<PAGE> 1
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported) February 18, 1998
ADVANCED COMMUNICATIONS GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 001-13875 76-0549396
--------------- ---------------------- ------------------
(State or other Commission File Number (IRS Employer
jurisdiction of Identification No.)
incorporation)
390 South Woods Mill Road, Suite 150, St. Louis, Missouri 63017
- - --------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (314) 205-8668
-------------------------
------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
The undersigned registrant hereby amends its Form 8-K dated
February 18, 1998 and filed on March 5, 1998 by restating Item 2 and
adding Items 7(a) and 7(b).
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Advanced Communications Group, Inc. was founded 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 Telephone Company and U S WEST
Communications, Inc. (the "Region"). On February 18, 1998, it acquired, 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"). Unless
otherwise indicated herein 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.
Unless otherwise indicated, the share data below 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 Acquisitions.
In the Acquisitions, ACG acquired (i) all the outstanding stock of Feist
Long Distance Service, Inc., FirsTel, Inc., Great Western Directories, Inc.,
Tele-Systems, Inc. and Valu-Line of Longview, Inc, (ii) substantially all the
assets of Long Distance Management II, Inc., Long Distance Management of Kansas,
Inc., National Telecom, and The Switchboard of Oklahoma City, Inc. and (iii) 49%
of the common stock of KIN Network, Inc. The following is a brief 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.
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.
<PAGE> 3
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. In early
September 1997, FirsTel contracted to acquire two small telecommunications
companies in South Dakota.
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.
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.
KINNET: KIN Network, Inc. ("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
<PAGE> 4
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.
As part of the consideration in the KINNET transaction, ACG 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.
SUMMARY OF TERMS OF THE ACQUISITIONS
ACG had entered into definitive acquisition agreements to acquire each
of the Acquired Companies, its predecessor and its interest in KINNET. The
aggregate consideration paid by ACG in the Acquisitions consisted of
approximately $73.9 million in cash to stockholders of the Acquired Companies,
$10.0 million as a direct cash investment in KINNET, promissory notes in the
aggregate principal amount of $17.4 million, 3,383,589 shares of ACG's common
stock, par value $.0001 per share ("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 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 to the transferor of certain assets
acquired by FirsTel if certain former customers of the transferor do a targeted
amount of business with FirsTel by August 31, 1998. Further, prior to the
closing of the Acquisitions, certain of the Acquired Companies that are S
Corporations made 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.
Additionally, ACG also acquired 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. The cash portion of the purchase price was provided by a
portion of the proceeds from ACG's initial public offering of 8,000,000 shares
of Common Stock at $14 per share which was registered under the Securities Act
of 1933, as amended (Registration No. 333-37671) and which was also closed on
February 18, 1998.
<PAGE> 5
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.
CONSIDERATION
ACQUIRED NUMBER OF
COMPANIES SHARES OF
AND KINNET(1) COMMON STOCK CASH NOTES OTHER
------------- ------------ ---- ----- -----
(dollars in thousands)
Great Western ......... 714,286 $55,000 $15,000(2) (3)
Valu-Line ............. 371,429(4) 6,600 -- --
FirsTel ............... 783,588 5,000 2,000(5) (6)
Feist Long
Distance .......... 714,286 1,500(7) -- --
Other Acquired
Companies ......... 85,714 5,822 350(8) (9)
KINNET ................ 714,286(10) 10,000(10) -- --
Total ......... 3,383,589 $83,922 $17,350
========= ======= =======
(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 its outstanding capital stock.
(2) 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.
(3) 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.
(4) 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 arise.
(5) 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.
(6) 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.
<PAGE> 6
(7) 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.
(8) 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.
(9) 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.
(10) The shares are being issued to the stockholder of KINNET, and the $10.0
million cash component is a direct cash investment in KINNET.
The consideration 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 was subject to customary
conditions.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS,
AND EXHIBITS
(a) Financial Statements of Businesses Acquired
See the Index to Financial Statements attached hereto and
incorporated herein by reference.
(b) Pro Forma Financial Information
See the Index to Financial Statements to Financial Statements
attached hereto and incorporated herein by reference.
(c) See the Exhibit Index attached hereto and incorporated herein by
reference.
<PAGE> 7
<TABLE>
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
PAGE
----
<S> <C>
ADVANCED COMMUNICATIONS GROUP, INC. FINANCIAL STATEMENTS
Report of Independent Auditors...........................................................
Consolidated Balance Sheets as of December 31, 1996 and 1997.............................
Consolidated Statements of Operations for the period from inception (June 1, 1996) thru
December 31, 1996 and the year ended December 31, 1997.............................
Consolidated Statements of Changes in Stockholders' Deficit for the period from inception
(June 1, 1996) thru December 31, 1996 and the year ended December 31, 1997.........
Consolidated Statements of Cash Flows for the period from inception (June 1, 1996) thru
December 31, 1996 and year ended December 31, 1997.................................
Notes to Consolidated Financial Statements...............................................
GREAT WESTERN DIRECTORIES, INC. FINANCIAL STATEMENTS
Report of Independent Auditors...........................................................
Balance Sheets as of December 31, 1996 and December 31, 1997.............................
Statements of Operations for the year ended January 31, 1996, and the two years ended
December 31, 1997..................................................................
Statements of Stockholders' Equity for the year ended January 31, 1996, the 11 months
ended December 31, 1996 and the year ended December 31, 1997.......................
Statements of Cash Flows for the year ended January 31, 1996, and the two years
ended December 31, 1997............................................................
Notes to Financial Statements............................................................
VALU-LINE OF LONGVIEW, INC. FINANCIAL STATEMENTS
Report of Independent Auditors...........................................................
Combined Balance Sheets as of December 31, 1996 and 1997.................................
Combined Statements of Income for the three years ended December 31, 1995, 1996
and 1997...........................................................................
Combined Statements of Stockholders' Equity for the three years ended December 31,
1995, 1996 and 1997................................................................
Combined Statements of Cash Flows for the three years ended December 31, 1995, 1996
and 1997...........................................................................
Notes to Combined Financial Statements...................................................
<PAGE> 8
FEIST LONG DISTANCE SERVICE, INC. FINANCIAL STATEMENTS
Report of Independent Auditors...........................................................
Balance Sheets as of December 31, 1996 and 1997..........................................
Statements of Operations for the two years ended December 31, 1997.......................
Statements of Stockholders' Equity for the two years ended December 31, 1997.............
Statements of Cash Flows for the two years ended December 31, 1997.......................
Notes to Financial Statements............................................................
FIRSTEL, INC. FINANCIAL STATEMENTS
Report of Independent Auditors...........................................................
Balance Sheets as of December 31, 1996 and 1997..........................................
Statements of Operations for the three years ended December 31, 1997.....................
Statements of Stockholders' Deficit for the three years ended December 31, 1997..........
Statements of Cash Flows for the three years ended December 31, 1997.....................
Notes to Financial Statements............................................................
KIN NETWORK, INC. FINANCIAL STATEMENTS
Reports of Independent Auditors..........................................................
Balance Sheets as of December 31, 1996 and 1997..........................................
Statements of Operations for the two years ended December 31, 1997.......................
Statements of Stockholders' Equity for the two years ended December 31, 1997.............
Statements of Cash Flows for the two years ended December 31, 1997.......................
Notes to Financial Statements............................................................
ADVANCED COMMUNICATIONS GROUP, INC. UNAUDITED
PRO FORMA COMBINED FINANCIAL STATEMENTS
Basis of Presentation of Unaudited Pro Forma Combined Financial Statements...............
Unaudited Pro Forma Combined Balance Sheet as of December 31, 1997.......................
Unaudited Pro Forma Combined Statement of Operations for the year ended December 31,
1996...............................................................................
Unaudited Pro Forma Combined Statement of Operations for the year ended December 31,
1997...............................................................................
Notes to Pro Forma Combined Financial Statements.........................................
<PAGE> 9
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Advanced Communications Group, Inc.
We have audited the accompanying consolidated balance sheets of Advanced
Communications Group, Inc. as of December 31, 1996 and 1997, and the related
consolidated statements of operations, changes in stockholders' deficit, and
cash flows for the period from inception (June 6, 1996) through December 31,
1996 and for the year ended December 31, 1997. 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 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 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 1997, and the results
of its operations and its cash flows for the period from inception (June 6,
1996) through December 31, 1996 and for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
March 23, 1998
<PAGE> 10
</TABLE>
<TABLE>
ADVANCED COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS December 31, December 31,
1996 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 33,450 $ --
Employee advance 1,388 --
--------- -----------
Total Current Assets 34,838 --
Office furniture and equipment, net 8,252 5,966
Other non-current assets 48,480 2,688,976
--------- -----------
Total Assets $ 91,570 $ 2,694,942
========= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Note payable to stockholder $ 565,047 $ 2,874,609
Accrued interest payable to stockholder 9,890 266,107
Accounts payable and accrued expenses 148,653 2,098,433
--------- -----------
Total Current Liabilities 723,590 5,239,149
--------- -----------
Commitments and Contingencies -- --
--------- -----------
Stockholders' Deficit:
Common stock, $.00001 par, 180,000,000 shares authorized,
8,227,736 and 8,232,276 shares issued and outstanding, respectively 82 82
Additional paid-in capital 26,718 1,314,566
Accumulated deficit (658,820) (3,858,855)
--------- -----------
Total stockholders' deficit (632,020) (2,544,207)
--------- -----------
Total liabilities and stockholders' deficit $ 91,570 $ 2,694,942
========= ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 11
<TABLE>
ADVANCED COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
For the period
from inception
(June 6, 1996) For the year
through ended
December 31, December 31,
1996 1997
-------------- ------------
<S> <C> <C>
Revenues $ -- $ --
General and administrative expenses 648,930 2,940,469
Depreciation and amortization -- 3,277
Interest expense 9,890 256,289
-------- ----------
Loss before income tax benefit 658,820 3,200,035
Income tax benefit -- --
-------- ----------
Net loss $658,820 $3,200,035
======== ==========
Basic and diluted loss per share $ .08 $ .39
======== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 12
<TABLE>
ADVANCED COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (JUNE 6, 1996) THROUGH DECEMBER 31, 1997
<CAPTION>
Common stock Additional Total
------------ Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Initial capitalization 8,227,736 $ 82 $ 26,718 $ -- $ 26,800
Net loss -- -- -- (658,820) (658,820)
--------- ---- ---------- ----------- -----------
BALANCES, December 31, 1996 8,227,736 82 26,718 (658,820) (632,020)
Issuance of stock options and warrants -- -- 1,237,000 -- 1,237,000
Issuance of stock for services performed 4,540 -- 50,848 -- 50,848
Net loss -- -- -- (3,200,035) (3,200,035)
--------- ---- ---------- ----------- -----------
BALANCES, December 31, 1997 8,232,276 $ 82 $1,314,566 $(3,858,855) $(2,544,207)
========= ==== ========== =========== ===========
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE> 13
<TABLE>
ADVANCED COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the period
From inception
(June 6, 1996) For the year
through December ended December
31, 1996 31, 1997
---------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(658,820) $(3,200,035)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization -- 3,277
Stock-based compensation expense -- 870,000
Changes in assets and liabilities:
(Increase) decrease in employee advances (1,388) 1,388
Increase in property and equipment (8,252) --
--------- -----------
Net cash used by operating activities (668,460) (2,325,370)
--------- -----------
Cash flow from investing activities:
Increase in other non-current assets (48,480) (2,223,639)
--------- -----------
Cash flows from financing activities:
Increase in accounts payable and accrued expenses 148,653 1,949,780
Increase in note payable to stockholder 565,047 2,309,562
Increase in accrued interest payable to stockholder 9,890 256,217
Issuance of common stock 26,800 --
--------- -----------
Net cash provided by financing activities 750,390 4,515,559
--------- -----------
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 $ --
========= ===========
Summary of significant non-cash activities:
Deferred acquisition costs paid for through
issuance of common stock and warrants $ -- $ 417,848
========= ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 14
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND DECEMBER 31, 1997
1. ORGANIZATION AND BUSINESS:
Advanced Communications Group, Inc. ("ACG") was incorporated in Delaware
in September 1997 as a subsidiary of a predecessor company that was
ultimately named Advanced Communications Corp. ("ACC"). ACC was formed in
June 1996 and had previously been named Advanced Communications Group, Inc.
By September 1997, ACC had entered into acquisition agreements to acquire a
number of companies in various aspects of the telecommunications business. In
October 1997, in order to facilitate these acquisitions, ACG entered into new
definitive agreements to acquire the stock or assets of six
telecommunications service providers, one yellow page publisher, two
telephone equipment sales and maintenance companies, ACC, and a 49% interest
in a company owning a fiber optic network (collectively, the "Acquisitions").
Shortly thereafter, ACG filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission (the "Commission") with respect to an
initial public offering ("IPO") of its common stock, par value $.0001 per
share ("Common Stock"). The Registration Statement, as amended, was declared
effective on February 12, 1998. On February 18, 1998, ACG consummated the IPO
and the Acquisitions, including a merger of ACC into a subsidiary of ACG
pursuant to which ACC became a wholly-owned subsidiary of ACG. Hereafter,
unless the context otherwise indicates, references to "ACG" or the "Company"
refer to ACG and its predecessor. Prior to February 1998, ACG had not
conducted any operations other than those relating to the IPO and the
Acquisitions. Consequently, the financial statements included herein relate
only to ACG. All intercompany accounts have been eliminated in consolidation.
In 1997, the Company signed definitive agreements pursuant to which it
agreed to acquire 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.
("Acquisitions"). The consideration to be paid by the Company in the
Acquisitions includes $83.9 million in cash, shares of the Company'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 the Company's Common
Stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 IPO. At December 31, 1996 and 1997,
deferred acquisition costs amounted to approximately $40,900 and $929,000,
respectively, and deferred offering costs amounted to $2,700 and
<PAGE> 15
$1,756,800, respectively. At such time as the Acquisitions are completed,
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 IPO.
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 -- The Company has adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", which replaces the presentation of primary earnings per share and
fully diluted earnings per share with a presentation of basic earnings per
share ("Basic EPS") and diluted earnings per share ("Diluted EPS"). Basic EPS
excludes dilution and is determined by dividing income available to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS reflects the potential dilution that could
occur if securities and other contracts to issue common stock were exercised
or converted into common stock. Adoption of SFAS No. 128 did not change EPS
as previously reported for 1996.
The weighted average shares outstanding were 8,227,736 for the period
from inception (June 6, 1996) through December 31, 1996 and 8,230,006 for the
year ended December 31, 1997. In calculating diluted EPS for the year ended
December 31, 1997, options to purchase 1,525,000 shares of common stock at
exercise prices ranging from $2.50 to $14.00 per share, and warrants to
purchase 1,296,199 shares of common stock at exercise prices ranging from
$2.50 to $6.61 per share were outstanding during part of 1997 but were not
included in the computation of diluted EPS due to their antidilutive effect.
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.
Stock Based Compensation -- 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"). The Company has
elected to remain with the accounting in APB No. 25 and has included in
<PAGE> 16
these financial statements pro forma disclosures of net loss and net loss per
share as if the fair value method of accounting had been applied. No employee
stock options or similar equity instruments were issued by the Company prior to
January 1, 1997.
3. TRANSACTIONS WITH RELATED PARTIES:
COMMON OWNERSHIP AND MANAGEMENT
At December 31, 1996 and 1997, a total of 7,986,074 shares and
7,915,192 shares, respectively, of the Company's Common Stock was owned by
Consolidation Partners Founding Fund, L.L.C., ("CPFF") and by individuals who
then served as directors 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 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 became listed or quoted on a national basis.
During 1996 and 1997, the Company incurred interest expense of $9,890 and
$256,289, respectively, under the Note. Between September 1997 and February
1998, the Company and CPFF amended the terms of the Note three times to
provide for increases in the principal balance to $3,230,000, and to extend
the maturity of the Note to the earlier of December 31, 1998 or the
consummation of the IPO. At December 31, 1997 and 1996, the principal balance
under the Note was approximately $565,000 and $2,875,000, respectively. In
connection with the IPO in February 1998, the entire Note balance was
repaid.
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 warrant at the date of grant.
In connection with the Great Western Directories, Inc. ("Great
Western") acquisition agreement, the Company issued warrants to purchase
756,078 shares of common stock at $6.61 per share. Based on an independent
appraisal, the fair value of these warrants was determined to be $367,000 on
the date of grant, which was recorded as deferred acquisition costs by the
Company.
<PAGE> 17
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.
EMPLOYEE AND DIRECTOR STOCK OPTIONS
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.
During 1997, the Company agreed to make various grants and awards under
the Plan to employees and officers of the Acquired Companies, and to certain
individuals who became officers of the Company. These options will be
exercisable at the initial offering price and have various vesting and
termination provisions. In addition, the Company has agreed to compensate
each of its outside directors with an option award for 15,000 shares of
common stock upon election to the board and an additional option award of
5,000 shares of common stock upon each subsequent re-election of the
director. At December 31, 1997, no director options had yet been granted.
During December 1997, the Company awarded to three of its officers
ten-year options to purchase 1,275,000 shares of common stock, consisting of
options for 300,000 shares exercisable at $2.50 per share which vest in full
at the end of three months, and options for 975,000 shares of common stock
exercisable at the initial public offering price ($14.00) which vest in three
equal increments on the first three anniversaries of the date of grant.
During the year ended December 31, 1997, the Company recognized $850,000 of
compensation expense related to these options.
At December 31, 1997, there were 2,225,000 additional shares available
for grant under the Plan. The per share weighted-average value of stock
options granted during 1997 was $8.63 using the Black-Scholes model with the
following assumptions: weighted-average risk-free interest rate of 6.50%,
expected life of 10 years, expected volatility of 60%, and an expected
dividend yield of zero percent.
The Company applies APB Opinion No. 25 in accounting for the Plan.
Accordingly, apart from the compensation expense referred to above, the
Company has not recognized compensation expense related to the issuance of
options for the purchase of its common stock. Had the Company determined
compensation expense based on the fair value at the date of grant for its
stock options under SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:
<PAGE> 18
<TABLE>
<CAPTION>
1997
<S> <C>
Net loss:
As reported $3,200,035
Pro forma $5,972,195
Basic and diluted loss per share:
As reported $0.39
Pro forma $0.73
</TABLE>
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual lives of the options was $2.50 to $14.00 per share and
10 years, respectively. No options were exercisable at December 31, 1997.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Number of Weighted average
Shares Exercise price
--------- -----------------
<S> <C> <C>
Balance, December 31, 1996 -- $ --
Options granted 1,275,000 11.29
--------- ------
Balance, December 31, 1997 1,275,000 $11.29
========= ======
</TABLE>
OTHER COMMITMENTS
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 year ended December 31, 1997, the
Company recognized approximately $14,000 of rental expense related to this
lease agreement.
The Company has entered into six-year employment agreements with three
officers of the Company. These agreements provide for annual salaries plus
potential bonuses and stock option grants as determined by the Compensation
Committee of the Board of Directors.
5. SUBSEQUENT EVENTS:
In January 1998, the Company entered into an agreement with a certain
utility company regarding the possible creation of a strategic alliance.
Under the terms of the agreement, which was consummated contemporaneously
with the closing of the initial public offering, the Company issued 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 $14.00) eighteen months after the consummation of the
initial public offering. The Preferred Stock does not pay
<PAGE> 19
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, the Company may, at its option, redeem the Preferred
Stock for total proceeds of $1.25 million. The Company has discussed, and
continues to discuss, similar strategic alliances with other utility companies.
In February 1998, the Company'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.
In February 1998, the Company completed an initial public offering of
8,000,000 shares of its common stock, and closed on the Acquisitions.
Proceeds from the IPO, net of offering costs, were $99.9 million of which
$83.9 million was paid to acquire the Acquired Companies, $5.5 million was
paid to retire debt of the Company and the Acquired Companies, and $1.75
million was paid to a stockholder for a five-year non-compete agreement.
Stockholders of the Acquired Companies who became executive officers or
directors of the Company upon the consummation of the Acquisitions received
approximately $35.6 million of the cash purchase price paid in the
Acquisitions.
Prior to the pricing of the IPO, 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 the Company 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 IPO. As of March
30, 1998, no negotiated settlement had been reached and Mr. O'Neal had
delivered to CPFF a demand for binding arbitration. CPFF has agreed not to
effect any distribution of the Company's 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. The
Company shall have no liability with respect to the resolution of this
matter and no additional Common Stock or equivalents will be issued in
connection therewith. In no event shall any assets of the Company be used
too satisfy any negotiated settlement or arbitration award.
<PAGE> 20
GREAT WESTERN DIRECTORIES, INC.
FINANCIAL STATEMENTS
JANUARY 31, 1995 AND
DECEMBER 31, 1996 AND 1997
(WITH INDEPENDENT AUDITORS'
REPORT THEREON)
<PAGE> 21
Independent Auditors' Report
----------------------------
The Board of Directors
Great Western Directories, Inc.:
We have audited the accompanying balance sheets of Great Western Directories,
Inc. as of December 31, 1996 and 1997, and the related statements of
operations and cash flows for the year ended January 31, 1996 and for each of
the years in the two-year period ended December 31, 1997, and the related
statements of stockholders' equity for the year ended January 31, 1996, the
eleven months ended December 31, 1996, and the year ended December 31, 1997.
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 Great Western Directories,
Inc. as of December 31, 1996 and 1997, and the results of its operations and
its cash flows for the year ended January 31, 1996 and for each of the years
in the two-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
March 20, 1998
<PAGE> 22
<TABLE>
GREAT WESTERN DIRECTORIES, INC.
Balance Sheets
December 31, 1996 and 1997
<CAPTION>
Assets 1996 1997
------ ---- ----
<S> <C> <C>
Current assets:
Cash $ 719,268 $ 47,349
Accounts receivable, net of allowance for
doubtful accounts of $8,282,945 and
$9,411,602, respectively 13,324,783 11,900,243
Income taxes receivable 384,145 672,875
Deferred directory costs 3,052,944 4,593,770
Deferred income taxes 1,627,821 --
Other current assets 377,275 2,162
----------- -----------
Total current assets 19,486,236 17,216,399
Property and equipment, net 1,118,168 1,227,296
Other assets 4,607 18,955
----------- -----------
Total assets $20,609,011 $18,462,650
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Bank overdraft $ -- $ 468,656
Accounts payable 1,393,021 2,649,200
Payable to related parties 483,311 265,264
Accrued liabilities 1,138,730 1,022,460
Current maturities on long-term debt 1,849,309 --
Prepayments on directory advertising 3,170,840 3,208,092
----------- -----------
Total current liabilities 8,035,211 7,613,672
----------- -----------
Stockholders' equity:
Common stock, $1 par value; 10,000
authorized shares, 1,250 shares
issued and outstanding 1,250 1,250
Additional paid-in capital 5 5
Retained earnings 12,572,545 10,847,723
----------- -----------
Total stockholders' equity 12,573,800 10,848,978
----------- -----------
Total liabilities and stockholders' equity $20,609,011 $18,462,650
=========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE> 23
<TABLE>
GREAT WESTERN DIRECTORIES, INC.
Statements of Operations
For the years ended January 31, 1996 and December 31, 1996 and 1997
<CAPTION>
Year ended
Year ended December 31,
January 31, ----------------------------
1996 1996 1997
---- ---- ----
<S> <C> <C> <C>
Advertising revenues $36,469,094 $44,324,097 $43,246,527
----------- ----------- -----------
Cost of revenues:
Commissions and other sales expenses 8,784,336 9,543,696 10,416,378
Publishing, related party 578,223 1,077,795 1,155,457
Publishing, other 8,944,754 9,333,705 7,613,424
Distribution, related party 697,250 815,566 190,465
Distribution, other 563,362 622,820 1,145,095
Depreciation and amortization 228,324 223,434 235,000
----------- ----------- -----------
Total cost of revenues 19,796,249 21,617,016 20,755,819
----------- ----------- -----------
Gross margin 16,672,845 22,707,081 22,490,708
----------- ----------- -----------
General and administrative expenses:
Salaries and payroll taxes 5,953,869 6,320,326 7,527,174
Provision for bad debts 3,249,165 4,650,918 4,351,667
Other 3,457,492 4,015,824 4,307,365
----------- ----------- -----------
Total general and administrative expenses 12,660,526 14,987,068 16,186,206
----------- ----------- -----------
Total operating income 4,012,319 7,720,013 6,304,502
----------- ----------- -----------
Other income (expense):
Interest expense (602,100) (503,768) (49,750)
Settlement of litigation, net of expenses of $318,496 -- 6,281,504 --
Other, net 66,857 93,587 85,943
----------- ----------- -----------
Total other income (expense) (535,243) 5,871,323 36,193
----------- ----------- -----------
Income before income taxes 3,477,076 13,591,336 6,340,695
Provision for income taxes 1,307,290 5,294,596 1,804,112
----------- ----------- -----------
Net income $ 2,169,786 $ 8,296,740 $ 4,536,583
=========== =========== ===========
Basic and diluted income per share $ 1,735.83 $ 6,637.39 $ 3,629.27
=========== =========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE> 24
<TABLE>
GREAT WESTERN DIRECTORIES, INC.
Statements of Stockholders' Equity
For the year ended January 31, 1996,
the eleven months ended December 31, 1996
and the year ended December 31, 1997
<CAPTION>
Additional
Common paid-in Retained Treasury
stock capital earnings stock Total
----- ------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Balances, January 31, 1995 $1,250 $ 5 $ 2,476,726 $ -- $ 2,477,981
Cash dividends -- -- (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 -- -- (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) -- -- -- (225,000) (225,000)
Issuance of treasury stock
(31.25 shares) -- -- -- 225,000 225,000
Cash dividends -- -- (6,261,405) -- (6,261,405)
Net income -- -- 4,536,583 -- 4,536,583
------ ------ ----------- --------- -----------
Balances, December 31, 1997 $1,250 $ 5 $10,847,723 $ -- $10,848,978
====== ====== =========== ========= ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE> 25
<TABLE>
GREAT WESTERN DIRECTORIES, INC.
Statements of Cash Flows
For the years ended January 31, 1996,
and December 31, 1996 and 1997
<CAPTION>
Year ended
Year ended December 31,
January 31, --------------------------------
1996 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,169,786 $ 8,296,740 $ 4,536,583
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation and amortization 228,324 223,434 235,000
Loss on disposal of assets 72,000 -- --
Provision for bad debts 3,249,165 4,650,918 4,351,667
Deferred income taxes (68,045) (542,074) 1,627,821
Changes in:
Accounts receivable (7,505,966) (6,707,225) (2,927,127)
Deferred directory costs (1,159,636) (696,008) (1,540,826)
Income taxes receivable (755,005) 688,233 (288,730)
Accounts payable (708,170) (569,983) 1,038,132
Accrued liabilities 85,664 886,520 (116,270)
Prepayments on directory advertising 825,617 (352,931) 37,252
Other assets 611,754 72,136 360,765
----------- ----------- -----------
Net cash provided (used) by operating
activities (2,954,521) 5,949,760 7,314,267
----------- ----------- -----------
Cash flows from investing activities -
purchases of property and equipment (116,288) (300,125) (344,128)
----------- ----------- -----------
Cash flows from financing activities:
Change in bank overdraft 33,144 (169,011) 468,656
Net borrowings (payments) under note payable to bank 1,800,000 -- --
Advances under long-term debt 3,000,000
Principal payments under long-term debt (2,037,364) (4,708,019) (1,849,309)
Purchase of treasury stock -- -- (225,000)
Issuance of treasury stock -- -- 225,000
Cash dividends paid (46,250) (92,500) (6,261,405)
----------- ----------- -----------
Net cash provided (used) by financing
activities 2,749,500 (4,969,530) (7,642,058)
----------- ----------- -----------
Net increase (decrease) in cash (321,309) 680,105 (671,919)
Cash at beginning of year 353,002 39,163 719,268
----------- ----------- -----------
Cash at end of year $ 31,693 $ 719,268 $ 47,349
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 602,100 $ 503,768 $ 49,750
=========== =========== ===========
Cash paid during the year for income taxes $ 2,017,092 $ 4,350,000 $ --
=========== =========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE> 26
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
DESCRIPTION OF BUSINESS
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.
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 in the near term because of 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
As discussed in Note 4, 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.
Prior to January 1, 1997 the Company used the asset and liability
method whereby 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 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.
<PAGE> 27
2
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at discrete points in time based on
in 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 financial
instrument current assets and current liabilities approximate the
fair value of such items due to their short-term nature.
(Continued)
<PAGE> 28
3
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS
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, 1996 and December 31, 1996 and 1997.
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
no prototype directories for the years ended January 31, 1996 and
December 31, 1996 and 1997.
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 $1,598,000,
$2,155,000 and $1,848,000 and barter expense aggregated
approximately $1,459,000, $1,547,000 and $2,118,000 for the years
ended January 31, 1996 and December 31, 1996 and 1997,
respectively.
NET INCOME PER SHARE
The Company has adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share, which
replaces the presentation of primary earnings per share and fully
diluted earnings per share with a presentation of basic earnings
per share (Basic EPS) and diluted earnings per share (Diluted
EPS). Basic EPS excludes dilution and is determined by dividing
the income available to
<PAGE> 29
4
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS
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 issued into common stock.
Adoption of SFAS No. 128 did not change EPS as previously reported.
The weighted average shares outstanding were 1,250 for the years
ended January 31, 1996 and December 31, 1996 and 1997.
(Continued)
<PAGE> 30
5
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the 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) PROPERTY AND EQUIPMENT
At December 31, 1996 and 1997, property and equipment consisted
of the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Land $ 79,900 $ 79,900
Building and improvements 644,061 654,862
Furniture, fixtures and equipment 1,991,215 2,324,542
----------- -----------
2,715,176 3,059,304
Less accumulated depreciation (1,597,008) (1,832,008)
----------- -----------
$ 1,118,168 $ 1,227,296
=========== ===========
</TABLE>
(3) DEBT OBLIGATIONS
NOTE PAYABLE TO BANK
At December 31, 1996 and 1997, the Company had a $2,000,000 line
of credit with a bank with no outstanding advances. The line of
credit bears interest at prime, which was 8.25% at December 31,
1996 and 1997, respectively. The line is collateralized by
accounts receivable and may be used for general corporate working
capital and other purposes as approved by the bank.
<PAGE> 31
6
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS
LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Term note payable to bank, due in
monthly installments of $204,000
including interest at prime (8.25%
at December 31, 1996) through
July 1997, secured by accounts
receivable $ 1,849,309 $ --
----------- ----
Total long-term debt 1,849,309 --
Less current maturities (1,849,309) $ --
----------- ----
Long-term debt, less current maturities $ -- --
=========== ===
</TABLE>
(Continued)
<PAGE> 32
7
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS
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.
(4) INCOME TAXES
The source of deferred tax assets and the tax effect of each as
of December 31, 1996 are as follows:
Deferred tax assets - allowance for doubtful
accounts $ 1,627,821
-----------
Total deferred tax assets $ 1,627,821
===========
The provision for income taxes for the years ended January 31,
1996 and December 31, 1996 and 1997, consists of the following
components:
<TABLE>
<CAPTION>
January 31, December 31, December 31,
1996 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal:
Current $ 1,262,087 $5,057,155 $ (288,730)
Deferred (68,045) (542,074) 1,627,821
State 113,248 779,515 465,021
----------- ---------- ----------
Total provision for
income taxes $ 1,307,290 $5,294,596 $1,804,112
=========== ========== ==========
</TABLE>
A reconciliation of the provision for income taxes for the years
ended January 31, 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, December 31,
1996 1996
---- ----
<S> <C> <C>
Computed "expected" tax expense $ 1,216,977 $4,756,968
Nondeductible expenses 16,702 30,943
State income taxes, net of federal benefits 73,611 506,685
----------- ----------
Total provision for income taxes $ 1,307,290 $5,294,596
=========== ==========
</TABLE>
(Continued)
<PAGE> 33
8
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS
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
1997 financial statements. Also during 1997, the Company filed
an amended 1996 tax return to recover state taxes not previously
deducted, resulting in an increase to the Company's federal tax
receivable by $288,730.
(5) 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 $462,000, $472,000 and $561,000 for the years ended
January 31, 1996 and December 31, 1996 and 1997, respectively.
Future minimum lease payments under noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
Years ending
December 31,
------------
<S> <C>
1998 $ 419,000
1999 364,000
2000 274,000
2001 181,000
2002 119,000
----------
$1,357,000
==========
</TABLE>
(6) 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, 1996 and December 31,
1996 and 1997 were approximately $1,275,000, $1,893,000 and
$1,346,000, respectively. Amounts payable to related parties at
December 31, 1996 and 1997 were approximately $483,000 and
$265,000, respectively.
Notes receivable from shareholders at December 31, 1996 included
notes totaling approximately $360,000 which are included in other
current assets and represent
<PAGE> 34
9
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS
advances to related parties. The notes bear interest at 8% and are
secured by personal property. The notes were repaid on June 15,
1997.
(7) PROFIT SHARING PLAN
The Company formed a self-employed profit sharing plan (the Plan)
during 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 and December 31, 1996 and 1997 was
approximately $40,000, $53,000 and $157,000, respectively. No
discretionary profit sharing contributions were made to the Plan
for the years ended January 31, 1996 and December 31, 1996 and
1997.
(Continued)
<PAGE> 35
10
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS
(8) 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.
During 1997, the Company settled a class action lawsuit filed
during 1996 in Sonoma County, California, alleging, among other
things, breach of contract. The Company made approximately
$479,000 in refunds and credits to various advertisers, and such
amount was recognized at December 31, 1996.
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.
(9) SUBSEQUENT EVENT (UNAUDITED)
In connection with the initial public offering of Advanced
Communications Group, Inc. (ACG) in February 1998, the Company's
stockholders sold all of the issued and outstanding capital stock
of the Company to ACG for $55,000,000 in cash, a $15,000,000
promissory note, shares of ACG common stock and warrants to
purchase shares of ACG common stock.
<PAGE> 36
VALU-LINE OF LONGVIEW, INC. AND
RELATED COMPANIES
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(WITH INDEPENDENT AUDITORS'
REPORT THEREON)
<PAGE> 37
INDEPENDENT AUDITORS 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 two 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. The combined financial statements
of Valu-Line of Longview, Inc. and Related Companies as of December 31, 1997
were audited by other auditors whose report dated March 19, 1998, expressed
an unqualified opinion on these statements.
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 two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Houston, Texas
May 23, 1997
<PAGE> 38
Independent Auditors' Report
----------------------------
The Stockholders and Board of Directors of
Valu-Line of Longview, Inc.
We have audited the accompanying combined balance sheet of Valu-Line of
Longview, Inc., Valu-Line of Louisiana, Inc., and Shared Tenant Services, Inc.
(collectively, the "Companies") as of December 31, 1997, and the related
combined statements of income, stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Companies' 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of the Companies
as of December 31, 1997, and the results of their operations and their cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Houston, Texas
March 19, 1998
<PAGE> 39
<TABLE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
Combined Balance Sheets
December 31, 1996 and 1997
<CAPTION>
Assets 1996 1997
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 289,612 $ 565,701
Accounts receivables, net 760,457 970,170
Unbilled services 260,645 279,438
Prepaid expenses 8,624 327
---------- ----------
Total current assets 1,319,338 1,815,636
Property and equipment, net 1,650,497 1,130,594
Other noncurrent assets 6,615 6,552
---------- ----------
Total assets $2,976,450 $2,952,782
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued line costs $ 743,572 $ 761,677
Sales, property, excise and franchise taxes payable 149,262 176,598
Accrued payroll and related taxes 65,053 82,040
Customer deposits 11,162 10,062
Current portion of notes payable 384,543 1,172,547
---------- ----------
Total current liabilities 1,353,592 2,202,924
Notes payable, net of current portion 1,357,011 224,856
---------- ----------
Total liabilities 2,710,603 2,427,780
---------- ----------
Commitments and contingencies (note 5) -- --
---------- ----------
Stockholders' equity:
Common stock 3,000 3,000
Retained earnings 262,847 522,002
---------- ----------
Total stockholders' equity 265,847 525,002
---------- ----------
Total liabilities and stockholders' equity $2,976,450 $2,952,782
========== ==========
See accompanying notes to combined financial statements.
</TABLE>
<PAGE> 40
<TABLE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
Combined Statements of Income
For the years ended December 31, 1995, 1996 and 1997
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues $13,330,346 $11,181,125 $12,022,208
Operating expenses:
Line and other direct costs 7,491,433 6,036,439 6,615,320
Depreciation and amortization 717,631 819,315 474,688
----------- ----------- -----------
Gross margin 5,121,282 4,325,371 4,932,200
Selling, general and administrative 3,898,106 3,571,468 3,772,310
----------- ----------- -----------
Income from operations 1,223,176 753,903 1,159,890
Other income (expense):
Interest expense (81,579) (185,777) (134,619)
Other 93,287 72,812 (36,116)
----------- ----------- -----------
Net income $ 1,234,884 $ 640,938 $ 989,155
=========== =========== ===========
Basic and diluted income per share $ 411.63 $ 213.65 $ 329.72
=========== =========== ===========
See accompanying notes to combined financial statements.
</TABLE>
<PAGE> 41
<TABLE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
Combined Statements of Stockholders' Equity
For the years ended December 31, 1995, 1996 and 1997
<CAPTION>
Common stock
--------------------- Retained
Shares Amount earnings Total
------ ------ -------- -----
<S> <C> <C> <C> <C>
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 -- -- 989,155 989,155
Distributions to stockholders -- -- (730,000) (730,000)
----- ------ ----------- -----------
Balances, December 31, 1997 3,000 $3,000 $ 522,002 $ 525,002
===== ====== =========== ===========
See accompanying notes to combined financial statements.
</TABLE>
<PAGE> 42
<TABLE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
Combined Statements of Cash Flows
For the years ended December 31, 1995, 1996 and 1997
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,234,884 $ 640,938 $ 989,155
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 717,631 819,315 474,688
Changes in assets and liabilities:
Accounts receivable, net and unbilled services 281,235 (34,758) (228,506)
Prepaid expenses and other assets 19,806 (3,170) 8,360
Accounts payable and accrued
line costs 53,696 34,313 18,105
Other current liabilities (71,602) 35,457 43,223
----------- ----------- -----------
Net cash provided by operations 2,235,650 1,492,095 1,305,025
----------- ----------- -----------
Cash flows from investing activities:
Puchases of property and equipment (2,375,964) (134,651) (161,060)
Other, net 15,523 6,435 206,275
----------- ----------- -----------
Net cash provided by (used in)
investing activities (2,360,441) (128,216) 45,215
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on long-term debt, capital leases
and other notes payable (519,209) (581,123) (422,976)
Proceeds from long-term debt and other notes payable 2,112,950 40,153 78,825
Distributions to stockholders (1,325,000) (815,000) (730,000)
----------- ----------- -----------
Net cash provided by (used in)
financing activities 268,741 (1,355,970) (1,074,151)
----------- ----------- -----------
Net increase in cash 143,950 7,909 276,089
Cash and cash equivalents, beginning year 137,753 281,703 289,612
----------- ----------- -----------
Cash and cash equivalents, end of year $ 281,703 $ 289,612 $ 565,701
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 81,579 $ 185,777 $ 134,619
=========== =========== ===========
Equipment acquired under capital leases $ 238,683 $ -- $ --
=========== =========== ===========
See accompanying notes to combined financial statements.
</TABLE>
<PAGE> 43
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1996 and 1997
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Valu-Line of Longview, Inc. and Related Companies provide local
and long distance telecommunications services primarily to
commercial and residential customers located in Texas, Louisiana
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."
CASH EQUIVALENTS
For purposes of reporting cash flows, cash equivalents include
highly-liquid investments purchased with a maturity of three
months or less.
ACCOUNTS RECEIVABLE AND UNBILLED SERVICES
The Company recorded an allowance for doubtful accounts of
$25,000 at December 31, 1996 and 1997, respectively. The Company
bills in seven 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 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 five to seven 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.
(Continued)
<PAGE> 44
2
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
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.
(Continued)
<PAGE> 45
3
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at discreet points in time based on
relevant market information. These estimates may be subjective
in nature and involve uncertainities and matters of significant
judgment, and therefore cannot be determined with precision.
The Company believes that the carrying amounts of its financial
instrument current assets and liabilities approximate the fair
value of such items due to their short-term nature. The carrying
amounts of notes payable approximate their fair value because the
interest rates thereon approximate market rates of interest.
REVENUE RECOGNITION
Revenues are recognized as long distance and local services are
provided. Billings in advance for local services are deferred
until earned.
NET INCOME PER SHARE
The Company has adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share, which
replaces the presentation of primary earnings per share and fully
diluted earnings per share with a presentation of basic earnings
per share (Basic EPS) and diluted earnings per share (Diluted
EPS). Basic EPS excludes dilution and is determined by dividing
the 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 issued into common stock. Adoption of SFAS No. 128
did not change EPS as previously reported for 1995 and 1996.
The weighted average shares outstanding were 3,000 for the years
ended December 31, 1995, 1996 and 1997.
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.
(Continued)
<PAGE> 46
4
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(2) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1997
---- ----
<S> <C> <C>
Land $ 50,622 $ 38,421
Building 350,605 350,605
Switch and network equipment 3,349,534 2,110,268
Vehicles 201,121 178,656
Computer equipment 229,759 177,835
Furniture and fixtures 46,365 46,365
Leasehold improvements 26,607 26,607
----------- -----------
4,254,613 2,928,757
Less accumulated depreciation
and amortization (2,604,116) (1,798,163)
----------- -----------
$ 1,650,497 $ 1,130,594
=========== ===========
</TABLE>
During 1997, the Company sold switching equipment for cash proceeds of
$60,000 and recognized a loss on the sale of $60,000.
(Continued)
<PAGE> 47
5
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(3) NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1997
---- ----
<S> <C> <C>
Notes payable to a bank due in monthly
installments ranging from $324 to $926,
including interest ranging from 8.25% to
8.5% and maturing at various times
through 1999. The notes are collateralized
by a switch and network equipment,
computer equipment and vehicles. $ 49,128 $ 60,869
Notes payable to a bank due in monthly
installments of $3,456 and $3,970,
including interest at 8.75% and prime,
not to exceed 12% (8.5% at December 31,
1997) and maturing August 2005 and
October 1998, respectively. The notes
are collateralized by land and buildings.
An additional unsecured note was taken
out in 1997. This note is due in monthly
payments of $442, including interest at
8.25%, and maturing March 1999 330,826 274,212
Note payable to a bank due in monthly.
Installments of $33,536, including interest
at prime, not to exceed 12% (8.5% at
December 31, 1997) with a balloon
payment on December 28, 1998. The
note is collateralized by certain switch
and network equipment. 1,361,600 1,062,322
---------- -----------
1,741,554 1,397,403
Less current portion (384,543) (1,172,547)
---------- -----------
$1,357,011 $ 224,856
========== ===========
</TABLE>
(Continued)
<PAGE> 48
6
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Future maturities of notes payable as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Years ending
December 31, Amount
------------ ------
<S> <C>
1998 $1,172,547
1999 44,744
2000 26,769
2001 29,207
2002 31,868
Thereafter 92,268
----------
$1,397,403
==========
</TABLE>
(Continued)
<PAGE> 49
7
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(4) COMMITMENTS AND CONTINGENCIES
COMMITMENTS
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 $175,273, $102,010 and $88,242 for the years ended December
31, 1995, 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>
1998 $40,875
1999 31,719
2000 22,345
2001 --
2002 --
-------
$94,939
=======
</TABLE>
CONTINGENCIES
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. In 1998, the Company
reached a settlement with the Arkansas regulatory authorities for
approximately $120,000, this amount was recorded as other
expenses for the year ended December 31, 1997.
In addition, the Company was involved in a class action lawsuit
in which certain customers alleged that they were improperly
billed. The lawsuit was settled in February 1998 for $35,000 and
has been recorded as other expenses for the year ended December
31, 1997.
The Company is involved in various claims and legal actions
arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these
(Continued)
<PAGE> 50
8
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
matters will not have a material adverse effect on the Company's
combined financial condition, liquidity or results of operations.
(5) STOCKHOLDERS' EQUITY
Common Stock is as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997
---- ----
<S> <C> <C>
Value-Line of Longview, Inc.
Common Stock - No par value, 100,000 shares
authorized, 1,000 shares issued and outstanding $1,000 $1,000
Value-Line of Louisiana, Inc.
Common Stock - No par value, 1,000 shares
authorized, 1,000 shares issued and outstanding 1,000 1,000
Shares Tenant Services, Inc.
Common Stock - No par value, 1,000 shares
Authorized, 1,000 shares issued and outstanding 1,000 1,000
------ ------
$3,000 $3,000
====== ======
</TABLE>
(6) 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 and local traffic. Historically, these access charges
have made up a significant percentage of the overall cost of
providing long distance and local services. 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.
(7) SUBSEQUENT EVENT (UNAUDITED)
In connection with the initial public offering of Advanced
Communications Group, Inc. (ACG) in February 1998, the Company's
stockholders sold all of the issued and outstanding capital stock
of the Company to ACG for $6,600,000 in cash and shares of common
stock of ACG.
<PAGE> 51
FEIST LONG DISTANCE SERVICE, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(WITH INDEPENDENT AUDITORS'
REPORT THEREON)
<PAGE> 52
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Feist Long Distance Service, Inc.:
We have audited the accompanying balance sheets of Feist Long Distance
Service, Inc. as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Feist Long Distance Service,
Inc. as of December 31, 1996 and 1997, 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
March 20, 1998
<PAGE> 53
<TABLE>
FEIST LONG DISTANCE SERVICE, INC.
Balance Sheets
December 31, 1996 and 1997
<CAPTION>
Assets
------
1996 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,565 $ 75,591
Accounts receivable, net allowance for
doubtful accounts of $106,280 and $ 1,190,307 1,893,641
Other current assets 7,545 79,837
---------- -----------
Total current assets 1,219,417 2,049,069
Property and equipment, net 370,043 445,135
---------- -----------
Total assets $1,589,460 $ 2,494,204
========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 647,555 $ 1,469,941
Accrued expenses 72,045 110,464
Deferred revenue -- 224,982
Notes payable 20,323 --
Notes payable to shareholders 809,450 666,254
---------- -----------
Total current liabilities 1,549,373 2,471,641
---------- -----------
Long-term portion of notes payable -- 8,565
---------- -----------
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) (1,024,502)
---------- -----------
Total stockholders' equity 40,087 13,998
---------- -----------
Total liabilities and stockholders' equity $1,589,460 $ 2,494,204
========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE> 54
<TABLE>
FEIST LONG DISTANCE SERVICE, INC.
Statements of Operations
For the years ended December 31, 1996 and 1997
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Revenues:
Long distance revenues $10,027,743 $11,751,196
Local revenues -- 888,192
----------- -----------
Total revenues 10,027,743 12,639,388
Cost of services 6,854,333 9,006,138
Depreciation 237,240 207,555
----------- -----------
Gross proift 2,936,170 3,425,695
Selling, general and administrative expenses 2,469,137 3,490,615
----------- -----------
Income (loss) from operations 467,033 (64,920)
Other income (expense):
Interest, net (60,211) (45,620)
Other, net (1,737) 84,451
----------- -----------
Net income (loss) $ 405,085 $ (26,089)
=========== ===========
Basic and diluted income (loss) per share $ 40.51 $ (2.61)
=========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE> 55
<TABLE>
FEIST LONG DISTANCE SERVICE, INC.
Statements of Stockholders' Equity
For the years ended December 31, 1996 and 1997
<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 -- -- -- (26,089) (26,089)
------ -------- -------- ----------- ---------
Balances, December 31, 1997 10,000 $100,000 $938,500 $(1,024,502) $ 13,998
====== ======== ======== =========== =========
See accompanying notes to financial statements
</TABLE>
<PAGE> 56
<TABLE>
FEIST LONG DISTANCE SERVICE, INC.
Statements of Cash Flows
For the years ended December 31, 1996 and 1997
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 405,085 $ (26,089)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 237,240 207,555
Changes in assets and liabilities:
Accounts receivable, net (169,468) (703,334)
Prepaids and other current assets 11,916 (72,292)
Accounts payable (199,626) 822,386
Accrued expenses (9,695) 38,419
Deferred revenue -- 224,982
--------- ---------
Net cash provided by operating activities 275,452 491,627
--------- ---------
Cash flows from investing activities -
purchases of property and equipment (114,576) (282,647)
--------- ---------
Cash flows from financing activities:
Repayments of notes payable (180,906) (166,996)
Proceeds from notes payable -- 12,042
--------- ---------
Net cash used in financing activities (180,906) (154,954)
--------- ---------
Net increase (decrease) in cash and cash equivalents (20,030) 54,026
Cash and cash equivalents, beginning of year 41,595 21,565
--------- ---------
Cash and cash equivalents, end of year $ 21,565 $ 75,591
========= =========
Supplemental disclosure of cash flow information -
cash paid during the year for interest $ 60,313 $ 45,716
========= =========
See accompanying notes to financial statements.
</TABLE>
<PAGE> 57
FEIST LONG DISTANCE SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
DESCRIPTION OF BUSINESS
Feist Long Distance Service, Inc. (the Company) is headquartered
in Wichita, Kansas and provides long distance, local and 800
services to business and residential customers in Kansas,
Nebraska, Missouri, Texas and Oklahoma.
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 financial
instrument current assets and current liabilities approximate the
fair value of such items due to their short-term nature.
REVENUE RECOGNITION
Revenues are recognized when long-distance, local and 800 services
are provided. Billings made in advance for local services are
deferred until earned.
<PAGE> 58
2
FEIST LONG DISTANCE SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
NET INCOME (LOSS) PER SHARE
The Company has adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share, which
replaces the presentation of primary earnings per share and fully
diluted earnings per share with a presentation of basic earnings
per share (Basic EPS) and diluted earnings per share (Diluted
EPS). Basic EPS excludes dilution and is determined by dividing
the 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 issued into
(Continued)
<PAGE> 59
3
FEIST LONG DISTANCE SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
common stock. Adoption of SFAS No. 128 did not change EPS as
previously reported for 1996.
The weighted average shares outstanding were 10,000 for the years
ended December 31, 1996 and 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 revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, December 31, Estimated
1996 1997 useful lives
---- ---- ------------
<S> <C> <C> <C>
Machinery and equipment $ 1,394,466 $ 1,376,512 3 to 5 years
Office equipment 55,368 62,446 7 years
Vehicles 31,900 68,874 5 years
----------- -----------
1,481,734 1,507,832
Less accumulated
depreciation 1,111,691 1,062,697
----------- -----------
$ 370,043 $ 445,135
=========== ===========
</TABLE>
(3) NOTES PAYABLE
At December 31, 1996 and 1997, the Company had notes payable
totaling $809,450 and $666,254, respectively, outstanding to the
Company's eight shareholders. The notes are payable on demand and
accrue interest at 5.75%. The Company paid approximately $46,543
and $45,717 in interest expense on these notes payable for the
years ended December 31, 1996 and 1997.
(4) RELATED PARTY TRANSACTION
The Company leases its office space through a sublease agreement
with an affiliate, Feist Publications, Inc. Rental expense for
the years ended December 31, 1996 and
<PAGE> 60
4
FEIST LONG DISTANCE SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
1997 amounted to approximately $45,000 and $80,441, 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 and local traffic. Historically, these access charges
have made up a significant percentage of the overall cost of
providing long distance and local services. To the extent that
the access services of the local
(Continued)
<PAGE> 61
5
FEIST LONG DISTANCE SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
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.
(6) COMMITMENTS
The Company leases office space under long-term lease agreements.
Future minimum rental payments under noncancelable long-term
leases as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Fiscal
Year Amount
---- ------
<S> <C>
1998 $ 130,410
1999 159,480
2000 154,680
2001 36,670
---------
$ 481,240
=========
</TABLE>
Total rent expense under all operating leases for the years ended
December 31, 1996 and 1997 was $73,733 and $119,882 respectively.
(7) SUBSEQUENT EVENT (UNAUDITED)
In connection with the initial public offering of Advanced
Communications Group, Inc. (ACG) in February 1998, the Company's
stockholders sold all of the issued and outstanding capital stock
of the Company to ACG for $5,000,000 in cash and shares of common
stock of ACG. The notes payable to shareholders were acquired by
ACG in the acquisition.
<PAGE> 62
FIRSTEL, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(WITH INDEPENDENT AUDITORS'
REPORT THEREON)
<PAGE> 63
Independent Auditors' Report
----------------------------
The Stockholders and Board of Directors of
FirsTel, Inc.:
We have audited the accompanying balance sheets of FirsTel, Inc. as of
December 31, 1996 and 1997, and the related statements of operations,
stockholders' deficit and cash flows for each of the years in the three-year
period ended December 31, 1997. 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 FirsTel, Inc. as of December
31, 1996 and 1997, and the results of its operations and its cash flows for
each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
February 27, 1998
<PAGE> 64
<TABLE>
FIRSTEL, INC.
Balance Sheets
December 31, 1996 and 1997
<CAPTION>
Assets 1996 1997
------ ---- ----
<S> <C> <C>
Current assets:
Cash $ 54,128 $ 187,792
Receivables
Trade, net of allowance of $40,063 and $-0-, respectively 640,259 1,348,790
Other 5,254 20,510
Unbilled services 499,679 629,501
Inventory 2,187 95,919
Prepaid expenses and other current assets 23,413 182,203
---------- ----------
Total current assets 1,224,920 2,464,715
Property and equipment, net 903,602 922,061
Intangible assets, net -- 938,535
Other assets 44,433 64,121
---------- ----------
Total assets $2,172,955 $4,389,432
========== ==========
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Current maturities of long-term debt $1,397,834 $1,057,849
Revolving line of credit -- 334,000
Acquisition note payable -- 967,996
Accounts payable 895,186 1,908,427
Deferred revenue -- 169,891
Accrued expenses:
Taxes, other than income taxes 58,617 131,395
Other 9,611 32,870
---------- ----------
Total current liabilities 2,361,248 4,602,428
Deferred compensation payable 26,686 27,365
Long-term debt, less current maturities 18,073 --
---------- ----------
Total liabilities 2,406,007 4,629,793
---------- ----------
Stockholders' deficit:
Common stock, par value $1 per share. Authorized,
1,000,000 shares; issued 1,000 shares 1,000 1,000
Accumulated deficit (234,052) (241,361)
---------- ----------
Total stockholders' deficit (233,052) (240,361)
---------- ----------
Total liabilities and stockholders' deficit $2,172,955 $4,389,432
========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE> 65
<TABLE>
FIRSTEL, INC.
Statements of Operations
For the years ended December 31, 1995, 1996, and 1997
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Long distance revenues $7,838,345 $10,355,229 $12,095,720
Local and cellular revenues -- -- 1,240,381
---------- ----------- -----------
Total revenues 7,838,345 10,355,229 13,336,101
---------- ----------- -----------
Cost of revenues:
Line costs 5,001,807 6,620,483 8,317,311
Direct labor 288,459 393,983 398,063
Cellular costs -- -- 636,380
Dialer costs 161,807 191,854 225,019
Switch costs 81,663 101,673 122,383
Other 6,108 5,943 520,603
---------- ----------- -----------
Total cost of revenues 5,539,844 7,313,936 10,219,759
---------- ----------- -----------
Depreciation and amortization 205,890 247,618 280,308
---------- ----------- -----------
Gross profit 2,092,611 2,793,675 2,836,034
---------- ----------- -----------
Operating expenses:
Selling 926,115 1,107,800 1,284,240
General and administrative 410,033 563,019 708,422
Sales support 183,649 228,574 623,648
---------- ----------- -----------
1,519,797 1,899,393 2,616,310
---------- ----------- -----------
Income from operations 572,814 894,282 219,724
---------- ----------- -----------
Other income (expense):
Finance charges and penalties 36,792 34,718 52,502
Interest expense (220,932) (191,076) (152,357)
Other 4,422 142 (676)
---------- ----------- -----------
Net income $ 393,096 $ 738,066 $ 119,193
========== =========== ===========
Basic and diluted income per share $ 393.10 $ 738.07 $ 119.19
========== =========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE> 66
<TABLE>
FIRSTEL, INC.
Statements of Stockholders' Deficit
For the years ended December 31, 1995, 1996, and 1997
<CAPTION>
Common stock Total
-------------------- Accumulated Treasury stockholders'
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) -- -- (126,502) -- (126,502)
Net income -- -- 119,193 -- 119,193
----- ----- --------- --------- ---------
Balances, December 31, 1997 1,000 $1,000 $(241,361) $ -- $(240,361)
===== ====== ========= ========= =========
See accompanying notes to financial statements.
</TABLE>
<PAGE> 67
<TABLE>
FIRSTEL, INC.
Statements of Cash Flows
For the years ended December 31, 1995, 1996, and 1997
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 393,096 $ 738,066 $ 119,193
Adjustments to reconcile net income to
Net cash provided by operating activities -
Depreciation and amortization 205,890 247,618 309,770
Loss on sale of equipment 1,139 158 --
Changes in assets and liabilities:
Receivables, net (221,079) (52,610) (703,277)
Unbilled services (109,796) (100,069) (129,822)
Inventory -- (2,187) (63,020)
Prepaid expenses and other current assets (1,638) (3,654) (198,989)
Other assets (150) (37,801) --
Accounts payable 73,866 136,630 930,371
Deferred revenue -- -- 169,891
Accrued expenses 19,989 (21,928) 206,709
Deferred compensation payable 36,845 (10,159) 679
---------- --------- ---------
Net cash provided by operating activities 398,162 894,064 641,505
---------- --------- ---------
Cash flows from investing activities:
Payments for property and equipment purchases (378,501) (202,907) (260,112)
Payments for acquisitions -- -- 97,169
Payments to/from collateral account (74,515) 74,515 --
Payments for loan origination fees (1,443) (2,000) --
---------- --------- ---------
Net cash used in investing activities (454,459) (130,392) (357,281)
---------- --------- ---------
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) (358,058)
Proceeds from debt borrowings 494,964 27,383 334,000
Distribution payments (165,000) (221,281) (126,502)
Purchase of treasury stock -- (700,000) --
Sale of treasury stock -- 600,000 --
---------- --------- ---------
Net cash provided by (used in) financing activities 96,021 (753,305) (150,560)
---------- --------- ---------
Net increase in cash 39,724 10,367 133,664
Cash at beginning of year 4,037 43,761 54,128
---------- --------- ---------
Cash at end of year $ 43,761 $ 54,128 $ 187,792
========== ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 212,936 $ 199,845 $ 152,357
========== ========= =========
Supplemental disclosure of noncash financing activities:
Noncash short-term debt refinanced $1,400,000 $ -- $ --
========== ========= =========
Issuance of debt for acquisitions $ -- $ -- $ 968,000
========== ========= =========
See accompanying notes to financial statements.
</TABLE>
<PAGE> 68
FIRSTEL, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(1) ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
FirsTel, Inc. (the Company) provides long distance, local and
cellular tele-communications services to commercial and
residential customers in South Dakota, North Dakota, Minnesota,
Iowa, Nebraska, Wyoming, Colorado, and Montana.
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
Intangible assets consist primarily of acquired customer lists
and goodwill, and are amortized straight-line over 5 years and 15
years, respectively. Accumulated amortization on intangible
assets approximated $29,461 at December 31, 1997.
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
<PAGE> 69
2
FIRSTEL, INC.
NOTES TO FINANCIAL STATEMENTS
and matters of significant judgment, and therefore cannot be
determined with precision.
The Company believes that the carrying amounts of its financial
instrument current assets and current liabilities approximate the
fair value of such items due to their short-term nature.
REVENUE RECOGNITION
Revenues are recognized when long-distance, local and cellular
services are provided. Billings in advance for local services
are deferred until earned.
(Continued)
<PAGE> 70
3
FIRSTEL, INC.
NOTES TO FINANCIAL STATEMENTS
NET INCOME PER SHARE
The Company has adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share, which
replaces the presentation of primary earnings per share and fully
diluted earnings per share with a presentation of basic earnings
per share (Basic EPS) and diluted earnings per share (Diluted
EPS). Basic EPS excludes dilution and is determined by dividing
the 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 issued into common stock. Adoption of SFAS No. 128
did not change EPS as previously reported for 1995 and 1996.
The weighted average shares outstanding were 1,000 for the years
ended December 31, 1995, 1996 and 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 revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
(2) ACQUISITIONS
During September 1997, the Company purchased substantially all
of the assets of Pam Comm, a division of Pam Oil, Inc., and
Tele-Tech, Inc. (Tele-Tech) in two separate transactions.
Pam Comm, a provider of long distance and local telecommunication
services primarily to customers in South Dakota, was acquired by
the Company for $4,300 cash and common stock of the Company.
Tele-Tech, a provider of telephone system equipment, was acquired
by the Company for $93,000 cash and a note payable to be settled
in common stock of Advanced Communications Group, Inc. (ACG).
The total purchase price for both acquisitions was allocated to
acquired tangible assets, customer lists and goodwill based on
their respective fair values on the date of acquisition.
As discussed further in Note 12, the common stock of the Company
was acquired by ACG in connection with its initial public offering
in February 1998. The fair value of the common stock given to Pam
Comm and Tele-Tech was determined to be $355,000 and $613,000,
respectively, based on the initial public offering price of
ACG's common stock, and reflecting a discount of 20% due to
restrictions on the sale and transferability of the shares issued.
(Continued)
<PAGE> 71
4
FIRSTEL, INC.
NOTES TO FINANCIAL STATEMENTS
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31,
1996 and 1997:
<TABLE>
<CAPTION>
Estimated
1996 1997 useful lives
---- ---- ------------
<S> <C> <C> <C>
Network equipment $ 656,068 $ 775,118 5-7 years
Dialers 535,113 593,539 5 years
Office furniture and equipment 263,611 368,902 5-7 years
Leasehold improvements 34,182 34,182 5-10 years
Vehicles -- 16,000 5 years
---------- ----------
1,488,974 1,787,741
Less: accumulated depreciation
and amortization (585,373) (865,681)
---------- ----------
$ 903,601 $ 922,060
========== ==========
</TABLE>
(4) EQUITY TRANSACTIONS
Upon initial capitalization, the Company issued 1,000 shares of
its common stock to the original five shareholders. 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 these shares to a new shareholder for
$600,000. As described in Note 11, the stockholders surrendered
all outstanding shares of the company stock concurrent with the
effective date of the merger with ACG.
(5) 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, 1996 and 1997 was $5,051,893, $6,797,857 and $8,404,491,
respectively.
<PAGE> 72
5
FIRSTEL, INC.
NOTES TO FINANCIAL STATEMENTS
Capitalized leased assets consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
---- ----
<S> <C> <C>
Office furniture and equipment $ 85,693 $ 85,693
Harris switches 296,536 296,536
--------- ---------
382,229 382,229
Less accumulated amortization (129,796) (187,080)
---------- ---------
$ 252,433 $ 195,149
========== =========
</TABLE>
(Continued)
<PAGE> 73
6
FIRSTEL, INC.
NOTES TO FINANCIAL STATEMENTS
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, 1998 $15,666 $ 433,235
Remaining years -- --
------- ---------
Total minimum lease payments 15,666 $ 433,235
=========
Less interest 873
-------
Present value of minimum lease payments as
of December 31, 1997 $14,793
=======
</TABLE>
(6) LONG-TERM DEBT AND REVOLVING LINE OF CREDIT
Long-term debt consisted of the following at December 31, 1996
and 1997:
<TABLE>
<CAPTION>
December 31,
------------------
1996 1997
---- ----
<S> <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 $ 115,907 $ 17,849
Unsecured notes payable to shareholders, at
12%, assumed by ACG in February 1998,
subordinated to revolving line of credit 1,300,000 1,040,000
----------- -----------
1,415,907 1,057,849
Less current maturities (1,397,834) (1,057,849)
----------- -----------
$ 18,073 $ --
=========== ===========
</TABLE>
The Company has an $800,000 revolving line of credit payable to a
bank, due July 1, 1998, with interest accruing at a variable rate
(9.5% at December 31, 1997). The revolving line of credit is
secured by substantially all assets of the Company, personal
guarantees of four Company officers, and a Company owned life
insurance policy on an officer of the Company. The terms of the
revolving line of credit include various debt covenants. At
December 31, 1996 and 1997, the Company was not in compliance
with one of these covenants. As a result, the Company was
<PAGE> 74
7
FIRSTEL, INC.
NOTES TO FINANCIAL STATEMENTS
charged an additional 2% interest until such time as compliance
with all debt covenants is achieved.
Long-term debt maturities are as follows at December 31, 1997:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Year ending December 31, 1998 $1,057,849
Thereafter --
----------
$1,057,849
==========
</TABLE>
(Continued)
<PAGE> 75
8
FIRSTEL, INC.
NOTES TO FINANCIAL STATEMENTS
(7) 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, 1996 and 1997, accounting fees paid to the related company
order were $27,579, $41,774 and $43,522, respectively.
(8) 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, 1996 and 1997, for such future obligation were $36,845,
$125,541 and $64,710, respectively.
(9) 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
expense for the year ended December 31, 1996 and 1997 was
$7,157 and $13,084, respectively.
(10) 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 and local traffic. Historically, these access charges
have made up a significant percentage of the overall cost of
providing long distance and local 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.
(11) COMMITMENTS AND CONTINGENCIES
In 1996, the Company signed a long-term carrier agreement with
MCI Corp. Included in the agreement is a commitment that the
Company's monthly usage shall equal or exceed $225,000. If usage
is less the Company will pay the actual usage plus an
underutilization charge of 15% of the difference between actual
usage and $225,000.
<PAGE> 76
9
FIRSTEL, INC.
NOTES TO FINANCIAL STATEMENTS
(12) SUBSEQUENT EVENTS
In connection with the initial public offering of ACG in February
1998, the Company's stockholders sold all of the issued and
outstanding capital stock of the Company to ACG for consideration
of $5,000,000 in cash, $2,000,000 in 10% convertible subordinated
notes, common stock of ACG and 50,000 warrants to purchase common
stock of ACG. The notes payable to stockholders were acquired by
ACG in the acquisition.
<PAGE> 77
FINANCIAL STATEMENTS
KIN NETWORK, INC.
YEARS ENDED DECEMBER 31, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE> 78
KIN Network, Inc.
Financial Statements
Years ended December 31, 1997 and 1996
CONTENTS
Report of Independent Auditors 1
Audited Financial Statements
Balance Sheets 2
Statements of Operations 4
Statements of Stockholder's Equity 5
Statements of Cash Flows 6
Notes to Financial Statements 8
<PAGE> 79
Report of Independent Auditors
The Board of Directors
KIN Network, Inc.
We have audited the accompanying balance sheet of KIN Network, Inc. (the
Company), a wholly-owned subsidiary of Liberty Cellular, Inc., as of December
31, 1997, and the related statement of operations and 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.
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 1997 financial statements referred to above present
fairly, in all material respects, the financial position of KIN Network, Inc.
at December 31, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
Ernst & Young
March 13, 1998
<PAGE>
Report of Independent Auditors
The Board of Directors
KIN Network, Inc.
We have audited the accompanying balance sheet of KIN Network, Inc. (the
Company), a wholly-owned subsidiary of Liberty Cellular, Inc., as of December
31, 1996, and the related statement of operations and 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.
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.
at 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.
SARTAIN FISCHBEIN & CO.
February 25, 1997
<PAGE> 80
<TABLE>
KIN Network, Inc.
Balance Sheets
<CAPTION>
DECEMBER 31
1997 1996
---------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 810,709 $ 2,688,775
Receivables:
Trade accounts 775,770 324,771
Accrued revenue 467,011 533,145
Liberty Cellular, Inc. 2,035,171 1,185,538
Patronage credits 190,326 227,259
Prepaid expenses 193,947 144,874
Rural Telephone Finance Cooperative
capital certificates 272,772 251,609
---------------------------------
Total current assets 4,745,706 5,355,971
Property, plant and equipment, at cost:
Network telephone plant in service 31,856,772 28,700,208
Construction in process 3,621,720 234,181
---------------------------------
35,478,492 28,934,389
Less accumulated depreciation 9,232,831 7,113,312
---------------------------------
Net property, plant and equipment 26,245,661 21,821,077
---------------------------------
Other assets:
Rural Telephone Finance Cooperative
capital certificates 2,741,580 3,014,351
Deferred income taxes - 3,108,267
Debt issue costs, net of accumulated amortization
of $41,707 in 1997 and $35,207 in 1996 55,790 62,290
Patronage credits receivable 673,150 604,921
Prepayments on fiber leases 168,111 197,778
Organization and other intangible costs, net of
accumulated amortization of $846,536 in 1997
and $836,278 in 1996 186 10,444
Other assets - 1,300
---------------------------------
Total other assets 3,638,817 6,999,351
---------------------------------
$34,630,184 $ 34,176,399
=================================
2
<PAGE> 81
<CAPTION>
DECEMBER 31
1997 1996
---------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 3,054,311 $ 2,892,009
Accounts payable:
Trade 180,498 632,519
Liberty Cellular, Inc. 4,727 -
Affiliate 189,457 66,408
Accrued expenses 990,025 515,932
---------------------------------
Total current liabilities 4,419,018 4,106,868
Long-term debt, less current maturities 27,281,724 28,763,687
Deferred income taxes 1,971,692 -
---------------------------------
Total liabilities 33,672,434 32,870,555
Stockholder's equity:
Common stock, no par value; authorized
1,000,000 shares; issued and outstanding
300,000 shares - -
Additional paid-in capital 12,071,316 12,071,316
Accumulated deficit (11,113,566) (10,765,472)
---------------------------------
Total stockholder's equity 957,750 1,305,844
---------------------------------
$34,630,184 $ 34,176,399
=================================
See accompanying notes.
</TABLE>
3
<PAGE> 82
<TABLE>
KIN Network, Inc.
Statements of Operations
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
---------------------------------
<S> <C> <C>
Income:
Network revenue $12,265,264 $ 8,552,564
---------------------------------
Expenses:
Depreciation and amortization 2,169,868 1,906,094
Operating and administrative 9,073,242 6,280,446
---------------------------------
Total expenses 11,243,110 8,186,540
---------------------------------
Operating income 1,022,154 366,024
Other income (expense):
Interest and other 93,679 80,678
Interest, net of patronage credits of $240,293
in 1997 and $305,346 in 1996 1,686,510 1,826,148
---------------------------------
Net loss before income taxes (570,677) (1,379,446)
Deferred income tax benefit 222,583 587,073
---------------------------------
Net loss $ (348,094) $ (792,373)
=================================
See accompanying notes.
</TABLE>
4
<PAGE> 83
<TABLE>
KIN Network, Inc.
Statements of Stockholder's Equity
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1995 $ - $10,500,000 $ (9,973,099) $ 526,901
Capital contributions - 1,571,316 - 1,571,316
Net loss - - (792,373) (792,373)
--------------------------------------------------------------------------
December 31, 1996 - 12,071,316 (10,765,472) 1,305,844
Net loss - - (348,094) (348,094)
--------------------------------------------------------------------------
December 31, 1997 $ - $12,071,316 $(11,113,566) $ 957,750
==========================================================================
See accompanying notes.
</TABLE>
5
<PAGE> 84
<TABLE>
KIN Network, Inc.
Statements of Cash Flows
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (348,094) $ (792,373)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Deferred income taxes (222,583) (587,073)
Depreciation and amortization 2,169,868 1,906,094
Gain on sale of assets (11,359) (13,883)
Changes in operating assets and liabilities:
Receivables (416,161) (224,348)
Prepaid expenses (19,406) (96,960)
Other assets 1,300 29,667
Accounts payable (679,490) 273,173
Accrued expenses 474,093 (20,621)
-----------------------------
Net cash provided by operating activities 948,168 473,676
-----------------------------
INVESTING ACTIVITIES
Additions to property, plant and equipment (6,330,150) (1,545,534)
Proceeds from sale of plant 117,676 40,456
-----------------------------
Net cash used in investing activities (6,212,474) (1,505,078)
-----------------------------
FINANCING ACTIVITIES
Proceeds from borrowings 2,000,000 -
Payment by Liberty Cellular, Inc. for utilizing income
tax benefit of operating loss carryover 4,454,293 2,500,000
Proceeds from Rural Telephone Finance Cooperative
capital certificates and patronage credits 251,608 452,376
Principal payments on long-term debt (2,727,719) (2,516,089)
Payments on capital lease obligations (591,942) (2,470)
Contributions of capital from Liberty Cellular, Inc. - 1,000,000
-----------------------------
Net cash provided by financing activities 3,386,240 1,433,817
-----------------------------
Net increase (decrease) in cash and cash equivalents (1,878,066) 402,415
Cash and cash equivalents, beginning of year 2,688,775 2,286,360
-----------------------------
Cash and cash equivalents, end of year $ 810,709 $ 2,688,775
=============================
6
<PAGE> 85
<CAPTION>
KIN Network, Inc.
Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Property contributed as capital by Liberty Cellular, Inc. $ - $ 571,316
=============================
Property acquired through increases in accounts
payable - trade $ 564,290 $ 209,675
=============================
OTHER DISCLOSURES
Interest paid, net of patronage refunds $ 1,666,105 $ 1,923,165
=============================
See accompanying notes.
</TABLE>
7
<PAGE> 86
KIN Network, Inc.
Notes to Financial Statements
December 31, 1997 and 1996
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.
REVENUE RECOGNITION
The Company recognizes network revenue as services are rendered to customers.
ALLOWANCE FOR BAD DEBTS
The Company recognizes bad debts under the allowance method. As of December
31, 1997 and 1996, the Company believes that the dollar amount of receivables
subject to the risk of uncollectibility is minimal and has not established an
allowance for doubtful accounts.
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 $2,153,110 in 1997 and $1,887,774 in 1996.
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 15
years. Annual amortization expense was $6,500 in 1997 and 1996.
8
<PAGE> 87
KIN Network, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Operations of the Company are included in the consolidated tax returns of
Liberty. Income taxes are provided for the tax effects of transactions
reported in the Company's 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.
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 $10,258 and $11,821 in 1997 and 1996, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
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.
RECLASSIFICATIONS
Certain amounts previously reported have been reclassified to conform to the
current year presentation in the financial statements. These
reclassifications had no effect on the results of operations or stockholder's
equity as previously reported.
9
<PAGE> 88
KIN Network, Inc.
Notes to Financial Statements (continued)
2. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---------------------------------
<S> <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% and
6.3% as of December 31, 1997 and 1996,
respectively) 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 collater-
alized by network telephone plant and revenues. $27,415,796 $30,143,515
Secured line of credit for $2,000,000 with RTFC.
This line of credit was obtained in November
1997, bears a variable rate of interest (6.65% at
December 31, 1997) and has a term of
60 months. The note is collateralized by
substantially all of the network telephone plant. 2,000,000 -
Capital lease obligations (described in Note 4) with
certain stockholders (or their affiliates) of Liberty.
The obligations are due in variable annual prin-
cipal installments, plus interest, with the final
installments due in the year 2006. The obligations
are collateralized by portions of the fiber optic
network. 920,242 1,512,181
---------------------------------
30,336,038 31,655,696
Less current maturities 3,054,311 2,892,009
---------------------------------
$27,281,724 $28,763,687
=================================
</TABLE>
This line of credit was subsequently repaid on March 4, 1998 (Note 10).
10
<PAGE> 89
KIN Network, Inc.
Notes to Financial Statements (continued)
2. LONG-TERM DEBT (CONTINUED)
Estimated maturities on the borrowings with RTFC over the next five years are
as follows:
1998 $2,949,248
1999 3,188,013
2000 3,446,034
2001 3,724,932
2002 4,026,402
Future minimum payments for property under capital leases at December 31,
1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
-----------------------
<S> <C>
1998 $ 213,621
1999 204,605
2000 195,588
2001 186,571
2002 174,589
After 2002 594,283
-----------
Total minimum lease payments 1,569,257
Less amount representing interest,
administration and overhead 649,015
-----------
Present value of minimum lease payments
excluding interest, administration and
overhead 920,242
Less current maturities 105,063
-----------
$ 815,179
===========
</TABLE>
RTFC distributes patronage credits to the Company on an annual basis based on
annually determined percentages of interest paid by the Company to RTFC. The
Company received patronage credits of $240,293 in 1997 and $305,346 in 1996.
11
<PAGE> 90
KIN Network, Inc.
Notes to Financial Statements (continued)
2. LONG-TERM DEBT (CONTINUED)
As a condition to the loan agreement, the Company must purchase noninterest-
bearing subordinated capital certificates from RTFC in an amount equal to 10%
of each advance under the note. 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. During 1997 and 1996, RTFC returned
certificates to the Company totaling $251,608 and $452,376, respectively,
leaving certificate balances totaling $3,014,352 at December 31, 1997 and
$3,265,960 at December 31, 1996.
The notes payable to RTFC discussed above contain various convenants
pertaining to the maintenance of net worth and the payment of dividends. At
December 31, 1997, the Company was in noncompliance with one of the
covenants. However, the covenant has been waived by RTFC.
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 $1,686,510 in 1997 and $1,826,148 in 1996.
Capitalized interest was $138,186 for the year ended December 31, 1997. No
significant interest was capitalized during 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 1997 and 1996. Interest expense associated with the
obligations under these leases amounted to $130,385 in 1997 and $132,666 in
1996. Fiber optic cable under capital leases was $1,789,585 and $1,890,182 at
December 31, 1997 and 1996, respectively, net of accumulated depreciation of
$624,758 at December 31, 1997 and $524,161 at December 31, 1996.
12
<PAGE> 91
KIN Network, Inc.
Notes to Financial Statements (continued)
4. LEASING ARRANGEMENTS (CONTINUED)
Effective December 31, 1994, the Company renegotiated the terms of the
capital lease obligations for nine of the 10 obligations. The renegotiated
leases called for the deferral of the principal portion of the lease for a
two-year period ending December 31, 1996. Beginning in 1997, the remaining
principal balances on the renegotiated leases are being repaid evenly over a
nine- or 10-year period. During 1997, three of the capital lease obligations
were fully repaid. In 1996, the interest rate, which was previously set at
12%, was renegotiated 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
renegotiated at rates ranging from 8.5% to 12% for the remainder of the lease
term.
OPERATING LEASES
The Company leases various facilities, circuits and equipment under operating
leases expiring in various years through the year 2010. Minimum future rental
commitments under these operating leases as of December 31, 1997 for each of
the next five years and in the aggregate are:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 AMOUNT
-------------------------------------
<S> <C>
1998 $42,166
1999 37,546
2000 33,485
2001 27,485
2002 27,485
After 2002 12,510
</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
$2,583,995 in 1997 and $1,653,971 in 1996.
The Company leases space from Liberty under a year-to-year operating lease.
Total rent expense paid to Liberty was $43,000 in 1997 and 1996.
13
<PAGE> 92
KIN Network, Inc.
Notes to Financial Statements (continued)
5. 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 for 1997 and 1996 incurred by the Company through KINI L.C. amounted
to approximately $3,535,216 and $2,377,223, respectively, including $15,329
which was capitalized in 1996. The operating and administrative expenses
include a management fee. Under a new operating agreement effective January
1, 1997, this management fee increased from 12.5% of total operating and
administrative fees incurred by the Company to 15%.
Network revenue includes revenue resulting from services performed for
Liberty which amounted to approximately $3,379,000 (28% of total network
revenue) in 1997 and approximately $2,810,000 (33% of total network revenue)
in 1996. At December 31, 1997 and 1996, trade accounts receivable and accrued
revenue includes approximately $184,000 and $186,000, respectively, 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 $38,000 in 1997 and $45,000 in 1996.
6. 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 has 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.
14
<PAGE> 93
KIN Network, Inc.
Notes to Financial Statements (continued)
7. INCOME TAXES
The income taxes benefit consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------------------------
<S> <C> <C>
Current:
Federal $ - $ -
State - -
-------------------------
- -
Deferred:
Federal 179,373 482,625
State 43,210 104,448
-------------------------
Income tax benefit $222,583 $587,073
=========================
</TABLE>
The primary difference that causes the effective tax rate to vary from the
statutory federal income tax rate of 35% is state income taxes.
The Company has net operating losses totaling approximately $3,678,000
expiring in various years through the year 2010 which management believes
will be utilized in Liberty's consolidated tax return to offset future
taxable income from the operations of the Company and Liberty.
Deferred income taxes arise principally due to net operating losses, net of
temporary differences in the depreciation of property, plant and equipment.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 1,431,443 $6,190,810
Deferred tax liabilities:
Property, plant and equipment 3,403,135 3,082,543
-----------------------------
Net deferred tax asset (liability) - noncurrent $(1,971,692) $3,108,267
=============================
</TABLE>
15
<PAGE> 94
KIN Network, Inc.
Notes to Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
In 1997, Liberty utilized approximately $13,658,000 of the Company's net
operating loss carryforward to offset Liberty's 1997 taxable income. As a
result, Liberty will pay the Company approximately $5,305,000 for the use of
the Company's net operating loss, of which $3,270,000 was paid in 1997.
Additionally, Liberty paid $1,185,000 during 1997 for the use of the
Company's prior year net operating loss. Accounts receivable from Liberty as
of December 31, 1997 consists of the remaining amounts due to the Company for
the use of net operating losses.
8. 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, 1997 and 1996.
However, the financial institution has pledged assets to secure the
repurchase agreement in excess of the federal insurance limitation.
9. DEFERRED COMPENSATION PLAN
KINI L.C. has established a deferred compensation plan for its employees. The
plan provides that these employees will receive additional compensation based
on certain key operating results of the companies. The total expense under
the plan was $190,675 and $1,190,761 for the years ended December 31, 1997 and
1996, respectively. Of the total liability under the plan of $1,929,192,
$73,605 will be paid in 1998 and the remaining balance of $1,855,587 deferred
to future years. Liberty has assumed all of the liability and expense under
the plan with the Company contingently liable as cosigner.
10. SUBSEQUENT EVENTS
On February 18, 1998, Liberty exchanged 89,767 shares of the Company's stock
for 714,286 shares of Advanced Communications Group, Inc. (ACG) stock. The
Company issued an additional 112,221 shares of no par value stock to ACG for
$10,000,000 in cash. After the transaction, the Company has 412,221 shares
outstanding, of which Liberty owns 210,233 shares (51%) and ACG owns 201,988
shares (49%).
16
<PAGE> 95
KIN Network, Inc.
Notes to Financial Statements (continued)
10. SUBSEQUENT EVENTS (CONTINUED)
The $2,000,000 secured line of credit (Note 2) was repaid to RTFC on March 4,
1998 with a portion of the proceeds from the ACG stock issuance.
11. YEAR 2000 ISSUE - UNAUDITED
The Company is in the process of developing a plan to modify its information
technology and network to be ready for the year 2000, converting critical
data processing systems and estimating associated costs. Estimates will
include internal costs, but exclude the costs to upgrade and replace systems
in the normal course of business. The Company does not expect this project
will have a significant effect on operations. The Company will continue to
implement systems with strategic value though some projects may be delayed
due to resource constraints.
17
<PAGE> 96
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 I, 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 December 31, 1997.
The unaudited pro forma combined statements of operations for the two years
ended December 31, 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 that
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 Form 8K.
<PAGE> 97
<TABLE>
ADVANCED COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<CAPTION>
Other
Great Feist Long Founding
Western Valu-Line Distance Firstel Companies ACG
------- --------- ---------- ------- --------- ---
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 47 $ 566 $ 76 $ 188 $ 616 $ -
Accounts receivable 21,312 970 2,000 1,349 928 -
Less allowance (9,412) - (106) - - -
------- ------ ------- ------ ------ -------
Accounts receivable, net 11,900 970 1,894 1,349 928 -
Deferred costs 4,594 - - - - -
Prepaid expenses and other 675 280 80 928 262 -
------- ------ ------- ------ ------ -------
Total current assets 17,216 1,816 2,050 2,465 1,806 -
Property and equipment, net 1,227 1,131 445 922 239 6
Intangible assets, net of amortization - - - - 64 -
Equity investment in KINNET - - - - - -
Other noncurrent assets 19 7 - 1,003 185 2,322
------- ------ ------- ------ ------ -------
Total assets $18,462 $2,954 $ 2,495 $4,390 $2,294 $ 2,328
======= ====== ======= ====== ====== =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current maturities of long-term debt $ - $1,173 $ - $ 18 $ 141 $ -
Accounts payable and accrued expenses 4,140 1,021 1,581 3,402 394 3,141
Current maturities of related party debt - - 666 1,040 - 2,149
Payable to shareholder/affiliate 265 - - - - -
Other 3,208 10 225 170 137 -
------- ------ ------- ------ ------ -------
Total current liabilities 7,613 2,204 2,472 4,630 672 5,290
Long-term debt, net of current maturities - 225 9 - 96 -
Long-term related party debt, net of current - - - - - -
------- ------ ------- ------ ------ -------
Total liabilities 7,613 2,429 2,481 4,630 768 5,290
------- ------ ------- ------ ------ -------
Stockholders' equity:
Preferred stock - - - - - -
Common stock 1 3 100 1 354 -
Additional paid-in-capital - - 939 - - 897
Retained earnings 10,848 522 (1,025) (241) 1,172 (3,859)
------- ------ ------- ------ ------ -------
10,849 525 14 (240) 1,526 (2,962)
------- ------ ------- ------ ------ -------
Total liabilities and stockholders' equity $18,462 $2,954 $ 2,495 $4,390 $2,294 $ 2,328
======= ====== ======= ====== ====== =======
<CAPTION>
Post
Historical Pro forma Acquisition
Basis Adjustments Pro forma Adjustments As
Combined (See Note 3) Combined (See Note 3) Adjusted
---------- ------------ --------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 1,493 $ (259) $ 1,234 $ 10,475 $ 11,709
Accounts receivable 26,559 - 26,559 - 26,559
Less allowance (9,518) - (9,518) - (9,518)
------- -------- -------- -------- --------
Accounts receivable, net 17,041 - 17,041 - 17,041
Deferred costs 4,594 - 4,594 - 4,594
Prepaid expenses and other 2,225 - 2,225 - 2,225
------- -------- -------- -------- --------
Total current assets 25,353 (259) 25,094 10,475 35,569
Property and equipment, net 3,970 - 3,970 - 3,970
Intangible assets, net of amortization 64 108,497 108,561 - 108,561
Equity investment in KINNET - 18,041 18,041 - 18,041
Other noncurrent assets 3,536 (561) 2,975 2,253 5,228
------- -------- -------- -------- --------
Total assets $32,923 $125,718 $158,641 $ 12,728 $171,369
======= ======== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current maturities of long-term debt $ 1,332 $ - $ 1,332 $ (1,332) $ -
Accounts payable and accrued expenses 13,679 101 13,780 (1,915) 11,865
Current maturities of related party debt 3,855 (1,589) 2,266 (2,149) 117
Payable to shareholder/affiliate 265 83,922 84,187 (83,922) 265
Other 3,750 - 3,750 - 3,750
------- -------- -------- -------- --------
Total current liabilities 22,881 82,434 105,315 89,318 15,997
Long-term debt, net of current maturities 330 - 330 (330) -
Long-term related party debt, net of current - 17,233 17,233 - 17,233
------- -------- -------- -------- --------
Total liabilities 23,211 99,667 122,878 (89,648) 33,230
------- -------- -------- -------- --------
Stockholders' equity:
Preferred stock - - - 1,122 1,122
Common stock 459 (459) - 1 1
Additional paid-in-capital 1,836 37,786 39,622 101,253 140,875
Retained earnings 7,417 (11,276) (3,859) - (3,859)
------- -------- -------- -------- --------
9,712 26,051 35,763 102,376 138,139
------- -------- -------- -------- --------
Total liabilities and stockholders' equity $32,923 $125,718 $158,641 $ 12,728 $171,369
======= ======== ======== ======== ========
</TABLE>
<PAGE> 98
<TABLE>
ADVANCED COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<CAPTION>
Other
Great Feist Long Founding
Western Valu-Line Distance Firstel Companies
------- --------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications services $ - $11,181 $10,028 $10,355 $7,798
Yellow page publishing 44,324 - - - -
------- ------- ------- ------- -------
Total revenues 44,324 11,181 10,028 10,355 7,798
Cost of services 21,394 6,036 6,854 7,313 4,693
Depreciation and amortization 223 819 237 248 84
------- ------- ------- ------- -------
Gross profit 22,707 4,326 2,937 2,794 3,021
Selling, general and administrative
expenses 14,987 3,572 2,470 1,900 2,484
------- ------- ------- ------- -------
Income (loss) from operations 7,720 754 467 894 537
Other income (expense):
Other income and expense, net 6,375 73 (2) 35 (30)
Interest expense (504) (186) (60) (191) (44)
Equity in earnings of KINNET - - - - -
------- ------- ------- ------- -------
Income (loss) before income taxes 13,591 641 405 738 463
Provision for income taxes 5,295 - - - 36
------- ------- ------- ------- -------
Net income (loss) $ 8,296 $ 641 $ 405 $ 738 $ 427
======= ======= ======= ======= =======
Pro forma net income
Accretion of preferred stock
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
<CAPTION>
Historical Pro forma
Basis Adjustments Pro forma
ACG Combined (See Note 3) Combined
--- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications services $ - $39,362 $ 1,728 $ 41,090
Yellow page publishing - 44,324 - 44,324
----- ------- ------- ----------
Total revenues - 83,686 1,728 85,414
Cost of services - 46,290 1,044 47,334
Depreciation and amortization - 1,611 4,607 6,218
----- ------- ------- ----------
Gross profit - 35,785 (3,923) 31,862
Selling, general and administrative
expenses 649 26,062 657 26,719
----- ------- ------- ----------
Income (loss) from operations (649) 9,723 (4,580) 5,143
Other income (expense):
Other income and expense, net - 6,451 (3) 6,448
Interest expense (10) (995) 221 (775)
Equity in earnings of KINNET - - (1,071) (1,071)
----- ------- ------- ----------
Income (loss) before income taxes (659) 15,179 (5,434) 9,745
Provision for income taxes - 5,331 821 6,152
----- ------- ------- ----------
Net income (loss) $(659) $ 9,848 $(5,385) $ 3,593
===== ======= ======= ==========
Pro forma net income $ 3,593
Accretion of preferred stock (112)
----------
Pro forma net income available to
common stockholders $ 3,481
==========
Pro forma net income per share available
to common stockholders $ 0.17
==========
Shares used in computing pro forma
net income per share 20,232,339
==========
</TABLE>
<PAGE> 99
<TABLE>
ADVANCED COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<CAPTION>
Other
Great Feist Long Founding
Western Valu-Line Distance Firstel Companies
------- --------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications services $ - $12,022 $12,639 $13,336 $8,048
Yellow page publishing 43,247 - - - -
------- ------- ------- ------- ------
Total revenues 43,247 12,022 12,639 13,336 8,048
Cost of services 20,521 6,615 9,006 10,220 4,073
Depreciation and amortization 235 475 208 280 118
------- ------- ------- ------- ------
Gross profit 22,491 4,932 3,425 2,836 3,857
Selling, general and administrative
expenses 16,186 3,772 3,491 2,616 2,569
------- ------- ------- ------- ------
Income (loss) from operations 6,305 1,160 (66) 220 1,288
Other income (expense):
Other income and expense, net 86 (36) 84 52 67
Interest expense (50) (135) (46) (152) (16)
Equity in earnings of KINNET - - - - -
------- ------- ------- ------- ------
Income (loss) before income taxes 6,341 989 (28) 120 1,339
Provision for income taxes 1,804 - - - -
------- ------- ------- ------- ------
Net income (loss) $ 4,537 $ 989 $ (28) $ 120 $1,339
======= ======= ======= ======= ======
Pro forma net income
Accretion of preferred stock
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
<CAPTION>
Historical Pro forma
Basis Adjustments Pro forma
ACG Combined (See Note 3) Combined
--- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications services $ - $46,045 $ - $ 46,045
Yellow page publishing - 43,247 - 43,247
------- ------- ------- ----------
Total revenues - 89,292 - 89,292
Cost of services - 50,435 - 50,435
Depreciation and amortization 3 1,319 4,563 5,882
------- ------- ------- ----------
Gross profit (3) 37,538 (4,563) 32,975
Selling, general and administrative
expenses 2,941 31,575 - 31,575
------- ------- ------- ----------
Income (loss) from operations (2,944) 5,963 (4,563) 1,400
Other income (expense):
Other income and expense, net - 253 - 253
Interest expense (256) (655) (120) (775)
Equity in earnings of KINNET - - (854) (854)
------- ------- ------- ----------
Income (loss) before income taxes (3,200) 5,561 (5,537) 24
Provision for income taxes - 1,804 373 2,177
------- ------- ------- ----------
Net income (loss) $(3,200) $ 3,757 $(5,910) $ (2,153)
======= ======= ======= ==========
Pro forma net income $ (2,153)
Accretion of preferred stock (16)
----------
Pro forma net income available to
common stockholders $ (2,169)
==========
Pro forma net income per share available
to common stockholders $ (0.11)
==========
Shares used in computing pro forma
net income per share 20,232,339
==========
</TABLE>
<PAGE> 100
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 two years ended
December 31, 1997. The audited historical financial statements included
elsewhere in this Form 8K 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.
The consideration to be paid in the Acquisitions includes (i) cash,
(ii) Common Stock, (iii) promissory notes, (iv) a payable for reimbursement
of cash paid to purchase two companies in September 1997, and (v) 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 (i) $15.0
million in notes payable two years from the closing of the Acquisitions and
bearing an annual rate of interest of five percent (5%), which notes may be
prepaid at any time and are subordinated to the Company's senior debt (as
defined), (ii) $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 (iii) 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 (i) and (ii) 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
<PAGE> 101
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 $140.1 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 December 31, 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 4,061 - - - -
Switchboard 1,631 - - 386 38,635
Tele-Systems - 960 - - 36,000
National Telecom 130 - 350 - 12,500
------- ------- ------- ---- ---------
Subtotal 5,822 960 350 386 87,135
------- ------- ------- ---- ---------
Total $83,922 $37,998 $17,350 $854 1,393,213
======= ======= ======= ==== =========
</TABLE>
<PAGE> 102
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records an estimated S Corporation Distribution of $259,000 which is
expected to be paid to the stockholders of one of the Acquired
Companies cash on hand.
(b) Records the related party debt of $666,000 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 inter-company 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) $83.9 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 $140.1 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 $125.6 million (including $0.6 million of deferred
acquisition costs incurred by ACG) over the fair value of the net
assets acquired of $15.1 million. Of this $125.6 million, $108.5
million relates to the Acquired Companies and $17.1 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 is currently obtaining
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 Company expects the independent appraisals to be completed
for inclusion in the Company's results for the quarter ended March 31,
1998. 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 principal 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 $11.9
million including amounts deferred and payable by ACG at
<PAGE> 103
December 31, 1997. Offering costs primarily consist of underwriting
discounts and commissions, accounting fees, legal fees, listing and
filing fees, and printing expenses.
(e) Records the payment of the cash portion of the total consideration
($83.9 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%.
<PAGE> 104
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 December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Total
Pro forma
(a) (b) (c) Adjustments (d)
--- --- --- ----------- ---
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $(259) $ - $ - $ (259) $100,059
----- ------- -------- -------- --------
Total current assets (259) - - (259) 100,059
Intangible assets, net - - 108,497 108,497 -
Equity investment in
KINNET - - - 18,041 18,041 -
Other noncurrent assets - - (561) (561) (619)
----- ------- -------- -------- --------
Total assets $(259) $ - $125,977 $125,718 $ 99,440
===== ======= ======== ======== ========
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Current maturities of
long-term debt $ - $ - $ - $ - $ -
Accounts payable and
accrued expenses - - 101 101 (1,814)
Current portion of notes
payable to related parties - (1,706) 117 (1,589) -
Obligation for cash portion
of consideration in the
Acquisitions - - 83,922 83,922 -
----- ------- -------- -------- --------
Total current liabilities - (1,706) 84,140 82,434 (1,814)
Long-term debt, net of
current maturities - - - - -
Notes payable to related
parties, net of current
maturities - - 17,233 17,233 -
----- ------- -------- -------- --------
Total liabilities - (1,706) 101,373 99,667 (1,814)
----- ------- -------- -------- --------
Stockholders' equity:
Preferred stock - - - - -
Common stock - - (459) (459) 1
Additional paid-in capital - 1,706 36,080 37,786 101,253
Retained earnings (259) - (11,017) (11,276) -
----- ------- -------- -------- --------
Total stockholders' equity
(deficit) (259) 1,706 24,604 26,051 101,254
----- ------- -------- -------- --------
Total liabilities and
Stockholders' equity $(259) $ - $125,977 $125,718 $ 99,440
===== ======= ======== ======== ========
<CAPTION>
Total
Post-
Acquisition
(e) (f) (g) (h) Adjustments
--- --- --- --- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $(83,922) $(3,912) $(1,750) $ - $ 10,475
-------- ------- ------- ------ --------
Total current assets (83,922) (3,912) (1,750) - 10,475
Intangible assets, net - - - - -
Equity investment in
KINNET - - - - - -
Other noncurrent assets - - 1,750 1,122 2,253
-------- ------- ------- ------ --------
Total assets $(83,922) $(3,912) $ - $1,122 $ 12,728
======== ======= ======= ====== ========
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Current maturities of
long-term debt $ - $(1,332) $ - $ - $ (1,332)
Accounts payable and
accrued expenses - (101) - - (1,915)
Current portion of notes
payable to related parties - (2,149) - - (2,149)
Obligation for cash portion
of consideration in the
Acquisitions (83,922) - - - (83,922)
-------- ------- ------- ------ --------
Total current liabilities (83,922) (3,582) - - (89,318)
Long-term debt, net of
current maturities - (330) - - (330)
Notes payable to related
parties, net of current
maturities - - - - -
-------- ------- ------- ------ --------
Total liabilities (83,922) (3,912) - - (89,648)
-------- ------- ------- ------ --------
Stockholders' equity:
Preferred stock - - - 1,122 1,122
Common stock - - - - 1
Additional paid-in capital - - - - 101,253
Retained earnings - - - -
-------- ------- ------- ------ --------
Total stockholders' equity
(deficit) - - - 1,122 102,376
-------- ------- ------- ------ --------
Total liabilities and
Stockholders' equity $(83,922) $(3,912) $ - $1,122 $ 12,728
======== ======= ======= ====== ========
</TABLE>
<PAGE> 105
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 is currently obtaining
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. Management
expects these appraisals to result in changes to the estimated useful
life noted above and the amortization expense recognized annually when
separate values and depreciable lives are assigned to the various asset
categories acquired. The appraisals are expected to be completed for
inclusion in the Company's results for the quarter ended March 31, 1998.
(b) Reflects the equity in losses of KINNET of $388,000 and the
amortization of $683,000 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.
<PAGE> 106
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
Yellow page publishing -
------- ------- ---- ------ ----- ----- -------
Total revenues - - - 1,728 - - 1,728
Cost of services - - - 1,044 - - 1,044
Depreciation and amortization 4,340 - - 43 - 224 4,607
------- ------- ---- ------ ----- ----- -------
Gross profit (4,340) - - 641 - (224) (3,923)
Selling, general and administrative
expenses - - - 657 - - 657
------- ------- ---- ------ ----- ----- -------
Income (loss) from operations (4,340) - - (16) - (224) (4,580)
Other income (expense):
Other income and expense, net - - - (3) - - (3)
Interest expense - - 221 - - - 221
Equity in earnings of KINNET - (1,071) - - - - (1,071)
------- ------- ---- ------ ----- ----- -------
Income (loss) before income taxes (4,340) (1,071) 221 (19) - (224) (5,434)
Provision for income taxes - - - - 821 - 821
------- ------- ---- ------ ----- ----- -------
Net income (loss) $(4,340) $(1,071) $221 $ (19) $(821) $(224) $(6,255)
======= ======= ==== ====== ===== ===== =======
</TABLE>
<PAGE> 107
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Year Ended December 31, 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 $171,000 and the
amortization of $683,000 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 $775,000 of interest expense attributable to
debt issued as consideration for the Acquisitions, net of a reduction
of $654,000 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.
<PAGE> 108
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 twelve months ended December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Total
Pro forma
(a) (b) (c) (d) (e) Adjustments
--- --- --- --- --- -----------
<S> <C> <C> <C> <C> <C> <C>
Depreciation and amortization $ 4,340 $ - $ - $ - $ 223 $ 4,563
------- ----- ----- ----- ----- -------
Gross profit (4,340) - - - (223) (4,563)
Selling, general and administrative
expenses - - - - - -
------- ----- ----- ----- ----- -------
Income (loss) from operations (4,340) - - - (223) (4,563)
Other income (expense):
Other income and expense, net - - - - - -
Interest expense - - (120) - - (120)
Equity in earnings of KINNET - (854) - - - (854)
------- ----- ----- ----- ----- -------
Income (loss) before income taxes (4,340) (854) (120) - (223) (5,537)
Provision for income taxes - - - 373 - 373
------- ----- ----- ----- ----- -------
Net income (loss) $(4,340) $(854) $(120) $(373) $(223) $(5,910)
======= ===== ===== ===== ===== =======
</TABLE>
<PAGE> 109
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ADVANCED COMMUNICATIONS GROUP, INC.
By: /s/ Richard P. Anthony
----------------------------------------
Name: Richard P. Anthony
----------------------------------------
Title: Chairman of the Board, President and
----------------------------------------
Chief Executive Officer
----------------------------------------
Date: May 4, 1998
<PAGE> 110
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of
Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
Exhibit No. Description
- - ----------- -----------
<C> <S>
1 Omitted -Inapplicable
<F*>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.
<F*>2.1A Amendment No. 1 dated as of January 8, 1998 to the Restated Stock Purchase Agreement
filed as Exhibit 2.1.
<F*>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. and
the shareholders of Valu-Line of Longview, Inc.
<F*>2.2A Amendment No. 1 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed
as Exhibit 2.2.
<F*>2.2B Form of Second Amendment dated as of February 11, 1998 to the Agreement and Plan and
Exchanged filed as Exhibit 2.2, including a Form of Escrow Agreement attached thereto as
Annex III.
<F*>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 V Acquisition Corp.,
Feist Long Distance Service, Inc. and the stockholders of Feist Long Distance Service,
Inc.
<F*>2.3A Amendment No. 1 dated as of January 10, 1998 to the Agreement and Plan of Exchange filed
as Exhibit 2.3.
<F*>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.
<F*>2.4A Amendment No. 1 dated as of December 15, 1997 to the Agreement and Plan of Exchange filed
as Exhibit 2.4.
<PAGE> 111
<F*>2.4B Amendment No. 2 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed
as Exhibit 2.4.
<F*>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.
<F*>2.5A Amendment No. 1 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed
as Exhibit 2.5.
<F*>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.
<F*>2.6A Amendment No. 1 dated as of January 8, 1998 to the Restated Asset Purchase Agreement
filed as Exhibit 2.6.
<F*>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.
<F*>2.7A Amendment No. 1 dated as of January 8, 1998 to the Restated Asset Purchase Agreement
filed as Exhibit 2.7.
<F*>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.
<F*>2.8A First Amendment dated as of October 6, 1997 to the Restated Asset Purchase Agreement
filed as Exhibit 2.8.
<F*>2.8B Second Amendment dated as of January 8, 1998 to the Restated Asset Purchase Agreement
filed as Exhibit 2.8.
<F*>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.
<F*>2.9A Amendment No. 1 dated as of January 8, 1998 to the Restated Asset Purchase Agreement
filed as Exhibit 2.9.
<PAGE> 112
<F*>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.
<F*>2.10A Amendment No. 1 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed
as Exhibit 2.10.
<F*>2.11 Agreement of Merger dated as of October 9, 1997 among Advanced Communications Group,
Inc., Advanced Communications Corp. and Advanced Communications Group Acquisition, Inc.
<F*>2.11A Amendment No. 1 dated as of January 8, 1998 to the Agreement of Merger filed as Exhibit
2.11.
4 Omitted - Inapplicable
<F*>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.
<F*>10.44 Amendment to the Asset Purchase Agreement filed as Exhibit 10.43.
16 Omitted - Inapplicable
17 Omitted - Inapplicable
20 Omitted - Inapplicable
23 Omitted - Inapplicable
24 Omitted - Inapplicable
27 Omitted - Inapplicable
99 Omitted - Inapplicable
<FN>
<F*> Incorporated herein by reference to the exhibit of the same number to
ACG's Registration Statement on Form S-1 (Registration No. 333-37671.
</TABLE>
