group, Inc. as of December 31, 1996, and the related
consolidated statements of operations, stockholders' deficit, and cash flows
for the period from inception (June 6, 1996) through December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Advanced
Communications Group, Inc. as of December 31, 1996, and the results of its
operations and its cash flows for the period from inception (June 6, 1996)
through December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Houston, Texas
September 15, 1997,
except as to Footnote 5
which is as of February 11, 1998
F-15
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 33,450 $ --
Employee advances........................................ 1,388 --
-------------- ---------------
Total current assets................................... 34,838 --
Office furniture and equipment, net...................... 8,252 6,515
Other non-current assets................................. 48,480 1,184,230
-------------- ---------------
Total assets........................................... $ 91,570 $ 1,190,745
============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Note payable to stockholder.............................. $ 565,047 $ 1,706,469
Accrued interest payable to stockholder.................. 9,890 149,412
Accounts payable and accrued expenses.................... 148,653 1,551,131
-------------- ---------------
Total current liabilities.............................. 723,590 3,407,012
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $.00001 par, 180,000,000 shares
authorized,
8,232,276 shares issued and outstanding................. 82 82
Additional paid-in capital .............................. 26,718 46,718
Accumulated deficit ..................................... (658,820) (2,263,067)
-------------- ---------------
Total stockholders' deficit............................ (632,020) (2,216,267)
-------------- ---------------
Total liabilities and stockholders' deficit................ $ 91,570 $ 1,190,745
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(JUNE 6, 1996) FOR THE NINE
THROUGH MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Revenues............................ $ -- $ --
General and administrative
expenses........................... 648,930 1,462,172
Depreciation and amortization ...... -- 2,481
Interest expense.................... 9,890 139,594
Other (income) loss................. -- --
----------------- ------------------
Loss before income tax benefit ... 658,820 1,604,247
Income tax benefit.................. -- --
----------------- ------------------
Net loss.......................... $658,820 $1,604,247
================= ==================
Net loss per share................ $ .08 $ .19
================= ==================
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Period From Inception (June 6, 1996) Through September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
----------- -------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Initial capitalization....... 8,232,276 $82 $26,718 $ -- $ 26,800
Net loss..................... -- -- -- (658,820) (658,820)
----------- -------- ------------ --------------- ---------------
BALANCES, December 31, 1996 . 8,232,276 82 26,718 (658,820) (632,020)
Issuance of stock warrants
(unaudited)................. -- -- 20,000 -- 20,000
Net loss (unaudited)......... -- -- -- (1,604,247) (1,604,247)
----------- -------- ------------ --------------- ---------------
BALANCES, September 30, 1997
(unaudited)................. 8,232,276 $82 $46,718 $ (2,263,067) $ (2,216,267)
=========== ======== ============ =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(JUNE 6, 1996) FOR THE NINE
THROUGH MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................... $(658,820) $ (1,604,247)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization............................................ -- 2,481
Stock-based compensation expense......................................... -- 20,000
Changes in assets and liabilities:
(Increase) decrease in employee advances................................ (1,388) 1,388
Increase in property and equipment...................................... (8,252) --
Increase in other non-current assets.................................... (48,480) (1,136,494)
Increase in accounts payable and accrued expenses....................... 148,653 1,402,478
----------------- ------------------
Net cash used by operating activities.................................. (568,287) (1,314,394)
----------------- ------------------
Cash flows from financing activities:
Increase in note payable to stockholder.................................. 565,047 1,141,422
Increase in accrued interest payable to stockholder...................... 9,890 139,522
Issuance of common stock................................................. 26,800 --
----------------- ------------------
Net cash provided by financing activities.............................. 601,737 1,280,944
----------------- ------------------
Net increase (decrease) in cash and cash equivalents....................... 33,450 (33,450)
Cash and cash equivalents:
Beginning of period...................................................... -- 33,450
----------------- ------------------
End of period............................................................ $ 33,450 $ --
================= ==================
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997 (UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Advanced Communications Group, Inc. (the "Company") (formerly 1+USA, Inc.)
was incorporated in the State of Delaware in June 1996 to create a regional
competitive local exchange carrier that provides an integrated portfolio of
telecommunications services principally to business customers in selected
service areas of Southwestern Bell and U S WEST. As of September 30, 1997,
the Company intended to acquire the stock or assets of nine operating
companies (the "Acquired Companies") and a 49% interest in another operating
company (collectively, the "Acquisitions") and complete an initial public
offering of its common stock. The Company has not conducted any operations,
and all activities to date have related to the offering and the Acquisitions.
The Company is dependent upon the public offering to complete the
Acquisitions and to repay an obligation it has incurred under a promissory
note made in favor of its major stockholder, Consolidation Partners Founding
Fund, L.L.C. ("CPFF"). There can be no assurance that the Acquisitions will
be completed or that the Company will be able to generate future operating
revenues.
2. ACQUISITIONS OF THE ACQUIRED COMPANIES:
Prior to September 1997, the Company signed definitive agreements pursuant
to which it agreed to acquire in mergers, stock purchases or asset purchases,
all of the outstanding capital stock of Great Western Directories, Inc.,
Valu-Line of Longview, Inc., Feist Long Distance Service, Inc., FirsTel, Inc.
and Tele-Systems, Inc., substantially all of the assets of Long Distance
Management II, Inc., Long Distance Management of Kansas, Inc., The
Switchboard of Oklahoma City, Inc., and National Telecom, a proprietorship,
and 49% of the outstanding capital stock of KIN Network, Inc. The
consideration to be paid by the Company in the Acquisitions was to include
cash, common stock of the Company, notes, and options or warrants to purchase
common stock of the Company and the assumption of debt in the case of two
companies.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Unaudited interim periods -- The interim consolidated financial statements
as of September 30, 1997, and for the nine months then ended are unaudited.
These interim consolidated financial statements have been prepared on the
same basis as the annual financial statements included herewith. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the consolidated balance sheets,
results of operations and cash flows with respect to the interim financial
statements, have been included. The results of operations for the interim
period are not necessarily indicative of the results for the entire fiscal
year.
Principles of consolidation -- The consolidated financial statements
include the accounts of Advanced Communications Group, Inc. and its
wholly-owned subsidiaries which were formed for the sole purpose of acquiring
the stock or assets of the Acquired Companies.
Deferred acquisition and deferred offering costs -- The Company has
deferred certain legal, accounting, appraisal and other costs incurred in
connection with the Acquisitions and the Offering. At December 31, 1996 and
September 30, 1997, deferred acquisition costs amounted to approximately
$40,900 and $560,000, respectively, and deferred offering costs amounted to
$2,700 and $619,000, respectively. At such time as the Company completes the
Acquisitions, deferred acquisition costs will be included in the
determination of excess purchase price. Deferred offering costs will be
charged to additional paid-in capital upon the closing of the Offering.
F-20
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Office furniture and equipment -- Office furniture and equipment are
stated at cost. Depreciation is computed using the straight-line method over
the respective lives of the assets. The estimated useful lives are as
follows:
Furniture and fixtures.............. 7 years
Computer equipment and software .... 3 years
Income taxes -- No provision for Federal, state and local income taxes has
been made because the Company has sustained cumulative losses since its
inception in June 1996. A 100% valuation allowance has been established for
the related deferred tax asset.
Net Loss Per Share -- Net loss per share is computed using the weighted
average number of shares outstanding. The weighted average shares outstanding
were 8,232,276 for the period from inception (June 6, 1996) through December
31, 1996 and for the nine months ended September 30, 1997.
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.
New Accounting Pronouncements -- Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," allows
entities to choose between a new fair value based method of accounting for
employee stock options or similar equity instruments and the current
intrinsic, value-based method of accounting required by Accounting Principles
Board Opinion No. 25 ("APB No. 25"). Entities electing to remain with the
accounting in APB No. 25 must make pro forma disclosures of net income and
earnings per share as if the fair value method of accounting had been
applied. No employee stock options or similar equity instruments were issued
by the Company prior to January 1, 1997. The Company will provide pro forma
disclosure of net income and earnings per share, as applicable in the notes
to future consolidated financial statements.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share". For the Company, SFAS No. 128 will be effective
for the year ended December 31, 1997, but not for any periods ended prior to
that time. SFAS No. 128 simplifies the standards required under current
accounting rules for computing earnings per share and 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. Diluted EPS is computed similarly to full diluted earnings per
share under current accounting rules. The implementation of SFAS No. 128 is
not expected to have a material effect on the Company's earnings per share as
determined under current accounting rules.
4. TRANSACTIONS WITH RELATED PARTIES:
COMMON OWNERSHIP AND MANAGEMENT
At December 31, 1996 and September 30, 1997, a total of 7,986,074 shares
of the Company's common stock was owned by CPFF and by two individuals who
then served as directors and officers of both the Company and CPFF and who
own the controlling interest in CPFF.
SUBORDINATED PROMISSORY NOTE IN FAVOR OF CPFF
The Company's activities have been financed through a subordinated note
agreement with CPFF. In September 1996, the Company executed a Subordinated
Promissory Note (the "Note") in favor of CPFF
F-21
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in the principal amount of $1,200,000 and bearing an annual interest rate of
eight (8%) percent. Under its original terms, the principal and accrued
interest under the Note were to be paid in full on the earlier of September
15, 1997, or the date on which the Company's common stock becomes listed or
quoted on a national basis. During the year ended December 31, 1996 and the
nine months ended September 30, 1997, the Company incurred interest expense
of $9,890 and $139,594, respectively, under the Note. In September 1997, the
Company and CPFF amended the terms of the Note to provide for an increase in
the principal balance from $1.2 million to $2.2 million, and to extend the
maturity of the Note to the earlier of December 31, 1998 or the consummation
of the Offering.
STOCK OPTIONS AND WARRANTS
In May 1997 the Company granted to one of its consultants a warrant for
the purchase of 7,561 shares of common stock at an exercise price of $2.65
per share. This warrant is exercisable in whole or in part at any time up to
its expiration date in May 2007. In connection with the issuance of this
warrant, the Company recorded a non-recurring, non-cash compensation expense
of $20,000 reflecting the difference between the exercise price for the
shares and the estimated fair value of the shares at the date of grant.
In June 1997, the Company granted options for the purchase of 775,000
shares of common stock at an exercise price equal to the fair value of a
share of common stock at the date of grant, specifically $2.50 per share, to
three individuals. In December 1997, two of these individuals exchanged their
options to purchase 525,000 shares of common stock for ten-year, fully vested
warrants to purchase a like number of shares of common stock at the same
exercise price.
In June 1997, the Company's Board of Directors approved a Stock Awards
Plan (the "Plan") which provides for the granting or awarding of incentive or
non-qualified stock options, stock appreciation rights, restricted or
deferred stock, dividend equivalents and other incentive awards to directors,
officers, and key employees of the Company. The number of shares of common
stock authorized and reserved for issuance under the Plan is 3,500,000
shares.
Subsequent to September 30, 1997, the Company agreed to make various
grants and awards under the Plan to employees and officers of the Acquired
Companies, to outside directors, and to certain individuals who became
officers of the Company after September 30, 1997. These options are
exercisable at the initial public offering price, and they have various
vesting and termination provisions. Also, the Company agreed to compensate
each of its outside directors with annual option awards for 15,000 shares of
common stock. Under this arrangement, options for 90,000 shares, exercisable
at the initial public offering price, will be issued annually to six outside
directors. In addition, three individuals who become officers of the Company
after September 30, 1997, have been awarded ten-year options for the purchase
of 1,275,000 shares of common stock, consisting of options for the purchase
of 300,000 shares at a price of $2.50 per share and options for the purchase
of 975,000 shares which are exercisable at the initial public offering price.
The Company estimates that it will record compensation expense of
approximately $950,000 during the fourth quarter of 1997 related to the
300,000 options issued at $2.50 per share. Actual compensation expense to be
recorded will be determined upon the completion of a third-party valuation of
the fair value of these options on the date of grant.
OPERATING LEASE AGREEMENT
In January 1997, the Company entered into a four year lease agreement with
CPFF pursuant to which the Company leases furniture and office equipment.
Under this agreement the Company is obligated to make monthly rental payments
to CPFF of $1,163. For the nine months ended September 30, 1997, the Company
recognized approximately $10,000 of rental expense related to this lease
agreement.
5. STOCK SPLIT
In February 1998, ACG's Board of Directors approved an approximately
1-for-2.645 reverse stock split, subject to stockholder approval. This
reverse stock split has been reflected retroactively for all periods
presented.
F-22
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SUBSEQUENT EVENT
On September 29, 1997, the Company incorporated a new wholly owned
subsidiary under the laws of the State of Delaware. On October 6, 1997, the
Company changed its name to Advanced Communications Corp. and subsequently
the new subsidiary changed its name to Advanced Communications Group, Inc.
("ACG"). As of October 6, 1997 and in order to facilitate securing requisite
regulatory permits, ACG entered into new definitive agreements to acquire the
stock or assets of the Acquired Companies and a 49% interest in a fiber optic
network company that replaced the various definitive agreements that had been
entered into earlier with the Acquired Companies. In the aggregate, the
consideration to be paid by ACG in the Acquisitions includes $83.3 million in
cash, shares of ACG's Common Stock valued for purposes of computing the
estimated purchase price for accounting purposes at $37.9 million, $17.4
million in promissory notes, and options and warrants to purchase 1,393,213
shares of ACG's Common Stock.
Also as of October 6, 1997, the Company, ACG and a wholly owned subsidiary
of ACG entered into an Agreement of Merger pursuant to which, after the
consummation of a reverse stock split and concurrently with the closing of
the Acquisitions, the Company will be merged with the subsidiary of ACG, with
the Company as the surviving corporation. In the merger, each share of common
stock of the Company will be converted into one share of Common Stock of ACG,
ACG will succeed to all options and warrants of the Company, and the Company
will become a wholly owned subsidiary of ACG.
On October 10, 1997, ACG filed with the Securities and Exchange Commission
a Registration Statement on Form S-1 relating to the initial public offering
of its Common Stock. The closing of the Acquisitions and the merger of the
Company with the subsidiary of ACG will occur concurrently with, and are a
condition to, the closing of that offering. A portion of the proceeds of that
offering will be used to pay the cash portion of the consideration in the
Acquisitions. ACG has not conducted any operations, and all of its activities
to date have related to the public offering and the Acquisitions.
In January 1998, ACG entered into an agreement with a certain utility
company regarding the possible creation of a strategic alliance. Under the
terms of the agreement, which will be consummated contemporaneously with the
closing of the initial public offering, ACG will issue 142,857 shares of
Series A Redeemable Convertible Preferred Stock (Preferred Stock) with an
aggregate liquidation preference of $2 million. The Preferred Stock is
convertible into shares of common stock at the initial public offering price
eighteen months after the consummation of the initial public offering. The
Preferred Stock does not pay dividends and is not entitled to vote in the
election of directors. If a strategic alliance has not been entered into by
the 13th month after the initial public offering, ACG may, at its option,
redeem the Preferred Stock for total proceeds of $1.25 million.
ACG is dependent on the public offering to complete the Acquisitions and
to repay an obligation of the Company to CPFF. There can be no assurance that
the Acquisitions will be completed or that ACG will be able to generate
future operating revenues.
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Great Western Directories, Inc.
Amarillo, Texas
We have audited the accompanying balance sheets of Great Western
Directories, Inc. as of January 31, 1996 and December 31, 1996, and the
related statements of operations and cash flows for the years ended January
31, 1995 and 1996 and December 31, 1996, and the related statements of
stockholders' equity for the years ended January 31, 1995 and 1996 and the
eleven months ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Great Western
Directories, Inc. as of January 31, 1996 and December 31, 1996, and the
results of its operations and its cash flows for the years ended January 31,
1995 and 1996 and December 31, 1996 in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
October 2, 1997
F-24
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31, SEPTEMBER 30,
1996 1996 1997
------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash.................................................... $ 31,693 $ 719,268 $ 1,317,877
Accounts receivable..................................... 17,678,787 21,607,728 24,489,630
Less: Allowance for doubtful accounts................... (6,590,847) (8,282,945) (9,628,295)
------------- -------------- ---------------
Net accounts receivable............................. 11,087,940 13,324,783 14,861,335
------------- -------------- ---------------
Income taxes receivable................................. 1,072,378 384,145 384,145
Deferred directory costs................................ 3,436,346 3,052,944 2,460,618
Deferred income taxes................................... 1,085,748 1,627,821 --
Other current assets.................................... 423,400 377,275 7,209
------------- -------------- ---------------
Total current assets................................ 17,137,505 19,486,236 19,031,184
------------- -------------- ---------------
PROPERTY AND EQUIPMENT
Land.................................................... 79,900 79,900 79,900
Building and improvements............................... 640,059 644,061 654,312
Furniture, fixtures and equipment....................... 1,722,500 1,991,215 2,253,623
------------- -------------- ---------------
2,442,459 2,715,176 2,987,835
Less: Accumulated depreciation.......................... (1,400,578) (1,597,008) (1,764,584)
------------- -------------- ---------------
Net property and equipment.......................... 1,041,881 1,118,168 1,223,251
------------- -------------- ---------------
OTHER ASSETS.............................................. 2,391 4,607 18,832
------------- -------------- ---------------
TOTAL ASSETS.............................................. $18,181,777 $20,609,011 $20,273,267
============= ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft.......................................... $ 33,114 $ -- $ --
Accounts payable........................................ 1,378,318 1,393,021 1,626,845
Payable to related parties.............................. 270,246 483,311 172,271
Accrued liabilities..................................... 467,530 1,138,730 1,768,319
Note payable to bank.................................... 2,100,000 -- --
Current maturities of long-term debt.................... 2,109,740 1,849,309 --
Prepayments on directory advertising.................... 3,690,261 3,170,840 2,452,723
------------- -------------- ---------------
Total current liabilities........................... 10,049,209 8,035,211 6,020,158
LONG-TERM DEBT, less current maturities................... 3,531,051 -- --
------------- -------------- ---------------
Total liabilities................................... 13,580,260 8,035,211 6,020,158
------------- -------------- ---------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized shares of
10,000, 1,250 shares issued and outstanding............ 1,250 1,250 1,250
Additional paid-in capital.............................. 5 5 5
Retained earnings....................................... 4,600,262 12,572,545 14,251,854
------------- -------------- ---------------
Total stockholders' equity.......................... 4,601,517 12,573,800 14,253,109
------------- -------------- ---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY..................................... $18,181,777 $20,609,011 $20,273,267
============= ============== ===============
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED YEAR ENDED NINE MONTHS ENDED
JANUARY 31, DECEMBER 31, SEPTEMBER 30,
---------------------------- -------------- ----------------------------
1995 1996 1996 1996 1997
------------- ------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
ADVERTISING REVENUES............... $29,406,843 $36,469,094 $44,324,097 $33,463,165 $35,623,889
COST OF REVENUES
Commissions and other sales
expenses........................ 7,443,762 8,784,336 9,543,696 6,747,684 8,542,611
Publishing, related party........ 94,448 578,223 1,077,795 635,557 843,021
Publishing, other................ 8,807,084 8,944,754 9,333,705 6,718,801 6,345,956
Distribution, related party ..... 558,885 697,250 815,566 332,585 180,907
Distribution, other.............. 828,892 563,362 622,820 676,106 777,332
Depreciation and amortization ... 272,296 228,324 223,434 171,243 167,576
------------- ------------- -------------- ------------- -------------
Total cost of revenues......... 18,005,367 19,796,249 21,617,016 15,281,976 16,857,403
------------- ------------- -------------- ------------- -------------
Gross margin................... 11,401,476 16,672,845 22,707,081 18,181,189 18,766,486
GENERAL AND ADMINISTRATIVE
EXPENSES
Salaries and payroll taxes ...... 4,672,222 5,953,869 6,320,326 4,656,001 5,565,196
Provision for bad debts.......... 2,907,720 3,249,165 4,650,918 3,764,746 3,590,097
Other............................ 3,204,938 3,457,492 4,015,824 3,185,682 3,491,993
------------- ------------- -------------- ------------- -------------
Total general and
administrative expenses....... 10,784,880 12,660,526 14,987,068 11,606,429 12,647,286
------------- ------------- -------------- ------------- -------------
Total operating income......... 616,596 4,012,319 7,720,013 6,574,760 6,119,200
------------- ------------- -------------- ------------- -------------
OTHER INCOME (EXPENSE)
Interest expense................. (216,228) (602,100) (503,768) (449,106) (49,751)
Settlement of litigation, net of
expenses of $318,496............ -- -- 6,281,504 6,281,504 --
Other, net....................... 80,520 66,857 93,587 68,089 57,977
------------- ------------- -------------- ------------- -------------
Total other income (expense) .. (135,708) (535,243) 5,871,323 5,900,487 8,226
------------- ------------- -------------- ------------- -------------
Income before income taxes .... 480,888 3,477,076 13,591,336 12,475,247 6,127,426
PROVISION FOR INCOME TAXES......... 245,497 1,307,290 5,294,596 4,828,254 2,048,117
------------- ------------- -------------- ------------- -------------
NET INCOME......................... $ 235,391 $ 2,169,786 $ 8,296,740 7,646,993 4,079,309
============= ============= ============== ============= =============
NET INCOME PER SHARE............... $ 188.31 $ 1,735.83 $ 6,637.39 $ 6,117.59 $ 3,263.45
============= ============= ============== ============= =============
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
-------- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances, January 31, 1994........................... $1,250 $5 $ 2,287,585 $ -- $ 2,228,840
Cash dividends ($37 per share)....................... -- -- (46,250) -- (46,250)
Net income........................................... -- -- 235,391 -- 235,391
-------- ------------ -------------- ----------- -------------
Balances, January 31, 1995........................... 1,250 5 2,476,726 -- 2,477,981
Cash dividends ($37 per share)....................... -- -- (46,250) -- (46,250)
Net income........................................... -- -- 2,169,786 -- 2,169,786
-------- ------------ -------------- ----------- -------------
Balances, January 31, 1996........................... 1,250 5 4,600,262 -- 4,601,517
Cash dividends ($37 per share)....................... -- -- (46,250) -- (46,250)
Net income (eleven months)........................... -- -- 8,018,533 -- 8,018,533
-------- ------------ -------------- ----------- -------------
Balances, December 31, 1996.......................... 1,250 5 12,572,545 12,573,800
Purchase of treasury stock (31.25 shares, unaudited) -- -- -- (225,000) (225,000)
Issuance of treasury stock (31.25 shares, unaudited). -- -- -- 225,000 225,000
Cash dividends ($480 per share, unaudited) .......... -- -- (600,000) -- (600,000)
Cash dividends ($1,440 per share, unaudited) ........ -- -- (1,800,0000) -- (1,800,000)
Net income (unaudited)............................... -- -- 4,079,309 -- 4,079,309
-------- ------------ -------------- ----------- -------------
Balances, September 30, 1997 (unaudited) ............ $1,250 $5 $ 14,251,854 -- $14,253,109
======== ============ ============== =========== =============
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED YEAR ENDED NINE MONTHS
JANUARY 31, DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------- -------------- ----------------------------
1995 1996 1996 1996 1997
------------- ------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................. $ 235,391 $ 2,169,786 $ 8,296,740 $ 7,646,993 $ 4,079,309
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation and amortization............ 272,296 228,324 223,434 171,243 167,576
Loss on disposal of assets............... -- 72,000 -- -- --
Provision for bad debts.................. 2,907,720 3,249,165 4,650,918 3,764,746 3,590,097
Deferred income taxes.................... (288,362) (68,045) (542,074) (605,855) 1,627,821
Changes in:
Accounts receivable..................... (5,630,561) (7,505,966) (6,707,225) (5,444,897) (5,126,649)
Deferred directory costs................ (402,971) (1,159,636) (696,008) (444,023) 592,326
Income taxes receivable................. 464,836 (755,005) 688,233 1,098,919 --
Accounts payable........................ (84,661) (708,179) (569,983) (1,389,581) (77,216)
Accrued liabilities..................... (471,403) 85,664 886,520 1,075,841 629,589
Prepayments on directory
advertising............................ (198,306) 825,617 (352,931) (668,431) (718,117)
Federal income taxes payable............ -- -- -- 3,177,789 --
Other, net............................... (622,044) 611,754 72,136 30,630 355,841
------------- ------------- -------------- ------------- -------------
Net cash provided (used) by
operating activities................. (3,818,065) (2,954,521) 5,949,760 8,413,374 5,120,577
------------- ------------- -------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ....... (279,140) (116,288) (300,125) (69,555) (272,659)
------------- ------------- -------------- ------------- -------------
Net cash used by investing
activities........................... (279,140) (116,288) (300,125) (69,555) (272,659)
------------- ------------- -------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in bank overdraft..................... -- 33,114 (169,011) (169,011) --
Net borrowings (payments) under note
payable to bank........................... (500,000) 1,800,000 -- (750,000) --
Advances under long-term debt................ 4,500,000 3,000,000 -- 2,100,000 --
Principal payments under long-term debt ..... (33,275) (2,037,364) (4,708,019) (1,750,682) (1,849,309)
Purchase of treasury stock................... -- -- -- -- (225,000)
Issuance of treasury stock................... -- -- -- -- 225,000
Cash dividends paid.......................... (46,250) (46,250) (92,500) (46,250) (2,400,000)
------------- ------------- -------------- ------------- -------------
Net cash provided (used) by
financing activities................. 3,920,475 2,749,500 (4,969,530) (615,943) (4,249,309)
------------- ------------- -------------- ------------- -------------
Net increase (decrease) in
cash................................. (176,730) (321,309) 680,105 7,727,876 598,609
CASH AT BEGINNING OF PERIOD.................. 529,732 353,002 39,163 39,163 719,268
------------- ------------- -------------- ------------- -------------
CASH AT END OF PERIOD........................ $ 353,002 $ 31,693 $ 719,268 $ 7,767,039 $ 1,317,877
============= ============= ============== ============= =============
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest .... $ 216,228 $ 602,100 $ 503,768 $ 449,106 $ 49,751
============= ============= ============== ============= =============
Cash paid during the period for income
taxes....................................... $ -- $ 2,017,092 $ 4,350,000 $ 500,000 $ --
============= ============= ============== ============= =============
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1995 AND 1996, DECEMBER 31, 1996
AND SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature Of Operations And General
Great Western Directories, Inc. (the Company) is an independent telephone
directory publisher that publishes telephone directories in Texas, Oklahoma
and California. Revenues are primarily derived from the sale of advertising
space in the telephone directories. During 1996, the Company changed its
fiscal year from January 31 to December 31. However, the year ended rather
than the eleven months ended December 31, 1996 is presented in the statement
of operations and the statement of cash flows for comparative purposes. As
discussed in note 3, the Company changed from a Subchapter C Corporation for
income tax purposes to a Subchapter S Corporation effective January 1, 1997.
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996 and 1997, are unaudited. These interim financial statements have been
prepared on the same basis as the annual financial statements included
herewith. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the balance sheets,
results of operations and cash flows with respect to the interim financial
statements, have been included. The results of operations for the interim
period are not necessarily indicative of the results for the entire fiscal
year.
Allowance For Doubtful Accounts
The Company maintains an allowance for doubtful accounts based on
management's estimate of the collectibility of all accounts receivable. The
allowance for doubtful accounts is established through a provision for
doubtful accounts charged to expense. Accounts receivable are charged against
the allowance when management believes that the collectibility of the
receivable is unlikely. Recoveries of amounts previously charged off are
credited to the allowance. The Company's accounts receivable are unsecured.
The allowance is subjective in nature and may be adjusted due to changes in
economic conditions.
Property And Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed on accelerated methods over the estimated useful
lives of the assets, which range from 3 to 31 years.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
As discussed in note 3, the Company changed to a Subchapter S Corporation
effective January 1, 1997. The income or loss of a Subchapter S Corporation
is includable in the federal income tax returns of the individual
shareholders.
Fair Value Of Financial Instruments
Fair value estimates are made at discrete points in time based on relevant
market information. These estimates may be subjective in nature and involve
uncertainties and matters of significant judgment, and therefore cannot be
deteremined with precision.
F-29
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company believes that the carrying amounts of its current assets and
current liabilities approximate the fair value of such items due to their
short-term nature.
Revenue And Cost Recognition
Advertising revenues are derived from the sale of advertising space in
telephone directories and are recognized on the date that the directory is
published and delivered. If the estimate of total directory costs exceeds
advertising revenues for a specific telephone directory, a provision is made
for the entire amount of such estimated loss. No provision for estimated
losses was included in the financial statements for the years ended January
31, 1995 and 1996 or December 31, 1996.
Directory costs are deferred until the date that the directory is
published and delivered. Directory costs include all direct costs related to
the publishing of a telephone directory, such as publishing and distribution
expenses and commissions on sales, other sales expenses and depreciation and
amortization. General and administrative costs are charged to expense as
incurred.
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. As the future economical
benefit of the direct costs related to prototype directories cannot be
determined, such direct costs are charged to expense as incurred. The Company
had three prototype directories for the year ended January 31, 1995. Direct
costs related to the prototype directories charged to expense totaled
$4,316,000 for the year ended January 31, 1995. The Company had no prototype
directories for the years ended January 31, 1996 or December 31, 1996.
Nonmonetary Transactions
The Company trades advertising space for goods and services used primarily
for promotional, sales and other business activities. Barter revenue is
recorded when directories are published and barter expense is recorded when
goods and services are received or used. Barter transactions are recorded at
their estimated fair value and are included in the accompanying statements of
operations. Barter revenue aggregated approximately $1,507,000, $1,598,000,
$2,155,000, $1,531,000 (unaudited) and $1,555,000 (unaudited) and barter
expense aggregated approximately $1,042,000, $1,459,000, $1,547,000,
$1,902,000 (unaudited) and $1,224,000 (unaudited) for the years ended January
31, 1995 and 1996, December 31, 1996 and the nine months ended September 30,
1996 and 1997, respectively.
Net Income Per Share
Net income per share is computed using the weighted average number of
shares outstanding during the period of computation. The weighted average
shares outstanding were 1,250 for the years ended January 31, 1995 and 1996
and December 31, 1996 and the nine months ended September 30, 1996 and 1997
(unaudited).
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) DEBT OBLIGATIONS
Note Payable To Bank
The note payable to bank was a $2,500,000 line of credit with outstanding
advances of $2,100,000 at January 31, 1996. At December 31, 1996, the Company
had a $2,000,000 line of credit with a bank with
F-30
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
no outstanding advances. The line of credit bears interest at prime, which
was 8.50% at January 31, 1996 and 8.25% at December 31, 1996. The line is
collateralized by accounts receivable and may be used for general corporate
working capital and other purposes as approved by the bank.
Long-Term Debt
Long-term debt at January 31, 1996 and December 31, 1996 consisted of the
following:
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31,
1996 1996
------------- --------------
<S> <C> <C>
Term note payable to bank, due in monthly installments of $204,000
including interest at prime (8.5% and 8.25% at January 31, 1996
and December 31, 1996, respectively) through July 1997, secured
by accounts receivable............................................ $ 5,495,930 $ 1,849,309
Term note payable to bank, due in monthly installments of $4,133
including interest at 1% over prime (9.5% at January 31, 1996),
secured by certain property....................................... 144,861 --
------------- --------------
Total long-term debt............................................... 5,640,791 1,849,309
Less current maturities............................................ (2,109,740) (1,849,309)
------------- --------------
Long-term debt, less current maturities............................ $ 3,531,051 $ --
============= ==============
</TABLE>
The Company has a letter agreement with a bank relating to a line of
credit and the term note payable. The agreement includes provisions which,
among other things, require the maintenance of specified financial ratios and
other debt covenants. Further, the agreement imposes certain restrictions
with respect to new market expansion, dividend distributions and
contributions to the profit sharing plan. At December 31, 1996, the Company
was not in compliance with certain debt covenants requirements and obtained a
waiver of these covenants through July 31, 1997. The Company paid all debt
obligations on June 15, 1997.
(3) INCOME TAXES
The sources of deferred tax assets and the tax effect of each as of
January 31, 1996 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31,
1996 1996
------------- --------------
<S> <C> <C>
Deferred tax assets--
Allowance for doubtful accounts. $1,085,748 $1,627,821
------------- --------------
Total deferred tax assets .... 1,085,748 1,627,821
============= ==============
</TABLE>
F-31
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes for the years ended January 31, 1995 and
1996 and December 31, 1996 consists of the following components:
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31, DECEMBER 31,
1995 1996 1996
------------- ------------- --------------
<S> <C> <C> <C>
Federal:
Current......................... $ 480,662 $1,262,087 $5,057,155
Deferred........................ (298,468) (68,045) (542,074)
State............................. 63,303 113,248 779,515
------------- ------------- --------------
Total provision for income taxes $ 245,497 $1,307,290 $5,294,596
============= ============= ==============
</TABLE>
A reconciliation of the provision for income taxes for the years ended
January 31, 1995 and 1996 and December 31, 1996 at the statutory federal tax
rate to the Company's actual provision for income taxes is as follows:
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31, DECEMBER 31,
1995 1996 1996
------------- ------------- --------------
<S> <C> <C> <C>
Computed "expected" tax expense............. $168,311 $1,216,977 $4,756,968
Nondeductible expenses...................... 36,039 16,702 30,943
State income taxes, net of federal
benefits................................... 41,147 73,611 506,685
------------- ------------- --------------
Total provision for income taxes............ $245,497 $1,307,290 $5,294,596
============= ============= ==============
</TABLE>
Prior to January 1, 1997, the Company had been a Subchapter C Corporation
for income tax purposes, and therefore paid U.S. Federal income taxes. On
March 15, 1997, the Company filed an election to become a nontaxable
Subchapter S Corporation effective January 1, 1997. The effect of the change
in tax status on the net deferred tax asset and corresponding charge to
income tax expense of approximately $1,600,000 was recognized in the
September 30, 1997 financial statements.
(4) LEASES
The Company leases certain property and equipment under leases classified
as operating leases that expire over the next five years. Rental expense for
all operating leases totaled approximately $400,000, $462,000, $472,000,
$365,000 (unaudited) and $434,000 (unaudited) for the years ended January 31,
1995 and 1996, December 31, 1996 and the nine months ended September 31, 1997
and 1996, respectively. For the five fiscal years subsequent to December 31,
1996, future minimum lease payments under noncancelable operating leases
total $1,029,000 and are approximately $318,000, $282,000, $225,000, $143,000
(unaudited) and $61,000, (unaudited) respectively.
(5) RELATED PARTY TRANSACTIONS
Transactions with related parties include certain publishing and
distribution services with shareholders and entities in which they have an
interest. Purchases of services from these related parties for the years
ended January 31, 1995 and 1996, December 31, 1996 and the nine months ended
September 30, 1996 and 1997 were approximately, $653,000, $1,275,000,
$1,893,000, $968,000 and $1,024,000, respectively. Amounts payable to related
parties at January 31, 1996, December 31, 1996 and September 30, 1997 were
approximately $270,000, $483,000 and $172,000, respectively.
Notes receivable from shareholders at January 31, 1996 and December 31,
1996 included notes totaling approximately $405,000 and $360,000,
respectively, which are included in other current assets and represent
advances to related parties. The notes bear interest at 8% and are secured by
personal property.
F-32
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interest income recognized on related-party notes receivable was not
significant for the years ended January 31, 1995 and 1996 and December 31,
1996. The notes were repaid on June 15, 1997.
(6) PROFIT SHARING PLAN
The Company formed a self-employed profit sharing plan in the year ended
January 31, 1996 that provides certain retirement, disability, death and
termination benefits for eligible employees. The Plan contains a 401(k)
arrangement whereby each participant may elect to contribute a portion of
their salary to the Plan. Each Plan year, the Company may contribute an
amount of matching contributions determined at the Company's discretion. Such
matching contributions are allocated to participants based on the Plan's
provisions. Discretionary Company contributions may also be made. Participant
after-tax contributions are not allowed. The provision for the Company's
matching contributions for the years ended January 31, 1996, December 31,
1996 and the nine months ended September 30, 1997 was approximately $40,000,
$53,000 and $103,000, respectively. No discretionary profit sharing
contributions were made to the Plan for the years ended January 31, 1996 or
December 31, 1996.
(7) LITIGATION
During 1996, the Company settled its lawsuit against a utility
telephone-directory publisher related to, among other things, certain
antitrust violations. Under the terms of the settlement, the Company received
approximately $6,282,000 in cash, net of related expenses, and such amount is
reflected in other income for the year ended December 31, 1996.
At December 31, 1996, the Company was the defendant in a class action
lawsuit filed in Sonoma County, California, alleging, among other things,
breach of contract. Subsequent to December 31, 1996, the lawsuit was settled.
Pending expected court approval, the Company will make approximately $479,000
in refunds and credits to various advertisers, and such amount has been
recognized in the accompanying December 31, 1996 financial statements.
The Company has been involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect
on the company's financial condition, liquidity or results of operations.
(8) SUBSEQUENT EVENT
The Company's shareholders have entered into a stock purchase agreement to
sell all of the issued and outstanding common stock of the Company for a
total consideration consisting of $55,000,000 in cash, a $15,000,000
promissory note, shares of common stock of the purchaser, and nontransferable
common stock warrants of the purchaser. The purchase of the Company's stock
is generally contingent upon the successful completion of an initial public
offering by the purchaser.
F-33
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Valu-Line of Longview, Inc.
Longview, Texas
We have audited the accompanying combined balance sheets of Valu-Line of
Longview, Inc. and Related Companies as of December 31, 1995 and 1996, and
the related combined statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Valu-Line of Longview, Inc. and Related Companies as of December 31, 1995 and
1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Houston, Texas
May 23, 1997
F-34
<PAGE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.................................................... $ 281,703 $ 289,612 $ 312,890
Receivables, net........................................ 986,344 1,021,102 1,389,947
Prepaid expenses........................................ 4,508 8,624 4,113
------------ ------------ ---------------
Total current assets.................................. 1,272,555 1,319,338 1,706,950
PROPERTY AND EQUIPMENT, net............................... 2,341,596 1,650,497 1,226,289
OTHER NONCURRENT ASSETS................................... 7,561 6,615 6,552
------------ ------------ ---------------
Total assets.......................................... $3,621,712 $2,976,450 $2,939,791
============ ============ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable, including current portion of long-term
debt................................................... $ 413,741 $ 384,543 $ 423,910
Current portion of capital lease obligation............. 170,297 -- --
Accounts payable and accrued line costs................. 709,259 743,572 748,567
Accrued payroll and related taxes....................... 53,330 65,053 55,964
Sales, property excise and franchise taxes payable ..... 124,378 149,262 158,682
Customer deposits....................................... 12,312 11,162 9,562
------------ ------------ ---------------
Total current liabilities............................. 1,483,317 1,353,592 1,396,685
NOTES PAYABLE, net of current portion..................... 1,698,486 1,357,011 1,082,392
------------ ------------ ---------------
Total liabilities..................................... 3,181,803 2,710,603 2,479,077
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Common stock, no par value; 102,000 shares authorized;
3,000 shares issued and outstanding.................... 3,000 3,000 3,000
Retained earnings....................................... 436,909 262,847 457,714
------------ ------------ ---------------
Total stockholders' equity............................ 439,909 265,847 460,714
------------ ------------ ---------------
Total liabilities and stockholders' equity ........... $3,621,712 $2,976,450 $2,939,791
============ ============ ===============
</TABLE>
See accompanying notes to these combined financial statements.
F-35
<PAGE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ --------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES....................... $13,416,673 $13,330,346 $11,181,125 $8,623,340 $9,058,467
OPERATING EXPENSES:
Line and other direct costs . 6,774,963 7,491,433 6,036,439 4,592,903 5,070,031
Selling, general and
administrative.............. 3,724,582 3,898,106 3,571,468 2,658,506 2,875,098
Depreciation and
amortization................ 399,050 717,631 819,315 615,519 398,548
------------- ------------- ------------- ------------ ------------
Total operating expenses .. 10,898,595 12,107,170 10,427,222 7,866,928 8,343,677
------------- ------------- ------------- ------------ ------------
Income from operations .... 2,518,078 1,223,176 753,903 756,412 714,790
OTHER INCOME (EXPENSE):
Interest expense............. (67,906) (81,579) (185,777) (148,001) (103,491)
Interest income and other,
net......................... 29,943 93,287 72,812 58,659 63,568
------------- ------------- ------------- ------------ ------------
Net income................. $ 2,480,115 $ 1,234,884 $ 640,938 $ 667,070 $ 674,867
============= ============= ============= ============ ============
</TABLE>
See accompanying notes to these combined financial statements.
F-36
<PAGE>
VALU-LINE OF LONGVIEW INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
Period from January 1, 1994 to September 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------ RETAINED
SHARES AMOUNT EARNINGS TOTAL
-------- -------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCES, January 1, 1994.................. 3,000 $3,000 $ 402,910 $ 405,910
Net income............................... -- -- 2,480,115 2,480,115
Distributions to stockholders............ -- -- (2,356,000) (2,356,000)
-------- -------- ------------- -------------
BALANCES, December 31, 1994................ 3,000 3,000 527,025 530,025
Net income............................... -- -- 1,234,884 1,234,884
Distributions to stockholders............ -- -- (1,325,000) (1,325,000)
-------- -------- ------------- -------------
BALANCES, December 31, 1995................ 3,000 3,000 436,909 439,909
Net income............................... -- -- 640,938 640,938
Distributions to stockholders............ -- -- (815,000) (815,000)
-------- -------- ------------- -------------
BALANCES, December 31, 1996................ 3,000 3,000 262,847 265,847
Net income (unaudited) .................. -- -- 674,867 674,867
Distributions to stockholders
(unaudited) ............................ -- -- (480,000) (480,000)
-------- -------- ------------- -------------
BALANCES, September 30, 1997 (unaudited) . 3,000 $3,000 $ 457,714 $ 460,714
======== ======== ============= =============
</TABLE>
See accompanying notes to these combined financial statements.
F-37
<PAGE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ --------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income..................... $ 2,480,115 $ 1,234,884 $ 640,938 $ 667,070 $ 674,867
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization................. 399,050 717,631 819,315 615,519 398,548
(Increase) decrease in:
Receivables.................. (139,187) 281,235 (34,758) (128,138) (368,845)
Prepaid expenses and other
assets...................... 8,569 19,806 (3,170) 5,408 4,574
Increase (decrease) in:
Accounts payable and accrued
line costs.................. 60,708 53,696 34,313 27,826 4,995
Other current liabilities ... 51,647 (71,602) 35,457 61,303 (1,269)
------------- ------------- ------------- ------------- -----------
Net cash provided by
operations.................. 2,860,902 2,235,650 1,492,095 1,248,988 712,870
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures........... (95,124) (2,375,964) (134,651) (133,042) (55,913)
Other, net..................... 3,016 15,523 6,435 234 81,573
------------- ------------- ------------- ------------- -----------
Net cash provided by (used
in) investing activities ... (92,108) (2,360,441) (128,216) (132,808) 25,660
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on
long-term debt, capital
leases and other notes
payable....................... (494,734) (519,209) (581,123) (477,231) (354,231)
Proceeds from long-term debt
and other notes payable....... 124,890 2,112,950 40,153 40,154 118,979
Distributions to stockholders . (2,356,000) (1,325,000) (815,000) (700,000) (480,000)
------------- ------------- ------------- ------------- -----------
Net cash provided by (used
in) financing activities ... (2,725,844) 268,741 (1,355,970) (1,137,077) (715,252)
------------- ------------- ------------- ------------- -----------
NET INCREASE (DECREASE) IN
CASH........................... 42,950 143,950 7,909 (20,897) 23,278
CASH, beginning of period ...... 94,803 137,753 281,703 281,703 289,612
------------- ------------- ------------- ------------- -----------
CASH, end of period............. $ 137,753 $ 281,703 $ 289,612 $ 260,806 $ 312,890
============= ============= ============= ============= ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid.................. $ 67,906 $ 81,579 $ 185,777 $ 148,001 $ 103,491
Equipment acquired under
capital leases................ $ -- $ 238,683 $ -- $ -- $ --
============= ============= ============= ============= ===========
</TABLE>
See accompanying notes to these combined financial statements.
F-38
<PAGE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Organization -- Valu-Line of Longview, Inc. and Related Companies provide
long distance or "interexchange" services primarily to commercial and
residential customers located in Texas and Arkansas.
Principles of Combination -- The accompanying financial statements include
the combined accounts of Valu-Line of Longview, Inc., Valu-Line of Louisiana,
Inc. and Shared Tenant Services, Inc., which are each owned proportionately
by the same stockholders. All significant intercompany transactions have been
eliminated. Collectively, the entities are referred to as "the Company".
Receivables -- Revenue is recognized as service is rendered. Receivables
include billed and unbilled amounts that are due from customers according to
contractual terms.
Property and Equipment -- Property and equipment is stated at cost, net of
accumulated depreciation and amortization. Maintenance and repairs are
expensed as incurred. Depreciation is calculated using various accelerated
methods over the estimated useful lives of the related assets which range
from 5 to 7 years. Leasehold improvements are amortized over the life of the
lease. Equipment under capital leases is recorded at the present value of
minimum lease payments at the inception of the lease and amortized over the
shorter of the lease term or estimated useful life of the asset. Amortization
of equipment held under capital leases is included in depreciation and
amortization expense. Expenditures to acquire dialers are expensed as
incurred.
Income Taxes -- The Company has elected to be taxed under the provisions
of Subchapter S of the Internal Revenue Code. Under such provisions the
Company does not pay federal corporate income taxes on its taxable income.
The stockholders, therefore, are liable for individual income taxes on the
Company's taxable income.
Concentrations of Credit Risk -- The Company's financial instruments that
are exposed to concentrations of credit risk consist primarily of cash
investments and trade accounts receivable. The Company places its cash and
temporary cash investments with high credit quality banking institutions. At
times such investments may be in excess of the FDIC insurance limit.
Management does not anticipate any losses will arise from this exposure.
Use of Estimates -- The preparation of the Company's financial statements
in conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and the accompanying results.
Actual results could differ from these 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.
Cash Equivalents -- For purposes of reporting cash flows, cash equivalents
include highly-liquid investments purchased with a maturity of three months
or less.
Recent Accounting Pronouncements -- The Financial Accounting Standards
Board (FASB) issued SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets And For Long-Lived Assets To Be Disposed of, which is effective for
fiscal years beginning after December 15, 1995. SFAS No. 121 specifies
certain events and circumstances which indicate the cost of an asset or
assets may be impaired, the method by which the evaluation should be
performed, and the method by which writedowns, if any, of the asset or assets
are to be determined and recognized. The adoption of this pronouncement in
1996 did not have a material impact on the Company's financial condition or
operating results.
F-39
<PAGE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The FASB issued SFAS No. 123, Accounting for Stock Based Compensation,
effective for fiscal years beginning after December 31, 1995. This statement
allows companies to choose to adopt the statement's new rules for accounting
for employee stock-based compensation plans. For those companies who choose
not to adopt the new rules, the statement requires disclosures as to what
earnings per share would have been if the new rules had been adopted. The
Company did not grant stock options or any other form of stock-based
compensation during any of the periods included in the accompanying financial
statements.
The FASB issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share, during February 1997. The new statement which is
effective for financial statements issued after December 31, 1997, including
interim periods, establishes standards for computing and presenting earnings
per share. The new statement requires retroactive restatement of all
prior-period earnings per share data presented.
The FASB issued SFAS No. 130, Reporting Comprehensive Income and SFAS No.
131, Disclosures About Segments of an Enterprise and Related Information.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS No. 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be
reported in a financial statement that displays with the same prominence as
other financial statements. SFAS No. 131 supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. SFAS No. 131 establishes
standards on the way that public companies report financial information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance.
SFAS Nos. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any,
the standards may have on the future financial statement disclosures. Results
of operations and financial position, however, will be unaffected by
implementation of these standards.
Unaudited Interim Information -- The accompanying financial information as
of September 30, 1997 and for the nine-month periods ended September 30, 1996
and 1997 has been prepared by the Company without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. The
financial statements reflect all adjustments, consisting of normal recurring
accruals which are, in the opinion of management, necessary to fairly present
such information in accordance with generally accepted accounting principles.
F-40
<PAGE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. RECEIVABLES:
Receivables consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
----------- ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C>
Trade receivables:
Billed........................ $ 805,569 $ 785,457 $1,078,094
Unbilled...................... 205,775 260,645 336,853
----------- ------------ ---------------
1,011,344 1,046,102 1,414,947
Allowance for doubtful
accounts....................... (25,000) (25,000) (25,000)
----------- ------------ ---------------
$ 986,344 $1,021,102 $1,389,947
=========== ============ ===============
</TABLE>
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1995 1996 1997
------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Land.............................. $ 50,622 $ 50,622 $ 38,422
Building.......................... 350,605 350,605 350,605
Switch and network equipment ..... 3,396,746 3,349,534 3,343,083
Vehicles.......................... 229,773 201,121 186,649
Computer equipment................ 208,694 229,759 174,660
Furniture and fixtures............ 45,603 46,365 46,365
Leasehold improvements............ 26,607 26,607 26,607
------------- ------------- ---------------
4,308,650 4,254,613 4,166,391
Less accumulated depreciation and
amortization..................... (1,967,054) (2,604,116) (2,940,102)
------------- ------------- ---------------
$ 2,341,596 $ 1,650,497 $ 1,226,289
============= ============= ===============
</TABLE>
F-41
<PAGE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE:
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to a bank due in monthly
installments ranging from $324 to $926,
including interest ranging from 8.25% to 9.0%
and maturing at various times through 1999.
The notes are collateralized by a switch and
network equipment, computer equipment and
vehicles...................................... $ 98,694 $ 49,128 $ 82,694
Notes payable to a bank due in monthly
installments of $3,456 and $3,970, including
interest at 8.25% and prime, not to exceed
12% (8.75% at September 30, 1997) and
maturing August 2005 and October 1998,
respectively. The notes are collateralized by
land and buildings............................ 388,533 330,826 284,270
Note payable to a bank due in monthly
installments of $33,536, including interest
at prime, not to exceed 12% (8.5% at
September 30, 1997) with a balloon payment on
December 28, 1998. The note is collateralized
by certain switch and network equipment ...... 1,625,000 1,361,600 1,139,338
------------ ------------ ---------------
2,112,227 1,741,554 1,506,302
Less current portion........................... (413,741) (384,543) (423,910)
------------ ------------ ---------------
$1,698,486 $1,357,011 $1,082,392
============ ============ ===============
</TABLE>
Future maturities of notes payable as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
- -------------- -----------
<S> <C>
1997 ........ $ 384,543
1998 ........ 1,154,268
1999 ........ 25,400
2000 ........ 27,600
2001 ........ 30,000
Thereafter .. 119,743
-----------
$1,741,554
===========
</TABLE>
F-42
<PAGE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES:
Commitments -- The Company was obligated under capital leases for switch
equipment which expired at various dates through 1996. The carrying value of
the leased equipment and related accumulated amortization included in
property and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1995 1996 1997
------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Switch equipment.............. $ 1,244,803 $ 1,244,803 $ 1,244,803
Less accumulated
amortization................. (1,029,983) (1,125,460) (1,170,213)
------------- ------------- ---------------
$ 214,820 $ 119,343 $ 74,590
============= ============= ===============
</TABLE>
The Company leases office space and certain equipment under operating
leases which expire on various dates through the year 2000. Several of the
office leases require the Company to pay its portion of taxes, maintenance
and insurance. Rent expense was $163,732, $175,273 and $102,010 for the years
ended December 31, 1994, 1995 and 1996, respectively, and $60,387 and $70,213
for the nine-month periods ended September 30, 1996 and 1997, respectively.
Future minimum lease payments under noncancelable operating leases with
original terms in excess of one year are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
- -------------- ---------
<S> <C>
1997 ........ $ 63,584
1998 ........ 37,757
1999 ........ 29,757
2000 ........ 21,037
---------
$152,135
=========
</TABLE>
Contingencies --In early February 1998, the Company's was served with a
petition by four plaintiffs (including the lawyer filing the suit) which
alleged, among other things, that the Company's billed the plaintiffs for
services never provided and intentionally "bumped up" the actual time of
services used by plaintiffs in order to increase the Company's charges to
them. The plaintiffs purported to bring the suit as a class action and
alleged violations of the Texas Deceptive Trade Practices Act, fraud, breach
of contract, negligence and gross negligence. They sought damages in an
unspecified amount, further damages under the Deceptive Trade Practices Act
(which could be as much as triple the actual damages), interest, attorney's
fees and such other relief to which they may have been entitled. The petition
contained no details with respect to the Company's alleged conduct. While the
Company's management believe the Company's billing practices have and do
conform generally to industry standards and FCC rate filings and that the
plaintiffs' allegations are without merit, the Company, in order to avoid
protracted litigation, entered into a settlement, a nominal portion of which
will be paid by the Company, and an agreed confidential dismissal with
prejudice, with the four named plaintiffs prior to the certification of the
suit as a class action. The stockholders of the Company have agreed,
severally, to indemnify the Company for a period of six months after the
closing of the Offering against liabilities, costs and expenses, including
legal fees, relating to similar claims which others may bring in the future.
In order to fund this indemnity obligation, the former stockholders have
deposited in escrow an aggregate of 71,428 shares of Common Stock, and their
obligation is limited to the value of those shares.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect
on the Company's combined financial condition, liquidity or results of
operations.
F-43
<PAGE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has been providing intrastate long distance services to
customers in Arkansas since 1992 without the requisite permit from the state
utility commission. The Company has initiated steps to secure the requisite
permit for such activities and no penalties have been assessed to date. While
the Arkansas regulatory authorities have the power to require the forfeiture
of the approximately $300,000 in revenues generated through September 30,
1997 by the Company's unlicensed intrastate activities in Arkansas, the
Company is endeavoring to negotiate a reduced penalty.
6. STOCK PURCHASE AGREEMENT:
The Company entered into an agreement under which it will be sold to a
Delaware corporation. The sale is subject to various terms and conditions as
outlined in the agreement, including the requirement that the purchaser
obtain additional equity capital.
F-44
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Feist Long Distance Service, Inc.:
We have audited the accompanying balance sheet of Feist Long Distance
Service, Inc. as of December 31, 1996, and the related statements of
operations, stockholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Feist Long Distance
Service, Inc. as of December 31, 1996, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
August 5, 1997
F-45
<PAGE>
FEIST LONG DISTANCE SERVICE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 21,565 $ 149,151
Accounts receivable, net allowance for doubtful accounts of
$106,280 and $143,208, respectively.............................. 1,190,307 1,625,436
Other current assets.............................................. 7,545 22,903
-------------- ---------------
Total current assets............................................ 1,219,417 1,797,490
PROPERTY AND EQUIPMENT, net......................................... 370,043 370,420
-------------- ---------------
Total assets.................................................... $1,589,460 $2,167,910
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable..................................................... $ 20,323 $ 17,402
Accounts payable.................................................. 647,555 940,429
Accrued expenses.................................................. 72,045 167,035
Notes payable to shareholders..................................... 809,450 659,450
-------------- ---------------
Total current liabilities....................................... 1,549,373 1,784,316
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value; 10,000 shares authorized, issued and
outstanding...................................................... 100,000 100,000
Additional paid-in capital........................................ 938,500 938,500
Accumulated deficit............................................... (998,413) (654,906)
-------------- ---------------
Total stockholders' equity...................................... 40,087 383,594
-------------- ---------------
Total liabilities and stockholders' equity...................... $1,589,460 $2,167,910
============== ===============
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
FEIST LONG DISTANCE SERVICE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------------
1996 1996 1997
-------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES............................ $10,027,743 $7,415,712 $8,964,581
COST OF SERVICES.................... 6,854,333 5,057,038 6,043,871
DEPRECIATION........................ 237,240 170,392 141,745
-------------- ------------ ------------
Gross profit.................... 2,936,170 2,188,282 2,778,965
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 2,469,137 1,706,266 2,404,056
-------------- ------------ ------------
Income from operations.......... 467,033 482,016 374,909
OTHER INCOME (EXPENSE):
Interest expense.................. (60,211) (46,303) (32,873)
Other............................. (1,737) 1,251 1,471
-------------- ------------ ------------
NET INCOME.......................... $ 405,085 $ 436,964 $ 343,507
============== ============ ============
NET INCOME PER SHARE................ $ 40.51 $ 43.70 $ 34.35
============== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
FEIST LONG DISTANCE SERVICE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
-------- ---------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCES, December 31, 1995 . 10,000 $100,000 $938,500 $(1,403,498) $(364,998)
Net income................. -- -- -- 405,085 405,085
-------- ---------- ------------ -------------- ---------------
BALANCES, December 31, 1996 . 10,000 $100,000 $938,500 (998,413) 40,087
Net income (unaudited) .... -- -- -- 343,507 343,507
-------- ---------- ------------ -------------- ---------------
BALANCES, September 30, 1997
(unaudited)................. 10,000 $100,000 $938,500 $ (654,906) $ 383,594
======== ========== ============ ============== ===============
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
FEIST LONG DISTANCE SERVICE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ------------------------
1996 1996 1997
-------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 405,085 $ 436,964 $ 343,507
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation................................ 237,240 170,392 141,745
Changes in assets and liabilities:
Accounts receivable, net.................. (169,468) (273,745) (435,129)
Other current assets...................... 11,916 8,516 (15,358)
Accounts payable.......................... (199,626) (222,788) 292,874
Accrued expenses.......................... (9,695) 63,175 94,990
-------------- ----------- -----------
Net cash provided by operating
activities................................. 275,452 182,514 422,629
-------------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........... (114,576) (66,729) (142,122)
-------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable................... (180,906) (123,299) (152,921)
Proceeds from notes payable................... -- -- --
-------------- ----------- -----------
Net cash used in financing activities ... (180,906) (123,299) (152,921)
-------------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... (20,030) (7,514) 127,586
CASH AND CASH EQUIVALENTS, beginning of period . 41,595 41,595 21,565
-------------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period ....... $ 21,565 $ 34,081 $ 149,151
============== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest ..... $ 60,313 $ -- $ --
============== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
FEIST LONG DISTANCE SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997 (UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Feist Long Distance Service, Inc. (the Company) is headquartered in
Wichita, Kansas and was founded in 1992 to provide long distance and 800
services to business and residential customers in Kansas, Nebraska, Missouri,
Texas and Oklahoma.
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996 and 1997 are unaudited, and certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements,
have been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Cash Equivalents
Cash equivalents consist of short-term investments with an original
maturity of three months or less.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated
using the double declining method over the estimated useful lives of the
assets which range from 3 to 7 years.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S
of the Internal Revenue Code. Accordingly, no provision for federal income
taxes has been provided for by the Company, as the shareholders of the
Company have included the income on their personal income tax returns.
Fair Value of Financial Instruments
Fair value estimates are made at discrete points in time based on relevant
market information. These estimates may be subjective in nature and involve
uncertainties and matters of significant judgment, and therefore cannot be
determined with precision.
The Company believes that the carrying amounts of its current assets and
current liabilities approximate the fair value of such items due to their
short-term nature.
Revenue Recognition
Revenues are recognized as long-distance services are provided.
Net Income Per Share
Net income per share is based on the weighted average number of shares of
common stock outstanding during the respective periods. The weighted average
shares outstanding were 10,000 for the year ended December 31, 1996 and for
the nine months ended September 30, 1996 and 1997 (unaudited).
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 revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
F-50
<PAGE>
FEIST LONG DISTANCE SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, ESTIMATED
1996 1997 USEFUL LIFE
-------------- --------------- --------------
<S> <C> <C> <C>
Machinery and equipment....... $1,394,466 $1,510,818 3 to 5 years
Office equipment.............. 55,368 62,446 7 years
Vehicles...................... 31,900 50,592 5 years
-------------- ---------------
1,481,734 1,623,856
Less accumulated
depreciation................. 1,111,691 1,253,436
-------------- ---------------
$ 370,043 $ 370,420
============== ===============
</TABLE>
(3) NOTES PAYABLE
At December 31, 1996 and September 30, 1997, the Company had notes payable
totaling $809,450 and $659,450, respectively, outstanding to the Company's
eight shareholders. The notes are payable on demand and accrue interest at
5.75%. The Company paid $46,543 in interest expense on these notes payable
for the year ended December 31, 1996.
At December 31, 1996, the Company also had a $16,996 note payable to an
affiliate, Feist Publications, Inc. The note was payable on demand and
accrued interest at 8.83%. The Company paid $3,141 in interest expense on
this note payable for the year ended December 31, 1996.
(4) RELATED PARTY TRANSACTION
The Company leases its office space through a sublease agreement with an
affiliate, Feist Publications, Inc. Rental expense for the year ended
December 31, 1996 and the nine months ended September 30, 1997 amounted to
approximately $45,000 and $62,000, respectively, related to this lease.
(5) DEPENDENCE ON LOCAL EXCHANGE CARRIER
The Company is dependent on local exchange carriers to provide access
service for the origination and termination of its long distance traffic.
Historically, these access charges have made up a significant percentage of
the overall cost of providing long distance service. To the extent that the
access services of the local exchange carriers are used, the Company and its
customers are subject to the quality of service, equipment failures and
service interruptions of the local exchange carriers.
F-51
<PAGE>
FEIST LONG DISTANCE SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) COMMITMENTS AND CONTINGENCIES
The Company leases office space under long-term lease agreements. Future
minimum rental payments under noncancelable long-term leases are as follows:
<TABLE>
<CAPTION>
FISCAL
YEAR AMOUNT
- -------- ---------
<S> <C>
1997 .... $56,568
1998..... 22,692
1999..... 2,850
---------
$82,110
=========
</TABLE>
Total rent expense under all operating leases for the year ended December
31, 1996 and the nine months ended September 30, 1997 was $73,733 and
$72,524, respectively.
The Company has been providing intrastate long distance services to
customers in Missouri for the past 18 months without the requisite permit
from the appropriate regulatory agency. The Company has initiated steps to
secure the requisite permit for such activities and no penalties have been
assessed to date, although the Missouri regulatory authorities have the power
to require the forfeiture of the approximately $250,000 in revenues generated
by the Company's unlicensed intrastate activities in that state.
(7) SUBSEQUENT EVENT (UNAUDITED)
The Company's shareholders have entered into a stock purchase agreement to
sell all of the issued and outstanding common stock of the Company for a
total consideration consisting of $5,000,000 in cash and shares of common
stock of the purchaser. The purchase of the Company's stock is generally
contingent upon the successful completion of an intitial public offering by
the purchaser.
F-52
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
The Stockholders and Board of Directors
FirsTel, Inc.
Sioux Falls, South Dakota
We have audited the accompanying balance sheets of FirsTel, Inc. as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' deficit and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FirsTel, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
September 26, 1997
F-53
<PAGE>
FIRSTEL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash..................................................... $ 43,761 $ 54,128 $ 61,616
Collateral account ...................................... 74,515 -- --
Receivables
Trade, net of allowance of $0, $0, and $29,053,
respectively.......................................... 569,122 640,259 1,056,109
Due from independent contractors....................... 13,420 2,207 --
Other.................................................. 10,361 3,047 196,857
Unbilled services........................................ 399,610 499,679 601,406
Inventory................................................ -- 2,187 96,323
Prepaid expenses......................................... 19,759 23,413 103,714
------------ ------------ ---------------
Total current assets................................... 1,130,548 1,224,920 2,116,025
------------ ------------ ---------------
OTHER ASSETS
Deposit.................................................. 1,150 38,951 80,775
Intangible assets, net of accumulated
amortization............................................ 6,723 5,482 2,780
------------ ------------ ---------------
7,873 44,433 83,555
------------ ------------ ---------------
PROPERTY AND EQUIPMENT
Leasehold improvements................................... 30,632 34,182 34,182
Office furniture and equipment........................... 186,421 263,611 326,892
Network equipment........................................ 576,518 656,069 707,942
Dialers.................................................. 493,288 535,113 585,258
------------ ------------ ---------------
1,286,859 1,488,975 1,654,274
Less accumulated depreciation and amortization .......... (341,629) (585,373) (785,082)
------------ ------------ ---------------
945,230 903,602 869,192
------------ ------------ ---------------
$2,083,651 $2,172,955 $3,068,772
============ ============ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Checks issued but not presented for payment.............. $ 36,466 $ -- $ 332,588
Current maturities of long-term debt..................... 452,110 1,397,834 1,187,068
Accounts payable......................................... 722,090 895,186 1,358,137
Accrued expenses
Taxes, other than income taxes......................... 69,283 58,617 94,713
Interest............................................... 8,769 -- --
Wages.................................................. -- -- 73,848
Other.................................................. 12,104 9,611 3,671
------------ ------------ ---------------
Total current liabilities................................ 1,300,822 2,361,248 3,050,025
------------ ------------ ---------------
OTHER LIABILITIES
Deferred compensation payable ........................... 36,845 26,686 7,177
LONG-TERM DEBT, less current maturities ................... 1,395,821 18,073 --
------------ ------------ ---------------
Total liabilities...................................... 2,733,488 2,406,007 3,057,202
COMMITMENTS AND CONTINGENCIES .............................
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $1 per share; Authorized,
1,000,000 shares; Issued, 1,000 shares.................. 1,000 1,000 1,000
Retained earnings (accumulated deficit).................. (650,837) (234,052) 10,570
------------ ------------ ---------------
(649,837) (233,052) 11,570
------------ ------------ ---------------
$2,083,651 $2,172,955 $3,068,772
============ ============ ===============
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE>
FIRSTEL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- --------------------------
1995 1996 1996 1997
------------ ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES...................... $7,838,345 $10,355,229 $7,658,888 $9,487,892
------------ ------------- ------------ ------------
COST OF REVENUES:
Line costs.................. 5,001,807 6,620,483 4,834,738 6,083,178
Direct labor................ 288,459 393,983 288,204 283,148
Cellular costs.............. -- -- -- 336,122
Dialer costs................ 161,807 191,854 156,053 161,408
Switch costs................ 81,663 101,673 66,926 82,025
Local costs................. -- -- -- 72,049
Other....................... 6,108 5,943 5,513 47,863
------------ ------------- ------------ ------------
5,539,844 7,313,936 5,351,434 7,065,793
------------ ------------- ------------ ------------
GROSS PROFIT.................. 2,298,501 3,041,293 2,307,454 2,422,099
------------ ------------- ------------ ------------
OPERATING EXPENSES:
Selling..................... 926,115 1,107,800 814,192 881,002
General and administrative . 615,923 810,637 583,461 671,484
Sales support............... 183,649 218,525 160,201 326,055
Cellular.................... -- 10,049 -- 90,430
------------ ------------- ------------ ------------
1,725,687 2,147,011 1,557,854 1,968,971
------------ ------------- ------------ ------------
INCOME FROM OPERATIONS........ 572,814 894,282 749,600 453,128
OTHER INCOME (EXPENSE):
Finance charges and
penalties.................. 36,792 34,718 27,001 32,437
Other income................ 5,561 300 300 1,680
Interest expense............ (220,932) (191,076) (145,445) (116,121)
Loss on sale of equipment .. (1,139) (158) -- --
------------ ------------- ------------ ------------
NET INCOME ................... $ 393,096 $ 738,066 $ 631,456 $ 371,124
============ ============= ============ ============
INCOME PER SHARE.............. $ 393.10 $ 738.07 $ 631.46 $ 371.12
============ ============= ============ ============
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE>
FIRSTEL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED TOTAL
------------------ EARNINGS STOCKHOLDERS'
(ACCUMULATED TREASURY EQUITY
SHARES AMOUNT DEFICIT) STOCK (DEFICIT)
-------- -------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1994 ................... 1,000 1,000 $(878,933) $ -- $(877,933)
Distributions ($165.00 per share)............ -- -- (165,000) -- (165,000)
Net income................................... -- -- 393,096 -- 393,096
-------- -------- ------------- ----------- ---------------
BALANCES, DECEMBER 31, 1995.................... 1,000 1,000 (650,837) -- (649,837)
Distributions ($221.28 per share)............ -- -- (221,281) -- (221,281)
Net income................................... -- -- 738,066 -- 738,066
Purchase of 100 shares of treasury stock .... -- -- -- (700,000) (700,000)
Sale of 100 shares of treasury stock ........ -- -- (100,000) 700,000 600,000
-------- -------- ------------- ----------- ---------------
BALANCES, DECEMBER 31, 1996.................... 1,000 1,000 (234,052) -- (233,052)
Distributions ($126.50 per share,
unaudited).................................... -- -- (126,502) -- (126,502)
Net income (unaudited)....................... -- -- 371,124 -- 371,124
-------- -------- ------------- ----------- ---------------
BALANCES, September 30, 1997 (unaudited) ...... 1,000 $1,000 $ 10,570 $ -- $ 11,570
======== ======== ============= =========== ===============
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE>
FIRSTEL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------------
1995 1996 1996 1997
------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 393,096 $ 738,066 $ 631,456 $ 371,124
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 205,890 247,618 182,866 202,412
Provision for bad debts..................... -- -- 27,000 32,000
Write-off of shareholder's receivable ...... -- -- -- --
Loss on sale of equipment................... 1,139 158 -- --
Changes in assets and liabilities:
Receivables................................. (221,079) (52,610) (82,816) (636,506)
Unbilled services........................... (109,796) (100,069) (106,820) (101,727)
Inventory................................... -- (2,187) -- (94,136)
Prepaid expenses............................ (1,638) (3,654) (37,600) (80,301)
Deposits.................................... (150) (37,801) (25,425) (19,200)
Checks issued but not presented for
payment.................................... (139,268) (36,466) (36,466) 332,588
Accounts payable............................ 213,134 173,096 196,521 462,951
Accrued expenses............................ 19,989 (21,928) 77,906 78,432
Deferred compensation payable............... 36,845 (10,159) (5,179) (19,509)
------------ ----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..... 398,162 894,064 821,443 528,128
------------ ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment............... 923 255 -- --
Property and equipment purchases.............. (379,424) (203,162) (166,272) (165,299)
Payments to/from collateral account........... (74,515) 74,515 -- --
Payments for loan origination fees............ (1,443) (2,000) -- --
------------ ----------- ----------- -----------
NET CASH USED BY INVESTING
ACTIVITIES..................................... (454,459) (130,392) (166,272) (165,299)
------------ ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on notes payable................. (99,300) -- -- --
Principal payments on long-term debt,
including capitalized leases................. (134,643) (459,407) (365,547) (333,839)
Proceeds from debt borrowings................. 494,964 27,383 -- 105,000
Distribution payments......................... (165,000) (221,281) (218,121) (126,502)
Purchase of treasury stock.................... -- (700,000) (700,000) --
Sale of treasury stock........................ -- 600,000 600,000 --
------------ ----------- ----------- -----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES .................................... 96,021 (753,305) (683,668) (355,341)
------------ ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH................. 39,724 10,367 (28,497) 7,488
CASH AT BEGINNING OF PERIOD..................... 4,037 43,761 43,761 54,128
------------ ----------- ----------- -----------
CASH AT END OF PERIOD........................... $ 43,761 $ 54,128 $ 15,264 $ 61,616
============ =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period--Interest ........ $ 212,936 $ 199,845 $ 145,445 $ 116,122
============ =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
ACTIVITIES
Short-term debt refinanced.................... $1,400,000 $ -- $ -- $ --
============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-57
<PAGE>
FIRSTEL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1996 AND 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
FirsTel, Inc. (the Company), located in Sioux Falls, South Dakota, is a
carrier of long distance, local and cellular telecommunications services. The
Company's service area includes South Dakota, North Dakota, Minnesota, Iowa,
Nebraska, Wyoming, Colorado, and Montana.
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996 and 1997 are unaudited, and certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements,
have been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method)
or market, and consist primarily of cellular phone and other telephone system
equipment.
Unbilled Services
The Company bills in four cycles per month. At the end of each month any
new charges which have not been included in the billing cycles are shown as
unbilled services.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated
using the double declining method over the estimated useful lives of the
assets which range from 5 to 7 years.
Intangible Assets
Organizational costs, stated at cost less accumulated amortization, are
amortized straight-line over 5 years. Loan origination fees, stated at cost
less accumulated amortization, are amortized straight-line over the term of
the loan.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S
of the Internal Revenue Code. Accordingly, no provision for federal income
taxes has been provided for by the Company, as the shareholders of the
Company have included the income on their personal income tax returns.
Fair Value of Financial Instruments
Fair value estimates are made at discrete points in time based on relevant
market information. These estimates may be subjective in nature and involve
uncertainties and matters of significant judgment, and therefore cannot be
determined with precision.
The Company believes that the carrying amounts of its current assets and
current liabilities approximate the fair value of such items due to their
short-term nature.
Revenue Recognition
Revenues are recognized as long-distance, local and cellular services are
provided.
F-58
<PAGE>
FIRSTEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net Income Per Share
Net income per share is based on the weighted average number of shares of
common stock outstanding during the respective periods. The weighted average
shares outstanding were 1,000 for the years ended December 31, 1996 and 1995
and the nine months ended September 30, 1996 and 1997 (unaudited).
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 revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(2) COLLATERAL ACCOUNT
Pursuant to a line of credit agreement with a bank, signed January 4,
1995, the Company directed all receipts to a lockbox established by the bank.
The funds were subsequently deposited into a collateral account and held for
two days. At that time, they became available for use and were transferred to
the regular business account. In 1996, the Company entered into a lockbox
agreement with a different bank. All receipts are directed to a lockbox
established by the bank and are directly deposited to the Company's checking
account daily.
(3) ACQUISITIONS
In September 1997, the Company purchased two telecommunications companies
located in Sioux Falls, South Dakota. The combined purchase price of the two
companies was approximately $1,083,000 payable with notes from the Company
maturing January 31, 1998. Payment of the notes will be with stock issued by
the potential purchaser of the Company, upon the successful completion of an
initial public offering. If the potential purchase of the Company does not
take place by January 31, 1998, the notes will be paid with cash.
(4) INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Organizational costs............ $ 10,206 $ 10,206 $ 10,206
Loan origination fees........... 7,443 9,443 9,443
---------- ---------- ---------------
17,649 19,649 19,649
Less accumulated
amortization................... (10,926) (14,167) (16,869)
---------- ---------- ---------------
$ 6,723 $ 5,482 $ 2,780
========== ========== ===============
</TABLE>
Amortization expense charged to operations was $8,885 and $3,241,
respectively for the years ended December 31, 1995 and 1996 and $2,702 and
$2,281 for the nine months ended September 30, 1996 and 1997 (unaudited).
(5) CAPITALIZATION
Upon initial capitalization, the Company issued 1,000 shares of its common
stock to the original five stockholders. The stock was recorded at par value
at the date of issuance. In February of 1996, the Company purchased 100
treasury shares for $700,000 and subsequently reissued those shares to a new
shareholder for $600,000. As described in Note 13, the stockholders will
surrender all outstanding shares of the Company stock, concurrent with the
effective date of the merger, and such shares will be canceled.
F-59
<PAGE>
FIRSTEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) LEASES
The Company leases office space, equipment and telephone lines under
long-term lease agreements. The leases for office space, telephone lines and
equipment are operating leases which expire in various years through 1998.
Generally, the Company is required to pay executory costs such as maintenance
and insurance. Rental payments include minimum rentals plus contingent
rentals based on usage.
Rental expense for operating leases for the years ended December 31, 1995
and 1996, and for the nine month periods ended September 30, 1996 and 1997
(unaudited) was $5,051,893, $6,797,857, $4,982,568 and $6,143,566,
respectively.
Capitalized leased assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
---------- ----------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Office furniture and equipment . $ 38,791 $ 85,693 $ 46,902
Harris switches................. 296,536 296,536 296,536
---------- ----------- ---------------
335,327 382,229 343,438
Less accumulated
amortization................... (74,857) (129,796) (139,668)
---------- ----------- ---------------
$260,470 $ 252,433 $ 203,770
========== =========== ===============
</TABLE>
Minimum lease payments for capital and operating leases in future years
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- -----------
<S> <C> <C>
Year ending December 31, 1997............................. $121,447 $450,063
Year ending December 31, 1998............................. 15,666 433,235
Remaining years........................................... -- --
---------- -----------
Total minimum lease payments.............................. 137,113 $883,298
===========
Less interest............................................. (11,206)
----------
Present value of minimum lease payments as of December
31, 1996................................................. $125,907
==========
</TABLE>
(7) LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Capitalized lease obligations, at varying rates of
imputed interest from 10.42% to 18.60%, due in
monthly installments of $10,225, including interest,
through June 1998, secured by leased assets--Note 6 .. $ 177,142 $ 115,907 $ 42,068
$800,000 revolving line of credit payable to bank, due
July 1, 1998, variable rate, 9.5% at December 31,
1996 and 12.05% at December 31, 1995, secured by
substantially all assets of the Company, personal
guarantees of four Company officers, and Company
owned life insurance on an officer of the Company .... 370,789 -- 105,000
Unsecured notes payable to shareholders, at 12%, due
December 31, 1997, subordinated to revolving line .... 1,300,000 1,300,000 1,040,000
------------ ------------- ---------------
1,847,931 1,415,907 1,187,068
Less current maturities................................ (81,321) (1,397,834) (1,187,068)
------------ ------------- ---------------
$1,766,610 $ 18,073 $ --
============ ============= ===============
</TABLE>
F-60
<PAGE>
FIRSTEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The terms of the revolving line of credit include various debt covenants.
At December 31, 1996, the Company was not in compliance with one of these
covenants. As a result, the Company was charged an additional 2% interest
until such time as compliance with all debt covenants was achieved. At
September 30, 1997, the Company is in compliance with all applicable debt
covenants.
Long-term debt maturities are as follows at December 31, 1996:
<TABLE>
<CAPTION>
AMOUNT
------------
<S> <C>
Year ending December 31, 1997......................... $1,397,834
Year ending December 31, 1998......................... 18,073
Thereafter........................................... --
------------
$1,415,907
============
</TABLE>
(8) RELATED PARTY TRANSACTIONS
One of the Company's major shareholders, Fred L. Thurman, is also a
partner in an accounting firm. For the years ending December 31, 1995 and
1996 and for nine months ending September 30, 1996 and 1997, accounting fees
paid to the related company were $27,579, $41,774, $29,676 and $32,727,
respectively.
(9) DEFERRED COMPENSATION PLAN
In 1995, the Company established deferred compensation plans for the
benefit of the shareholders who are also key employees of the Company. The
benefit payable was accrued based on various criteria for each person. The
amount expensed for the years ended December 31, 1995 and 1996 and for the
nine months ended September 30, 1996 and 1997 (unaudited), for such future
obligation were $36,845, $125,541, $86,087 and $49,522, respectively.
(10) RETIREMENT PLAN
In 1996, the Company adopted a qualified 401(k) employee savings and
profit sharing plan which covers all employees who meet eligibility
requirements. Eligible employees may contribute directly to the plan. The
Company matches twenty-five percent (25%) of the employee contribution, not
to exceed one percent of the employee's eligible wages. The Company has the
option to make discretionary contributions to the plan. The Company's
contribution expenses for the year ended December 31, 1996 and the nine
months ended September 30, 1997 (unaudited) were $7,157 and $8,378,
respectively.
(11) DEPENDENCE ON LOCAL EXCHANGE CARRIER
The Company is dependent on local exchange carriers to provide access
service for the origination and termination of its long distance traffic.
Historically, these access charges have made up a significant percentage of
the overall cost of providing long distance service. To the extent that the
access services of the local exchange carriers are used, the Company and its
customers are subject to the quality of service, equipment failures and
service interruptions of the local exchange carriers.
(12) COMMITMENTS AND CONTINGENCIES
In 1996, FirsTel, Inc. signed a long term carrier agreement with MCI Corp.
Included in the agreement is a commitment that FirsTel's monthly usage shall
equal or exceed $225,000. If usage is less FirsTel will pay the actual usage
plus an underutilization charge of 15% of the difference between actual usage
and $225,000.
(13) SUBSEQUENT EVENTS
The Company's stockholders have entered into a stock purchase agreement to
sell all of the issued and outstanding capital stock of the Company for
consideration of $5,000,000 in cash, $2,000,000 in 10% convertible
subordinated notes, common stock of the purchaser and warrants to purchase
common stock of the purchaser. The notes payable to stockholders will be
acquired by the purchaser in the acquisition. The transaction is generally
contingent upon the successful completion of an initial public offering of
the purchaser.
F-61
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholder of KIN Network, Inc.:
We have audited the balance sheets of KIN Network, Inc. as of December 31,
1994 and 1995, and the related statements of operations, stockholder's equity
(deficit), and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits. The accompanying financial statements of KIN Network, Inc. as
of and for the year ended December 31, 1996 and as of and for the nine month
periods ended September 30, 1996 and 1997 were not audited by us and,
accordingly, we have not expressed an opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 1994 and 1995 financial statements referred to above
present fairly, in all material respects, the financial position of KIN
Network, Inc. as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
KENNEDY AND COE, LLC
Salina, Kansas
February 23, 1996
F-62
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
KIN Network, Inc.
Salina, Kansas
We have audited the balance sheet of KIN Network, Inc. as of December 31,
1996, and the related statements of operations, stockholder's equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The financial
statements of KIN Network, Inc. as of December 31, 1995, and 1994, were
audited by other auditors whose reports dated February 23, 1996, and March 1,
1995, respectively, expressed unqualified opinions on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present
fairly, in all material respects, the financial position of KIN Network, Inc.
as of December 31, 1996, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
Out audit was conducted for the purpose of forming an opinion on the 1996
basic financial statements taken as a whole. The financial information for
September 30, 1997 and 1996 and for the periods then ended (marked
"unaudited" and accompanying the basic financial statements) is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. Such information has not been subjected to the auditing
procedures applied in the audit of the 1996 basic financial statements, and
accordingly, we express no opinion on it.
SARTAIN FISCHBEIN & CO.
Tulsa, Oklahoma
February 25, 1997
F-63
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------- ---------------
1995 1996 1997
------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................ $ 2,286,360 $ 2,688,775 $ 3,134,624
Receivables:
Trade accounts......................................... 432,780 324,771 661,597
Accrued revenue........................................ 283,648 533,145 394,863
Patronage credits...................................... 351,138 227,259 190,326
Affiliated company..................................... -- -- --
Liberty Cellular, Inc.................................. -- 1,185,538 562,469
Prepaid expenses......................................... 47,914 144,874 169,643
RTFC capital certificates................................ 452,373 251,609 202,498
------------- -------------- ---------------
Total Current Assets....................................... 3,854,213 5,355,971 5,316,020
------------- -------------- ---------------
Property, Plant and Equipment, net......................... 21,408,898 21,821,077 26,063,471
------------- -------------- ---------------
Other Assets
RTFC capital certificates................................ 3,265,963 3,014,351 2,811,853
Deferred income taxes.................................... 6,206,648 3,108,267 25,530
Debt issue costs, net.................................... 68,790 62,290 57,415
Patronage credits receivable............................. 398,266 604,921 607,654
Prepayments on fiber leases.............................. 227,445 197,778 175,528
Organization and other intangible costs, net of
accumulated amortization of $826,801 in 1995, $836,278
in 1996, and $841,407 in 1997........................... 22,265 10,444 2,751
Other assets............................................. 1,300 1,300 --
------------- -------------- ---------------
Total Other Assets......................................... 10,190,677 6,999,351 3,680,731
------------- -------------- ---------------
Totals..................................................... $35,453,788 $ 34,176,399 $ 35,060,222
============= ============== ===============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Current maturities of long-term debt..................... $ 2,518,559 $ 2,892,009 $ 2,892,341
Accounts payable:
Trade.................................................. 198,246 632,519 3,763,209
Liberty Cellular, Inc.................................. 2,649 -- 4,062
Affiliate.............................................. 15,184 66,408 45,009
Accrued expenses......................................... 536,553 515,932 773,003
------------- -------------- ---------------
Total Current Liabilities.................................. 3,271,191 4,106,868 7,477,624
Long-Term Debt, less current maturities.................... 31,655,696 28,763,687 26,574,085
------------- -------------- ---------------
Total Liabilities.......................................... 34,926,887 32,870,555 34,051,709
------------- -------------- ---------------
Stockholder's Equity
Common stock, no par value; authorized 10,000,000
shares; issued and outstanding 300,000 shares .......... 3,000,000 3,000,000 3,000,000
Additional paid in capital............................... 7,500,000 9,071,316 9,071,316
Retained earnings........................................ (9,973,099) (10,765,472) (11,062,803)
------------- -------------- ---------------
Total Stockholder's Equity................................. 526,901 1,305,844 1,008,513
------------- -------------- ---------------
Totals..................................................... $35,453,788 $ 34,176,399 $ 35,060,222
============= ============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
-------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
-------------- -------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................... $ 3,550,242 $ 6,496,741 $ 8,552,564 $ 6,030,536 $ 8,796,000
Cost of Services................... 2,450,281 3,094,454 2,863,857 2,054,764 2,995,543
-------------- -------------- ------------- ------------- -------------
Gross Profit....................... 1,099,961 3,402,287 5,688,707 3,975,772 5,800,457
-------------- -------------- ------------- ------------- -------------
Expenses
Operating and administrative .... 2,533,095 2,929,555 3,416,589 2,478,742 3,465,761
Depreciation and amortization ... 1,700,096 1,825,297 1,906,094 1,320,656 1,596,567
-------------- -------------- ------------- ------------- -------------
Total Expenses..................... 4,233,191 4,754,852 5,322,683 3,799,398 5,062,328
-------------- -------------- ------------- ------------- -------------
Income (Loss) from Operations ..... (3,133,230) (1,352,565) 366,024 176,374 738,129
Other Income (Expense)
Interest and other income........ 26,532 41,683 80,678 68,933 73,705
Interest, net of patronage
credits......................... (1,616,071) (2,047,215) (1,826,148) (1,383,517) (1,296,265)
-------------- -------------- ------------- ------------- -------------
Net Loss Before Income Taxes ...... (4,722,769) (3,358,097) (1,379,446) (1,138,210) (484,431)
Deferred Income Tax Benefit........ 1,839,803 1,303,549 587,073 426,225 187,100
-------------- -------------- ------------- ------------- -------------
Net Loss........................... $(2,882,966) $(2,054,548) $ (792,373) $ (711,985) $ (297,331)
============== ============== ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994........ $3,000,000 $ -- $ (5,035,585) $(2,035,585)
Capital Contributions......... -- 1,500,000 -- 1,500,000
Net Loss--1994................ -- -- (2,882,966) (2,882,966)
------------ ------------ --------------- ---------------
Balance, December 31, 1994 ..... 3,000,000 1,500,000 (7,918,551) (3,418,551)
Capital Contributions......... -- 6,000,000 -- 6,000,000
Net Loss--1995................ -- -- (2,054,548) (2,054,548)
------------ ------------ --------------- ---------------
Balance, December 31, 1995 ..... 3,000,000 7,500,000 (9,973,099) 526,901
Capital Contributions......... -- 1,571,316 -- 1,571,316
Net Loss--1996................ -- -- (792,373) (792,373)
------------ ------------ --------------- ---------------
Balance, December 31, 1996 ..... 3,000,000 9,071,316 (10,765,472) 1,305,844
Net Income--September 30,
1997 (Unaudited)............. -- -- (297,331) (297,331)
------------ ------------ --------------- ---------------
Balance, September 30, 1997
(Unaudited).................... $3,000,000 $9,071,316 $(11,062,803) $ 1,008,513
============ ============ =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
-------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
-------------- -------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net loss................................ $(2,882,966) $(2,054,548) $ (792,373) $ (711,985) $ (297,331)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities
Deferred income taxes.................. (1,839,803) (1,303,549) (587,073) (426,225) (187,100)
Depreciation and amortization.......... 1,700,096 1,825,297 1,906,094 1,320,656 1,596,567
Gain on sale of assets................. -- (2,984) (13,883) (14,604) (9,081)
(Increase) decrease in:
Receivables.......................... (348,783) (140,406) (224,348) (222,564) (336,342)
Prepaid expenses..................... 28,202 1,344 (96,960) (52,235) (24,769)
Other assets......................... 198,041 29,666 29,667 149,056 223,315
Increase (decrease) in:
Accounts payable..................... (636,864) 87,384 273,173 (67,258) 3,049,688
Accrued expenses..................... (300,041) (302,349) (20,621) 604,851 257,071
-------------- -------------- ------------- ------------- -------------
Net Cash Provided By (Used In) Operating
Activities.............................. (4,082,118) (1,860,145) 473,676 579,692 4,272,018
-------------- -------------- ------------- ------------- -------------
Cash Flows from Investing Activities
Repayment of advance................... 1,000,000 -- -- -- --
Additions--property, plant & equip .... (1,203,916) (749,668) (1,545,534) (1,075,816) (5,923,656)
Proceeds from sale of plant............ -- 24,592 40,456 44,463 106,344
-------------- -------------- ------------- ------------- -------------
Net Cash Provided By (Used In)
Investing Activities................... (203,916) (725,076) (1,505,078) (1,031,353) (5,817,312)
-------------- -------------- ------------- ------------- -------------
Cash Flows from Financing Activities
Proceeds from borrowings............... 5,634,998 -- -- -- --
Return of RTFC capital certificates ... -- -- 452,376 452,376 251,609
Principal payments on debt............. (1,821,913) (2,329,374) (2,516,089) (1,866,282) (2,024,981)
Payments on capital leases............. (217,642) (2,470) (2,470) (2,470) (100,625)
Payment by Liberty Cellular, Inc:
Income tax benefit................... -- -- 2,500,000 -- 3,865,140
Capital contributions................ 1,500,000 6,000,000 1,000,000 1,000,000 --
-------------- -------------- ------------- ------------- -------------
Net Cash Provided By (Used In)
Financing Activities................... 5,095,443 3,668,156 1,433,817 (416,376) 1,991,143
-------------- -------------- ------------- ------------- -------------
Net Increase (Decrease) in Cash and Cash
Equivalents............................. 809,409 1,082,935 402,415 (868,037) 445,849
Cash and Cash Equivalents:
Beginning of Period.................... 394,016 1,203,425 2,286,360 2,286,360 2,688,775
-------------- -------------- ------------- ------------- -------------
End of Period.......................... $ 1,203,425 $ 2,286,360 $ 2,688,775 $ 1,418,323 $ 3,134,624
============== ============== ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING & FINANCING ACTIVITIES
Property contributed as capital by
Liberty Cellular, Inc.................. $ -- $ -- $ 571,316 $ -- $ --
Property acquired through increases
in accounts payable--trade............. $ 148,393 $ 25,577 $ 209,675 $ 76,001 $3,308,202
RTFC capital certificates received in
lieu of cash with borrowings........... $ 626,114 $ -- $ -- $ -- $ --
OTHER DISCLOSURES
Interest paid, net of patronage
refunds................................ $1,791,252 $2,290,421 $1,923,165 $1,540,831 $1,445,070
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995, 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: KIN Network, Inc. ("the Company") is a wholly-owned
subsidiary of Liberty Cellular, Inc. ("Liberty").
The Company is constructing and operating a statewide fiber optic network
in Kansas to provide private circuit transport, network toll terminations,
equal access transport and switching, and other services to businesses and
independent telephone companies in Kansas.
ALLOWANCE FOR BAD DEBTS: The Company recognizes bad debts under the
allowance method. As of December 31, 1995, 1996, and September 30, 1996 and
1997, the Company believes that the dollar amount of receivables subject to
the risk of uncollectibility is minimal and has set its allowance for
doubtful accounts at zero.
PROPERTY, PLANT AND EQUIPMENT: Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets.
Repairs and maintenance are expensed as incurred, whereas major improvements
are capitalized.
Depreciation expense on property, plant and equipment charged to
operations was $1,524,492 in 1994, $1,648,377 in 1995, $1,887,774 in 1996,
and $1,583,999 for the nine months ended September 30, 1997.
DEBT ISSUE COSTS: Debt issue costs, which were incurred in 1991, are being
amortized using the straight-line method over the term of the related debt,
which approximates fifteen years. Annual amortization expense charged to
operations was $6,500 in 1994, 1995, and 1996. Expense charged for the nine
months ended September 30, 1997 was $4,875.
INCOME TAXES: The Company and Liberty file consolidated tax returns.
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes.
Deferred tax liabilities are recognized for differences between the basis of
assets and liabilities for financial statement and income tax purposes. The
differences relate primarily to depreciable and amortizable assets (use of
different depreciation and amortization methods and lives for financial
statement and income tax purposes). In addition, deferred tax assets result
from the anticipated benefits attributable to the utilization of the
Company's net operating losses as an offset to Liberty's taxable income on a
consolidated basis. The net deferred tax benefits represent the tax impact of
the future resolution of the above described differences.
ORGANIZATION COSTS AND OTHER INTANGIBLES: The costs of organizing the
Company have been capitalized and are being amortized over a five-year
period. Annual amortization expense charged to operations was $169,105 in
1994, $170,420 in 1995, $11,821 in 1996, and $12,569 for the nine months
ended September 30, 1997.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that could affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates.
CASH EQUIVALENTS: For purposes of the balance sheets and statements of
cash flows, cash equivalents include all highly liquid debt instruments with
original maturities of three months or less.
F-69
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1995 1996 1997
------------- ------------- ---------------
<S> <C> <C> <C>
Borrowings under a $37,183,333 note with Rural Telephone Finance
Cooperative ("RTFC"). The note bears a variable rate of interest
(6.65% as of June 30, 1997) and borrowings under the note are
due in equal quarterly installments of principal and interest
of approximately $1,130,000 beginning November 1993, with the
final payment due August 2006. The note is collateralized by
network telephone plant and revenues...................... $32,659,604 $30,143,515 $28,118,534
Capital lease obligations (described in Note 3) with certain
stockholders (or their affiliates) of Liberty. The obligations
are due in variable annual principal installments, plus interest,
with the final installments due in the year 2006. The obligations
are collateralized by portions of the fiber optic network. $ 1,514,651 $ 1,512,181 1,347,891
------------- ------------- ---------------
34,174,255 31,655,696 29,466,425
Less current maturities.................................... 2,518,559 2,892,009 2,892,340
------------- ------------- ---------------
$31,655,696 $28,763,687 26,574,085
============= ============= ===============
</TABLE>
The note payable to the RTFC contains various covenants pertaining to the
maintenance of net worth, payment of dividends, and debt service coverage. At
December 31, 1996, the Company was in compliance with such covenants.
Estimated maturities on the borrowings with RTFC over the next 5 1/2 years
beginning July 1, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997... $1,393,177
1998... 2,949,248
1999... 3,188,013
2000... 3,446,034
2001... 3,724,932
2002... 4,026,402
</TABLE>
F-70
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments for property under capital leases at September
30, 1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1997 ....................................................... $ 0.00
1998 ....................................................... 345,872
1999 ....................................................... 328,990
2000 ....................................................... 312,110
2001 ....................................................... 295,228
2002 ....................................................... 263,748
After 2002 ................................................. 867,387
------------
Total minimum lease payments ............................... 2,413,335
Less amount representing interest,administration, and
overhead ................................................... 1,065,444
------------
Present value of minimum lease payments, excluding
interest, administration and overhead ..................... $1,347,891
Less current maturities .................................... 147,393
------------
$1,200,498
============
</TABLE>
RTFC distributes patronage credits to the Company on an annual basis based
upon annually determined percentages of interest paid by the Company to RTFC.
The amount of patronage credits was $254,879 in 1994, $325,515 in 1995,
$305,346 in 1996, and $107,653 in 1997.
As a condition to the loan agreement, the Company must purchase
non-interest bearing subordinated capital certificates from RTFC in an amount
equal to 10% of each advance under the note. Through December 31, 1995, the
Company had purchased $3,718,336 of RTFC subordinated capital certificates.
Beginning in 1996, as principal payments are made on the underlying debt,
returns of certificate principal amounts are made proportionately in order to
maintain a certificate principal balance equal to 10% of the outstanding loan
balances. RTFC has returned certificates to the Company totaling $452,376 and
$251,609 in 1996 and through September 30, 1997, respectively, leaving
certificate balances totaling $3,014,351 at September 30, 1997.
3. INTEREST EXPENSE
The Company follows the policy of capitalizing interest as a component of
property and equipment constructed for its own use. Total interest incurred
(net of patronage credits) was $1,616,071 in 1994, $2,047,215 in 1995,
$1,826,148 in 1996, and $1,296,265 at September 30, 1997. No significant
interest was capitalized in 1994, 1995, or 1996.
4. LEASING ARRANGEMENTS
CAPITAL LEASES: The Company leases fiber optic cable from certain Liberty
stockholders (or their affiliates) under capital leases expiring in the year
2006. The assets and obligations under capital leases are recorded at the
lower of the present value of the minimum lease payments or the fair value of
the asset. The assets are depreciated over their estimated productive lives.
Depreciation of assets under capital leases is included in depreciation
expense and amounted to $100,598 in 1994, 1995, and 1996, and $75,449 for the
period ended September 30, 1997. Interest expense associated with the
obligations under these leases amounted to $207,706 in 1994, $132,924 in
1995, $132,666 in 1996. Fiber optic cable under capital leases was
$2,091,378, $1,990,780, $1,890,182 and $1,839,883 at December 31, 1994, 1995,
1996 and September 30, 1997, respectively, net of accumulated depreciation of
$322,965 at December 31, 1994, $423,563 at December 31, 1995, $524,161 at
December 31, 1996, and $599,610 for the period ended September 30, 1997.
F-71
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Effective December 31, 1994, the Company re-negotiated the terms of the
capital lease obligations for nine of the ten obligations. The re-negotiated
leases call for the deferral of the principal portion of the lease for a two
year period ending December 31, 1996. At that time the remaining principal
balances on the re-negotiated leases will be repaid evenly over a nine or
ten-year period. The interest rate, which was previously set at 12%, was
re-negotiated for 1995 and 1996 to 8.5% for a majority of the leases and 10%
on the balance of the leases. In 1997, the interest rates on those leases
were re-negotiated at rates ranging from 8.5% to 12% for the remainder of the
lease term.
5. OPERATING LEASES
The Company leases various facilities, circuits and equipment under
operating leases expiring in various years through the year 2004. Minimum
future rental commitments under these operating leases as of September 30,
1997, for each of the next 5 1/2 years and in the aggregate are:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, AMOUNT
- -------------- ---------
<S> <C>
1997 ........ $ 40,808
1998 ........ 26,763
1999 ........ 22,482
2000 ........ 20,510
2001 ........ 17,510
2002 ........ 24,514
After 2002 .. 95,886
---------
$248,473
=========
</TABLE>
The Company also leases circuits on a month-to-month basis from various
interconnect companies.
Total rental expense under operating leases, including leased circuits was
$1,257,260 in 1994, $1,146,694 in 1995, $1,653,971 in 1996, and $1,062,378 at
September 30, 1997.
The Company leases space from Liberty under a year-to-year operating
lease. Total rent expense paid to Liberty was $43,000 in 1996 and $32,250 for
the period ended September 30, 1997.
6. RELATED PARTY TRANSACTIONS
The Company is operated under a management agreement by KINI L.C., which
is related to Liberty through common ownership. Operating and administrative
expenses incurred by the Company through KINI L.C. amounted to $1,682,730,
including $127,401 which was capitalized in 1994, $1,924,084, including
$47,684 which was capitalized, in 1995, and $2,377,223, including $15,329
which was capitalized, in 1996. Beginning January 1, 1997, the management fee
paid to KINI L.C. was increased from 12.5% to 15% under a new operating
agreement. Expenses incurred in 1997 amount to $2,481,315, including $60,352
which was capitalized.
Network revenue includes revenue resulting from services performed for
Liberty which amounted to approximately $482,000 (14% of total network
revenue) in 1994, approximately $1,625,000 (25% of total network revenue) in
1995, approximately $2,810,000 (33% of total network revenue) in 1996, and
approximately $1,926,000 (28% of total network revenue) in 1997. At September
30, 1997, trade accounts receivable and accrued revenue includes
approximately $151,000 due from Liberty.
As part of the capital leases for fiber optic cable with certain
stockholders (or their affiliates), the Company is required to pay fees for
maintenance. Additional fiber optic maintenance costs were also paid to
certain stockholders (or their affiliates). Maintenance costs under these
arrangements were approximately $45,000 in 1994, 1995, 1996 and approximately
$33,750 at September 30, 1997.
F-72
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. CONTINGENCIES
During the course of constructing the statewide fiber-optic network, it
has been necessary for the Company to obtain rights-of-way from property
owners. Outside counsel has advised the Company that the form of a number of
these rights-of-way are defective from a marketable title point of view.
Outside counsel have advised management that at this point they cannot offer
an opinion as to any asset impairment or other outcome resulting from this
situation. In 1992, the Company obtained an indemnification commitment from
the consultants hired by the Company to obtain the rights-of-way, in the
amount of $250,000, which expires over 15 years.
8. INCOME TAXES
Deferred income taxes arise principally due to net operating losses net of
temporary differences in the depreciation of property, plant and equipment.
The Company has net operating losses totaling approximately $15,900,000
expiring in various years through the year 2011, which management believes
will be utilized in the consolidated tax return to offset future taxable
income from the operations of the Company and Liberty.
A reconciliation of the deferred income tax benefit at the federal
statutory rate to the deferred income tax benefit at the effective tax rate
is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------------ ------------ ---------- ---------------
<S> <C> <C> <C> <C>
Deferred income tax benefit computed at
federal statutory rate of 34%.......... $1,605,741 $1,141,753 $469,012 $164,707
State taxes, net of federal benefit .... 228,582 162,532 66,765 19,377
Other................................... 5,480 (736) 51,296 3,016
------------ ------------ ---------- ---------------
$1,839,803 $1,303,549 $587,073 $187,100
============ ============ ========== ===============
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
------------------------------------------ SEPTEMBER 30,
1994 1995 1996 1997
------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Total deferred tax assets--net operating
losses....................................... $ 7,119,644 $8,957,575 $ 6,190,810 $ 4,947,538
Less valuation allowance...................... -- -- -- --
------------- ------------ ------------- ---------------
7,119,644 8,957,575 6,190,810 4,947,538
Total deferred tax liabilities--depreciation . (2,216,545) 2,750,927 (3,082,543) (4,922,008)
------------- ------------ ------------- ---------------
Net deferred tax assets....................... $ 4,903,099 $6,206,648 $ 3,108,267 $ 25,530
============= ============ ============= ===============
</TABLE>
In 1996, Liberty utilized approximately $9,500,000 of the Company's net
operating loss carryforward to offset Liberty's 1996 taxable income. As a
result, Liberty agreed to pay the Company approximately $3,700,000 for the
use of the Company's net operating loss, of which $2,500,000 was paid in
1996. Accounts receivable from Liberty as of December 31, 1996 consists of
the remaining amounts due to the Company for the use of net operating losses.
F-73
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. CREDIT RISK
The Company grants credit to customers, primarily local telephone
companies and local businesses.
The Company has a demand deposit and a repurchase agreement account with a
financial institution. The balance at the financial institution exceeded the
federal insurance limitation of $100,000 at December 31, 1994, 1995, 1996 and
September 30, 1997. However, the financial institution has pledged assets to
secure the repurchase agreement in excess of the federal insurance
limitation.
10. DEFERRED COMPENSATION PLAN
The Company, along with Liberty Cellular, Inc. and KINI, L.C., established
in 1994, a deferred compensation plan for their employees. The plan provides
that the employees will receive additional compensation based upon certain
key operating results of the companies. The total expense under the plan was
$479,198, $1,063,895, and $1,190,761 for the years ended December 31, 1994,
1995, and 1996, respectively. Of the total liability under the plan of
$2,164,646, $387,141 was paid in 1997 and the remaining balance of $1,777,505
deferred to future years. Liberty Cellular, Inc. has assumed all of the
liability and expense under the plan, with the Company contingently liable as
co-signer.
F-74
<PAGE>
INSIDE BACK COVER GRAPHIC:
[Graphic depicting ACG CLEC configuration strategy along with explanation of
strategy as detailed below. Strategy consists of five phases, described as
"Build Smart".]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Phase 1 Phase 2 Phase 3 Phase 4 Phase 5
- -----------------------------------------------------------------------------------------------------------------------
Resell LEC local Use Intercity networks Add local service Collocate in Construct local and
service bundled with to aggregate traffic at circuit and packet appropriate LEC mid-haul fiber
L/D, cellular, yellow key switching points switches to key switch central offices to facilities where
pages, Internet access points; use ATM acquire access to economics warrant
and other premium backbone to reduce unbundled local loops
services switching costs
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained
in this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Company or the Underwriters. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the date
hereof or that the information contained herein is correct as of any time
subsequent to its date. This Prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any securities other than the registered
securities to which it relates. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy such securities in any
circumstances in which such offer or solicitation is unlawful.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 11
The Company............................... 24
Dividend Policy........................... 29
Use of Proceeds........................... 29
Capitalization............................ 30
Dilution.................................. 31
Selected Financial Data................... 32
Management's Discussion and Analysis
of Financial Condition and Results of
Operations of Certain Acquired Companies 34
Industry Background and Overview.......... 50
Business.................................. 52
Management................................ 67
Certain Transactions...................... 75
Principal Stockholders.................... 79
Description of Capital Stock.............. 81
Shares Eligible for Future Sale........... 84
Underwriting.............................. 85
Validity of Common Stock.................. 87
Experts................................... 87
Available Information..................... 87
Glossary.................................. G-1
Index to Financial Statements............. F-1
</TABLE>
UNTIL MARCH 9, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
8,000,000 SHARES
[ACG Advanced
Communications
Group LOGO]
COMMON STOCK
PROSPECTUS
PAINEWEBBER INCORPORATED
CIBC OPPENHEIMER
FEBRUARY 12, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the securities being registered. All amounts are estimates
except for the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee.................. $ 52,273
NASD filing fee....................... 14,300
NYSE original listing fee............. 150,000
Printing expenses..................... 675,000
Legal fees and expenses............... 2,350,000
Accounting fees and expenses.......... 650,000*
Blue Sky fees and expenses............ 10,000
Transfer Agent's and Registrar's
fees................................. 25,000
Miscellaneous......................... 148,427
-------------
TOTAL .............................. $4,075,000*
</TABLE>
- ------------
* Includes $500,000 paid prior to the consummation of the Offering.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Delaware General Corporation Law
Section 145(a) of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other that an action by or in the
right of the corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe such
person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that such person's conduct was unlawful.
Section 145(b) of the DGCL states that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that
such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including
attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such
person acted in good faith and in a manner such person reasonably believed to
be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the court of Chancery or the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
II-1
<PAGE>
Section 145(c) of the DGCL provides that to the extent that a present or
former director or officer of a corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in
connection therewith.
Section 145(d) of the DGCL states that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be
made by the corporation only as authorized in the specific case upon a
determination that indemnification of the present or former director,
officer, employee or agent is proper in the circumstances because such person
has met the applicable standard of conduct set forth in subsections (a) and
(b). Such determination shall be made with respect to a person who is a
director or officer at the time of such determination (1) by a majority vote
of the directors who are not parties, to such action, suit or proceeding,
even though less than a quorum or (2) by a committee of such directors
designated by a majority of such directors, even though less than a quorum or
(3) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (4) by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the corporation as authorized in
Section 145. Such expenses (including attorneys' fees) incurred by former
directors and officers or other employees and agents may be so paid upon such
terms and conditions, if any, as the corporation deems appropriate.
Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in such person's official capacity and as to
action in another capacity while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the
power to purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against such person and incurred
by such person in any such capacity, or arising out of such person's status
as such, whether or not the corporation would have the power to indemnify
such person against such liability under the provisions of Section 145.
Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who
has ceased to be a director, officer, employee or agent, and shall inure to
the benefit of the heirs, executors and administrators of such a person.
Certificate of Incorporation
The Restated Certificate of Incorporation of the Company provides that a
director of the Company shall not be personally liable to the Company 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 Company 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 DGCL or (iv) for any transaction from which the
director derived an improper personal benefit. Any repeal or modification of
such provision of the Restated Certificate of Incorporation by the
stockholders of the Company shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director of
the Company existing at the time of such repeal or modification.
II-2
<PAGE>
The Company's Restated Certificate of Incorporation also provides that
each person who was or is made a party or is threatened to be made a party to
or is involved in any action 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
Company or, while a director or officer of the Company, is or was serving at
the request of the Company 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 Company to the fullest extent authorized by the DGCL, 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 herein, the Company shall indemnify any
such person seeking indemnification in connection with a proceeding (or part
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 the Restated Certificate of Incorporation shall be a contract
right and shall include the right to be paid by the Company the expenses
incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the DGCL 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 Company
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 the Restated Certificate
of Incorporation or otherwise. The Company may, by action of the Board of
Directors, provide indemnification to employees and agents of the Company
with the same scope and effect as the foregoing indemnification of directors
and officers.
If a claim under the foregoing is not paid in full by the Company within
30 days after a written claim has been received by the Company, the claimant
may at any time thereafter bring suit against the Company 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 Company) that the claimant has not met the
standards of conduct which make it permissible under the DGCL for the Company
to indemnify the claimant for the amount claimed but the burden of proving
such defense shall be on the Company. Neither the failure of the Company
(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
DGCL, nor an actual determination by the Company (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.
The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred by the
Restated Certificate of Incorporation shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the Restated Certificate of Incorporation, the Company's
By-Laws, any agreement, any vote of stockholders or disinterested Directors
of the Company or otherwise.
The Company may maintain insurance, at its expense, to protect itself and
any director, officer, employee or agent of the Company or another
corporation, partnership, joint venture, trust or other enterprise against
any such expense, liability or loss, whether or not the Company would have
the power to indemnify such person against such expense, liability or loss
under the DGCL.
II-3
<PAGE>
No amendment, alteration or repeal of, nor the adoption of any provision
inconsistent with, any of the foregoing provisions of the Company's Restated
Certificate of Incorporation, which shall in any manner increase the actual
or potential liability of any director of the Company 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.
Notwithstanding that a lesser percentage may be permitted from time to
time by applicable law, none of the foregoing provisions of the Company's
Restated Certificate of Incorporation 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.
Indemnification Agreements
The Company intends to enter into Indemnification Agreements with each of
its directors. The Indemnification Agreements generally are to the same
effect as the charter provisions described above.
Underwriting Agreement
The Underwriting Agreement provides for the indemnification of the
directors and officers of the Company in certain circumstances.
Insurance
The Company intends to maintain liability insurance for the benefit of its
directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On September 17, 1996, the Company's predecessor ("Predecessor") issued
and sold shares of Common Stock, $.00001 par value ("Predecessor Stock"), to
the following parties in the amounts and for the consideration indicated.
These sales were exempt from registration under Section 4(2) of the
Securities Act: CPFF -- 7,560,781 shares for a consideration of $1,000; Rod
K. Cutsinger -- 378,039 shares for a consideration of $10,000; Bradley K.
Cutsinger -- 47,255 shares for a consideration of $1,250; Don Chessher --
98,290 (subsequently reduced to 62,093) shares for a consideration of $2,600;
Jeffrey L. Corl -- 94,510 shares for a consideration of $2,500 (subsequently
reduced to 11,341 shares, for a consideration of $300); Frank Bango -- 94,510
shares for a consideration of $2,500; Louis A. Waters -- 94,510 shares for a
consideration of $2,500 (subsequently reduced to 7,561 shares for a
consideration of $1,000); Ronald Shapss -- 11,341 shares for a consideration
of $300; G. Edward Powell -- 7,561 shares for a consideration of $200;
Fentress Bracewell -- 1,890 shares for a consideration of $50; Jackson Hines
- -- 1,890 shares for a consideration of $50; Rod Crosby -- 1,890 shares for a
consideration of $50; and Ron Ormand -- 1,890 shares for a consideration of
$50.
On September 19, 1996 the Predecessor issued and sold to CPFF an 8%
promissory note, as amended, due upon the first to occur of the effectiveness
of registration statement relating to the Company's initial underwritten
public offering or December 31, 1998, in a transaction exempt from
registration under Section 4(2) of the Securities Act, no public offering
being involved.
In October 1996, the Predecessor agreed to issue non-transferable
five-year warrants to purchase an aggregate of 16,256 shares of Common Stock
at the initial public offering price per share to the following eight persons
for consulting services rendered in transactions exempt from registration
under Section 4(2) of the Securities Act, no public offering being involved:
II-4
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME SUBJECT TO WARRANTS
- ---- -------------------
<S> <C>
Ronald Shapps ...... 9,451
Rod L. Crosby, Jr. 1,890
Ron Ormond ......... 567
Jim Neebling ....... 567
Howard Kra ......... 567
Julius Binetti ..... 1,323
Julius DeVito ...... 1,323
Errol Cvern ........ 567
</TABLE>
On November 7, 1996, the Predecessor issued and sold 37,804 shares of
Predecessor Stock to G. Edward Powell for a consideration of $5,000 in a
transaction exempt from registration under Section 4(2) of the Securities
Act, no public offering being involved.
On January 3, 1997, the Predecessor issued and sold 1,890 shares of
Predecessor Stock to Beverly A. Aden for a consideration of $250 in a
transaction exempt from registration under Section 4(2) of the Securities
Act, no public offering being involved.
On May 2, 1997, the Predecessor issued to Joseph C. Cook, for services
rendered as a consultant, a ten year warrant to purchase 7,561 shares of
Predecessor Stock at a price of $2.65 per share in a transaction exempt from
registration under Section 4(2) of the Securities Act, no public offering
being involved.
On June 12, 1997, in connection with the execution of a related employment
agreement, the Predecessor granted Todd J. Feist a non-transferrable five
year option to purchase 250,000 shares of Predecessor Stock. This transaction
was completed without registration under the Securities Act in reliance upon
the exemption provided by Section 4(2) thereof, no public offering being
involved. These options were issued in exchange for a comparable number of
options issued in mid 1997 by the Predecessor.
On June 16, 1997, the Predecessor issued to the stockholders of Great
Western Directories, Inc. non-transferable, ten-year warrants to purchase
756,078 shares of Predecessor Stock. This transaction was completed without
registration under the Securities Act in reliance upon the exemption afforded
by Section 4(2) of the Securities Act, no public offering being involved.
Pursuant to agreements entered into in May, July and July of 1997,
respectively, the Predecessor issued to Valerie A. Caser, Malcolm F. McNeill
and William McCaughey 849 shares of Common Stock, 3,692 shares of Common
Stock, and warrants to purchase 7,561 shares of Common Stock at a price of
$6.61 per share, respectively, in lieu of compensation for consulting
services in transactions exempt from registration under Section 4(2) of the
Securities Act, no public offering being involved.
On December 29, 1997, the Company issued ten-year warrants to purchase
66,157 shares and 132,314 shares of Common Stock at a price of $2.50 per
share to Brad K. Cutsinger and G. Edward Powell, respectively, in
transactions exempt from registration under the Securities Act, no public
offering being involved. The warrants were issued to Messrs. Cutsinger and
Powell in exchange for employee stock options having the same economic terms.
Pursuant to the Acquisition Agreements filed as Exhibits 2.1 through 2.10
and substantially concurrently with the consummation of the Offering, the
Company has agreed to issue an aggregate of 3,392,644 shares of Common Stock,
$17.4 million in promissory notes, $2.0 million in convertible subordinated
notes and 637,135 warrants or options to purchase Common Stock to the
stockholders of Great Western, Valu-Line, Feist Long Distance, FirsTel,
Tele-Systems and KINNET. These transactions will be completed without
registration under the Securities Act in reliance upon the exemption provided
by Section 4(2) thereof, no public offering being involved.
On October 9, 1997, the Company issued to its parent, Advanced
Communications Corp., 1,000 shares of Common Stock for the consideration of
$1,000. Concurrently with the consummation of the
II-5
<PAGE>
Offering, Advanced Communications Corp. will be merged with a subsidiary of
the Company, will become a subsidiary of the Company, and the stockholders of
Advanced Communications Corp. will receive one share of Common Stock of the
Company for each share of common stock they hold in Advanced Communications
Corp. These transactions will be completed without registration under the
Securities Act in reliance upon the exemption provided by Section 4(2)
thereof, no public offering being involved.
On January 15, 1998, the Company agreed to issue 142,857 shares of Series
A Redeemable Convertible Preferred Stock to Northwestern Growth Corporation
in connection with the negotiation of a strategic alliance. This transaction
was completed without registration under the Securities Act in reliance upon
the exemption provided by Section 4(2) thereof, no public offering being
involved.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS
------ ----------------------------------------------------------------------------------------
<S> <C>
*1.1 --Form of Underwriting Agreement.
2.1 --Restated Stock Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., Great Western Directories, Inc. and the stockholders
of Great Western Directories, Inc.
2.1A --Amendment No. 1 dated as of January 8, 1998 to the Restated Stock Purchase Agreement filed
as Exhibit 2.1 to the Registration Statement.
2.2 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., ACG Acquisition Corp., Valu-Line of Longview,
Inc. and the shareholders of Valu-Line of Longview, Inc.
2.2A --Amendment No. 1 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed
as Exhibit 2.2 to the Registration Statement.
*2.2B --Form of Second Amendment dated as of February 11, 1998 to the Agreement and Plan and Exchanged
filed as Exhibit 2.2 to the Registration Statement, including a Form of Escrow Agreement
attached thereto as Annex III.
2.3 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., 1+USA Acquisition Corp., Feist Long Distance
Service, Inc. and the stockholders of Feist Long Distance Service, Inc.
2.3A --Amendment No. 1 dated as of January 10, 1998 to the Agreement and Plan of Exchange filed
as Exhibit 2.3 to the Registration Statement.
2.4 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., FirsTel, Inc., the stockholders of FirsTel, Inc. and others.
*2.4A --Amendment No. 1 dated as of December 15, 1997 to the Agreement and Plan of Exchange filed
as Exhibit 2.4 to the Registration Statement.
2.4B --Amendment No. 2 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed
as Exhibit 2.4 to the Registration Statement.
2.5 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., ACG Acquisition II Corp., Tele-Systems, Inc.
and the stockholders of Tele-Systems, Inc.
2.5A --Amendment No. 1 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed
as Exhibit 2.5 to the Registration Statement.
2.6 --Restated Asset Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., Long Distance Management II, Inc. and Robert
Alexander.
2.6A --Amendment No. 1 dated as of January 8, 1998 to the Restated Asset Purchase Agreement filed
as Exhibit 2.6 to the Registration Statement.
2.7 --Restated Asset Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., Long Distance Management of Kansas, Inc., Robert
Alexander and others.
II-6
<PAGE>
EXHIBIT
NUMBER DESCRIPTIONS
- ----------- ----------------------------------------------------------------------------------------
2.7A --Amendment No. 1 dated as of January 8, 1998 to the Restated Asset Purchase Agreement filed
as Exhibit 2.7 to the Registration Statement.
2.8 --Restated Asset Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., Switchboard of Oklahoma City, Inc. and others.
2.8A --First Amendment dated as of October 6, 1997 to the Restated Asset Purchase Agreement filed
as Exhibit 2.8 to the Registration Statement.
2.8B --Second Amendment dated as of January 8, 1998 to the Restated Asset Purchase Agreement filed
as Exhibit 2.8 to the Registration Statement.
2.9 --Restated Asset Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., ACG Acquisition II Corp. and Daniel W. and Cheryl
A. Peters.
2.9A --Amendment No. 1 dated as of January 8, 1998 to the Restated Asset Purchase Agreement filed
as Exhibit 2.9 to the Registration Statement.
2.10 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., KIN Network, Inc. and Liberty Cellular, Inc.
2.10A --Amendment No. 1 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed
as Exhibit 2.10 to the Registration Statement.
2.11 --Agreement of Merger dated as of October 9, 1997 among Advanced Communications Group, Inc.,
Advanced Communications Corp. and Advanced Communications Acquisition, Inc.
2.11A --Amendment No. 1 dated as of January 8, 1998 to the Agreement of Merger filed as Exhibit
2.11 to the Registration Statement.
3.1 --Restated Certificate of Incorporation of ACG.
3.1A --Form of Amendment to Restated Certificate of Incorporation of ACG.
3.2 --Restated Bylaws of ACG.
3.3 --Form of Certificate of Designation of Series A Redeemable Convertible Preferred Stock (see
Annex A to Exhibit 10.46).
4.1 --Form of certificate representing Common Stock.
*5.1 --Opinion of Bracewell & Patterson, L.L.P.
10.1 --ACG 1997 Stock Awards Plan.
10.1A --Form of Non-Qualified Stock Option Agreement.
10.2 --Non-Qualified Stock Option Plan for Non-Employee Directors.
10.3 --Employment Agreement between ACG and Richard P. Anthony.
10.4 --Form of Employment Agreement between Great Western Directories, Inc. and Richard O'Neal
(see Annex V to Exhibit 2.1).
10.5 --Form of Employment Agreement between Feist Long Distance Service, Inc. and Todd Feist (see
Annex VII to Exhibit 2.3A).
10.6 --Form of Employment Agreement between Fred L. Thurman and FirsTel, Inc. (see Annex V to Exhibit
2.4).
10.7 --Form of Indemnification Agreement entered into between ACG and each of its executive officers
and directors.
10.9 --Form of Series A Warrant issued to shareholders of Great Western Directories, Inc.
10.10 --Form of Series B Warrant issued to shareholders of Great Western Directories, Inc.
10.11 --Form of Series C Warrant issued to shareholders of Great Western Directories, Inc.
10.12 --Form of Series D Warrant to be issued to shareholders of Great Western Directories, Inc.
(see Annex IV to Exhibit 2.1).
10.13 --Form of 5% Subordinated Note to be issued to shareholders of Great Western Directories,
Inc. (see Annex III to Exhibit 2.1).
10.14 --Form of 10% Convertible Subordinated Note to be issued to shareholders of FirsTel, Inc.
(see Annex III to Exhibit 2.4).
II-7
<PAGE>
EXHIBIT
NUMBER DESCRIPTIONS
- ----------- ----------------------------------------------------------------------------------------
10.15 --Management Agreement dated January 1, 1997 between KINI, L.C. and KIN Network, Inc.
10.16 --Sales Agreement Terms and Conditions dated July 16, 1997 between Big Stuff, Inc. and Great
Western Directories, Inc.
10.16A --Supplemental Letter dated December 22, 1997 from Big Stuff, Inc. to Great Western Directories,
Inc. regarding exclusively marketing rights to World Pages in certain areas.
10.17 --Employment Agreement between ACG and William H. Zimmer III.
10.18 --Employment Agreement between ACG and James F. Cragg.
10.19 --Form of Series E Warrant to be issued to certain shareholders of Tele-Systems, Inc.
10.20 --Form of Series F Warrant to be issued to certain shareholders of Tele-Systems, Inc.
10.21 --Form of Series G Warrant to be issued to certain shareholders of FirsTel, Inc. (see Annex
IV to Exhibit 2.4).
10.22 --Form of Series H Warrant to be issued to Daniel W. and Cheryl A. Peters (see Annex IV to
Exhibit 2.9).
10.23 --Form of Series I Warrant to be issued to Daniel W. and Cheryl A. Peters (see Annex V to
Exhibit 2.9).
10.24 --Warrant issued to Joseph C. Cook.
10.25 --Form of Series K Warrant issued to certain consultants.
10.26 --Form of Series L Warrant issued to G. Edward Powell and Brad K. Cutsinger.
10.27 --Resale Agreement between Southwestern Bell Telephone Company and Feist Long Distance dated
June 4, 1997 (Oklahoma).
10.28 --Resale Agreement between Southwestern Bell Telephone Company and Feist Long Distance dated
April 4, 1997 (Kansas).
10.29 --Agreement for Service Resale dated as of June 6, 1997 between FirsTel, Inc. and U S West
Communications, Inc. (South Dakota).
10.30 --Agreement for Service Resale dated as of March 19, 1997 between FirsTel, Inc. and U S West
Communications, Inc. (Wyoming).
10.31 --Agreement for Service Resale dated as of October 14, 1997 between FirsTel, Inc. and U S
West Communications, Inc. (Iowa).
10.32 --Agreement for Service Resale dated as of March 19, 1997 between FirsTel, Inc. and U S West
Communications, Inc., as amended by a First Amendment to Agreement for Service Resale, dated
July , 1997 between FirsTel, Inc. and US West Communications, Inc. (North Dakota).
10.33 --Agreement for Service Resale dated as of March 19, 1997 between FirsTel, Inc. and U S West
Communications, Inc., as amended by a Second Amendment to Agreement for Service Resale,
dated November 6, 1997, between FirsTel, Inc. and US West Communications, Inc. (Nebraska).
10.34 --Agreement for Service Resale dated as of August 12, 1997 between FirsTel, Inc. and U S West
Communications, Inc. (Minnesota).
10.35 --Resale Agreement dated as of April 30, 1997, between Southwestern Bell Telephone Company
and Valu-Line of Longview, Inc. (Texas).
10.36 --Resale Agreement dated as of September 12, 1997, between GTE Southwest Incorporated and
Valu-Line Long Distance (Texas).
10.37 --Master Resale Agreement dated as of May 9, 1997, among Valu-Line Long Distance and United
Telephone Company of Texas, Inc. dba Sprint and Central Telephone Company of Texas dba Sprint
and Southwest Incorporated and Valu-Line Long Distance (Texas).
10.38 --Form of Office Expense Agreement by and between Feist Publications, Inc., Feist Systems,
Inc. and Feist Long Distance Service, Inc.
10.39 --Form of Advertisement Agreement by and between Feist Publications, Inc. and Feist Long Distance
Service, Inc. (see Annex IV to Exhibit 2.3).
II-8
<PAGE>
EXHIBIT
NUMBER DESCRIPTIONS
- ----------- ----------------------------------------------------------------------------------------
10.40 --Form of InterNet Reseller Agreement by and between Feist Systems, Inc. and Feist Long Distance
Service, Inc.
10.41 --Form of Standstill Agreement dated as of February , 1998 between ACG and Rod K. Cutsinger.
*10.42 --Form of Non-Competition Agreement dated as of February , 1998 between ACG and Rod K. Cutsinger.
10.43 --Asset Purchase Agreement made and entered into as of September 3, 1997 by and between RAFT,
L.L.C., PAM Oil, Inc., Scott D. Scofield, William Pederson and FirsTel, Inc.
10.44 --Amendment to the Asset Purchase Agreement filed as Exhibit 10.43 to the Registration Statement.
10.45 --Form of Stockholders' Agreement among KIN Network, Inc. and its Stockholders.
10.46 --Letter Agreement dated January 15, 1998 among Advanced Communications Group, Inc., Northwestern
Public Service Company and Northwestern Growth Corporation.
*10.47 --Form of Series M Warrant issued to William McCaughey.
*10.48 --Form of Stock Option and Put Agreement issued to Mark Beall.
*10.49 --Commitment Letter between ACG and Canadian Imperial Bank of Commerce dated February 11,
1998 with respect to proposed $25 million senior secured credit facility.
21.1 --List of subsidiaries of ACG.
*23.1 --Consent of KPMG Peat Marwick LLP.
*23.2 --Consent of KPMG Peat Marwick LLP.
*23.3 --Consent of KPMG Peat Marwick LLP.
*23.4 --Consent of KPMG Peat Marwick LLP.
*23.5 --Consent of Hein + Associates LLP.
*23.6 --Consent of Sartain Fischbein & Co.
*23.7 --Consent of Kennedy and Coe LLC.
23.8 --Consent of Richard O'Neal to be named as a director.
23.9 --Consent of Todd J. Feist to be named as a director.
23.10 --Consent of Fentress Bracewell to be named as a director.
33.11 --Consent of E. Clarke Garnet to be named as a director.
23.12 --Consent of David Mitchell to be named as a director.
23.13 --Consent of Fred L. Thurman to be named as a director
*23.14 --Consent of Bracewell & Patterson, L.L.P. (to be contained in Exhibit 5.1).
23.15 --Consent of Reginald J. Hollinger to be named as a director.
24.1 --Power of Attorney (included on the Signature Page of Amendment No. 1 to this Registration
Statement).
27.1 --Financial Data Schedule.
27.2 --Financial Data Schedule.
</TABLE>
- ------------
* Filed herewith.
All other exhibits are previously filed.
(b) Financial Statement Schedules
All schedules have been omitted because they are not required under the
related instructions, are inapplicable, or the information is included in the
consolidated financial statements.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described in Item 14, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
II-9
<PAGE>
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that: (i) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as
of the time it was declared effective; (ii) for the purpose of determining
any liability under the Securities Act of 1933, each post-effective amendment
that contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-10
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, ADVANCED
COMMUNICATIONS GROUP, INC. HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION
STATEMENT THERETO TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW YORK, ON FEBRUARY 11,
1998.
ADVANCED COMMUNICATIONS GROUP, INC.
By: RICHARD P. ANTHONY
-------------------------------------
RICHARD P. ANTHONY
CHAIRMAN OF THE BOARD
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATES INDICATED ON FEBRUARY 4, 1998.
<TABLE>
<CAPTION>
SIGNATURE CAPACITIES IN WHICH SIGNED
- ------------------------- ------------------------------------------------------------
<S> <C>
RICHARD P. ANTHONY Chairman of the Board, President and Chief Executive Officer
- ------------------------- and Director (Principal Executive Officer)
RICHARD P. ANTHONY
WILLIAM H. ZIMMER III
- ------------------------- Chief Financial Officer and Director (Principal Financial
WILLIAM H. ZIMMER III and Accounting Officer)
JAMES F. CRAGG
-------------------------
JAMES F. CRAGG Director
ROD K. CUTSINGER
-------------------------
ROD K. CUTSINGER Director
G. EDWARD POWELL
-------------------------
G. EDWARD POWELL Director
</TABLE>
II-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS PAGE
- ----------- ----------------------------------------------------------------------------------------- --------
<S> <C> <C>
*1.1 --Form of Underwriting Agreement.
2.1 --Restated Stock Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., Great Western Directories, Inc. and the stockholders
of Great Western Directories, Inc.
2.1A --Amendment No. 1 dated as of January 8, 1998 to the Restated Stock Purchase Agreement filed
as Exhibit 2.1 to the Registration Statement.
2.2 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., ACG Acquisition Corp., Valu-Line of Longview,
Inc. and the shareholders of Valu-Line of Longview, Inc.
2.2A --Amendment No. 1 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed as
Exhibit 2.2 to the Registration Statement.
*2.2B --Form of Second Amendment dated as of February 11, 1998 to the Agreement and Plan and Exchanged
filed as Exhibit 2.2 to the Registration Statement, including a Form of Escrow Agreement
attached thereto as Annex III.
2.3 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., 1+USA Acquisition Corp., Feist Long Distance
Service, Inc. and the stockholders of Feist Long Distance Service, Inc.
2.3A --Amendment No. 1 dated as of January 10, 1998 to the Agreement and Plan of Exchange filed
as Exhibit 2.3 to the Registration Statement.
2.4 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., FirsTel, Inc., the stockholders of FirsTel, Inc. and others.
*2.4A --Amendment No. 1 dated as of December 15, 1997 to the Agreement and Plan of Exchange filed
as Exhibit 2.4 to the Registration Statement.
2.4B --Amendment No. 2 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed as
Exhibit 2.4 to the Registration Statement.
2.5 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., ACG Acquisition II Corp., Tele-Systems, Inc.
and the stockholders of Tele-Systems, Inc.
2.5A --Amendment No. 1 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed as
Exhibit 2.5 to the Registration Statement.
2.6 --Restated Asset Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., Long Distance Management II, Inc. and Robert
Alexander.
2.6A --Amendment No. 1 dated as of January 8, 1998 to the Restated Asset Purchase Agreement filed
as Exhibit 2.6 to the Registration Statement.
2.7 --Restated Asset Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., Long Distance Management of Kansas, Inc., Robert
Alexander and others.
2.7A --Amendment No. 1 dated as of January 8, 1998 to the Restated Asset Purchase Agreement filed
as Exhibit 2.7 to the Registration Statement.
2.8 --Restated Asset Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., Switchboard of Oklahoma City, Inc. and others.
2.8A --First Amendment dated as of October 6, 1997 to the Restated Asset Purchase Agreement filed
as Exhibit 2.8 to the Registration Statement.
<PAGE>
EXHIBIT
NUMBER DESCRIPTIONS PAGE
- ----------- ----------------------------------------------------------------------------------------- --------
2.8B --Second Amendment dated as of January 8, 1998 to the Restated Asset Purchase Agreement filed
as Exhibit 2.8 to the Registration Statement.
2.9 --Restated Asset Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., ACG Acquisition II Corp. and Daniel W. and Cheryl
A. Peters.
2.9A --Amendment No. 1 dated as of January 8, 1998 to the Restated Asset Purchase Agreement filed
as Exhibit 2.9 to the Registration Statement.
2.10 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., KIN Network, Inc. and Liberty Cellular, Inc.
2.10A --Amendment No. 1 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed as
Exhibit 2.10 to the Registration Statement.
2.11 --Agreement of Merger dated as of October 9, 1997 among Advanced Communications Group, Inc.,
Advanced Communications Corp. and Advanced Communications Acquisition, Inc.
2.11A --Amendment No. 1 dated as of January 8, 1998 to the Agreement of Merger filed as Exhibit 2.11
to the Registration Statement.
3.1 --Restated Certificate of Incorporation of ACG.
3.1A --Form of Amendment to Restated Certificate of Incorporation of ACG.
3.2 --Restated Bylaws of ACG.
3.3 --Form of Certificate of Designation of Series A Redeemable Convertible Preferred Stock (see
Annex A to Exhibit 10.46).
4.1 --Form of certificate representing Common Stock.
*5.1 --Opinion of Bracewell & Patterson, L.L.P.
10.1 --ACG 1997 Stock Awards Plan.
10.1A --Form of Non-Qualified Stock Option Agreement.
10.2 --Non-Qualified Stock Option Plan for Non-Employee Directors.
10.3 --Employment Agreement between ACG and Richard P. Anthony.
10.4 --Form of Employment Agreement between Great Western Directories, Inc. and Richard O'Neal (see
Annex V to Exhibit 2.1).
10.5 --Form of Employment Agreement between Feist Long Distance Service, Inc. and Todd Feist (see
Annex VII to Exhibit 2.3A).
10.6 --Form of Employment Agreement between Fred L. Thurman and FirsTel, Inc. (see Annex V to Exhibit
2.4).
10.7 --Form of Indemnification Agreement entered into between ACG and each of its executive officers
and directors.
10.9 --Form of Series A Warrant issued to shareholders of Great Western Directories, Inc.
10.10 --Form of Series B Warrant issued to shareholders of Great Western Directories, Inc.
10.11 --Form of Series C Warrant issued to shareholders of Great Western Directories, Inc.
10.12 --Form of Series D Warrant to be issued to shareholders of Great Western Directories, Inc.
(see Annex IV to Exhibit 2.1).
10.13 --Form of 5% Subordinated Note to be issued to shareholders of Great Western Directories, Inc.
(see Annex III to Exhibit 2.1).
10.14 --Form of 10% Convertible Subordinated Note to be issued to shareholders of FirsTel, Inc. (see
Annex III to Exhibit 2.4).
10.15 --Management Agreement dated January 1, 1997 between KINI, L.C. and KIN Network, Inc.
10.16 --Sales Agreement Terms and Conditions dated July 16, 1997 between Big Stuff, Inc. and Great
Western Directories, Inc.
<PAGE>
EXHIBIT
NUMBER DESCRIPTIONS PAGE
- ----------- ----------------------------------------------------------------------------------------- --------
10.16A --Supplemental Letter dated December 22, 1997 from Big Stuff, Inc. to Great Western Directories,
Inc. regarding exclusively marketing rights to World Pages in certain areas.
10.17 --Employment Agreement between ACG and William H. Zimmer III.
10.18 --Employment Agreement between ACG and James F. Cragg.
10.19 --Form of Series E Warrant to be issued to certain shareholders of Tele-Systems, Inc.
10.20 --Form of Series F Warrant to be issued to certain shareholders of Tele-Systems, Inc.
10.21 --Form of Series G Warrant to be issued to certain shareholders of FirsTel, Inc. (see Annex
IV to Exhibit 2.4).
10.22 --Form of Series H Warrant to be issued to Daniel W. and Cheryl A. Peters (see Annex IV to
Exhibit 2.9).
10.23 --Form of Series I Warrant to be issued to Daniel W. and Cheryl A. Peters (see Annex V to Exhibit
2.9).
10.24 --Warrant issued to Joseph C. Cook.
10.25 --Form of Series K Warrant issued to certain consultants.
10.26 --Form of Series L Warrant issued to G. Edward Powell and Brad K. Cutsinger.
10.27 --Resale Agreement between Southwestern Bell Telephone Company and Feist Long Distance dated
June 4, 1997 (Oklahoma).
10.28 --Resale Agreement between Southwestern Bell Telephone Company and Feist Long Distance dated
April 4, 1997 (Kansas).
10.29 --Agreement for Service Resale dated as of June 6, 1997 between FirsTel, Inc. and U S West
Communications, Inc. (South Dakota).
10.30 --Agreement for Service Resale dated as of March 19, 1997 between FirsTel, Inc. and U S West
Communications, Inc. (Wyoming).
10.31 --Agreement for Service Resale dated as of October 14, 1997 between FirsTel, Inc. and U S West
Communications, Inc. (Iowa).
10.32 --Agreement for Service Resale dated as of March 19, 1997 between FirsTel, Inc. and U S West
Communications, Inc., as amended by a First Amendment to Agreement for Service Resale, dated
July , 1997 between FirsTel, Inc. and US West Communications, Inc. (North Dakota).
10.33 --Agreement for Service Resale dated as of March 19, 1997 between FirsTel, Inc. and U S West
Communications, Inc., as amended by a Second Amendment to Agreement for Service Resale, dated
November 6, 1997, between FirsTel, Inc. and US West Communications, Inc. (Nebraska).
10.34 --Agreement for Service Resale dated as of August 12, 1997 between FirsTel, Inc. and U S West
Communications, Inc. (Minnesota).
10.35 --Resale Agreement dated as of April 30, 1997, between Southwestern Bell Telephone Company
and Valu-Line of Longview, Inc. (Texas).
10.36 --Resale Agreement dated as of September 12, 1997, between GTE Southwest Incorporated and Valu-Line
Long Distance (Texas).
10.37 --Master Resale Agreement dated as of May 9, 1997, among Valu-Line Long Distance and United
Telephone Company of Texas, Inc. dba Sprint and Central Telephone Company of Texas dba Sprint
and Southwest Incorporated and Valu-Line Long Distance (Texas).
10.38 --Form of Office Expense Agreement by and between Feist Publications, Inc., Feist Systems,
Inc. and Feist Long Distance Service, Inc.
10.39 --Form of Advertisement Agreement by and between Feist Publications, Inc. and Feist Long Distance
Service, Inc. (see Annex IV to Exhibit 2.3).
10.40 --Form of InterNet Reseller Agreement by and between Feist Systems, Inc. and Feist Long Distance
Service, Inc.
<PAGE>
EXHIBIT
NUMBER DESCRIPTIONS PAGE
- ----------- ----------------------------------------------------------------------------------------- --------
10.41 --Form of Standstill Agreement dated as of February , 1998 between ACG and Rod K. Cutsinger.
*10.42 --Form of Non-Competition Agreement dated as of February , 1998 between ACG and Rod K. Cutsinger.
10.43 --Asset Purchase Agreement made and entered into as of September 3, 1997 by and between RAFT,
L.L.C., PAM Oil, Inc., Scott D. Scofield, William Pederson and FirsTel, Inc.
10.44 --Amendment to the Asset Purchase Agreement filed as Exhibit 10.43 to the Registration Statement.
10.45 --Form of Stockholders' Agreement among KIN Network, Inc. and its Stockholders.
10.46 --Letter Agreement dated January 15, 1998 among Advanced Communications Group, Inc., Northwestern
Public Service Company and Northwestern Growth Corporation.
*10.47 --Form of Series M Warrant issued to William McCaughey.
*10.48 --Form of Stock Option and Put Agreement issued to Mark Beall.
*10.49 --Commitment Letter between ACG and Canadian Imperial Bank of Commerce dated February 11, 1998
with respect to proposed $25 million senior secured credit facility.
21.1 --List of subsidiaries of ACG.
*23.1 --Consent of KPMG Peat Marwick LLP.
*23.2 --Consent of KPMG Peat Marwick LLP.
*23.3 --Consent of KPMG Peat Marwick LLP.
*23.4 --Consent of KPMG Peat Marwick LLP.
*23.5 --Consent of Hein + Associates LLP.
*23.6 --Consent of Sartain Fischbein & Co.
*23.7 --Consent of Kennedy and Coe LLC.
23.8 --Consent of Richard O'Neal to be named as a director.
23.9 --Consent of Todd J. Feist to be named as a director.
23.10 --Consent of Fentress Bracewell to be named as a director.
33.11 --Consent of E. Clarke Garnet to be named as a director.
23.12 --Consent of David Mitchell to be named as a director.
23.13 --Consent of Fred L. Thurman to be named as a director
*23.14 --Consent of Bracewell & Patterson, L.L.P. (to be contained in Exhibit 5.1).
23.15 --Consent of Reginald J. Hollinger to be named as a director.
24.1 --Power of Attorney (included on the Signature Page of Amendment No. 1 to this Registration
Statement).
27.1 --Financial Data Schedule.
27.2 --Financial Data Schedule.
</TABLE>
- ------------
* Filed herewith.
<PAGE>
EXECUTION COPY
8,000,000 Shares
ADVANCED COMMUNICATIONS GROUP, INC.
Common Stock
UNDERWRITING AGREEMENT
February 12, 1998
PAINEWEBBER INCORPORATED
CIBC OPPENHEIMER
As Representatives of the
several Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
Advanced communications Group, Inc., a Delaware corporation
(the "Company"), proposes to sell an aggregate of 8,000,000 shares (the "Firm
Shares") of the Company's Common Stock, $.0001 par value per share (the "Common
Stock"), to you and to the other underwriters named in Schedule I
(collectively, the "Underwriters"), for whom you are acting as representatives
(the "Representatives"). The Company has also agreed to grant to you and the
other Underwriters an option (the "Option") to purchase up to an additional
1,200,000 shares of Common Stock (the "Option Shares") on the terms and for the
purposes set forth in Section 1(b). The Firm Shares and the Option Shares are
hereinafter collectively referred to as the "Shares."
The initial public offering price per share for the Shares
and the purchase price per share are for the Shares to be paid by the several
Underwriters shall be agreed upon by the Company and the Representatives,
acting on behalf of the several Underwriters, and such agreement shall be set
forth in a separate written instrument substantially in the form of Exhibit A
hereto (the "Price Determination Agreement"). The Price Determination Agreement
may take the form of an exchange of any standard form of written
<PAGE>
telecommunication among the Company and the Representatives and shall specify
such applicable information as is indicated in Exhibit A hereto. The offering
of the Shares will be governed by this Agreement, as supplemented by the Price
Determination Agreement. From and after the date of the execution and delivery
of the Price Determination Agreement, this Agreement shall be deemed to
incorporate, and, unless the context otherwise indicates, all references
contained herein to "this Agreement" and to the phrase "herein" shall be deemed
to include, the Price Determination Agreement.
The Company confirms as follows its agreements with the
Representatives and the several other Underwriters.
1. Agreement to Sell and Purchase.
(a) On the basis of the representations, warranties
and agreements of the Company herein contained and subject to all the terms and
conditions of this Agreement, the Company agrees to sell to each Underwriter
named below, and each Underwriter, severally and not jointly, agrees to
purchase from the Company at the purchase price per share for the Firm Shares
to be agreed upon by the Representatives and the Company in accordance with
Section 1(c) or 1(d) hereof and set forth in the Price Determination Agreement,
the number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I, plus such additional number of Firm Shares which such Underwriter
may become obligated to purchase pursuant to Section 8 hereof. Schedule I may
be attached to the Price Determination Agreement.
(b) Subject to all the terms and conditions of this
Agreement, the Company grants the Option to the several Underwriters to
purchase, severally and not jointly, up to 1,200,000 Option Shares from the
Company at the same price per share as the Underwriters shall pay for the Firm
Shares. The Option may be exercised only to cover over-allotments in the sale
of the Firm Shares by the Underwriters and may be exercised in whole or in part
at any time (but not more than once) on or before the 30th day after the date
of this Agreement (or, if the Company has elected to rely on Rule 430A, on or
before the 30th day after the date of the Price Determination Agreement), upon
written or telegraphic notice (the "Option Shares Notice") by the
Representatives to the Company no later than 12:00 noon, New York City time, at
least two and no more than five business days before the date specified for
closing in the Option Shares Notice (the "Option Closing Date") setting forth
the aggregate number of Option Shares to be purchased and the time and date for
such purchase. On the Option Closing Date, the Company will issue and sell to
the Underwriters the number of Option Shares set forth in the Option Shares
Notice, and each Underwriter will purchase such percentage of the Option Shares
as is equal to the percentage of Firm Shares that such Underwriter is
purchasing, as adjusted by the Representatives in such manner as they deem
advisable to avoid fractional shares.
(c) The initial public offering price per share for
the Firm Shares and the purchase price per share for the Firm Shares to be paid
by the several Underwriters shall be agreed upon and set forth in the Price
Determination Agreement, if the Company
2
<PAGE>
has elected to rely on Rule 430A. In the event such price has not been agreed
upon and the Price Determination Agreement has not been executed by the close
of business on the fourteenth business day following the date on which the
Registration Statement (as hereinafter defined) becomes effective, this
Agreement shall terminate forthwith, without liability of any party to any
other party except that Section 6 shall remain in effect.
(d) If the Company has elected not to rely on Rule
430A, the initial public offering price per share for the Firm Shares and the
purchase price per share for the Firm Shares to be paid by the several
Underwriters shall be agreed upon and set forth in the Price Determination
Agreement, which shall be dated the date hereof, and an amendment to the
Registration Statement containing such per share price information shall be
filed before the Registration Statement becomes effective.
2. Delivery and Payment. Delivery of the Firm Shares shall be
made to the Representatives for the accounts of the Underwriters electronically
through the Depository Trust Company ("DTC"), against payment of the purchase
price by wire transfer of Federal Funds or similar same day funds to an account
designated in writing by the Company to PaineWebber Incorporated at least one
business day prior to the Closing Date (as hereinafter defined). Such payment
shall be made at 10:00 a.m., New York City time, on the third business day (or
fourth business day, if the Price Determination Agreement is executed after
4:30 p.m.) after the date on which the first bona fide offering of the Shares
to the public is made by the Underwriters or at such time on such other date,
not later than ten business days after such date, as may be agreed upon by the
Company and the Representatives (such date is hereinafter referred to as the
"Closing Date").
To the extent the Option is exercised, delivery of the Option
Shares against payment by the Underwriters (in the manner specified above) will
take place at the offices specified above for the Closing Date at the time and
date (which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive
form and shall be registered in such names and in such denominations as the
Representatives shall request at least two business days prior to he Closing
Date or the Option Closing Date, as the case may be, by written notice to the
Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection at least 24 hours prior to the Closing Date or the
Option Closing Date, as the case may be.
The cost of original issue tax stamps, if any, in connection
with the issuance and delivery of the Firm Shares and Option Shares by the
Company to the respective Underwriters shall be borne by the Company. The
Company will pay and save each Underwriter and any subsequent holder of the
Shares harmless from any and all liabilities with respect to or resulting from
any failure or delay in paying Federal and state stamp and
3
<PAGE>
other transfer taxes, if any, which may be payable or determined to be payable
in connection with the original issuance or sale to such Underwriter of the
Firm Shares and Option Shares.
3. Representations and Warranties of the Company. The Company
represents, warrants and covenants to each Underwriter that:
(a) A registration statement (Registration No.
333-37671) on Form S-1 relating to the Shares, including a preliminary
prospectus and such amendments to such registration statement as may have been
required to the date of this Agreement, has been prepared by the Company under
the provisions of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (collectively referred to as the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") thereunder, and
has been filed with the Commission. The term "preliminary prospectus" as used
herein means a preliminary prospectus as contemplated by Rule 430 or Rule 430A
("Rule 430A") of the Rules and Regulations included at any time as part of the
registration statement. Copies of such registration statement and amendments
and of each related preliminary prospectus have been delivered to the
Representatives. The term "Registration Statement" means the registration
statement as amended at the time it becomes or became effective (the "Effective
Date"), including financial statements and all exhibits and any information
deemed to be included by Rule 430A or Rule 434 of the Rules and Regulations. If
the Company files a registration statement to register a portion of the Shares
and relies on Rule 462(b) of the Rules and Regulations for such registration
statement to become effective upon filing with the Commission (the "Rule 462
Registration Statement"), then any reference to the "Registration Statement"
shall be deemed to include the Rule 462 Registration Statement, as amended from
time to time. The term "Prospectus" means the prospectus as first filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no
such filing is required, the form of final prospectus included in the
Registration Statement at the Effective Date.
(b) On the Effective Date, the date the Prospectus
is first filed with the Commission pursuant to Rule 424(b) (if required), at
the Closing Date and, if later, the Option Closing Date and when any
post-effective amendment to the Registration Statement becomes effective or any
amendment or supplement to the Prospectus is filed with the Commission, the
Registration Statement and the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment or supplement
thereto), including the financial statements included in the Prospectus, did or
will comply with all applicable provisions of the Act and the Rules and
Regulations and will contain all statements required to be stated therein in
accordance with the Act and the Rules and Regulations. On the Effective Date
and when any post-effective amendment to the Registration Statement becomes
effective, no part of the Registration Statement or any such amendment did or
will contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. At the Effective Date, the date the
Prospectus or any amendment or supplement to the Prospectus is filed with the
Commission and at the Closing Date and, if
4
<PAGE>
later, the Option Closing Date, the Prospectus did not or will not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading. The foregoing representations and warranties in
this Section 3(b) do not apply to any statements or omissions made in reliance
on and in conformity with information relating to any Underwriter furnished in
writing to the Company by the Representatives specifically for inclusion in the
Registration Statement or Prospectus or any amendment or supplement thereto.
For all purposes of this Agreement, the amounts of the selling concession and
reallowance set forth in the Prospectus, the last full paragraph on the cover
of the Prospectus, and the penultimate paragraph under the caption
"Underwriting" in the Prospectus constitute the only information relating to
any Underwriter furnished in writing to the Company by the Representatives
specifically for inclusion in the Registration Statement, the preliminary
prospectus or the Prospectus. The Company has not distributed any offering
material in connection with the offering or sale of the Shares other than the
Registration Statement, the preliminary prospectus, the Prospectus or any other
materials, if any, permitted by the Act.
(c) The Company and each of its subsidiaries as
listed on Exhibit 21.1 to the Registration Statement together with, after the
Closing, Tele-Systems, Inc. (the "Subsidiaries") is, and at the Closing Date
will be, a corporation or an entity duly organized or formed, validly existing
and in good standing under the laws of its jurisdiction of incorporation. The
Company and each of its Subsidiaries has, and at the Closing Date will have,
full corporate power and authority to conduct all the activities conducted by
it, to own or lease all the assets owned or leased by it and to conduct its
business as described in the Registration Statement and the Prospectus. The
Company and each of its Subsidiaries is, and at the Closing Date will be, duly
licensed or qualified to do business and in good standing as a foreign
corporation in all jurisdictions in which the nature of the activities
conducted by it or the character of the assets owned or leased by it makes such
licensing or qualification necessary and where the failure to be so qualified
would have a material adverse effect on the Company and its subsidiaries
considered as a whole. All of the outstanding shares of capital stock of the
Subsidiaries have been duly authorized and validly issued and are fully paid
and non-assessable and are owned by the Company free and clear of all liens,
encumbrances and claims whatsoever, except as set forth in the Registration
Statement. Except for the stock of the Subsidiaries and of subsidiaries which,
considered in the aggregate as a single subsidiary, would not constitute a
"significant subsidiary" as defined in the Rules and Regulations or as
disclosed in the Registration Statement, the Company does not own, and at the
Closing Date will not own, directly or indirectly, any shares of stock or any
other equity or long-term debt securities of any corporation or have any equity
interest in any firm, partnership, joint venture, association or other entity.
Complete and correct copies of the certificate of incorporation and of the
by-laws of the Company and each of its Subsidiaries and all amendments thereto
have been delivered to the Representatives, and except for those disclosed in
the Registration Statement no changes therein will be made subsequent to the
date hereof and prior to the Closing Date or, if later, the Option Closing
Date.
5
<PAGE>
(d) The outstanding shares of Common Stock have
been, and the Shares to be issued and sold by the Company upon such issuance
will be, duly authorized, validly issued, fully paid and nonassessable and will
not be subject to any preemptive or similar right. The description of the
Common Stock in the Registration Statement and the Prospectus is, and at the
Closing Date will be, complete and accurate in all material respects. Except as
set forth in the Prospectus, the Company does not have outstanding, and at the
Closing Date will not have outstanding, any options to purchase, or any rights
or warrants to subscribe for, or any securities or obligations convertible
into, or any contracts or commitments to issue or sell, any shares of Common
Stock, any shares of capital stock of any Subsidiary or any such warrants,
convertible securities or obligations.
(e) The financial statements and schedules included
in the Registration Statement or the Prospectus present fairly the consolidated
financial condition of the Company and the financial condition of certain of
the Subsidiaries and KIN Network Inc. as of the respective dates thereof and
the consolidated results of operations and cash flows of the Company and the
results of operations and cash flows of such Subsidiaries and KIN Network Inc.
for the respective periods covered thereby, all in conformity with generally
accepted accounting principles applied on a consistent basis throughout the
entire period involved, except as otherwise disclosed in the Prospectus. The
pro forma financial statements and other pro forma financial information
included in the Registration Statement or the Prospectus (i) present fairly in
all material respects the information shown therein, (ii) have been prepared in
accordance with the Commission's rules and guidelines with respect to pro forma
financial statements and (iii) have been properly computed on the bases
described therein. The assumptions used in the preparation of the pro forma
financial statements and other pro forma financial information included in the
Registration Statement or the Prospectus are reasonable and the adjustments
used therein are appropriate to give effect to the transactions or
circumstances referred to therein. No other financial statements or schedules
are required by the Act or the Rules and Regulations to be included in the
Registration Statement or the Prospectus. KPMG Peat Marwick LLP, Hein +
Associates LLP, Kennedy and Coe, LLC and Sartain Fischbein & Co. (the
"Accountants") who have reported on such financial statements and schedules,
are independent accountants with respect to the Company as required by the Act
and the Rules and Regulations. The statements included in the Registration
Statement with respect to the Accountants pursuant to Item 509 of Regulation
S-K of the Rules and Regulations are true and correct in all material respects.
(f) The Company maintains a system of internal
accountings control sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access
to assets is permitted only in accordance with management's general or specific
6
<PAGE>
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(g) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus and prior
to the Closing Date, except as set forth in or contemplated by the Registration
Statement and the Prospectus, (i) there has not been and will not have been any
change in the capitalization of the Company, or any materially adverse change
in the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company and its Subsidiaries
considered as a whole, arising for any reason whatsoever, (ii) neither the
Company nor any of its Subsidiaries has incurred nor will it incur any material
liabilities or obligations, direct or contingent, nor has it entered into nor
will it enter into any material transactions other than pursuant to this
Agreement and the transactions referred to herein and (iii) the Company has not
and will not have paid or declared any dividends or other distributions of any
kind on any class of its capital stock.
(h) The Company is not an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act
of 1940, as amended.
(i) Except as set forth in the Registration
Statement and the Prospectus, there are no actions, suits or proceedings
pending or threatened against or affecting the Company or any of its
Subsidiaries or any of their respective officers in their capacity as such,
before or by any Federal or state court, commission, regulatory body,
administrative agency or other governmental body, domestic or foreign, wherein
an unfavorable ruling, decision or finding might materially and adversely
affect the Company and its Subsidiaries, or their business, properties,
business prospects, condition (financial or otherwise) or results of
operations, considered as a whole.
(j) Except as set forth in the Registration
Statement, and except as would not have a materially adverse effect on the
Company and its Subsidiaries considered as a whole, the Company and each of its
Subsidiaries has, and at the Closing Date will have, (i) all governmental
licenses, permits, consents, orders, approvals and other authorizations
necessary to carry on its business as currently conducted and as described in
the Prospectus, (ii) complied in all respects with all laws, regulations and
orders applicable to it or its business and (iii) performed all its obligations
required to be performed by it, and is not, and at the Closing Date will not
be, in default, under any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement, bond, debenture, note agreement, lease, contract or
other agreement or instrument (collectively, a "contract or other agreement")
to which it is a party or by which its property is bound or affected. To the
best knowledge of the Company, neither the Company nor any of its Subsidiaries
is a party to any contract or other agreement in which the other party is in
default in any respect thereunder that would be materially adverse to the
Company and its Subsidiaries considered as a whole. Neither
7
<PAGE>
the Company nor any of its Subsidiaries is, nor at the Closing Date will any of
them be, in violation of any provision of its certificate of incorporation or
by-laws.
(k) No consent, approval, authorization or order of,
or any filing or declaration with, any court or governmental agency or body is
required in connection with the authorization, issuance, transfer, sale or
delivery of the Shares by the Company, in connection with the execution,
delivery and performance of this Agreement by the Company or in connection with
the taking by the Company of any action contemplated hereby, except such as
have been obtained under the Act or the Rules and Regulations and such as may
be required under state securities or Blue Sky laws or the by-laws and rules of
the National Association of Securities Dealers, Inc. (the "NASD") in connection
with the purchase and distribution by the Underwriters of the Shares.
(l) The Company has full corporate power and
authority to enter into this Agreement. This Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid and
binding agreement of the Company and is enforceable against the Company in
accordance with the terms hereof. The performance of this Agreement and the
consummation of the transactions contemplated hereby and the application of the
net proceeds from the offering and sale of the Shares in the manner set forth
in the Prospectus under "Use of Proceeds" will not result in the creation or
imposition of any lien, charge or encumbrance upon any of the assets of the
Company or any of its Subsidiaries pursuant to the terms or provisions of, or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, or give any other party a right to terminate any of
its obligations under, or result in the acceleration of any obligation under,
the certificate of incorporation or by-laws of the Company or any of its
Subsidiaries, any material contract or other agreement to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries or any of its properties is bound or affected, or violate or
conflict with any judgment, ruling, decree, order, statute, rule or regulation
of any court or other governmental agency or body applicable to the business or
properties of the Company or any of its Subsidiaries.
(m) The Company and each of its Subsidiaries has
good title to all properties and assets described in the Prospectus as owned by
it, free and clear of all liens, charges, encumbrances or restrictions, except
such as are described in the Prospectus or are not material to the business of
the Company and its Subsidiaries considered as a whole. The Company and each of
its Subsidiaries has valid, subsisting and enforceable leases for the
properties described in the Prospectus as leased by it, with such exceptions as
are not material and do not materially interfere with the use made and proposed
to be made of such properties by the Company and such Subsidiaries.
(n) Except as set forth in the Registration
Statement, and except as would not have a materially adverse effect on the
Company and its Subsidiaries considered as a whole, the Company and its
Subsidiaries (i) are in compliance with any and all applicable federal, state
and local laws and regulations relating to telecommunications
8
<PAGE>
("Telecommunications Laws"), (ii) have received all permits, licenses or other
approvals required of them under applicable Telecommunications Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval.
(o) There is no document or contract of a character
required to be described in the Registration Statement or the Prospectus or to
be filed as an exhibit to the Registration Statement which is not described or
filed as required. All such contracts to which the Company or any Subsidiary is
a party have been duly authorized, executed and delivered by the Company or
such Subsidiary, constitute valid and binding agreements of the Company or such
Subsidiary and are enforceable against the Company or such Subsidiary in
accordance with the terms thereof.
(p) No statement, representation, warranty or
covenant made by the Company in this Agreement or made in any certificate or
document required by this Agreement to be delivered to the Representatives was
or will be, when made, inaccurate, untrue or incorrect in any material respect.
(q) Neither the Company nor any of its directors,
officers or controlling persons has taken, directly or indirectly, any action
intended, or which might reasonably be expected, to cause or result, under the
Act or otherwise, in, or which has constituted, stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Shares.
(r) No holder of securities of the Company has
rights to the registration of any securities of the Company because of the
filing of the Registration Statement.
(s) Prior to the Closing Date, the Shares will be
duly authorized for listing by the New York Stock Exchange upon official notice
of issuance.
(t) Except as would not have a materially adverse
effect on the Company and its Subsidiaries considered as a whole, the Company
and its Subsidiaries are in compliance with all federal, state and local
employment and labor laws, including, but not limited to, laws relating to
non-discrimination in hiring, promotion and pay of employees, and no labor
dispute with the employees of the Company or any Subsidiary exists or, to the
knowledge of the Company, is imminent or threatened; and the Company is not
aware of any existing, imminent or threatened labor disturbance by the
employees of any of its principal suppliers, manufacturers or contractors that
could result in a material adverse effect on the condition (financial or
otherwise) or on the earnings, business, properties, business prospects or
operations of the Company and its Subsidiaries, taken as a whole.
(u) Except as would not have a materially adverse
effect on the Company and its Subsidiaries considered as a whole, the Company
and its Subsidiaries own,
9
<PAGE>
or are licensed or otherwise have the right to use, the material patents,
patent rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, services marks and trade names
(collectively, "patent and proprietary rights") presently employed by them or
which are necessary in connection with the conduct of the business now operated
by them, and neither the Company nor any of its Subsidiaries has received any
written notice or otherwise has actual knowledge of any infringement of or
conflict with asserted rights of others or any other claims with respect to any
patent or proprietary rights, or of any basis for rendering any patent and
proprietary rights invalid or inadequate to protect the interest of the Company
or any of its Subsidiaries.
(v) Neither the Company nor any of its Subsidiaries
nor, to the Company's knowledge, any employee or agent of the Company or any
Subsidiary has made any payment of funds of the Company or any Subsidiary or
received or retained any funds in violation of any law, rule or regulation or
of a character required to be disclosed in the Prospectus.
(w) The Company has complied, and until the
completion of the distribution of the Shares will comply, with all of the
provisions of (including, without limitation, filing all forms required by)
Section 517.075 of the Florida Securities and Investor Protection Act and
Regulation 3E-900.001 issued thereunder with respect to the offering and sale
of the Shares.
(x) The Company and its Subsidiaries (i) are in
compliance with any and all applicable foreign, federal, state and local laws
and regulations relating to the protection of human health and safety, the
environment or imposing liability or standards of conduct concerning any
Hazardous Material (as hereinafter defined) ("Environmental Laws"), (ii) have
received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii)
are in compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance with Environmental Laws, failure to
receive required permits, licenses or other approvals or failure to comply with
the terms and conditions of such permits, licenses or approvals would not,
individually or in the aggregate result in a material adverse effect on the
condition (financial or otherwise) or on the earnings, business, properties,
business prospects or operations of the Company and its Subsidiaries, taken as
a whole. The term "Hazardous Material" means (A) any "hazardous substance" as
defined by the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, (B) any "hazardous waste" as defined by the Resource
Conservation and Recovery Act, as amended, (C) any petroleum or petroleum
product, (D) any polychlorinated biphenyl and (E) any pollutant or contaminant
or hazardous, dangerous, or toxic chemical, material, waste or substance
regulated under or within the meaning of any other Environmental Law.
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(y) The Company maintains insurance with respect to
its properties and business of the types and in amounts generally deemed
adequate for its business and consistent with insurance coverage maintained by
similar companies and businesses, all of which insurance is in full force and
effect.
(z) The Company has filed all material federal,
state and foreign income and franchise tax returns and has paid all taxes shown
as due thereon, other than taxes which are being contested in good faith and
for which adequate reserves have been established in accordance with generally
accepted accounting principles ("GAAP"); and the Company has no knowledge of
any material tax deficiency which has been or might be asserted or threatened
against the Company. There are no tax returns of the Company or any of its
Subsidiaries that are currently being audited by state, local or federal taxing
authorities or agencies (and with respect to which the Company or any
Subsidiary has received notice), where the findings of such audit, if adversely
determined, would result in a material adverse effect on the condition
(financial or otherwise) or on the earnings, business, properties, business
prospects or operations of the Company and its Subsidiaries, taken as a whole.
(aa) With respect to each employee benefit plan,
program and arrangement (including, without limitation, any "employee benefit
plan" as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA")) maintained or contributed to by the Company, or
with respect to which the Company could incur any liability under ERISA
(collectively, the "Benefit Plans"), no event has occurred and, to the best
knowledge of the Company, there exists no condition or set of circumstances, in
connection with which the Company could be subject to any liability under the
terms of such Benefit Plan, applicable law (including, without limitation,
ERISA and the Internal Revenue Code of 1986, as amended) or any applicable
agreement that could materially adversely affect the business, properties,
business prospects, condition (financial or otherwise) or results of operations
of the Company and its Subsidiaries, taken as a whole.
4. Agreements of the Company. The Company agrees with the
several Underwriters as follows:
(a) The Company will not, either prior to the
Effective Date or thereafter during such period as the Prospectus is required
by law to be delivered in connection with sales of the Shares by an Underwriter
or dealer, file any amendment or supplement to the Registration Statement or
the Prospectus, unless a copy thereof shall first have been submitted to the
Representatives within a reasonable period of time prior to the filing thereof
and the Representatives shall not have objected thereto in good faith.
(b) The Company will use its best efforts to cause
the Registration Statement to become effective, and will notify the
Representatives promptly, and will confirm such advice in writing, (1) when the
Registration Statement has become effective and when any post-effective
amendment thereto becomes effective, (2) of any
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request by the Commission for amendments or supplements to the Registration
Statement or the Prospectus or for additional information, (3) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for that purpose or
the threat thereof, (4) of the happening of any event during the period
mentioned in the second sentence of Section 4(e) that in the judgment of the
Company makes any statement made in the Registration Statement or the
Prospectus untrue in any material respect or that requires the making of any
changes in the Registration Statement or the Prospectus in order to make the
statements therein, in light of the circumstances in which they are made, not
misleading in any material respect and (5) of receipt by the Company or any
representative or attorney of the Company of any other communication from the
Commission relating to the Company, the Registration Statement, any preliminary
prospectus or the Prospectus. If at any time the Commission shall issue any
order suspending the effectiveness of the Registration Statement, the Company
will make every reasonable effort to obtain the withdrawal of such order at the
earliest possible moment. The Company will use its best efforts to comply with
the provisions of and make all requisite filings with the Commission pursuant
to Rule 430A and to notify the Representatives promptly of all such filings.
(c) The Company will furnish to the Representatives,
without charge, two signed copies of the Registration Statement and of any
post-effective amendment thereto, including financial statements and schedules,
and all exhibits thereto and will furnish to the Representatives, without
charge, for transmittal to each of the other Underwriters, a copy of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules but without exhibits.
(d) The Company will comply with all the provisions
of any undertakings contained in the Registration Statement.
(e) On the Effective Date, and thereafter from time
to time, the Company will deliver to each of the Underwriters, without charge,
as many copies of the Prospectus or any amendment or supplement thereto as the
Representatives may reasonably request. The Company consents to the use of the
Prospectus or any amendment or supplement thereto by the several Underwriters
and by all dealers to whom the Shares may be sold, both in connection with the
offering or sale of the Shares and for any period of time thereafter during
which the Prospectus is required by law to be delivered in connection
therewith. If during such period of time any event shall occur which in the
judgment of the Company or counsel to the Underwriters should be set forth in
the Prospectus in order to make any statement therein, in the light of the
circumstances under which it was made, not misleading in any material respect,
or if it is necessary to supplement or amend the Prospectus to comply with law,
the Company will forthwith prepare and duly file with the Commission an
appropriate supplement or amendment thereto, and will deliver to each of the
Underwriters, without charge, such number of copies thereof as the
Representatives may reasonably request.
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(f) Prior to any public offering of the Shares by
the Underwriters, the Company will cooperate with the Representatives and
counsel to the Underwriters in connection with the registration or
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of such jurisdictions as the Representatives may request; provided, that
in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action which would
subject it to general service of process in any jurisdiction where it is not
now so subject.
(g) During the period of five years commencing on
the Effective Date, the Company will furnish to the Representatives and each
other Underwriter who may so request copies of such financial statements and
other periodic and special reports as the Company may from time to time
distribute generally to the holders of any class of its capital stock, and will
furnish to the Representatives and each other Underwriter who may so request a
copy of each annual or other report it shall be required to file with the
Commission.
(h) The Company will make generally available to
holders of its securities as soon as may be practicable but in no event later
than the last day of the fifteenth full calendar month following the calendar
quarter in which the Effective Date falls, an earnings statement (which need
not be audited but shall be in reasonable detail) for a period of 12 months
ended commencing after the Effective Date, and satisfying the provisions of
Section 11(a) of the Act (including Rule 158 of the Rules and Regulations).
(i) Whether or not the transactions contemplated by
this Agreement are consummated or this Agreement is terminated, the Company
will pay, or reimburse if paid by the Representatives, all costs and expenses
incident to the performance of the obligations of the Company under this
Agreement, including but not limited to costs and expenses of or relating to
(1) the preparation, printing and filing of the Registration Statement and
exhibits to it, each preliminary prospectus, the Prospectus and any amendment
or supplement to the Registration Statement or the Prospectus, (2) the
preparation and delivery of certificates representing the Shares, (3) the word
processing, printing and reproduction of this Agreement, the Agreement Among
Underwriters, any Dealer Agreements and any Underwriters' Questionnaire, (4)
furnishing (including costs of shipping, mailing and courier) such copies of
the Registration Statement, the Prospectus and any preliminary prospectus, and
all amendments and supplements thereto, as may be reasonably requested for use
in connection with the offering and sale of the Shares by the Underwriters or
by dealers to whom Shares may be sold, (5) the listing of the Shares on the New
York Stock Exchange, (6) any filings required to be made by the Underwriters
with the NASD, and the fees, disbursements and other charges of counsel for the
Underwriters in connection therewith, (7) the registration or qualification of
the Shares for offer and sale under the securities or Blue Sky laws of such
jurisdictions designated pursuant to Section 4(f), including the fees,
disbursements and other charges of counsel to the Underwriters in connection
therewith, and the preparation and printing of preliminary, supplemental and
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final Blue Sky memoranda, (8) counsel to the Company, (9) the transfer agent
for the Shares and (10) the Accountants.
(j) If this Agreement shall be terminated by the
Company pursuant to any of the provisions hereof (otherwise than pursuant to
Section 8) or if for any reason the Company shall be unable to perform its
obligations hereunder, the Company will reimburse the several Underwriters for
all out-of-pocket expenses (including the fees, disbursements and other charges
of counsel to the Underwriters) reasonably incurred by them in connection
herewith.
(k) The Company will not at any time, directly or
indirectly, take any action intended, or which might reasonably be expected, to
cause or result in, or which will constitute, stabilization of the price of the
shares of Common Stock to facilitate the sale or resale of any of the Shares.
(l) The Company will apply the net proceeds from the
offering and sale of the Shares to be sold by the Company in the manner set
forth in the Prospectus under "Use of Proceeds" and shall file such reports
with the Commission with respect to the sale of the Shares and the application
of the proceeds therefrom as may be required in accordance with Rule 463 under
the Act.
(m) Except as provided in this Agreement, during the
period of 180 days commencing at the Closing Date, the Company will not,
without the prior written consent of PaineWebber Incorporated, directly or
indirectly, sell, offer to sell, grant any option for the sale of, or otherwise
dispose of or file any shelf registration statement or any registration other
than the Registration Statement with the Commission for any Common Stock or
securities convertible into or exercisable or exchangeable for Common Stock,
other than to the Underwriters pursuant to this Agreement and other than
pursuant to employee or director benefit plans, provided, that the Company will
not grant options to purchase shares of Common Stock pursuant to such employee
or director benefit plans at a price less than the initial public offering
price, except that the Company may (i) issue on the Closing Date the shares of
Common Stock to be issued in connection with the acquisitions to be consummated
on the Closing Date, as described in the Registration Statement, so long as the
certificates issued to such purchasers set forth the legends relating to the
one-year restrictions on the sale or disposition of such shares provided for in
the agreements related to such acquisitions (and the Company hereby agrees with
the Representatives that for a period of 365 days after the Closing Date
("Lock-Up Period"), without written consent of PaineWebber Incorporated, the
Company will not agree to waive or amend such restrictions on sale or
disposition), (ii) issue shares of Common Stock ("Acquisition Shares") during
the Lock-Up Period in connection with additional acquisitions so long as the
purchasers of such Acquisition Shares agree to be bound by the lock-up
agreement with the Representatives in the form set forth in Exhibit B to the
effect that they will not, except as provided therein, without written consent
of PaineWebber Incorporated, sell, contract to sell or otherwise dispose of any
of such shares at any time before the expiration of the Lock-Up Period and
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the certificates evidencing such Acquisition Shares bear a legend to such
effect, (iii) issue shares of Common Stock during the Lock-Up Period pursuant
to the (x) conversion of the Company's convertible notes ("Convertible Notes"),
and (y) exercise of warrants ("Warrants"), and (z) options ("Options") issued
by the Company in the acquisitions described in the Registration Statement, so
long as the certificates representing such Convertible Notes, Warrants and
Options issued in connection with the acquisitions to be consummated on the
Closing Date and any shares of Common Stock issued upon conversion or exercise
thereof set forth the legends relating to the one-year restrictions on the sale
or disposition of such shares provided for in the agreements related to such
acquisitions (and the Company hereby agrees with the Representatives that
during the LockUp Period, without written consent of PaineWebber Incorporated,
the Company will not agree to waive or amend such restrictions on sale or
disposition), and (iv) grant awards and permit the exercise of awards granted
pursuant to the Company's 1997 Stock Awards Plan and its Non-Qualified Stock
Option Plan for Non-Employee Directors.
(n) The Company will cause each of its executive
officers, directors and each beneficial owner of more than 5% of the
outstanding shares of Common Stock other than Rod K. Cutsinger to enter into
agreements with the Representatives in the form set forth in Exhibit B to the
effect that they will not, except as provided therein, for a period of 365 days
after the commencement of the public offering of the Shares, without the prior
written consent of PaineWebber Incorporated, sell, contract to sell or
otherwise dispose of any of such shares (other than pursuant to employee stock
option plans or in connection with other employee incentive compensation
arrangements).
(o) Rod K. Cutsinger shall have entered into an
agreement with the Representatives in the form set forth in Exhibit C to the
effect that he will not, except as provided therein, for a period of eighteen
months after the Closing, without the prior written consent of PaineWebber
Incorporated, sell, contract to sell or otherwise dispose of any shares of
Common Stock held by him.
5. Conditions of the Obligations of the Underwriters. In
addition to the execution and delivery of the Price Determination Agreement,
the obligations of each Underwriter hereunder are subject to the following
conditions:
(a) Notification that the Registration Statement has
become effective shall be received by the Representatives not later than 5:00
p.m., New York City time, on the date of this Agreement or at such later date
and time as shall be consented to in writing by the Representatives and all
filings required by Rule 424 of the Rules and Regulations and Rule 430A shall
have been made.
(b) (i) No stop order suspending the effectiveness
of the Registration Statement shall have been issued and no proceedings for
that purpose shall be pending or threatened by the Commission, (ii) no order
suspending the effectiveness of the Registration Statement or the qualification
or registration of the Shares under the securities
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<PAGE>
or Blue Sky laws of any jurisdiction shall be in effect and no proceeding for
such purpose shall be pending before or threatened by the Commission or the
authorities of any such jurisdiction, (iii) any request for additional
information on the part of the staff of the Commission or any such authorities
shall have been complied with to the satisfaction of the staff of the
Commission or such authorities and (iv) after the date hereof no amendment or
supplement to the Registration Statement or the Prospectus shall have been
filed unless a copy thereof was first submitted to the Representatives and the
Representatives did not object thereto in good faith, and the Representatives
shall have received certificates, dated the Closing Date and the Option Closing
Date and signed by the Chief Executive Officer of the Company and the Chief
Financial Officer of the Company (who may, as to proceedings threatened, rely
upon the best of their information and belief), to the effect of clauses (i),
(ii) and (iii).
(c) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus, (i)
there shall not have been, and no development shall have occurred which could
reasonably be expected to result in, a material adverse change in the general
affairs, business, business prospects, properties, management, condition
(financial or otherwise) or results of operations of the Company and its
Subsidiaries, taken as a whole, whether or not arising from transactions in the
ordinary course of business, in each case other than as set forth in or
contemplated by the Registration Statement and the Prospectus and (ii) neither
the Company nor any of its Subsidiaries shall have sustained any loss or
interference with its business or properties material to the Company and its
Subsidiaries taken as a whole from fire, explosion, flood or other casualty,
whether or not covered by insurance, or from any labor dispute or from any
court or legislative or other governmental action, order or decree, which is
not set forth in the Registration Statement and the Prospectus, if in the
judgment of the Representatives any such development makes it impracticable or
inadvisable to consummate the sale and delivery of the Shares by the
Underwriters at the initial public offering price.
(d) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus, except
as contemplated by the Registration Statement and the Prospectus, there shall
have been no litigation or other proceeding instituted against the Company or
any of its Subsidiaries or any of their respective officers or directors in
their capacities as such, before or by any Federal, state or local court,
commission, regulatory body, administrative agency or other governmental body,
domestic or foreign, in which litigation or proceeding an unfavorable ruling,
decision or finding would materially and adversely affect the business,
properties, business prospects, condition (financial or otherwise) or results
of operations of the Company and its Subsidiaries taken as a whole.
(e) Each of the representations and warranties of
the Company contained herein shall be true and correct in all material respects
at the Closing Date and, with respect to the Option Shares, at the Option
Closing Date, as if made at the Closing Date and, with respect to the Option
Shares, at the Option Closing Date, and all covenants
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<PAGE>
and agreements herein contained to be performed on the part of the Company and
all conditions herein contained to be fulfilled or complied with by the Company
at or prior to the Closing Date and, with respect to the Option Shares, at or
prior to the Option Closing Date, shall have been duly performed, fulfilled or
complied with.
(f) The Representatives shall have received an
opinion, dated the Closing Date and, with respect to the Option Shares, the
Option Closing Date, and satisfactory in form and substance to counsel for the
Underwriters, from Bracewell & Patterson L.L.P., counsel to the Company, to the
effect set forth in Exhibit D.
(g) The Representatives shall have received an
opinion, dated the Closing Date and the Option Closing Date, from Morgan, Lewis
& Bockius LLP, counsel to the Underwriters, with respect to the Registration
Statement, the Prospectus and this Agreement, which opinion shall be
satisfactory in all respects to the Representatives.
(h) On the date of the Prospectus, the Accountants
shall have furnished to the Representatives a letter, dated the date of its
delivery, addressed to the Representatives and in form and substance
satisfactory to the Representatives, confirming that they are independent
accountants with respect to the Company as required by the Act and the Rules
and Regulations and, in the case of KPMG Peat Marwick LLP, with respect to the
financial and other statistical and numerical information contained in the
Registration Statement. At the Closing Date and, as to the Option Shares, the
Option Closing Date, KPMG Peat Marwick LLP shall have furnished to the
Representatives a letter, dated the date of its delivery, which shall confirm,
on the basis of a review in accordance with the procedures set forth in their
letter, that nothing has come to their attention during the period from the
date of the letter referred to in the prior sentence to a date (specified in
the letter) not more than five days prior to the Closing Date and the Option
Closing Date which would require any change in their letter dated the date of
the Prospectus, if it were required to be dated and delivered at the Closing
Date and the Option Closing Date.
(i) At the Closing Date and, as to the Option
Shares, the Option Closing Date, there shall be furnished to the
Representatives an accurate certificate, dated the date of its delivery, signed
by each of the Chief Executive Officer and the Chief Financial Officer of the
Company, in form and substance satisfactory to the Representatives, to the
effect that:
(i) Each signer of such certificate has
carefully examined the Registration Statement and the Prospectus and (A) as of
the date of such certificate, such documents are true and correct in all
material respects and do not omit to state a material fact required to be
stated therein or necessary in order to make the statements therein not untrue
or misleading and (B) since the Effective Date, no event has occurred as a
result of which it is necessary to amend or supplement the Prospectus in order
to make the statements therein not untrue or misleading in any material
respect;
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(ii) Each of the representations and
warranties of the Company contained in this Agreement were, when originally
made, and are, at the time such certificate is delivered, true and correct in
all material respects;
(iii) Each of the covenants required herein
to be performed by the Company on or prior to the delivery of such certificate
has been duly, timely and fully performed and each condition herein required to
be complied with by the Company on or prior to the date of such certificate has
been duly, timely and fully complied with; and
(iv) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus, (A)
there has not been, and no development has occurred which could reasonably be
expected to result in, a material adverse change in the general affairs,
business, business prospects, properties, management, condition (financial or
otherwise) or results of operations of the Company and its Subsidiaries, taken
as a whole, whether or not arising from transactions in the ordinary course of
business, in each case other than as set forth in or contemplated by the
Registration Statement and the Prospectus and (B) neither the Company nor any
of its Subsidiaries has sustained any loss or interference with its business or
properties material to the Company and its Subsidiaries taken as a whole from
fire, explosion, flood or other casualty, whether or not covered by insurance,
or from any labor dispute or from any court or legislative or other
governmental action, order or decree, which is not set forth in the
Registration Statement and the Prospectus.
(j) On or prior to the Closing Date, the
Representatives shall have received the executed agreements referred to in
Section 4(n).
(k) The Shares shall be qualified for sale in such
states as the Representatives may reasonably request each such qualification
shall be in effect and not subject to any stop order or other proceeding on the
Closing Date and the Option Closing Date.
(l) Prior to the Closing Date, the Shares shall have
been duly authorized for listing by the New York Stock Exchange upon official
notice of issuance.
(m) The National Association of Securities Dealers,
Inc. shall have approved the underwriting terms and arrangements and such
approval shall not have been withdrawn or limited.
(n) The Company shall have furnished to he
Representatives such certificates, in addition to those specifically mentioned
herein, as the Representatives may have reasonably requested as to the accuracy
and completeness at the Closing Date and the Option Closing Date of any
statement in the Registration Statement or the Prospectus as to the accuracy at
the Closing Date and the Option Closing Date of the representations and
warranties of the Company herein, as to the performance by the Company of its
obligations
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hereunder, or as to the fulfillment of the conditions concurrent and precedent
to the obligations hereunder of the Representatives.
6. Indemnification.
(a) The Company will indemnify and hold harmless
each Underwriter, the directors, officers, employees and agents of each
Underwriter and each person, if any, who controls each Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act from and
against any and all losses, claims, liabilities, expenses and damages
(including, but not limited to, any and all investigative, legal and other
expenses reasonably incurred in connection with, and any and all amounts paid
in settlement of, any action, suit or proceeding between any of the indemnified
parties and any indemnifying parties or between any indemnified party and any
third party, or otherwise, or any claim asserted), as and when incurred, to
which any Underwriter, or any such person, may become subject under the Act,
the Exchange Act or other Federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, liabilities, expenses
or damages arise out of or are based on (i) any untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus,
the Registration Statement or the Prospectus or any amendment or supplement to
the Registration Statement or the Prospectus or in any application or other
document executed by or on behalf of the Company or based on written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to qualify the Shares under the Securities Laws thereof or filed with
the Commission, (ii) the omission or alleged omission to state in such document
a material fact required to be stated in it or necessary to make the statements
in it not misleading, (iii) the terms of the acquisitions of the Acquired
Companies and the reverse stock split described in the Registration Statement
and any legal or arbitral proceedings related thereto, or (iv) any act or
failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Shares or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, liability, expense or damage arising out of or based upon matters
covered by clause (i) or (ii) above (provided that the Company shall not be
liable under this clause (iv) to the extent it is finally judicially determined
by a court of competent jurisdiction that such loss, claim, liability, expense
or damage resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such underwriter through its gross negligence or willful
misconduct); provided that the Company will not be liable to the extent that
such loss, claim, liability, expense or damage arises from the sale of the
Shares in the public offering to any person by an Underwriter and (A) is based
on an untrue statement or omission or alleged untrue statement or omission made
in reliance on and in conformity with information relating to any Underwriter
furnished in writing to the Company by the Representatives on behalf of any
Underwriter expressly for inclusion in the Registration Statement, any
preliminary prospectus or the Prospectus or (B) results solely from an untrue
statement of a material fact contained in, or the omission of a material fact
from, such preliminary prospectus, which untrue statement or omission was
completely corrected in the Prospectus (as then amended or supplemented), if
the Company shall sustain the burden of proving that the
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Underwriters sold Shares to the person alleging such loss, claim, liability,
expense or damage without sending or giving, at or prior to the written
confirmation of such sale, a copy of the Prospectus (as then amended or
supplemented) provided that the Company had previously furnished copies thereof
to the Underwriters within a reasonable amount of time prior to such sale or
such confirmation, and the Underwriters failed to deliver the corrected
Prospectus, if required by law to have so delivered it and if delivered would
have been a complete defense against the person asserting such loss, claim,
liability, expense or damage. This indemnity agreement will be in addition to
any liability that the Company might otherwise have.
(b) Each Underwriter will indemnify and hold
harmless the Company, each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, each
director of the Company and each officer of the Company who signs the
Registration Statement to the same extent as the foregoing indemnity from the
Company to each Underwriter, but only insofar as losses, claims, liabilities,
expenses or damages arise out of or are based on any untrue statement or
omission or alleged untrue statement or omission made in reliance on and in
conformity with information relating to any Underwriter furnished in writing to
the Company by the Representatives on behalf of such Underwriter expressly for
use in the Registration Statement, the Preliminary Prospectus or the
Prospectus. This indemnity will be in addition to any liability that each
Underwriter might otherwise have; provided, however, that in no case shall any
Underwriter be liable or responsible for any amount in excess of the
underwriting discounts and commissions received by such Underwriter.
(c) Any party that proposes to assert the right to
be indemnified under this Section 6 will, promptly after receipt of notice of
commencement of any action against such party in respect of which a claim is to
be made against an indemnifying party or parties under this Section 6, notify
each such indemnifying party of the commencement of such action, enclosing a
copy of all papers served, but the omission so to notify such indemnifying
party will not relieve it from any liability that it may have to any
indemnified party under the foregoing provisions of this Section 6 unless, and
only to the extent that, such omission results in the forfeiture of substantive
rights or defenses by the indemnifying party. If any such action is brought
against any indemnified party and it notifies the indemnifying party of its
commencement, the indemnifying party will be entitled to participate in and, to
the extent that it elects by delivering written notice to the indemnified party
promptly after receiving notice of the commencement of the action from the
indemnified party, jointly with any other indemnifying party similarly
notified, to assume the defense of the action, with counsel satisfactory to the
indemnified party, and after notice from the indemnifying party to the
indemnified party of its election to assume the defense, the indemnifying party
will not be liable to the indemnified party for any legal or other expenses
except as provided below and except for the reasonable costs of investigation
subsequently incurred by the indemnified party in connection with the defense.
The indemnified party will have the right to employ its own counsel in any such
action, but the fees, expenses and other charges of such counsel will be at the
expense of such indemnified
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party unless (1) the employment of counsel by the indemnified party has been
authorized in writing by the indemnifying party, (2) the indemnified party has
reasonably concluded (based on advice of counsel) that there may be legal
defenses available to it or other indemnified parties that are different from
or in addition to those available to the indemnifying party, (3) a conflict or
potential conflict exists (based on advice of counsel to the indemnified party)
between the indemnified party and the indemnifying party (in which case the
indemnifying party will not have the right to direct the defense of such action
on behalf of the indemnified party) or (4) the indemnifying party has not in
fact employed counsel to assume the defense of such action within a reasonable
time after receiving notice of the commencement of the action, in each of which
cases the reasonable fees, disbursements and other charges of counsel will be
at the expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable
fees, disbursements and other charges of more than one separate firm admitted
to practice in such jurisdiction at any one time for all such indemnified party
or parties. All such fees, disbursements and other charges will be reimbursed
by the indemnifying party promptly as they are incurred. An indemnifying party
will not be liable for any settlement of any action or claim effected without
its written consent (which consent will not be unreasonably withheld). No
indemnifying party shall, without the prior written consent of each indemnified
party, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action or proceeding relating to the matters
contemplated by this Section 6 (whether or not any indemnified party is a party
thereto), unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising or
that may arise out of such claim, action or proceeding. Notwithstanding any
other provision of this Section 6 (c), if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel, such indemnifying party agrees that it shall
be liable for any settlement effected without its written consent if (i) such
settlement is entered into more than 45 days after receipt by such indemnifying
party of the aforesaid request, (ii) such indemnifying party shall have
received notice of the terms of such settlement at least 30 days prior to such
settlement being entered into and (iii) such indemnifying party shall not have
reimbursed such indemnified party in accordance with such request prior to the
date of such settlement.
(d) In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in the
foregoing paragraphs of this Section 6 is applicable in accordance with its
terms but for any reason is held to be unavailable from the Company or the
Underwriters, the Company and the Underwriters will contribute to the total
losses, claims, liabilities, expenses and damages (including any investigative,
legal and other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claim asserted,
but after deducting any contribution received by the Company from persons other
than the Underwriters, such as persons who control the Company within the
meaning of the Act, officers of the Company who signed the Registration
Statement and directors of the Company, who also may be liable for
contribution) to which the Company and any one or
21
<PAGE>
more of the Underwriters may be subject in such proportion as shall be
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. If, but only if, the
allocation provided by the foregoing sentence is not permitted by applicable
law, the allocation of contribution shall be made in such proportion as is
appropriate to reflect not only the relative benefits referred to in the
foregoing sentence but also the relative fault of the Company, on the one hand,
and the Underwriters, on the other, with respect to the statements or omissions
which resulted in such loss, claim, liability, expense or damage, or action in
respect thereof, as well as any other relevant equitable considerations with
respect to such offering. Such relative fault shall be determined by reference
to whether the untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Representatives on behalf of the Underwriters,
the intent of the parties and their relative knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and the Underwriters agree that it would not be just and equitable if
contributions pursuant to this Section 6(d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, liability, expense or
damage, or action in respect thereof, referred to above in this Section 6(d)
shall be deemed to include, for purpose of this Section 6(d), any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 6(d), no Underwriter shall be required to contribute
any amount in excess of the underwriting discounts and commissions received by
it and no person found guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) will be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute as provided in this Section 6(d) are
several in proportion to their respective underwriting obligations and not
joint. For purposes of this Section 6(d), any person who controls a party to
this Agreement within the meaning of the Act will have the same rights to
contribution as that party, and each officer of the Company who signed the
Registration Statement will have the same rights to contribution as the
Company, subject in each case to the provisions hereof. Any party entitled to
contribution, promptly after receipt of notice of commencement of any action
against such party in respect of which a claim for contribution may be made
under this Section 6(d), will notify any such party or parties from whom
contribution may be sought, but the omission so to notify will not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have under this Section 6 (d). Except for a settlement entered
into pursuant to the last sentence of Section 6 (c) hereof, no party will be
liable for
22
<PAGE>
contribution with respect to any action or claim settled without its written
consent (which consent will not be unreasonably withheld).
(e) The indemnity and contribution agreements
contained in this Section 6 and the representations and warranties of the
Company contained in this Agreement shall remain operative and in full force
and effect regardless of (i) any investigation made by or on behalf of the
Underwriters, (ii) acceptance of the Shares and payment therefore or (iii) any
termination of this Agreement.
7. Termination. The obligations of the several Underwriters
under this Agreement may be terminated at any time on or prior to the Closing
Date (or, with respect to the Option Shares, on or prior to the Option Closing
Date), by notice to the Company from the Representatives, without liability on
the part of any Underwriter to the Company, if, prior to delivery and payment
for the Shares (or the Option Shares, as the case may be), in the sole judgment
of the Representatives, (i) there has been, since the respective dates as of
which information is given in the Registration Statement, any material adverse
change in the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company and its Subsidiaries
considered as a whole, (ii) trading in any of the equity securities of the
Company shall have been suspended by the Commission, the NASD, by an exchange
that lists the Shares or by the Nasdaq Stock Market, (iii) trading in
securities generally on the New York Stock Exchange or the Nasdaq Stock Market
shall have been suspended or limited or minimum or maximum prices shall have
been generally established on such exchange or over the counter market, or
additional material governmental restrictions, not in force on the date of this
Agreement, shall have been imposed upon trading in securities generally by such
exchange or by order of the Commission or the NASD or any court or other
governmental authority, (iv) a general banking moratorium shall have been
declared by either Federal or New York State authorities or (v) any material
adverse change in the financial or securities markets in the United States or
in political, financial or economic conditions in the United States or any
outbreak or material escalation of hostilities or declaration by the United
States of a national emergency or war or other calamity or crisis shall have
occurred, the effect of any of which is such as to make it, in the sole
judgment of the Representatives, impracticable or inadvisable to market the
Shares on the terms and in the manner contemplated by the Prospectus.
8. Substitution of Underwriters. If any one or more of the
Underwriters shall fail or refuse to purchase any of the Firm Shares which it
or they have agreed to purchase hereunder, and the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase is not more than one-tenth of the aggregate number of Firm
Shares, the other Underwriters shall be obligated, severally, to purchase the
Firm Shares which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase, in the proportions which the number of Firm Shares
which they have respectively agreed to purchase pursuant to Section 1 bears to
the aggregate number of Firm Shares which all such non-defaulting Underwriters
have so
23
<PAGE>
agreed to purchase, or in such other proportions as the Representatives may
specify; provided that in no event shall the maximum number of Firm Shares
which any Underwriter has become obligated to purchase pursuant to Section 1 be
increased pursuant to this Section 8 by more than one-ninth of the number of
Firm Shares agreed to be purchased by such Underwriter without the prior
written consent of such Underwriter. If any Underwriter or Underwriters shall
fail or refuse to purchase any Firm Shares and the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase exceeds one-tenth of the aggregate number of the Firm
Shares and arrangements satisfactory to the Representatives and the Company for
the purchase of such Firm Shares are not made within 48 hours after such
default, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or the Company for the purchase or sale of any
Shares under this Agreement. In any such case either the Representatives or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. Any action taken pursuant to this Section 8 shall
not relieve any defaulting Underwriter from liability in respect of any default
of such Underwriter under this Agreement.
9. Miscellaneous. Notice given pursuant to any of the
provisions of this Agreement shall be in writing and, unless otherwise
specified, shall be mailed or delivered (a) if to the Company, at the office of
the Company, 390 South Woods Mill Road, Suite 150, St. Louis, Missouri 63017.
Attention: Richard P. Anthony, or (b) if to the Underwriters, to the
Representatives at the offices of PaineWebber Incorporated, 1285 Avenue of the
Americas, New York, New York 10019, Attention: Reginald J. Hollinger, Corporate
Finance Department. Any such notice shall be effective only upon receipt. Any
notice under Section 7 or 8 may be made by telex or telephone, but if so made
shall be subsequently confirmed in writing.
This Agreement has been and is made solely for the benefit of
the several Underwriters and the Company and of the controlling persons,
directors and officers referred to in Section 6, and their respective
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. The term "successors and assigns" as used
in this Agreement shall not include a purchaser, as such purchaser, of Shares
from any of the several Underwriters.
All representations, warranties and agreements of the Company
contained herein or in certificates or other instruments delivered pursuant
hereto, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any of its controlling
persons and shall survive delivery of and payment for the Shares hereunder.
Any action required or permitted to be taken by the
Representatives under this Agreement may be taken by them jointly or by
PaineWebber Incorporated.
24
<PAGE>
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE
CONFLICT OF LAWS PRINCIPLES OF SUCH STATE.
This Agreement may be signed in two or more counterparts with
the same effect as if the signatures thereto and hereto were upon the same
instrument.
In case any provision in this Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
The Company and the Underwriters each hereby irrevocably
waive any right they may have to a trial by jury in respect of any claim based
upon or arising out of this Agreement or the transactions contemplated hereby.
This Agreement may not be amended or otherwise modified or any
provision hereof waived except by an instrument in writing signed by the
Representatives and the Company.
Please confirm that the foregoing correctly sets forth the
agreement among the Company and the several Underwriters.
Very truly yours,
ADVANCED COMMUNICATIONS GROUP, INC.
By: /s/ William H. Zimmer III
----------------------------------------
Name: William H. Zimmer III
Title: Chief Financial Officer, Executive Vice
President, Secretary and Treasurer
Confirmed as of the date first above mentioned:
PAINEWEBBER INCORPORATED
CIBC OPPENHEIMER
Acting on behalf of themselves
and as the Representatives of the
other several Underwriters
named in Schedule I hereof.
25
<PAGE>
By: PAINEWEBBER INCORPORATED
By:/s/ Reginald J. Hollinger
----------------------------
Name: Reginald J. Hollinger
Title: Managing Director
By: CIBC OPPENHEIMER
By:/s/ Monica Masuda
-----------------------------
Name: Monica Masuda
Title: Vice President
26
<PAGE>
Schedule I
Number of
Underwriter Shares
- ----------- ------
PaineWebber Incorporated ........................................ 3,500,000
CIBC Oppenheimer ................................................ 2,340,000
ABN AMRO Chicago Corporation .................................... 150,000
Credit Lyonnaise Securities (USA) Inc. .......................... 150,000
Donaldson, Lufkin & Jenrette Securities Corporation ............. 150,000
Furman Selz LLC ................................................. 150,000
Goldman, Sachs & Co. ............................................ 150,000
Morgan Stanley & Co. Incorporated ............................... 150,000
SBC Warburg Dillon Read Inc. .................................... 150,000
Salomon Smith Barney Inc. ....................................... 150,000
George K. Baum & Company ........................................ 80,000
Fahnestock & Co. Inc. ........................................... 80,000
Gerard Klauer Mattison & Co., LLC ............................... 80,000
Kaufman Bros., L.P. ............................................. 80,000
Ladenburg Thalmann & Co. Inc .................................... 80,000
Brad Peery Inc. ................................................. 80,000
Ragen MacKenzie Incorporated .................................... 80,000
Sanders Morris Mundy Inc. ....................................... 80,000
Sands Brothers & Co., Ltd. ...................................... 80,000
Soundview Financial Group ....................................... 80,000
C.E. UNTERBURG, TOWBIN .......................................... 80,000
Wit Capital Corporation ......................................... 80,000
Total ........................................................... 8,000,000
---------
<PAGE>
EXHIBIT A
ADVANCED COMMUNICATIONS GROUP, INC.
- ---------------------
PRICE DETERMINATION AGREEMENT
[Date]
PAINEWEBBER INCORPORATED
CIBC OPPENHEIMER
As Representatives of the several Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Dear Sirs:
Reference is made to the Underwriting Agreement, dated
______, 1998 (the "Underwriting Agreement"), among Advanced Communications
Group, Inc., a Delaware corporation (the "Company") and the several
Underwriters named in Schedule I thereto or hereto (the "Underwriters"), or
whom PaineWebber Incorporated and CIBC Oppenheimer are acting as
representatives (the "Representatives"). The Underwriting Agreement provides
for the purchase by the Underwriters from the Company, subject to the terms and
conditions set forth therein, of an aggregate of ________ shares (the "Firm
Shares") of the Company's common stock, par value $.0001 per share. This
Agreement is the Price Determination Agreement referred to in the Underwriting
Agreement.
Pursuant to Section 1 of the Underwriting Agreement, the
undersigned agrees with the Representatives as follows:
The initial public offering price per share for the Firm
Shares shall be $
-------.
<PAGE>
The purchase price per share for the Firm Shares to be paid
by the several Underwriters shall be $_______ representing an amount equal to
the initial public offering price set forth above, less $______ per share.
The Company represents and warrants to each of the
Underwriters that the representations and warranties of the Company set forth
in Section 3 of the Underwriting Agreement are accurate as though expressly
made at and as of the date hereof.
As contemplated by the Underwriting Agreement, attached as
Schedule I is a completed list of the several Underwriters, which shall be a
part of this Agreement and the Underwriting Agreement.
THIS AGREEMENT SHALL BE GOVERNED BY THE LAW OF THE STATE OF
NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES OF SUCH STATE.
If the foregoing is in accordance with your understanding of
the agreement among the Underwriters and the Company, please sign and return to
the Company a counterpart hereof, whereupon this instrument along with all
counterparts and together with the Underwriting Agreement shall be a binding
agreement among the Underwriters and the Company in accordance with its terms
and the terms of the Underwriting Agreement.
Very truly yours,
ADVANCED COMMUNICATIONS GROUP, INC.
By:________________________________________
Name: William H. Zimmer III
Title: Chief Financial Officer
Executive Vice President
Secretary and Treasurer
2
<PAGE>
Confirmed as of the date first above mentioned:
PAINEWEBBER INCORPORATED CIBC OPPENHEIMER Acting on behalf of
themselves and as the Representatives of the other several
Underwriters named in Schedule I hereof.
By: PAINEWEBBER INCORPORATED
By: ________________________
Name: Reginald J. Hollinger
Title: Managing Director
By: CIBC OPPENHEIMER
By: _______________________
Name: Monica Masuda
Title: Vice President
3
<PAGE>
EXHIBIT B
[DATE]
PAINEWEBBER INCORPORATED
CIBC OPPENHEIMER
As Representatives of the
several Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Dear Sirs:
In consideration of the agreement of the several
Underwriters, for which PaineWebber Incorporated and CIBC Oppenheimer
(the "Representatives") intend to act as Representatives to underwrite
a proposed public offering (the "Offering") of ____ shares of Common
Stock, par value $.0001 per share (the "Common Stock") of Advanced
Communications Group, Inc., a Delaware corporation, as contemplated by
a registration statement with respect to such shares filed with the
Securities and Exchange Commission on Form S-1 (Registration No.
333-37671), the undersigned hereby agrees that the undersigned will
not, except for transfers to immediate family members, or to charities
or charitable foundations or similar entities, who, in each case,
agree to be bound in writing by the restrictions set forth herein (or
trusts for the benefit of the undersigned or family members the
trustees of which so agree in writing), or, in the case of
Consolidation Partners Founding Fund, L.L.C., distributions of shares
of Common Stock in accordance with its charter and regulations to
holders of its Class A and Class B Interests, so long as the
certificates representing the shares so distributed bear legends with
respect to the restrictions on transfer imposed on such shares, for a
period of 365 days after the Closing without the prior written consent
of PaineWebber Incorporated, offer to sell, sell, contract to sell,
grant any option to sell, or otherwise dispose of, or require the
Company to file
<PAGE>
with the Securities and Exchange Commission a registration statement
under the Securities Act of 1933 to register any shares of Common
Stock, or in the case of persons signing this agreement or agreements
in writing to be bound hereby, securities convertible into or
exchangeable for Common Stock or warrants or other rights to acquire
shares of Common Stock of which the undersigned is now[, or may in the
future become,] the beneficial owner within the meaning of Rule 13d-3
under the Securities Exchange Act of 1934) (other than pursuant to
employee or director stock option plans or in connection with other
employee incentive compensation arrangements).
Very truly yours,
By:_______________________
Print Name:_______________
2
<PAGE>
EXHIBIT C
[DATE]
PAINEWEBBER INCORPORATED
CIBC OPPENHEIMER
As Representatives of the
several Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Dear Sirs:
In consideration of the agreement of the several
Underwriters, for which PaineWebber Incorporated and CIBC Oppenheimer
(the "Representatives") intend to act as Representatives to underwrite
a proposed public offering (the "Offering") of ____ shares of Common
Stock, par value $.0001 per share (the "Common Stock") of Advanced
Communications Group, Inc., a Delaware corporation, as contemplated by
a registration statement with respect to such shares filed with the
Securities and Exchange Commission on Form S-1 (Registration No.
333-37671), the undersigned hereby agrees that the undersigned will
not, except for transers to immediate family members, or to charities
or charitable trusts or foundations or similar entities, who, in each
case, agree in writing to be bound by the restrictions set forth
herein (or trusts for the benefit of the undersigned or family members
of which trusts the trustees so agree in writing), and except for
transfers or dispositions described in the Registration Statement, for
a period of eighteen months after the Closing, without the prior
written consent of PaineWebber Incorporated, offer to sell, sell,
contract to sell, grant any option to sell, or otherwise dispose of,
or require the Company to file with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933
to register any shares of Common Stock or securities convertible into
or exchangeable for Common Stock or warrants or other rights to
acquire shares of Common Stock of which the undersigned is now, or may
in the future become, the beneficial owner within the meaning of Rule
13d-3 under the Securities Exchange Act of
<PAGE>
1934 (other than pursuant to option plans or in connection with other
employee incentive compensation arrangements).
Very truly yours,
By:________________________
Print Name: Rod K. Cutsinger
2
<PAGE>
EXHIBIT D
Form of Opinion of
Counsel to the Company
The Company and each of its Subsidiaries is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has full corporate power and authority to
conduct all the activities conducted by it, to own or lease all the assets
owned or leased by it and to conduct its business as described in the
Registration Statement and the Prospectus. The Company is the sole record owner
and, to the best of our knowledge after due inquiry, the sole beneficial owner
of all of the capital stock of each of its Subsidiaries.
All of the outstanding shares of Common Stock have been, and
the Shares, when paid for by the Underwriters in accordance with the terms of
the Agreement, will be, duly authorized, validly issued, fully paid and
nonassessable and will not be subject to any preemptive or similar right under
(i) the General Corporation Law of the State of Delaware, (ii) the Company's
certificate of incorporation or by-laws or (iii) any instrument, document,
contract or other agreement specifically referred to in the Registration
Statement or any instrument, document, contract or agreement filed as an
exhibit to the Registration Statement. Except as described in the Registration
Statement or the Prospectus, to the best of our knowledge after due inquiry,
there is no commitment or arrangement to issue, and there are no outstanding
options, warrants or other rights calling for the issuance of, any share of
capital stock of the Company or any Subsidiary to any person or any security or
other instrument that by its terms is convertible into, exercisable for or
exchangeable for capital stock of the Company.
No consent, approval, authorization or order of, or any
filing or declaration with, any court or governmental agency or body is
required in connection with the authorization, issuance, transfer, sale or
delivery of the Shares by the Company, in connection with the execution,
delivery and performance of the Agreement by the Company or in connection with
the taking by the Company of any action contemplated thereby [or, if so
required, all such consents, approvals, authorizations and orders, [specifying
the same] have been obtained and are in full force and effect], except such as
have been obtained under the Act and the Rules and Regulations and such as may
be required under state securities or "Blue Sky" laws or by the by-laws and
rules of the NASD in connection with the purchase and distribution by the
Underwriters of the Shares to be sold by the Company.
<PAGE>
The authorized, issued and outstanding capital stock of the
Company is as set forth in the Registration Statement and the Prospectus under
the caption "Capitalization." The description of the Common Stock contained in
the Prospectus is complete and accurate in all material respects. The form of
certificate used to evidence the Common Stock is in due and proper form and
complies with all applicable statutory requirements.
The Registration Statement and the Prospectus comply in all
material respects as to form with the requirements of the Act and the Rules and
Regulations (except that we express no opinion as to financial statements,
schedules and other financial and statistical data contained in the
Registration Statement or the Prospectus).
To the best of our knowledge after due inquiry, any
instrument, document, lease, license, contract or other agreement
(collectively, "Documents") required to be described or referred to in the
Registration Statement or the Prospectus has been described or referred to
therein as required and any Document required to be filed as an exhibit to the
Registration Statement has been filed as an exhibit thereto or has been
incorporated as an exhibit by reference in the Registration Statement.
To the best of our knowledge after due inquiry, except as
disclosed in the Registration Statement or the Prospectus, no person or entity
has the right to require the registration under the Act of shares of Common
Stock or other securities of the Company by reason of the filing or
effectiveness of the Registration Statement.
Except as set forth in the Registration Statement and the
Prospectus or as will not have a material adverse effect on the Company and its
Subsidiaries considered as a whole, each of the Company and the Subsidiaries
has all permits, licenses or other authorizations required by the FCC or
relevant state regulatory authorities required to provide the local and long
distance telecommunications services described as being provided by it in the
Registration Statement and the Prospectus.
To the best of our knowledge after due inquiry, neither the
Company nor any of the Subsidiaries is in violation of, or default with respect
to, any federal or state Telecommunications Law, except as set forth in the
Registration Statement and the Prospectus or such as do not have a material
adverse effect on the Company and its Subsidiaries considered as a whole.
Except as set forth in the Registration Statement, to the
best of our knowledge after due inquiry, (a) there is no decision, decree, or
order that has been issued by the FCC or any
2
<PAGE>
relevant state regulatory agency against or in respect of the Company or the
Subsidiaries, or any of the FCC and state licenses held by the Subsidiaries,
that would reasonably be expected to impair materially the operations of the
Company and the Subsidiaries taken as a whole, and (b) there is no notice of
violation, proceeding, claim, investigation, or other action by or before the
FCC or any relevant state regulatory agency pending or threatened in writing
that is specifically directed against or in respect of the Company and the
Subsidiaries, or any of the FCC licenses and state licenses held by the Company
and the Subsidiaries, that would reasonably be expected to result in the
revocation of any such FCC or state licenses, to impair the operations of the
Company and the Subsidiaries or to result in any assessment, fine or penalty
against the Company or the Subsidiaries, in each case, material to the Company
and its Subsidiaries considered as a whole.
The statements appearing in the Prospectus under the captions
"Risk Factors -Implications of Telecommunications Act and Other Regulation" and
"Business -- Regulation," to the extent that they constitute summaries of
statutes, regulations or legal or governmental proceedings are accurate in all
material respects.
In rendering the opinions referred to in paragraphs
[telecommunications permits and Telecommunications Laws], we have consulted
with and relied in part upon the advice of other legal counsel who we believe
to be experts with respect to such matters.
The Company has full corporate power and authority to enter
into the Agreement, and the Agreement has been duly authorized, executed and
delivered by the Company, is a valid and binding agreement of the Company and,
except for the indemnification and contribution provisions thereof, as to which
we express no opinion, is enforceable against the Company in accordance with
the terms thereof.
The execution and delivery by the Company of, and the
performance by the Company of its agreements in, the Agreement do not and will
not (i) violate the certificate of incorporation or by-laws of the Company,
(ii) breach or result in a default under, cause the time for performance of any
obligation to be accelerated under, or result in the creation or imposition of
any lien, charge or encumbrance upon any of the assets of the Company or any of
its Subsidiaries pursuant to the terms of, (x) any material indenture,
mortgage, deed of trust, loan agreement, bond, debenture, note agreement,
capital lease or other evidence of indebtedness of which we have knowledge
after due inquiry, (y) any voting trust arrangement or any contract or other
agreement to which the Company is a party that restricts the ability of the
Company to issue securities and of which we have knowledge after due inquiry or
(z) any Document filed as an exhibit to the Registration Statement, (iii)
breach or otherwise violate any existing obligation of the Company under any
court or administrative order, judgment or decree of which we have knowledge
after due
3
<PAGE>
inquiry or (iv) violate applicable provisions of any statute or regulation of
the State of Texas or the United States or of the General Corporation Law of
the State of Delaware.
The Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company," as such terms are defined in the Investment Company Act of 1940, as
amended.
The Shares have been duly authorized for listing by the New
York Exchange upon official notice of issuance.
We hereby confirm to you that we have been advised by the
Commission that the Registration Statement has become effective under the Act
and that to the best of our knowledge after due inquiry no order suspending the
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose has been instituted or is pending, threatened or contemplated.
We hereby further confirm to you that except as set forth in
or contemplated by the Registration Statement and the Prospectus, to the best
of our knowledge after due inquiry, there are no actions, suits, proceedings or
investigations pending or overtly threatened in writing against the Company or
any of its Subsidiaries, or any of their respective officers or directors in
their capacities as such, before or by any court, governmental agency or
arbitrator which (i) seek to challenge the legality or enforceability of the
Agreement, (ii) seek to challenge the legality or enforceability of any of the
Documents filed as exhibits to the Registration Statement, (iii) seek damages
or other remedies with respect to any of the Documents filed as exhibits to the
Registration Statement, except as set forth in or contemplated by the
Registration Statement or as would not have a material adverse effect on the
Company and its Subsidiaries considered as a whole, (iv) except as set forth in
or contemplated by the Registration Statement and the Prospectus, seek money
damages which would be material to the Company and its Subsidiaries considered
as a whole or seek to impose criminal penalties upon the Company, any of its
Subsidiaries or any of their respective officers or directors in their
capacities as such and of which we have knowledge or (v) seek to enjoin any of
the business activities of the Company or any of its Subsidiaries that are
material to the Company and its Subsidiaries considered as a whole or the
transactions described in the Prospectus and of which we have knowledge.
We have participated in conferences with officers and other
representatives of the Company, its auditors, and your representatives at which
the contents of the Registration Statement and the Prospectus and related
matters were discussed. Based upon such participation and review, and relying
as to materiality in part upon the factual statements of officers and other
representatives
4
<PAGE>
of the Company, we advise you that no facts have come to our attention that
have caused us to believe that the Registration Statement (except for the
financial statements, schedules and related data and other financial or
statistical data as to which we have not been asked to comment), at the time it
became effective, contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus (except for the
financial statements, schedules and related data and other financial or
statistical data, as to which we have not been asked to comment), as of the
date of such Prospectus or as of the data hereof, contained an untrue statement
of a material fact or omitted to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading. However, because the primary purpose of our
engagement was not to confirm factual matters or financial or accounting
matters and because of the wholly or partially non-legal character of many of
the statements contained in the Registration Statement and the Prospectus, we
are not passing upon and do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus (except to the extent expressly set forth in
paragraphs ___ and ___ above [Capitalization and statements under specified
sections]), and we have not independently verified the accuracy, completeness
or fairness of such statements (except as aforesaid). Without limiting the
foregoing, we assume no responsibility for, have not independently verified and
have not been asked to comment on the accuracy, completeness or fairness of the
financial statements, schedules and other financial or statistical data
included in the Registration Statement or the exhibits to the Registration
Statement, and we have not examined the accounting, financial or other records
from which such financial statements, schedules and other financial or
statistical data and information were derived. We note that, although certain
portions of the Registration Statement (including financial statements and
related data) have been included herein on the authority of "experts" within
the meaning of the 1933 Act, we are not experts with respect to any portion of
the Registration Statement, including, without limitation, such financial
statements and related data and other financial or accounting data included
therein.
The foregoing opinion is subject to the qualification that
the enforceability of the Agreement may be: (i) subject to bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally; and (ii) subject to general principles of equity (regardless
of whether such enforceability is considered in a proceeding at law or in
equity) including principles of commercial reasonableness or conscionability
and an implied covenant of good faith and fair dealing.
This letter is furnished by us solely for your benefit in
connection with the transactions referred to in the Agreement and may not be
circulated to, or relied upon by, any other person.
5
<PAGE>
The foregoing opinion will be limited to the laws of the
United States, the State of Texas, and the General Corporation Law of the State
of Delaware and, with respect to paragraphs [telecommunications permits and
Telecommunications Laws], Telecommunications Laws of the United States and the
Telecommunications Laws of the States of Kansas, Minnesota, Nebraska, North
Dakota, Oklahoma, South Dakota and Texas. In rendering the opinions with
respect to organization, qualification and corporate power and authority of the
Subsidiaries, counsel may rely, to the extent they deem such reliance proper,
on the opinions (in form and substance reasonably satisfactory to Underwriters'
counsel) of other counsel reasonably acceptable to Underwriters' counsel as to
matters governed by the laws of jurisdictions other than the United States and
the State of Texas, and as to matters of fact, upon certificates of officers of
the Company, the Subsidiaries and of government officials; provided
Underwriters and their counsel may rely on such opinions and that such counsel
shall state that the opinion of any other counsel is in form and scope
satisfactory to such counsel and they believe that they are justified in
relying on such opinions. Copies of all such opinions and certificates shall be
furnished to counsel to the Underwriters on the Closing Date.
Solely for purposes of their opinion pursuant to the
Underwriting Agreement, Morgan, Lewis & Bockius LLP, counsel to the several
Underwriters may rely on paragraphs [telecommunications permits and
Telecommunications Laws].
6
<PAGE>
SECOND AMENDMENT TO AGREEMENT AND PLAN OF EXCHANGE
THIS SECOND AMENDMENT TO AGREEMENT AND PLAN OF EXCHANGE (this
"Amendment"), made as of the 11th day of February, 1998, by and among ADVANCED
COMMUNICATIONS GROUP, INC., a Delaware corporation organized in September 1997,
ADVANCED COMMUNICATIONS CORP. (formerly named Advanced Communications Group,
Inc.), a Delaware corporation organized in June 1996, ACG ACQUISITION CORP., a
Delaware corporation, VALU-LINE OF LONGVIEW, INC., a Texas corporation, and
DAVID M. MITCHELL, BOB DAMUTH, RICHARD ROPER, ANNE ROPER and CLARENCE FRIAR,
amends the Agreement and Plan of Exchange dated as of October 6, 1997, as
amended by the First Amendment to Agreement and Plan of Exchange dated January
8, 1998, among the parties (the "Restated Agreement"; and as amended hereby,
the "Agreement").
RECITALS
WHEREAS, capitalized terms not otherwise defined in this
Amendment have the meanings set forth in the Restated Agreement or, if
not defined therein, in the Escrow Agreement attached hereto as Annex
III; and
WHEREAS, the parties wish to escrow a portion of the shares
of Parent Stock described in Section 2 of the Agreement for the
purposes described herein;
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties, covenants and agreements herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which is acknowledged by all parties, the parties
hereby agree as follows:
<PAGE>
AMENDMENT OF SECTION 1.
1.1 Class Action Claims. The following is added to Section 1 between
the definitions of "Charter Documents" and "Closing":
"Class Action Claims" means any claim or assertion by any Person that
the Company, at any time prior to the Closing, did one or more of the
following: (a) invoiced one or more of its customers for long distance
services that were never rendered; (b) invoiced its customers at long
distance rates above the rates which the customers contracted for; (c)
overstated in its customer invoice(s) the time of long distance
telephone calls made (rounded to the nearest billing increment); or
(d) utilized software that caused the Company to record or invoice
more time per long distance call than the properly chargeable time
(rounded to the nearest billing increment).
1.2 Excluded Litigation. The following is added to Section 1 between
the definitions of "ERISA" and "Founding Companies":
"Excluded Litigation" means all allegations, claims, actions,
investigations, or other proceedings by the Federal Communications
Commission, the Office of the Attorney General of the State of Texas,
or the Public Utility Commission of Texas proximately arising from or
connected with any complaint filed by Sherry Bond with said office or
agency.
1.3 Litigation. The following is added to Section 1 between the
definitions of "Liens" and "Material Adverse Effect":
"Litigation" means: (i) the purported class action filed against the
Company on January 29, 1998, the settlement agreement executed
February 6, 1998 in connection therewith, and all proceedings,
actions, and claims brought from time to time against the Company
pursuant thereto, in connection therewith or by one or more of the
plaintiffs in that action; (ii) all allegations, claims, complaints,
investigations, or similar matters brought by any Person from time to
time making Class Action Claims; and (iii) any litigation,
arbitration, settlement or administrative, investigation or other
proceeding arising from or in connection with any Class Action Claim
or Litigation; provided, however, that "Litigation" shall not include
"Excluded Litigation."
<PAGE>
1.4 Person. The following is added to Section 1 between the
definitions of "Qualified Plans" and "Registerable Securities":
"Person" means an individual, partnership, corporation, limited
liability partnership, limited liability company, joint stock company,
trust, unincorporated association, joint venture or other entity, or a
government or any political subdivision or agency thereof or any
trustee, receiver, custodian or similar official; other than the
Parent, the Company and any of their respective subsidiaries,
affiliates, successors and assigns.
1.5 Published Price. The following is added to Section 1 between the
definitions of "Prospectus" and "Qualified Plans":
"Published Price" means the closing price per share of the Escrowed
Shares as reflected in the Wall Street Journal on the date immediately
prior to the date the Stockholders and Parent execute written
instructions to the Escrow Agent as provided herein (or if such price
was not published on that date, then the price printed in the Wall
Street Journal which was then most recently published, but if that
price was published more than seven days prior to the date such
written instructions are executed by the Stockholders and Parent, then
the Published Price shall be the fair market value as agreed between
the Board of Directors of Parent and the Stockholders in good faith).
2. AMENDMENT OF SECTION 2.
The first sentence of Section 2 is deleted and is replaced by the
following:
Pursuant to the terms of this Agreement, at the Closing, (x)
Stockholders will transfer, convey, assign and deliver to
Parent the Shares, together with stock powers duly endorsed
by Stockholders so that the Shares may be duly registered in
Parent's name, and (y) Parent will acquire the Shares from
Stockholders for an aggregate consideration of (i) $6.6
million in immediately available funds, (ii) such number of
shares of Parent Stock (rounded to the nearest whole share)
as shall be determined by dividing $3.92 million by the IPO
Price ("Stock Component") and (iii) subject to the terms of
the escrow agreement in the form attached hereto as Annex III
(the "Escrow Agreement") and the other provisions of this
Amendment, (a) a number of shares of Parent Stock (rounded to
the nearest whole
<PAGE>
share) as shall be determined by dividing $280,000 by the IPO
Price (the "Arkansas Escrowed Shares") and (b) a number of
shares of Parent Stock (rounded to the nearest whole share)
as shall be determined by dividing $1,000,000 by the IPO
Price (the "Litigation Escrowed Shares"). The parties agree
that at or prior to the Closing, Parent, the Stockholders and
an institution selected by Stockholders and reasonably
acceptable to Parent will enter into the Escrow Agreement and
that Parent will in connection with the Closing deposit with
such institution, as escrow agent (the "Escrow Agent"), a
certificate representing the Arkansas Escrowed Shares and a
certificate representing the Litigation Escrowed Shares
(collectively, the "Escrowed Shares"). The Escrowed Shares
shall be registered in the name of the Escrow Agent and be
maintained and disbursed strictly in accordance with the
terms of the Escrow Agreement.
3. ADDITION OF SECTION 7.11.
The following is added as Section 7.11 of the Agreement:
7.11. Arkansas Liability. Stockholders and the Company will
continue to make good faith efforts to obtain authority from the
Arkansas Public Service Commission for the Company to conduct
telecommunications business in Arkansas and to settle liabilities that
may arise or may have arisen from the Company's (i) failure to have
such authority from the Arkansas Public Service Commission or (ii)
failure to make contributions to the common carrier line fund,
including any penalties, fines, interest, and other charges directly
associated with the foregoing matters. Prior to the Closing, the
Stockholders will pay (or will cause the Company to pay from cash
otherwise distributable by the Company to the Stockholders pursuant to
this Agreement), all expenses, attorneys' fees (other than attorneys'
fees accrued through January 13, 1998 from services rended by
Bourland, Smith, Wall & Wenzel), and other costs payable to third
parties which the Company or the Stockholders accrued or incurred at
any time prior to the Closing in connection with such efforts.
<PAGE>
ADDITION OF SECTION 7.12.
The following is added as Section 7.12 of the Agreement:
7.12. Settlement of Litigation. With respect to the action
filed January 29, 1998 against the Company (the "January Litigation"),
the parties agree that Parent will pay $8,750 of the amounts owing
under the settlement agreement memorialized on or about February 6,
1998 plus 25% of the Company's legal fees and costs in connection with
that settlement. The balance of the settlement, inclusive of all
incidental fees, costs and attorneys' fees incurred by the Company
that are associated directly or indirectly with the action, shall be
paid by the Company prior to the Closing from funds otherwise
distributable to the Stockholders pursuant to Section 10.4 of the
Agreement.
5. ADDITION OF SECTION 8.11.
The following is added as Section 8.11 of the Agreement:
8.11. Delivery of Escrow Agreement. Parent and the Escrow
Agent shall have executed and delivered to Stockholders an agreement
in the form attached hereto as Annex III.
6. ADDITION OF SECTION 9.14.
The following is added as Section 9.14 of the Agreement:
9.14. Settlement of Pending Litigation. The settlement
reached on or about February 6, 1998 with respect to the January
Litigation has been memorialized and executed and has not been
repudiated in any substantial respect by any party thereto.
7. ADDITION OF SECTION 9.15.
The following is added as Section 9.15 of the Agreement:
9.15. Delivery of Escrow Agreement. The Stockholders and the
Escrow Agent shall have executed and delivered to Parent an agreement
in the form attached hereto as Annex III. Stockholders agree that,
notwithstanding any term in this
<PAGE>
Agreement to the contrary, their payment obligations under
Section 7.12 and Section 7.11 shall survive the Closing for a period
of six months.
8. MODIFICATION OF SECTION 17.6.
The following sentence is appended to Section 17.6 of the Restated
Agreement: "The foregoing provisions of this Section 17.6 are subject to and
qualified by the terms of Section 7.11, Section 9.14, and the provisions of the
Escrow Agreement."
9. CHANGE OF ADDRESS.
For purposes of Section 17.7, the address of Advanced Communications
Group, Inc. and Advanced Communications Corp. is changed, effective as of the
Closing Date, to 390 South Woods Mill Road, Suite 150, St. Louis, MO 63017,
Attn: Richard P. Anthony.
10. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS.
The following provisions are added as Section 18 of the Agreement:
18.1 Estimate of Intrastate Revenues. Each Stockholder
severally represents and warrants that, to his or her knowledge, the
January 9, 1998 letter from N. M. Norton to the Arkansas Public
Service Commission sets forth an approximate, but materially accurate,
calculation of the intrastate revenues (exclusive of revenues
attributable to 800 services) described therein.
18.2 Settlement of Arkansas Liability. The parties understand
that obtaining authorization to provide telecommunications services in
Arkansas and establishing a positive working relationship with the
Arkansas regulatory authorities is of great practical importance to
the Company and Parent. Consequently, after the Closing, the Company
may take actions it determines in good faith are necessary or
advisable in connection with the resolution of the liabilities
described in Section 7.11. The Company shall have the sole power and
authority to litigate, negotiate and resolve, by settlement or
otherwise, the foregoing matters and, in connection therewith, shall
consult regularly with the Stockholders and their counsel. The Company
agrees that any negotiated settlement of such liabilities is subject
to the Stockholders' prior written approval, which shall not be
unreasonably withheld or delayed.
<PAGE>
11. INDEMNITY.
The following provisions are added as Section 19 of the Agreement:
19. LITIGATION INDEMNITY.
19.1 Indemnity. Subject to the limitations in Sections 19.2
and 19.3 below, each Stockholder severally hereby agrees to indemnify
and hold harmless Parent, the Company and all of their respective
subsidiaries, successors, and assigns (collectively, the "Indemnitees"
and individually, an "Indemnitee") from and against any and all
losses, claims, liabilities, damages, fines, penalties and other
expenses (including, but not limited to, any and all investigative,
legal and other expenses reasonably incurred, and any and all amounts
paid in settlement as provided below; but excluding amounts owing or
paid with respect to any claims that directly and proximately arise
from the Company's actions or omissions having a nature substantially
similar to Class Action Claims that occur after the Closing Date)
which any Indemnitee incurs, pays, or becomes liable for to a Person
arise out of, relate to or are based upon Litigation (collectively,
the "Litigation Liabilities").
19.2 Limitation on Indemnity. Except as provided in Section
19.4, each Stockholder's maximum liability from time to time for
Litigation Liabilities is limited to the value at such time of his or
her interest in the Litigation Escrowed Shares that are held by the
Escrow Agent or its successor, and no Stockholder shall have any
obligation to fund any Litigation Liabilities other than from its
Litigation Escrowed Shares. For these purposes, a Stockholder shall be
deemed to have an interest in the Litigation Escrowed Shares (and the
proceeds thereof, if any) that is proportional to his or her
percentage of ownership of the Company's common stock immediately
prior to the Closing.
19.3 Notices of Claim. After an Indemnitee becomes aware that
Litigation has arisen or is likely to arise or is threatened
(collectively, a "Claim"), the Indemnitee shall notify David Mitchell,
or any successive designee which the Stockholders shall jointly
appoint for this purpose, or all the Stockholders, in writing of the
Claim and that indemnification will be required pursuant to this
Agreement (the "Notice of Claim"). The Notice of Claim shall describe
in reasonable detail, to the extent then known by the Indemnitee, the
amount of the Claim, its nature, the events giving rise to it, and the
identity of the claimant. The Stockholders shall have no obligation to
indemnify an Indemnitee or hold it harmless from any Litigation with
respect to a Claim for which an Indemnitee has not given a Notice of
Claim in accordance with this Section on or prior to the date
occurring six months after the
<PAGE>
Closing Date (the "Cut-Off Date"). All notices described in this
Amendment shall be deemed given when dispatched by fax, telegram,
overnight delivery service, or postal service, with postage pre-paid
as required, properly addressed to their intended recipient. Any
Litigation which is brought after the Cut-Off Date, if brought by a
Person identified in a Notice of Claim that was delivered on or prior
to the Cut-Off Date, shall be deemed to be a continuation of such
Claim and subject to indemnification under Section 19.1.
19.4 Settlement of Disputes.
a. The Company shall have the sole power and authority to
litigate, negotiate and resolve, by settlement or otherwise, any
Litigation with counsel reasonably satisfactory to the Stockholders
and shall conduct such litigation, negotiation, or resolution in good
faith. In connection therewith, the Company shall consult regularly
with the Stockholders and their counsel. The Company agrees not to
enter into to any settlement of Litigation subject to the
indemnification provided herein without the Stockholders' prior
written approval, which shall not be unreasonably withheld or delayed.
b. If (i) the Stockholders withhold approval with respect to
any bona fide proposed negotiated settlement of Litigation agreeable
to the claimants therein, (ii) at the time such approval is withheld,
such settlement could have been satisfied either (a) out of the
Litigation Escrowed Shares or (b) out of the Litigation Escrowed
Shares plus any amounts the Company declares at the time it would be
willing to contribute toward the settlement without seeking
indemnification for such contribution under Section 19.1, (iii) upon
final disposition, the Litigation results in a binding and
unappealable judgment, award or order granting the claimant or
claimants relief having a value exceeding the amount of such bona fide
negotiated settlement amount, and (iv) the judgment, award or order
cannot be satisfied out of the Litigation Escrowed Shares, then the
Stockholders severally shall pay on demand to the Company an amount of
cash equal to the difference between the amount of the bona fide
negotiated settlement amount and the judgment, award or order. The
several obligations of the Stockholders in the previous sentence shall
be in addition to any other obligation under this Section 19 and is
not subject to the limitation with respect to the Litigation Escrowed
Shares in Section 19.2.
c. If (i) the claimants in any Litigation make the Company a
bona fide settlement offer and the Stockholders notify the Company in
writing that the Stockholders wish the Company to settle the
Litigation on such terms and (ii) the cost of the settlement,
inclusive of accrued attorneys' fees and incidental costs, does not
<PAGE>
exceed the value of the Litigation Escrowed Shares plus any additional
amounts the Stockholders have offered to contribute toward the
settlement and (iii) the Company refuses to settle the Litigation on
such terms and pursues the matter to final and binding resolution,
judicially or otherwise and (iv) the amounts payable upon that
resolution to the claimants exceeds the amount of the bona fide
settlement offer, then the Company shall pay, without seeking
indemnification under Section 19 therefor, the difference referenced
in (iv) of this sentence.
19.5 Payment of Billing Liabilities.
a. From time to time, Parent may request indemnification
pursuant to Section 19.1 by delivering a written notice to the
Stockholders that (i) states that a right to indemnification has
accrued, matured, and is payable under Section 19.1, (ii) sets forth
the dollar amount of the indemnification claim and (iii) describes in
reasonable detail relevant information supporting the claim ("Payment
Notice"). If the Stockholders agree with the Payment Notice, the
Stockholders shall then pay their respective indemnification
obligations by causing the Escrow Agent, or any third party having
custody or possession of the Litigation Escrowed Shares or its
proceeds, to convey to Parent, pursuant to both the terms of the
Escrow Agreement and written instructions executed by the Stockholder
and Parent, an amount of Litigation Escrowed Shares and proceeds
thereof, if any, sufficient to satisfy the amount of the claim
asserted in the Payment Notice. The Litigation Escrowed Shares so
conveyed shall be valued at the Published Price.
b. If the Parent and the Shareholders disagree as to the
extent of the claim or whether indemnification is owed therefor
pursuant to this Agreement, they shall negotiate for a period of 60
days to resolve their differences. If the parties are unable to agree
within this period, they shall jointly instruct the Escrow Agent to
interplead pursuant to the Agreement an amount of Litigation Escrowed
Shares and other property that have a Published Price equal to the
amounts requested in the Payment Notice. The interpleader of such
Litigation Escrowed Shares and other property shall not prejudice
Parent's indemnification rights should the Litigation Escrowed Shares
have a Published Price, at the time of their distribution to Parent,
that does not exceed the amounts properly requested in the Payment
Notice. Any interplead Litigation Escrowed Shares which the court
determines are not payable to Parent shall be returned to the Escrow
Agent and shall be subject, in all respects, to the terms of this
Agreement and the Escrow Agreement.
19.6 Release from Escrow. If, immediately after the Cut-Off
Date no Notice of Claim has been given, then the parties shall jointly
instruct the Escrow
<PAGE>
Agent to release the Litigation Escrowed Shares to the Stockholders in
proportion to their interests therein. If, however, one or more
Notices of Claim have been given in accordance with Section 19, the
Litigation Escrowed Shares shall be held in escrow subject to the
terms of the Escrow Agreement and the provisions of this Section 19
shall apply for so long as the Litigation matters on which all such
Notices of Claim are based remain unresolved or, if resolved, for so
long as all payments required pursuant to this Section 19 have not
been made. If, upon the final resolution of all Litigation underlying
all Notices of Claim and payment in full for all indemnification
liabilities owing pursuant to this Section 19 any Litigation Escrowed
Shares are held by the Escrow Agent, they shall be distributed to the
Stockholders, in proportion to their interests therein, upon the joint
written instructions of the parties.
12. ADDITION OF ANNEX III.
12.1 Annex III hereto is hereby added as Annex III to the Restated
Agreement.
13. MISCELLANEOUS
13.1 Counterparts. For the convenience of the parties, any number of
counterparts of this Amendment may be executed by any one or more parties
hereto, and each such executed counterpart shall be, and shall be deemed to be,
an original, but all of which shall constitute, and shall be deemed to
constitute, in the aggregate but one and the same instrument. A facsimile copy
of a signature page to this Amendment shall be accorded the same force and
effect as a manually executed original counterpart of a signature page to this
Amendment.
13.2 Integration Clause. The Restated Agreement, as modified by this
Amendment, represents the final agreement among the parties relating to its
subject matter and may not be
<PAGE>
contradicted by evidence of prior, contemporaneous, or subsequent oral
agreements of the parties. There are no unwritten oral agreements
between the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
ADVANCED COMMUNICATIONS GROUP, INC.
BY:
---------------------------------------------
NAME: RICHARD P. ANTHONY
TITLE: CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ADVANCED COMMUNICATIONS CORP.
BY:
---------------------------------------------
NAME: ROD K. CUTSINGER
TITLE: CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ACG ACQUISITION CORP.
BY:
---------------------------------------------
NAME: BRAD K. CUTSINGER
TITLE: PRESIDENT
VALU-LINE OF LONGVIEW, INC.
BY:
---------------------------------------------
NAME:
TITLE:
<PAGE>
STOCKHOLDERS:
------------------------------------------------
DAVID M. MITCHELL
------------------------------------------------
BOB DAMUTH
------------------------------------------------
ANNE ROPER
------------------------------------------------
RICHARD ROPER
------------------------------------------------
CLARENCE FRIAR
<PAGE>
ANNEX III
ESCROW AGREEMENT
THIS ESCROW AGREEMENT ("Escrow Agreement") is made and
entered into as of February 18, 1998 by and among ADVANCED COMMUNICATIONS,
GROUP, INC., a Delaware corporation formed in September 1997 ("Parent"); DAVID
M. MITCHELL, BOB DAMUTH, ANNE ROPER, RICHARD ROPER and CLARENCE FRIAR
(individually, a "Stockholder", and, collectively, the "Stockholders"); and
Longview Bank & Trust, a ________________________ bank with offices in
Longview, Texas (the "Bank").
W I T N E S S E T H :
WHEREAS, Parent, Stockholders, Valu-Line of Longview, Inc.,
and others have entered into an Agreement and Plan of Exchange dated as of
October 6, 1997, as amended as of January 8, 1998 and February 11, 1998
(collectively, the "Restated Agreement");
WHEREAS, pursuant to Section 2 of the Restated Agreement,
Parent is required to deliver to the Escrow Agent (as defined below) at the
Closing a number of shares of common stock, $.0001 par value, of the Parent,
that is equal to $1,280,000 divided by the IPO Price, to be maintained and
disbursed pursuant to this Escrow Agreement and the terms of the Restated
Agreement; and
WHEREAS, Parent and Stockholders have requested Bank to act
in the capacity of escrow agent under this Escrow Agreement, and Bank, subject
to the terms and provisions hereof, has agreed so to do; and
WHEREAS, capitalized terms used herein without definition
shall have the meanings ascribed to them in the Restated Agreement;
NOW, THEREFORE, in consideration of the premises and mutual
covenants and agreements contained herein, the parties hereto hereby agree as
follows:
1. Nature of Agreement; Definitions.
(a) Good Title. The Stockholders agree and understand that
this Escrow Agreement is intended to function as a security arrangement with
respect to the Arkansas Liability
<PAGE>
and the Litigation Liabilities and that Parent has relied upon this arrangement
by consummating the Closing. Therefore, to ensure the availability of the
Escrowed Shares for this purpose, the Stockholders, severally and not jointly,
represent, warrant and covenant that, except as otherwise provided herein, the
Arkansas Escrowed Shares and the Litigation Escrowed Shares are and shall
remain, during the term of the Escrow Agreement applicable to the same, free
and clear of all security interests, pledges, liens, encumbrances and other
claims of ownership rights in favor of any third party (other than Parent)
which either were granted by such Stockholder or secure any obligation of such
Stockholder. In addition, each Stockholder shall hold Parent harmless from all
claims asserting such an interest.
(b) Definitions.
(1) "Arkansas Deposit" means the Arkansas Escrowed
Shares, together with any dividends thereon and other distributions with
respect thereto, whether in cash, capital stock or other property, and the
proceeds thereof.
(2) "Arkansas Escrowed Shares" means the Arkansas
Escrowed Shares, as defined in the Restated Agreement, plus any securities of
the Parent received by the Escrow Agent with respect to such shares, whether by
stock split, merger, recapitalization or otherwise.
(3) "Arkansas Liability" means any and all costs,
liabilities, forfeiture amounts, fines, penalties, debts, claims, demands,
damages, liabilities, attorneys' fees, court costs, and other expenses paid by
Parent or the Company (or any subsidiary, affiliate, director, officer,
employee, agent, attorney, successor, or assign of either of them) to third
parties, contingent or matured, that arise, during the one year period
commencing on the Closing Date, directly or indirectly from this Escrow
Agreement, from the Company's failure to have obtained the requisite authority
to conduct its business in Arkansas, from the Company's unlicensed furnishing
of telecommunications services in Arkansas or to Arkansas residents, or from
nonpayment of amounts due with respect to the common carrier line fund that are
accrued and unpaid as of the Closing; provided, however, that Arkansas
Liability shall not include incidental expenses to third parties incurred by
the Company in excess of $5,000 after the Closing in connection with preparing,
printing, and mailing notices to customers which regulatory authorities may
require in connection with the settlement of the Arkansas Liability.
(4) "Deposit" means the Arkansas Deposit and the
Litigation Deposit collectively.
(5) "Litigation Deposit" means the Litigation Escrowed
Shares, together with any dividends thereon and other distributions with
respect thereto, whether in cash, capital stock or other property, and the
proceeds thereof.
-2-
<PAGE>
(6) "Litigation Escrowed Shares" means the Litigation
Escrowed Shares, as defined in the Restated Agreement, plus any securities of
the Parent received by the Escrow Agent with respect to such shares, whether by
stock split, merger, recapitalization or otherwise.
2. Appointment of Escrow Agent. Parent and Stockholders
hereby appoint the Bank as the escrow agent under this Escrow Agreement (the
Bank in such capacity, the "Escrow Agent"), and Escrow Agent hereby accepts
such appointment.
3. Deposit. At Closing, Parent will deliver to the Escrow
Agent two certificates registered in the name of the Escrow Agent representing
the maximum number of Arkansas Escrowed Shares and Litigation Escrowed Shares
issuable to all Stockholders pursuant to the Restated Agreement, as more
particularly described in Schedule 1 attached hereto. The Escrow Agent shall
hold the Deposit in accordance with the terms of this Escrow Agreement. Subject
to and in accordance with the terms and conditions hereof, the Escrow Agent
agrees that it shall receive, hold in escrow, invest and reinvest (to the
extent noted below) and release or distribute the Deposit. It is hereby
expressly stipulated and agreed that all interest and other earnings on any
cash portion of the Arkansas Deposit or the Litigation Deposit, as applicable,
shall become a part of the respective Deposit for all purposes and that, for
purposes of Section 19 of the Restated Agreement, a Stockholder's interest in
the Litigation Deposit shall be deemed to be proportional to the distribution
percentage set forth on Schedule 1 hereto. It is the express intent of the
parties that the Arkansas Deposit and the Litigation Deposit shall be separate
and distinct escrow deposits. The Arkansas Deposit shall only be used to
satisfy obligations of the Stockholders, if any, related to the Arkansas
Liability, and the Litigation Deposit shall only be used to satisfy indemnity
obligations of the Stockholders, if any, related to the Litigation Liabilities.
4. Investment of Cash Portion of the Deposit. Escrow Agent
shall invest any cash portion of the Arkansas Deposit and the Litigation
Deposit in certificates of deposit or money market accounts as may be
instructed in writing by Parent and Stockholders. Such written instructions
referred to in the foregoing sentence shall specify the type and identity of
the investments to be purchased and/or sold, any particular settlement
procedures required, if any (which settlement procedures shall be consistent
with industry standards and practices), and such other information as Escrow
Agent may require. Escrow Agent shall not be liable for failure to invest or
reinvest funds absent sufficient written direction. Unless Escrow Agent is
otherwise directed in such written instructions, Escrow Agent may use a
broker-dealer of its own selection, including a broker-dealer owned by or
affiliated with Escrow Agent or any of its affiliates. It is expressly agreed
and understood by the parties hereto that Escrow Agent shall not in any way
whatsoever be liable for losses on any investments, including, but not limited
to, losses from market risks due to premature liquidation or resulting from
other actions taken or not taken pursuant to this Escrow Agreement.
-3-
<PAGE>
Receipt, investment and reinvestment, if any, of any cash
portion of the Arkansas Deposit and the Litigation Deposit shall be confirmed
by Escrow Agent as soon as practicable by account statement delivered to Parent
and Stockholders, and any discrepancies in any such account statement shall be
noted by either of Parent or Stockholders to Escrow Agent within 30 calendar
days after receipt thereof. Failure to inform Escrow Agent in writing of any
discrepancies in any such account statement within said 30-day period shall
conclusively be deemed confirmation of such account statement in its entirety.
For purposes of this paragraph, (a) each account statement shall be deemed to
have been received by the party to whom directed on the earlier to occur of (i)
actual receipt thereof and (ii) three "Business Days" (hereinafter defined)
after the deposit thereof in the United States Mail, postage prepaid and (b)
the term "Business Day" shall mean any day of the year, excluding Saturday,
Sunday and any other day on which banks are required or authorized to close in
Houston, Texas.
5. Disbursement of Deposit.
(a) Except as otherwise provided herein, the Escrow Agent is
hereby authorized and instructed to make, and shall make, disbursements of the
Arkansas Deposit and the Litigation Deposit from time to time only upon receipt
of written instructions signed by both Parent and all of the Stockholders (or
duly appointed agent) which are otherwise, in form and substance, satisfactory
to Escrow Agent and such disbursements shall be made strictly in accordance
with such instructions.
(b) Regarding the Arkansas Escrowed Shares, Parent, the
Escrow Agent and the Stockholders agree to take the following action as
promptly as all the relevant information is available (but in any event no
later than the one year anniversary of February 18, 1998, in which case the
parties' best estimate shall be utilized):
(i) Calculate the "Market Price" of the Arkansas
Deposit on the date on which the instructions are given; and
for this purpose, "Market Price" means (x) with respect to
Arkansas Escrowed Shares, the closing price per share as
reflected in the previous day's Wall Street Journal (or if
such price was not published on that date, then the price
printed in the Wall Street Journal which was then most
recently published, but if that price was published more than
seven days prior to the date on which the instructions are
given, then the Market Price shall be its fair market value
as agreed between the Board of Directors of Parent and the
Stockholders in good faith) plus (y) with respect to portions
of the Arkansas Deposit which are not Arkansas Escrowed
Shares, their fair market value;
(ii) Calculate the Arkansas Liability (and for the
purposes of such calculation, any settlements or arrangements
which Parent or the Company may
-4-
<PAGE>
reach in good faith with the State of Arkansas in accordance
with the Restated Agreement shall be presumed reasonable);
(iii) If the Arkansas Liability exceeds the Market
Price of the Arkansas Deposit, as calculated pursuant to the
provisions above, then the Escrow Agent shall transfer to
Parent the components of the Arkansas Deposit that are not
Arkansas Escrowed Shares and, with respect to Arkansas
Escrowed Shares, tender the certificate(s) representing the
Arkansas Escrowed Shares and a stock power or stock powers
indorsed in blank, together with its signature thereon
guaranteed by a national or state chartered bank or other
financial institution; further, all right, title and interest
of the Stockholders in the Arkansas Deposit shall be
transferred to Parent. Each Stockholder's maximum liability
for the Arkansas Liability from time to time is limted to the
value at such time of his or her interests in the Arkansas
Deposit that are either held by the Escrow Agent or its
successor or interplead pursuant to this Escrow Agreement,
and no Stockholder shall have any obligation to Parent or the
Company to fund any Arkansas Liability other than from his or
her interests in the Arkansas Deposit.
(iv) If the Market Price of the Arkansas Deposit
exceeds the Arkansas Liability, as calculated pursuant to the
provisions above, then the Escrow Agent shall deliver to
Parent the certificate(s) representing the Arkansas Escrowed
Shares and a stock power indorsed in blank, together with its
signature thereon guaranteed by a national or state chartered
bank or other financial institution, together with all other
components of the Arkansas Deposit, for issuance of
certificates representing shares of Parent Stock registered
in the names of the Stockholders. Each Stockholder shall
receive a certificate representing a number of shares of
Parent Stock (with fractional shares being eliminated in each
case by rounding up or down to the nearest whole share )
having a calculated Market Price equal to his or her
Distribution Percentage (as set forth on Schedule 1 hereto)
of the difference between the calculated Market Price of the
Arkansas Deposit and the calculated Arkansas Liability. The
balance of the Arkansas Escrowed Shares, if any, evidenced by
such certificate shall be registered in the Parent's name as
treasury shares, and all right, title and interest of the
Stockholders therein and in the remainder of the Arkansas
Deposit shall be transferred to Parent.
(c) The Escrow Agent shall make distributions with respect to
the Litigation Deposit in accordance with the terms of Section 19 of the
Restated Agreement and only upon written instructions executed by the
Stockholders and Parent.
-5-
<PAGE>
6. Tax Matters.
(a) Each of Parent and Stockholders shall provide Escrow
Agent with their taxpayer identification numbers documented by an appropriate
Form W-9 upon or as soon as practicable after execution of this Escrow
Agreement. Failure so to provide such forms may prevent or delay disbursements
from the Deposit and may also result in the assessment of a penalty and Escrow
Agent's being required to withhold tax on any interest or other income earned
on the Deposit. Any payments of income shall be subject to applicable
withholding regulations then in force in the United States or any other
jurisdiction, as applicable.
(b) With respect to any fiscal year in which any portion of
the Deposit is disbursed, the party or parties receiving the Deposit agrees to
report and pay the applicable taxes on the portion of the Deposit disbursed to
such party respecting that fiscal year.
7. Scope of Undertaking. Escrow Agent's duties and
responsibilities in connection with this Escrow Agreement shall be purely
ministerial and shall be limited to those expressly set forth in this Escrow
Agreement. Escrow Agent is not a principal, participant or beneficiary in any
transaction underlying this Escrow Agreement and shall have no duty to inquire
beyond the terms and provisions hereof. Escrow Agent shall have no
responsibility or obligation of any kind in connection with this Escrow
Agreement or the Deposit and shall not be required to deliver the Deposit or
any part thereof or take any action with respect to any matters that might
arise in connection therewith, other than to receive, hold, invest, reinvest
and deliver the Deposit as herein provided. Without limiting the generality of
the foregoing, it is hereby expressly agreed and stipulated by the parties
hereto that Escrow Agent shall not be required to exercise any discretion
hereunder and shall have no investment or management responsibility and,
accordingly, shall have no duty to, or liability for its failure to, provide
investment recommendations or investment advice to the other parties hereto or
any of them. Escrow Agent shall not be liable for any error in judgment, any
act or omission, any mistake of law or fact, or for anything it may do or
refrain from doing in connection herewith, except for, subject to Section 8
hereinbelow, its own willful misconduct or gross negligence. It is the
intention of the parties hereto that Escrow Agent shall never be required to
use, advance or risk its own funds or otherwise incur financial liability in
the performance of any of its duties or the exercise of any of its rights and
powers hereunder.
-6-
<PAGE>
8. Reliance; Liability. Escrow Agent may rely on, and shall
not be liable for following the instructions contained in any written notice,
instruction or request or other paper furnished to it hereunder or pursuant
hereto and believed by it to have been signed or presented by the proper party
or parties. Escrow Agent shall be responsible for holding, investing,
reinvesting and disbursing the Deposit pursuant to this Escrow Agreement;
provided, however, that in no event shall Escrow Agent be liable for any lost
profits, lost savings or other special, exemplary, consequential or incidental
damages in excess of Escrow Agent's fee hereunder and provided, further, that
Escrow Agent shall have no liability for any loss arising from any cause beyond
its control, including, but not limited to, the following: (a) acts of God,
force majeure, including, without limitation, war (whether or not declared or
existing), revolution, insurrection, riot, civil commotion, accident, fire,
explosion, stoppage of labor, strikes and other differences with employees; (b)
the act, failure or neglect of any other party hereto or any agent or
correspondent or any other person selected by Escrow Agent; (c) any delay,
error, omission or default of any mail, courier, telegraph, cable or wireless
agency or operator; or (d) the acts or edicts of any government or governmental
agency or other group or entity exercising governmental powers. Escrow Agent is
not responsible or liable in any manner whatsoever for the sufficiency,
correctness, genuineness or validity of the subject matter of this Escrow
Agreement or any part hereof or for the transaction or transactions requiring
or underlying the execution of this Escrow Agreement, the form or execution
hereof or for the identity or authority of any person executing this Escrow
Agreement or any part hereof or depositing the Deposit.
9. Right of Interpleader. Should any controversy arise
involving the parties hereto or any of them or any other person, firm or entity
with respect to this Escrow Agreement or the Deposit, or should a substitute
escrow agent fail to be designated as provided in Section 16 hereof, or if
Escrow Agent should be in doubt as to what action to take, Escrow Agent shall
have the right, but not the obligation, either to (a) withhold delivery of the
Deposit until the controversy is resolved, the conflicting demands are
withdrawn or its doubt is resolved, or (b) institute a petition for
interpleader in any court of competent jurisdiction to determine the rights of
the parties hereto. In the event Escrow Agent is a party to any dispute, Escrow
Agent shall have the additional right to refer such controversy to binding
arbitration. Should a petition for interpleader be instituted, or should Escrow
Agent be threatened with litigation or become involved in litigation or binding
arbitration in any manner whatsoever in connection with this Escrow Agreement
or the Deposit, then, as between (a) the other parties hereto on the one hand
and (b) Escrow Agent on the other, such other parties hereby jointly and
severally agree to reimburse Escrow Agent for its attorneys' fees and any and
all other expenses, losses, costs and damages incurred by Escrow Agent in
connection with or resulting from such threatened or actual litigation or
arbitration prior to any disbursement hereunder. The parties agree that upon
any interpleader of the Arkansas Deposit or the Litigation Deposit, or any
portion thereof, such assets shall remain subject to this Escrow Agreement,
mutatis mutandis, notwithstanding the fact that the Escrow Agent is no longer
in possession of them.
-7-
<PAGE>
10. Indemnification. The other parties hereto hereby jointly
and severally indemnify Escrow Agent, its officers, directors, partners,
employees and agents (each herein called an "Indemnified Party") against, and
hold each Indemnified Party harmless from, any and all expenses, including,
without limitation, attorneys' fees and court costs, losses, costs, damages and
claims, including, but not limited to, costs of investigation, litigation and
arbitration, tax liability and loss on investments suffered or incurred by any
Indemnified Party in connection with or arising from or out of this Escrow
Agreement, except such acts or omissions as may result from the willful
misconduct or gross negligence of such Indemnified Party.
11. Compensation and Reimbursement of Expenses. Parent agrees
to pay Escrow Agent the fees for its services hereunder in accordance with the
fee schedules attached hereto by Escrow Agent and to pay all expenses incurred
by Escrow Agent in connection with the performance of its duties and
enforcement of its rights hereunder and otherwise in connection with the
preparation, operation, administration and enforcement of this Escrow
Agreement, including, without limitation, attorneys' fees, brokerage costs and
related expenses incurred by Escrow Agent.
12. Lien. Each of the parties hereto other than the Escrow
Agent hereby grants to Escrow Agent a lien upon, and security interest in, all
its right, title and interest in and to all of the Deposit as security for the
payment and performance of its obligations owing to Escrow Agent hereunder,
including, without limitation, its obligations of payment, indemnity and
reimbursement provided for hereunder, which lien and security interest may be
enforced by Escrow Agent without notice by charging, and setting-off and paying
from, the Deposit any and all amounts then owing to it pursuant to this Escrow
Agreement or by appropriate foreclosure proceedings.
13. Notices. Any notice or other communication required or
permitted to be given under this Escrow Agreement by any party hereto to any
other party hereto shall be considered as properly given if in writing and (a)
delivered against receipt therefor, (b) mailed by registered or certified mail,
return receipt requested and postage prepaid or (c) sent by telex, telefax
machine or prepaid telegram, in each case addressed as follows:
If to Escrow Agent:
Longview Bank & Trust, N.A.
P.O. Box 3188
Longview, Texas 75606-3188
Facsimile No.: (903) 237-5544
Phone No.: (903) 237-5500
-8-
<PAGE>
If to Parent:
Advanced Communications Group, Inc.
390 South Woods Mill Road, Suite 150
St. Louis, Missouri 63017
Attention: Richard P. Anthony
Facsimile No.: _________________
If to Stockholders:
David M. Mitchell
1302 South Bridge
Brady, Texas 76825
Facsimile No.: ____________
with a copy to:
Bourland, Smith, Wall & Wenzel, P.C.
301 Commerce Street
City Center Tower II
Suite 1500
Forth Worth, Texas 76102
Attention: Kenneth L. Wenzel
Facsimile No.: (817) 810-0463
Phone No.: (817) 877-1088
Delivery of any communication given in accordance herewith shall be effective
only upon actual receipt thereof by the party or parties to whom such
communication is directed. Any party to this Escrow Agreement may change the
address to which communications hereunder are to be directed by giving written
notice to the other party or parties hereto in the manner provided in this
section.
14. Consultation with Legal Counsel. Escrow Agent may consult
with its counsel or other counsel satisfactory to it concerning any question
relating to its duties or responsibilities hereunder or otherwise in connection
herewith and shall not be liable for any action taken, suffered or omitted by
it in good faith upon the advice of such counsel.
15. Choice of Laws; Cumulative Rights. This Escrow Agreement
shall be construed under, and governed by, the laws of the State of Texas,
excluding, however, its choice of law rules. All of Escrow Agent's rights
hereunder are cumulative of any other rights it may have at
-9-
<PAGE>
law, in equity or otherwise. The parties hereto agree that the forum for
resolution of any dispute arising under this Escrow Agreement shall be Harris
County, Texas, and each of the parties hereto hereby consents, and submits
himself or itself, to the jurisdiction of any state or federal court sitting in
Harris County, Texas.
16. Resignation. Escrow Agent may resign hereunder upon ten
(10) days' prior notice to Parent and Stockholders. Upon the effective date of
such resignation, Escrow Agent shall deliver the Deposit to any substitute
escrow agent designated jointly by Parent and Stockholders in writing. If
Parent and Stockholders fail to designate a substitute escrow agent within ten
(10) days after the giving of such notice, Escrow Agent may institute a
petition for interpleader. Escrow Agent's sole responsibility after such 10-day
notice period expires shall be to hold the Deposit (without any obligation to
reinvest the same) and to deliver the same to a designated substitute escrow
agent, if any, or in accordance with the directions of a final order or
judgment of a court of competent jurisdiction, at which time of delivery Escrow
Agent's obligations hereunder shall cease and terminate.
17. Assignment. This Escrow Agreement shall not be assigned
by any of the other parties hereto without the prior written consent of Escrow
Agent (such assigns of such other parties to which Escrow Agent consents, if
any, and Escrow Agent's assigns being hereinafter referred to collectively as
"Permitted Assigns").
18. Severability. If one or more of the provisions hereof
shall for any reason be held to be invalid, illegal or unenforceable in any
respect under applicable law, such invalidity, illegality or unenforceability
shall not affect any other provisions hereof, and this Escrow Agreement shall
be construed as if such invalid, illegal or unenforceable provision had never
been contained herein, and the remaining provisions hereof shall be given full
force and effect.
19. Termination. This Escrow Agreement shall terminate upon
(a) disbursement of all the Deposit in accordance with Section 5 hereof, and
(b) unless Escrow Agent shall otherwise elect, full and final payment of all
amounts required to be paid to the Escrow Agent hereunder (whether fees,
expenses, costs or otherwise); provided, however, that in the event all such
amounts required to be paid to Escrow Agent hereunder are not fully and finally
paid prior to termination, the provisions of Section 11 hereof shall survive
the termination hereof and, provided further, that Section 9 hereof and the
provisions of Section 10 hereof shall, in any event, survive the termination
hereof.
20. General. The section headings contained in this Escrow
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Escrow Agreement. This Escrow Agreement and
any affidavit, certificate, instrument, agreement or other document required to
be provided hereunder may be executed in two or more counterparts, each of
-10-
<PAGE>
which shall be deemed an original, but all of which taken together shall
constitute but one and the same instrument. Unless the context shall otherwise
require, the singular shall include the plural and vice versa, and each pronoun
in any gender shall include all other genders. The terms and provisions of this
Escrow Agreement constitute the entire agreement among the parties hereto in
respect of the subject matter hereof. This Escrow Agreement or any provision
hereof may be amended, modified, waived or terminated only by written
instrument duly signed by the Escrow Agent, Parent and Stockholders. This
Escrow Agreement shall inure to the benefit of, and be binding upon, the
parties hereto and their respective successors, trustees, receivers and
Permitted Assigns. This Escrow Agreement is for the sole and exclusive benefit
of the parties hereto, and nothing in this Escrow Agreement, express or
implied, is intended to confer or shall be construed as conferring upon any
other person any rights, remedies or any other type or types of benefits.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Escrow Agreement to be effective as of the date first above written.
"PARENT"
ADVANCED COMMUNICATIONS
GROUP, INC.
BY:
-------------------------------------------
NAME: RICHARD P. ANTHONY
TITLE: CHAIRMAN AND CHIEF EXECUTIVE OFFICER
"STOCKHOLDERS"
----------------------------------------------
DAVID M. MITCHELL
----------------------------------------------
BOB DAMUTH
----------------------------------------------
ANNE ROPER
----------------------------------------------
RICHARD ROPER
----------------------------------------------
CLARENCE FRIAR
-12-
<PAGE>
"ESCROW AGENT"
LONGVIEW BANK & TRUST
BY:
-----------------------
NAME:
---------------------
TITLE:
--------------------
-13-
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
<S> <C> <C> <C>
COLUMN I COLUMN II COLUMN III COLUMN IV
- ----------------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
NAME OF STOCKHOLDER ARKANSAS ESCROWED SHARES LITIGATION ESCROWED SHARES DISTRIBUTION PERCENTAGE
- ----------------------------------------------------------------------------------------------------------------------------
David M. Mitchell 50%
- ----------------------------------------------------------------------------------------------------------------------------
Bob Damuth 30%
- ----------------------------------------------------------------------------------------------------------------------------
Anne Roper 5%
- ----------------------------------------------------------------------------------------------------------------------------
Richard Roper 5%
- ----------------------------------------------------------------------------------------------------------------------------
Clarence Friar 10%
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL 100%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
-14-
<PAGE>
- -------------------------------------------------------------------------------
AMENDMENT TO
AGREEMENT AND PLAN OF EXCHANGE
dated as of December 15, 1997
by and among
ADVANCED COMMUNICATIONS GROUP, INC.
(Parent)
and
FIRSTEL, INC.
(Company)
and
FRED L. THURMAN, JAMES E. PERRY, W. BRADLEY VAN LEUR, WALLACE JANSMA, MARK
VANDERBERGE, TELE-TECH, INC. AND RAFT, L.L.C.
(Stockholders of the Company)
and
SCOTT D. SCOFIELD, WILLIAM PEDERSON, AND JERRY R. NOONAN
(Beneficial Owners)
- -------------------------------------------------------------------------------
<PAGE>
AMENDMENT TO AGREEMENT AND PLAN OF EXCHANGE
THIS AMENDMENT TO AGREEMENT AND PLAN OF EXCHANGE (the
"Amendment"), made as of December 15, 1997 but effective for all purposes as
of October 6, 1997, by and among ADVANCED COMMUNICATIONS GROUP, INC., FIRSTEL,
INC, FRED L. THURMAN, JAMES E. PERRY, W. BRADLEY VAN LEUR, WALLACE JANSMA,
MARK VANDERBERGE, TELE-TECH, INC., RAFT, L.L.C., SCOTT D. SCOFIELD, WILLIAM
PEDERSON, and JERRY R. NOONAN, amends the Agreement and Plan of Exchange dated
October 6, 1997 among the parties (the "Original Agreement"). Capitalized
terms used but not defined herein shall have the meanings given them in the
Original Agreement.
RECITALS
WHEREAS, the Asset Purchase Agreement dated September 3,
1997 among RAFT, L.L.C., PAM Oil, Inc., Scott D. Scofield, William
Pederson and Firstel, Inc., as amended, (the "Asset Purchase
Agreement") provides that a portion of the consideration to be
delivered by Advanced Communications Group, Inc. to RAFT, L.L.C.
("RAFT") in connection with the Original Agreement is contingent upon
RAFT procuring certain business by October 31, 1997;
WHEREAS, the parties wish to implement the terms of the
Asset Purchase Agreement and reflect the recent procurement of
certain business by RAFT;
NOW, THEREFORE, in consideration of the premises and of the
mutual representations, warranties, covenants, and agreements herein
contained, the parties hereto hereby agree as follows:
1. AMENDMENTS TO SECTION 3.
a. Recalculation of Stock Component. The number $11,097,000 in
the tenth line of the first paragraph of Section 3 of the Original
Agreement is deleted and replaced by $10,970,230.
<PAGE>
b. Reallocation of Consideration. The chart presented in
Section 3 of the Original Agreement is deleted and replaced by the
following chart:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF PRINCIPAL NUMBER OF NUMBER OF
NUMBER OF COMPANY AMOUNT OF AMOUNT OF SERIES G SHARES OF
NAME OF STOCKHOLDER SHARES NOTES CASH NOTES WARRANTS PARENT'S STOCK (1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fred L. Thurman 287.5 $250,000 $1,437,500 $575,000 14,375 25.3155%
James E. Perry 287.5 $250,000 $1,437,500 $575,000 14,375 25.3155%
W. Bradley Van Leur 125 $40,000 $625,000 $250,000 6,250 10.1716%
Wallace Jansma 150 $250,000 $750,000 $300,000 7,500 14.6616%
Mark VanderBerge 150 $250,000 $750,000 $300,000 7,500 14.6616%
Tele-Tech, Inc. 45.35 None None None None 6.9813%
RAFT, L.L.C. 18.79 None None None None 2.8929%
TOTAL 1064.14 $1,040,000 $5,000,000 $2,000,000 50,000 100%
</TABLE>
- ---------------
(1) Expressed as a percentage of the Stock Component.
c. Addition to Section 3. The following is appended to Section 3
of the Original Agreement:
The parties agree that if Champion or Schlauger or both of
them remain Firstel, Inc. customers through August 31, 1998, then
Parent shall issue additional shares of Parent common stock to RAFT.
The number of shares issuable shall be equal the lesser of (a)
$50,000 divided by the initial public offering price of Parent's
common stock (the "IPO Price") or (b) three times the relevant
Average Monthly Revenue divided by the IPO Price. "Average Monthly
Revenue" means: (i) in the case of Champion, 60% of one-twelfth of
the total revenues collected from Champion over the twelve month
period ending August 31, 1998, but not more than $17,000, and (ii) in
the case of Schlauger, 40% of one-twelfth of the total revenues
collected from Schlauger over the twelve month period ending August
31, 1998, but not more than $24,000. If three times the Average
Monthly Revenue exceeds $50,000, then Firstel, Inc. shall pay the
difference in cash to RAFT on demand. The parties confirm that,
except as provided in the previous sentence, neither Firstel, Inc.
nor Parent is required to pay cash to RAFT in lieu of the shares
deliverable pursuant to this Agreement; except that Firstel, Inc. may
be required to pay cash pursuant to the Asset Purchase Agreement if
the Closing does not occur.
-2-
<PAGE>
2. GENERAL
2.1 Entire Agreement. The Original Agreement (including the Schedules
and Annexes thereto), as modified by the Amendment, and the documents
delivered pursuant thereto constitute the entire agreement and understanding
among Stockholders, Company and Parent and supersede any prior agreement and
understanding relating to the subject matter of this Agreement. This
Agreement, upon execution and delivery, constitutes a valid and binding
agreement of the parties hereto enforceable in accordance with its terms and
may be modified or amended only by a written instrument executed by
Stockholders and by Company and Parent, acting through their respective
officers or representatives, duly authorized by their respective Boards of
Directors.
2.2 Counterparts. This Amendment may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
2.3 Governing Law. This Amendment shall be construed in accordance
with the laws of the State of South Dakota, excluding its conflict of laws
principles.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
as of the day and year first above written.
ADVANCED COMMUNICATIONS GROUP, INC.
By:
-------------------------------------------
Name: Rod K. Cutsinger
Title: Chairman and Chief Executive Officer
FIRSTEL, INC.
By:
-------------------------------------------
Name: Fred L. Thurman
Title: President and Chief Executive Officer
STOCKHOLDERS:
----------------------------------------------
Fred L. Thurman
----------------------------------------------
James E. Perry
----------------------------------------------
W. Bradley Van Leur
-4-
<PAGE>
-----------------------------------------------
Wallace Jansma
-----------------------------------------------
Mark VanderBerge
NEW STOCKHOLDERS:
TELE-TECH, INC.
By:
--------------------------------------------
Name:
Title:
RAFT, L.L.C.
By:
--------------------------------------------
Name:
Title:
BENEFICIAL OWNERS:
-----------------------------------------------
Jerry R. Noonan
-----------------------------------------------
Scott D. Scofield
-5-
<PAGE>
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William Pederson
PRINCIPALS OF BOLES, KNOP &
COMPANY LLC
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John M. Boles
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J. Richard Knop
Montross, Inc.
By:
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Name: James R. Meadows, Jr.
Title: President
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Richard R. Miller
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<PAGE>
Exhibit 5.1
February 12, 1998
Advanced Communications Group, Inc.
390 South Woods Mill Road, Suite 150
St. Louis, Missouri 63017
Ladies and Gentlemen:
We have acted as counsel to Advanced Communications Group Inc., a Delaware
corporation (the "Company"), in connection with its proposed public offering of
8,000,000 shares (9,200,000 shares if the over-allotment option granted to the
underwriters is exercised in full)(the "Shares") of the Company's common stock,
par value $0.0001 per share (the "Common Stock"), pursuant to the Registration
Statement on Form S-1 (Registration No. 333-37671)(the "Registration
Statement"), filed by the Company under the Securities Act of 1933, as amended,
with the Securities and Exchange Commission (the "Commission").
We have examined copies of (I) the Restated Certificate of Incorporation and
the By-laws of the Company, each as amended to date, (ii) certain resolutions
adopted by the Board of Directors of the Company, (iii) the Registration
Statement, (iv) the Underwriting Agreement executed among the Company and the
Underwriters named therein, and (v) such other document and records as we have
deemed necessary and relevant for the purposes hereof. In addition, we have
relied upon certificates of officers of the Company and certificates of public
officials as to certain matters of fact relating to this opinion and have made
such investigations of law as we have deemed necessary and relevant as a basis
hereof. We have assumed the genuineness of all signatures, the authenticity of
all documents and records submitted to us as originals, the conformity to
original documents and records of all documents and records submitted to us as
copies, and the truthfulness of all statements of fact contained therein.
Based upon the foregoing, subject to the limitations and assumptions set forth
herein, and having due regard for such legal considerations as we deem
relevant, we are of the opinion that:
<PAGE>
1. The Company is a corporation duly incorporated and validly
existing under the laws of the State of Delaware; and
2. The issuance of the Shares has been duly authorized, and upon
the issuance and delivery thereof against payment therefor in
accordance with the terms of the Underwriting Agreement and
as set forth in the Registration Statement, the Shares will
be validly issued, fully paid and nonassessable.
The opinion set forth above is limited in all respects to the General
Corporation Law of the State of the State of Delaware, and we render no opinion
with respect to the law of any other jurisdiction.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Validity
of Common Stock" in the Prospectus included in the Registration Statement. By
giving such consent we do not admit that we are experts with respect to any
part of the Registration Statement, including this exhibit, within the meaning
of the term "expert" as used in the Securities Act of 1933, as amended, or the
rules and regulations of the Commission issued thereunder.
Very truly yours,
Bracewell & Patterson, L.L.P.
/pd
<PAGE>
THE WARRANTS REPRESENTED BY THIS WARRANT CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS
(COLLECTIVELY, THE "ACTS") AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT PURSUANT TO
THE ACTS OR IN RELIANCE ON AN OPINION, REASONABLY SATISFACTORY TO ADVANCED
COMMUNICATIONS GROUP, INC. IN FORM AND SUBSTANCE, OF COUNSEL REASONABLY
ACCEPTABLE TO SUCH COMPANY, THAT SUCH SALE, PLEDGE OR OTHER TRANSFER IS BEING
MADE IN RELIANCE ON AN EXEMPTION FROM THE ACTS.
WARRANT
Total Number of Series M Warrants: 20,000 Warrant No. M-1
Number of Series M Warrants Represented by
This Warrant Certificate: 20,000, subject to adjustment(1)
This Warrant Certificate certifies that, in consideration of services
rendered to Advanced Communications Corp., and for other value received,
WILLIAM MCCAUGHEY
is the registered holder of the number of Warrants (the "Warrants") set forth
above. Each Warrant entitles the holder thereof, (a) after the IPO Date and
from time to time thereafter but (b) on or before the Expiration Date, to
purchase from the Company one fully paid and nonassessable share of Common
Stock at the Exercise Price, subject to adjustment as provided herein.
"ACG Corp." means Advanced Communications Corp., a Delaware
corporation organized in June, 1996 that was formerly named Advanced
Communications Group, Inc.
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(1) Notwithstanding any provision herein to the contrary, the parties
agree that since the warrants granted hereby are granted in substitution for
an option granted by ACG Corp., (i) any stock split or other change in the
capitalization of Corp. prior to the consummation of the reverse triangular
merger among the Company, ACG Corp. and Advanced Communications Group
Acquisition, Inc. shall be treated for the purposes of this Warrant
Certificate as a stock split or other change in the capitalization of the
Company and (ii) except for the matters described in (i), no antidilution
adjustments shall be made pursuant to Section 3 prior the consummation of the
initial public offering of the Common Stock and the acquisition transactions
associated therewith (including the acquisition of ACG Corp.).
<PAGE>
"Board of Directors" means the board of directors of the Company (or
any authorized committee thereof).
"Common Stock" means the Common Stock, $.0001 par value per share, of
the Company, or such other class of securities as shall then represent the
common equity of the Company.
"Company" means Advanced Communications Group, Inc., a Delaware
corporation organized in September, 1997.
"Exercise Price" subject in all circumstances to adjustment in
accordance with Section 3 and Footnote 1, means $2.50.
"Expiration Date" means 5:00 p.m., Houston Time on the fifth
anniversary of the IPO Date.
"IPO Date" means the date upon which the initial public offering of
the Common Stock and the acquisitions contemplated in connection therewith are
consummated.
"Issuance Date" means January 22, 1997.
"Price" on any day means 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 admitted 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 Company for that
purpose; or, in all other cases, the value established by the Board of
Directors in good faith; and the "average" Price per share for any period
shall be determined by dividing the sum of the Prices determined for each
Trading Day in such period by the number of Trading Days in such period.
"Trading Day" means a day on which the principal national securities
exchange on 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,
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<PAGE>
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.
"Warrant Shares" means the shares of Common Stock and other
securities, property or cash receivable upon the exercise of the Warrants.
"Warrants" means the Series M Warrants represented by this Warrant
Certificate.
1. EXERCISE OF WARRANTS. (a) The Warrants evidenced by this Warrant
Certificate may be exercised in whole or in part, after the IPO Date, by
presentation and surrender at the office of the Company specified herein of
(i) this Warrant Certificate with the Election To Exercise duly completed and
executed, and (ii) payment of the Exercise Price as then in effect, by bank
draft or cashier's check, for the number of Warrants being exercised. If the
holder of this Warrant Certificate at any time exercises less than all the
Warrants evidenced by this Warrant Certificate, the Company shall issue to
such holder a Warrant Certificate identical in form to this Warrant
Certificate, but evidencing a number of Warrants equal to the number of
Warrants originally represented by this Warrant Certificate less the number of
Warrants previously exercised. Likewise, upon the presentation and surrender
of this Warrant Certificate at the office of the Company and at the request of
the holder, the Company will, at the option of the holder, issue to the holder
in substitution for this Warrant Certificate one or more warrant certificates
in identical form and for an aggregate number of Warrants equal to the number
of Warrants evidenced by this Warrant Certificate.
(b) To the extent that the Warrants evidenced by this
Warrant Certificate have not been exercised at or prior to the Expiration
Date, such Warrants shall expire and the rights of the holder shall become
void and of no effect.
2. RESTRICTIONS ON TRANSFER. The Warrants evidenced hereby have not
been registered under the Securities Act of 1933, as amended, or under any
state securities law (collectively, the "Acts"), in reliance on exemptions
from the registration provisions thereof. The holder hereof acknowledges that
the Warrants evidenced hereby and the Common Stock or other securities or
property purchasable on the exercise of the Warrants (collectively, the
"Conversion Securities") may not be directly or indirectly sold, transferred
or otherwise disposed of in violation of the provisions of the Acts. Any
purported sale, transfer or other disposition of this Warrant Certificate, the
Warrants evidenced hereby or the Conversion Securities in violation of this
provision shall be void and the Company shall not be required to recognize the
same. Compliance with this provision is the responsibility of the holder. Each
certificate representing Conversion Securities shall bear a legend
substantially similar to the bold-faced legend appearing at the head of this
Warrant Certificate. The Company shall deem and treat the registered holder of
this Warrant Certificate as the true and lawful owner of the Warrants
evidenced hereby for all purposes, any claims of another person to the
contrary notwithstanding.
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<PAGE>
In addition, the holder of this Warrant further agrees and
acknowledges that for a period of one year from the date of the original
issuance of any Conversion Securities issued upon the exercise of a Warrant
such holder may not -- except in full compliance with all of the applicable
provisions of the Securities Act of 1933, as amended, and the rules and
regulations of the Securities and Exchange Commission thereunder and the
provisions of applicable state securities laws and regulations -- sell,
assign, exchange, transfer, encumber, pledge, distribute, appoint, or
otherwise dispose of any Conversion Securities.
3. ANTIDILUTION ADJUSTMENTS. The shares of Common Stock purchasable
on exercise of the Warrants evidenced by this Warrant Certificate are shares
of Common Stock as constituted as of the Issuance Date. The number and kind of
securities purchasable on the exercise of the Warrants evidenced by this
Warrant Certificate, and the Exercise Price, shall be subject to adjustment
from time to time upon the happening of certain events, as follows:
(a) Mergers, Consolidations and Reclassifications. In case
of any reclassification or change of outstanding securities issuable upon
exercise of the Warrants evidenced by this Warrant Certificate (other than a
change in par value, or from par value to no par value, or from no par value
to par value or as a result of a subdivision or combination to which paragraph
(b) of this Section 3 applies), or in case of any consolidation or merger of
the Company with or into another corporation (other than a merger with another
corporation in which the Company is the surviving corporation and which does
not result in any reclassification or change [other than a change in par
value, or from par value to no par value, or from no par value to par value,
or as a result of a subdivision or combination to which paragraph (b) of this
Section 3 applies] in the securities issuable upon exercise of this Warrant),
the holder of the Warrants evidenced by this Warrant Certificate shall have,
and the Company, or such successor corporation or other entity, shall covenant
in the constituent documents effecting any of the foregoing transactions that
such holder does have, the right to obtain upon the exercise of the Warrants
evidenced by this Warrant Certificate, in lieu of each share of Common Stock,
other securities, money or other property theretofore issuable upon exercise
of a Warrant, the kind and amount of shares of stock, other securities, money
or other property receivable upon such reclassification, change, consolidation
or merger by a holder of the shares of Common Stock, other securities, money
or other property that were issuable upon exercise of a Warrant had the
Warrants evidenced by this Warrant Certificate been exercised immediately
prior to such reclassification, change, consolidation or merger. The
constituent documents effecting any such reclassification, change,
consolidation or merger shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided in paragraph (a)
of this Section 3. The provisions of paragraph (a) of this Section 3 shall
similarly apply to successive reclassifications, changes, consolidations or
mergers.
(b) Subdivisions and Combinations. If the Company, at any
time after the Issuance Date, shall subdivide its shares of Common Stock into
a greater number of shares (or pay
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<PAGE>
to any holders of securities of the Company a dividend payable in, or make any
other distribution of, Common Stock), the Exercise Price in effect immediately
prior to such subdivision shall be proportionately reduced, and the number of
shares of Common Stock purchasable upon exercise of the Warrants evidenced by
this Warrant Certificate shall be proportionately increased, as at the
effective date of such subdivision, dividend or distribution or if the Company
shall take a record of holders of its Common Stock for such purpose, as at
such record date, whichever is earlier. If the Company at any time shall
combine its shares of Common Stock into a smaller number of shares, the
Exercise Price in effect immediately prior to such combination shall be
proportionately increased, and the number of shares of Common Stock
purchasable upon exercise of the Warrants evidenced by this Warrant
Certificate shall be proportionately reduced, as at the effective date of such
combination, or if the Company shall take a record of holders of its Common
Stock for purposes of such combination, as at such record date, whichever is
earlier.
(c) Certain Issuances of Securities. If the Company at any
time after the IPO Date shall issue any additional shares of Common Stock
(otherwise than as provided in paragraphs (a) through (b) of this Section 3)
at a price per share less than the average Price per share of Common Stock for
the 20 trading days immediately preceding the date of the authorization of
such issuance (the "Market Price") by the Board of Directors, then the
Exercise Price upon each such issuance shall be adjusted to that price
determined by multiplying the Exercise Price by a fraction:
i. the numerator of which shall be the sum of (1)
the number of shares of Common Stock outstanding immediately prior to
the issuance of such additional shares of Common Stock multiplied by
the Market Price, and (2) the consideration, if any, received and
deemed received by the Company upon the issuance of such additional
shares of Common Stock, and
ii. the denominator of which shall be the Market
Price multiplied by the total number of shares of Common Stock
outstanding immediately after the issuance of such additional shares
of Common Stock.
No adjustments of the Exercise Price shall be made under paragraph
(c) of this Section 3 upon the issuance of any additional shares of Common
Stock that:
(v) are issued pursuant to thrift plans, stock purchase plans, stock
bonus plans, stock option plans, employee stock ownership plans and
other incentive or profit sharing arrangements for the benefit of
employees ("Employee Benefit Plans") that otherwise would cause an
adjustment under paragraph (c) of this Section 3; provided that the
aggregate number of shares of Common Stock so issued (including the
shares issued pursuant to any options, rights or warrants or
convertible or exchangeable securities issued under such Employee
Benefit Plans containing the right to purchase shares of Common
Stock) pursuant to Employee
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<PAGE>
Benefit Plans shall not exceed 10% of the Company's outstanding Common
Stock (on a fully diluted basis using the treasury stock method) at
the time of such issuance;
(w) are issued pursuant to any Common Stock Equivalent (as defined in
paragraph (d) of this Section 3) of the Company or ACG Corp. (i)
which was or will foreseeably be outstanding on the IPO Date or (ii)
if upon the issuance of any such Common Stock Equivalent, any such
adjustments shall previously have been made pursuant to paragraph (d)
of this Section 3 or (iii) if no adjustment was required pursuant to
paragraph (d) of this Section 3.
(d) Common Stock Equivalents. If the Company shall, after
the IPO Date, issue any security or evidence of indebtedness which is
convertible into or exchangeable for Common Stock ("Convertible Security"), or
any warrant, option or other right to subscribe for or purchase Common Stock
or any Convertible Security, other than pursuant to Employee Benefit Plans
(together with Convertible Securities, "Common Stock Equivalent"), or if,
after any such issuance, the price per share for which additional shares of
Common Stock may be issuable thereunder is amended, then the Exercise Price
upon each such issuance or amendment shall be adjusted as provided in
paragraph (c) of this Section 3 on the basis that (i) the maximum number of
additional shares of Common Stock issuable pursuant to all such Common Stock
Equivalents shall be deemed to have been issued as of the earlier of (a) the
date on which the Company shall enter into a firm contract for the issuance of
such Common Stock Equivalent, or (b) the date of actual issuance of such
Common Stock Equivalent; and (ii) the aggregate consideration for such maximum
number of additional shares of Common Stock shall be deemed to be the minimum
consideration received and receivable by the Company for the issuance of such
additional shares of Common Stock pursuant to such Common Stock Equivalent;
provided, however, that no adjustment shall be made pursuant to paragraph (d)
of this Section 3 unless the consideration received and receivable by the
Company per share of Common Stock for the issuance of such additional shares
of Common Stock pursuant to such Common Stock Equivalent is less than the
Market Price. No adjustment of the Exercise Price shall be made under
paragraph (d) of this Section 3 upon the issuance of any Convertible Security
which is issued pursuant to the exercise of any warrants or other subscription
or purchase rights therefor, if any adjustment shall previously have been made
in the Exercise Price then in effect upon the issuance of such warrants or
other rights pursuant to paragraph (d) of this Section 3.
(e) Miscellaneous. The following provisions shall be
applicable to the making of adjustments in the Exercise Price hereinbefore
provided in this Section 3:
i. The consideration received by the Company shall
be deemed to be the following: (I) to the extent that any additional
shares of Common Stock or any Common Stock Equivalent shall be issued
for cash consideration, the consideration received by the Company
therefor, or, if such additional shares of Common Stock or Common
Stock Equivalent are offered by the Company for subscription, the
subscription price, or, if such
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<PAGE>
additional shares of Common Stock or Common Stock Equivalent are sold
to underwriters or dealers for public offering without a subscription
offering, the initial public offering price, in any such case
excluding any amounts paid or receivable for accrued interest or
accrued dividends and without deduction of any compensation,
discounts, commissions or expenses paid or incurred by the Company
for and in the underwriting of, or otherwise in connection with, the
issue thereof; (II) to the extent that such issuance shall be for a
consideration other than cash, then, except as herein otherwise
expressly provided, the fair value of such consideration at the time
of such issuance as determined in good faith by the Board of
Directors, as evidenced by a certified resolution of the Board of
Directors delivered to the holder of this Warrant Certificate setting
forth such determination. The consideration for any additional shares
of Common Stock issuable pursuant to any Common Stock Equivalent
shall be the consideration received by the Company for issuing such
Common Stock Equivalent, plus the additional consideration payable to
the Company upon the exercise, conversion or exchange of such Common
Stock Equivalent. In case of the issuance at any time of any
additional shares of Common Stock or Common Stock Equivalent in
payment or satisfaction of any dividend upon any class of stock other
than Common Stock, the Company shall be deemed to have received for
such additional shares of Common Stock or Common Stock Equivalent
(which shall not be deemed to be a dividend payable in, or other
distribution of, Common Stock under paragraph (b) of this Section 3)
consideration equal to the amount of such dividend so paid or
satisfied.
ii. Upon the expiration of the right to convert,
exchange or exercise any Common Stock Equivalent the issuance of
which effected an adjustment in the Exercise Price, if any such
Common Stock Equivalent shall not have been converted, exercised or
exchanged, the number of shares of Common Stock deemed to be issued
and outstanding because they were issuable upon conversion, exchange
or exercise of any such Common Stock Equivalent shall no longer be
computed as set forth above, and the Exercise Price shall forthwith
be readjusted and thereafter be the price which it would have been
(but reflecting any other adjustments in the Exercise Price made
pursuant to the provisions of paragraph (c) of this Section 3 after
the issuance of such Common Stock Equivalent) had the adjustment of
the Exercise Price made upon the issuance or sale of such Common
Stock Equivalent been made on the basis of the issuance only of the
number of additional shares of Common Stock actually issued upon
exercise, conversion or exchange of such Common Stock Equivalent and
thereupon only the number of additional shares of Common Stock
actually so issued shall be deemed to have been issued and only the
consideration actually received by the Company (computed as in
subparagraph (i) of paragraph (e) of this Section 3) shall be deemed
to have been received by the Company.
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<PAGE>
iii. The number of shares of Common Stock at any
time outstanding shall not include any shares thereof then directly
or indirectly owned or held by or for the account of the Company or
its subsidiaries.
iv. For the purposes of this Section 3, the term
"shares of Common Stock" shall mean, except as otherwise provided in
Footnote 1, shares of (i) the class of stock designated as the Common
Stock of the Company at the Issuance Date or (ii) any other class of
stock resulting from successive changes or reclassifications of such
shares consisting solely of changes in par value, or from par value
to no par value, or from no par value to par value. If at any time,
because of an adjustment pursuant to paragraph (a) of this Section 3,
the Warrants shall entitle the holders to purchase any securities
other than shares of Common Stock, thereafter the number of such
other securities so purchasable upon exercise of each Warrant and the
Exercise Price of such securities 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 Warrant Shares
contained in this Section 3.
(f) Calculation of Exercise Price. The Exercise Price in
effect from time to time shall be calculated to four decimal places
and rounded to the nearest thousandth.
4. NOTICE OF ADJUSTMENT TO EXERCISE PRICE. Whenever the Exercise
Price is required to be adjusted as provided in Section 3, the Company shall
forthwith compute the adjusted Exercise Price and shall prepare and mail to
the holder hereof a certificate setting forth such adjusted Exercise Price and
showing in reasonable detail the facts upon which such adjustment is based.
5. VOLUNTARY REDUCTION. (a) The Company may at its option, but shall
not be obligated to, at any time during the term of the Warrants, reduce the
then current Exercise Price by any amount selected by the Board of Directors;
provided that if the Company elects so to reduce the then current Exercise
Price, such reduction shall be irrevocable during its effective period and
remain in effect for a minimum of 20 days following the date of such election,
after which time the Company may, at its option, reinstate the Exercise Price
in effect prior to such reduction. Whenever the Exercise Price is reduced, the
Company shall mail to the holder a notice of the reduction at least 15 days
before the date the reduced Exercise Price takes effect, stating the reduced
Exercise Price and the period for which such reduced Exercise Price will be in
effect.
(b) The Company may make such decreases in the Exercise
Price, in addition to those required or allowed by this Section 5, as shall be
determined by it, as evidenced by a certified resolution of the Board of
Directors delivered to the holders, to be advisable to avoid or diminish any
income tax to the holder resulting from any dividend or distribution of stock
or issuance of rights or warrants to purchase or subscribe for stock or from
any event treated as such for income tax purposes.
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<PAGE>
6. NOTICES TO WARRANT HOLDER. In the event that, after the IPO Date:
(a) of any consolidation or merger to which the Company is a
party and for which approval of any stockholders of the Company is required,
or of the conveyance or sale of all or substantially all of the assets of the
Company, or of any reclassification or change of the Common Stock or other
securities issuable upon exercise of the Warrants (other than a change in par
value, or from par value to no par value, or from no par value to par value or
as a result of a subdivision or combination), or a tender offer or exchange
offer for shares of Common Stock (or other securities issuable upon the
exercise of the Warrants); or
(b) the Company shall declare any dividend (or any other
distribution) on the Common Stock, other than regular cash dividends; or
(c) the Company shall authorize the granting to the holders
of Common Stock of rights or warrants to subscribe for or purchase any shares
of any class or series of capital stock; or
(d) of the voluntary or involuntary dissolution, liquidation
or winding up of the Company;
then the Company shall cause to be sent to the holder hereof, at
least 30 days prior to the applicable record date hereinafter specified, or
promptly in the case of events for which there is no record date, a written
notice stating (x) the date for the determination of the holders of record of
shares of Common Stock (or other securities issuable upon the exercise of the
Warrants) entitled to receive any such dividends or other distribution, (y)
the initial expiration date set forth in any tender offer or exchange offer
for shares of Common Stock (or other securities issuable upon the exercise of
the Warrants), or (z) the date on which any such consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up is expected to
become effective or consummated, and the date as of which it is expected that
holders of record of shares of Common Stock (or other securities issuable upon
the exercise of the Warrants) shall be entitled to exchange such shares for
securities or other property, if any, deliverable upon such reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding up. Failure to give such notice or any defect therein shall not affect
the legality or validity of any distribution, right, option, warrant,
issuance, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up, or the vote upon any action.
7. REPORTS TO HOLDERS. The Company will cause to be delivered, by
first-class mail, postage prepaid, to the holder at such holder's address
appearing hereon, or such other address as the holder shall specify, a copy of
any reports delivered by the Company to the holders of Common Stock.
8. COVENANTS OF THE COMPANY. The Company covenants and agrees that:
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<PAGE>
(a) Prior to thirty (30) days after the IPO Date and until
the Expiration Date, the Company shall at all times reserve and keep
available, free from preemptive rights, out of the aggregate of its authorized
but unissued Common Stock (and other securities), for the purpose of enabling
it to satisfy any obligation to issue shares of Common Stock (and other
securities) upon the exercise of the Warrants evidenced by this Warrant
Certificate, the number of shares of Common Stock (and other securities)
issuable upon the exercise of such Warrants.
(b) The Company shall pay all expenses, taxes (other than
stock transfer taxes or charges) and other charges payable in connection with
the preparation, issuance and delivery of new warrant certificates on transfer
of the Warrants evidenced by this Warrant Certificate.
(c) All Common Stock (and other securities) which may be
issued upon exercise of the Warrants evidenced by this Warrant Certificate
shall upon issuance be validly issued, fully paid, non-assessable and free
from all taxes, liens and charges with respect to the issuance thereof.
(d) The Company shall not be required to pay any tax or
charge imposed in connection with any transfer
involved in the issuance of any certificate
representing shares of Common Stock (and other
securities) in any name other than that of the
registered holder hereof, and in such case the
Company shall not be required to issue or deliver
any certificate representing shares of Common Stock
(and other securities) until such tax or other
charge has been paid or it has been established to
the Company's satisfaction that no such tax or
charge is due.
9. NO RIGHTS AS STOCKHOLDER. The holder of the Warrants evidenced by
this Warrant Certificate shall not, by virtue of holding such Warrants, be
entitled to any rights of a stockholder of the Company either at law or in
equity, and the rights of the holder of the Warrants evidenced by this Warrant
Certificate are limited to those expressed herein.
10. NOTICES. All notices provided for hereunder shall be in writing
and may be given by registered or certified mail, return receipt requested,
telex, telegram, telecopier, air courier guaranteeing overnight delivery of
personal delivery, if to the holder at the following address:
William P. McCaughey
McCaughey & Associates
P.O. Box 1175
Sugarland, Texas 77487-1175
Telecopier: (281)265-3950
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<PAGE>
and, if to the Company:
Advanced Communications Group, Inc.
390 South Woods Mill Road, Suite 150
St. Louis, MO 63017
Attention: Chairman and Chief Executive Officer
Telecopier: ___________________
11. GOVERNING LAW. This Warrant Certificate shall be governed by and
construed in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate
to be executed this _____ day of January, 1998 by its Chairman and Chief
Executive Officer, thereunto duly authorized.
ADVANCED COMMUNICATIONS GROUP, INC.
By:
---------------------------------------
Name: Richard P. Anthony
Title: Chairman, Chief Executive
Officer and President
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<PAGE>
ELECTION TO EXERCISE
[To be executed on exercise of the Warrants
evidenced by this Warrant Certificate]
TO: Advanced Communications Group, Inc.
The undersigned, the holder of the Warrants evidenced by the attached
Warrant Certificate, hereby irrevocably elects to exercise Warrants, and
herewith makes payment of ___________________________ ($________) representing
the aggregate Exercise Price thereof, and requests that the certificate
representing the securities issuable hereunder be issued in the name of
_____________________ and delivered to ______________________, whose address
is ______________________________________________________________.
Dated:
----------- ---------------------------------------------
-----------------------------------
Signature(s) of Registered Holder(s)
Note: The above signature(s) must
correspond with the name as
written on the face of this
Warrant Certificate in every
particular, without alteration or
enlargement or any change
whatsoever.
- -------------------------------------------------------------------------------
TRANSFER FORM
[To be executed only upon transfer of the Warrants
evidenced by this Warrant Certificate]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ______________________________________________________ the
Warrants represented by the within Warrant Certificate, together with all
right, title and interest therein, and does hereby irrevocably constitute and
appoint _____________________________________ Attorney-in-Fact, to transfer
same on the books of the Company with full power of substitution in the
premises.
Dated:
----------- ---------------------------------------------
-----------------------------------
Signature(s) of Registered Holder(s)
Note: The above signature(s) must
correspond with the name as written
on the face of this Warrant
Certificate in every particular,
without alteration or enlargement
or any change whatsoever.
WITNESS:
- ----------------------------------------
-12-
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
STOCK OPTION AND PUT AGREEMENT
This Stock Option and Put Agreement ("Option Agreement"), dated as of
February 8, 1998, is by and between Advanced Communications Group, Inc., a
Delaware corporation (the "Company"), and Mark Beall ("Optionee"), who agree as
follows:
Section 1. Purchase Agreement; Noncompetition Covenant. This option is
granted pursuant to Schedule 6.9 of the Restated Asset Purchase Agreement dated
October 6, 1997, among the Company, Advanced Communications Corp., Switchboard
of Oklahoma City, Inc., Mark Beall, Donald Hunter, Charles Johnson and James
Hunter, as attorney-in-fact for Jamie Hunter, a minor, as amended (the
"Purchase Agreement"). Notwithstanding any provision in this Option Agreement
to the contrary, this Option Agreement shall terminate in the event that the
Purchase Agreement is rescinded or in the event that the Company determines in
good faith that the Optionee has violated any of the noncompetition covenants
set forth in (a) Section 12 of the Purchase Agreement, (b) the Employment
Agreement of even date herewith between, or (c) any employment or consulting
agreement which the parties may enter into in the future.
Section 2. Option and Put. Subject to the terms and conditions
contained herein, the Company hereby grants to Optionee the right and option
("Option") to purchase from the Company Thirty-Eight Thousand Six Hundred
Thirty Five (38,635) shares of the Company's common stock, $.0001 par value
("Stock"), at a price per share equal to 331/3% of the price per share at which
the Stock is offered to the public in the Company's initial underwritten public
offering (the "Exercise Price"). Subject to the terms and conditions contained
herein, the Company grants to Optionee the right (the "Put") to require the
Company to purchase all of Optionee's right, title and interest in this Option
Agreement and the rights represented hereby for One Hundred Fifty-Five Thousand
Dollars ($155,000) (the "Put Price").
Section 3. Option and Put Period. The Option is granted on the date
first referenced above (the "Date of Grant"). The Option herein granted may be
exercised by Optionee, subject to the limitation in Section 1 above, only
between March 31, 2001 and the tenth anniversary of the Date of Grant (the
"Option Period"). The put may only be exercised during the month of April, 2001
(the "Put Period"). The Option shall expire on February 18, 2008 ("Option
Expiration Date"), and the Put shall expire May 1, 2001.
Section 4. Procedure for Exercise of Option. The Option herein granted
may be exercised during the Option Period by the delivery by Optionee of
written notice to the Secretary of the Company setting forth the number of
shares of Stock with respect to which the Option is being exercised. The notice
shall be accompanied by, at the election of the Optionee, cash, cashier's
check,
<PAGE>
bank draft, or postal or express money order payable to the order of the
Company equal in value to the aggregate Exercise Price. Notice may also be
delivered by telecopy provided that the Exercise Price of such shares is
received by the Company via wire transfer on the same day the telecopy
transmission is received by the Company. The notice shall specify the address
to which the certificates for such shares are to be mailed. An option to
purchase shares of Stock in accordance with this Plan, shall be deemed to have
been exercised immediately prior to the close of business on the date (i)
written notice of such exercise and (ii) payment in full of the Exercise Price
for the number of share for which Options are being exercised are both received
by the Company, and Optionee shall be treated for all purposes as the record
holder of such shares of Stock as of such date.
As promptly as practicable after receipt of such written notice and
payment, the Company shall deliver to Optionee certificates for the number of
shares with respect to which such Option has been so exercised, issued in
Optionee's name; provided, however, that such delivery shall be deemed effected
for all purposes when a stock transfer agent of the Company shall have
deposited such certificates in the United States mail, addressed to Optionee at
the address specified pursuant to this Section 4.
Section 5. Procedure for Exercise of Put. Optionee may exercise the
Put during the Put Period by delivering to the Secretary of the Company (a) a
written notice, which specifically references this Option Agreement and states
that the Put is exercised and that Optionee thereby conveys to the Company this
Option Agreement and all rights represented thereby, free and clear of all
security interests, liens, claims, charges and encumbrances that contains
Optionee's agreement to indemnify and hold the Company harmless from and
against all losses, claims, liabilities, damages, and expenses, arising from
the claims and demands of any person or entity having or claiming any security
interest, lien, or encumbrance in the Option Agreement and the rights it
represents and (b) the original copy of the Option Agreement must be reasonably
satisfactory in form and substance to the Company's counsel. The Put Price
shall be paid to Optionee by cashier's check or wire transfer, as the Company
may elect, within 30 days after the valid exercise of the Put pursuant to the
provisions above.
Section 6. Transferability. Neither this Option nor the Put may be
transferred by Optionee. The shares of Stock issuable upon exercise of the
Option will not be registered under the Securities Act of 1933, as amended, or
any state securities laws (collectively, the "Acts") and may not be sold,
pledged or otherwise transferred except pursuant to an effective registration
statement pursuant to the Acts or in reliance on an opinion, reasonably
satisfactory in form and substance to the Company and its counsel, that such
sale, pledge or other transfer is being made in reliance on an exemption from
the Acts. Any purported sale, pledge or other transfer in violation of this
Section shall be void.
-2-
<PAGE>
Section 7. No Rights as Shareholder. Optionee shall have no rights as
a shareholder with respect to any shares of Stock covered by this Option
Agreement until the Option is exercised as provided in Section 4 of this Option
Agreement.
Section 8. Extraordinary Corporate Transactions. The existence of
outstanding Options shall not affect in any way the right or power of the
Company or its shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or
any issue of debt or equity securities ahead of or affecting Stock or the
rights thereof, or the dissolution or liquidation of the Company, or any sale,
lease, exchange or other disposition of all or any part of its assets or
business, or any other corporate act or proceedings, whether of a similar
character or otherwise.
Section 9. Anti-dilutions Adjustments. The shares of Stock purchasable
on exercise of the Option evidenced by this Option Agreement are shares of
Stock as constituted as of the Date of Grant. The number and kind of securities
purchasable on the exercise of the Option evidenced by this Option Agreement,
and the Exercise Price, shall be subject to adjustment from time to time upon
the happening of certain events, as follows:
a. Mergers, Consolidations and Reclassifications. In case of
any reclassification or change of outstanding securities issuable upon exercise
of the Options evidenced by this Option Agreement (other than a change in par
value, or from par value to no par value, or from no par value to par value or
as a result of a subdivision or combination to which paragraph (b) of this
Section applies), or in case of any consolidation or merger of the Company with
or into another corporation (other than a merger with another corporation in
which the Company is the surviving corporation and which does not result in any
reclassification or change [other than a change in par value, or from par value
to no par value, or from no par value to par value, or as a result of a
subdivision or combination to which paragraph (b) of this Section applies] in
the securities issuable upon exercise of this Option), the holder of the
Options evidenced by this Option Agreement shall have, and the Company, or such
successor corporation or other entity, shall covenant in the constituent
documents effecting any of the foregoing transactions that such holder does
have, the right to obtain upon the exercise of the Options evidenced by this
Option Agreement, in lieu of each share of Common Stock, theretofore issuable
upon exercise of a Option, the kind and amount of shares of stock, other
securities, money or other property receivable upon such reclassification,
change, consolidation or merger by a holder of one share of Common Stock had
the Options evidenced by this Option Agreement been exercised immediately prior
to such reclassification, change, consolidation or merger. The constituent
documents effecting any such reclassification, change, consolidation or merger
shall provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided in this Section. The provisions of
paragraph (a) of this Section shall similarly apply to successive
reclassifications, changes, consolidations or mergers.
-3-
<PAGE>
b. Subdivisions and Combinations. If the Company, at any time
after the Date of Grant, shall subdivide its shares of Common Stock into a
greater number of shares (or pay to any holders of securities of the Company a
dividend payable in, or make any other distribution of, Stock), the Exercise
Price in effect immediately prior to such subdivision shall be proportionately
reduced, and the number of shares of Stock purchasable upon exercise of the
Options evidenced by this Option Agreement shall be proportionately increased,
as at the effective date of such subdivision, dividend or distribution or if
the Company shall take a record of holders of its Stock for such purpose, as at
such record date, whichever is earlier. If the Company at any time shall
combine its shares of Stock into a smaller number of shares, the Exercise Price
in effect immediately prior to such combination shall be proportionately
increased, and the number of shares of Stock purchasable upon exercise of the
Options evidenced by this Option Agreement shall be proportionately reduced, as
at the effective date of such combination, or if the Company shall take a
record of holders of its Stock for purposes of such combination, as at such
record date, whichever is earlier.
c. Calculation of Exercise Price. The Exercise Price in effect
from time to time shall be calculated to four decimal places and rounded to the
nearest thousandth.
Section 10. Notice of Adjustment to Exercise Price. Whenever the
Exercise Price is required to be adjusted as provided in Section 9, the Company
shall forthwith compute the adjusted Exercise Price and shall prepare and mail
to the holder hereof a certificate setting forth such adjusted Exercise Price
and showing in reasonable detail the facts upon which such adjustment is based.
Section 11. Notices to Warrant Holder. In the event that, after the
Date of Grant:
a. of any consolidation or merger to which the Company is a
party and for which approval of any stockholders of the Company is required, or
of the conveyance or sale of all or substantially all of the assets of the
Company, or of any reclassification or change of the Stock or other securities
issuable upon exercise of the Options (other than a change in par value, or
from par value to no par value, or from no par value to par value or as a
result of a subdivision or combination), or a tender offer or exchange offer
for shares of Stock (or other securities issuable upon the exercise of the
Options); or
b. the Company shall declare any dividend (or any other
distribution) on the Stock, other than regular cash dividends; or
c. the Company shall authorize the granting to the holders of
Stock of rights or warrants to subscribe for or purchase any shares of any
class or series of capital stock; or
d. of the voluntary or involuntary dissolution, liquidation or
winding up of the Company;
-4-
<PAGE>
then the Company shall cause to be sent to the holder hereof, at least
5 days prior to the applicable record date hereinafter specified, or promptly
in the case of events for which there is no record date, a written notice
stating (x) the date for the determination of the holders of record of shares
of Stock (or other securities issuable upon the exercise of the Options)
entitled to receive any such dividends or other distribution, (y) the initial
expiration date set forth in any tender offer or exchange offer for shares of
Stock (or other securities issuable upon the exercise of the Options), or (z)
the date on which any such consolidation, merger, conveyance, transfer,
dissolution, liquidation or winding up is expected to become effective or
consummated, and the date as of which it is expected that holders of record of
shares of Stock (or other securities issuable upon the exercise of the Options)
shall be entitled to exchange such shares for securities or other property, if
any, deliverable upon such reclassification, consolidation, merger, conveyance,
transfer, dissolution, liquidation or winding up. Failure to give such notice
or any defect therein shall not affect the legality or validity of any
distribution, right, option, warrant, issuance, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up, or the vote upon
any action.
Section 12. Covenants of the Company. The Company covenants and agrees
that:
a. Prior to thirty (30) days after the Date of Grant and until
the Option Expiration Date, the Company shall at all times reserve and keep
available, free from preemptive rights, out of the aggregate of its authorized
but unissued Stock (and other securities), for the purpose of enabling it to
satisfy any obligation to issue shares of Stock (and other securities) upon the
exercise of the Options evidenced by this Option Certificate, the number of
shares of Stock (and other securities) issuable upon the exercise of such
Options.
b. All Stock (and other securities) which may be issued upon
exercise of the Options evidenced by this Option Agreement shall upon issuance
be validly issued, fully paid, non-assessable and free from all taxes, liens
and charges with respect to the issuance thereof.
Section 13. Compliance With Securities Laws. Prior to the acquisition
of any shares pursuant to the exercise of the Option herein granted, Optionee
will enter into such written representations, warranties and agreements as the
Company may reasonably request in order to comply with applicable securities
laws or with this Option Agreement.
Section 14. Compliance With Laws. Notwithstanding any of the other
provisions hereof, Optionee agrees that he will not exercise the Option granted
hereby, and that the Company will not be obligated to issue any shares pursuant
to this Option Agreement, if the exercise of the Option or the issuance of such
shares of Stock would constitute a violation by Optionee or by the Company of
any provision of any law or regulation of any governmental authority.
-5-
<PAGE>
Section 15. Withholding of Tax. To the extent that the exercise of
this Option results in compensation income to Optionee for federal or state
income tax purposes, Optionee shall pay to the Company at the time of such
exercise or disposition such amount of money as the Company may require to meet
its obligation under applicable tax laws or regulations; and, if Optionee fails
to do so, the Company is authorized to withhold from any cash remuneration then
or thereafter payable to Optionee any tax required to be withheld by reason of
such resulting compensation income or the Company may otherwise refuse to issue
any shares otherwise required to be issued pursuant to the terms hereof.
Section 16. Legends on Certificate. The certificates representing the
shares of Stock purchased by exercise of the Option will be stamped or
otherwise imprinted with legends in such form as the Company or its counsel may
require with respect to any applicable restrictions on sale or transfer and the
stock transfer records of the Company will reflect stop-transfer instructions
with respect to such shares.
Section 17. Notices. Every notice hereunder shall be in writing and
shall be given by registered or certified mail. All notices of the exercise of
any Option hereunder shall be directed to Advanced Communications Group, Inc.,
390 South Woods Mill Road, Suite 150, St. Louis, MO 63017, Attention:
Secretary. Any notice given by the Company to Optionee directed to Optionee at
the address on file with the Company. The Company shall be under no obligation
whatsoever to advise Optionee of the existence, maturity or termination of any
of Optionee's rights hereunder and Optionee shall be deemed to have
familiarized himself or herself with all matters contained herein.
Section 18. Binding Effect. This Option Agreement shall be binding
upon and inure to the benefit of any successors to the Company and all persons
lawfully claiming under Optionee as provided herein.
Section 19. Governing Law. This Option Agreement shall be governed by
and construed in accordance with the laws of the State of Delaware.
-6-
<PAGE>
IN WITNESS WHEREOF, this Nonqualified Stock Option and Put Agreement
has been executed as of the 18th day of February, 1998.
ADVANCED COMMUNICATIONS GROUP, INC.
By:
--------------------------
Richard P. Anthony
Chief Executive Officer
OPTIONEE
-----------------------------------
Mark Beall
-7-
<PAGE>
[CIBC OPPENHEIMER LETTERHEAD]
February 11, 1998
Private & Confidential
Advanced Communications Group, Inc.
$25,000,000 Senior Secured Facilities
Commitment Letter
Mr. William Zimmer
Advanced Communications Group, Inc.
390 South Woods Mill Road
Suite 150
St. Louis, Missouri 63017
Dear Mr. Zimmer:
Canadian Imperial Bank of Commerce or an affiliate ("CIBC") is pleased to
provide our commitment to arrange and underwrite $25 million of senior debt
in favor of Advanced Communications Group, Inc., a Delaware corporation (the
"Company"), on the terms and conditions set forth in the summary of terms and
conditions dated February 11, 1998 (the "Term Sheet"), attached hereto and
subject to satisfactory completion of due diligence by CIBC. Terms used
herein and not defined have the meanings ascribed to them in the Term Sheet.
The senior debt will consist of a $25 million revolving credit facility
with a one year term (the "Bank Facility"). The Bank Facility will be used
for working capital, capital expenditures and general corporate purposes of
the Borrower and its Subsidiaries (as defined below).
This commitment is subject to the preparation, execution and delivery of
mutually acceptable documentation, including, without limitation, a credit
agreement incorporating substantially the terms and conditions outlined in
the Term Sheet. The Term Sheet and this Commitment Letter are intended as an
outline only and do not summarize all the terms, conditions, representations,
warranties, defaults and other provisions that will be contained in the
documentation. The documentation will include, in addition to the provisions
contained in the Term Sheet and this Commitment Letter, provisions that are
customary or typical for transactions of this type and other provisions not
inconsistent with those set forth in the Term Sheet and this Commitment
Letter that CIBC may determine to be appropriate in the context of the
transactions contemplated hereunder. Our commitment is also subject (i) to
the absence of any material adverse change in the business, condition
(financial or otherwise), operations, performance, properties or prospects of
each of the Company and its Subsidiaries since December 31, 1997, (ii) the
completion by the Company of an initial public offering of its common stock,
par value per share, and the receipt therefrom of net proceed of not less
than $100 million, and (iii) completion by the Company of the acquisition of
all the capital stock of each of Great Western Directories, Inc., FirsTel,
Inc., Feist Long Distance Service, Inc, Valu-Line of Longview, Inc. and
Telesystems, Inc (collectively, the "Subsidiaries"),
<PAGE>
Advanced Communications Group, Inc.
February 11, 1998
Page 2
substantially all the assets of each of Switchboard of Oklahoma City, Inc.,
Long Distance Management II, Inc., Long Distance Management of Kansas and
National Telecom and a 49% interest in KIN Network, Inc. and (iv) any change
in financial or capital markets generally.
It is agreed that CIBC will act as the sole and exclusive agent, advisor
and arranger for the Bank Facility and will, in each such capacity, perform
the duties and exercise the authority customarily performed and exercised by
it in such roles. You agree that no other agents, co-agents, advisors or
arrangers will be appointed, no other titles will be awarded and no
compensation will be paid in connection with the Bank Facility unless you and
we shall so agree.
Should we desire to syndicate the Bank Facilities to any financial
institutions (together with CIBC, the "Lenders") identified by us in
consultation with you, you agree to actively assist in completing a
syndication satisfactory to CIBC. Such assistance shall include (a) your
using commercially reasonable efforts to ensure that the syndication efforts
benefit materially from your existing lending relationships with lenders
having an interest in facilities similar to the Bank Facility, (b) direct
contact between senior management and advisors of the Company and its
affiliates and the proposed Lenders, (c) assistance in the preparation of a
Confidential Information Memorandum and other marketing materials to be used
in connection with the syndication and (d) the hosting, with CIBC, of one or
more meetings of prospective lenders.
CIBC will manage all aspects of the syndication, including decisions as to
the selection of institutions to be approached, when their commitments will
be accepted, which institutions will participate, the allocations of the
commitments among the Lenders and the allocation and distribution of fees
among the Lenders. To assist CIBC in our syndication efforts, you agree
promptly to prepare and provide to CIBC all information with respect to the
Company and the transactions contemplated hereby, including all financial
information and projections (the "Projections"), as we may reasonably request
in connection with the arrangement and syndication of the Bank Facility. You
hereby represent and covenant that (a) all information other than the
Projections (the "Information") that has been or will be made available to
CIBC by you or any of your representatives does not or will not, when
finished, contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements contained therein not
materially misleading in light of the circumstances under which such
statements are made and (b) the Projections that have been or will be made
available to CIBC by you or any of your representatives have been or will be
prepared in good faith based upon the reasonable assumptions stated therein.
In arranging and syndicating the Bank Facility, we will use and rely on the
Information and Projections without independent verification thereof.
As consideration for CIBC's commitment and its agreement to perform the
services described herein, you agree to pay to CIBC an underwriting fee (the
"Underwriting Fee") in an amount equal to 1.00% of the aggregate commitments.
A portion of the Underwriting Fee equal to $50,000 will be payable upon the
execution of this letter and shall be non-refundable (subject to the proviso
in the first sentence of the next succeeding paragraph), with the remainder
being payable on the closing of the Bank Facility. In addition, you agree to
pay to CIBC an annual administration fee in an amount equal to $10,000 per
annum, which fee will be payable quarterly in arrears commencing on March 31,
1998 for the period from the date of the closing of the Bank Facility to the
final maturity or early termination thereof and the payment in full of all
amounts owing with respect thereto.
You agree that, once paid, such fees shall not be refundable under any
circumstances, regardless of whether the transactions or borrowings
contemplated by this commitment are consummated; provided that if the Bank
Facility is terminated and the closing thereof does not occur solely due to
the breach by CIBC of its obligations hereunder or under the Term Sheet, as
determined by a final non-appealable judgment by a court of competent
jurisdiction, you shall have the right to be reimbursed the amount of
<PAGE>
Advanced Communications Group, Inc.
February 11, 1998
Page 3
the portion of the Underwriting Fee paid by you prior thereto. All fees
payable hereunder shall be paid in immediately available funds and shall be
in addition to reimbursement of CIBC's out-of-pocket expenses and to any
other fees referenced in the Term Sheet.
By your acceptance of this Commitment Letter, you agree (a) to indemnify
and hold harmless CIBC and its affiliates officers, directors, employees,
advisors, and agents (each, an "indemnified person") from and against any and
all losses, claims, damages and liabilities to which any such indemnified
person may become subject arising out of or in connection with this
Commitment Letter, the Bank Facility, the syndication thereof, the use of the
proceeds thereof, any related transaction or any claim, litigation,
investigation or proceeding relating to any of the foregoing, regardless of
whether any indemnified person is a party thereto, and to reimburse each
indemnified person upon demand for any legal or other expenses incurred in
connection with investigating or defending any of the foregoing; provided
that the foregoing indemnity will not, as to any indemnified person, apply to
losses, claims, damages, liabilities or related expenses to the extent they
arise from the willful misconduct or gross negligence of such indemnified
person, and (b) to reimburse CIBC and its affiliates on demand for all
reasonable out-of-pocket expenses (including due diligence expenses,
syndication expenses, consultant's fees and expenses, travel expenses, and
reasonable fees, charges and disbursements of counsel) incurred in connection
with the Bank Facility and the syndication thereof, if any. No indemnified
person shall be liable for any indirect or consequential damages in
connection with its activities related to the Bank Facility. The provisions
of this paragraph shall survive any termination of this Commitment Letter but
shall terminate upon the execution of the loan documentation referred to in
the third paragraph of this letter.
In issuing this commitment, CIBC is relying on the accuracy of the
information furnished to it by the Company.
Regardless of whether any loans are made under the Bank Facility or any
documentation relating thereto is executed or any transaction contemplated
hereby or thereby is consummated, the Company will promptly reimburse CIBC
for, or pay directly, all reasonable out-of-pocket costs and expenses
(including, without limitation, the reasonable fees, charges and
disbursements of an outside counsel) incurred by CIBC in connection with its
review of the proposed transactions and the preparation, execution and
delivery of this Commitment Letter, such documentation (whether or not
executed) and any amendments or modification hereof or thereof.
This Commitment Letter may be modified only in writing by the parties
hereto and shall be binding upon the Company and its successors. This
Commitment Letter may be executed in any number of counterparts each of which
shall be an original, and all of which, when taken together, shall constitute
one agreement. Delivery of an executed signature page of this Commitment
Letter by facsimile transmission shall be effective as delivery of a manually
executed counterpart hereof. This Commitment Letter shall be governed by, and
construed in accordance with, the laws of the State of New York. Each of the
Company and CIBC hereby irrevocably waive all right to trial by jury in any
action, proceeding or counterclaim (whether based on contract or otherwise)
arising out of or relating to this Commitment Letter, the transactions
contemplated hereby or the actions of CIBC in the negotiation, performance or
enforcement hereof.
<PAGE>
Advanced Communications Group, Inc.
February 11, 1998
Page 4
Please evidence your acceptance of the provisions of this Commitment
Letter, the Term Sheet, and the other matters referred to above by signing
the enclosed copies of this Commitment Letter and returning it no later than
February 11, 1998. This offer will terminate on such date unless prior
thereto we shall have received signed copies of this letter and the portion
of the Underwriting Fee payable upon its execution. After your acceptance of
this Commitment Letter, the commitment of CIBC hereunder shall in no event be
available after March 20, 1998, if definitive loan documentation shall not
have been executed.
Sincerely,
CANADIAN IMPERIAL BANK
OF COMMERCE
By: /s/ Cynthia H. McCahill
-----------------------------
Name: Cynthia H. McCahill
Title: Executive Director
ACCEPTED this 11th day
of February, 1998
ADVANCED COMMUNICATIONS GROUP, INC.
By: /s/ William H. Zimmer III
-------------------------------
Name: William H. Zimmer III
Title: Executive Vice President
<PAGE>
ADVANCED COMMUNICATIONS GROUP
SUMMARY OF TERMS AND CONDITIONS
$25.0 MILLION SENIOR SECURED REVOLVING CREDIT
FEBRUARY 11, 1998
<TABLE>
<CAPTION>
<S> <C>
- -----------------------------------------------------------------------------------------------------------
The following terms are subject to satisfactory documentation and other such terms and conditions.
- -----------------------------------------------------------------------------------------------------------
BORROWER: Advanced Communications Group ("ACG")
GUARANTORS: Subsidiaries of the Borrower to guarantee the Facility on a joint and several
basis.
ADMINISTRATIVE Canadian Imperial Bank of Commerce and/or any of its affiliates ("CIBC" or the
AGENT: "Agent").
UNDERWRITER: CIBC.
LENDERS: CIBC reserves the right to syndicate all or a portion of the Facility subject
to the Borrower's consent, not to be unreasonably withheld.
FACILITY: $25.0 million Senior Secured Revolving Credit Facility (the "Revolver").
CLOSING DATE: On or before March 20, 1998.
USE OF PROCEEDS: The Facility will be used for working capital, capital expenditures and general
corporate purposes.
MATURITY: One year from closing.
AVAILABILITY: The Revolver will be available on the Closing Date subject, in the case of the
initial funding, to satisfaction of "Conditions Precedent to Initial Funding"
and in the case of subsequent fundings, to satisfaction of "Conditions
Precedent to Each Funding", according to the Advance Rate.
AMORTIZATION/ The revolver commitment will reduce to $0 and all outstandings will be repaid
COMMITMENT in full at Maturity.
REDUCTION:
ADVANCE RATE: 85% of the sum of (a) the face value of all Eligible Accounts as reflected on
the books of the Borrower and its Subsidiaries, and (b) Great Western Deferred
Revenue, in each case, net of all credits, discounts, reserves and allowances.
OPTIONAL Base Rate advances may be pre-paid in whole or part without penalty with two
PREPAYMENTS: business days notice. LIBOR advances may be prepaid in whole or in part with
three business days notice. All break-funding costs are for the account of the
Borrower.
YIELD PROTECTION: The Facilities to contain customary yield protection provisions relating to
increased costs, capital adequacy, tax gross-up, illegality and break-funding
costs.
MANDATORY The Facilities shall be automatically and permanently reduced by the following:
PREPAYMENTS: 1) Without limiting the prohibition on issuance of securities, 100% of the net
proceeds of any issuance of securities (other than securities issued in the
Initial Public Offering) shall be applied to permanently reduce the
Revolver.
2) 100% of net secured or unsecured debt proceeds, with the exception of
de-minimus carve outs to be agreed, shall be applied to permanently reduce
the Revolver.
<PAGE>
PRICING: Pricing on the Revolver will be fixed at the Applicable Margin as indicated
below:
APPLICABLE MARGIN
REVOLVER LIBOR + Base Rate +
1.500% 0.500%
LIBOR is the London Interbank Offered Rate for U.S. dollar loans as quoted in
the London Interbank market for loans of one, two, three, six, nine and twelve
(if available) months. LIBOR Rates will be quoted on a reserve adjusted basis
with 1, 2, 3 and 6 month maturities offered. Interest on LIBOR loans will be
calculated on the basis of a 360 day year and payable at the maturity of each
LIBOR period, but in any event no less frequently than quarterly.
Base Rate is the variable reference interest rate per year as declared by CIBC
from time to time to be its base rate for U.S. dollar commercial loans made by
CIBC. Base Rate is defined as the higher of (a) the Federal Funds Rate, as
established by the Federal Reserve Bank of New York, plus 1/2 of 1% and (b) the
prime commercial lending rate of CIBC. Interest on Base Rate Loans will be
calculated on the basis of a 365 day year and payable quarterly in arrears.
Default 2.0% above the then current interest rate (including the
Rate: Applicable Margin).
FEES: Up-Front Fee: 1.00% on the Facilities payable at closing.
Commitment Fee: 0.50% per annum on the unused portion of the
Facilities payable quarterly in arrears.
Administrative Fee: $10,000 per annum, payable on March 31, 1998.
SECURITY: The Facilities will be secured by the following:
o Pledge of the Company's accounts receivable.
o Negative pledge on the Company's assets and stock subject to de-minimus
carve outs for vendor financing to be agreed.
o Pledge of stock and guarantee of the subsidiaries of the Borrower.
<PAGE>
CONDITIONS Customary for a financing of this nature, including but not limited to the
PRECEDENT TO INITIAL following:
FUNDING: 1.Satisfaction with structure of the Borrower and its subsidiaries.
2.Execution of documentation, including but not limited to a credit agreement,
security agreements, guarantees and other customary or necessary
documentation (including opinions of counsel) which shall be acceptable to
CIBC.
3.Satisfactory completion of the Initial Public Offering, raising a minimum of
$100.0 million in net proceeds of which approximately $85.0 million will be
used to consummate the acquisition of the Predecessor Companies.
4.No material adverse change in the business, properties, financial condition,
prospects or results of operations. No litigation or other proceeding that
would materially affect the Borrower or this financing.
5.The Agent shall have received all fees due and payable on the Closing Date.
All reasonable costs and expenses (including without limitation, legal fees
and expenses of counsel of the Agent) shall have been paid to the extent
billed.
6.Satisfaction with the terms of the Seller Notes including their subordination
to the Revolver, including satisfaction with current pay interest rate and no
amortization until 91 days following repayment in full and cancellation of
the Facility.
7.Compliance with all applicable material US laws and regulations, including
all applicable environmental laws and regulations (including delivery of site
assessments).
8.Completion of the acquisition and repayment or defeasance of the existing
indebtedness of the Predecessor Companies.
9.Completion of satisfactory due diligence; including review of and
satisfaction with capital structure, organizational structure, inspection of
business plan, properties, historical analysis of the predecessor companies,
management, and all material agreements.
10.The Agent shall have a perfected first priority security interest in all the
stock and assets required under the heading "Security".
11.Receipt of a closing compliance certificate demonstrating compliance with
covenants on the closing date.
12.Satisfaction that all necessary licenses, permits and governmental and
third-party consents and approvals have been obtained and remain in full
force and effect.
13.Receipt of a pro forma balance sheet for the Borrower, in form satisfactory
to the Agent.
CONDITIONS Customary for facilities of this type, including but not limited to, compliance
PRECEDENT TO EACH with all covenants, all representation and warranties being true and correct in
FUNDING: all material respects, no Default or Event of Default being in existence or
resulting from such funding and receipt by the Agent and the Lenders of
requisite documentation to such effect.
<PAGE>
REPRESENTATIONS & Customary for a financing of this nature including but not limited to the
WARRANTIES: following:
1.Due authorization, execution and delivery of appropriate documents.
2.No material adverse change in the business, properties, financial condition,
prospects or results of operations.
3.Absence of any material litigation or environmental hazards.
4.Accuracy of information including information in the IPO registration
statement projections provided to the Agent.
5.All required state/local/federal government approvals and third party
consents.
6.No conflict with other documents.
AFFIRMATIVE Customary for a financing of this nature including but not limited to the
COVENANTS: following:
1.Comply with all laws including ERISA and all environmental laws.
2.Provide monthly and quarterly financial information compared to budget.
3.Provide an annual audit prepared by an accounting firm approved by the Agent,
and an annual budget.
4.Provide quarterly compliance certificates signed by an authorized signatory
of the Borrower.
5.Maintain adequate insurance policies.
6.Pay taxes.
NEGATIVE COVENANTS: Customary for a financing of this nature including but not limited to the
following:
1.Limitation on additional indebtedness with the exception of a to-be-agreed
basket for acquisitions.
2.Limitation on guarantees.
3.Limitations on liens;
4.Mergers, acquisitions and dispositions--none permitted other than those in
the ordinary course and to be agreed basket.
5.Limitations on restricted payments.
6.Transactions with affiliates--customary with standard arm's length
requirements.
7.Limitations on investments.
8.No change in lines of business.
9.Limitation on amendment of material agreements.
10.Limitation on capital expenditures in accordance with the Company's business
plan.
11.Prohibition on the creation of new subsidiaries.
FINANCIAL COVENANTS: Financial covenants to apply at all times and be measured quarterly:
MINIMUM INTEREST COVERAGE RATIO:
Interest Coverage shall be greater than or equal to the following:
PERIOD MINIMUM RATIO
Closing--12/31/98 3.00x.
EVENTS OF DEFAULT: Usual and customary for transactions of this nature, including but not limited
to: failure to pay interest, principal or fees, change of control, breach of
representations or warranties, default in any covenant, cross-default to other
indebtedness, events of bankruptcy or liquidation, failure to comply with
ERISA, failure of the Borrower to own 100% of the equity of its subsidiaries,
entry of judgments against the Borrower or any subsidiary, or any security
interest or guarantee ceases to be in effect.
<PAGE>
INDEMNIFICATION: The Borrower to indemnify the Agent and Banks against all losses, liabilities,
claims, damages, or expenses incurred in connection with investigating,
preparing to defend or defending any such loss, claim, damage, expense or
liability incurred in conjunction with these contemplated Facilities or the
proposed use of any Facility proceeds.
ASSIGNMENTS/ The Agent may, at any time, assign, all or any part of its commitments and
PARTICIPATIONS: outstandings in minimum increments of $5,000,000, subject to approval of the
Borrowers (provided no default exists) which consent shall not unreasonably be
withheld. Any Lender may grant a participation in all or any part of its
commitments, loans, or notes to its affiliates or one or more other financial
institutions without prior approval of the Borrowers.
EXPENSES: All reasonable fees and out of pocket expenses incurred by the Agent in the
negotiation, preparation, execution, syndication and enforcement of the
documents, whether or not the transaction ultimately closes or funds shall be
paid by Borrower.
GOVERNING LAW: New York.
ADDITIONAL PROVISIONS: As customary, including waiver of jury trial and consent to jurisdiction in New
York.
DEFINITIONS
EBITDA: The sum of (a) net income for the period, (b) amortization and depreciation,
(c) non-cash charges (net of non-cash income) and other extraordinary charges,
(d) interest payments, and (e) income taxes.
ELIGIBLE ACCOUNTS Definition to be determined in documentation and to be mutually acceptable to
RECEIVABLE: the Borrower and the Agent.
GREAT WESTERN To be determined in documentation and to be mutually acceptable to the Borrower
DEFERRED REVENUE: and the Agent.
INTEREST COVERAGE EBITDA to cash interest paid on Total Debt for the trailing quarter ended on
RATIO: the measurement date.
PERMITTED DEBT: Revolver, Seller Debt and any other secured or unsecured debt (to be agreed).
PREDECESSOR Companies to be acquired in the formation of the Borrower, including Great
COMPANIES: Western Directories, Inc., Valu-Line of Longview, Inc. and Related Companies,
FirsTel, Inc., Feist Long Distance Service, Inc., Long Distance Management II,
Inc., Long Distance Management of Kansas, Inc., The Switchboard of Oklahoma
City, Inc., Tele-Systems, Inc., National Telecom, and 49% interest in KIN
Network Inc.
SELLER NOTES: Notes payable to owners of Predecessor Companies on terms and conditions
satisfactory to the Agent not to exceed $17.5 million.
TOTAL DEBT: The sum of Revolver and other Permitted Debt.
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our report on the financial statements of Advanced
Communications Group, Inc. as of December 31, 1996 and for the period from
inception (June 6, 1996) through December 31, 1996, dated September 15, 1997,
included herein, in this Registration Statement on Form S-1 and the reference
to our Firm under the heading "Experts".
KPMG PEAT MARWICK LLP
Houston, Texas
February 11, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our report on the financial statements of Feist
Long Distance Service, Inc. as of and for the year ended December 31, 1996,
dated August 5, 1997, included herein, in this Registration Statement on Form
S-1 and the reference to our Firm under the heading "Experts".
KPMG PEAT MARWICK LLP
Houston, Texas
February 11, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our report on the financial statements of Great
Western Directories, Inc. as of January 31, 1996 and December 31, 1996 and for
the year ended January 31, 1995 and 1996 and December 31, 1996, dated October
2, 1997, included herein, in this Registration Statement on Form S-1 and the
reference to our Firm under the heading "Experts".
KPMG PEAT MARWICK LLP
Houston, Texas
February 11, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our reports on the financial statements of FirsTel,
Inc. as of and for the year ended December 31, 1995 and 1996, dated September
26, 1997, included herein, in this Registration Statement on Form S-1 and the
reference to our Firm under the heading "Experts".
KPMG PEAT MARWICK LLP
Houston, Texas
February 11, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our reports on the combined financial statements of
Valu-Line of Longview, Inc. as of December 31, 1996, dated May 23, 1997,
included herein, in this Registration Statement on Form S-1 and the reference
to our Firm under the heading "Experts".
HEIN + ASSOCIATES LLP
Houston, Texas
February 10, 1998
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-1) and the related Prospectus of Advanced
Communications Group, Inc. for the registration of common stock and to the use
therein of our independent auditors' report dated February 25, 1997, with
respect to the financial statements of KIN Network, Inc. for the year ended
December 31, 1996, filed with the Securities and Exchange Commission.
SARTAIN FISCHBEIN & CO.
February 10, 1998
<PAGE>
EXHIBIT 23.7
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-1) and the related Prospectus of Advanced
Communications Group, Inc. for the registration of $.0001 par value common
stock and to the use therein of our independent auditors' report dated February
23, 1996, with respect to the financial statements of KIN Network, Inc. for the
years ended December 31, 1995 and 1994, filed with the Securities and Exchange
Commission.
KENNEDY AND COE, LLC
Salina, Kansas
February 10, 1998