<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 1998
REGISTRATION NO. 333-37671
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ADVANCED COMMUNICATIONS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
Delaware 4813 76-0549396
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
<TABLE>
<S> <C>
Richard P. Anthony
390 South Woods Mill Road, Suite 150 390 South Woods Mill Road, Suite 150
St. Louis, Missouri 63017 St. Louis, Missouri 63017
(314) 469-9488 (314) 469-9488
Facsimile: (314) 530-9432 Facsimile: (314) 530-9432
(Address, including zip code, and telephone number, including (Name, address, including zip code, and telephone number,
area code, of Registrant's principal executive offices) including area code, of agent for service)
</TABLE>
Copies to:
Edgar J. Marston III Stephen P. Farrell
Bracewell & Patterson, L.L.P. Morgan, Lewis & Bockius LLP
711 Louisianna Street, Suite 2900 101 Park Avenue
Houston, Texas 77002-2781 New York, New York 10178-0060
(713) 223-2900 (212) 309-6000
Facsimile: (713) 221-1212 Facsimile: (212) 309-6273
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 16, 1998
8,000,000 SHARES
[ACG LOGO] Advanced
Communications
Group, Inc.
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by
Advanced Communications Group, Inc. ("ACG" or the "Company").
Prior to this offering (the "Offering"), there has been no public
market for the Common Stock. It is currently estimated that the initial
public offering price will be between $14.00 and $16.00 per share. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The Company has applied for listing of the
Common Stock on the New York Stock Exchange under the symbol ADG.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.......................... $ $ $
- ------------------------------------------------------------------------------------
Total.............................. $ $ $
- ------------------------------------------------------------------------------------
Total Assuming Full Exercise of
Over-Allotment Option (3) ........ $ $ $
- ------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting."
(2) Before deducting expenses estimated at $4,075,000, which are payable
by the Company.
(3) Assuming exercise in full of the 30-day option granted by the Company
to the Underwriters to purchase up to 1,200,000 additional shares, on
the same terms, solely to cover over-allotments. See "Underwriting."
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters,
and subject to their right to reject orders in whole or in part. It is
expected that delivery of the Common Stock will be made in New York City on
or about , 1998.
PAINEWEBBER INCORPORATED
CIBC OPPENHEIMER CORP.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
INSIDE COVER GATEFOLD GRAPHIC:
[Map of United States delineating ACG's current and planned service area
along with corporate headquarters, operating companies' headquarters, home
sales offices, telecom sales offices and switch locations. Further blowout of
map details KINNET's fiber optic network (existing and future fiber routes
owned and the location of Tandem switches).]
<PAGE>
[ACG LOGO] Advanced
Communications
Group, Inc.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVERALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
Concurrently with the closing of the Offering made hereby (the
"Offering"), ACG plans to acquire, in related transactions, six
telecommunications service providers, one yellow page publisher, two
telephone equipment sales and maintenance companies, a predecessor organized
in 1996 under the same name, and a 49% interest in a company owning a fiber
optic network (collectively, the "Acquisitions"). See "The Company." The
number of shares of Common Stock to be issued in the Acquisitions will depend
on the initial public offering price of the Common Stock. Accordingly, the
disclosures herein relating to the shares of Common Stock to be issued in the
Acquisitions are estimated, based on an assumed initial public offering price
of $15.00 per share (the midpoint of the estimated initial public offering
price range). Unless otherwise indicated by the context, references herein to
(i) ACG refer collectively to Advanced Communications Group, Inc. and its
predecessor, and (ii) the "Company" refer collectively to the entities
acquired in the Acquisitions other than the interest in the fiber optic
network company (collectively, the "Acquired Companies"), ACG and its
predecessor company.
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, which
appear elsewhere in this Prospectus. Prospective investors should carefully
consider the factors set forth herein under the caption "Risk Factors" and
are urged to read this Prospectus in its entirety. This Prospectus contains
certain forward-looking statements with respect to the Company's expectations
regarding its business after it has consummated the Acquisitions. These
forward-looking statements are subject to certain risks and uncertainties
which may cause actual results to differ significantly from such
forward-looking statements. See "Risk Factors." Unless otherwise indicated,
the information and share and per share data in this Prospectus (i) give
effect to the Acquisitions, (ii) assume the Underwriters' over-allotment
option is not exercised and (iii) will give effect to a reverse stock split
of approximately one-for-2.574 of the outstanding capital stock of ACG's
predecessor prior to the Offering.
THE COMPANY
The Company was founded to create a regional competitive local exchange
carrier ("CLEC") that provides an integrated portfolio of telecommunications
services principally to business customers in selected service areas of
Southwestern Bell Telephone Company and U S WEST Communications, Inc. (the
"Region"). The Company offers long distance, local, Internet access and
cellular service primarily in Kansas, Minnesota, Nebraska, North Dakota,
Oklahoma, South Dakota and Texas and publishes yellow page directories
covering certain markets in Oklahoma and Texas. The Company seeks to offer a
bundle of "one stop" integrated telecommunications services tailored to its
customers' specific requirements and billed on a single monthly invoice. As
of November 30, 1997, the Company provided telecommunications services to
almost 35,000 business customers and over 10,000 residential customers in
small to mid-sized markets. The Company has recently experienced substantial
growth in its base of local customers. The Company's local customer access
lines in service grew from approximately 1,000 at June 30, 1997 to
approximately 11,000 at September 30, 1997 and approximately 17,500 at
November 30, 1997. In the fiscal year ended December 31, 1996, the Company
had pro forma combined revenues of $85.4 million and EBITDA of $11.5 million.
For the nine months ended September 30, 1997, the Company had pro forma
combined revenues of $69.1 million and EBITDA of $8.5 million.
The Company owns and operates six digital tandem switches in Kansas,
Oklahoma, South Dakota and Texas. It also owns a 49% interest in KIN Network
Inc. ("KINNET"), the owner or operator of an approximately 880-route mile
fiber optic network and a Northern Telecom DMS 500 switch in Kansas. KINNET
currently has one of the largest fiber optic networks in the state of Kansas.
As part of the KINNET transaction, the Company made a $10.0 million direct
cash investment in KINNET, $5.0 million of which KINNET has agreed to apply
to the buildout in 1998 and 1999 of a 537-mile, $21.5 million network
extension from Wichita, Kansas to the greater Kansas City metropolitan area,
with a leg to Tulsa, Oklahoma, that will provide self-healing redundancy to
its fiber optic network. KINNET has advised the Company that it expects to
finance the balance of the expansion with loan proceeds from the Rural
Telephone Finance Cooperative.
The Company is also an independent publisher of yellow page directories,
and in the twelve months ended November 30, 1997 published approximately 3.1
million copies of its yellow page directories covering 20 markets in Oklahoma
and Texas. These directories contained advertisements for approximately
46,000 business customers. The Company anticipates expanding its yellow page
operations into
3
<PAGE>
additional markets in the Region. The Company believes that the advertisers
in its yellow page directories provide a significant opportunity to
cross-sell its bundle of telecommunications services through the Company's
direct sales force of approximately 255 persons, including approximately 40
telemarketers, as of November 30, 1997. Through a strategic relationship with
Feist Publications, Inc., an affiliate of one of the Acquired Companies, the
Company also has the opportunity to cross-sell its telecommunications
services to an additional 29,000 yellow page advertising customers.
ACG is pursuing a growth strategy that it believes will enable it to
minimize its initial capital expenditures relative to many other CLECs that
constructed facilities-based networks at a very early stage in their
development. The Company currently utilizes its own network facilities
combined with the leased network facilities of several long distance
providers and incumbent local exchange carriers ("ILECs") within the Region,
including Southwestern Bell Telephone Company ("Southwestern Bell") and U S
WEST Communications, Inc. ("U S WEST"). By reselling the local service of
Southwestern Bell and U S WEST, the Company has achieved a rapid penetration
of the local telephone markets in Wichita, Kansas and Sioux Falls, South
Dakota, although the Company's local service revenues to date have not been
material. Ultimately, the Company will only construct significant local
network infrastructure in those markets where a critical mass of customers
makes it economically justifiable to do so.
The Company has executed comprehensive local exchange resale agreements
with Southwestern Bell, U S WEST and affiliates of Sprint Corporation
("Sprint") and GTE Corporation ("GTE") covering eight states within the
Region. Additionally, the Company has entered into agreements with several
interexchange carriers to provide "off-net" switching and network
transmission services for its long distance traffic. The Company has also
entered into agreements to resell cellular service in selected areas in the
Region. These agreements allow the Company initially to offer a bundle of
telecommunications services without the necessity of substantial expenditures
for the construction of network facilities.
The Telecommunications Act of 1996 has created significant opportunities
for telecommunications service providers, particularly regional CLECs.
According to publicly available estimates, in 1996 total revenues from local
and long distance telecommunications services in the United States were
approximately $192.0 billion, of which approximately $107.0 billion were
derived from local exchange services and approximately $85.0 billion from
long distance services. In recent years, these telecommunications service
revenues have grown approximately 6% per year. Although the U.S. long
distance and local exchange industries are dominated by a few companies,
including AT&T Corp. ("AT&T"), MCI Communications Corporation ("MCI") (which
has entered into a merger agreement to be acquired by WorldCom, Inc.),
Sprint, WorldCom, Inc. ("WorldCom") and the Regional Bell Operating Companies
("RBOCs"), there are over 5,000 additional providers of long distance, local
and other telecommunications-related services. In many of the small to
mid-sized cities that are the Company's primary target markets, there are
independent telecommunications companies which have significant market
penetration, many of which the Company believes represent attractive
acquisition candidates.
The Company believes that it has significant opportunities to increase its
revenues and reduce elements of its cost structure that were not available to
the Acquired Companies prior to the Acquisitions and the Offering. The
Company's new senior management team brings extensive prior CLEC, ILEC and
public company experience, and its members have held senior operational,
strategic planning, financial and sales positions with their prior employers.
The Company intends to leverage this extensive management experience in the
centralizing of selected areas of operations where it can benefit from its
larger size such as the purchasing of minutes over its leased network and
consolidating its management information, selling and other administrative
functions. The Company also intends to permit the strong management teams of
the Acquired Companies to conduct the customer sensitive aspects of their
operations on a decentralized basis. In order to increase the revenues
provided by its existing customer base, the Company plans to train its sales
force to cross-sell all of the Company's services, with an increased emphasis
on selling local services. The Company believes that a personalized approach
to sales and customer service will enhance its ability to attract and retain
customers who desire the convenience of a fully integrated product offering.
To further enhance its marketing efforts, the Company intends to establish
the "ACG" brand name through co-branding with the established names of the
Acquired Companies.
4
<PAGE>
BUSINESS STRATEGY
The Company's objective is to become a leading provider of integrated
telecommunications services primarily to businesses in Kansas, Minnesota,
Nebraska, North Dakota, Oklahoma, South Dakota and Texas and a significant
provider of such services in Arkansas, Colorado and Montana. The Company
believes that it can achieve its goal of becoming a leading
telecommunications service provider in its target markets by adhering to the
following five-fold strategy:
o Plan Smart -- Focus on small and medium-sized businesses and residential
customers and select vertical market segments in small to mid-sized cities
in the Region. The Company believes that competition from other CLECs and
ILECs is less intense in these areas because, in many cases, the ILECs
have reduced their efforts to serve and defend these territories in
response to the competitive threat in their major market cities. In
addition, by focusing its sales efforts in territories served by ILEC
central offices where collocation is a viable economic alternative, the
Company can build a loyal customer base through the resale of local
services prior to committing to build the infrastructure necessary to
support facilities-based local service.
o Sell Smart --
- Sell into established customer relationships by marketing local
telephone services to the Company's existing yellow page and long
distance customers. Because the Company only recently began to offer
additional telecommunications services to its long distance customers,
only a small portion of these customers has been targeted to subscribe
to the Company's local, Internet access or cellular services. In
addition, the Company has not yet offered its bundle of
telecommunications services to the approximately 75,000 yellow page
customers to which it has access. The Company therefore believes that it
has a substantial reservoir of prospective business customers that is
already familiar with some aspects of the Company's services.
- Bundle services to bring value to the Company's customers, increase
total revenue per customer, reduce selling costs and minimize customer
churn. The Company currently bundles and bills local, long distance, and
cellular services and believes it can enhance its overall margins by
combining its yellow page and Internet services with these traditional
telecommunications services.
- Offer enhanced services that have less competition and higher margin
potential, such as high speed data transport, Internet access, Web Page
design and support, and integrated voice, data and video communications
services.
o Build Smart -- Predicate growth strategies on the recognition that network
capacity is increasingly becoming a commodity. By first focusing on
acquiring customers through resale of local, long distance, cellular and
Internet services, the Company believes that it can secure customer
relationships, produce a consistent revenue stream, and evolve an economic
strategy for serving customers. The Company's serving strategy includes
not only developing network facilities to directly serve customers, but
also enhancing its operational support system ("OSS") to provide network
monitoring and control, flow through provisioning, customer care, and
enhanced billing functionality. During 1998, the Company will resell the
network facilities of ILECs to provide local service to its customers.
During 1999 and thereafter, the Company will continue to focus on
reselling local service, while at the same time implementing a substantial
effort to acquire unbundled loops and local fiber. By interconnecting with
the ILEC in the central office and acquiring unbundled loops, the Company
should be able to reduce its cost of providing service and capture the
additional revenue paid by interexchange carriers ("IXCs") for local
access. The Company should also be able to further reduce its local and
long distance costs by acquiring rights to local and intercity fiber and
other high bandwidth capacity within the Region. By adding its own circuit
and packet switches to this bandwidth, the Company can add value, offer
new products, and better control the quality of service. Finally, where
economically advantageous, the Company intends to construct fiber and
other network facilities.
o Grow Smart --
- Increase the Company's sales force to rapidly market the Company's
services in all targeted service areas and thereafter to expand into
other areas within the Region. The Company recognizes it has an
opportunity to expand its yellow page base into other market areas as
well as to expand its
5
<PAGE>
service offering with World Pages, a specialized Web site development
and hosting service to which ACG has the exclusive marketing rights in
its service area.
- Evaluate attractive acquisition candidates in the Region. The Company
initially intends to target leading local companies whose customers can
be added to the Company's existing network without significant
expenditures for infrastructure additions. By aggregating the traffic of
several companies onto its existing network, the Company expects to
increase the utilization of equipment, consolidate its buying power and
increase its ability to negotiate more attractive contracts with
third-party suppliers of network services.
- Pursue the formation of additional strategic alliances with other yellow
page publishers, utility companies, cooperatives and others in order to
create marketing alliances that give the Company access to large, stable
customer bases in its market areas to which it can sell its bundle of
telecommunications services. The Company currently has a five-year
strategic relationship with Feist Publications, Inc. ("FPI"), a 20-year
publisher of yellow page directories in 15 markets in the Region. The
Company's telecommunications sales force will have access to FPI's
29,000 yellow page advertisers in the Region. Through one of the
Acquired Companies' purchase of PAM COMM, a division of PAM Oil, Inc.,
the Company has another strategic relationship that will allow it to
solicit PAM Oil, Inc.'s approximately 15,000 business customers
primarily in Idaho, Minnesota, Montana, North Dakota and South Dakota.
Finally, the Company and Northwestern Public Service Company
("Northwestern") have entered into an agreement regarding the possible
creation of a strategic alliance that would permit ACG to market its
telecommunications services to that utility's approximately 100,000
electric and natural gas business and residential customers in South
Dakota and Nebraska. See "The Company -- Strategic Relationships."
o Serve Smart -- Provide not only the highest quality customer service but
also become an industry leader in the deployment of innovative technology
and services. The Company believes that by prudently using new technology
and by offering new services, especially enhanced data applications, it
can become a low cost provider, maintain high value for its customers and
differentiate itself from other commodity providers. These services will
include data transport services such as frame relay, transparent LAN,
Internet content, and other packet-based integrated multimedia services.
Certain members of the Company's senior management team have considerable
experience in developing and deploying these services.
See the "Glossary" elsewhere in this Prospectus for the definition of
certain technical and other terms generally associated with the
telecommunications industry or the Offering.
6
<PAGE>
THE OFFERING
Common Stock Offered by the
Company ...................... 8,000,000
Common Stock to be Outstanding
after the Offering(1) ........ 19,624,920
Use of Proceeds ............... To pay the cash portion of the purchase
price for the Acquired Companies ($73.3
million), to make a direct cash investment
in KINNET, a fiber optic network company
($10.0 million), to repay indebtedness of
ACG and the Acquired Companies ($5.5
million), to make a one-time payment to the
founder of ACG for entering into a five-year
non-competition agreement ($1.75 million),
and for general corporate purposes,
including capital expenditures,
infrastructure buildout and acquisitions.
Shareholders of the Acquired Companies who
will become executive officers or directors
of the Company upon consummation of the
Acquisitions will receive approximately
$35.6 million of the cash purchase price
paid in the Acquisitions. See "Use of
Proceeds."
Proposed New York Stock
Exchange Symbol .............. ADG
- ------------
(1) The number of shares to be outstanding on completion of the Offering
consists of (i) 8,458,453 shares issued to the founders and consultants
of the Company, (ii) 3,166,467 shares to be issued in the Acquisitions
and (iii) the 8,000,000 shares being offered hereby. Such share number
does not include an aggregate of 4,193,815 shares subject to warrants or
options having exercise prices ranging from $2.50 to the initial public
offering price granted or to be granted under the Company's 1997 Stock
Awards Plan ("Plan"), the Company's 1997 Nonqualified Stock Option Plan
for Non-Employee Directors (the "Directors' Plan") or otherwise issued
prior to or contemporaneously with the consummation of the Offering and
the Acquisitions or issuable upon the conversion of convertible notes and
preferred stock. See "Certain Transactions -- Organization of the
Company" and "--The Acquisitions" and "Management -- Option Grants."
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. See "Risk Factors" beginning immediately after this Prospectus Summary
for information that should be considered by prospective investors. Such risk
factors include an absence of combined operating history of ACG and the
Acquired Companies; risks of integrating numerous separate companies; ability
to manage growth; capital requirements; recent results and anticipated future
quarterly losses; dependence on successful cross-selling of existing and new
customer bases; risks related to local service strategy; dependence on
development of billing, customer service and management information systems;
technology risks; limited technical staff; competition; implications of the
Telecommunications Act and other regulation; dependence on third-party long
distance carriers; dependence on incumbent local exchange carriers;
dependence on key personnel; new management team; control by existing
management and stockholders; terms of the Acquisitions; certain interests of
management in the Acquisitions and other transactions; risks of expansion
into additional yellow page markets; risks related to acquisitions; potential
effect of shares eligible for future sale on price of Common Stock; no prior
market and possible volatility of stock price; immediate and substantial
dilution; anti-takeover effects of certain charter provisions, Delaware law
and a standstill agreement; and no dividends.
7
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ACG will acquire the Acquired Companies, its predecessor and its interest
in KINNET, a fiber optic network company, concurrently with and as a
condition to the consummation of the Offering. The following summary of
unaudited pro forma combined financial data presents certain data for the
Company, which gives effect to the Acquisitions on an historical basis and
certain pro forma adjustments to the historical financial statements, as
adjusted to give effect to the Offering and the application of the proceeds
therefrom. See "Selected Financial Data" and the Unaudited Pro Forma Combined
Financial Statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PRO FORMA COMBINED(1)
------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 3
----------------- -----------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C>
Revenues
Telecommunications services..................... $ 41,090 $ 33,455
Yellow page publishing....................... 44,324 35,624
----------------- -----------------
Total revenues............................. 85,414 69,079
Gross profit.................................. 32,216 27,103
Operating income.............................. 5,250 3,931
Other income and expense, net(2).............. 4,605 (985)
Net income(3)................................. 3,703 168
Accretion of preferred stock(4)............... 112 16
----------------- -----------------
Net income available to common stockholders... $ 3,591 $ 152
================= =================
Net income per share available to common
stockholders................................. $ 0.18 $ 0.01
================= =================
Shares used in computing pro forma net income
per share(5).................................. 19,623,113 19,623,113
================= =================
OTHER DATA:
Cash provided by operating activities ........ $ 9,037 $ 5,893
Cash used in investing activities ............ (711) (579)
Cash used in financing activities ............ (7,482) (4,470)
EBITDA(6)..................................... $ 11,527 $ 8,523
<CAPTION>
As of September 30, 1997
------------------------------------
Pro
Forma
Combined(1) As Adjusted(7)
--------------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 554 $ 19,302
Working capital (deficit) .................... (73,532) 32,715
Total assets.................................. 153,393 174,394
Total debt, including current portion......... 21,507 17,350
Stockholders' equity.......................... $ 36,535 $ 146,351
<CAPTION>
As of
September 30,
1997
-----------------
<S> <C>
OPERATING DATA:
Telecommunications services
Number of customers .............................................. 40,749
Markets ......................................................... 54
Local access lines ............................................... 11,248
Route miles (of fiber)(8) ........................................ 880
Direct sales force, including 23 telemarketers ................... 76
Total employees ................................................. 250
Yellow page publishing
Number of advertising customers(9) ............................... 50,000
Markets(9) ....................................................... 23
Direct sales force, including 19 telemarketers ................... 169
Total employees ................................................. 311
</TABLE>
(Footnotes on following page)
8
<PAGE>
- ------------
(1) The pro forma statements of operations data and the pro forma balance
sheet data assume that the Acquisitions were closed on January 1, 1996
and September 30, 1997, respectively, and are not necessarily
indicative of the results the Company would have achieved had these
events actually then occurred or of the Company's future results. The
pro forma combined financial information (i) is based on preliminary
estimates, available information and certain assumptions that
management deems appropriate and (ii) should be read in conjunction
with the other financial statements and notes thereto included
elsewhere in this Prospectus. The pro forma combined revenues are all
attributable to the Acquired Companies.
(2) Other income for the year ended December 31, 1996 includes a $6.3
million litigation settlement received by Great Western Directories,
Inc.
(3) Assumes that all income is subject to a corporate tax rate of 40% and
that all goodwill amortization is non-deductible for income tax
purposes.
(4) Represents accretion of the excess of the liquidation preference over
the carrying value of the Preferred Stock. See Note 3 of Notes to Pro
Forma Combined Financial Statements.
(5) Includes (i) the 8,458,453 shares outstanding immediately prior to the
Offering, (ii) 3,166,467 shares issued in the Acquisitions, (iii)
6,623,113 shares sold in the Offering necessary to generate all net
proceeds other than those that are unallocated and available for
general corporate purposes (see "Use of Proceeds") and (iv) 1,375,080
shares representing the incremental effect of options and warrants on
shares outstanding.
(6) EBITDA as used in this Prospectus consists of earnings (loss) before
interest, income taxes, depreciation and amortization and less equity
in earnings (loss) of a minority owned affiliate and less the portion
of other income and expense (net) attributable to the $6.3 million
litigation settlement received by Great Western Directories, Inc. in
1996. The Company has included EBITDA data because it is a measure
commonly used in the telecommunications industry. EBITDA is not a
measure of financial performance determined under generally accepted
accounting principles, should not be considered as an alternative to
net income as a measure of performance or to cash flows as a measure of
liquidity, and is not necessarily comparable to similarly titled
measures of other companies.
(7) As adjusted to reflect the closing of the Offering (assuming an initial
public offering price of $15.00 per share) and the application of the
proceeds of the Offering to pay the consideration for the Acquisitions
and to retire $4.2 million of indebtedness. The balance of the net
proceeds of the Offering have been recorded as cash.
(8) Owned or operated by KINNET, of which the Company owns 49%.
(9) For the 12 months ended September 30, 1997, including approximately
4,000 customers in three markets in California.
9
<PAGE>
SUMMARY INDIVIDUAL COMPANY FINANCIAL DATA
The following table presents historical summary income statement data and
EBITDA (as previously defined) for the Acquired Companies and KINNET (see
"The Company") for the three most recent fiscal years as well as the most
recent interim period and comparative period of the prior year, as
applicable. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Certain Acquired Companies."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED,(1) SEPTEMBER 30,(1)
-------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- -------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Great Western Directories, Inc.
Revenues..................................... $29,407 $36,469 $44,324 $33,463 $35,624
Gross profit................................. 11,402 16,673 22,707 18,181 18,766
EBITDA....................................... 969 4,308 8,037 6,814 6,345
Valu-Line of Longview, Inc. and Related
Companies
Revenues..................................... 13,417 13,330 11,181 8,623 9,058
Gross profit................................. 6,243 5,121 4,326 3,414 3,589
EBITDA....................................... 2,947 2,034 1,646 1,431 1,177
FirsTel, Inc.
Revenues..................................... 4,079 7,838 10,355 7,659 9,488
Gross profit................................. 914 2,298 3,041 2,308 2,422
EBITDA....................................... (81) 820 1,177 960 690
Feist Long Distance Service, Inc.
Revenues..................................... 5,712 7,923 10,028 7,416 8,965
Gross profit................................. 1,834 2,176 2,937 2,189 2,779
EBITDA....................................... 162 174 702 654 518
Other Acquired Companies(2)
Revenues..................................... 3,940 6,997 7,798 5,950 5,944
Gross profit................................. 1,395 2,798 3,021 2,548 2,891
EBITDA....................................... 350 648 591 733 1,255
KIN Network, Inc.(3)
Revenues..................................... 3,550 6,497 8,553 6,031 8,796
Gross profit(4).............................. (600) 1,578 3,783 2,655 4,203
EBITDA....................................... (1,407) 514 2,353 1,566 2,408
Net loss..................................... (2,883) (2,055) (792) (712) (297)
</TABLE>
- ------------
(1) The historical summary income statement data for (i) all fiscal years
for Great Western Directories, Inc., Valu-Line of Longview, Inc., and
KIN Network, Inc., (ii) for fiscal years 1995 and 1996 for FirsTel,
Inc., and (iii) for fiscal year 1996 for Feist Long Distance, Inc., are
derived from the audited financial statements of such companies
included elsewhere herein. The historical summary income statement data
for the other fiscal years and nine month periods for such Acquired
Companies, all information regarding EBITDA and all information for the
Other Acquired Companies, is unaudited. The fiscal years of Long
Distance Management II, Inc. ended on June 30, 1995, 1996 and 1997, and
the fiscal years of Long Distance Management of Kansas, Inc. ended on
March 31, 1995, 1996 and 1997. Rather than information for their fiscal
years, financial information for these two Other Acquired Companies is
included for the twelve months ended December 31, 1994, 1995 and 1996
and the nine months ended September 30, 1996 and 1997. The fiscal years
of Great Western Directories, Inc. ended on January 31, 1995 and 1996
and December 31, 1996. Consequently the data for Great Western for the
fiscal years ended January 31, 1996 and December 31, 1996 both include
the month of January 1996. Except for those three Acquired Companies,
all of the Acquired Companies, KINNET and ACG have fiscal years ending
on December 31.
(2) Includes Long Distance Management II, Inc., Long Distance Management of
Kansas, Inc., The Switchboard of Oklahoma City, Inc., Tele-Systems,
Inc. and National Telecom, a proprietorship.
(3) The Company will own 49% of the outstanding voting stock of KINNET, and
hence KINNET's net income or loss will be included in the Company's
financial statements using the equity method of accounting. Such
amounts included in the Company's pro forma combined financial
statements for the fiscal year ended December 31, 1996 and the nine
months ended September 30, 1996 and 1997 were $(388,000), $(349,000)
and $(146,000), respectively.
(4) KIN Network, Inc. has historically included depreciation and
amortization not in gross profit, but as a separate item in the
calculation of income (loss) from operations. The Acquired Companies
have presented depreciation and amortization expenses as an element of
gross profit, and for consistency of presentation, in the text of this
Prospectus and the pro forma financial statements, KINNET's
depreciation and amortization expense is included in the calculation of
gross profit. As presented in its historical financial statements
included herein, the gross profit of KINNET for fiscal 1994, 1995 and
1996, and for the nine months ended September 30, 1996 and 1997, was
(in thousands) $1,100, $3,402, $5,689, $3,976, and $5,800,
respectively.
10
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the factors set forth
herein and are urged to read this Prospectus in its entirety. This Prospectus
contains certain forward-looking statements with respect to the Company's
expectations regarding its business after it has consummated the
Acquisitions. These forward-looking statements are subject to certain risks
and uncertainties which may cause actual results to differ significantly from
such forward-looking statements.
ABSENCE OF COMBINED OPERATING HISTORY OF ACG AND THE ACQUIRED COMPANIES;
RISKS OF INTEGRATING NUMEROUS SEPARATE COMPANIES
ACG was incorporated in Delaware in September 1997 as a subsidiary of its
predecessor, which had been incorporated in June 1996. ACG has conducted no
operations other than in connection with the Offering and the Acquisitions.
See "The Company." The Acquired Companies will continue to operate prior to
the consummation of the Offering as separate, independent businesses.
Consequently, the combined and pro forma combined financial information
herein may not be indicative of what the Company's operating results and
financial condition would have been for the periods presented had the
Acquisitions taken place on the dates indicated. Until the Company
establishes centralized accounting, management information and other
administrative systems, it will rely on the separate systems of the Acquired
Companies. The success of the Company will depend, in part, on the extent to
which it is able to centralize these functions, eliminate the unnecessary
duplication of other functions and otherwise integrate the Acquired Companies
and any additional businesses the Company may acquire into a cohesive,
efficient enterprise. Some or all of the Acquired Companies' systems,
hardware and software may be incompatible with those of other Acquired
Companies. The Company's senior management has been assembled only recently,
and there can be no assurance that it will be able to manage successfully the
combined entity or implement effectively the Company's operating, internal
growth or acquisition strategies (including acquisitions that may occur after
the Offering). In addition, the yellow pages business is different from the
Company's telecommunication businesses, and the Company is not aware of any
significant telecommunications company, other than the RBOCs and other local
exchange carriers and competitive local exchange carriers, that has
integrated a yellow pages business with a telecommunications business.
Furthermore, telecommunications providers generally experience higher
customer and employee turnover during and after an acquisition. The
integration of the systems of the Acquired Companies will entail significant
costs and delays can be expected. The failure of the Company to integrate the
Acquired Companies successfully would have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows
and the value of the Common Stock.
ABILITY TO MANAGE GROWTH
The Company's strategy is to expand primarily by internal growth as well
as by acquisition. Therefore the expansion and development of the Company's
business will depend not only on the Company's ability to, among other
things, successfully implement its sales and marketing strategy, evaluate
markets, install facilities, obtain any required government authorizations,
initially negotiate arrangements for the resale of local services with
incumbent local exchange carriers, implement interconnection to, and
co-location with, facilities owned by incumbent local exchange carriers and
obtain appropriately priced unbundled network elements and wholesale services
from the incumbent local exchange carriers, but also on its ability to
identify, evaluate, negotiate and consummate acquisitions successfully, all
in a timely manner, at reasonable costs and on satisfactory terms and
conditions. Future growth may place a significant strain on the Company's
administrative, operational and financial resources. The Company's ability to
manage its growth successfully will require the Company to centralize and
enhance its operational, management, financial and information systems and
controls and to hire and retain qualified sales, marketing, administrative,
operating and technical personnel. There can be no assurance that the Company
will be able to do so. In addition, as the Company expands into its targeted
markets, there will be additional demands on the customer support, sales,
marketing and administrative resources and the network infrastructures of the
Acquired Companies, which have not been integrated. The Company's inability
to implement its growth strategy successfully or to manage its growth
effectively could have a material adverse effect on the Company's business,
results of operations and financial condition and the value of the Common
Stock.
11
<PAGE>
CAPITAL REQUIREMENTS
The Company anticipates the expenditure of approximately $25.0 million
during calendar year 1998 for the acquisition of additional circuit and
packet switches, the leasing of bulk fiber optic capacity from others and the
purchase of other capital assets. In order to fund these expenditures, the
Company intends to utilize internally generated funds and borrowings under
the Company's proposed credit facility and may use a portion of the net
proceeds of the Offering allocated to general corporate purposes. With
respect to the Company's proposed credit facility, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Certain Acquired Companies -- Pro Forma Combined Results of Operations -- Pro
Forma Combined Liquidity and Capital Resources." If the Company is successful
in growing its local telecommunications services business or effecting
acquisitions, it will have materially increased capital requirements in
calendar year 1999 and beyond. In order to fund these capital requirements,
the Company will be required to raise substantial funds from external sources
through public or private debt and equity financings. However, in the event
that the Company's plans or assumptions change or prove to be inaccurate, the
Company may be required to seek additional capital sooner than currently
anticipated. There can be no assurance that financing will be available or
that if financing is available, that it will be available on terms and
conditions acceptable to the Company.
RECENT RESULTS AND ANTICIPATED FUTURE QUARTERLY LOSSES
The following table sets forth certain pro forma combined results of
operations data of the Company for the three months ended September 30, 1996
and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1997
-------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Revenue
Telecommunications services............... $ 9,015 $11,918
Yellow page publishing.................... 8,060 8,258
------- -------
Total................................... 17,075 20,176
Cost of services.......................... 9,393 12,202
Depreciation and amortization............. 1,465 1,460
------- -------
Gross profit.............................. 6,217 6,514
Selling, general and administrative
expenses................................. 5,321 7,418
------- -------
Income (loss) from operations............. $ 896 $ (904)
======= =======
</TABLE>
The Company's results of operations for the three months ended September
30, 1997 reflect operating expenses for ACG that were not present in the
third quarter of 1996 because ACG commenced operations in June 1996. The
results of operations for the third quarter of 1997 also reflect the
additional expenses associated with repositioning the Company to implement
its CLEC strategy, including the increased amortization of intangible assets
arising from the Acquisitions, an expanded marketing staff and the lower
margins associated with the resale of local service. The Company expects that
it will incur losses from operations over at least the next several quarters
as it continues to implement its CLEC strategy.
In addition, the Company expects that in the fourth quarter of 1997, it
will incur a compensation charge of approximately $1.0 million related to the
employment of the Company's new senior management team.
DEPENDENCE ON SUCCESSFUL CROSS-SELLING OF EXISTING AND NEW CUSTOMER BASES
The Company intends to expand its revenue base through the marketing of
its bundled telecommunication services to, among others, the aggregate of
approximately 75,000 advertisers in its yellow page directories and the
yellow page directories published by FPI and the approximately 15,000
business customers of PAM Oil, Inc. This cross-selling strategy presents
risks that, singularly or in any combination,
12
<PAGE>
could adversely affect the Company's business, financial condition, results
of operations and cash flows and the value of the Common Stock. These risks
include the possible adverse effects of a failure to coordinate and integrate
the sales programs of the Acquired Companies, a failure to train its sales
force effectively to market its bundled products, a failure to develop
compensation and incentive programs needed to appropriately motivate its
sales force, a failure to develop and implement a sales program and organize
a sales force to market the Company's bundled telecommunications services to
yellow page and other customers who do not at present purchase the Company's
telecommunications services, a failure to develop integrated accounting and
management information systems for ACG and the Acquired Companies and any
companies that are acquired in the future, a failure to convert long distance
customers into local service customers and other unanticipated problems that
might arise in connection with the implementation of any new marketing
strategy. Any of the foregoing problems could have a material adverse effect
on the Company's business, results of operations and financial condition and
the value of the Common Stock.
RISKS RELATED TO LOCAL SERVICES STRATEGY
The local dial tone services market has only recently been opened to
competition through the passage of the Telecommunications Act of 1996 (the
"Telecommunications Act") and subsequent state and Federal regulatory actions
designed to implement the Telecommunications Act. Regulatory bodies have not
completed all actions expected to be needed to implement local service
competition, and there is little experience under those decisions that have
been made to date. The Company has begun to act as a CLEC only recently and
on a small scale, through the resale of the ILEC's networks, and has limited
experience in this market. The revenues generated to date from local services
have not been material. At the time the Company determines to cease simple
resale of local services in some of its markets and provide those services
with its own switches and either leased unbundled loops or its own fiber
optic facilities, the Company will be required to make significant operating
and capital investments in order to implement that phase of its local service
strategy and will have to acquire rights-of-way, easements, conduits, other
equipment and facilities and permits. There are numerous operating
complexities associated with providing local services. The Company will be
required to develop new services and systems and will need to develop new
marketing initiatives and train its sales force in connection with selling
these services. The Company will face significant competition from ILECs,
including the RBOCs, whose core business is providing local dial tone
service. The RBOCs, who currently are the dominant providers of local
services in their markets, are expected to mount a significant competitive
response to new entrants such as the Company in their markets. Further, each
of the RBOCs may expand outside of its historical markets into the market
areas of other RBOCs. The Company also will face significant competitive
product and pricing pressures from other ILECs and from other firms seeking
to compete in the local services market. Many of these competitors, including
all of the RBOCs and many CLECs, have far greater experience and operational,
administrative and financial resources than the Company. A recent Eighth
Circuit Court of Appeals decision, which invalidated the pricing discounts
for such services which had been prescribed by the FCC under the
Telecommunications Act, adds uncertainty to the marketplace and could also
have an adverse effect on the Company's business, financial condition,
results of operations and cash flows and the value of the Common Stock.
The Company also expects that the addition of resold local service to its
bundle of telecommunications services will have an adverse impact on its
gross margin because the gross margin on the resale of local services through
an ILEC's facilities is lower than the gross margin on most of the Company's
existing business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Certain Acquired Companies--Overview
of the Acquired Companies' Sources of Revenue and Expenses."
DEPENDENCE ON DEVELOPMENT OF BILLING, CUSTOMER SERVICE AND MANAGEMENT
INFORMATION SYSTEMS; TECHNOLOGY RISKS
Sophisticated information and processing systems are vital to the
Company's operations and growth and its ability to monitor costs, render
single monthly invoices for bundled services, process customer orders,
provide customer service and achieve operating efficiencies. As the Company
commences
13
<PAGE>
providing dial tone and switched local access services in future years, the
need for further enhanced billing and information systems will increase
significantly and the Company will have significant additional requirements
for data interface with RBOCs. Additionally, any subsequent acquisitions will
place additional burdens on the Company's accounting, information and other
systems.
While the Company believes that its software applications are year 2000
compliant, there can be no assurance until the year 2000 occurs that all
systems will then actually function adequately. Further, if the software
applications of local exchange carriers, long distance carriers or others on
whose services the Company depends are not year 2000 compliant resulting in
any loss of such services, it could have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows
and the value of the Common Stock.
Unanticipated problems in any of the above areas, or the Company's
inability to implement solutions in a timely manner or to upgrade existing
systems as necessary, could have a material adverse impact on the ability of
the Company to reach its objectives and on its financial condition, results
of operations and cash flows and the value of the Common Stock.
In addition to its accounting and information systems, the
telecommunications industry generally is subject to rapid and significant
changes in technology. While the Company believes that for the foreseeable
future these changes will not materially hinder the Company's ability to
acquire necessary technologies, the effect of technological changes on the
business of the Company cannot be predicted. There can be no assurance that
technological developments in telecommunications will not have a material
adverse effect on the Company's business, financial condition, results of
operations and cash flows and the value of the Common Stock.
LIMITED TECHNICAL STAFF
The telecommunications industry is highly technical and the Company's
success in designing and operating local and long distance networks and their
components, such as switches, is dependent upon the quality of the Company's
technical support capabilities. While the Acquired Companies have technical
personnel on staff and the Company intends to expand its in-house technical
capabilities following the Offering, the Company also intends to engage
outside technical consultants and vendors rather than rely solely upon its
in-house expertise. The Company's technical personnel will coordinate and
supervise outside consultants and vendors, which may include KINI, L.C., the
entity that provides management services to KINNET. See "Management." While
the Company will attempt to select consultants and vendors that have the
technical expertise to provide in a timely manner the services required to
design, construct and maintain the Company's network and all additions
thereto, a failure by any consultant or vendor to perform in the anticipated
manner could have a material adverse effect upon the Company's business,
financial condition, results of operations and cash flows and the value of
the Common Stock because the Company could experience customer
dissatisfaction and possible defection and could be forced to contract with
other consultants and vendors and thereby incur time delays or additional
costs.
COMPETITION
The telecommunications industry is highly competitive. The Company
competes with long distance carriers in the provision of long distance
services. The United States long distance market includes approximately 1,000
service providers, but is dominated by four major competitors: AT&T, MCI,
Sprint and WorldCom (the "Dominant Long Distance Carriers"). The Company also
faces intense competition from ILECs, including Southwestern Bell and U S
WEST, two of the RBOCs which currently dominate their local
telecommunications markets in the Region, and independently owned
telecommunications companies. Other ILECs and CLECs with which the Company
does not now compete may initiate service or make acquisitions in the Region.
Other competitors of the Company may include cable television companies,
competitive access providers, microwave and satellite carriers and private
networks owned by large end users. In addition, the Company competes with
RBOCs and other ILECs, numerous direct marketers and telemarketers, equipment
vendors and installers and telecommunications management companies with
respect to certain portions of its business. Many of the Company's existing
and potential
14
<PAGE>
competitors have financial and other resources far greater than those of the
Company. Many of the Company's competitors may have lower overhead and
because of their ownership of fiber optic transmission networks have
substantially lower cost of service than the Company. Consequently, these
competitors may be able to provide their services at lower rates than the
Company.
The long distance telecommunications industry has relatively insignificant
barriers to entry, numerous entities competing for the same customers and a
high average churn rate, as customers frequently change long distance
providers in response to the offering of lower rates or promotional
incentives by competitors. As procompetitive regulatory initiatives are
implemented, the RBOCs will become competitors in the long distance
telecommunications industry and various other participants in the long
distance telecommunications industry, including one or more of the Dominant
Long Distance Carriers, also will seek to compete in the local switched
services market. The Company believes that the principal competitive factors
affecting its telecommunications market share are pricing, accurate billing
of a bundle of services on a single invoice, quality of service and customer
dissatisfaction with the services provided by the existing carrier. The
ability of the Company to compete effectively will depend upon its ability to
maintain high quality, market-driven services at prices generally equal to or
below those charged by its competitors. While customers may be willing to pay
to some extent for superior service, the Company believes that to maintain
its competitive posture, it must be in a position to reduce its prices in
order to meet reductions in rates, if any, by others. Any such reductions
could adversely affect the Company's business, financial condition, results
of operations and cash flows and the value of the Common Stock, and the
Company's numerous competitors with greater financial resources may be better
postured to withstand the effects of such reductions. See "Business --
Competition." The Company generally prices its services at a discount to the
primary carrier or carriers in each of its target markets. The Company has
experienced, and expects to continue to experience, declining revenue per
minute in all of its markets as a result of increased competition, although
due to technological innovation and substantial available transmission
capacity, transmission costs in the telecommunications industry often have
declined at a more rapid rate than prices. There can be no assurance that
this relationship will continue. Industry observers predict that, early in
the next decade, telephone charges will no longer be based on the distance a
call is carried. As a consequence, the Company could experience a substantial
reduction in its margins on long distance calls which, absent a significant
increase in billable minutes carried or charges for additional services,
would have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows and the value of the Common
Stock.
Local access telephone services offered by the Company compete principally
with the services offered by the local ILEC. ILECs have long-standing
relationships with their customers and have the potential to subsidize
competitive services with revenues from services they offer in which
competition is less intense. In addition, if ILECs expand their toll free
calling areas, traffic which might otherwise have been carried by the Company
as long distance traffic may be carried by the Company as local traffic, or
carried by the other carrier rather than by the Company.
The Company faces competition in the markets in which it operates from one
or more CLECs that own and operate fiber optic networks, in many cases in
conjunction with the local cable television operator. Each of the Dominant
Long Distance Carriers has indicated its intention to offer local
telecommunications services, either directly or in conjunction with other
competitive access providers or cable television operators. There can be no
assurance that these firms, and others, will not enter the small and
mid-sized markets where the Company currently focuses its sales efforts.
The Company believes that the market for wireless telecommunications
services is likely to expand significantly as equipment costs and service
rates continue to decline, equipment becomes more convenient and functional,
and wireless services become more diverse. The Company has only a very small
participation in the wireless services market, and as that market expands the
Company will face increasing competition. The Company also believes that
providers of wireless services increasingly will offer, in addition to
products that supplement customers' landline communications (similar to
cellular telephone services in use today), wireline replacement products that
may result in wireless services becoming customers' primary mode of
communication. The Company anticipates that in the future there could
potentially be several wireless competitors in each of its current or target
markets, including cellular and personal communication services providers.
15
<PAGE>
The Company primarily competes in the markets in which it currently
distributes yellow pages with Southwestern Bell. In expanding its yellow page
business into other service areas in the Region, the Company will face
competition from Southwestern Bell, U S WEST and other publishers of existing
directories in the Region. Many of these competitors, including all of the
RBOCs and many other ILECs, have greater financial, operational and
administrative resources than the Company.
IMPLICATIONS OF TELECOMMUNICATIONS ACT AND OTHER REGULATION
The Company's telecommunications services are subject to varying degrees
of federal, state and local regulation. The FCC exercises jurisdiction over
all telecommunications service providers to the extent such services involve
the provision, origination and termination of jurisdictionally interstate or
international telecommunications, including the resale of long distance
services and the provision of local access services necessary to connect
callers to long distance carriers. The state regulatory commissions retain
jurisdiction over services to the extent such services involve the provision,
origination and termination of jurisdictionally intrastate
telecommunications. The Company, as a provider of resale and switch-based
local and long distance telecommunications services, files tariffs with the
FCC and relevant state authorities for local, interstate and international
service on an ongoing basis. Challenges to these tariffs by third parties
could cause the Company to incur substantial legal and administrative
expenses. Additionally, the Company expects that, as its business expands and
as more procompetitive regulatory initiatives pertaining to the local
telecommunications services industry are implemented, it will offer increased
intrastate services which will be subject to state regulation. In its
provision of local telecommunications services, the Company currently is not
subject to price-cap or rate-of-return regulation, nor is it currently
required to obtain FCC authorization for installation or operation of the
facilities used by the Company in providing its domestic interstate services.
The Company believes that the Telecommunications Act and state legislative
and regulatory initiatives have substantially reduced the barriers to local
exchange competition. These initiatives include requirements that the RBOCs
negotiate with entities such as the Company to provide interconnection to the
existing local telephone network, to allow the purchase, at cost-based rates,
of access to unbundled network elements, to establish dialing parity, to
obtain access to rights-of-way and to resell services offered by the ILECs.
See "Business -- Regulation." The Company's plans to provide local switched
services are dependent, among other things, upon obtaining favorable
interconnection agreements with local exchange carriers. In August 1996, the
FCC adopted the Interconnection Decision to implement the interconnection,
resale and number portability provisions of the Telecommunications Act. In
October 1996, the U.S. Eighth Circuit Court of Appeals stayed the
effectiveness of certain portions of the Interconnection Decision, including
provisions establishing a pricing methodology and a procedure permitting new
entrants to "pick and choose" among various provisions of existing
interconnection agreements. Although the judicial stay of the Interconnection
Decision did not prevent the Company from attempting to negotiate
interconnection agreements with local exchange carriers, it did create
uncertainty about the rules governing pricing, terms and conditions of
interconnection agreements, and could make negotiating such agreements more
difficult and protracted. Although the FCC applied unsuccessfully to the U.S.
Supreme Court to vacate the judicial stay, on July 18, 1997, the U.S. Eighth
Circuit Court of Appeals issued an opinion which, among other things, held
that the stay had expired. The decision also invalidated key elements of the
Interconnection Decision and stated that the law grants the state
commissions, not the FCC, the authority to determine rates involved in the
implementation of the local competition provisions of the Telecommunications
Act. More specifically, the court overturned the FCC's pricing guidelines,
the "pick and choose" rule, and some portions of the FCC unbundling rules,
including the requirement that ILECs recombine network elements that are
purchased by CLECs on an unbundled basis. The court upheld, however, the
FCC's view of the network elements that ILECs must unbundle, found that
nothing in the Telecommunications Act requires a CLEC to own or control a
telecommunications network before being able to purchase unbundled elements,
and affirmed certain other aspects of the Interconnection Decision. Several
interexchange carriers (including AT&T, MCI and Sprint) filed petitions for
rehearing with the Eighth Circuit requesting the court to reinstate certain
of the FCC rules found unlawful, while various ILECs filed petitions of their
own regarding aspects of the court's decision that they found objectionable.
On October 14, 1997, the court denied the petitions of the
16
<PAGE>
interexchange carriers, granted those of the ILECs, and vacated an additional
FCC rule established in the Interconnection Decision that, it held, would
have the effect of permitting a CLEC access to an ILEC's network elements on
a bundled as well as an unbundled basis. The court's decision thereby
prevented CLECs from acquiring bundled network elements at cost-based rates
and made only unbundled elements available at those rates. In a separate
decision on August 22, 1997, the Eighth Circuit held that the FCC exceeded
the scope of its jurisdiction by issuing rules concerning dialing parity that
affect essentially intrastate services and local, interstate calls within a
single local access and transport area ("LATA"). The FCC, AT&T, MCI, Sprint,
WorldCom and a large number of CLECs and others have filed petitions for
certiorari requesting the United States Supreme Court to overturn both of the
Eighth Circuit's decisions. The petitions assert, among other things, that
the Eighth Circuit erred in finding the FCC lacked jurisdiction to promulgate
rules implementing the local competition pricing provisions of the
Telecommunications Act of 1996 and in rejecting the "pick and choose"
provisions of the FCC's rules. There can be no assurance that the Company
will be able to obtain and maintain resale and interconnection agreements on
terms acceptable to the Company.
In early July 1997, the parent company of Southwestern Bell ("SBC")
initiated litigation in the United States District Court, Northern District
of Texas (Wichita Falls) (the "Court") challenging the constitutionality of
Sections 271 through 275 of the Telecommunications Act on four grounds,
including a denial of First Amendment free speech rights. On December 31,
1997, the Court granted SBC's motion. The Court found that Sections 271-275
of the Telecommunications Act of 1996 (the "Special Provisions") constitute a
"bill of attainder" and are therefore unconstitutional. The Court's decision
is considered to be controversial by many, and the United States Department
of Justice has joined AT&T, MCI and Sprint in asking the Court for a stay of
the decision's effectiveness pending the filing of an appeal to the United
States Court of Appeals for the Fifth Circuit. In the meantime, the Court has
approved a December 30, 1997 request by Bell Atlantic Corporation ("Bell
Atlantic") that it be covered by the effect of the December 31 ruling. The
Court has also rejected the request of Ameritech Corporation ("Ameritech") to
join the case, on grounds that it was filed after the ruling. Most recently,
SBC has asked Oklahoma regulators to decide by late January on SBC's
application to offer long-distance service to its local telelphone customers
in the state. See "Business -- Regulation -- Federal Regulations."
The Telecommunications Act provides the ILECs with new competitive
opportunities. That Act removes previous restrictions concerning the
provision of long distance service by the RBOCs and also provides them with
increased pricing flexibility. Under the Telecommunications Act, the RBOCs
will, upon the satisfaction of certain conditions, be able to offer long
distance services that would enable them to duplicate the "one-stop"
integrated telecommunications approach that the Company intends to use. There
can be no assurance that the anticipated increased competition will not have
a material adverse effect on the Company's business, results of operation and
financial condition and the value of the Common Stock. The Telecommunications
Act provides that rates charged by ILECs for interconnection to their network
are to be nondiscriminatory and based upon the cost of providing such
interconnection, and may include a "reasonable profit," which terms are
subject to interpretation by regulatory authorities. If the ILECs,
particularly the RBOCs, charge alternative providers such as the Company
unreasonably high fees for interconnection to their networks or significantly
lower their rates for access and private line services or offer significant
volume and term discount pricing options to their customers, the Company
could be at a significant competitive disadvantage.
Effective January 1, 1998 ILECs became entitled to charge subscriber
interexchange carrier charges ("PICC") upon switching a customer's service
from one provider to another. At the present time, the Company expects to pay
a blended rate of approximately $5.00 per business and residential customer
as a PICC charge. Unless all interexchange carriers elect to pass these
charges along to their customers, those carriers that elect to absorb the
PICC charge will enjoy a competitive advantage over those that attempt to
pass the charge along to their customers. The Company believes that larger
carriers will be better able to absorb the PICC charges over the short term,
and hence will enjoy a competitive advantage until market conditions drive
the cost of the PICC charge to lower levels. The Company will determine
whether to absorb or pass along the PICC charge once it assesses the action
taken by its competitors.
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Absorption of the PICC charge would increase the Company's cost of providing
telecommunication services and consequently would adversely impact the
Company's results of operations and cash flows and could adversely affect the
value of the Common Stock.
The Company believes that, with two exceptions in Arkansas and Missouri,
it is in substantial compliance with all material laws, rules and regulations
governing its operations and has obtained, or is in the process of obtaining,
all licenses and approvals necessary or appropriate to conduct its operations
following the Offering; however changes in existing laws and regulations, or
any failure or significant delay in obtaining necessary regulatory approvals,
could have a material adverse effect on the Company's business, results of
operations, financial condition and cash flows and the value of the Common
Stock. Statutes and regulations which may become applicable to the Company as
it expands could require the Company to alter methods of operations at costs
which could be substantial, or otherwise limit the types of services offered
by the Company. See Notes to Combined Financial Statements of Valu-Line and
Notes to Financial Statements of Feist Long Distance Service, Inc. for
information relating to two of the Acquired Companies conducting long
distance telephone operations in Arkansas and Missouri without a permit.
The telecommunications industry is undergoing dynamic change and
regulatory responses to such change could be sweeping. Larger, more
established telecommunications companies may promote legislation or
regulations which could adversely affect the Company's ability to offer its
services to its targeted customers or to carry out its business plans. There
can be no assurance that the Company will be able to comply with additional
applicable laws, regulations and licensing requirements or have sufficient
resources to take advantage of the opportunities which may arise from this
dynamic regulatory environment. See "Business -- Regulation."
DEPENDENCE ON THIRD-PARTY LONG DISTANCE CARRIERS
The Company is dependent on certain major long distance carriers to
transmit its customers' long distance telephone calls. The Company has
agreements with such long distance carriers that provide it with access to
such carriers' networks for transmission of its customers' calls. Although
the Company believes that it currently has sufficient access to transmission
facilities and long distance networks and believes that its relationships
with its carriers are generally satisfactory, any increase in the rates
charged by carriers or their unwillingness to provide service to the Company
would materially adversely affect the Company's business, financial
condition, results of operations and cash flows and the value of the Common
Stock. Failure to obtain continuing access to such facilities and networks
also would have a material adverse effect on the Company, including possibly
requiring the Company to significantly curtail or cease its long distance
operations. In addition, the Company's long distance service operations
require that its switching facilities and its carriers' long distance
networks operate on a continuous basis. It is not atypical for long distance
carriers and switching facilities to experience periodic service
interruptions and equipment failures. It is possible that the Company's
switching facilities and its carriers' long distance networks may from time
to time experience service interruptions or equipment failures resulting in
material delays which would adversely affect consumer confidence as well as
the Company's business operations and reputation, which might ultimately
affect the value of the Common Stock.
DEPENDENCE ON INCUMBENT LOCAL EXCHANGE CARRIERS
The Company intends to obtain the local telephone services of ILECs on a
wholesale basis and resell that service to end users, particularly in the
early stages of its local telephone service business. To the extent that the
Company resells the local services of an ILEC, the Company and its customers
will be subject to the quality of service, equipment failures and service
interruptions of those carriers, all of which could redound to the Company's
detriment. Even if the Company ultimately constructs its own local network
facilities, it will be dependent on ILEC's for provision of local telephone
service through access to local loops, termination service and, in some
markets, central office switches.
The Company is also dependent on ILECs to provide access service for the
origination and termination of its toll long distance traffic and
interexchange private lines. Historically those access charges have made up a
significant percentage of the overall cost of providing long distance
service. On
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May 7, 1997, the FCC adopted changes to its interstate access rules that,
among other things, will reduce per-minute access charges and substitute new
per-line flat rate monthly charges. The FCC also approved reductions in
overall access rates, and established new rules to recover subsidies to
support universal service and other public policies. The impact of these
changes on the Company or its competitors is not yet clear. The Company could
be adversely affected if it does not experience access cost reductions
proportionally equivalent to those of its competitors. See "Business
- --Regulation."
In addition, the Company's plans to provide local telephone service are
heavily dependent upon implementation of provisions of the Telecommunications
Act. The Telecommunications Act preempted state and local laws to the extent
that those laws prohibited local telephone competition, and imposed a variety
of new duties on ILECs intended to advance such competition, including the
duty to negotiate in good faith with competitors requesting interconnection
to an ILEC's network. However, negotiations with ILECs have sometimes
involved considerable delays and the resulting negotiated agreements may not
necessarily be obtained on terms and conditions that are acceptable to the
Company. In such instances, the Company may petition the proper state
regulatory agency to arbitrate disputed issues. There can be no assurance
that the Company will be able to negotiate acceptable new interconnection
agreements with ILECs or that if state regulatory authorities impose terms
and conditions on the parties in arbitration, such terms will be acceptable
to the Company.
Any successful effort by the ILECs to deny or substantially limit the
Company's access to their network elements or wholesale services would have a
material adverse effect on the Company's ability to provide local telephone
services which could ultimately have a material adverse effect on its
business, financial condition, results of operations and cash flows and the
value of the Common Stock. Although the Telecommunications Act imposes
interconnection obligations on ILECs, there can be no assurance that the
Company will be able to obtain access to such network elements or services at
rates, and on terms and conditions, that permit the Company to offer local
services at rates that are both profitable and competitive. In order to
provide switched based local service, the Company must negotiate satisfactory
interconnect agreements with Southwestern Bell, U S WEST and other ILECs. The
forms of such agreements currently in use do not provide for all material
terms for the resale of local services or access to the unbundled network
elements. Some of such terms may be affected by pending legal proceedings
regarding FCC regulatory requirements. Many issues relevant to the terms and
conditions by which competitors may use an ILEC's network and wholesale
services remain to be resolved. For example, Southwestern Bell, U S WEST and
certain other ILECs have taken the position that when a carrier seeking to
provide local service obtains all necessary elements (loops and switches)
from the ILEC in a combined form, the ILEC retains the right to receive the
access revenues associated with service to the customers served on that
basis. See "Business -- Regulation."
DEPENDENCE ON KEY PERSONNEL; NEW MANAGEMENT TEAM
The efforts of a small number of key management and operating personnel
will largely determine the Company's success. The Company's operations depend
on the continuing efforts of its executive officers and the senior management
of the Acquired Companies. Because the Company is a holding company with no
previous operating experience and is seeking to consolidate numerous separate
businesses, it is particularly vulnerable to the loss of one or more members
of management in the near term. In addition, the Company likely will depend
on the senior management of any significant business it acquires in the
future. The Company's business, financial condition, results of operations
and cash flows and the value of the Common Stock could be affected adversely
if any of these persons does not continue in his or her management role after
joining the Company and the Company is unable to attract and retain qualified
replacements. As competition in the telecommunications business has
increased, it has become increasingly difficult and expensive to attract and
retain management personnel. The success of the Company's growth strategy, as
well as the Company's current operations, will depend, in part, on the extent
to which the Company is able to retain, recruit and train qualified personnel
who meet the Company's standards of conduct and service to its customers. The
Company's senior management team has been assembled only recently, and the
Company is currently seeking to augment that team with additional personnel.
There can be no assurance that the management team can function effectively
to implement the Company's business plans. See "Management."
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CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
On closing of the Acquisitions and the Offering, Consolidation Partners
Founding Fund, L.L.C. ("CPFF"), the executive officers and directors of the
Company and former owners of the Acquired Companies and KINNET will own in
the aggregate approximately 56.6% of the outstanding Common Stock. Promptly
after the Offering, CPFF intends to distribute to its owners all shares of
Common Stock owned by it. As a result of such distribution, Consolidation
Partners, L.L.C. ("Consolidation Partners"), a limited liability company
owned by Rod K. Cutsinger, a director of the Company, his wife and two adult
children, will own approximately 27.6% of the then outstanding shares of
Common Stock.
TERMS OF THE ACQUISITIONS
For accounting purposes, the aggregate purchase price of the Acquisitions
is estimated to be $139.5 million, an excess of $122.8 million (including
$0.6 million of deferred acquisition costs incurred by ACG) over the book
value of the net assets acquired of $17.3 million. This excess purchase price
of $122.8 million can be attributed to several factors, including the
customer lists of the Acquired Companies, the benefits to be gained from
switching existing and future traffic to KINNET, the ability to cross-sell
telecommunications services through established yellow page directories, and
the future operating synergies hoped to be realized from consolidating nine
entities into one. Of the excess, $105.8 million relates to the Acquired
Companies and $17.0 million relates to the assets of KINNET. The excess of
the respective purchase prices over the fair value of tangible net assets
acquired have been preliminarily classified as intangible assets. The final
allocation to identifiable tangible and intangible assets, including customer
lists and goodwill, and the useful lives for the amortization of the various
asset classifications will be based upon the results of an appraisal by an
independent third party which is expected to be completed prior to the
release of the Company's audited financial statements for 1997. The portion
of the purchase prices not allocated to identifiable tangible and intangible
assets will be recorded as goodwill. Until the independent appraisal is
completed, the intangible assets will be amortized over a period of 25 years.
After receipt of the appraisal, the tangible and intangible assets and the
goodwill attributable to the Acquisitions will be amortized over the useful
lives determined by the independent appraiser. Accordingly, if the
appraiser's composite amortization period is less than 25 years, the
Company's annual charge for depreciation and amortization will be increased,
perhaps significantly, over the preliminary amount reflected in the Company's
pro forma combined financial statements. See "The Company -- Summary of Terms
of the Acquisitions" and the Pro Forma Combined Financial Statements.
CERTAIN INTERESTS OF MANAGEMENT IN THE ACQUISITIONS AND OTHER TRANSACTIONS
Several shareholders of certain of the Acquired Companies will become
executive officers or directors of the Company upon the consummation of the
Acquisitions. These shareholders will receive a portion of the consideration
in the Acquisitions consisting of, in the aggregate, 791,356 shares of Common
Stock, $35.6 million in cash, $11.7 million in subordinated promissory notes,
$0.6 million in convertible subordinated notes, and 293,513 five-year
non-transferrable warrants to purchase Common Stock at the initial public
offering price. Certain of these shareholders, in connection with the
execution of the agreements pursuant to which their Acquired Company will be
acquired, received an aggregate of 776,851 ten-year non-transferrable
warrants to purchase Common Stock at $6.44 per share. Certain of these
shareholders will also have employment agreements with the Company. See "The
Company -- Summary of Terms of the Acquisitions" and "Certain Transactions --
The Acquisitions."
A corporation in which an executive officer and director of the Company is
an officer, director and 50% shareholder has provided high quality yellow
page colorizing services and licensed World Pages to Great Western. In
addition, KINI, L.C. (a majority of which is owned by the shareholders of
Liberty Cellular, Inc. ("Liberty"), which is the former sole stockholder and
current 51% stockholder of KINNET) has provided certain management services
to KINNET, and Feist Long Distance has transported traffic on KINNET's
network. These arrangements, which the Company considers reasonable under the
circumstances, are expected to continue after the Acquisitions, under the
terms described in "Certain Transactions -- Other Transactions," and the
Company intends, where practical and economic, to transport additional long
distance traffic over the KINNET network. Except as noted herein, any future
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transactions with directors, officers, employees or affiliates of the Company
are expected to be minimal and will, in any case, be approved in advance by a
majority of the Board of Directors, including a majority of disinterested
members of the Board of Directors.
RISKS OF EXPANSION INTO ADDITIONAL YELLOW PAGE MARKETS
The Company's strategy to expand into additional yellow page markets
carries certain risks in addition to those of its expansion plans generally.
To enter a new yellow page market, the Company will typically be required to
increase its sales force if it hopes to communicate effectively with its
proposed new customers. When the Company first expands into a yellow page
market, it often seeks to attract its targeted customers by producing and
publishing a full-scale initial directory with minimal or no charges for
advertising space. Thus for a first directory in a new market, the Company
may have substantial expenses, depending on the size of the directory and the
market, with insignificant offsetting revenues. Additionally, when the
Company enters a new market it has no prior first-hand credit experience with
its advertising customers, and therefore typically has higher bad debt risk
for the first directory in which advertising space is sold. Further, many of
the Company's yellow page advertisers pay for their advertisements in
installments over terms of twelve months. In connection with the acquisition
of one of the Acquired Companies, the Company has agreed not to publish a
yellow page directory in Oklahoma City or its metropolitan area until after
the fifth anniversary date of the acquisition of Feist Long Distance Service,
Inc.
RISKS RELATED TO ACQUISITIONS
A portion of the Company's future growth is expected to come through the
acquisition of companies engaged in the various aspects of the
telecommunications and yellow page publishing businesses. Other companies,
including existing publicly owned telecommunications companies, which have
objectives similar to those of the Company, may be actively evaluating the
same companies that would otherwise be targeted for acquisition by the
Company. A number of these acquiring companies may have greater resources
than the Company to finance acquisition opportunities and might be willing to
pay higher prices than the Company. Further, as competition for acquisitions
increases, the prices for the companies to be acquired are likely to increase
as well. Consequently, the Company may encounter significant difficulties in
its efforts to achieve growth through acquisitions. Its acquisition strategy
presents risks that, singularly or in any combination, could materially
adversely affect the Company's business, financial condition, results of
operations and cash flows and the value of the Common Stock. These risks
include the possibility of an adverse effect on existing operations of the
Company from the diversion of management attention and resources to
acquisitions, the possible loss of acquired customer bases and key personnel
and the contingent and latent risks associated with the past operations of
and other unanticipated problems arising in the acquired businesses. Customer
dissatisfaction or performance problems of a single acquired company could
have an adverse effect on the reputation of the Company generally and render
the Company's sales and marketing initiatives ineffective. Whether the
Company's acquisition strategy is successful will depend on the extent to
which it is able to acquire, successfully integrate and profitably manage
additional businesses, and no assurance can be given that the Company's
strategy will succeed.
The Company may use Common Stock, cash, notes or other consideration to
effect future acquisitions. The extent to which the Company will be able or
willing to use the Common Stock for this purpose will be dependent on its
market value from time to time and the willingness of potential sellers to
accept the Common Stock as payment. To the extent the Company is unable or
unwilling to use its Common Stock to make future acquisitions, its ability to
grow may be limited by the extent to which it is able to raise capital for
this purpose, as well as to expand existing operations, through debt or
additional equity financings. Significant incurrences of debt for
acquisitions or other purposes would increase the Company's leverage and
could adversely affect its business, financial condition, results of
operations and cash flows and the value of the Common Stock. See
"Management's Discussion and Analysis of Combined Financial Condition and
Results of Operations of Certain Acquired Companies -- Pro Forma Combined
Results of Operations -- Pro Forma Liquidity and Capital Resources."
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<PAGE>
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
On closing of the Acquisitions and the Offering, 19,624,920 shares of
Common Stock will be outstanding. The 8,000,000 shares sold in the Offering
(other than shares that may be purchased by affiliates of the Company) will
be freely tradable. Substantially all of the remaining shares outstanding may
be resold publicly only following their effective registration under the
Securities Act of 1933, as amended (the "Securities Act"), or pursuant to an
available exemption (such as that provided by Rule 144 following a one or two
year holding period from the registration requirements of the Securities
Act). The holders of these shares have certain rights to require the Company
to file a registration statement with respect to their shares in the future
under the Securities Act (see "Shares Eligible for Future Sale"), but may not
exercise such registration rights for a period of one year following the
closing of the Acquisitions. Sales made pursuant to Rule 144 must comply with
its applicable volume limitations and other requirements.
On closing of the Offering, the Company also will have outstanding
convertible notes and preferred stock and options and warrants to purchase up
to a total of 4,193,815 shares of Common Stock.
The Company has agreed not to offer or sell any shares of Common Stock for
a period of 180 days following the date of this Prospectus, subject to
certain exceptions, without the prior written consent of PaineWebber
Incorporated, provided that the Company may issue shares of Common Stock in
acquisitions if such Common Stock is subject to similar lock-up provisions.
The Company's directors, its executive officers and substantially all of the
stockholders of ACG prior to the Acquisitons, including CPFF, have agreed not
to offer or sell any shares for a period of one year following the date of
this Prospectus (the "Lock-up Period"), subject to certain exceptions,
without the prior written consent of PaineWebber Incorporated. Further, all
persons who acquire shares of Common Stock in connection with the
Acquisitions (other than the acquisition of ACG's predecessor) have agreed
with the Company, subject to certain exceptions, not to offer or sell such
shares during the Lock-Up Period, and the Company has agreed not to waive or
amend these agreements without the prior written consent of PaineWebber
Incorporated. In addition, Rod K. Cutsinger, a director and the largest
stockholder of the Company, has agreed not to offer or sell any of his shares
during a period ending 18 months after the closing of the Offering, subject
to certain exceptions, without the prior written consent of PaineWebber
Incorporated. See "Underwriting."
The effect, if any, of the availability for sale, or sale, of shares of
Common Stock will have on the market price of the Common Stock prevailing
from time to time is unpredictable, and no assurance can be given that the
effect will not be adverse.
NO PRIOR MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, no public market for the Common Stock has existed,
and the initial public offering price, which has been determined by
negotiation between the Company and representatives of the Underwriters, may
not be indicative of the price at which the Common Stock will trade after the
Offering. See "Underwriting." The Company is applying for the listing of the
shares of Common Stock on the New York Stock Exchange; however, no assurance
can be given that an active trading market for the Common Stock will develop
or, if developed, continue after the Offering. The market price of the Common
Stock after the Offering may be subject to significant fluctuations from time
to time in response to numerous factors, including variations in the reported
financial results of the Company, actions and recommendations of securities
analysts, and changing conditions in the economy in general or in the
Company's industry in particular. In addition, the stock markets experience
significant price and volume volatility from time to time which may affect
the market price of the Common Stock for reasons unrelated to the Company's
performance at that time.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering (i) will experience immediate,
substantial dilution in the net tangible book value of their stock of $13.95
per share (see "Dilution") and (ii) may experience further dilution in that
value from issuances of Common Stock in connection with future acquisitions.
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<PAGE>
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS, DELAWARE LAW AND A
STANDSTILL AGREEMENT
The terms of the Company's Restated Certificate of Incorporation, as well
as the concentration of ownership of the Common Stock and the Company's
ability to issue up to 20,000,000 "blank check" shares of preferred stock may
have the effect of discouraging proposals by third parties to acquire a
controlling interest in the Company, which could deprive stockholders of the
opportunity to consider an offer to acquire their shares at a premium price
to them. These provisions include (i) a classified Board of Directors, (ii)
the ability of the Board of Directors to establish a sinking fund for the
purchase or redemption of shares, fix the number of directors within a
certain range and fill vacancies on the Board of Directors, and (iii)
restrictions on the ability of stockholders to call special meetings, act by
written consent or amend the foregoing provisions. In addition, under certain
conditions Section 203 of the DGCL would impose a three-year moratorium on
certain business combinations between the Company and an "interested
stockholder" (in general, a stockholder owning 15% or more of a corporation's
outstanding voting stock). The existence of such provisions may have a
depressive effect on the market price of the Common Stock in certain
situations. While the Company has not adopted a stockholders' rights plan,
the Company has the power to do so under Delaware law. See "Description of
Capital Stock -- Provisions Having Possible Anti-Takeover Effect."
In addition, Rod K. Cutsinger, a director and the Company's largest
stockholder, intends to enter into a three-year standstill agreement with the
Company pursuant to which he will agree not to acquire any additional shares
of Common Stock except from the Company pursuant to stock dividends or splits
or option or benefit plans, solicit proxies in opposition to nominees for
directors proposed by the board, vote any of his shares of Common Stock in
opposition to the recommendation of the disinterested members of ACG's board
of directors regarding the election or removal of directors and matters
relating to a possible change in control of the Company or take certain other
proscribed actions. See "Description of Capital Stock -- Standstill
Agreement."
NO DIVIDENDS
The Company intends to retain all of its earnings, if any, to finance the
expansion of its business and for general corporate purposes and does not
anticipate paying any cash dividends on its Common Stock for the foreseeable
future. In addition, the Company's proposed credit facility may contain
certain significant restrictions on the ability of the Company to pay
dividends. See "Dividend Policy" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Certain Acquired Companies
- -- Pro Forma Combined Results of Operations -- Pro Forma Liquidity and
Capital Resources."
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THE COMPANY
ACG: ACG was founded to create a regional CLEC that provides an integrated
portfolio of telecommunications services principally to business customers.
The Company offers long distance, local, Internet access and cellular
services, primarily in Kansas, Minnesota, Nebraska, North Dakota, Oklahoma,
South Dakota and Texas and to a lesser extent in Arkansas, Colorado and
Montana. As of November 30, 1997, the Company provided telecommunications
services to almost 35,000 business customers and over 10,000 residential
customers, typically located in mid-sized to smaller markets. The Company is
also an independent publisher of yellow page directories. As of November 30,
1997, the Company had approximately 255 direct sales personnel, including
approximately 40 telemarketing personnel. The Company is entering into these
businesses concurrently with the Offering by acquiring the nine Acquired
Companies, its predecessor and its interest in KINNET. The Company had pro
forma combined revenues of $85.4 million and EBITDA of $11.5 million in the
fiscal year ended December 31, 1996. See "Certain Transactions --
Organizational Transactions" and "--The Acquisitions." The following is a
description of the operating companies involved in the Acquisitions:
GREAT WESTERN: Great Western Directories, Inc. ("Great Western"), founded
in 1984 and headquartered in Amarillo, Texas, produces and distributes
approximately 3.1 million yellow page directories annually covering 20
service areas in Oklahoma and Texas, and also publishes three yellow page
directories in California. During the twelve months ended November 30, 1997,
Great Western published 20 yellow page directories covering markets in the
Region that contained advertisements for approximately 46,000 primarily small
to mid-sized business customers. Great Western's revenues and EBITDA for the
fiscal year ended December 31, 1996 were $44.3 million and $8.0 million,
respectively.
VALU-LINE: Valu-Line of Longview, Inc. ("Valu-Line"), headquartered in
Longview, Texas, was founded in 1983. Valu-Line owns and operates a Harris
2020 LX digital tandem and local switch located in Dallas, Texas, and as of
November 30, 1997, provided long distance services to approximately 9,200
customers in Arkansas, Louisiana, Oklahoma and Texas. Valu-Line has recently
received authorization to provide local telephone service in Texas, and as of
November 30, 1997, provided local service to approximately 2,250 access lines
on a resale basis through Southwestern Bell to customers in North and East
Texas. Valu-Line's revenues and EBITDA for the fiscal year ended December 31,
1996 were $11.2 million and $1.6 million, respectively.
FIRSTEL: FirsTel, Inc. ("FirsTel") headquartered in Sioux Falls, South
Dakota, was founded in 1993. FirsTel owns and operates a switch center in
Sioux Falls that includes three linked Harris 2020 digital tandem switches
and, as of November 30, 1997, provided bundled telecommunications service to
approximately 9,400 customers in Colorado, Idaho, Iowa, Minnesota, Montana,
Nebraska, North Dakota, South Dakota and Wyoming. As of November 30, 1997,
FirsTel provided local service to approximately 5,800 access lines on a
resale basis through U S WEST to customers in North Dakota and South Dakota.
FirsTel has recently secured authorization to provide local service in
Minnesota, Nebraska and Wyoming and has an application pending to provide
local service in Iowa. FirsTel began offering cellular service on a resale
basis in South Dakota in February 1997 and had approximately 2,200 cellular
subscribers as of November 30, 1997. FirsTel's revenues and EBITDA for the
fiscal year ended December 31, 1996 were $10.4 million and $1.2 million,
respectively. In early September 1997, FirsTel contracted to acquire two
small telecommunications companies in South Dakota whose combined revenues
for the fiscal year ended December 31, 1996 were $1.7 million.
FEIST LONG DISTANCE: Feist Long Distance Service, Inc. ("Feist Long
Distance"), headquartered in Wichita, Kansas, was founded in 1992 by the
stockholders of Feist Publications, Inc., a yellow page publisher that has
been in business for 20 years. Feist Long Distance owns and operates a
Northern Telecom DMS 250 digital tandem switch located in Wichita, Kansas,
and as of November 30, 1997, provided primarily long distance services to
approximately 15,000 customers in Colorado, Kansas, Nebraska, Oklahoma and
Texas. Feist Long Distance received authorization in March 1997 to provide
local telephone service in Kansas. As of November 30, 1997, Feist Long
Distance provided local service to approximately 9,400 access lines on a
resale basis through Southwestern Bell to customers primarily in the Wichita,
Kansas metropolitan area. Feist Long Distance's revenues and EBITDA for the
fiscal year ended December 31, 1996 were $10.0 million and $0.7 million,
respectively.
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OTHER ACQUIRED COMPANIES: The Other Acquired Companies (Long Distance
Management II, Inc., Long Distance Management of Kansas, Inc., The
Switchboard of Oklahoma City, Inc., Tele-Systems, Inc. and National Telecom,
a proprietorship) include three other small long distance companies and two
telephone equipment sales and service companies. One of the Other Acquired
Companies owns and operates a Stromberg Carlson digital tandem switch located
in Oklahoma City, Oklahoma. As of November 30, 1997, the Other Acquired
Companies provided long distance service to approximately 8,800 customers and
also provided telephone equipment and related maintenance services to over
2,800 customers in the Wichita, Kansas market. The Other Acquired Companies'
combined revenues and EBITDA for their most recent fiscal years were $7.8
million and $0.6 million, respectively.
KINNET: KINNET, headquartered in Salina, Kansas, owns or operates an
approximately 880-route mile fiber optic network in Kansas that connects 105
Kansas communities. KINNET sells private line services of DS0, DS1 and DS3
capacity to interexchange carriers, cellular carriers, independent local
telephone companies, business and governmental accounts and others, including
Feist Long Distance. KINNET currently has one of the largest fiber optic
networks in the state of Kansas. KINNET also operates a Northern Telecom DMS
500 digital tandem and local switch located near the center of its fiber
optic network in Moundridge, Kansas capable of handling both long distance
and local services. In 1996, KINNET provided 104 million minutes of equal
access time or 1+ dialing service for approximately 18 independent local
telephone companies in Kansas. ACG will account for its 49% ownership
interest in KINNET by using the equity method of accounting. KINNET's
revenues and EBITDA for the fiscal year ended December 31, 1996 were $8.6
million and $2.4 million, respectively.
As part of the consideration in the KINNET transaction, the Company issued
666,666 shares of Common Stock to the existing stockholder of KINNET, and it
also made a $10.0 million direct cash investment in KINNET, $5.0 million of
which KINNET has agreed to apply to the buildout in 1998 and 1999 of a
537-mile, $21.5 million network extension from Wichita, Kansas to the greater
Kansas City metropolitan area, with a leg to Tulsa, Oklahoma that will
provide self-healing redundancy to its fiber optic network. KINNET has
advised the Company that it expects to finance the balance of the expansion
with proceeds from the Rural Telephone Finance Cooperative ("RTFC").
STRATEGIC RELATIONSHIPS: The Company has a strategic relationship with
Feist Publications, Inc. During the twelve months ended November 30, 1997,
FPI sold advertisements in its yellow page directories published during the
period to approximately 29,000 business customers in Kansas, Texas and
Oklahoma. FPI has agreed, for a period of five years, to provide the Company
access to its advertising customers and to provide eight information pages in
the front of its directories with instructions on how to subscribe to the
Company's services as well as free advertising space in each of FPI's 15
yellow page directories that are currently in publication. FPI has reserved
the right to terminate this agreement if the Company commences the
publication of a yellow page directory in any market served by FPI.
One of the Acquired Companies recently purchased PAM COMM, a division of
PAM Oil, Inc. ("PAM Oil"). Such company and PAM Oil, a distributor of
automobile parts, oil and lubricants primarily in Idaho, Minnesota, Montana,
North Dakota and South Dakota, have entered into a strategic arrangement.
Under this arrangement, the Company is authorized to solicit the
telecommunications business of PAM Oil's approximately 15,000 business
customers, comprised of automobile dealers, parts suppliers and others. PAM
Oil has agreed to use its telemarketing staff to solicit and refer
telecommunications leads to the Company and to permit the Company to include
telecommunications inserts in PAM Oil's monthly billing statements to its
customers. The Company has agreed to pay PAM Oil a commission of 1% per month
on most telecommunications revenues attributable to PAM Oil's customers.
The Company and Northwestern have entered into an agreement (the
"Agreement") regarding the possible creation of a strategic alliance that
would permit ACG to market its telecommunications services to that utility's
approximately 100,000 electric and natural gas business and residential
customers in South Dakota and Nebraska. Under the terms of the Agreement,
which will be consummated contemporaneously with the Closing of the Offering,
ACG will issue a number of shares of its Series A Redeemable Convertible
Preferred Stock ("Preferred Stock") with an aggregate liquidation preference
of $2 million to Northwestern Growth Corporation ("NGC"), a wholly-owned
subsidiary of Northwestern, in exchange
25
<PAGE>
for, among other things, Northwestern's commitment to negotiate in good faith
a strategic alliance upon commercially reasonable terms ("Northwestern
Alliance"). Pursuant to the proposed Northwestern Alliance, ACG would have
the exclusive right to market its telecommunications services to the
customers of Northwestern and to have access to Northwestern's rights-of-way
for the purpose of laying fiber optic cables. Subject to existing contractual
commitments, ACG would also have the right to supply all of Northwestern's
telecommunications services on competitive terms. Northwestern would
cooperate with ACG in soliciting Northwestern's customers and receive a
percentage of the telecommunications revenues generated by ACG sales to such
customers. The Agreement contains a three-year standstill agreement by
Northwestern and NGC with respect to ACG containing customary terms and
conditions, regarding, among other things, mergers and acquisitions, tender
offers, proxy contests, joining groups or encouraging others with respect to
such matters.
The Preferred Stock becomes convertible into shares of Common Stock at the
initial public offering price eighteen months after the consummation of this
Offering, does not pay any dividends and is not entitled to vote in the
election of directors. If the Northwestern Alliance has not been signed by
the first anniversary date of the closing of the Offering, ACG can redeem the
shares of Preferred Stock as an entirety for $1.25 million on or prior to the
thirteenth monthly anniversary of the closing.
SUMMARY OF TERMS OF THE ACQUISITIONS
ACG has entered into definitive acquisition agreements to acquire each of
the Acquired Companies, its predecessor and its interest in KINNET. The
aggregate consideration to be paid by ACG in the Acquisitions consists of
approximately $73.3 million in cash to stockholders of the Acquired
Companies, $10.0 million as a direct cash investment in KINNET, a fiber optic
network company, promissory notes in the aggregate principal amount of $17.4
million, 3,166,467 shares of Common Stock, warrants issued in June 1997 to
purchase 776,851 shares of Common Stock exercisable at $6.44 per share, and
options or warrants to be issued at the closing to purchase 598,500 shares of
Common Stock exercisable at the initial public offering price and 38,635
shares of Common Stock exercisable at one-third of the initial public
offering price. Up to $50,000 in value of additional shares of Common Stock
(computed at the initial public offering price) may be issued in connection
with the acquisition of FirsTel if a company recently acquired by FirsTel
reaches certain customer targets by August 31, 1998. Further, prior to the
closing of the Acquisitions, certain of the Acquired Companies that are S
Corporations will make cash distributions to their stockholders in amounts
generally equal either to the undistributed retained earnings of the S
Corporations, or the income tax due on those amounts, subject to certain
limitations. Had these distributions been made at September 30, 1997, they
would have been approximately $1.9 million, in addition to the approximately
$3.1 million that had been distributed prior to that date. To the extent
these Acquired Companies have additional earnings after September 30, 1997,
the amounts of these distributions will increase. Additionally, ACG will also
acquire from the stockholders of Feist Long Distance and FirsTel, together
with the stock of those companies, approximately $0.7 million and $1.0
million, respectively, of notes owed by those corporations to certain of
their stockholders. See "Certain Transactions -- The Acquisitions."
26
<PAGE>
The following table sets forth certain summary information relating to the
acquisition of the Acquired Companies and the interest in KINNET, including
the consideration payable, anticipated debt of the Acquired Companies and
estimated cash distributions by S Corporations. See "The Company" and the
separate financial statements for certain of the Acquired Companies and
KINNET listed below included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
CONSIDERATION
---------------------------------------------------
ANTICIPATED
ACQUIRED NUMBER OF DEBT OF ESTIMATED
COMPANIES SHARES OF ACQUIRED S CORPORATION
AND KINNET(1) COMMON STOCK(2) CASH NOTES OTHER COMPANIES(3) DISTRIBUTIONS(4)
- -------------- --------------- ------------ ------------ ------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Great Western . 666,667 $55,000 $15,000(5) (6) $ -- $1,318
Valu-Line...... 346,667(7) 6,600 -- -- 1,506 195
FirsTel........ 739,800 5,000 2,000(8) (9) 147(10) 22
Feist Long
Distance...... 666,667 1,500(11) -- -- 17 343
Other Acquired
Companies..... 80,000 5,236 350(12) (13) 437 61
KINNET......... 666,666(14) 10,000(14) -- -- N/A N/A
--------------- ------------ ------------ ------------- --------------
Total........ 3,166,467 $83,336 $17,350 $2,107 $1,939
=============== ============ ============ ============= ==============
</TABLE>
- ------------
(1) In each case represents the acquisition of all of the stock or
substantially all of the assets, except KINNET, where the Company is
acquiring 49% of outstanding capital stock.
(2) The number of shares of Common Stock issued in the Acquisitions
assumes an initial public offering price of $15.00. The definitive
agreements with respect to the various Acquisitions provide that the
number of shares of Common Stock to be issued in each Acquisition
shall be calculated by dividing the initial public offering price
into the following dollar amounts: Great Western -- $10.0 million;
Valu-Line -- $5.2 million; FirsTel -- $11.1 million; Feist Long
Distance -- $10.0 million; Other Acquired Companies -- $1.2 million;
and KINNET -- $10.0 million.
(3) Includes long term debt outstanding as of September 30, 1997 and a
payable with respect to S Corporation distributions, all of which are
anticipated to be paid out of the net proceeds of the Offering. Does
not include approximately $1.7 million of notes owed to stockholders
of Feist Long Distance and FirsTel which will be acquired by ACG in
the Acquisitions.
(4) These S Corporation distributions are estimated as of September 30,
1997, and are shown net of $3.1 million of distributions made by the
Acquired Companies during the first nine months of fiscal 1997.
(5) Notes mature on the second anniversary date of the closing of the
Acquisitions, bear interest at 5% per annum, payable annually, and
are subordinated to the first $50.0 million of outstanding bank debt.
(6) Includes 776,851 non-transferable ten-year warrants to purchase
Common Stock exercisable at $6.44 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.
(7) Includes 18,667 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.
(8) Notes are convertible into Common Stock at the initial public
offering price, mature on the second anniversary date of the closing
of the Acquisitions, bear interest at 10% per annum, payable
annually, and are subordinated to the first $50.0 million of
outstanding bank debt.
(9) Includes 50,000 non-transferrable five-year warrants to purchase
Common Stock at the initial public offering price issued at the
closing of the Acquisitions.
(10) Includes obligations of $101,000 incurred by FirsTel in connection
with two acquisitions it made in September 1997 which will be paid
out of the proceeds of the Offering.
(11) In connection with the extension of the termination date of the
acquisition agreement relating to Feist Long Distance from January
31, 1998 to February 20, 1998, the Feist shareholders agreed to
reduce the cash component of the consideration payable to them by
$3.5 million in exchange for the Company's covenant not to commence
publication of a yellow page directory in Oklahoma City or its
metropolitan area until after the fifth anniversary of the
acquisition.
(12) Note bears interest at 7% per annum, and is payable in three equal
installments plus accrued interest, payable on the first three
anniversary dates of the closing of the Acquisitions.
(13) Includes 12,500 ten-year options and 36,000 ten-year warrants to
purchase Common Stock exercisable at the initial public offering
price and 38,635 ten-year options to purchase Common Stock at
one-third of the initial public offering price. These 38,635 options
vest as an entirety at the end of the 37th month following the
closing of the Acquisitions, may be put back to the Company for
$155,000 during the 38th month following the closing of the
Acquisitions, and are subject to cancellation if the terms of certain
employment and non-competition agreements are violated. A stockholder
of one of the Other Acquired Companies may receive up to 12,500
additional ten-year options to purchase Common Stock at the initial
public offering price if his company meets certain financial tests
subsequent to the closing.
(14) The shares are being issued to the stockholder of KINNET, and the
$10.0 million cash component is a direct cash investment in KINNET.
27
<PAGE>
The consideration being paid by ACG in the Acquisitions was determined by
arm's length negotiations between representatives of ACG and each of the
respective companies. The closing of each Acquisition is subject to customary
conditions. These conditions include, among others, the accuracy on the
closing date of the Acquisitions of the representations and warranties made
by their principal stockholders and ACG; the performance of each of their
respective covenants included in the agreements relating to the Acquisitions;
and the nonexistence of a material adverse change in the results of
operations, financial condition or business of each of the companies being
acquired.
Each agreement relating to an Acquisition may be terminated, under certain
circumstances, prior to the closing of the Offering (i) by the mutual consent
of the boards of directors of ACG and the relevant company being acquired;
(ii) if the Offering and the acquisition of that company are not closed by
February 20, 1998; (iii) by ACG if the schedules to the acquisition agreement
are amended to reflect a material adverse change; or (iv) if a material
breach or default under the agreement by one party occurs and is not waived.
No assurance can be given that the conditions to the closing of all the
Acquisitions will be satisfied or waived or that each Acquisition will close.
For information regarding the employment agreements to be entered into by
certain officers of certain of the Acquired Companies (which include
covenants not to compete), see "Management -- Employment Agreements."
28
<PAGE>
DIVIDEND POLICY
It is the Company's current intention to retain its earnings, if any, to
finance the expansion of its business and for general corporate purposes and
the Company expects that it will not pay any dividends for the foreseeable
future. Any future dividends will be at the discretion of the Board of
Directors after taking into account various factors, including, among others,
the Company's financial condition, results of operations, cash flows from
operations, current and anticipated cash needs, general business conditions,
the income tax laws then in effect, the requirements of Delaware law, the
restrictions that may be imposed by the Company's proposed $25.0 million
revolving credit facility to finance the Company's working capital
requirements, any restrictions that may be imposed by the Company's future
indebtedness and such other factors as the Board of Directors deems relevant.
The proposed credit facility may place limitations on the payment of
dividends (except for dividends payable in Common Stock and certain preferred
stock). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Certain Acquired Companies -- Pro Forma Results of
Operations -- Pro Forma Liquidity and Capital Resources."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered hereby, after deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company, are estimated to be
approximately $108.1 million (approximately $124.9 million if the
Underwriters exercise their over-allotment option in full). Of those net
proceeds, $73.3 million will be used to pay the aggregate cash portion of the
purchase price for the Acquired Companies, $10.0 million will be used to make
a direct cash investment in KINNET, a fiber optic network company, and the
remaining net proceeds will be used for (i) the repayment of outstanding
principal amount of indebtedness and certain other payables of the Acquired
Companies (approximately $2.3 million as of September 30, 1997 and the date
of this Prospectus), (ii) the repayment of outstanding principal amount of
indebtedness of ACG to CPFF (approximately $1.7 million and $3.2 million,
respectively, as of September 30, 1997 and the date of this Prospectus);
(iii) a one-time payment to Rod K. Cutsinger, the founder of ACG, as
consideration for a five-year non-competition agreement ($1.75 million); and
(iv) general corporate purposes, including capital expenditures,
infrastructure buildout and acquisitions. Shareholders of the Acquired
Companies who will become executive officers or directors of the Company upon
the consummation of the Acquisitions will receive approximately $35.6 million
of the cash purchase price paid in the Acquisitions. See "Certain
Transactions -- The Acquisitions" and "--Organization of the Company."
The indebtedness of the Acquired Companies to be repaid from the proceeds
of the Offering (some of which has been guaranteed by stockholders of the
Acquired Companies) bears interest at rates ranging from 5.75% to 18.6% per
annum. Such indebtedness would otherwise mature at various dates through
August 2005. The indebtedness of ACG to CPFF bears interest at 8% per annum
and is payable on the earlier of the effectuation of an initial public
offering by ACG or December 31, 1998.
29
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1997, the cash,
short-term debt and current maturities of long-term obligations and
capitalization of (i) ACG and its predecessor on an actual basis, (ii) the
Company on a pro forma combined basis to give effect to the Acquisitions and
the issuance of shares of Preferred Stock to Northwestern, and (iii) the
Company on a pro forma combined basis to give effect to the Acquisitions and
the issuance of shares of Preferred Stock to Northwestern, as further
adjusted to give effect to the Offering and the application of the estimated
net proceeds therefrom. See "Use of Proceeds." This table should be read in
conjunction with the Unaudited Pro Forma Financial Statements of the Company
and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------
COMPANY
COMPANY PRO FORMA
PRO AS
ACG FORMA ADJUSTED
--------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash............................................................ $ -- $ 554 $ 19,302
========= ========== ===========
Short-term debt and current maturities of long-term
obligations:
$
8% promissory note payable to CPFF (1)........................ $ 1,856 $ 1,856 --
Other(2)...................................................... -- 1,102 117
Obligation for cash portion of consideration for Acquisitions .. -- 83,336 --
Long-term debt:
Long-term debt of Acquired Companies, less current
maturities................................................... -- 1,316 --
5% Subordinated Promissory Notes(3)........................... -- 15,000 15,000
10% Convertible Subordinated Notes(4)......................... -- 2,000 2,000
7% Note, less current maturities(5)........................... -- 233 233
Stockholders' equity:
Preferred Stock: $0.0001 par value, 20,000,000 shares
authorized: no shares of Series A issued and outstanding,
ACG and Company pro forma; 133,334 shares issued and
outstanding, Company pro forma as adjusted(6)................ -- -- 1,122
Common Stock: $0.0001 par value, 180,000,000 shares
authorized: 8,453,788 shares issued and outstanding, ACG;
11,624,920 shares issued and outstanding, Company pro forma;
19,624,920 shares issued and outstanding, Company pro forma
as adjusted(7)............................................... 1
Additional paid-in capital.................................... 47 38,798 147,491
Retained earnings............................................. (2,263) (2,263) (2,263)
--------- ---------- -----------
Total stockholders' equity (deficit) ........................ (2,216) 36,535 146,351
--------- ---------- -----------
Total debt and capitalization............................... $ (360) $141,378 $163,701
========= ========== ===========
</TABLE>
- ------------
(1) As of January 12, 1998, this amount has increased to $3.2 million.
(2) Includes $985,000 in current portion of long-term debt of the Acquired
Companies and $117,000 in current maturities of a 7% Note.
(3) Notes mature on the second anniversary date of the closing of the
Acquisitions and are subordinated to the first $50.0 million of
outstanding bank debt.
(4) Notes are convertible into Common Stock at the initial public offering
price, mature on the second anniversary date of the closing of the
Acquisitions and are subordinated to the first $50.0 million of
outstanding bank debt.
(5) Note is payable in three annual installments on the first, second and
third anniversary dates of the closing of the Acquisitions.
(6) The Preferred Stock has an aggregate liquidation preference of $2
million, is convertible into 133,334 shares of Common Stock at the
initial public offering price 18 months after the consummation of the
initial public offering and is redeemable, at the option of the
Company, for $1.25 million in the 13th month after the initial public
offering if no strategic alliance has been entered into. The Preferred
Stock has been assigned a value of $1,122,000 representing the
estimated fair value on the date of grant based on an imputed market
interest rate of 10%. See "The Company -- Strategic Relationships."
(7) Excludes an aggregate of 4,193,815 shares of Common Stock issuable upon
the exercise of options granted pursuant to the Plan, the Directors'
Plan or otherwise issuable upon the exercise of options, warrants or
convertible notes and preferred stock issued prior to or
contemporaneously with the consummation of the Offering and the
Acquisitions at exercise prices ranging from $2.50 to the initial
public offering price. See "Management -- 1997 Stock Awards Plan."
30
<PAGE>
DILUTION
The pro forma net tangible book value deficit of the Company as of
September 30, 1997 was approximately $86.4, or approximately $7.43 per share,
after giving effect to the Acquisitions. The pro forma net tangible book
value per share represents the Company's pro forma net tangible assets as of
September 30, 1997, divided by the number of shares to be outstanding after
giving effect to the Acquisitions. After giving effect to the sale of the
8,000,000 shares offered hereby at an assumed initial public offering price
of $15.00 per share and deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company, the
Company's pro forma net tangible book value as of September 30, 1997 would
have been approximately $20.6 million or approximately $1.05 per share. This
represents an immediate increase in pro forma net tangible book value of
approximately $8.48 per share to existing stockholders and an immediate
dilution of approximately $13.95 per share to new investors purchasing shares
in the Offering. The following table illustrates this pro forma dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $15.00
Pro forma net tangible book value per share before the
Offering..................................................... $(7.43)
Increase in pro forma net tangible value per share attributable
to new investors ............................................ 8.48
---------
Pro forma net tangible book value per share after the
Offering...................................................... 1.05
--------
Dilution per share to new investors............................ $13.95
========
</TABLE>
The following table sets forth on a pro forma basis to give effect to the
Acquisitions as of September 30, 1997, the number of shares of Common Stock
purchased from the Company, the total consideration to the Company and the
average price per share paid to the Company by existing stockholders and the
new investors purchasing shares from the Company in the Offering (before
deducting underwriting discounts and commissions and estimated offering
expenses):
<TABLE>
<CAPTION>
TOTAL
CONSIDERATION
SHARES PURCHASED (IN THOUSANDS) AVERAGE
-------------------------- ------------------ PRICE
NUMBER PERCENT AMOUNT(2) PER SHARE
--------------- --------- ------------------ ----------
<S> <C> <C> <C> <C>
Existing stockholders. 11,624,920(1) 59.2% $(69,310) $(5.96)
New investors......... 8,000,000 40.8 120,000 15.00
--------------- --------- ------------------ -----------
Total............... 19,624,920 100% $ 50,690 $ 2.58
=============== ========= ================== ===========
</TABLE>
- ------------
(1) Shares purchased by existing stockholders include shares outstanding on
September 30, 1997 plus 3,166,467 shares issued in the Acquisitions.
(2) Total consideration paid by existing stockholders represents the sum of
(i) total stockholders' equity of the Acquired Companies and ACG as set
forth under the caption "Historical Basis Combined" on ACG's pro forma
balance sheet, less (ii) cash paid in the Acquisitions of $83,336,000,
less (iii) S Corporation distributions of $1,939,000, plus (iv) notes
payable to existing stockholders of the Acquired Companies acquired by
ACG of $1,699,000.
31
<PAGE>
SELECTED FINANCIAL DATA
ACG will effect the Acquisitions concurrently with and as a condition to
the consummation of the Offering. For financial statement presentation
purposes, ACG has been identified as the "accounting acquiror." The following
selected financial data for ACG as of December 31, 1996 and for the period
from inception to December 31, 1996, has been derived from the audited
financial statements of ACG. The selected historical financial data for ACG
as of and for the nine months ended September 30, 1997 have been derived from
unaudited financial statements of ACG which have been prepared on the same
basis as the audited financial statements and, in the opinion of ACG, reflect
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of such data. The selected unaudited pro forma
combined financial data for the Company as of September 30, 1997, and for the
year ended December 31, 1996 and the nine months ended September 30, 1996 and
1997, are as adjusted for (i) the effects of the Acquisitions; (ii) the
effects of certain pro forma adjustments to the historical financial
statements and (iii) the consummation of the Offering and the application of
the net proceeds therefrom as set forth under "Use of Proceeds" and recording
the balance as cash. See the Unaudited Pro Forma Combined Financial
Statements and the notes thereto and the historical financial statements and
the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 6, 1996)
THROUGH NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
ACG
Revenues................................................ $ -- $ --
Selling, general and administrative expenses ........... 649 1,462
Net loss................................................ 659 1,604
Net loss per share ..................................... $ 0.08 $ 0.19
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
THE COMPANY
PRO FORMA COMBINED(1)
Revenues
Telecommunications services........................... $41,090 $33,455
Yellow page publishing................................ 44,324 35,624
----------------- ------------------
Total revenues...................................... 85,414 69,079
Cost of services........................................ 47,087 37,637
Depreciation and amortization(2)........................ 6,111 4,339
----------------- ------------------
Gross profit............................................ 32,216 27,103
Selling, general and administrative expenses ........... 26,966 23,172
----------------- ------------------
Operating income........................................ 5,250 3,931
Other income and expense, net(3)........................ 6,448 253
Interest expense........................................ (774) (581)
Equity in earnings (loss) of KINNET..................... (1,069) (657)
----------------- ------------------
Income before tax....................................... 9,855 2,946
----------------- ------------------
Net income(4)........................................... $ 3,703 $ 168
================= ==================
Accretion of preferred stock(5)......................... 112 16
----------------- ------------------
Net income available to common stockholders ........... $ 3,591 $ 152
================= ==================
Net income per share available to common stockholders . $ 0.18 $ 0.01
================= ==================
Shares used in computing pro forma net income per
share(6)............................................... 19,623,113 19,623,113
================= ==================
Cash provided by operating activities................... $ 9,037 $ 5,893
Cash used in investing activities....................... (711) (579)
Cash used in financing activities....................... (7,482) (4,470)
EBITDA (7) ............................................. $11,527 $ 8,523
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
THE COMPANY
ACG SEPTEMBER 30, 1997
------------------------------- -----------------------
DECEMBER 31, SEPTEMBER 30, AS
1996 1997 PRO FORMA ADJUSTED
-------------- --------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 33 $ -- $ 554 $ 19,302
Working capital (deficit) ............. (689) (3,407) (73,532) 32,715
Total assets........................... 92 1,191 153,393 174,394
Total debt, including current portion.. 575 1,856 21,507 17,350
Stockholders' equity................... (632) (2,216) 36,535 146,351
</TABLE>
- ------------
(1) The pro forma statements of operations data and the pro forma balance
sheet data assume that the Acquisitions were closed on January 1, 1996
and September 30, 1997, respectively, and are not necessarily
indicative of the results the Company would have obtained had these
events actually then occurred or of the Company's future results. The
pro forma combined financial information (i) is based on preliminary
estimates, available information and certain assumptions that
management deems appropriate and (ii) should be read in conjunction
with the other financial statements and notes thereto included
elsewhere in this Prospectus. The pro forma combined revenues are all
attributable to the Acquired Companies.
(2) Includes $4.2 million and $3.2 million of amortization for the twelve
months ended December 31, 1996 and the nine months ended September 30,
1997, respectively, on the estimated $105.8 million of goodwill to be
recorded as a result of the Acquisitions computed on the basis
described in Notes to the Unaudited Pro Forma Combined Financial
Statements.
(3) Other income for the year ended December 31, 1996 includes a $6.3
million litigation settlement received by Great Western.
(4) Assumes that all income is subject to a corporate tax rate of 40% and
that all intangible asset amortization is non-deductible for income tax
purposes.
(5) Represents accretion of the excess of the liquidation preference over
the carrying value of the Preferred Stock.
(6) Includes (i) the 8,458,453 shares outstanding immediately prior to the
Offering, (ii) 3,166,467 shares issued in the Acquisitions, (iii)
6,623,113 of the shares sold in the Offering necessary to generate all
net proceeds other than those unallocated and available for general
corporate purposes (see "Use of Proceeds") and (iv) 1,375,080 shares
representing the incremental effect of options and warrants on shares
outstanding.
(7) EBITDA as used in this Prospectus consists of earnings (loss) before
interest, income taxes, depreciation and amortization and less equity
in earnings (loss) of a minority owned affiliate and less the portion
of other income and expense (net) attributable to the $6.3 million
litigation settlement received by Great Western in 1996. The Company
has included EBITDA data because it is a measure commonly used in the
telecommunications industry. EBITDA is not a measure of financial
performance determined under generally accepted accounting principles,
should not be considered as an alternative to net income as a measure
of performance or to cash flows as a measure of liquidity, and is not
necessarily comparable to similarly titled measures of other companies.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CERTAIN ACQUIRED COMPANIES
The following discussion should be read in conjunction with the financial
statements, the notes thereto and the other financial data included elsewhere
in this Prospectus. The following discussion contains certain forward-looking
statements with respect to the Company's expectations regarding its business
after it has consummated the Acquisitions. These forward-looking statements
are subject to certain risks and uncertainties which may cause actual results
to differ significantly from such forward-looking statements. See "Risk
Factors."
OVERVIEW OF THE ACQUIRED COMPANIES' SOURCES OF REVENUES AND EXPENSES
The Acquired Companies derive their revenues primarily from the provision
of telecommunications services in the Region and the sale of advertising
space in yellow page directories serving market areas in two states in the
Region and California.
Telecommunications Services Revenues and Price Declines. The Acquired
Companies' telecommunications services principally include long distance and
local services, Internet access, cellular service and other enhanced
services. Their telecommunications revenues are derived principally from
minutes of long distance telecommunications traffic carried. As discussed
under " -- Pro Forma Combined Results of Operations," the domestic revenue
per minute and domestic cost per minute have declined steadily over the last
several years, while the domestic billable minutes of use attributable to the
Acquired Companies' combined long distance operations have increased
substantially over the same period.
The Acquired Companies generally price their long distance services at a
discount to the primary carrier or carriers in each of their markets. The
Acquired Companies have generally experienced and expect to continue to
experience declining revenue per minute in all of their markets as a result
of increased competition; nevertheless, due to technological innovation and
substantial available transmission capacity, transmission costs in the
telecommunications industry have often declined at a more rapid rate than
prices. There can be no assurance that this relationship will continue.
Industry observers predict that, early in the next decade, telephone charges
will no longer be based on the distance a call is carried. As a consequence,
the Company could experience a substantial reduction in its margins on long
distance calls which, absent a significant increase in billable minutes of
traffic carried or charges for additional services, would have a material
adverse effect on the Company's financial position and results of operations
and could have a material adverse effect on the price of the Common Stock.
Local service revenues, which are currently not material but which the
Company expects to increase in future periods, represent the resale at a
discount of the local carrier services provided primarily by Southwestern
Bell and U S WEST. In most of the Acquired Companies' market areas, local
service is sold on a flat monthly fee basis. Certain of the Acquired
Companies have recently commenced reselling cellular service in a limited
portion of the Region, and the revenues generated to date from these
activities have not been material.
Yellow Page Publishing Revenues. Yellow page publishing revenues are
attributable to the sale of advertising space in the directories that serve
its 17 market areas in Texas, three market areas in Oklahoma and six market
areas in California. Revenues are recognized when each directory is
published. Great Western has decided to discontinue three of its directories
in California, which produced revenues of $2.3 million in fiscal 1996.
Because of the timing of the discontinuation, $1.4 million of these revenues
will not recur in 1997, and none of them will recur in 1998. While Great
Western's yellow page business is not seasonal, five of its directories which
have for the last several years accounted for approximately one-third of its
annual revenue are published in the first quarter. The gross margin on these
directories is generally significantly higher than that in several
directories published in the fourth quarter. Consequently, Great Western's
gross margin and gross profit in the first quarter are higher than those in
subsequent quarters. Directories are typically published annually in each
market area. Increases in revenues have generally been attributable to
increases in the number and size of advertisements in the directories.
34
<PAGE>
When Great Western expands into a new yellow page market, it typically
seeks to attract its targeted customers by producing and publishing a full
scale initial directory in which it gives away advertising space. Thus on a
first directory in a new market (the "prototype year"), Great Western may
have substantial expenses, depending on the size of the market, with little
or no offsetting revenues. During the last three fiscal years, the expenses
associated with the first publication of a directory in a market have ranged
from approximately $500,000 to $2.0 million, depending on the size of the
market. Great Western sells advertising in the second directory in a market
(the "first sold year"), after the advertisers have had an opportunity to
experience the reception of the new yellow page directory and their
advertisements in the marketplace. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Certain Acquired
Companies -- Great Western Directories, Inc." Great Western usually is able
to sell advertising space in the directory for the first sold year to
approximately 65% of the advertisers who received free space in the prototype
directory. In a new market, however, Great Western has no prior first-hand
credit experience with its advertising customers, and therefore usually has
disproportionate bad debt expense with respect to the directory for the first
sold year, and it typically records a provision for bad debts of 20% with
respect to that directory, versus its overall allowance of 10% for current
receivables. Once in a market, Great Western may seek to increase its
geographic coverage by expanding outward from its initial service area.
Cost of Services -- Telecommunications Services. The Acquired Companies
have an extensive network that connects a number of cities in the Region and
upon which they can transmit their customers' long distance calls. These
"on-net" facilities include the Acquired Companies' switches, a web of leased
access trunks that connect those switches to the local exchange carrier's
switches, DS1 and DS3 lines that connect certain high volume customers to the
Acquired Companies' switches and leased lines from other long-haul carriers.
Once a long distance call reaches one of the Acquired Comanies' switches, it
can be routed over that Acquired Companies' network or, if the Acquired
Company does not have an "on-net" connection, over the network of another
long-haul carrier from which the Acquired Company purchases access. The bulk
of the Acquired Companies' "off-net" termination services are provided by
large long distance companies with long haul transmission capabilities. See
"Business -- Network Facilities and Carrier Agreements."
Because of its ownership interest in KINNET, the Company expects to
consolidate some of its traffic in KINNET's area of operations on the KINNET
network after the Offering. Further, the Company expects that after the
Offering it will obtain pricing reductions from KINNET with respect to the
traffic that the Company consolidates on the KINNET network.
The Acquired Companies' cost of long distance services comprises the costs
associated with acquiring switched transmission and leased line capacity.
Switched transmission capacity is acquired on a per-minute basis (with volume
discounts) and is, therefore, a variable cost. Virtually all calls carried by
the Acquired Companies must be originated or terminated over another
carrier's facilities and access charges must be paid to utilize those
facilities. Termination, origination and access charges on calls are paid by
the Acquired Companies to ILECs. Leased transmission capacity is typically
acquired on a fixed cost basis, generally involving fixed monthly payments
regardless of usage levels. Accordingly, once certain volume levels are
reached, leased line capacity is more cost effective than switched
transmission capacity. Following the Offering, the Company expects to be able
to obtain better pricing because of the substantial number of minutes of
traffic generated by the Acquired Companies on a combined basis. Although the
Acquired Companies have entered into four take-or-pay agreements with other
carriers in order to maximize volume discounts, since their inception the
minimum usage levels under these contracts have been met, and the Acquired
Companies have not incurred any obligation to make cash payments in lieu of
usage under these agreements. See "Business -- Network Facilities and Carrier
Agreements."
At present the Acquired Companies provide local services by reselling the
local services of other local exchange carriers at a discount from the prices
charged by those carriers to individual customers. The cost of providing such
services depends on the rates which the Acquired Companies can negotiate from
those carriers.
35
<PAGE>
Cost of Services -- Yellow Page Publishing. The principal components of
cost of service relate to sales commissions, paper and publishing costs,
colorizing advertisements and delivery expenses. The introduction of a new
directory of significant size in one of the cities in the Region would
increase the Company's aggregate yellow page cost of services. Great Western
has in the last year lowered its printing costs by switching from a single
printing supplier to a competitive bidding process among several suppliers.
Great Western contracts with third parties for printing and delivering its
directories and routinely purchases its paper requirements from third party
suppliers. The colorizing of advertisements in its yellow page directories is
provided by a company in which an executive officer and director of the
Company is an officer, director and significant stockholder. See "Certain
Transactions -- Other Matters."
Selling, General Administrative Expenses. The Acquired Companies have
historically sold their telecommunications services primarily through
commissioned sales personnel, advertising, internal and external marketers
and agents. Selling expenses have, therefore, primarily consisted of
advertising and promotion costs, salaries and commissions of employees,
expenses related to the provision of customer service and, to a lesser
extent, commissions paid to agents. Great Western has historically sold
advertising space in its yellow page directories through commissioned sales
personnel. Hence selling expenses for the Great Western's yellow pages
business consists primarily of employee salaries and commissions. After the
Offering, the Company expects its total selling expenses to increase as it
increases its sales staff to expand its marketing efforts. Great Western has
historically included its selling expenses in cost of services.
In anticipation of the commencement of operating activities and of the
Offering, the Company has been assembling its senior management team, which
it expects to continue to augment, which is resulting in an increase in
general and administrative expenses. General and administrative expenses will
increase substantially subsequent to the Offering, as the Company publishes
additional yellow page directories, expands its customer service and sales
staffs, implements billing, financial reporting and other management
information systems and network management systems and incurs organizational
expenses relating to entering additional markets. Such expenses will be
incurred in advance of anticipated related revenues.
GREAT WESTERN DIRECTORIES, INC.
The following table sets forth for Great Western selected statement of
operations data and such data as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
YEAR ENDED JANUARY 31, DECEMBER 31, SEPTEMBER 30,
--------------------------------------- ------------------- ---------------------------------------
1995 1996(1) 1996(1) 1996 1997
------------------- ------------------- ------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $29,407 100.0% $36,469 100.0% $44,324 100.0% $33,463 100.0% $35,624 100.0%
Cost of services .... 17,733 60.3% 19,568 53.7% 21,394 48.3% 15,111 45.2% 16,690 46.8%
Depreciation and
amortization........ 272 0.9% 228 0.6% 223 0.5% 171 0.5% 168 0.5%
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Gross profit......... 11,402 38.8% 16,673 45.7% 22,707 51.2% 18,181 54.3% 18,766 52.7%
Selling, general and
administrative
expenses............ 10,785 36.7% 12,661 34.7% 14,987 33.8% 11,606 34.7% 12,647 35.5%
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Income from
operations.......... 617 2.1% 4,012 11.0% 7,720 17.4% 6,575 19.6% 6,119 17.2%
</TABLE>
- ------------
(1) The fiscal years of Great Western Directories, Inc. ended on January
31, 1995 and 1996 and December 31, 1996. Consequently the data for
Great Western for the fiscal years ended January 31, 1996 and December
31, 1996 both include the month of January 1996.
Great Western results for the nine months ended September 30, 1996 compared
to the nine months ended September 30, 1997.
Revenues. Revenues increased $2.1 million, or 6.5%, from $33.5 million for
the nine months ended September 30, 1996 to $35.6 million for the nine months
ended September 30, 1997. This improvement resulted primarily from a $1.2
million increase in sales of advertising space in the Tulsa, Oklahoma
36
<PAGE>
directory, due to increased numbers of customers. The Tulsa directory was in
its second year of revenue publication after its prototype publication in
fiscal 1995. In addition, there were increases in sales of advertising space
in directories of $0.2 million in each of the established Texas markets of
Amarillo and Humble, $0.1 million in the established markets of Lawton,
Oklahoma and Temple, Arlington, Clear Lake and Baytown, Texas, and $0.4
million in the established markets of Enid, Oklahoma and Denton, Grand
Prairie, Killeen, Northeast Tarrant County, Pasadena and
Pearland/Friendswood, Texas. These gains were partially offset by decreases
in sales of advertising space of $0.3 million in the established California
markets of Santa Cruz, Napa and Vallejo.
Gross profit. Gross profit increased $0.6 million, or 3.2%, from $18.2
million for the nine months ended September 30, 1996 to $18.8 million for the
nine months ended September 30, 1997. Gross margin decreased from 54.3% for
the nine months ended September 30, 1996 to 52.7% for the nine months ended
September 30, 1997. While certain variable costs of services, such as
commissions, increased at a more rapid rate than revenues, due primarily to
temporary changes in commission payment methodology, certain other costs of
services, such as printing and distribution, which fluctuate with the number
of directories published, remained flat due to a competitive bidding process
that resulted in the use of alternative printing facilities and delivery
services.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.0 million, or 9.0%, from $11.6 million
for the nine months ended September 30, 1996 to $12.6 million for the nine
months ended September 30, 1997. As a percentage of revenues, selling,
general and administrative expenses increased from 34.7% for the nine months
ended September 30, 1996 to 35.5% for the nine months ended September 30,
1997 due to an increase in salaries and payroll taxes of $1.3 million, which
includes an increase in executive compensation in the amount of approximately
$500,000, a substantial portion of which will not recur after the
Acquisitions and the Offering. As a percentage of revenues, salaries and
payroll taxes increased from 12.7% for the nine months ended September 30,
1996 to 15.6% for the nine months ended September 30, 1997.
Great Western results for the fiscal year ended January 31, 1996 compared
to the fiscal year ended December 31, 1996.
Revenues. Revenues increased $7.8 million, or 21.5%, from $36.5 million
for the fiscal year ended January 31, 1996 to $44.3 million for the fiscal
year ended December 31, 1996, primarily as a result of the first publication
for revenue of the Tulsa, Oklahoma directory in February 1996, which resulted
in sales of advertising space of $7.4 million. This increase was partially
offset by a $0.5 million charge from the settlement of litigation in Sonoma
County, California, and a $0.6 million decrease in sales of advertising space
of the combined California markets. An additional $1.6 million in revenue
growth was the result of successful marketing efforts in the remaining, more
mature markets.
Gross profit. Gross profit increased $6.0 million, or 36.2%, from $16.7
million for the fiscal year ended January 31, 1996 to $22.7 million for the
fiscal year ended December 31, 1996. Gross margin increased from 45.7% for
the fiscal year ended January 31, 1996 to 51.2% for the fiscal year ended
December 31, 1996 due primarily to the gross profit contribution of the first
sold year of the Tulsa, Oklahoma directory, a highly profitable market. Also,
certain costs of services did not increase proportionately with revenues due
to a competitive bidding process that resulted in the use of alternative
printing facilities. In addition, Great Western was able to take advantage of
an overall decrease in paper prices.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $2.3 million, or 18.4%, from $12.7 million
for the fiscal year ended January 31, 1996 to $15.0 million for the fiscal
year ended December 31, 1996. As a percentage of revenues, selling, general
and administrative expenses decreased from 34.7% for the fiscal year ended
January 31, 1996 to 33.8% for the fiscal year ended December 31, 1996 as a
result of the impact of the revenues from the first sold year of the Tulsa,
Oklahoma directory. While the sales for the first publication for revenue of
the Tulsa directory were included in the fiscal year ended December 31, 1996,
the associated general and administrative expenses were included in the
fiscal year ended January 31, 1996. General and administrative expenses
related to
37
<PAGE>
a given directory are generally incurred prior to the generation and
recognition of revenues and costs of services. As a percentage of revenues,
bad debt expense increased from 8.9% for the fiscal year ended January 31,
1996 to 10.5% for the fiscal year ended December 31, 1996 due to a 20%
provision, or $1.3 million, related to the first sold year of the Tulsa,
Oklahoma directory, partially offset by lower bad debt provisions for
maturing markets.
Great Western results for the fiscal year ended January 31, 1995 compared
to the fiscal year ended January 31, 1996.
Revenues. Revenues increased $7.1 million, or 24.0%, from $29.4 million
for fiscal year ended January 31, 1995 to $36.5 million for fiscal year ended
January 31, 1996 as a result of the first sold publications of the Irving and
Fort Worth, Texas, directories in November 1995 which resulted in combined
sales of $3.6 million. In addition, the Lawton, Oklahoma directory was
published for 1995 in February 1995 and for 1996 in January 1996;
consequently fiscal year ended January 31, 1996 includes $2.7 million revenue
for both directories, while fiscal year ended January 31, 1995 includes no
revenues related to Lawton, Oklahoma. These increases are partially offset by
an $0.8 million decrease in sales of advertising space in the combined
California markets. An additional $1.6 million in revenue growth was the
result of successful marketing efforts in the remaining, more mature markets.
Gross profit. Gross profit increased $5.3 million, or 46.2%, from $11.4
million for fiscal year ended January 31, 1995 to $16.7 million for fiscal
year ended January 31, 1996. Gross margin increased from 38.8% for fiscal
year ended January 31, 1995 to 45.7% for fiscal year ended January 31, 1996
as a result of three prototype directories published in fiscal year ended
January 31, 1995 that made significant contributions to gross profit in
fiscal year ended January 31, 1996 during their second year of publication
but resulted in only minimal revenues in their prototype year of fiscal year
ended January 31, 1995 to offset the related cost of services of $4.3
million.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.9 million, or 17.4%, from $10.8 million
for fiscal year ended January 31, 1995 to $12.7 million for fiscal year ended
January 31, 1996. As a percentage of revenues, selling, general and
administrative expenses decreased from 36.7% for fiscal year ended January
31, 1995 to 34.7% for fiscal year ended January 31, 1996 as a result of the
impact of the revenues from the first sold years of the Irving and Fort
Worth, Texas directories. In order to support the anticipated increase in
volume, Great Western's infrastructure was enhanced during fiscal year ended
January 31, 1995, when the Irving and Fort Worth, Texas directories were
prototyped. As a percentage of revenues, bad debt expense decreased from 9.9%
for fiscal year ended January 31, 1995 to 8.9% fiscal year ended January 31,
1996 due to lower bad debt provisions for maturing markets, based on improved
collection experience in those markets, partially offset by provisions for
the first sold directories in Irving and Fort Worth, Texas.
Great Western liquidity and capital resources
Great Western follows a policy of extending three to twelve month terms to
its customers. Accounts receivable consist of current balances that are less
than one year (approximately 70% of total receivables) and prior year
balances with aging of more than one year but less than two years. This aging
is consistent with Great Western's general customer profile which is
comprised of small businesses that tend to have a higher failure rate. Using
historical collection rates, Great Western records an allowance for doubtful
accounts based on 10% of sales for current receivables plus 92.5% of all
receivables that are older than one year. The allowance covering prior year
balances is adjusted quarterly to reflect write-offs of balances maturing
beyond two years, new provisions for balances maturing into the prior year
category, and for collections. Great Western believes this method of
providing an allowance which is substantially equivalent to the receivable
itself results in a reasonable estimate of future cash realization.
Great Western generated $5.1 million in net cash from operating activities
for the nine months ended September 30, 1997. Net cash used in investing
activities was approximately $0.3 million, principally for purchases of
property and equipment. Net cash used in financing activities was $4.2
million, representing repayments of long term debt, and cash dividends.
38
<PAGE>
At September 30, 1997, working capital was $13.0 million and there was no
debt.
Great Western generated $5.9 million in net cash from operating activities
in the fiscal year ended December 31, 1996. Net cash used in investing
activities in the fiscal year ended December 31, 1996 was approximately $0.3
million, principally for the purchase of property and equipment. Net cash
used in financing activities in the fiscal year ended December 31, 1996 was
$5.0 million, primarily for repayments of long-term debt and notes payable.
At December 31, 1996, working capital was $11.5 million and total debt was
$1.8 million.
Great Western used $3.0 million in net cash from operating activities for
the fiscal year ended January 31, 1996. Net cash used in investing activities
was approximately $0.1 million principally for purchases of property and
equipment. Net cash provided by financing activities was $2.7 million,
primarily from net borrowings under a bank line of credit and advances under
long-term debt.
At January 31, 1996, working capital was $7.1 million and total debt was
$5.6 million.
VALU-LINE OF LONGVIEW, INC.
The following table sets forth for Valu-Line selected statement of
operations data and such data as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------- -------------------------------------
1994 1995 1996 1996 1997
------------------- ------------------- ------------------- ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $13,417 100.0% $13,330 100.0% $11,181 100.0% $8,623 100.0% $9,058 100.0%
Cost of services .... 6,775 50.5% 7,491 56.2% 6,036 54.0% 4,593 53.3% 5,070 56.0%
Depreciation and
amortization........ 399 3.0% 718 5.4% 819 7.3% 616 7.1% 399 4.4%
--------- -------- --------- -------- --------- -------- -------- -------- -------- --------
Gross profit......... 6,243 46.5% 5,121 38.4% 4,326 38.7% 3,414 39.6% 3,589 39.6%
Selling, general and
administrative
expenses............ 3,725 27.7% 3,898 29.2% 3,571 32.0% 2,659 30.8% 2,875 31.7%
--------- -------- --------- -------- --------- -------- -------- -------- -------- --------
Income from
operations.......... 2,518 18.8% 1,223 9.2% 755 6.7% 755 8.8% 714 7.9%
</TABLE>
Valu-Line results for the nine months ended September 30, 1996 compared
to the nine months ended September 30, 1997.
Revenues. Revenues increased $0.4 million, or 5.0%, from $8.6 million for
the nine months ended September 30, 1996 to $9.0 million for the nine months
ended September 30, 1997. A decrease in domestic long distance revenue was
more than offset by the effects of adding international long distance service
to the revenue base. Revenues for the first nine months of 1997 include sales
of local telephone service and non-contract international traffic, which were
not offered by Valu-Line in the first nine months of 1996. For domestic long
distance traffic, total billed minutes increased slightly from 59.6 million
for the nine months ended September 30, 1996 to 59.9 million for the nine
months ended September 30, 1997, while the average revenue per domestic
billable minute decreased by 9.8%. During the first nine months of 1997,
international long distance service included 3.8 million minutes at an
average price per minute of more than twice the domestic long distance rate.
Gross profit. Gross profit increased $0.2 million, or 5.1%, from $3.4
million for the nine months ended September 30, 1996 to $3.6 million for the
nine months ended September 30, 1997. Gross margin remained at 39.6% for each
of the nine month periods ended September 30 due to scheduled decreases in
depreciation expense of equipment under accelerated depreciation methods,
offset by higher cost of service. For domestic long distance traffic, average
cost per billable minute decreased 18.1% between the periods. However, the
average cost per billable international minute was over four times the cost
per billable minute for domestic traffic.
39
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.2 million, or 8.1%, from $2.7 million
for the nine months ended September 30, 1996 to $2.9 million for the nine
months ended September 30, 1997. As a percentage of revenues, selling,
general and administrative expenses increased from 30.8% for the nine months
ended September 30, 1996 to 31.7% for the nine months ended September 30,
1997 primarily because of salary and administrative costs incurred to rebuild
a segment of the sales team. Several employees resigned from Valu-Line in
late 1995 and, accordingly, their salaries and related costs are not included
in the nine months ended September 30, 1996. Replacements for the sales team
were hired during 1996 with the result of a higher level of salaries and
related expenses reflected in the nine months ended September 30, 1997.
Valu-Line results for the fiscal year ended December 31, 1995 compared
to the fiscal year ended December 31, 1996.
Revenues. Revenues declined $2.1 million, or 16.1%, from $13.3 million for
fiscal 1995 to $11.2 million for fiscal 1996 due to a decrease in the volume
of business long distance accounts. This resulted from technical difficulties
experienced during a transition from a larger, more technically complex
switching system which caused a temporary erosion of Valu-Line's customer
base. For domestic long distance traffic, total billed minutes decreased from
99.6 million for fiscal 1995 to 79.5 million for fiscal 1996, while average
revenue per billable minute increased 3.2%.
Gross profit. Gross profit decreased $0.8 million, or 15.5%, from $5.1
million for fiscal 1995 to $4.3 million for fiscal 1996. Gross margin
increased from 38.4% for fiscal 1995 to 38.7% for fiscal 1996 as Valu-Line
instituted a program to recycle surplus dialer equipment. Subsequent to the
transition to the new switching system, new customers were supplied with
refurbished dialer equipment recovered from previous subscribers. The cost of
refurbishing dialer equipment is significantly less than the cost to purchase
new dialers. These savings were partially offset by an increase in the
average cost of service per minute resulting from the additional cost
associated with carrying Longview area traffic to the new switch in Dallas.
For domestic long distance traffic, average cost per billable minute
increased 6.1%.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $0.3 million, or 8.4%, from $3.9 million
for fiscal 1995 to $3.6 million for fiscal 1996. As a percentage of revenues,
selling, general and administrative expenses increased from 29.2% for fiscal
1995 to 32.0% for fiscal 1996, primarily as a result of costs incurred to
accommodate customers' service needs resulting from technical problems
encountered upon the installation of the new switch. For periods generally
ranging from one to four months, Valu-Line customers became temporary
subscribers to other long distance carriers because of the technical problems
associated with the new switch. Valu-Line reimbursed those customers for the
difference between the tariffed rates charged by other carriers and
Valu-Line's contracted rates as an inducement to return to Valu-Line.
Valu-Line results for the fiscal year ended December 31, 1994 compared
to the fiscal year ended December 31, 1995.
Revenues. Revenues decreased $0.1 million, or 0.6%, from $13.4 million for
fiscal 1994 to $13.3 million for fiscal 1995, primarily due to new
competition. In order to maintain its existing customers and to attract new
business, Valu-Line reduced its rate structures in fiscal 1995. For domestic
long distance traffic, total billed minutes increased from 92.8 million for
fiscal 1994 to 99.6 million for fiscal 1995, while average revenue per
billable minute decreased 6.0%.
Gross profit. Gross profit decreased $1.1 million, or 18.0%, from $6.2
million for fiscal 1994 to $5.1 million for fiscal 1995. Gross margin
decreased from 46.5% for fiscal 1994 to 38.4% for fiscal 1995 as a result of
a one-time charge incurred to change the dialing patterns of all its dialers
in accordance with industry requirements. For domestic long distance traffic,
average cost per billable minute increased 4.9%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.2 million, or 4.6%, from $3.7 million
for fiscal 1994 to $3.9 million for fiscal 1995. As a percentage of revenues,
selling, general and administrative expenses increased from 27.7% for fiscal
1994 to 29.2% for fiscal 1995 as a result of costs associated with the
unsuccessful launch of a new sales office in Houston and costs incurred in
preparation for the switch transition.
40
<PAGE>
Valu-Line liquidity and capital resources
Valu-Line generated $0.7 million in net cash from operating activities for
the nine months ended September 30, 1997. Net cash used in financing
activities was $0.7 million, representing $0.3 million in net repayments of
long term debt and $0.5 million in distributions to shareholders, net of $0.1
million provided by proceeds from long term debt.
At September 30, 1997, Valu-Line had working capital of $0.3 million and
total debt outstanding of $1.5 million. Valu-Line has historically funded its
operations with cash from operations and borrowings from lenders.
Valu-Line generated $1.5 million in net cash from operating activities in
fiscal 1996. Net cash used in investing activities was approximately $0.1
million, which was primarily used for capital expenditures. Net cash used in
financing activities was $1.4 million, of which $0.8 million was distributed
to shareholders and $0.6 million was used to repay long-term debt, capital
leases and other notes payable.
As of December 31, 1996, Valu-Line had a working capital deficit of $0.1
million and total debt outstanding of $1.7 million.
Valu-Line generated $2.2 million in net cash from operating activities in
fiscal 1995. Net cash used in investing activities was approximately $2.4
million, which was primarily used for capital expenditures. Net cash provided
by financing activities was $0.3 million, of which $2.1 million was provided
by proceeds from long-term debt and other notes payable, net of $1.3 million
distributed to shareholders and $0.5 million was used to repay long-term
debt, capital leases and other notes payable.
See "Business-Regulation--State Regulation" for information regarding
Valu-Line's conducting intrastate long distance telephone operations in
Arkansas without a permit for approximately the last six years.
FIRSTEL, INC.
The following table sets forth for FirsTel selected operating data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------- -------------------------------------
1994 1995 1996 1996 1997
------------------ ------------------ ------------------- ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $4,079 100.0% $7,838 100.0% $10,355 100.0% $7,659 100.0% $9,488 100.0%
Cost of services .... 3,040 74.5% 5,334 68.1% 7,066 68.2% 5,168 67.5% 6,864 72.3%
Depreciation and
amortization........ 125 3.1% 206 2.6% 248 2.4% 183 2.4% 202 2.1%
-------- -------- -------- -------- --------- -------- -------- -------- -------- --------
Gross profit......... 914 22.4% 2,298 29.3% 3,041 29.3% 2,308 30.1% 2,422 25.5%
Selling, general and
administrative
expenses............ 1,155 28.3% 1,726 22.0% 2,147 20.7% 1,558 20.3% 1,969 20.7%
-------- -------- -------- -------- --------- -------- -------- -------- -------- --------
Income (loss) from
operations.......... (241) (5.9)% 573 7.3% 894 8.6% 750 9.8% 453 4.8%
</TABLE>
FirsTel results for the nine months ended September 30, 1996 compared
to the nine months ended September 30, 1997.
Revenues. Revenues increased $1.8 million, or 23.9%, from $7.7 million for
the nine months ended September 30, 1996 to $9.5 million for the nine months
ended September 30, 1997 primarily due to increased sales of long distance
services, partially offset by competitive pricing. For long distance traffic,
total billed minutes increased from 49.3 million for the nine months ended
September 30, 1996 to 62.9 million for the nine months ended September 30,
1997, while average revenue per billable minute decreased 6.9%.
Gross profit. Gross profit increased $0.1 million, or 4.9%, from $2.3
million for the nine months ended September 30, 1996 to $2.4 million for the
nine months ended September 30, 1997. Gross margin
41
<PAGE>
decreased from 30.1% for the nine months ended September 30, 1996 to 25.5%
for the nine months ended September 30, 1997 as a result of competitive
pricing strategies and low margins on the start up of cellular and local
sales. For long distance traffic, average cost per billable minute decreased
14.5%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.4 million, or 26.4%, from $1.6 million
for the nine months ended September 30, 1996 to $2.0 million for the nine
months ended September 30, 1997. As a percentage of revenues, selling,
general and administrative expenses increased slightly from 20.3% for the
nine months ended September 30, 1996 to 20.8% for the nine months ended
September 30, 1997 as a result of increases in sales support expenses. Most
of these increases were due to costs associated with preparing for the
provision of cellular and local services prior to revenues being generated
from these services.
FirsTel results for the fiscal year ended December 31, 1995 compared
to the fiscal year ended December 31, 1996.
Revenues. Revenues increased $2.6 million, or 32.1%, from $7.8 million for
fiscal 1995 to $10.4 million for fiscal 1996, primarily due to expansion into
new markets and a larger sales force. For long distance traffic, total billed
minutes increased from 48.3 million for fiscal 1995 to 67.9 million for
fiscal 1996, while average revenue per billable minute decreased 8.1%.
Gross profit. Gross profit increased $0.7 million, or 32.3%, from $2.3
million for fiscal 1995 to $3.0 million for fiscal 1996. Gross margin
remained stable at 29.4% for fiscal 1995 and fiscal 1996. For long distance
traffic, average cost per billable minute decreased 5.6%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.4 million, or 24.4%, from $1.7 million
for fiscal 1995 to $2.1 million for fiscal 1996. As a percentage of revenues,
selling, general and administrative expenses decreased from 22.0% for fiscal
1995 to 20.7% for fiscal 1996 as a result of reduced selling expenses. In
1995, sales personnel were paid base salaries; whereas, in 1996 sales
personnel were compensated on a straight commission basis.
FirsTel results for fiscal year ended December 31, 1994 compared
to fiscal year ended December 31, 1995.
Revenues. Revenues increased $3.7 million, or 92.2%, from $4.1 million for
fiscal 1994 to $7.8 million for fiscal 1995. Although FirsTel was founded in
1993, its initial launch of an effective sales force and a comprehensive
marketing effort occurred during fiscal 1994. Accordingly, fiscal 1995 was
the first year to reflect a full year of benefit from the sales and marketing
programs. For long distance traffic, total billed minutes increased from 24.1
million for fiscal 1994 to 48.3 million for fiscal 1995, while average
revenue per billable minute decreased 4.1%.
Gross profit. Gross profit increased $1.4 million, or 151.4%, from $0.9
million for fiscal 1994 to $2.3 million for fiscal 1995. Gross margin
increased from 22.4% for fiscal 1994 to 29.3% for fiscal 1995 as a result of
a reduction in line costs per minute, and more efficient use of the network
and switching facilities. For long distance traffic, average cost per
billable minute decreased 3.7%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.5 million, or 49.4%, from $1.2 million
for fiscal 1994 to $1.7 million for fiscal 1995. As a percentage of revenues,
selling, general and administrative expenses decreased from 28.3% for fiscal
1994 to 22.0% for fiscal 1995 as a result of increased revenues without a
corresponding increase in expenses.
FirsTel liquidity and capital resources
FirsTel generated $0.5 million in net cash from operating activities for
the nine months ended September 30, 1997. Net cash used in investing
activities was approximately $0.2 million, representing equipment purchases.
Net cash used in financing activities was $0.4 million, representing
reductions in capitalized leases and distributions to stockholders, offset by
the proceeds from a debt offering.
At September 30, 1997, FirsTel had a working capital deficit of $0.9
million and $1.2 million of total debt outstanding, including $1.0 million of
notes payable to stockholders which will be acquired by ACG.
42
<PAGE>
FirsTel has historically funded its operations with cash flow from operations
and loans from stockholders. FirsTel maintains a revolving line of credit
with a local bank in the amount of $0.8 million for the financing of
receivables and unbilled services. As of September 30, 1997 there was an
outstanding balance of $0.1 million on the line of credit.
FirsTel generated $0.9 million in net cash from operating activities in
fiscal 1996. Net cash used in investing activities was approximately $0.1
million, of which $0.2 million was used for purchasing equipment. Net cash
used in financing activities was $0.8 million, primarily for reduction in
long-term debt.
As of December 31, 1996, FirsTel had a working capital deficit of $1.1
million and total debt outstanding of $1.4 million.
FirsTel generated $0.4 million in net cash from operating activities in
fiscal 1995. Net cash used in investing activities was approximately $0.5
million, of which $0.4 million was used for purchases of property and
equipment. Net cash provided by financing activities was $0.1 million, of
which $0.5 million represented proceeds from long term borrowings, net of
$0.2 million in principal payments on long-term debt and $0.2 million in
distributions to stockholders.
FEIST LONG DISTANCE, INC.
The following table sets forth for Feist Long Distance selected statement
of operations data and such data as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------- -------------------------------------
1994 1995 1996 1996 1997
------------------ ------------------ ------------------- ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $5,712 100.0% $7,923 100.0% $10,028 100.0% $7,416 100.0% $8,965 100.0%
Cost of services .... 3,623 63.4% 5,469 69.0% 6,854 68.3% 5,057 68.2% 6,044 67.4%
Depreciation and
amortization........ 255 4.5% 278 3.5% 237 2.4% 170 2.3% 142 1.6%
-------- -------- -------- -------- --------- -------- -------- -------- -------- --------
Gross profit......... 1,834 32.1% 2,176 27.5% 2,937 29.3% 2,189 29.5% 2,779 31.0%
Selling, general and
administrative
expenses............ 1,553 27.2% 2,201 27.8% 2,469 24.6% 1,706 23.0% 2,404 26.8%
-------- -------- -------- -------- --------- -------- -------- -------- -------- --------
Income (loss) from
operations.......... 281 4.9% (25) (0.3)% 467 4.7% 482 6.5% 375 4.2%
</TABLE>
Feist Long Distance results for the nine months ended September 30, 1996
compared
to the nine months ended September 30, 1997.
Revenues. Revenues increased $1.6 million, or 20.9%, from $7.4 million for
the nine months ended September 30, 1996 to $9.0 million for the nine months
ended September 30, 1997 primarily due to a larger customer base. However,
for the nine months ended September 30, 1997 Feist experienced a slower rate
of growth than experienced in prior periods due to a change in advertising
strategy. For long distance traffic, total billed minutes increased from 49.8
million for the nine months ended September 30, 1996 to 66.1 million for the
nine months ended September 30, 1997, while average revenue per billable
minute decreased 6.9%.
Gross profit. Gross profit increased $0.6 million, or 27.0%, from $2.2
million for the nine months ended September 30, 1996 to $2.8 million for the
nine months ended September 30, 1997. Gross margin increased from 29.5% for
the nine months ended September 30, 1996 to 31.0% for the nine months ended
September 30, 1997 as a result of an increase in lower-cost "on-net" traffic
and decrease in higher cost "off-net" resold traffic, as well as declining
fiber lease rates and access charges. For long distance traffic, average cost
per billable minute decreased 15.3%.
43
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.7 million, or 40.9%, from $1.7 million
for the nine months ended September 30, 1996 to $2.4 million for the nine
months ended September 30, 1997. As a percentage of revenues, selling,
general and administrative expenses increased from 23.0% for the nine months
ended September 30, 1996 to 26.8% for the nine months ended September 30,
1997 as Feist Long Distance added selling and administrative personnel in
anticipation of providing local service.
Feist Long Distance results for the fiscal year ended December 31, 1995
compared to the fiscal year ended December 31, 1996.
Revenues. Revenues increased $2.1 million, or 26.6%, from $7.9 million for
fiscal 1995 to $10.0 million for fiscal 1996, due to successful marketing
efforts to obtain new small business customers in the long distance market.
For long distance traffic, total billed minutes increased from 50.9 million
for fiscal 1995 to 71.3 million for fiscal 1996, while average revenue per
billable minute decreased 7.1%.
Gross profit. Gross profit increased $0.7 million, or 35.0%, from $2.2
million for fiscal 1995 to $2.9 million for fiscal 1996. Gross margin
increased from 27.5% for fiscal 1995 to 29.3% for fiscal 1996 as a result of
an increase in lower-cost "on-net" traffic as compared to higher cost
"off-net" resold traffic, as well as declining fiber lease rates and access
charges. For long distance traffic, average cost per billable minute
decreased 9.4%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.3 million, or 12.2%, from $2.2 million
for fiscal 1995 to $2.5 million for fiscal 1996. As a percentage of revenues,
selling, general and administrative expenses decreased from 27.8% for fiscal
1995 to 24.6% for fiscal 1996 as management improved the efficiency of
administrative and clerical personnel through higher levels of automation.
Feist Long Distance results for the fiscal year ended December 31, 1994
compared to the fiscal year ended December 31, 1995.
Revenues. Revenues increased $2.2 million, or 38.7%, from $5.7 million for
fiscal 1994 to $7.9 million for fiscal 1995, due to the penetration of new
markets in Oklahoma, Nebraska, Missouri and Texas utilizing agents and
telemarketing. For long distance traffic, total billed minutes increased from
35.1 million for fiscal 1994 to 50.9 million for fiscal 1995, while average
revenue per billable minute decreased 4.8%.
Gross profit. Gross profit increased $0.4 million, or 18.6%, from $1.8
million for fiscal 1994 to $2.2 million for fiscal 1995. Gross margin
decreased from 32.1% for fiscal 1994 to 27.5% for fiscal 1995 as a result of
an expansion into areas served by independent telephone companies which
impose higher access charges than areas served by RBOCs, and the costs
associated with utilizing purchased facilities in those new areas. For long
distance traffic, average cost per billable minute increased 3.7%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.6 million, or 41.7%, from $1.6 million
for fiscal 1994 to $2.2 million for fiscal 1995. As a percentage of revenues,
selling, general and administrative expenses slightly increased from 27.2%
for fiscal year 1994 to 27.8% for fiscal year 1995.
Feist Long Distance liquidity and capital resources
Feist Long Distance generated $0.4 million in net cash from operating
activities for the nine months ended September 30, 1997. Net cash used in
investing activities was approximately $0.1 million, principally for
equipment purchases. Net cash used in financing activities was $0.2 million,
representing repayment of long-term debt.
At September 30, 1997, Feist Long Distance had current assets
approximately equal to current liabilities and $0.7 million of total debt
outstanding which amount is due to shareholders and will be acquired by ACG.
44
<PAGE>
Feist Long Distance generated $0.3 million in net cash from operating
activities in fiscal 1996. Net cash used in investing activities was
approximately $0.1 million, which was primarily used to purchase equipment.
Net cash used in financing activities was $0.2 million, which was used to
repay long term debt.
As of December 31, 1996, Feist Long Distance had a working capital deficit
of $0.3 million and total debt outstanding of $0.8 million.
Feist Long Distance used $0.3 million in net cash from operating
activities in fiscal 1995. Net cash used in investing activities was
approximately $0.1 million, which was primarily used for the purchase of
equipment. Net cash generated from financing activities was $0.4 million,
which represented net proceeds from the issuance of long term debt.
As of December 31, 1995, Feist Long Distance had a working capital deficit
of $0.8 million and total debt outstanding of $1.1 million.
KIN NETWORK, INC.
The following table sets forth for KINNET selected statement of operations
data and such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------ -------------------------------------
1994 1995 1996 1996 1997
-------------------- -------------------- ------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $ 3,550 100.0% $ 6,497 100.0% $8,553 100.0% $6,031 100.0% $8,796 100.0%
Cost of services .... 2,450 69.0% 3,094 47.6% 2,864 33.5% 2,055 34.1% 2,996 34.1%
Depreciation and
amortization(1)..... 1,700 47.9% 1,825 28.1% 1,906 22.3% 1,321 21.9% 1,597 18.2%
--------- --------- --------- --------- -------- -------- -------- -------- -------- --------
Gross profit(1)...... (600) (16.9)% 1,578 24.3% 3,783 44.2% 2,655 44.0% 4,203 47.7%
Selling, general and
administrative
expenses............ 2,533 71.4% 2,930 45.1% 3,417 40.0% 2,479 41.1% 3,466 39.4%
--------- --------- --------- --------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations.......... (3,133) (88.3)% (1,352) (20.8)% 366 4.3% 176 2.9% 737 8.4%
</TABLE>
- ------------
(1) KINNET has historically included depreciation and amortization in
neither gross profit nor selling, general and administrative expenses,
but as a separate item in the calculation of income (loss) from
operations. The Acquired Companies have historically recorded
depreciation and amortization expense as an element of gross profit,
and for consistency of presentation, in the text of this Prospectus and
the pro forma financial statements, KINNET's depreciation and
amortization expense is included in the calculation of gross profit. As
presented in KINNET's historical financial statements included herein,
its gross profit for fiscal 1994, 1995 and 1996, and for the nine
months ended September 30, 1996 and 1997, was (in thousands) $1,100,
$3,402, $5,689, $3,976, and $5,800, respectively.
The Company is acquiring 49% of the outstanding voting stock of KINNET,
and hence KINNET's results of operations are included in the Company's
financial statements on the equity method of accounting. Such amounts
included in the Company's pro forma combined financial statements for the
fiscal year ended December 31, 1996 and the nine months ended September 30,
1996 and 1997 were $(388,000), $(349,000) and $(146,000), respectively.
KINNET results for the nine months ended September 30, 1996 compared
to the nine months ended September 30, 1997.
Revenues. Revenues increased $2.8 million, or 45.8%, from $6.0 million for
the nine months ended September 30, 1996 to $8.8 million for the nine months
ended September 30, 1997. This increase in revenues occurred primarily
because of an increase in the volume of traffic as a result of continued
successful marketing efforts. Incremental customers gains included two
resellers, two equal access subscribers and 79 new private line customers.
For long distance traffic, total billed minutes increased from 11.6 million
for the nine months ended September 30, 1996 to 16.9 million for the nine
months ended September 30, 1997, while average revenue per billable minute
decreased 19.3%.
45
<PAGE>
Gross profit. Gross profit increased $1.5 million, or 58.3%, from $2.7
million for the nine months ended September 30, 1996 to $4.2 million for the
nine months ended September 30, 1997. Gross margin increased from 44.0% for
the nine months ended September 30, 1996 to 47.7% for the nine months ended
September 30, 1997 as a result of network efficiencies, volume discounts and
negotiated lower rates. For long distance traffic, average cost per billable
minute decreased 4.7%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.0 million, or 39.8%, from $2.5 million
for the nine months ended September 30, 1996 to $3.5 million for the nine
months ended September 30, 1997. As a percentage of revenues, selling,
general and administrative expenses decreased from 41.1% for the nine months
ended September 30, 1996 to 39.4% for the nine months ended September 30,
1997 as KINNET was able to take advantage of economies of scale.
KINNET results for the fiscal year ended December 31, 1995 compared
to the fiscal year ended December 31, 1996.
Revenues. Revenues increased $2.1 million, or 31.6%, from $6.5 million for
fiscal 1995 to $8.6 million for fiscal 1996. The largest contribution to the
increase came from wholesale long distance services which increased from $0.5
million in fiscal 1995 to $1.4 million in fiscal 1996. KINNET experienced
significant revenue gains in its other major product lines with private line
revenues and equal access revenues increasing 44% and 31%, respectively.
Increases in revenues for all product lines are attributable to increases in
volumes resulting from successful marketing efforts. For long distance
traffic, total billed minutes increased from 10.2 million for fiscal 1995 to
15.9 million for fiscal 1996, while average revenue per billable minute
increased 37.3%.
Gross profit. Gross profit increased $2.2 million, or 139.7%, from $1.6
million for fiscal 1995 to $3.8 million for fiscal 1996. Gross margin
increased from 24.3% for fiscal 1995 to 44.2% for fiscal 1996 as the
Company's product mix shifted to a greater proportion of equal access
service, which is a higher margin product. For long distance traffic, average
cost per billable minute decreased 11.3%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.5 million, or 16.6%, from $2.9 million
for fiscal 1995 to $3.4 million for fiscal 1996. As a percentage of revenues,
selling, general and administrative expenses decreased from 45.1% for fiscal
1995 to 40.0% for fiscal 1996 as a result of efficiencies achieved on
maintenance of the fiber system and economies of scale achieved in
administrative operations.
KINNET results for the fiscal year ended December 31, 1994 compared
to the fiscal year ended December 31, 1995.
Revenues. Revenues increased $2.9 million, or 83.0%, from $3.6 million for
fiscal 1994 to $6.5 million for fiscal 1995. The largest contribution to the
increase came from equal access revenues which more than doubled in fiscal
1995 to a total of $3.0 million. Thirteen independent telephone companies
were utilizing KINNET's access tandem switch by the end of fiscal 1995 with
three more in the process of conversion. For long distance traffic, total
billed minutes increased from 3.0 million for fiscal 1994 to 10.2 million for
fiscal 1995, while average revenue per billable minute increased 38.1%.
Gross profit. Gross profit increased $2.2 million, from a loss of $0.6
million for fiscal 1994 to profit of $1.6 million for fiscal 1995. Gross
margin increased from (16.9)% for fiscal 1994 to 24.3% for fiscal 1995 as the
company's product mix shifted to a greater proportion of equal access
service, which is a higher margin product. For long distance traffic, average
cost per billable minute increased 9.3%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.4 million, or 15.7%, from $2.5 million
for fiscal 1994 to $2.9 million for fiscal 1995. As a percentage of revenues,
selling, general and administrative expenses decreased from 71.4% for fiscal
1994 to 45.1% for fiscal 1995 as KINNET achieved significant economies of
scale in customer support and administration.
KINNET liquidity and capital resources
KINNET generated $4.3 million in net cash from operating activities for
the nine months ended September 30, 1997. Net cash used in investing
activities was approximately $5.8 million for additions to
46
<PAGE>
property, plant and equipment. Net cash generated in financing activities was
$2.0 million of which $3.9 million was received from KINNET's parent for
utilizing the income tax benefit of an operating loss carryover, and $0.3
million was received from the return of Rural Telephone Finance Cooperative
capital certificates, net of $2.0 million in principal payments on long-term
debt.
At September 30, 1997, KINNET had a working capital deficit of $2.2
million and $29.5 million of total debt outstanding. KINNET has historically
funded its operations with cash flow from operations and debt from lenders.
KINNET generated $0.5 million in net cash from operating activities in
fiscal 1996. Net cash used in investing activities was approximately $1.5
million, which was primarily used for additions to property, plant and
equipment. Net cash provided by financing activities was $1.4 million, of
which $3.5 million was received from KINNET's parent for utilizing the income
tax benefit of an operating loss carryover and for contributions of capital,
and $0.4 million was received from the return of Rural Telephone Finance
Cooperative capital certificates, net of $2.5 million principal repayments on
long-term debt.
As of December 31, 1996, KINNET had working capital of $1.2 million and
total debt outstanding of $31.7 million.
KINNET used $1.9 million in net cash from operating activities in fiscal
1995. Net cash used in investing activities was approximately $0.7 million,
which was primarily used for additions to property, plant and equipment. Net
cash provided by financing activities was $3.7 million, of which $6.0 million
represented a capital contribution from Liberty Cellular, Inc., net of $2.3
million principal repayments on long-term debt.
As of December 31, 1995, KINNET had working capital of $0.6 million and
total debt of $34.2 million.
PRO FORMA COMBINED RESULTS OF OPERATIONS
The following discussion of the Company's pro forma combined results of
operations for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1996 and 1997 should be read in conjunction with the pro
forma financial statements included elsewhere herein.
The following table sets forth certain pro forma combined results of
operations data of the Company and such results as a percentage of pro forma
combined revenues:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED(1) NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------- ---------------------------------------
1995(1) 1996(1) 1996 1997
------------------- ------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Telecommunications services . $37,772 50.9% $41,090 48.1% $29,648 47.0% $33,455 48.4%
Yellow page publishing....... 36,469 49.1% 44,324 51.9% 33,463 53.0% 35,624 51.6%
--------- -------- --------- -------- --------- -------- --------- --------
Total........................ 74,241 100.0% 85,414 100.0% 63,111 100.0% 69,079 100.0%
Cost of services.............. 43,005 57.9% 47,087 55.1% 33,322 52.8% 37,637 54.5%
Depreciation and
amortization................. 5,975 8.0% 6,111 7.2% 4,521 7.2% 4,339 6.3%
--------- -------- --------- -------- --------- -------- --------- --------
Gross profit.................. 25,261 34.0% 32,216 37.7% 25,268 40.0% 27,103 39.2%
Selling, general and
administrative expenses...... 23,243 31.3% 26,966 31.6% 19,323 30.6% 23,172 33.5%
--------- -------- --------- -------- --------- -------- --------- --------
Income from operations........ 2,018 2.7% 5,250 6.1% 5,945 9.4% 3,931 5.7%
</TABLE>
- ------------
(1) All of the Acquired Companies and ACG, except Great Western Directories
(for fiscal 1995), Long Distance Management of Kansas, Inc. ("LDM
Kansas") and Long Distance Management II, Inc. ("LDM II") have fiscal
years which end on December 31. The combined data above for the fiscal
years ended December 31, 1995 and 1996 includes data for LDM Kansas and
LDM II for the twelve month periods then ended. The combined data above
also includes Great Western's fiscal year ended January 31, 1996 for
the combined fiscal year ended 1995. Because of the change in Great
Western's fiscal year, revenues for the month of January 1996 are
included both in fiscal 1995 and fiscal 1996.
47
<PAGE>
Pro forma combined results for the nine months ended September 30, 1996
compared to the nine months ended September 30, 1997.
Pro forma revenues. Revenues increased $6.0 million, or 9.5%, from $63.1
million for the nine months ended September 30, 1996 to $69.1 million for the
nine months ended September 30, 1997. Telecommunications services revenue
increased $3.9 million, or 12.8%, from $29.6 million for the nine months
ended September 30, 1996 to $33.5 million for the nine months ended September
30, 1997 as a result of an overall increase in traffic for all of the
Acquired Companies except Valu-Line, whose domestic long distance minutes
were relatively flat. For long distance traffic, total domestic billed
minutes increased 13.7% from 192.2 million for the nine months ended
September 30, 1996 to 222.6 million for the nine months ended September 30,
1997, while average revenue per domestic billable minute decreased 7.4% from
$0.1422 to $0.1317. Yellow page publishing revenue increased $2.2 million, or
6.5%, from $33.5 million for the nine months ended September 30, 1996 to
$35.6 million for the nine months ended September 30, 1997 primarily as a
result of increased sales of advertising space in the directory in Tulsa,
Oklahoma and in other established markets. See "Risk Factors -- Recent
Results and Anticipated Future Quarterly Losses."
Pro forma gross profit. Gross profit increased $1.8 million, or 7.3%, from
$25.3 million for the nine months ended September 30, 1996 to $27.1 million
for the nine months ended September 30, 1997. As a percentage of revenue,
gross margin decreased from 40.0% to 39.2% for the nine months ended
September 30, 1996 and 1997. Telecommunications services gross profit
increased $1.2 million, or 17.1%, from $7.1 million for the nine months ended
September 30, 1996 to $8.3 million for the nine months ended September 30,
1997. Telecommunications services gross margin increased from 24.0% for the
nine months ended September 30, 1996 to 24.8% for the nine months ended
September 30, 1997 as a result of a scheduled decrease in depreciation
expense on equipment. For domestic long distance traffic, average cost per
billable minute decreased 10.7% from $0.0856 for the nine months ended
September 30, 1996 to $0.0786 for the nine months ended September 30, 1997.
Yellow page publishing gross profit increased $0.6 million, or 3.3%, from
$18.2 million for the nine months ended September 30, 1996 to $18.8 million
for the nine months ended September 30, 1997. Yellow page publishing gross
margin declined from 54.3% for the nine months ended September 30, 1996, to
52.7% for the nine months ended September 30, 1997, due to certain variable
costs of services, such as commissions, increasing at a more rapid rate than
revenues, resulting from temporary changes in commission payment methodology
and certain other costs of services, such as printing and distribution.
Pro forma combined results for fiscal 1995 compared to fiscal 1996.
Pro forma revenues. Revenues increased $11.2 million, or 15.0%, from $74.2
million for fiscal 1995 to $85.4 million for fiscal 1996. Telecommunications
services revenue increased $3.3 million, or 8.8%, from $37.8 million for
fiscal 1995 to $41.1 million for fiscal 1996 primarily as a result of
successful marketing efforts and expansion into new markets. These gains were
partially offset by a decrease in the volume of commercial long distance
accounts at Valu-Line resulting from technical difficulties experienced
during an equipment change. For long distance traffic, total domestic billed
minutes increased 10.9% from 238.3 million for fiscal 1995 to 264.3 million
for fiscal 1996, while average revenue per domestic billable minute decreased
3.4% from $0.1458 to $0.1409. Yellow page publishing revenue increased $7.8
million, or 21.5% from $36.5 million for fiscal 1995 to $44.3 million for
fiscal 1996 primarily as a result of the first publication for revenue of the
Tulsa, Oklahoma directory in February 1996.
Pro forma gross profit. Gross profit increased $6.9 million, or 27.5%,
from $25.3 million for fiscal 1995 to $32.2 million for fiscal 1996. Gross
margin increased from 34.0% for fiscal 1995 to 37.7% for fiscal 1996.
Telecommunications services gross profit increased $0.9 million, or 10.1%,
from $8.7 million for fiscal 1995 to $9.6 million for fiscal 1996.
Telecommunications services gross margin decreased from 35.6% for fiscal 1995
to 35.0% for fiscal 1996 as a result of changes in product mix to lower
margin, higher cost services and implementation of a program to recycle
surplus equipment. For long distance traffic, average cost per domestic
billable minute decreased 1.7% from $0.0858 for fiscal 1995 to $0.0843 for
fiscal 1996. Yellow page publishing gross profit increased $6.0 million, or
36.2%, from $16.7 million for fiscal 1995 to $22.7 million for fiscal 1996.
Yellow page publishing gross margin increased from 45.7% for fiscal 1995 to
51.2% for fiscal 1996 due primarily to the gross profit contribution of the
first sold year of the Tulsa,
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Oklahoma directory, a highly profitable market. Also, certain costs of
services did not increase proportionately with revenues due to a competitive
bidding process for printing. In addition, Great Western was able to take
advantage of an overall decrease in paper prices.
Pro forma combined liquidity and capital resources
An affiliate ("Lender") of CIBC Oppenheimer Corp., one of the
Representatives of the Underwriters in this Offering, has supplied the
Company a summary of terms and conditions relating to a proposed $25.0
million Senior Secured Revolving Credit Facility ("Proposed Credit
Facility"), the finalization of which is conditioned upon the consummation of
the Offering and the negotiation of a definitive agreement. While the Lender
has not committed to make any loans to the Company, the Company believes
that, if any arrangement is ultimately negotiated with the Lender, it will
incorporate the following key features: (a) the facility will be secured by a
pledge of accounts receivable and the stock of the Company's subsidiaries, a
negative pledge of the Company's other assets and guaranties from the
Company's subsidiaries; (b) loans under the facility will mature within one
year; (c) the payment of interest on outstanding balances will be computed
based upon stated increments over LIBOR or a base rate; (d) the proposed
facility will require the payment of a 1% transaction fee and a 0.5%
commitment fee on the undrawn balance available under the Proposed Credit
Facility; and (e) the Proposed Credit Facility will include representations,
warranties, affirmative or negative covenants and conditions of the sort
generally found in credit facilities obtained by comparable companies that
have recently completed an initial public offering.
The $17.0 million of notes issued to stockholders of Great Western and
FirsTel in the Acquisitions will be subordinated to the first $50.0 million
of outstanding bank debt.
The Company expects to expend approximately $25.0 million in 1998 to fund
the acquisition of additional circuit and packet switches, the leasing of
bulk fiber optic capacity from others and the purchase of other capital
assets. See "Risk Factors -- Capital Requirements."
The Company generated $5.9 million in net cash from operating activities
for the nine months ended September 30, 1997. Net cash used in investing
activities was approximately $0.6 million, principally for property and
equipment purchases. Net cash used in financing activities was $4.5 million,
representing $3.8 million in principal payments on long-term debt, capital
leases and other notes payable and $1.1 million in dividends and
distributions to shareholders, net of $0.4 million of proceeds from long-term
debt and other notes payable.
At September 30, 1997, the Company had working capital, as adjusted, of
$32.7 million and total debt outstanding of $17.4 million.
The Company generated $9.0 million in net cash from operating activities
in the fiscal year ended December 31, 1996. Net cash used in investing
activities in the fiscal year ended December 31, 1996 was approximately $0.7
million, principally for property and equipment purchases, net of proceeds
from the sale of equipment. Net cash used in financing activities was $7.5
million, representing $6.5 million in principal payments on long-term debt,
capital leases and other notes payable and $1.2 million in dividends and
distributions to shareholders, net of $0.3 million of proceeds from long-term
debt and other notes payable and $0.1 net purchases of treasury stock.
At December 31, 1996, working capital was $10.7 million and total debt
outstanding was $6.3 million.
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INDUSTRY BACKGROUND AND OVERVIEW
GENERAL
The present U.S. telecommunications marketplace was shaped principally by
the court-directed divestiture (the "Divestiture") of the Bell System in
1984. In connection with the Divestiture, the United States was divided into
194 local regions known as Local Access Transport Areas ("LATAs") and the
Bell System was separated into a long distance carrier, AT&T, to provide long
distance services, and seven RBOCs, including Southwestern Bell and U S WEST,
to provide local telecommunications services. Long distance services involve
the carriage of telecommunications traffic between LATAs (interexchange).
Local services involve the carriage of telecommunications traffic within
LATAs (local exchange) and the provision of local network access to the long
distance carriers by the local exchange carriers ("LECs"), including the
RBOCs and independent entities, thereby allowing long distance traffic to
reach end users in a LATA (local access).
Both local and long distance telephony are switched services, meaning that
a customer's call travels over the public switched telephone network with
millions of possible routes and is switched (i.e., routed) to its intended
destination by a telecommunications service provider, such as the Company,
based on dialing information provided by the caller. A letter of
authorization from a customer permits a service provider to instruct the ILEC
to tag all calls from that customer with the service provider's
identification code. This code enables the service provider to bill such
customer directly for its local and long distance services. A second type of
telephony service is "dedicated" or non-switched service, which generally
involves the provision of service between two fixed points, such as between
two branch offices of a corporation or between a long distance carrier's
points of presence ("POPs") and the customer's private branch exchange
("PBX").
The long distance and local telecommunications markets are currently
undergoing substantial changes, including fundamental changes resulting from
the February 8, 1996 enactment of the Telecommunications Act, and the Company
believes that it is well positioned to take advantage of these developments.
LONG DISTANCE SERVICES
Until 1984, AT&T largely monopolized local and long distance telephone
services in the United States. Technological and regulatory developments
gradually enabled others to compete with AT&T in the long distance market.
Since the Divestiture in 1984, competition in the long distance market has
increased, service levels have improved, product offerings have increased and
prices for long distance services have generally declined, all of which has
resulted in increased consumer demand and significant market growth for long
distance services. One component of this growth has been the advent of a
number of long distance resellers (including some of the Acquired Companies),
which emerged as a result of procompetitive regulatory initiatives fostered
by the Divestiture. Typically, a reseller of long distance services enters
into interconnect agreements with one or more major long distance carriers
that allow the reseller to channel its customers' traffic over the major
carriers' networks at rates more favorable than those generally available to
individual customers.
A long distance telephone call between two LATAs consists of three
segments. Starting with the originating customer, the call is transmitted
along the ILEC's local network to a long distance carrier's POP in the
originating customer's LATA. At the POP, the call is sent along the long
distance carrier's network to the long distance carrier's POP in the LATA in
which the terminating customer is located. The call is then sent from this
POP along another local network to the terminating customer. Long distance
carriers provide only the connection between the two local networks, and pay
access charges for switched calls to both the originating and terminating
ILEC for traffic obtained from or terminated on their respective local
networks.
LOCAL SERVICES
While the Divestiture facilitated competition in the long distance segment
of the telecommunications market, each ILEC initially enjoyed a monopoly in
the provision of local telecommunications services in
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its respective service area. In the mid-1980s, however, there was a surge of
construction activity by entities building their own local networks and
providing local access and dedicated services designed to allow users to
bypass a portion of a particular ILEC's local network. The competitive access
providers ("CAPs") were the first providers of these access services and the
first competitors in the local telecommunications services market. The demand
for alternative local telecommunications services providers in the past has
been driven in large part by the significant charges levied by the ILECs
against the long distance carriers for access to such ILECs' local networks
(access charges). Access charges typically represent approximately 40% to 45%
of long distance carriers' long distance revenue. The CAPs' local networks
typically consist of fiber optic-based facilities connecting long distance
carriers' POPs within a metropolitan area, connecting end users (primarily
large businesses and government agencies) with long distance carriers' POPs
and connecting different locations of a particular customer. CAPs take
advantage of the substantial capacity and economies of scale inherent in
their networks to offer customers service that is generally less expensive
and of higher quality than that obtained from the ILECs. As CAPs have grown,
regulators in some states and at the federal level have issued rulings which
favored competition and allowed CAPs to offer a number of new services.
Several CAPs have emerged into full-fledged CLECs capable of providing an
entire range of switch-based local and long distance telephony services. The
Company believes that the trend toward increased competition and deregulation
of the telecommunications industry is continuing and accelerating.
The market for local exchange services consists of a number of distinct
service components. These service components are defined by specific
regulatory tariff classifications including: (i) local network services,
which generally include basic dial tone, enhanced calling features and data
services (dedicated point-to-point and frame relay service); (ii) network
access services, which consist of access provided by ILECs to long distance
network carriers; (iii) short-haul long distance network services, which
include intraLATA long distance calls; and (iv) other varied services,
including the publication of white page and yellow page telephone
directories. According to publicly available sources, the 1996 aggregate
revenues of all ILECs were approximately $107.0 billion. Until recently,
there was virtually no competition in the local exchange markets.
Since the Divestiture in 1984, several factors have served to promote
competition in the local exchange market, including: (i) rapidly growing
customer demand for an alternative to the ILECs monopoly, spurred partly by
the development of competitive activities in the long distance market; (ii)
advances in the technology for transmission of data and video, which require
significant capacity and reliability levels; (iii) the development of fiber
optics and digital electronic technology, which reduced network construction
costs while increasing transmission speeds, capacity and reliability as
compared to traditional copper-based networks; (iv) the significant access
charges interexchange carriers are required to pay to ILECs to access the
ILECs' networks; and (v) a willingness on the part of legislators to enact
and regulators to enforce legislation and regulations permitting and
promoting competition in the local exchange market. In particular, the
Telecommunications Act requires all ILECs to "unbundle" their local network
offerings and allow other providers of telecommunications services to
interconnect with their facilities and equipment. Most significantly, the
incumbent local exchange carriers will be required to complete local calls
originated by the Company's customers and switched by the Company and to
deliver inbound local calls to the Company for termination to its customers,
assuring customers of unimpaired local calling ability. The Company expects
that it will be able to obtain access to incumbent carrier local "loop"
facilities (the transmission lines connecting customers' premises to the
public switched telephone network) on an unbundled basis at reasonable rates.
In addition, ILECs are obligated to provide local number portability and
dialing parity upon request and make their local services available for
resale by competitors. ILECs also are required to allow competitors
non-discriminatory access to local exchange carrier pole attachments, conduit
space and other rights-of-way. Moreover, states may not erect "barriers to
entry" of local competition, although they may regulate such competition. The
Company believes that, as a result of continued regulatory and technological
changes and competitive trends, competitive local telecommunications
companies have substantial opportunities for growth.
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BUSINESS
THE COMPANY
The Company was founded to create a regional CLEC that provides an
integrated portfolio of telecommunications services principally to business
customers in selected service areas of Southwestern Bell Telephone Company
and U S WEST Communications, Inc. The Company offers long distance, local,
Internet access and cellular service primarily in Kansas, Minnesota,
Nebraska, North Dakota, Oklahoma, South Dakota and Texas and publishes yellow
page directories covering certain markets in Oklahoma and Texas. The Company
seeks to offer a bundle of "one stop" integrated telecommunications services
tailored to its customers' specific requirements and billed on a single
monthly invoice. As of November 30, 1997, the Company provided
telecommunications services to almost 35,000 business customers and over
10,000 residential customers in small to mid-sized markets. The Company has
recently experienced substantial growth in its base of local customers. The
Company's local customer access lines in service grew from approximately
1,000 at June 30, 1997 to approximately 11,000 at September 30, 1997 and
approximately 17,500 at November 30, 1997. In the fiscal year ended December
31, 1996, the Company had pro forma combined revenues of $85.4 million and
EBITDA of $11.5 million. For the nine months ended September 30, 1997, the
Company had pro forma combined revenues of $69.1 million and EBITDA of $8.5
million.
The Company owns and operates six digital tandem switches in Kansas,
Oklahoma, South Dakota and Texas. It also owns a 49% interest in KINNET, the
owner or operator of an approximately 880-route mile fiber optic network and
a Northern Telecom DMS 500 switch in Kansas. KINNET currently has one of the
largest fiber optic networks in the state of Kansas. As part of the KINNET
transaction, the Company made a $10.0 million direct cash investment in
KINNET, $5.0 million of which KINNET has agreed to apply to the buildout in
1998 and 1999 of a 537-mile, $21.5 million network extension from Wichita,
Kansas to the greater Kansas City metropolitan area, with a leg to Tulsa,
Oklahoma, that will provide self-healing redundancy to its fiber optic
network. KINNET has advised the Company that it expects to finance the
balance of the expansion with loan proceeds from the RTFC.
The Company is also an independent publisher of yellow page directories,
and in the twelve months ended November 30, 1997 published approximately 3.1
million copies of its yellow page directories covering 20 markets in Oklahoma
and Texas. These directories contained advertisements for approximately
46,000 business customers. The Company anticipates expanding its yellow page
operations into additional markets in the Region. The Company believes that
the advertisers in its yellow page directories provide a significant
opportunity to cross-sell its bundle of telecommunications services through
its direct sales force of approximately 255 persons, including approximately
40 telemarketers, as of November 30, 1997. Through a strategic relationship
with Feist Publications, Inc., an affiliate of one of the Acquired Companies,
the Company also has the opportunity to cross-sell its telecommunications
services to an additional 29,000 yellow page advertising customers.
The Company is pursuing a growth strategy that it believes will enable it
to minimize its initial capital expenditures relative to many other CLECs
that constructed facilities-based networks at a very early stage in their
development. The Company currently utilizes its own network facilities
combined with the leased network facilities of several long distance
providers and ILECs within the Region, including Southwestern Bell and U S
WEST. By reselling the local service of Southwestern Bell and U S WEST, the
Company has achieved a rapid penetration of the local telephone markets in
Wichita, Kansas and Sioux Falls, South Dakota. Ultimately, the Company will
only construct significant local network infrastructure in those markets
where a critical mass of customers makes it economically justifiable to do
so.
The Company has executed comprehensive local exchange resale agreements
with Southwestern Bell, U S WEST and affiliates of Sprint and GTE covering
eight states within the Region. Additionally, the Company has entered into
agreements with several interexchange carriers to provide "off-net" switching
and network transmission services for its long distance traffic. The Company
has also entered into agreements to resell cellular service in selected areas
in the Region. These agreements allow the Company initially to offer a bundle
of telecommunications services without the necessity of substantial
expenditures for the construction of network facilities.
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The Telecommunications Act of 1996 has created significant opportunities
for telecommunications service providers, particularly regional CLECs.
According to publicly available estimates, in 1996 total revenues from local
and long distance telecommunications services in the United States were
approximately $192.0 billion, of which approximately $107.0 billion were
derived from local exchange services and approximately $85.0 billion from
long distance services. In recent years, these telecommunications service
revenues have grown approximately 6% per year. Although the U.S. long
distance and local exchange industries are dominated by a few companies,
including AT&T, MCI (which has entered into a merger agreement to be acquired
by WorldCom), Sprint, WorldCom and the RBOCs, there are over 5,000 additional
providers of long distance, local and other telecommunications-related
services. In many of the small to mid-sized cities that are the Company's
primary target markets, there are independent telecommunications companies
which have significant market penetration, many of which the Company believes
represent attractive acquisition candidates.
The Company believes that it has significant opportunities to increase its
revenues and reduce elements of its cost structure that were not available to
the Acquired Companies prior to the Acquisitions and the Offering. The
Company's new senior management team brings extensive prior CLEC, ILEC and
public company experience, and its members have held senior operational,
strategic planning, financial and sales positions with their prior employers.
The Company intends to leverage this extensive management experience in the
centralizing of selected areas of operations where it can benefit from its
larger size such as the purchasing of minutes over its leased network and
consolidating its management information, selling and other administrative
functions. The Company also intends to permit the strong management teams of
the Acquired Companies to conduct the customer sensitive aspects of their
operations on a decentralized basis. In order to increase the revenues
provided by its existing customer base, the Company plans to train its sales
force to cross-sell all of the Company's services, with an increased emphasis
on selling local services. The Company believes that a personalized approach
to sales and customer service will enhance its ability to attract and retain
customers who desire the convenience of a fully integrated product offering.
To further enhance its marketing efforts, the Company intends to establish
the "ACG" brand name through co-branding with the established names of the
Acquired Companies.
BUSINESS STRATEGY
The Company's objective is to become a leading provider of integrated
telecommunications services primarily to businesses in Kansas, Minnesota,
Nebraska, North Dakota, Oklahoma, South Dakota and Texas and a significant
provider of such services in Arkansas, Colorado and Montana. The Company
believes that it can achieve its goal of becoming a leading
telecommunications service provider in its target markets by adhering to the
following five-fold strategy:
o Plan Smart -- Focus on small and medium-sized businesses and residential
customers and select vertical market segments in small to mid-sized cities
in the Region. The Company believes that competition from other CLECs and
ILECs is less intense in these areas because, in many cases, the ILECs
have reduced their efforts to serve and defend these territories in
response to the competitive threat in their major market cities. In
addition, by focusing its sales efforts in territories served by ILEC
central offices where collocation is a viable economic alternative, the
Company can build a loyal customer base through the resale of local
services prior to committing to build the infrastructure necessary to
support facilities-based local service.
o Sell Smart --
- Sell into established customer relationships by marketing local
telephone services to the Company's existing yellow page and long
distance customers. Because the Company only recently began to offer
additional telecommunications services to its long distance customers,
only a small portion of these customers has been targeted to subscribe
to the Company's local, Internet access or cellular services. In
addition, the Company has not yet offered its bundle of
telecommunications services to the approximately 75,000 yellow page
customers to which it has access. The Company therefore believes that it
has a substantial reservoir of prospective business customers that is
already familiar with some aspects of the Company's services.
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- Bundle services to bring value to the Company's customers, increase
total revenue per customer, reduce selling costs and minimize customer
churn. The Company currently bundles and bills local, long distance, and
cellular services and believes it can enhance its overall margins by
combining its yellow page and Internet services with these traditional
telecommunications services.
- Offer enhanced services that have less competition and higher margin
potential, such as high speed data transport, Internet access, Web Page
design and support, and integrated voice, data and video communications
services.
o Build Smart -- Predicate growth strategies on the recognition that network
capacity is increasingly becoming a commodity. By first focusing on
acquiring customers through resale of local, long distance, cellular and
Internet services, the Company believes that it can secure customer
relationships, produce a consistent revenue stream, and evolve an economic
strategy for serving customers. The Company's serving strategy includes
not only developing network facilities to directly serve customers, but
also enhancing its OSS to provide network monitoring and control, flow
through provisioning, customer care, and enhanced billing functionality.
During 1998, the Company will resell the network facilities of ILECs to
provide local service to its customers. During 1999 and thereafter, the
Company will continue to focus on reselling local service, while at the
same time implementing a substantial effort to acquire unbundled loops and
local fiber. By interconnecting with the ILEC in the central office and
acquiring unbundled loops, the Company should be able to reduce its cost
of providing service and capture the additional revenue paid by IXCs for
local access. The Company should also be able to further reduce its local
and long distance costs by acquiring rights to local and intercity fiber
and other high bandwidth capacity within the Region. By adding its own
circuit and packet switches to this bandwidth, the Company can add value,
offer new products, and better control the quality of service. Finally,
where economically advantageous, the Company intends to construct fiber
and other network facilities.
o Grow Smart --
- Increase the Company's sales force to rapidly market the Company's
services in all targeted service areas and thereafter to expand into
other areas within the Region. The Company recognizes it has an
opportunity to expand its yellow page base into other market areas as
well as to expand its service offering with World Pages, a specialized
Web site development and hosting service to which ACG has the exclusive
marketing rights in its service area.
- Evaluate attractive acquisition candidates in the Region. The Company
initially intends to target leading local companies whose customers can
be added to the Company's existing network without significant
expenditures for infrastructure additions. By aggregating the traffic of
several companies onto its existing network, the Company expects to
increase the utilization of equipment, consolidate its buying power and
increase its ability to negotiate more attractive contracts with
third-party suppliers of network services.
- Pursue the formation of additional strategic alliances with other yellow
page publishers, utility companies, cooperatives and others in order to
create marketing alliances that give the Company access to large, stable
customer bases in its market areas to which it can sell its bundle of
telecommunications services. The Company currently has a five-year
strategic relationship with FPI, a 20-year publisher of yellow page
directories in 15 markets in the Region. The Company's
telecommunications sales force will have access to FPI's 29,000 yellow
page advertisers in the Region. Because of one of the Acquired
Companies' purchase of PAM COMM, a division of PAM Oil, Inc., the
Company has another strategic relationship that will allow it to solicit
PAM Oil, Inc.'s approximately 15,000 business customers primarily in
Idaho, Minnesota, Montana, North Dakota and South Dakota. Finally, the
Company and Northwestern have entered into an agreement regarding the
possible creation of a strategic alliance that would permit ACG to
market its telecommunications services to that utility's approximately
100,000 electric and natural gas business and residential customers in
South Dakota and Nebraska. See "The Company -- Strategic Relationships."
o Serve Smart -- Provide not only the highest quality customer service but
also become an industry leader in the deployment of innovative technology
and services. The Company believes that by prudently
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using new technology and by offering new services, especially enhanced
data applications, it can become a low cost provider, maintain high value
for its customers and differentiate itself from other commodity providers.
These services will include data transport services such as frame relay,
transparent LAN, Internet content, and other packet-based integrated
multimedia services. Certain members of the Company's senior management
team have considerable experience in developing and deploying these
services.
PRODUCTS AND SERVICES
The Company primarily provides retail telecommunications services
principally to business customers in the Region. Currently, the Company
offers long distance, local, Internet access, cellular and other enhanced
services to customers primarily in Kansas, Minnesota, Nebraska, North Dakota,
Oklahoma, South Dakota and Texas and to a lesser extent in Arkansas, Colorado
and Montana. The Company currently provides its local services on a resale
basis through Southwestern Bell and U S WEST. The Company's other services
include private lines, and the sale, installation and service of telephone
equipment. The Company also publishes yellow page directories serving 23
market areas in Texas, Oklahoma and California.
Long Distance. The Company offers a full range of retail long distance
services, including traditional switched and private line long distance, toll
free (800/888), and operator services, to almost 35,000 business and over
10,000 residential customers. The Company's long distance service is
generally accessed from the customer's location using "1+" dialing, and the
Company primarily targets business customers because of the greater volume
and relatively higher profitability of their business. Residential customers
are desirable, however, because they frequently use the Company's network
during off-peak hours. High volume customers may lease dedicated access lines
in order to reduce their costs of service. Toll-free services are utilized by
customers who have a substantial number of incoming long distance calls.
Local Services. In early 1997, the Company began to resell the local
exchange services primarily of Southwestern Bell and U S WEST. At November
30, 1997, the Company was providing approximately 17,500 local access lines
to customers in Kansas, North Dakota, South Dakota and Texas and was
authorized to resell local service in four other states in the Region. The
Company plans to promptly seek authorization to resell such services in the
remainder of the Region. Once the Company generates a critical mass of
customers in a market area and outstanding regulatory issues are resolved,
the Company may expand its facilities to provide local service over its own
network, supplemented by other local exchange carriers' unbundled facilities.
Cellular Services. As of November 30, 1997 the Company provided cellular
service on a resale basis to more than 2,200 customers in Iowa, Nebraska,
North Dakota and South Dakota.
Telephone Equipment and Maintenance Services. The Company sells and
installs customer premise equipment such as telephones, office switchboard
systems and, to a lesser extent, PBXs, manufactured by Toshiba America
Information Systems, Panasonic, Inc., Harris Corporation and others. As of
November 30, 1997, the Company serviced over 2,800 customers in the Wichita,
Kansas market. The Company intends to offer these services in additional
markets in the future, with the goals of enhancing and supporting the
Company's sale of local and long distance services and facilitating customer
retention.
Wholesale Services. The Company currently resells leased line capacity to
other carriers and owns a 49% interest in KINNET, the owner or operator of an
approximately 880-route mile fiber optic network in Kansas. The Company's
investment in KINNET is accounted for on the equity method of accounting. See
"--Network Facilities and Carrier Agreements -- KINNET."
Yellow Page Publishing. During the twelve months ended November 30, 1997,
the Company produced and distributed an aggregate of approximately 3.1
million copies of 20 annual yellow page telephone directories in Oklahoma and
Texas, including many of the Company's target telecommunications markets.
These locations served include: Alvin/Friendswood/Pearland, Amarillo,
Arlington, Baytown, Clear Lake City, Denton, Fort Worth, Grand Prairie,
Humble/Kingwood, Irving, Killeen, Lufkin/Nacodoches, Northeast Tarrant
County, Pasadena, Temple/Belton, Waco, and Wichita Falls, Texas; Enid, Lawton
and Tulsa, Oklahoma. The Company has published six annual yellow page
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directories in California, including Monterey Peninsula-Salinas, Santa Cruz
and Palo Alto, California. The Company will not continue to publish the other
three directories in California after 1997. The Company is at present
evaluating the publication of additional yellow page directories covering
other portions of the Region, but is contractually prohibited from publishing
a yellow page directory in Oklahoma City or its metropolitan area until after
the fifth anniversary date of the acquisition of Feist Long Distance. The
start-up costs associated with the development of a new directory for a
typical population center are substantial. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Certain Acquired
Companies -- Great Western Directories, Inc." Great Western derives its
revenue primarily from the sale of advertising space in its directories. It
contracts with third parties for the printing of its directories. The Company
believes that the telephone directories provide valuable marketing
opportunities for its bundle of telecommunications services. The Company
intends to utilize Great Western's sales force of approximately 170 direct
sales personnel, including approximately 20 telemarketers, to sell both
advertising space in Great Western's telephone directories and the Company's
telecommunications services.
Enhanced Services. The Company believes that it can significantly increase
its revenues and margins and reduce customer churn by offering enhanced
telecommunications services to its customers. By buying bandwidth in bulk and
acquiring rights to fiber, the Company believes that it can use its own
switching resources to provide multiple services to each individual customer
while at the same time enabling many customers to use the same network
resources simultaneously. In addition, these network resources can be
monitored and controlled effectively from a central location. This efficiency
creates value for the customers and enhanced profitability potential for the
Company. The Company intends to further develop and offer the following
enhanced services:
o Transparent LAN Service -using leased and acquired high bandwidth
networks the Company will provide business customers seamless native
speed point-to-point Ethernet, Token Ring, or other high speed transport
service.
o Fast Packet Service -using its switches and unbundled local loops, tail
circuits, and its intercity capacity, the Company will offer customers
Frame Relay, ATM and other packet services for local point-to-point
connections, intercity connections, or access to national and
international packet switched networks.
o Internet Access -in conjunction with one or more highly qualified
Internet service providers ("ISPs"), the Company will offer Internet
access as a bundled service to its business and residential customers.
The Company may seek to acquire an ISP and thereby provide Internet
content as well as access.
o Web Hosting and Enhanced Internet Business Services -- Great Western is
currently marketing World Pages, a specialized Web Page service, to its
yellow pages customers in its target markets. World Pages provides an
opportunity not only to provide customers with Web page design and
support, but also to expand into Web based advertising and electronic
commerce. The Company will aggressively enhance and market its Web based
product offerings with World Pages as a cornerstone of that service.
o Integrated Communications Services -by early 1999, the Company intends
to market a new type of integrated telecommunications service to small
and medium-sized businesses in the Region. The Company intends to use
advanced packet switching technology to integrate voice, data, and
multimedia onto one network. This service will feature full LAN support
using virtual LAN technology, telephone and video over LAN, local
calling, long distance calling, Internet access, LAN to LAN access for
E-commerce as well as help desk and software upgrade service. Customer
assistance will be expedited with "reach through" technology for
downloading software and trouble resolution. Through central software
management, applications "metering" (paying only for the number of
applications in use) and similar arrangements with software vendors, the
Company expects to enhance the profitability of its integrated
communications services. Full help desk services will be available under
various billing plans as will off-line storage, data image retrieval and
similar services. The foregoing services may be offered in conjunction
with strategic partners.
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o Specialize Vertical Market Applications -because the Company's markets
include many smaller communities, the Company will use its intercity
capabilities to deliver integrated solutions to specially targeted
institutions and businesses. The Company will leverage its expertise in
telephony, data, and network management by partnering or acquiring
companies with specific solutions with high demand in a given market
segment. For example, the Company may seek to partner with a company
offering tele-medicine and records management software by jointly
marketing these services in its serving area. The Company will develop
and support these products through a centralized group.
NETWORK FACILITIES AND CARRIER AGREEMENTS
On-Net. The Company has an extensive communications network within the
Region and upon which the Company can transmit its customer's long distance
calls. The Company's "on-net" facilities consist of (i) the Company's
switches, (ii) leased access trunks that connect the Company's switches to
the ILEC central offices, (iii) leased lines that connect the Company's high
volume business customers directly to its switches, and (iv) leased lines and
access trunks that connect the Company's switches to certain points of
presence and central offices in the Region. Once a long distance call reaches
one of the Company's switches, it can be routed "on-net" over the Company's
network of leased lines to a point of presence in the city of its
destination; or, if the Company does not have an "on-net" connection, the
call can be routed over the network of another carrier from which the Company
purchases access, generally on a usage basis, for the transmission of the
calls on that carrier's system. Transmissions on facilities owned by others
are referred to as "off-net" transmissions.
To provide its services, the Company offers various types of dedicated
fiber optic lines that operate at different speeds and handle varying amounts
of traffic to provide appropriate solutions to its customers' needs.
o DS-0 -- A dedicated line service that meets the requirements of everyday
business communications, with transmission capacity of up to 64 kilobits
of bandwidth per second (a voice grade equivalent circuit). This service
offers a basic low capacity dedicated digital channel for connecting
telephones, fax machines, personal computers and other telecommunications
equipment.
o T-1 or DS-1 -- A high speed channel typically linking high volume
customer locations to ILECs or other customer locations. Used for voice
transmissions as well as the interconnection of local area networks, T-1
or DS-1 service accommodates transmission speeds of up to 1.544 megabits
per second, the equivalent of 24 DS-0 circuits. The Company offers this
high-capacity service for customers who need a larger communications
pipeline.
o DS-3 -- This service provides a very high capacity digital channel with
transmission capacity of 45 megabits per second, which is equivalent to
28 DS-1 circuits or 672 DS-0 circuits. This is a digital service used by
ILECs for central office connections and by some large commercial users
to link multiple sites.
The Company owns and operates six digital switches: one Harris 2020LX
digital tandem and local switch located in Dallas, Texas; three Harris 2020
digital tandem switches located in Sioux Falls, South Dakota; one Northern
Telecom DMS 250 digital tandem switch located in Wichita, Kansas; and one
Stromberg Carlson digital tandem switch located in Oklahoma City, Oklahoma.
Furthermore, KINNET owns a Northern Telecom DMS 500 with local and long
distance switching capability located in Moundridge, Kansas.
Following the Offering the Company believes that it can enhance the
functionality and reduce the costs of its "on-net" facilities by (i)
centralizing network management in a single location, (ii) connecting its
various switches with leased high capacity fiber optic cables to increase
least cost routing flexibility, (iii) installing digital access cross
connects or other types of nodes that permit the Company to access local
exchange carriers' switches without installing a switch and (iv) leveraging
the higher traffic volume of the Acquired Companies to secure rate reductions
on the cost of usage-based leased lines because of materially increased
traffic volume available for transmission over such leased lines.
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Off-net. MCI and WorldCom provide the majority of the Company's long
distance "off-net" transmission services. The Company has two off-net carrier
agreements with one of the Dominant Long Distance Carriers that expire in
February 1998 and September 1999 and provide for minimum monthly commitments
of $225,000 and $200,000, respectively. If the minimum usage level is not
met, an additional amount is due, although the aggregate will not exceed the
monthly minimum. Since the inception of the agreements, the minimum usage
levels under these contracts have been met and the Company has not incurred
any cash payments in lieu of minimum usage requirements under these
contracts. The Company's contracts with these companies contain terms and
conditions that are customary in the industry, do not impose unusual burdens
and can be readily replaced upon comparable terms and conditions by
arrangements with other carriers.
FirstTel entered into a long distance resale agreement with Total Network
Services in July 1996 with an initial term of 24 months. This agreement
provides for a minimum monthly payment obligation of $75,000, rising to
$100,000 per month in the last six months of the agreement. The minimum usage
levels under this contract prior to October 1, 1997 have been waived and
subsequent levels have been reduced to $25,000 per month to the end of the
contract. Through an acquisition, FirsTel has also recently assumed a
take-or-pay contract with WorldCom with a $25,000 per month minimum through
July 1999. The Company has no other take-or-pay contracts.
The Company believes that the aggregate traffic volume of the Acquired
Companies will enable the Company to negotiate more favorable "off-net"
carrier agreements than any individual Acquired Company could negotiate based
upon its individual traffic volume.
KINNET. The Company owns 49% of the outstanding capital stock of KINNET,
the owner or operator of an approximately 880-route mile fiber optic network
in Kansas. KINNET is a carriers' carrier and currently serves 26 counties,
105 communities and over 60,000 end users in Kansas. It also sells private
line services of DS-1 and DS-3 capacity to interexchange carriers, cellular
telephone carriers, independent local telephone companies, business and
government accounts and other long distance telephone service providers such
as the Company. KINNET operates a Northern Telecom DMS 500 switch located in
Moundridge, Kansas. In 1996, this switch provided approximately 104 million
minutes of equal access time or "1+" dialing services for approximately 18
independent local telephone companies in Kansas. KINNET also provides
wholesale termination services for other long distance telephone companies.
Feist Long Distance, one of the Acquired Companies, intends to transfer its
entire customer base of switched long distance minutes to the KINNET switch
after the Offering. KINNET has agreed to apply $5.0 million of the $10.0
million direct cash investment by the Company to the buildout in 1998 and
1999 of a 537-mile, $21.5 million network extension from Wichita, Kansas to
the greater Kansas City metropolitan area with a leg to Tulsa, Oklahoma that
will provide self-healing redundancy to its fiber optic network. KINNET has
advised the Company that it expects to finance the balance of the expansion
with loan proceeds from the RTFC. In 1996, the KINNET network operated at
99.9% reliability. The network is regularly tested and serviced and is
monitored 24 hours per day.
The remaining 51% of KINNET is owned by Liberty, and the shares owned by
Liberty and ACG are subject to a 10-year stockholders' agreement. Under that
agreement ACG is entitled to elect four directors and Liberty is entitled to
elect five directors. After the Offering, KINI, L.C. will continue to manage
KINNET pursuant to a management agreement. KINI, L.C. is owned by, among
others, independent Kansas telephone companies that are significant customers
of KINNET. E. Clarke Garnett, President of KINNET, KINI, L.C. and Liberty,
has agreed to become a director of ACG effective upon the Offering.
SALES AND MARKETING
The Company intends to focus its sales efforts primarily on business
customers in the Region. The Company's marketing strategy is built upon the
belief that small to mid-sized business customers prefer one supplier for all
of their telecommunications services. The Company believes that it can
effectively compete for business customers based upon price, accurate billing
of a bundle of services on a single invoice, quality of service, and existing
relationships with yellow page advertisers of the Company or one of its
strategic partners. The Company's management believes that high quality
training is a prerequisite
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for customer focused selling and superior customer service, and as a result
the Company intends to initiate an intensive training program for each member
of the Company's sales force.
Sales and marketing of the Company's telecommunications services were
conducted, as of November 30, 1997, by approximately 85 direct sales
personnel including approximately 20 telemarketers. As of the same date,
advertising space in the Company's yellow page directories was sold by Great
Western's direct sales force of approximately 170 persons, including
approximately 20 telemarketers, which the Company plans to train to
cross-sell the Company's telecommunications services in conjunction with the
sale of advertising space in its directories. The Company intends in 1998 to
increase its direct sales force by approximately 150 new direct sales
personnel as well as expand its staff of telemarketers. Additional directory
sales personnel will be needed to expand into new markets and also to call on
existing customers, since the marketing of telecommunications services will
increase the length of time of each sales call. The Company's expanded direct
sales force will focus on increasing revenues from existing business
customers by offering an integrated bundle of telecommunications services and
emphasizing the marketing of competitive local service to customers who have
not previously been offered this service.
The Company believes the addition of Great Western's sales force in
selling telecommunications services will greatly enhance the Company's sales
and marketing efforts. It will provide the Company with an immediate presence
in Great Western's markets where it does not yet provide integrated
telecommunications services, but where the Company expects to do so in the
future. The Company's sales force will begin marketing telecommunications
services to existing directory customers in Great Western's current markets,
and as Great Western enters new markets, the sales force will jointly market
directory advertising and telecommunications services. The directories will
contain detailed descriptions of the Company's services, and instructions on
how to order the Company's bundle of services. In effect, the directories
will serve as advertising for the Company's telecommunications services. The
Company believes that directories are commonly used sources of information
that will provide the Company with a long-term marketing presence in the
businesses and residences that receive and review the Great Western
directories.
In addition to the field marketing sales force in the Region, the Company
plans to develop a small group of highly experienced and technologically
proficient major accounts sales persons and sales engineers. This group will
market more complex solutions, including enhanced services, to targeted large
customers in the Region. The Company believes that in this way it can
continue the focus of its local sales forces on the primary target segment of
small and mid-sized businesses while at the same time availing itself of the
opportunity to serve specific large customers.
COMPETITION
Telecommunications
The telecommunications industry is highly competitive. The Company
competes primarily on the basis of pricing, accurate billing of a bundle of
services on a single invoice, quality of service and customer dissatisfaction
with the service provided by existing carriers. The ability of the Company to
compete effectively will depend on its ability to maintain high quality
services at prices generally equal to or below those charged by its
competitors. In particular, price competition in the long distance market has
generally been intense and is expected to increase. Many of the Company's
competitors (such as the Dominant Long Distance Carriers on an interLATA
basis and Southwestern Bell and U S WEST on an intraLATA basis) have
substantially greater financial, personnel, technical, marketing and other
resources, significantly larger numbers of established customers and more
prominent name recognition than the Company and utilize extensive
transmission networks. Certain of the Company's competitors may have lower
overhead cost structures and, consequently, may be able to provide their
services at lower rates than the Company. In addition, the Company will also
increasingly face competition in the long distance market from local exchange
carriers, switchless resellers and satellite carriers and may eventually
compete with public utilities and cable companies. In particular, RBOCs such
as Southwestern Bell and U S WEST are now allowed to provide interLATA long
distance services outside their home regions, as well as interLATA mobile
services within their regions. They will be allowed to provide interLATA long
distance
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services within their regions after meeting certain requirements of the
Telecommunications Act intended to foster opportunities for local telephone
competition. The RBOCs already have extensive fiber optic cable, switching,
and other network facilities in their respective regions that can be used for
their long distance services.
The Company's principal competitor for local exchange services will be the
ILEC in each particular market, including either Southwestern Bell or U S
WEST in virtually all of the Company's initial market areas. The ILECs will
enjoy substantial competitive advantages arising from their historical
monopoly position in the local telephone market, including their preexisting
customer relationship with all or virtually all end users. Furthermore, the
Company will be highly dependent on the competing ILEC for local network
facilities and wholesale services required in order for the Company to
assemble its own local retail products. The Company will also face
competition from CLECs, some of whom have already established local
operations in the Company's target markets.
The Company generally prices its services at a discount to the primary
carrier (or carriers) in each of its target markets. The Company has
experienced, and expects to continue experiencing, declining revenue per
minute in many of its markets as a result of increased competition, although
due to technological innovation and substantial available transmission
capacity, transmission costs in the industry have historically declined at a
more rapid rate than prices. There can be no assurance that this cost trend
will continue. Some industry observers have predicted that, early in the next
decade, telephone charges will no longer be based on the distance a call is
carried and hence the Company's results of operations may be adversely
affected. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Certain Acquired Companies -- Overview of the
Acquired Companies Sources of Revenues and Expenses."
Large long distance carriers, such as some of the Dominant Long Distance
Carriers, have begun to offer both local and long distance telecommunications
services. In addition, ILECs are expected to compete in each other's markets
in some cases. For example, in the future RBOCs may provide local services
within their respective geographic regions in competition with independent
telephone companies, as well as outside their regions. Wireless
telecommunications providers may develop into effective substitutes for
wireline local telephone service. Certain long distance companies are also
considering using this strategy. In addition, if local access carriers expand
their toll free calling areas, traffic which might otherwise have been
carried by the Company as long distance traffic may be carried by the Company
as local traffic, or carried by the other carrier. Utilities companies are
also entering into the telecommunications business. The Company also competes
with numerous direct marketers and telemarketers and equipment vendors and
installers with respect to certain portions of its business.
Yellow Page Directories
Great Western competes for advertising dollars to finance the publication
of its yellow pages directories with the RBOCs, other ILECs and independent
publishers of yellow page directories, many of whom have substantially
greater resources than the Company. Based upon independent surveys, Great
Western believes that between 40% and 60% of the users of yellow page
directories in most of its market areas generally use Great Western's
publications when they consult yellow page directories. The Company believes
that Great Western is among the four largest publishers of independent yellow
page directories in the United States. Southwestern Bell is Great Western's
principal competitor in its market areas.
REGULATION
Overview. The Company's services are subject to federal, state and local
regulation. The Company, through its wholly owned subsidiaries, holds various
federal and state regulatory authorizations. The FCC exercises jurisdiction
over telecommunications common carriers to the extent they provide, originate
or terminate interstate or international communications. The FCC also
establishes rules and has other authority over certain issues related to
local telephone competition. State regulatory commissions retain jurisdiction
over telecommunications carriers to the extent they provide, originate or
terminate intrastate
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communications. Local governments may require the Company to obtain licenses,
permits or franchises in order to use the public rights-of-way necessary to
install and operate portions of its networks.
Federal Regulation. The Company is categorized as a non-dominant carrier
by the FCC, and as a result is subject to relatively limited regulation of
its interstate and international services. Certain general policies and rules
apply (such as a current requirement for the filing of tariffs, which may be
eliminated for domestic interstate service), as well as certain reporting
requirements, but the Company's rates and practices are not routinely
reviewed. Each of ACG and the Acquired Companies engaged in providing long
distance telephone services has obtained or is seeking all authority required
by the FCC to conduct its international long distance business and expects to
have all authority, the lack of which would be material, prior to the
consummation of the Offering. As a non-dominant carrier, the Company may
install and operate wireline facilities for the transmission of domestic
interstate communications without prior FCC authorization.
The FCC also imposes prior approval requirements on transfers of control
of regulated companies and assignments of operating authorizations. The FCC
has the authority generally to condition, modify, cancel, terminate or revoke
operating authority for failure to comply with federal laws or the rules,
regulations and policies of the FCC. Fines or other penalties also may be
imposed for such violations. There can be no assurance that the FCC or third
parties will not raise issues with regard to the Company's compliance with
applicable laws and regulations.
Under the Communications Act of 1934 as amended, and the rules,
regulations and policies of the FCC, the Company is required to provide its
services pursuant to just, reasonable and non-discriminatory rates and
practices. This includes the requirement that the Company's rates for
interexchange service to rural and high cost areas be no higher than those
charged to urban areas and that the same rates for the same interstate
interexchange services be applied in every state in which the Company offers
such communications services. In addition, as a communications common carrier
engaged in the provision of interstate communications, the Company is
required to pay annual regulatory fees to the FCC (in an amount based on its
proportionate share of gross interstate revenues), provide Telecommunications
Relay Service ("TRS") for the hearing and speech impaired in its operating
areas (either directly, through designees, or in concert with other
carriers), and make annual contributions to the TRS Fund (also based upon the
Company's share of gross interstate revenues) and, in the near future, the
Universal Service Fund.
The FCC also regulates the interstate access rates charged by ILECs for
the origination and termination of interstate long distance traffic. Those
access rates make up a significant portion of the cost of providing long
distance service. The FCC has recently announced changes to its interstate
access rules that will result in restructuring of the access charge system
and changes in access charge rate levels. These changes will reduce
per-minute access charges and substitute new per-line flat-rate monthly
charges. These actions are expected to reduce access rates, and hence the
cost of providing long distance service, especially to business customers.
However, the full impact of the FCC's new decisions will not be known until
those decisions are implemented over the next several years, during which
time parties may ask the FCC to reconsider its decision. AT&T has committed
to reduce its long distance rates to reflect access cost reductions, and
other competitors of the Company are likely to make similar reductions. In
such event, the Company may need to reduce its rates in response to
competitive pressures. In a related proceeding, the FCC has adopted changes
to the methodology by which access has been used in part to subsidize
universal telephone service and other public policy goals.
The Telecommunications Act also gives the FCC a substantial role in
establishing rules for the implementation of local telephone competition. The
Telecommunications Act imposes a variety of new duties on ILECs in order to
promote competition in local exchange and access services, and the FCC has
authority to develop rules to implement these duties. Some smaller
independent ILECs may seek suspension or modification of these obligations,
and some companies serving rural areas are exempt from them.
In that regard, on August 8, 1996, the FCC adopted the Interconnection
Decision to implement the interconnection, resale and number portability
provisions of the Telecommunications Act. The Intercon-
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nection Decision established rules pursuant to which ILECs would interconnect
their networks with the networks of CLECs on the basis of reasonable and
non-discriminatory rates. The Interconnection Decision also established rules
governing the rights of CLECs to obtain and use elements of the ILECs'
networks at cost-based rates either to supplement or substitute for
alternative local network facilities that the CLECs would otherwise be
required to install. In addition, the Interconnection Decision sets rules
governing a CLEC's access to wholesale versions of the ILECs' retail local
services for resale. The ILECs were required to establish administrative
support systems so that these services and functionalities could be made
available to other carriers on a nondiscriminatory basis. The Interconnection
Decision also created rules to deal with reciprocal compensation for the
transport and termination of local telecommunications, non-discriminatory
access to rights of way, and related matters. A related FCC order adopted the
same day established rules implementing the Telecommunications Act with
respect to local and toll dialing parity among competitors; nondiscriminatory
access to telephone numbers, operator services, directory assistance and
listings, network information; and reform of numbering administration.
Some of these rules have yet to be implemented, while others have been
struck down on appeal. The Telecommunications Act provides that ILECs and
other carriers will attempt to negotiate interconnection agreements pursuant
to the rules developed by the FCC. Where those negotiations are not
successful, state public utility commissions ("PUCs") act as arbitrators,
subject to the rights of the parties to seek further appeals. To date a
number of interconnection agreements have been negotiated or arbitrated, but
nevertheless important pricing and operational issues remain to be resolved
in future proceedings.
In addition, the U.S. Court of Appeals for the Eighth Circuit has
responded to appeals from the ILECs by vacating certain portions of the
Interconnection Decision, including rules governing the rates that ILECs may
charge for use of their network elements and services. The court had
initially granted a stay of certain provisions of the Interconnection
Decision, including the pricing rules and a rule that would have permitted
new entrants to "pick and choose" among various provisions of existing
interconnection agreements. All other provisions of the Interconnection
Decision and related FCC orders were to remain in effect pending resolution
of the appeal on the merits. Although the judicial stay of the
Interconnection Decision did not prevent the Company from attempting to
negotiate other interconnection agreements with local exchange carriers, it
did create uncertainty about the rules governing pricing, terms and
conditions of interconnection agreements, and could have made negotiating
such agreements more difficult and protracted. The FCC applied unsuccessfully
to the U.S. Supreme Court to vacate the judicial stay, but on July 18, 1997,
the Eighth Circuit issued an opinion which, among other things, held that the
stay had expired. The decision also invalidated key elements of the
Interconnection Decision and stated that the law grants the state
commissions, not the FCC, the authority to determine rates involved in the
implementation of the local competition provisions of the Telecommunications
Act. More specifically, the court overturned the FCC's pricing guidelines,
the "pick and choose" rule, and some portions of the FCC unbundling rules,
including the requirement that ILECs recombine network elements that are
purchased by CLECs on an unbundled basis. The court upheld, however, the
FCC's view of the network elements that ILECs must unbundle, found that
nothing in the Telecommunications Act requires a CLEC to own or control a
telecommunications network before being able to purchase unbundled elements,
and affirmed certain other aspects of the Interconnection Decision. Several
interexchange carriers (including AT&T, MCI and Sprint) filed petitions for
rehearing with the Eighth Circuit, requesting the court to reinstate certain
of the FCC rules that were found unlawful. Various ILECs filed petitions of
their own regarding aspects of the court's decision that they found
objectionable. On October 14, 1997, the court denied the petitions of the
interexchange carriers, granted those of the ILECs and struck down an
additional FCC rule established in the Interconnection Decision that, it
held, would have the effect of permitting a CLEC access to an ILEC's network
elements on a bundled as well as on an unbundled basis. The court's decision
thereby prevented CLECs from acquiring bundled network elements at cost-based
rates, and made only unbundled elements available at those rates. In a
separate decision on August 22, 1997, the Eighth Circuit held that the FCC
exceeded the scope of its jurisdiction by issuing rules concerning dialing
parity that affect essentially intrastate services and local, interstate
calls within a single LATA.
The FCC, AT&T, MCI, Sprint, WorldCom and a large number of CLECs and
others have filed petitions for certiorari requesting the United States
Supreme Court to overturn both of the Eight Circuit's
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decisions. The petitions assert, among other things, that the Eighth Circuit
erred in finding the FCC lacked jurisdiction to promulgate rules implementing
the local competition pricing provisions of the Telecommunications Act of
1996 and in rejecting the "pick and choose" provisions of the FCC's Rules.
There can be no assurance that the stricken portions of the FCC's rules will
be reinstated on appeal or on further consideration by the FCC, or that the
Company will be able to obtain interconnection agreements on terms acceptable
to the Company. There can also be no assurance that the FCC's rules will
prove sufficient, as implemented in the negotiation and arbitration process,
to permit local telephone competition to develop as a general matter. In this
latter regard, on July 2, 1997, SBC Communications Inc. ("SBC"), the parent
of Southwestern Bell, filed suit in United States District Court, Northern
District of Texas (Wichita Falls) challenging the constitutionality of the
Telecommunications Act. SBC alleged that Sections 271 through 275 of the Act,
which govern the entry by a regional holding company ("RHC") into long
distance markets and certain other lines of business, are unconstitutional in
four ways: (i) the sections deny a RHC's First Amendment free speech rights
by imposing a four-year separate subsidiary requirement for entry into
electronic publishing; (ii) the provisions violate the separation of powers
clause by revoking the legally protected monopolies that were established in
the Divestiture; (iii) the sections infringe on the equal protection clause
of the Fifth Amendment by restricting long distance entry for RBOCs and not
their competitors; and (iv) the provisions violate the "Bill of Attainder"
clause by employing legislative means to tread on judicial boundaries and
bring about a loss of civil rights and business opportunities. SBC filed a
motion for summary judgment with the Court on July 30, 1997. SBC's motion
alleged that the Act is "causing irreparable harm, including denial of
significant business opportunities, the loss of customer goodwill and
infringement of First Amendment rights."
On December 31, 1997, the Court granted SBC's motion. The Court found that
the Special Provisions constitute a "bill of attainder" and are therefore
unconstitutional because they (i) identify the Bell Operating Companies
("BOCs") as a specific group; (ii) inflict punishment on that group; and
(iii) do so without giving the BOCs the benefit of a judicial trial. The
Court devoted the bulk of its analysis to the second of these points,
concluding that (a) the Special Provisions are comparable to burdens that the
U.S. Supreme Court has historically identified as punitive (observing that
they prevent the BOCs from entering lucrative markets that are open to their
competitors, and reinstate certain restrictions on BOC activities that were
imposed by the consent decree that broke up AT&T but had long since been
removed); (b) they cannot reasonably be said to further non-punitive
legislative purposes (on grounds that they presume the BOCs' guilt for
anticompetitive conduct that has not yet taken place); and (c) the
legislative history of the Special Provisions evidences an intent to punish
the BOCs (in that the Special Provisions perpetuate constraints on the BOCs
that were imposed by the AT&T consent decree, which was crafted in response
to alleged anticompetitive conduct by AT&T and not by the BOCs themselves).
The Court saw no need to address SBC's equal protection and First Amendment
arguments.
The Court's decision is considered to be controversial by many, and the
United States Department of Justice has joined AT&T, MCI and Sprint in asking
the Court for a stay of the decision's effectiveness pending the filing of an
appeal to the United States Court of Appeals for the Fifth Circuit. In the
meantime, the court has approved a December 30, 1997 request by Bell Atlantic
that it be covered by the effect of the December 31 ruling. The Court has
also rejected the request of Ameritech to join the case, on grounds that it
was filed after the ruling. Most recently, SBC has asked Oklahoma regulators
to decide by late January on SBC's application to offer long distance service
to its local telephone customers in the state.
The Company has executed comprehensive local exchange resale agreements
with Southwestern Bell, U S West, Sprint and GTE covering eight states in the
Region. These agreements do not completely resolve all pricing and
operational issues for the resale of local services or access to the
unbundled network elements. Some of such terms may be affected by legal
proceedings regarding FCC regulatory requirements, the outcome of which will
apply to the industry as a whole. However, the Company believes that these
agreements represent a reasonable initial step in the process of establishing
local service on a commercial basis.
The Company expects to negotiate similar agreements with other ILECs.
However, other carriers who have preceded the Company in the negotiation
process have expressed dissatisfaction with some of
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the terms of their agreements, or with the operational support systems by
which they obtain the interconnection they require to provide local services
to end users. No assurance is possible regarding how quickly or how
adequately the Company will be able to take advantage of the opportunities
created by the Telecommunications Act. The Company could be adversely
affected if the court decision reversing some of the new FCC rules, or
problems in the related arbitration and negotiation process, result in
increasing the cost of using ILEC network elements or services, or if such
actions otherwise resulted in delays in the implementation of the
Telecommunications Act.
In addition, the Company's plans to provide local telephone service are
heavily dependent upon implementation of provisions of the Telecommunications
Act. The Telecommunications Act preempted state and local laws to the extent
that they prohibited local telephone competition, and imposed a variety of
new duties on ILECs intended to advance such competition, including the duty
to negotiate in good faith with competitors requesting interconnection to an
ILEC's network. However, negotiations with ILECs have sometimes involved
considerable delays and the resulting negotiated agreements may not
necessarily be obtained on terms and conditions that are acceptable to the
Company. In such instances, the Company may petition the proper state
regulatory agency to arbitrate disputed issues. There can be no assurance
that the Company will be able to negotiate acceptable new interconnection
agreements with ILECs or that if state regulatory authorities impose terms
and conditions on the parties in arbitration, such terms will be acceptable
to the Company.
The Telecommunications Act also imposes certain duties on non-ILECs, such
as the Company. These duties include the obligation to complete calls
originated by competing carriers under reciprocal arrangements or through
mutual exchange of traffic without explicit payment; the obligation to permit
resale of their telecommunications services without unreasonable restrictions
or conditions; and the duty to provide dialing parity, number portability,
and access to rights of way. The Company does not anticipate that these
obligations will impose a material burden on its operations. However, given
that local telephone competition is still in its infancy and implementation
of the Telecommunications Act has just begun, there can be no assurance in
this regard.
The Telecommunications Act also establishes the foundation for substantial
additional competition to the Company's long distance operations through
elimination or modification of previous prohibitions on the provision of
interLATA long distance services by the RBOCs and General Telephone Operating
Companies. The RBOCs are now permitted to provide interLATA long distance
service outside those states in which they provide local exchange service
("out-of-region long distance service") upon receipt of any necessary state
or federal regulatory approvals that are otherwise applicable to the
provision of intrastate or interstate long distance service. They also are
allowed to provide long distance services for their cellular and other mobile
services within the regions in which they also provide local exchange service
("in-region service"). The RBOCs will be allowed to provide wireline
in-region service upon specific approval of the FCC and satisfaction of other
conditions, including a checklist of interconnection requirements. (Many of
these additional conditions to entry will be eliminated if the Court's
decision in the SBC case discussed above is affirmed on appeal.) The General
Telephone Operating Companies are permitted to enter the long distance market
without regard to limitations by region. The General Telephone Operating
Companies are also subject to the provisions of the Telecommunications Act
that impose interconnection and other requirements on local exchange
carriers.
The FCC has granted ILECs certain flexibility in pricing their interstate
special and switched access services. Under this pricing scheme, local
exchange carriers may establish pricing zones based on access traffic density
and charge different prices for access provided in each zone. The Company
anticipates that the FCC will grant ILECs increasing pricing flexibility as
the number of interconnection agreements and competitors increases. In a
pending rulemaking proceeding scheduled for completion soon, the FCC is
expected to announce new and more specific policies regarding the conditions
and timing under which ILECs will be eligible for such increased pricing
flexibility. There can be no assurance that such pricing flexibility will not
place the Company at a competitive disadvantage, either as a purchaser of
access for its long distance operations, or as a vendor of access to other
carriers or end user customers.
Effective January 1, 1998, ILECs became entitled to assess PICC charges
upon switching a customer's service from one provider to another. At the
present time, the Company expects to pay a blended rate of
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approximately $5.00 per business and residential customer as a PICC charge.
Unless all interexchange carriers elect to pass these charges along to their
customers, those carriers that elect to absorb the PICC charge will enjoy a
competitive advantage over those that attempt to pass the charge along to
their customers. The Company believes that larger carriers will be better
able to absorb the PICC charges over the short term, and hence will enjoy a
competitive advantage until market conditions drive the cost of the PICC
charge to lower levels. The Company will determine whether to absorb or pass
along the PICC charge once it assesses the action taken by its competitors.
Absorption of the PICC charge would increase the Company's cost of providing
telecommunication services and consequently would adversely impact the
Company's results of operations.
State Regulation. The Company is also subject to various state laws and
regulations. Most PUCs require providers such as the Company to obtain
authority from the commission prior to the initiation of service. In most
states, including Texas, Kansas, Oklahoma, North Dakota, South Dakota and
Nebraska, the Company also is required to file tariffs setting forth the
terms, conditions and prices for services that are classified as intrastate.
The Company also is required to update or amend its tariffs when it adjusts
its rates or adds new products, and is subject to various reporting and
record-keeping requirements.
Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply
with state law or the rules, regulations and policies of state regulatory
authorities. Fines or other penalties also may be imposed for such
violations. There can be no assurance that state utilities commissions or
third parties will not raise issues with regard to the Company's compliance
with applicable laws or regulations.
The Company initially will provide CLEC services in the Region through
resale of the retail local services of the respective ILECs. Certain of the
Acquired Companies have obtained CLEC certification in eight states and are
currently reselling local services in portions of Texas, Kansas, North Dakota
and South Dakota. ACG has initiated proceedings to secure regulatory
approvals for the Acquisitions, and expects to have all approvals the absence
of which would be material prior to the consummation of the Offering. The
Company intends to seek CLEC certification in other states throughout the
Region.
Many issues remain open regarding how new local telephone carriers will be
regulated at the state level. For example, although the Telecommunications
Act preempts the ability of states to forbid local service competition, it
preserves the ability of states to impose reasonable terms and conditions of
service and other regulatory requirements. However, these statutes and
related questions arising from the Telecommunications Act will be elaborated
further through rules and policy decisions made by PUCs in the process of
addressing local service competition issues.
The Company also will be heavily affected by state PUC decisions related
to the ILECs. For example, PUCs have significant responsibility under the
Telecommunications Act to oversee relationships between ILECs and their new
competitors with respect to such competitors' use of the ILECs' network
elements and wholesale local services. PUCs arbitrate interconnection
agreements between the ILECs and new competitors such as the Company when
necessary. PUCs are considering ILEC pricing issues in major proceedings now
underway. PUCs will also determine how competitors can take advantage of the
terms and conditions of interconnection agreements that ILECs reach with
other carriers. It is too early to evaluate how these matters will be
resolved, or their impact on the ability of the Company to pursue its
business plan.
States also regulate the intrastate carrier access services of the ILECs.
The Company is required to pay such access charges to such carriers that
originate and terminate its intrastate long distance traffic. The Company
could be adversely affected by high access charges, particularly to the
extent that the ILECs do not incur the same level of costs with respect to
their own intrastate long distance services. A related issue is used by
certain ILECs, with the approval of PUCs, of extended local area calling that
converts otherwise competitive intrastate toll service to local service.
States also are or will be addressing various
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<PAGE>
intraLATA dialing parity issues that may affect competition. It is unclear
whether state utility commissions will adopt changes in their rules governing
intrastate access charges similar to those recently approved by the FCC for
interstate access. The Company's business could be adversely affected by such
changes.
The Company also will be affected by how states regulate the retail prices
of the ILECs with which it competes. The Company believes that, as the degree
of intrastate competition increases, the states will offer the local exchange
carriers increasing pricing flexibility. This flexibility may present the
local exchange carriers with an opportunity to subsidize services that
compete with the Company's services with revenues generated from
non-competitive services, thereby allowing ILECs to offer competitive
services at lower prices than they otherwise could. The Company cannot
predict the extent to which this may occur or its impact on the Company's
business.
Valu-Line has been providing intrastate long distance services to
customers in Arkansas since 1992 without the requisite permit from the state
utility commission. Valu-Line has initiated steps to secure the requisite
permit for such activities and no penalties have been assessed to date. While
the Arkansas regulatory authorities have the power to require the forfeiture
of the revenues generated by Valu-Line's unlicensed intrastate activities in
Arkansas (approximately $270,000 through September 30, 1997), Valu-Line is
endeavoring to negotiate a reduced penalty. The Company is negotiating an
appropriate escrow arrangement with the stockholders of Valu-Line or a
reduction in the purchase price to cover such penalty. See also Notes to
Financial Statements of Feist Long Distance for information relating to a
potential liability of approximately $250,000 arising from the provision of
long distance services in Missouri without the requisite state permits.
Local Government Authorizations. In the event the Company determines to
construct any portion of its network, it will be required to obtain
easements, street use and construction permits and licenses or franchises to
install its network using municipal rights-of-way. In some municipalities
where the Company might elect to construct a network, it might be required to
pay license or franchise fees based on a percentage of gross revenues or on a
per linear foot basis. In many markets, the ILECs do not pay such franchise
fees or pay fees that are substantially less than those that might be
required to be paid by the Company, although the Telecommunications Act
requires that in the future such fees be applied in a competitively neutral
manner. To the extent that, notwithstanding the Telecommunications Act,
competitors do not pay the same level of fees as the Company, the Company
could be at a competitive disadvantage.
General. The telecommunications market is in a period of substantial
change and uncertainty. As the Telecommunications Act and related FCC and
state actions are implemented, new issues are likely to arise that can affect
the Company and its business plan. No assurance can be given that future
regulatory developments will not have a materially adverse impact on the
Company or on the value of the Common Stock.
REAL PROPERTY AND LEASES
The Company leases its corporate headquarters space in St. Louis, Missouri
from an unaffiliated third party on a month-to-month basis.
The Company owns office buildings in Amarillo and Longview, Texas and
leases office space and facilities in Dallas, Texas; Oklahoma City, Oklahoma;
Wichita, Kansas; Sioux Falls, South Dakota and several other locations. The
leases for these offices expire at various times through January 2002.
The Company may lease or purchase additional office space and switching
and other network facilities in connection with an expansion of its business.
EMPLOYEES
As of November 30, 1997, the Company had over 580 full-time employees,
none of whom is represented by a union or covered by a collective bargaining
agreement. The Company believes that its relationship with its employees is
good.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of
ACG's directors and executive officers (ages as of November 30, 1997). The
Board of Directors (the "Board") will consist of twelve directors, divided
into three classes of directors serving staggered terms. Directors and
executive officers of ACG are elected to serve until they resign or are
removed, or are otherwise disqualified to serve, or until their successors
are elected and qualified. Directors of ACG are elected at annual meetings of
the stockholders. Executive officers of ACG generally are appointed by the
Board shortly after each annual meeting of stockholders.
<TABLE>
<CAPTION>
TERM
AS
DIRECTOR
NAME AGE(1) POSITION(S) WITH COMPANY EXPIRES
---- ------ ------------------------ -------
<S> <C> <C> <C>
Richard P. Anthony ............ 49 Chairman of the Board, President and Chief 2000
Executive Officer
James F. Cragg................. 46 Executive Vice President, Sales and Marketing and 1998
Director
William H. Zimmer III ......... 44 Executive Vice President, Chief Financial Officer, 1999
Treasurer, Secretary and Director
Richard O'Neal(2) ............. 57 President--Directory Services Group and Director 1999
Fred L. Thurman(2) ............ 47 President--Telecommunications Services Group and 2000
Director
Todd J. Feist(2) .............. 33 Vice President--Kansas/Telecommunications 1999
Services Group and Director
Rod K. Cutsinger .............. 54 Director 2000
Fentress Bracewell(2)(3)(4)(5). 76 Director 1998
E. Clarke Garnett(2)(3)(6) ... 37 Director 1999
Reginald J. Hollinger(2)(3)(4). 34 Director 2000
David M. Mitchell(2)(4)(6) ... 49 Director 1998
G. Edward Powell(6) ........... 61 Director 1998
</TABLE>
- ------------
(1) No person shall be nominated for election, nor elected, as a director
of ACG if such person (i) has attained the age of 80 as of such
nomination or election, or (ii) will attain the age of 80 prior to the
expiration of the term of office for which he is being nominated or
elected.
(2) Election will become effective on the closing of the Offering, and the
biographical information set forth herein assumes the consummation of
the Offering.
(3) Member of the Nominating Committee.
(4) Member of the Compensation Committee.
(5) Member of the Audit Committee. The Company intends to promptly identify
and appoint two additional independent directors to the Board and the
Audit Committee no later than the 1998 annual meeting of stockholders
in order to satisfy the requirements of the NYSE.
(6) Elected pursuant to an agreement with ACG or certain stockholders. See
"Certain Transactions -- Voting Arrangements."
Richard P. Anthony joined ACG in November 1997 and was elected Chairman of
the Board, President and Chief Executive Officer of ACG in December 1997.
Since 1993, Mr. Anthony had been employed by Brooks Fiber Properties, Inc.
("Brooks Fiber"), a CLEC and a competitive access provider which has recently
entered into a merger agreement to be acquired by WorldCom. Mr. Anthony
joined Brooks Fiber as its seventh employee, and most recently served as
Regional President of one of the two regions of Brooks Fiber. In that
capacity he had responsibility for directing sales, construction and
operations in 25 cities, including Oklahoma City, Tulsa, Houston, Austin,
Dallas, San Antonio, Kansas City and Minneapolis. Mr. Anthony also chaired
the Brooks Fiber Service Delivery Committee which was concerned with defining
the business practices and recommending changes to the operational support
systems supporting order processing, billing, provisioning, as well as
network monitoring and asset
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administration. Earlier, from March 1993 until August 1996, Mr. Anthony was
Brooks Fiber's Senior Vice President of Marketing and Strategy. From 1991
until 1993, Mr. Anthony was Senior Vice President of Strategy, Marketing and
Network of Intermedia Communications of Florida, Inc. ("ICI"), a competitive
access provider that completed its initial public offering in 1992. From 1989
through 1990, Mr. Anthony was Director, Data Communications, of Telcom USA, a
large long distance company. From 1987, when ICI began operation, to 1989,
Mr. Anthony was Vice President of Strategy, Marketing and Sales of ICI. Mr.
Anthony had spent a number of years in the telecommunications industry prior
to that time.
James F. Cragg was elected Executive Vice President, Sales and Marketing
and Director in December 1997. Since January 1997 Mr. Cragg had been employed
by Brooks Fiber. Mr. Cragg most recently served as Acting Regional President,
Eastern Region, and also as General Manager and Regional Vice President,
Mid-America Region. In these capacities, he had responsibilities for
directing sales, construction and operations in Kansas, Minnesota, Missouri
and Tennessee. From 1995 to 1996, Mr. Cragg was Senior Vice President,
Business Markets for Snyder Communications Inc., an integrated marketing
company. In this capacity, Mr. Cragg was responsible for managing a large
outsourced sales channel (staffed by 650 sales representatives speaking 22
foreign languages) representing MCI Business to Business Sales as an agent to
MCI. From 1994 to 1995, Mr. Cragg was a Director of Sales and Marketing for
Ernst & Young. From 1983 to 1994, Mr. Cragg held various responsibilities at
MCI. His last position at MCI was Director of Sales and Service, Mid-America
Region.
William H. Zimmer III was elected Executive Vice President, Chief
Financial Officer, Treasurer Secretary and a Director of ACG in December
1997. Since 1991 Mr. Zimmer had been employed as Treasurer and Secretary of
Cincinnati Bell Inc., ("CBI"), the holding company of an incumbent local
exchange carrier. For more than nine years prior to that time, he served in a
variety of finance positions with CBI. As Secretary and Treasurer of CBI, Mr.
Zimmer was primarily responsible for that company's corporate financings,
risk management, trust asset management, cash management, corporate
investments and rating agency and exchange relationships. Mr. Zimmer has
agreed to facilitate an orderly transition of his duties at CBI by consulting
at mutually convenient times with officials of CBI through the first quarter
of 1998.
Richard O'Neal is President -- Directory Services Group and a Director of
ACG. He founded Great Western in 1984 and has served as its President since
that time. Mr. O'Neal also has served as an officer and director of several
publishing organizations such as the Yellow Page Publishers Association and
the Association of Directory Publishers, two of the largest organizations in
that industry.
Fred L. Thurman is President -- Telecommunications Services Group and a
Director of ACG. He has been President of FirsTel since April 1994. Prior to
that time he served as a consultant to FirstTel for six months. Between 1984
and 1989, Mr. Thurman provided accounting, tax and management advisory
services as a certified public accountant to Dial-Net, Inc., a long distance
telephone company, which was acquired by LDDS, Inc. in 1993. Since 1979 Mr.
Thurman has also been a partner in Thurman, Comes, Foley & Co. LLC, a public
accounting firm in Sioux Falls, South Dakota, but in the last several years
has not been active in the practice.
Todd J. Feist is Vice President -- Kansas/Telecommunications Services
Group and a Director of ACG. He has been President of Feist Long Distance
since February 2, 1996. Prior to that time he had been Network Manager for
Feist Long Distance since April 1, 1994 and before that date had been
Distribution Manager of Feist Publications, Inc. in Lubbock, Texas since
1987.
Rod K. Cutsinger has been a Director of ACG and its predecessor since the
organization of its predecessor in June 1996 and served as Chairman and Chief
Executive Officer from June 1996 until Mr. Anthony assumed those positions in
December 1997. Mr. Cutsinger, the founder of ACG, developed the Company's
initial acquisition strategy and successfully negotiated the definitive
acquisition agreements with the Acquired Companies. In early 1983 Mr.
Cutsinger founded Advanced Telecommunications Corporation ("ATC") and by the
end of that year ATC had acquired six companies and completed an initial
public offering. After selling his interest in ATC, in 1986 Mr. Cutsinger
founded American Funeral Services, Inc. ("AFS"), a publicly held death care
company headquartered in Houston, Texas. In late 1992 AFS was acquired by
Service Corporation International. Thereafter, Mr. Cutsinger founded and
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served as the principal officer of Vadacom, Inc., a switched based long
distance company headquartered in Houston, that sold substantially all its
assets in 1995. See "Certain Transactions -- Additional Background
Information." Mr. Cutsinger is also an executive officer, director and equity
interest owner of CPFF and Consolidation Partners.
Fentress Bracewell is primarily engaged in managing his personal
investments in Houston. Prior to his retirement in 1991, Mr. Bracewell was a
Senior Partner in the law firm of Bracewell & Patterson, L.L.P., having been
one of the founders of that firm in 1945. Mr. Bracewell remains a Founding
Partner and Special Counsel of Bracewell & Patterson, L.L.P., although he has
no continuing equity participation in that firm. He also serves as a director
of First Investors Financial Services, Inc., an automobile finance company.
E. Clarke Garnett has served as President of KINNET, KINI and Liberty,
(the owner of 51%, after the Offering and prior owner of 100% of the
outstanding capital stock of KINNET), since November 1996. Prior to that
time, he had served as an Executive Vice President of these three companies
since May 1994 and as Executive Director since September 1992. Between 1990
and 1992, Mr. Garnett was the General Manager, Western Region, of CommNet
Cellular, Inc.
Reginald J. Hollinger is a Managing Director and Group Head of the
Telecommunications Investment Banking Group at PaineWebber Incorporated, one
of the Representatives of the Underwriters. Mr. Hollinger serves as a member
of the Investment Banking Division's Management Committee. Prior to joining
PaineWebber in 1997, Mr. Hollinger worked at Morgan Stanley & Co.
Incorporated for eight years and was most recently a Principal focusing
exclusively on the telecommunications industry. Mr. Hollinger has a wide
range of corporate finance and mergers and acquisitions experience in the
telecommunications industry.
David M. Mitchell has been engaged primarily as an investor in the
telephone business since 1982 when he founded National Telephone Exchange of
Temple, Texas. Mr. Mitchell sold this and two other telephone companies in
1991 to U.S. Long Distance. Mr. Mitchell owned a 50% interest in Valu-Line at
the time Valu-Line was acquired by the Company.
G. Edward Powell served as Executive Vice President, Chief Financial
Officer and Director of ACG and its predecessor between July and December
1997, after having acted as a consultant to and a director of ACG's
predecessor since September 1996. Mr. Powell joined the accounting firm of
Price Waterhouse LLP in 1959 and served as managing partner of that firm's
Houston office between 1982 and his retirement in 1994. Since his retirement,
Mr. Powell has served as a director of and consultant to five emerging high
technology companies in addition to his involvement with the Company.
OTHER VICE PRESIDENTS
The following table sets forth certain information regarding other Vice
Presidents of Services Groups of ACG who are not considered executive
officers:
<TABLE>
<CAPTION>
NAME AGE VICE PRESIDENT (1)
---- --- -------------------
<S> <C> <C>
Brad Van Leur ..... 41 Marketing/Telecommunications Services Group
Donald R. Sarchet 48 Networks/Telecommunications Services Group
Bill Rhodes ....... 49 Texas/Telecommunications Services Group
Earle Brown ....... 40 Interconnect/Telecommunications Services Group
Larry Baldwin ..... 52 Operations/Directory Services Group
Mark Fields ....... 33 Finance/Directory Services Group
Max Andrews ....... 39 Marketing/Directory Services Group
</TABLE>
- ------------
(1) Election will become effective upon the closing of the Offering, and
the biographical information set forth below assumes the consummation
of the Offering.
Brad Van Leur is Vice President -- Marketing/Telecommunications Services
Group of ACG. Mr. Van Leur has been Vice President Sales & Marketing for
FirsTel since 1995, and between 1993 and 1995 served
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<PAGE>
as FirsTel's consultant for long distance. From 1989 to 1993, he served as
regional sales manager for North Dakota, South Dakota, Minnesota, Iowa and
Nebraska for Dial Net, and in 1993 he also served as Director of Operations
in South Dakota for LDDS/WorldCom. From 1987 to 1989 he was Sales Manager for
South Dakota for Computel, a long distance and interconnect company, which
was acquired by Dial Net in 1989. From 1985 to 1987 he served in various
positions for Long Line/Teletech, a long distance company.
Donald R. Sarchet is Vice President -- Networks/Telecommunications
Services Group of ACG. Since 1992, Mr. Sarchet has been Vice President,
Network Operations of Valu-Line. Between 1989 and 1992, he served as Area
Manager -- Field Operations -- North of ATC. From 1984 to 1989, Mr. Sarchet
served in various positions with Clay Desta Digital Corporation. Clay Desta
was acquired by ATC in 1989. Prior to that time, from 1966 to 1982, Mr.
Sarchet served in various positions with Southwestern Bell, including as
Network Service Supervisor in several locations.
Bill Rhodes is Vice President -- Texas/Telecommunications Services Group.
He has been President of Valu-Line since April 1996. Prior to that time, Mr.
Rhodes was employed by Rockwell International, Inc. for more than 20 years in
various engineering, program management, marketing and business development
executive capacities.
Earle Brown is Vice President -- Interconnect/Telecommunications Services
Group. He has served as President of Tele-Systems since January 1995 and
prior to that time had served as Vice President-Operations of Tele-Systems
since November 1989.
Larry Baldwin is Vice President -- Operations/Directory Services Group.
Mr. Baldwin has served as Great Western's Executive Vice President, Secretary
and Treasurer since its inception in 1984. Prior to that time he was involved
in instant printing operations in Amarillo, Texas.
Mark Fields is Vice President -- Finance/Directory Services Group. Mr.
Fields has been Controller of Great Western since December 1994. From August
1990 until December 1994, he was a Manager with KPMG Peat Marwick LLP.
Between August 1987 and August 1990, he was a Senior Auditor for Deloitte &
Touche.
Max Andrews is Vice President -- Marketing/Directory Services Group. Mr.
Andrews, whose sales experience dates back to 1982, has been a sales manager
with Great Western since January 1994; most recently having served as the
General Sales Manager for Texas and Oklahoma. From January 1989 to December
1993, he was a district sales manager for Dun & Bradstreet/Donnelley
Information Publishing in San Diego, California.
DIRECTOR COMPENSATION
Directors of ACG who are also employees of the Company receive no
directors' fees but are eligible to receive, and have received, grants of
stock options under the Company's 1997 Stock Awards Plan. Non-employee
directors receive fees of $1,000 for each board meeting in which they
participate, are reimbursed for reasonable out-of-pocket travel expenditures
incurred and receive options to purchase shares of Common Stock pursuant to
the Directors' Plan upon election to the Board.
In October 1997 ACG adopted the Directors' Plan. The Directors' Plan
provides for the grant of stock options to non-employee directors of the
Company. The Directors' Plan is administered by the Board of Directors and
authorizes the grant of options to purchase up to 300,000 shares of Common
Stock for issuance as nonqualified options. Each director of the Company who
is not an employee of the Company or any of the Company's subsidiaries (an
"Eligible Director"), is granted options to acquire 15,000 shares of Common
Stock on the first to occur of the date of consummation of the Offering or
the date of such director's first election to the Board. Additional options
to acquire 5,000 shares of Common Stock will thereafter be awarded to each
Eligible Director on the date of the annual meeting of stockholders at which
he or she is reelected to serve an additional three-year term as a Director
of the Company. As of the date of the consummation of the Offering, each of
Messrs. Fentress Bracewell, Rod K. Cutsinger, E. Clarke Garnett, Reginald J.
Hollinger, G. Edward Powell and David M. Mitchell will be granted options to
purchase 15,000 shares of Common Stock pursuant to the Directors' Plan at the
initial public offering price. The option will vest in equal annual
installments on the first, second and third anniversaries of the consummation
of the Offering.
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EXECUTIVE COMPENSATION
Neither ACG nor its predecessor has conducted any operations other than
related to the Acquisitions and the Offering, and ACG's predecessor did not
pay any compensation prior to June 1996. The Company anticipates that during
1997 its most highly compensated executive officer and his annualized base
salary will be Mr. Rod K. Cutsinger (who served as Chairman and Chief
Executive Officer until Mr. Richard P. Anthony assumed those positions in
December 1997) -- $300,000. Mr. Cutsinger is no longer an officer or employee
of ACG. In lieu of cash compensation from the Company, Mr. G. Edward Powell
(who served as Executive Vice President and Chief Financial Officer of the
Company until Mr. William H. Zimmer III assumed the position of Executive
Vice President, Chief Financial Officer, Treasurer and Secretary in December
1997) was afforded the opportunity to purchase an aggregate of 100,000 shares
of common stock of the Company's predecessor in October 1996 and January 1997
for an aggregate cash consideration of $5,000. In addition to Messrs.
Anthony, Cragg and Zimmer, who served in their positions for a brief period
in 1997, the only other person to serve as an officer of the Company during
1997 was Brad K. Cutsinger, the son of Rod K. Cutsinger, who is no longer
employed by ACG. No executive officer of ACG's predecessor received
perquisites in 1997, the value of which exceeded the lesser of $50,000 or 10%
of the salary and bonus of such executive.
The persons expected to be the five most highly compensated executive
officers of ACG in 1998 and their expected base salaries are:
<TABLE>
<CAPTION>
EXPECTED
NAME TITLE BASE SALARY
---- ----- -----------
<S> <C> <C>
Richard P. Anthony ... Chairman of the Board, President and Chief $250,000
Executive Officer
James F. Cragg ........ Executive Vice President, Sales and 175,000
Marketing
William H. Zimmer III Executive Vice President, Chief Financial 185,000
Officer, Secretary and Treasurer
Richard O'Neal ........ President--Directory Services Group 300,000
Fred L. Thurman ....... President--Telecommunications Services 175,000
Group
</TABLE>
EMPLOYMENT AGREEMENTS
Mr. Richard P. Anthony has entered into a six-year employment agreement
with the Company providing for his employment as Chairman of the Board,
President and Chief Executive Officer of the Company at an annual base salary
of $200,000, increasing to $250,000 after February 1, 1998, with a bonus
potential equal to 50% of base salary. The agreement provides for a one time
$50,000 cash bonus that was paid in December 1997, ten-year options to
purchase 150,000 shares of Common Stock at $2.50 per share which vest three
months after the date of grant, and ten-year options to purchase 350,000
shares of Common Stock at the initial public offering price which vest in
three equal increments on the first three anniversaries of the date of grant.
The agreement also provides for the grant of options to purchase up to 75,000
shares of Common Stock each year at the current market price on the date of
grant, if certain targets set by the Compensation Committee are met. Mr.
Anthony's options vest upon (i) his death or disability, (ii) his resignation
following a change of control, or (iii) the termination of his employment
other than "with cause," as defined in his employment agreement. In the event
Mr. Anthony resigns after a change in ownership or management of the Company
which significantly alters his job responsibilities or compensation, he will
be entitled to his base salary for a period of two years. Unless either Mr.
Anthony so resigns or the Company terminates his employment "with cause," as
defined in the employment agreement, Mr. Anthony will be entitled to his base
salary for a one year period upon his termination. The employment agreement
also provides for a one year post-termination noncompetition obligation that
is extended to three years upon his voluntary resignation under circumstances
that do not involve a change in control.
Mr. James F. Cragg has entered into a six-year employment agreement with
the Company providing for his employment as Executive Vice President,
Marketing and Sales at an annual base salary of $175,000 with a bonus
potential equal to 100% of base salary. The agreement provides for a one-time
$100,000 cash bonus that was paid in December 1997, ten-year options to
purchase 150,000 shares of Common Stock at $2.50 per share which vest three
months after the date of grant, and ten-year options to purchase 275,000
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shares of Common Stock at the initial public offering price which vest in
three equal increments on the first three anniversaries of the date of grant.
The agreement also provides for the grant of options to purchase up to 50,000
shares of Common Stock each year at the current market price on the date of
grant, if certain targets set by the Compensation Committee are met. Mr.
Cragg's options vest upon (i) his death or disability, (ii) his resignation
following a change of control, or (iii) the termination of his employment
other than "with cause," as defined in his employment agreement. In the event
Mr. Cragg resigns after a change in ownership or management of the Company
which significantly alters his job responsibilities or compensation, he will
be entitled to his base salary for a period of two years. Unless either Mr.
Cragg so resigns or the Company terminates his employment "with cause," as
defined in the employment agreement, Mr. Cragg will be entitled to his base
salary for a one year period upon his termination. The employment agreement
also provides for a one year post-termination noncompetition obligation that
is extended to three years upon his voluntary resignation under circumstances
that do not involve a change in control.
Mr. William H. Zimmer III has entered into a six-year employment agreement
with the Company providing for his employment as Executive Vice President,
Chief Financial Officer, Secretary and Treasurer at an annual base salary of
$185,000, with a bonus potential equal to 50% of base salary. The agreement
provides for a one time $50,000 cash bonus that was paid in December 1997,
ten-year options to purchase 350,000 shares of Common Stock at the initial
public offering price which vest in three equal increments on the first three
anniversaries of the date of grant. The agreement also provides for the grant
of options to purchase up to 50,000 shares of Common Stock each year at the
current market price on the date of grant, if certain targets set by the
Compensation Committee are met. Mr. Zimmer's options vest upon (i) his death
or disability, (ii) his resignation following a change of control, or (iii)
the termination of his employment other than "with cause," as defined in his
employment agreement. In the event Mr. Zimmer resigns after a change in
ownership or management of the Company which significantly alters his job
responsibilities or compensation, he will be entitled to his base salary for
a period of two years. Unless either Mr. Zimmer so resigns or the Company
terminates his employment "with cause," as defined in the employment
agreement, Mr. Zimmer will be entitled to his base salary for a one year
period upon his termination. The employment agreement also provides for a one
year post-termination noncompetition obligation that is extended to three
years upon his voluntary resignation under circumstances that do not involve
a change in control.
In addition, Messrs. O'Neal, Feist and Thurman have entered into three,
five and five-year employment agreements with the respective Acquired
Companies of which they are president that provide for base salaries of
$300,000, $110,000 and $175,000, respectively, and a bonus potential ranging
from 50% to 63% of base salary. In the event that the Company terminates Mr.
O'Neal's employment other than for cause (as defined in his agreement) or in
the event that Mr. O'Neal resigns under circumstances that he reasonably
believes were contrived by Great Western to force his resignation, or after a
change in control of the Company, Mr. O'Neal shall be entitled to continue to
receive his base salary until the scheduled expiration date of his employment
agreement. Mr. Thurman shall be entitled to receive one year's salary in the
event his employer terminates him for a reason other than with cause (as
defined in his agreement) and two years' salary in the event that he resigns
following a change in control of his employer. Mr. Feist is entitled to
receive six months salary in the event his employer terminates him for a
reason other than with cause (as defined in his agreement) and one year's
salary in the event that he resigns following a change in control of his
employer. These agreements contain three-year noncompetition covenants. Mr.
Feist is also entitled to receive a bonus of $50,000 upon consummation of the
Offering.
See "Option Grants" for information relating to stock options awarded to
Messrs. O'Neal, Feist and Thurman.
1997 STOCK AWARDS PLAN
In October 1997, the Board adopted and the stockholders subsequently
approved the Plan in substitution of a substantially identical plan which its
predecessor had adopted earlier in the year. The Plan is intended to provide
key employees with an opportunity to acquire a proprietary interest in the
Company and additional incentive and reward opportunities based on the
profitable growth of the
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Company and to aid the Company in attracting and retaining outstanding
personnel. The Plan provides for the granting of options (either incentive
stock options within the meaning of Section 422(b) of the Code, or options
that do not constitute incentive stock options ("nonqualified stock
options")), restricted stock awards, stock appreciation rights, performance
awards, and phantom stock awards, or any combination thereof. The Plan covers
an aggregate of 3,500,000 shares of Common Stock (subject to certain
adjustments in the event of stock dividends, stock splits and certain other
events).
Administration. The Plan was administered by the entire Board prior to the
closing of the Offering and will be administered by the Compensation
Committee of the Board thereafter. The Compensation Committee has the power
to determine which employees will receive an award, the time or times when
such award will be made, the type of the award and the number of shares of
Common Stock to be issued under the award or the value of the award. Only
persons who at the time of the award are key employees of the Company or of
any subsidiary of the Company are eligible to receive an award under the
Plan.
Options. The Plan provides for two types of options: incentive stock
options and nonqualified stock options. The Compensation Committee will
designate the key employees to receive the options, the number of shares
subject to the options, and the terms and conditions of each option granted
under the Plan. The term of any option granted under the Plan shall be
determined by the Compensation Committee; provided, however, that the term of
any incentive stock option cannot exceed ten years from the date of the grant
and any incentive stock option granted to an employee who possesses more than
10% of the total combined voting power of all classes of stock of the Company
or of its subsidiary within the meaning of Section 422(b)(6) of the Code must
not be exercisable after the expiration of five years from the date of grant.
No option may be exercised earlier than six months from the date of grant.
The exercise price per share of Common Stock of options granted under the
Plan will be determined by the Compensation Committee; provided, however,
that an incentive stock option exercise price cannot be less than the fair
market value of a share of Common Stock on the date such option is granted
(subject to adjustments). Further, the exercise price of any incentive stock
option granted to an employee who possesses more than 10% of the total
combined voting power of all classes of stock of the Company or of its
subsidiaries within the meaning of Section 422(b)(6) of the Code must be at
least 110% of the fair market value of the share at the time such option is
granted. The exercise price of options granted under the Plan will be paid in
full in a manner prescribed by the Compensation Committee.
Restricted Stock Awards. Pursuant to a restricted stock award, shares of
Common Stock may be issued to employees without any cash payment to the
Company, except to the extent otherwise provided by the Compensation
Committee or required by law; provided, however, that such shares will be
subject to certain restrictions on the disposition thereof and certain
obligations to forfeit such shares to the Company as may be determined in the
discretion of the Compensation Committee. The restrictions on disposition may
lapse based upon (a) the Company's attainment of specific performance targets
established by the Compensation Committee that are based on (i) the price of
a share of Common Stock, (ii) the Company's earnings per share, (iii) the
Company's revenue, (iv) the revenue of a business unit of the Company
designated by the Committee, (v) the return on stockholders' equity achieved
by the Company, or (vi) the Company's pre-tax cash flow from operations, (b)
the grantee's tenure with the Company, or (c) a combination of both factors.
The Company retains custody of the shares of Common Stock issued pursuant to
a restricted stock award until the disposition restrictions lapse. An
employee may not sell, transfer, pledge, exchange, hypothecate, or otherwise
dispose of such shares until the expiration of the restriction period.
However, upon the issuance to the employee of shares of Common Stock pursuant
to a restricted stock award, except for the foregoing restrictions, such
employee will have all the rights of a stockholder of the Company with
respect to such shares, including the right to vote such shares and to
receive all dividends and other distributions paid with respect to such
shares.
Stock Appreciation Rights. A stock appreciation right permits the holder
thereof to receive an amount (in cash, Common Stock, or a combination
thereof) equal to the number of stock appreciation rights exercised by the
holder multiplied by the excess of the fair market value of Common Stock on
the exercise date over the stock appreciation rights' exercise price
(generally the fair market value of the Common Stock on the date of grant).
Stock appreciation rights may or may not be granted in connection
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with the grant of an option and no stock appreciation right may be exercised
earlier than six months from the date of grant. A stock appreciation right
may be exercised in whole or in such installments and at such time as
determined by the Compensation Committee.
Performance and Phantom Stock Awards. The Plan permits grants of
performance awards and phantom stock awards, which may be paid in cash,
Common Stock, or a combination thereof as determined by the Compensation
Committee. Performance awards granted under the Plan will have a maximum
value established by the Compensation Committee at the time of the grant. A
grantee's receipt of such amount will be contingent upon satisfaction by the
Company, or any subsidiary, division or department thereof, of future
performance conditions established by the Compensation Committee prior to the
beginning of the performance period. Such performance awards, however, are
subject to later revisions as the Compensation Committee deems appropriate to
reflect significant unforeseen events or changes. A performance award will
terminate if the grantee's employment with the Company terminates during the
applicable performance period except as otherwise provided by the
Compensation Committee at the time of grant. Phantom stock awards granted
under the Plan are awards of Common Stock or rights to receive amounts equal
to share appreciation over a specific period of time. Such awards vest over a
period of time or upon the occurrence of a specific event(s) (including,
without limitation, a change of control ) established by the Compensation
Committee, without payment of any amounts by the holder thereof (except to
the extent required by law) or satisfaction of any performance criteria or
objectives. A phantom stock award will terminate if the grantee's employment
with the Company terminates during the applicable vesting period or, if
applicable, the occurrence of a specific event(s), except as otherwise
provided by the Compensation Committee at the time of grant. In determining
the value of performance awards or phantom stock awards, the Compensation
Committee must take into account the employee's responsibility level,
performance, potential, other awards under the Plan, and other such
consideration as it deems appropriate. Such payment may be made in a lump sum
or in installments as prescribed by the Compensation Committee. Any payment
made in Common Stock will be based upon the fair market value of the Common
Stock on the payment date.
Option Grants. In mid-1997, the Board of Directors of the Company's
predecessor granted ten-year options to purchase 350,000 shares and 175,000
shares of its common stock to Messrs. G. Edward Powell and Brad K. Cutsinger,
respectively, at an exercise price of $2.50 per share. One-third of these
options vested immediately and the balance vested in equal increments on the
first and second anniversaries of the date of grant and would have been
accelerated in the event of a change in control of the Company. In mid-1997,
the Board of the Company's predecessor granted a similar option to Todd J.
Feist covering 250,000 shares of its common stock upon his employment by an
acquisition subsidiary of the Company. In December 1997 Mr. Feist exchanged
this option for a substantially identical option to purchase 250,000 shares
of Common Stock issued under the Plan. Prior to the consummation of the
Offering, Messrs. Powell and Brad Cutsinger also exchanged their options for
ten-year, fully vested warrants to purchase a like number of shares of Common
Stock at the same exercise price. In late 1997, the Company granted options
to purchase an aggregate of 1,275,000 shares of Common Stock to Messrs.
Richard P. Anthony, James F. Cragg and William H. Zimmer III as described
under "--Employment Agreements." Contemporaneously with the closing of the
Offering, the Board intends to grant (i) five year options to purchase
150,000 shares, and 100,000 shares, respectively, to Richard O'Neal and Fred
L. Thurman, and (ii) an aggregate of approximately 500,000, shares of Common
Stock to the other officers and employees of various Acquired Companies at an
exercise equal to the initial public offering price per share. These options
will vest in equal increments over three to five year periods from the date
of grant.
COMPREHENSIVE REVIEW OF BENEFITS PLAN
Following the Offering, the Compensation Committee will engage a qualified
executive compensation consulting firm to evaluate the Company's overall
compensation program for officers and directors and assist that committee in
developing and implementing a program that properly motivates and rewards the
program participants in a manner that is consistent with prevailing industry
standards.
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CERTAIN TRANSACTIONS
THE ACQUISITIONS
Simultaneously with the consummation of the Offering, ACG will acquire by
merger, stock purchase or asset acquisition a 49% interest in KINNET and all
of the issued and outstanding stock (or in four cases, substantially all of
the assets) of the Acquired Companies and its predecessor, at which time each
Acquired Company and ACG's predecessor will become a wholly-owned subsidiary
of the Company. The aggregate consideration to be paid by ACG in the
Acquisitions includes approximately $83.3 million in cash, 3,166,467 shares
of Common Stock (assuming an initial public offering price of $15.00 per
share), $17.4 million in promissory notes and 1,413,986 warrants or options
to purchase Common Stock. Of the aggregate consideration, $30.8 million, $0.2
million, $3.3 million and $1.4 million in cash, will be paid to Messrs.
O'Neal, Feist, Mitchell and Thurman, respectively, 373,334, 66,667, 173,334
and 178,021 shares of Common Stock will be issued to Messrs. O'Neal, Feist,
Mitchell and Thurman, respectively; $8.4 million in subordinated notes will
be issued to Mr. O'Neal; $552,983 in convertible subordinated notes will be
issued to Mr. Thurman; and 280,000 and 13,513 five-year non-transferable
warrants to purchase Common Stock at the initial public offering price will
be issued to Mr. O'Neal and Mr. Thurman, respectively.
As part of this consideration, on June 16, 1997, ACG's predecessor issued
to the five stockholders of Great Western, as consideration for their
execution of a definitive acquisition agreement, three series of
non-transferable, ten-year warrants to purchase an aggregate of 776,851
shares of Common Stock at an exercise price of $6.44 per share, subject to
adjustment to protect against dilution. The warrants of each series become
exercisable upon the first, second and third anniversary dates of the
consummation of the Offering. Of these, Mr. O'Neal received warrants to
purchase an aggregate of 582,638 million shares of Common Stock.
For a description of the terms of the Acquisitions, the consideration
payable and certain other matters, see "The Company -- Summary of Terms of
the Acquisitions."
OTHER ORGANIZATIONAL MATTERS
CPFF was organized in June 1996 with a five-year term for the purpose of
financing consolidating transactions identified by Rod K. Cutsinger,
including a possible transaction in the telecommunications industry. CPFF has
two classes of equity interests: Class A interests and Class B interests. The
holders of the Class A interests have no right to vote for the election and
management of CPFF, such rights having been vested in the holders of the
Class B Interests. CPFF was capitalized in September 1996 upon (i) the sale
of an aggregate of $1,520,000 in Class A interests for cash to a limited
number of investors, including $50,000 in Class A interests to G. Edward
Powell, (ii) the issuance of $350,000 in Class A interests to Rod K.
Cutsinger in exchange for his contribution of certain intangible personal
property, including business plans, confidentiality agreements,
organizational documents and economic projections relating to several
consolidating company opportunities, (iii) the issuance of $250,000 in Class
A interests to Rod K. Cutsinger in exchange for $5,000 in cash and a
promissory note in the principal amount of $245,000, (iv) the issuance of
$100,000 in Class A interests to Brad K. Cutsinger in exchange for $5,000 in
cash and a promissory note in the principal amount of $95,000 and (v) the
sale of 100% of the Class B interests to Consolidation Partners for $22,200
in cash. The promissory notes issued by Messrs. Rod and Brad Cutsinger bear
interest at 8% per annum, are payable upon the first to occur of the
consummation of the Offering or December 31, 1998 and are secured by a pledge
of the acquired interests. At November 30, 1997, the promissory note of Rod
Cutsinger had been paid in full and the balance of the promissory note of
Brad Cutsinger had declined to $22,500 as a result of the application of
salaries from CPFF to which they were otherwise entitled to the reduction of
the principal balances of these notes. CPFF used a portion of the proceeds of
its initial capitalization to make loans to ACG in the amount of $1.2 millon.
In September 1997, November 1997 and January 1998, CPFF issued an
aggregate of $1,880,000 of additional Class A Interests. At the same time,
the holders of the Class B Interests contributed an additional $18,990 to the
capital of CPFF. In consideration for the agreements of four Class A Interest
owners to subscribe and oversubscribe for certain of these Class A Interests,
Rod K. Cutsinger has agreed to transfer to such persons for nominal
consideration an aggregate of 230,418 shares of his Common Stock.
Additionally, in consideration for the subscription of three other existing
Class A Interest owners for an aggregate of $200,000 of Class A Interests,
Rod K. Cutsinger transferred to such persons for nominal consideration an
aggregate of $44,400 of his Class A Interests. CPFF used the proceeds of the
issuance of these additional Class A Interests to increase its loan to ACG to
approximately $3.2 million.
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Under the terms of the corporate regulations of CPFF, CPFF is obligated to
distribute shares in a consolidating company such as ACG as soon as
practicable after the consummation of that company's initial public offering.
Shares of Common Stock in ACG will be distributed to the holders of the Class
A and Class B Interests on a fifty-fifty basis until the holders of the Class
A Interests have received shares of Common Stock of ACG (valued at the
initial public offering price) equal to three times their aggregate
investment in CPFF, or $12.3 million. Thereafter, the balance of the shares
of Common Stock held by ACG will be distributed 25% to the holders of the
Class A Interests and 75% to the holders of the Class B Interests.
Accordingly, promptly following the Offering, CPFF will distribute shares of
Common Stock to the holders of the Class A Interests (including shares to
Messrs. Rod K. Cutsinger and G. Edward Powell) and shares of Common Stock to
Consolidation Partners in respect of its Class B Interests. Rod K. Cutsinger
and his wife own 80% of the beneficial interests of Consolidation Partners,
and the remaining interests are owned by trusts for the benefit of their
adult children, including Brad K. Cutsinger. See "Principal Stockholders."
The shares of Common Stock distributed by CPFF will be entitled to certain
registration rights and subject to certain lock-up arrangements with the
Underwriters. See "Shares Eligible for Future Sale" and "Underwriting."
INITIAL CAPITALIZATION
In connection with its initial capitalization on September 17, 1996, ACG's
predecessor issued and sold an aggregate of 8,312,303 (net of subsequent
repurchases) shares of its common stock, of which 7,768,508 shares, 388,425
shares, 48,553 shares, 97,106 shares, 7,769 shares and 1,942 shares were
acquired by CPFF, Rod K. Cutsinger, Brad K. Cutsinger, Frank Bango (a former
director of ACG), G. Edward Powell and Fentress Bracewell for $1,000,
$10,000, $1,250, $2,500, $200 and $50, respectively. At the same time CPFF
agreed to loan the Company $1.2 million (increased to $3.2 million through
January 12, 1998) pursuant to an 8% promissory note payable upon the earlier
of the effectuation of an initial public offering by ACG or December 31,
1998. This promissory note, together with accrued interest thereon, will be
repaid from the net proceeds of the Offering.
Between October 14, 1996 and January 3, 1997, ACG's predecessor issued and
sold 40,785 shares of common stock at $0.05 per share, of which 38,843 shares
were sold to G. Edward Powell for an aggregate of $5,000. During the same
period, ACG's predecessor agreed to issue to eight persons for services
rendered five year warrants to purchase an aggregate of 16,703 shares of
Common Stock at the initial public offering price per share, subject to
adjustments to protect against dilution. Additionally, on May 2, 1997 ACG's
predecessor issued a ten-year non-transferrable warrant to purchase 7,769
shares of its common stock at $2.57 per share, subject to adjustment to
protect against dilution, to a consultant in consideration for services
rendered to the Company. In July 1997, the Company agreed to issue a similar
warrant to purchase 7,769 shares of Common Stock at $6.44 to another
consultant. Pursuant to agreements entered into in May and July 1997, the
Company has agreed to issue an aggregate of 4,665 shares of Common Stock,
valued at $6.44 per share, to two consultants in lieu of compensation. With
respect to certain other option and warrant grants, see "Management --1997
Stock Awards Plan -- Option Grants." In December 1997 Rod K. Cutsinger
privately placed an aggregate of 72,830 shares of his Common Stock with
Richard P. Anthony and another investor at a price of $5.15 per share and
agreed to privately place an additional 48,553 shares of Common Stock with
James F. Cragg at the same price.
VOTING ARRANGEMENTS
In the acquisition agreement relating to the investment in KINNET, Liberty
(the former owner of 100%, and the present owner of the remaining 51%, of the
stock of KINNET) agreed, until the tenth anniversary date of the consummation
of the Offering, to be present in person or by proxy at all meetings of
stockholders of ACG for quorum purposes. Additionally, Liberty has agreed,
among other things, not to initiate or solicit stockholders to become
participants in any proxy solicitation or induce or attempt to induce others
to initiate a tender offer, exchange offer or other change in control of ACG.
ACG's Board has also agreed, subject to its fiduciary obligations, to
nominate as a director an individual designated by Liberty that is reasonably
qualified to serve on the board of directors of a publicly held corporation.
This obligation expires on the first to occur of the tenth anniversary of the
closing of the consummation of the
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Offering or the reduction of Liberty's ownership of Common Stock below
100,000 shares. Mr. Rod K. Cutsinger has agreed to vote his shares of Common
Stock in favor of Liberty's designee nominated by the Board. Mr. Garnett has
been designated by Liberty as its initial director nominee.
In the acquisition agreement relating to Valu-Line, ACG's Board, subject
to its fiduciary obligations, agreed to place David M. Mitchell on its Board
and renominate Mr. Mitchell as a director from time to time as long as he
owns at least 100,000 shares of Common Stock at the time of such
renomination.
OTHER TRANSACTIONS
Richard O'Neal is an officer, director and owner of 50% of the outstanding
voting securities of Big Stuff, Inc. ("BSI"), a corporation that markets
Internet home page development services to business customers and provides
high quality yellow page colorizing services to Great Western and other
yellow page publishers. During the two fiscal years ended January 31, 1995
and 1996 and the year ended December 31, 1996, Great Western paid BSI
approximately $94,000, $578,000 and $1.1 million, respectively, for yellow
page colorizing services. Great Western and BSI have entered into a Sales
Agreement pursuant to which BSI expects to continue to render the foregoing
services to Great Western after the Offering upon terms and conditions that
the Company considers reasonable under the circumstances. BSI has also agreed
to give Great Western the exclusive right to market World Pages in its
service areas.
KINI renders management services to KINNET pursuant to an evergreen
Management Agreement dated January 1, 1997 ("Management Agreement") which is
terminable at any time upon six months advance notice of termination. Under
the Management Agreement, KINI receives a monthly payment equal to 100% of
employee, equipment and other direct costs associated with its management of
KINNET for the period plus 15% of such amount. During the three years in the
period ended December 31, 1996, KINNET paid KINI, L.C. approximately $1.6
million, $1.9 million and $2.4 million, respectively, pursuant to the
Management Agreement. ACG does not own any outstanding voting securities of
KINI, L.C. KINI, L.C. also renders management services to Liberty under a
similar arrangement. E. Clarke Garnett is the President of KINI, KINNET and
Liberty.
Pursuant to a network services agreement, Feist Long Distance transports
traffic on KINNET's network. During the three years in the period ended
December 31, 1996, Feist Long Distance paid KINNET approximately $46,300,
$120,000 and $136,300, respectively, for such services. The Company expects
that Feist Long Distance's payments to KINNET will increase after the
Offering because Feist Long Distance intends to transfer additional traffic
to the KINNET network. The Company also intends when practicable and economic
to transport the long distance traffic of its other telecommunications
subsidiaries over the KINNET network.
ADDITIONAL BACKGROUND INFORMATION
In mid-1992, Rod K. Cutsinger formed Vadacom, Inc. ("Vadacom") as a
switch-based long distance telephone company headquartered in Houston, Texas.
In early 1995 Vadacom transferred its switch, computer and related billing
software and customer base to Nationwide Long Distance, Inc. ("Nationwide"),
a switchless long distance reseller with a substantial customer base, in
exchange for cash, a subordinated promissory note and an opportunity to
convert the note into a substantial equity position in Nationwide, with the
expectation that an affiliate of Nationwide would promptly conclude an
initial public offering. Although Mr. Cutsinger served as an officer and
director of this affiliate for a brief period of time, he never served as an
officer or director of Nationwide. The affiliate's anticipated public
offering did not occur and the terms of the asset sale were restructured.
In late 1995 Nationwide and its three stockholders (collectively the
"Plaintiffs") filed suit against Vadacom and Mr. Cutsinger (collectively, the
"Defendants"), alleging, that the Defendants committed fraud in connection
with the sale of Vadacom's assets to Nationwide and the anticipated initial
public offering and that Vadacom breached its representations and warranties
in its agreements with Nationwide (Nationwide Long Distance, Inc., Kim
Wilhelm, Ellen Wilhelm and Chester M. Ranger v. Vadacom, Inc. and Rod K.
Cutsinger, No. 95-051059, Dist. Ct. of Harris County, 215th Judicial District
of Texas). The
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Plaintiffs seek in excess of $10 million in actual damages, punitive damages
in an unspecified amount, and injunctive relief. The Defendants believe that
the claims against them are without merit. The Defendants have filed
counterclaims alleging that the Plaintiffs willfully violated the rules and
regulations of the FCC by illegally switching customers' long distance
service without their authorization, that the Plaintiffs breached their
fiduciary duties to Defendants, and that the Plaintiffs defrauded Defendants
in materially diminishing the value of the assets sold to Nationwide by
Vadacom and frustrating the consummation of a public offering that
potentially could have been substantially remunerative to Vadacom's
shareholders. The Defendants have asked the court to impose a constructive
trust over the shares of Nationwide stock owned by its three shareholders.
All activity in the case has now been stayed by reason of Nationwide's
Chapter 11 bankruptcy proceedings initiated in 1997. Mr. Cutsinger's efforts
to settle the case earlier this year were not successful.
In addition, as a result of Mr. Cutsinger's substantial ownership position
in Vadacom and Nationwide's operation of Vadacom's assets following the
acquisition, both Mr. Cutsinger and Vadacom have been sued or threatened with
suit for breach of contract claims by long distance carriers, customers and
others, for failure to pay outstanding commercial accounts, ad valorem taxes
and promissory notes and for other causes of action. Some of these claims
relate directly to the operation of Vadacom's assets following their
acquisition by Nationwide. Mr. Cutsinger believes that the claims against him
personally are without merit, and he intends to contest them vigorously.
While in the past Mr. Cutsinger has expended substantial sums of his own
money financing Vadacom's defense of these claims, he reserves the right to
cease doing so. In such event, Vadacom may seek protection from such
litigants and its creditors under applicable bankruptcy law.
In early January 1998, legal counsel for the assignee of a defaulted
promissory note issued by Vadacom in the original principal amount of
approximately $80,000 which is the subject of a pending lawsuit (Lyle Cox v.
Vadacom Inc., No. 97-25464, Dist. Ct. of Harris County, 152nd Judicial
District of Texas) wrote Mr. Cutsinger's legal counsel a letter and alleged
that Mr. Cutsinger "has transferred assets that constitute fraudulent
transfers with respect to the creditors of Vadacom, Inc. These transfers have
been to companies owned by Mr. Cutsinger and his family. One of these
companies is [ACG]". Counsel for the plaintiff states that his client intends
to either (i) place Vadacom in involuntary bankruptcy, (ii) sue Mr.
Cutsinger, his family, ACG and Consolidation Partners, or (iii) seek a
temporary injunction. Mr. Cutsinger categorically denies that any Vadacom
assets were fraudulently transferred, believes that the foregoing allegations
are wholly without merit.
SUBSEQUENT MANAGEMENT CHANGES
In September 1997, the Company initiated a search for a President and
Chief Executive Officer and a Chief Financial Officer, each with extensive
experience in the local and long distance telephone business, to succeed
Messrs. Rod K. Cutsinger, and G. Edward Powell. Accordingly, upon the
Company's hiring of Richard P. Anthony and William H. Zimmer III, Mr.
Cutsinger relinquished his position as Chairman and Chief Executive Officer
of ACG and G. Edward Powell resigned as Executive Vice President and Chief
Financial Officer of ACG. Messrs. Cutsinger and Powell are no longer officers
or employees of ACG.
At the request of the Representatives of the Underwriters and in
consideration of the Company's payment of $1.75 million from the proceeds of
the Offering, Mr. Cutsinger intends to enter into a five-year non-competition
agreement with the Company. Under this agreement, Mr. Cutsinger will agree
not to engage in any business activity conducted by the Company as of the
date of this Prospectus in those portions of the Region in which the Company
operates at that date. See "Description of Capital Stock -- Standstill
Agreement" for information regarding a three-year standstill agreement that
Mr. Cutsinger has also entered into with the Company.
COMPANY POLICY
Except as noted herein, any future transactions with directors, officers,
employees or affiliates of the Company are anticipated to be minimal and
will, in any case, be approved in advance by a majority of the Board of
Directors, including a majority of disinterested members of the Board of
Directors.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of January 15, 1998 and
as adjusted to reflect the shares of Common Stock, options and warrants to be
issued in the Acquisitions and the distribution of the 7,768,508 shares of
Common Stock owned by CPFF to the beneficial owners of CPFF's outstanding
equity interests (assuming an initial public offering price of $15.00 per
share, the midpoint of the initial public offering price range) and the sale
of the shares of Common Stock in the Offering, by (a) each of the executive
officers of the Company, (b) each of the Company's directors (including
persons who will become directors upon consummation of the Offering), (c) all
executive officers and directors of the Company as a group, and (d) each
other person (or group of affiliated persons) who is known by the Company to
own beneficially 5% or more of the Company's Common Stock. See "Certain
Transactions."
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER OFFERING, AS ADJUSTED
---------------------------- ----------------------------
NAME(1) NUMBER(2) PERCENT(2)(3) NUMBER(2) PERCENT(2)(3)
------ --------- ------------ --------- -------------
<S> <C> <C> <C> <C>
Richard P. Anthony ......................... 198,553(4) 2.3% 198,553(4) 1.0%
James F. Cragg ............................. 198,553(4)(5) 2.3 198,553(4)(5) 1.0
William H. Zimmer III....................... -- -- -- --
Richard O'Neal ............................. -- -- 373,334(6) 1.9
Fred L. Thurman ............................ -- -- 178,021 *
Todd J. Feist .............................. -- -- 66,667 *
Rod K. Cutsinger ........................... 7,853,686(5)(7) 92.9 5,820,301(8) 29.7
Fentress Bracewell ......................... 1,942 * 1,942 *
E. Clarke Garnett .......................... -- -- 666,666(9) 3.4
Reginald J. Hollinger ...................... -- -- -- --
David M. Mitchell .......................... -- -- 173,334 *
G. Edward Powell ........................... 244,461(10) 2.8 244,461(10) 1.2
CPFF ....................................... 7,768,508 91.9 -- --
Consolidation Partners ..................... 7,768,508(11) 64.1 5,416,381 27.6
Executive officers and directors as a group
(6 persons and 12 persons, respectively) .. 8,386,741(12) 94.3 7,873,279(12) 39.2
</TABLE>
- ------------
* Percentage of shares beneficially owned is less than 1.0%.
(1) The address of all executive officers and directors (other than
Messrs. Cutsinger and Powell) is 390 South Woods Mill Road, Suite
150, St. Louis, Missouri 63005; the address of Messrs. Cutsinger and
Powell, CPFF and Consolidation Partners is 3355 West Alabama, Suite
580, Houston, Texas 77098.
(2) Beneficial ownership includes shares of Common Stock subject to
options, warrants, rights, conversion privileges or similar
obligations exercisable within 60 days for purposes of computing the
ownership percentage of the person or group holding such options,
warrants, rights, privileges or other obligations. Except as noted,
each stockholder has sole voting and dispositive power with respect
to all shares beneficially owned by such stockholder.
(3) The number of shares of Common Stock deemed outstanding after the
Offering consists of 19,624,920 shares outstanding as of January 15,
1998 (as adjusted for the shares of Common Stock issuable in the
Acquisitions and the shares of Common Stock being offered for sale
by the Company in the Offering (excluding 1,200,000 shares issuable
upon the exercise of the over-allotment option granted by the
Company to the Underwriters)).
(4) Includes 150,000 shares of Common Stock subject to stock options
issued by the Company that are exercisable within 60 days after
consummation of the Offering.
(5) Includes 48,553 shares of Common Stock that Mr. Cragg is entitled to
purchase from Mr. Cutsinger for $5.15 per share within 30 days after
the consummation of the Offering and, in the case of Mr. Cragg,
150,000 shares of Common Stock subject to stock options issued by
the Company that are exercisable within 60 days after consummation
of the Offering.
(6) A trustee for Mr. O'Neal's children owns non-transferable, ten-year
warrants to purchase 582,638 shares of Common Stock, one-third of
which warrants become exercisable on the first, second and third
anniversaries of the consummation of the Offering.
(Footnotes continued on following page)
79
<PAGE>
(7) Includes 7,768,508 shares of Common Stock owned by CPFF. Because all
of such shares will be distributed by CPFF to the holders of its
Class A and Class B Interests after the Offering, Mr. Cutsinger
disclaims beneficial ownership of all such shares except those which
he will receive by reason of his ownership of approximately 13.6% of
the Class A Interests in CPFF and those which will be received by
Consolidation Partners by reason of its ownership of all of the
Class B Interests. Also gives effect to an agreement to transfer an
aggregate of 230,418 shares of Common Stock to four unrelated owners
of interests in CPFF.
(8) Includes 5,416,381 shares of Common Stock owned by Consolidation
Partners, a limited liability company in which Rod K. Cutsinger and
his wife beneficially own of record 80% of the interests. The
remaining interests are owned by trusts for the benefit of the
Cutsingers' two children, including Brad K. Cutsinger, over which
Rod K. Cutsinger has sole voting and dispositive power.
(9) Includes 666,666 shares of Common Stock owned by Liberty, the owner
of 51% of KINNET, after the Offering, as to which E. Clarke Garnett
disclaims any beneficial interest.
(10) Includes 135,949 shares of Common Stock which Mr. Powell has the
right to acquire upon the exercise of warrants which are fully
exercisable.
(11) Includes 7,768,508 shares of Common Stock owned by CPFF. Because all
of such shares will be distributed by CPFF to the holders of its
Class A and Class B Interests after the Offering, Consolidation
Partners disclaims beneficial ownership of all such shares except
those which it will receive by reason of its ownership of all of the
Class B Interests.
(12) Includes 435,949 shares of Common Stock which such persons will have
the right to acquire upon the exercise of options and warrants which
are exercisable within 60 days after consummation of the Offering.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
At the date of this Prospectus, the authorized capital stock of the
Company is 200,000,000 shares, consisting of 180,000,000 shares of Common
Stock, par value $0.0001 per share, and 20,000,000 shares of Preferred Stock,
par value $0.0001 per share ("Preferred Stock"). The following summary is
qualified in its entirety by reference to the Company's Restated Certificate
of Incorporation (the "Charter"), a copy of which is included as an exhibit
to the Registration Statement of which this Prospectus is a part.
Common Stock. The holders of Common Stock are entitled to dividends in
such amounts and at such times as may be declared by the Board of Directors
out of funds legally available therefor. See "Dividend Policy." Holders of
the Common Stock are entitled to one vote per share for the election of
directors and other corporate matters. In the event of liquidation,
dissolution or winding up of the Company, holders of Common Stock would be
entitled to share ratably in all assets of the Company available for
distribution to the holders of Common Stock. The Common Stock carries no
preemptive rights. All outstanding shares of Common Stock are, and the shares
of Common Stock to be sold by the Company in the Offering when issued will
be, duly authorized, validly issued, fully paid and nonassessable.
Preferred Stock. The Board is authorized to issue from time to time,
without stockholder authorization, in one or more designated series,
20,000,000 shares of Preferred Stock with such dividend, redemption,
conversion and exchange provisions as are provided in the particular series.
Except as by law expressly provided, or except as may be provided by
resolution of the Board, the Preferred Stock shall have no right or power to
vote on any question or in any proceeding or to be represented at, or to
receive notice of, any meeting of stockholders of the Company. The issuance
of Preferred Stock, or the perception that such an issuance might occur,
could have the effect of delaying or preventing a change in control of the
Company. No shares of preferred stock are issued or outstanding and the Board
of Directors has no present plans to issue any of the Preferred Stock other
than the Series A Redeemable Convertible Preferred Stock (the "Series A
Preferred") to be issued to NGC. See "The Company -- Strategic Relationships."
The Company will issue to NGC shares of Series A Preferred having an aggregate
liquidation preference of $2.0 million. The number of shares issued will be
equal to the $2.0 million aggregate liquidation preference divided by the
initial public offering price (133,334 shares if the initial public offering
price is $15 per share). The Series A Preferred (i) will be senior to the
Common Stock as to liquidation, (ii) will not be entitled to receive dividends,
(iii) will become convertible into Common Stock at the initial public offering
price (subject to customary adjustments to protect against dilution) 18 months
after the consummation of the Offering, (iv) if the Northwestern Alliance has
not been signed by the first anniversary date of the closing of the Offering,
is redeemable in whole, but not in part, at an aggregate redemption price of
$1.25 million on or prior to the thirteenth monthly anniversary of the closing
of the Offering, (v) is not entitled to vote in the election of directors or
otherwise except as required by law and (vi) may not be transferred until the
earlier of the date occurring thirteen months after the closing of the Offering
or the date of the execution and delivery of the Northwestern Alliance.
POSSIBLE ANTI-TAKEOVER EFFECTS
General. Certain provisions of the Company's charter, as well as the
concentration of ownership of the Common Stock, and the Company's ability to
issue up to 20 million shares of "blank check" Preferred Stock and the
anticipated terms of Proposed Credit Facility, may have the effect of
discouraging a change in control of the Company, including transactions in
which stockholders might receive a premium price for their Common Stock. See
also "--Standstill Agreement."
Statutory Provisions. Section 203 ("Section 203") of the DGCL restricts
certain transactions between a corporation organized under Delaware law (or
its majority-owned subsidiaries) and any person holding 15% or more of the
corporation's outstanding voting stock, together with the affiliates or
associates of such person (an "Interested Stockholder"). Section 203
generally prohibits a publicly held Delaware corporation from engaging in the
following transactions with an Interested Stockholder, for a period of three
years from the date the stockholder becomes an Interested Stockholder (unless
certain conditions, described below, are met): (i) all mergers or
consolidations, (ii) sales, leases, exchanges or other transfers of 10% or
more of the aggregate assets of the corporation, (iii) issuances or transfers
by the corporation of any stock of the corporation which would have the
effect of increasing the Interested Stockholder's proportionate share of the
stock of any class or series of the corporation, (iv) any other transaction
which has the effect of increasing the proportionate share of the stock of
any class or series of the corporation which is owned by the Interested
Stockholder, and (v) receipt by the Interested Stockholder of the benefit
(except proportionately as a stockholder) of loans, advances, guarantees,
pledges or other financial benefits provided by the corporation.
The three-year ban does not apply if either the proposed transaction or
the transaction by which the Interested Stockholder became an Interested
Stockholder is approved by the board of directors of the corporation prior to
the date such stockholder becomes an Interested Stockholder. Additionally, an
Interested Stockholder may avoid the statutory restriction if, upon the
consummation of the transaction whereby such stockholder becomes an
Interested Stockholder, the stockholder owns at least 85% of the
81
<PAGE>
outstanding voting stock of the corporation without regard to those shares
owned by the corporation's officers and directors or certain employee stock
plans. Business combinations are also permitted within the three-year period
if approved by the board of directors and authorized at an annual or special
meeting of stockholders, by the holders of at least 66 2/3% of the
outstanding voting stock not owned by the Interested Stockholder. In
addition, any transaction is exempt from the statutory ban if it is proposed
at a time when the corporation has proposed, and a majority of certain
continuing directors of the corporation have approved, a transaction with a
party which is not an Interested Stockholder of the corporation (or who
becomes such with board approval) if the proposed transaction involves (i)
certain mergers or consolidations involving the corporation, (ii) a sale or
other transfer of over 50% of the aggregate assets of the corporation, or
(iii) a tender or exchange offer for 50% or more of the outstanding voting
stock of the corporation.
Prior to the effective date of Section 203, a corporation, by action of
its board of directors, had the option of electing to exclude itself from the
coverage of Section 203. Since the effective date of such section, a
corporation may, at its option, exclude itself from the coverage of Section
203 by amending its certificate of incorporation or bylaws by action of its
stockholders to exempt itself from coverage, provided that such charter or
bylaw amendment shall not become effective until 12 months after the date it
is adopted. The Company has not adopted such a charter or bylaw amendment.
Charter Provisions. The Board is divided into three classes. Each class of
directors consists, as nearly as possible, of one-third of the total number
of directors constituting the entire Board. The Charter provides that,
subject to the rights of the holders of any series of Preferred Stock, the
number of directors may be fixed from time to time by resolution of the
Board, but will consist of not less than three nor more than 14 members. The
term for directors in the first class expires at the annual meeting of
stockholders to be held in 1998; the initial term for directors in the second
class expires at the annual meeting of stockholders to be held in 1999; and
the initial term for directors in the third class expires at the annual
meeting of stockholders to be held in 2000. A director of the Company may be
removed only for cause and only upon the affirmative vote of the holders of a
majority of the outstanding capital stock entitled to vote at an election of
directors.
The Charter provides that the Company may, by action of its Board, provide
for a sinking fund for the purchase or redemption of shares of any series of
Preferred Stock and specify the terms and conditions governing the operations
of any such fund. The Company does not currently have any such fund.
The Charter provides that the Board shall fix the number of directors
within the range specified by the Charter, and number of directors has been
currently fixed at 12. A stockholder may nominate directors only if written
notice is delivered to the Company by such stockholder not less than 30 days
nor more than 60 days prior to the meeting or no later than ten days after
the date of notice by the Company of such meeting if such notice is given
less than 90 days in advance of the meeting. The Charter also provides that
any newly created directorship resulting from an increase in the number of
directors or a vacancy on the Board shall be filled by vote of a majority of
the remaining directors then in office, even though less than a quorum. The
Charter also provides that special meetings of the stockholders may only be
called by the Chairman of the Board or the Board, subject to the rights of
the holders of any series of Preferred Stock, and that the stockholders may
not act by written consent. The Charter provides that certain of these
provisions of the Charter may not be amended without the approval of at least
80% of the voting power of all shares of the Company entitled to vote
generally in the election of directors, voting together as a single class.
The foregoing provisions of the Charter and of Section 203, together with
the ability of the Board to issue Preferred Stock without further stockholder
action, could delay or frustrate the removal of incumbent directors or the
assumption of control by the holder of a large block of Common Stock even if
such removal or assumption would be beneficial, in the short term, to
stockholders of the Company. The provisions could also discourage or make
more difficult a merger, tender offer or proxy contest even if such event
would be favorable to the interests of stockholders.
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<PAGE>
LIMITATION ON DIRECTORS AND OFFICERS LIABILITY
The DGCL authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by such
legislation, directors are accountable to corporations and their stockholders
for monetary damages for conduct constituting gross negligence in the
exercise of their duty of care. Although the DGCL does not change directors'
duty of care, it enables corporations to limit available relief to equitable
remedies such as injunction or rescission. The Charter limits the liability
of the Company's directors to the Company or its stockholders (in their
capacity as directors but not in their capacity as officers) to the fullest
extent permitted by the DGCL. Specifically, directors of the Company will not
be personally liable for monetary damages for breach of a director's
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the director derived an improper personal benefit.
The inclusion of this provision in the Charter may have the effect of
reducing the likelihood of derivative litigation against directors and may
discourage or deter stockholders or management from bringing a lawsuit
against directors for breach of their duty of care, even though such an
action, if successful, might otherwise have benefited the Company and its
stockholders.
STANDSTILL AGREEMENT
The Company and Rod K. Cutsinger intend to enter into an agreement
pursuant to which Mr. Cutsinger, among other things, will agree that, for
three years after the completion of the Offering, he will not (i) acquire any
voting securities of the Company other than the shares of Common Stock
issuable as stock dividends or splits or upon exercise of his options under
the Company's Directors' Plan, (ii) sponsor or participate in any proxy
solicitations, (iii) enter into or form voting trusts, pooling agreements or
"groups", (iv) vote any of his shares of Common Stock in opposition to the
recommendation of the disinterested members of ACG's board of directors
regarding the election or removal of directors and matters relating to a
possible change in control of the Company, or (v) directly or indirectly
assist, encourage or induce any person to bid or acquire any class of
securities that is entitled to vote for the election of directors. Mr.
Cutsinger's obligations under the standstill agreement will terminate if he
is removed from the Board or not renominated for election as a director in
2000.
TRANSFER AGENT
The Transfer Agent for the Common Stock is Continental Stock Transfer &
Trust Company.
83
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, there will be 19,624,920 shares of Common
Stock outstanding. All of the 8,000,000 shares purchased in the Offering
(9,200,000 shares if the Underwriters' over-allotment option is exercised in
full), as well as 102,642 other outstanding shares, will be freely tradeable
without registration or other restriction under the Securities Act, except
for any shares purchased by an affiliate of the Company. All of the remaining
shares of Common Stock outstanding are either subject to the resale
restrictions referred to in "Underwriting" or may be sold only pursuant to an
effective registration statement filed by the Company or pursuant to an
applicable exemption, including an exemption under Rule 144 under the
Securities Act (the "Restricted Shares"). In this regard, the remaining
11,522,278 shares of the shares of Common Stock currently outstanding or
issued in the Acquisitions will be eligible for resale pursuant to Rule 144
no later than one year following the consummation of this offering.
In general, Rule 144 provides that if a person (including an affiliate)
holds Restricted Shares (regardless of whether such person is the initial
holder or a subsequent holder of such shares), and if at least one year has
elapsed since the later of the date on which the Restricted Shares were
issued or the date that they were acquired from an affiliate, then such
person is entitled to sell within any three-month period a number of shares
that does not exceed the greater of 1% of the then outstanding shares of
Common Stock or the average weekly trading volume of such stock during the
four calendar weeks preceding the sale. After Restricted Shares are held for
two years, a person who is not deemed an "affiliate" of the Company would be
entitled to sell such shares under Rule 144 without regard to the volume
limitations described above.
The holders of substantially all the shares of Common Stock and Warrants
issuable in the Acquisitions and the reverse triangular merger of the
Company's predecessor have certain rights to require the Company (but may not
exercise such registration rights for a period of one year following the
closing of the Offering) to register sales of such shares, or shares acquired
pursuant to such warrants, under the Securities Act. If, subsequent to the
consummation of the Offering, the Company proposes to register any of its
securities under the Securities Act, such holders are entitled to notice of
such registration and to include their shares in such registration with their
expenses borne by the Company, subject to the right of an underwriter
participating in the offering to limit the number of shares included in such
registration. In addition, the holders of a majority of such shares of Common
Stock have the right to demand after one year from the closing of the
Acquisitions, subject to certain limitations, that the Company file one
registration statement covering sales of their respective shares, and the
Company is obligated to pay the expenses of such registration.
The Company's directors, its executive officers, and substantially all of
the stockholders of ACG prior to the Acquisitions, including CPFF, have
agreed that, subject to certain exceptions, during the one-year Lock-up
Period they will not, and the Company has agreed that for a period of 180
days following the date of this Prospectus it will not, without the prior
written consent of PaineWebber Incorporated, offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock, or any securities
convertible into, or exercisable or exchangeable for, Common Stock, except
that the Company may grant options under the Company's stock option and
purchase plans, and may issue shares of Common Stock (i) in connection with
acquisitions, (ii) pursuant to the exercise of options granted under the
Company's stock option and purchase plans or (iii) pursuant to the exercise
of options and warrants outstanding as of the closing of the Offering.
Further, all persons who acquire shares of Common Stock in connection with
the Acquisitions (other than the acquisition of ACG's predecessor) have
agreed with the Company, subject to certain exceptions, not to offer or sell
such shares during the Lock-Up Period, and the Company has agreed not to
waive or amend these agreements without the prior written consent of
PaineWebber Incorporated. In addition, Rod K. Cutsinger has agreed not to
offer or sell any of his shares of Common Stock for a period ending 18 months
after the closing of the Offering, subject to certain exceptions, in each
case without the prior written consent of PaineWebber Incorporated.
The effect, if any, that future market sales of shares or the availability
of shares for sale will have on the prevailing market prices for the Common
Stock cannot be predicted. Nevertheless, sales of a substantial number of
shares in the public market could adversely affect prevailing market prices
for the Common Stock.
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UNDERWRITING
The Underwriters named below, acting through PaineWebber Incorporated and
CIBC Oppenheimer Corp. (the "Representatives"), have severally agreed,
subject to the terms and conditions set forth in the Underwriting Agreement
by and among the Company and the Representatives (the "Underwriting
Agreement"), to purchase from the Company, and the Company has agreed to sell
to the Underwriters, the number of shares of Common Stock set forth opposite
the name of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ -----------
<S> <C>
PaineWebber Incorporated .................
CIBC Oppenheimer Corp. ..................
-----------
Total .................................. 8,000,000
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the Shares listed above are subject to certain
conditions. The Underwriting Agreement also provides that the Underwriters
are committed to purchase, and the Company is obligated to sell, all of the
Shares offered by this Prospectus, if any of the Shares being sold pursuant
to the Underwriting Agreement are purchased (without consideration of any
shares that may be purchased through the exercise of the Underwriters'
over-allotment option).
The Representatives have advised the Company that the Underwriters propose
to offer the Shares to the public initially at the public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per share. The Underwriters
may allow, and such dealers may reallow, a concession to other dealers not in
excess of $ per share. After the initial public offering of the Shares,
the public offering price, the concessions to selected dealers and the
reallowance to other dealers may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
additional 1,200,000 shares of Common Stock at the initial public offering
price set forth on the cover page of this Prospectus, less underwriting
discounts and commissions. The Underwriters may exercise such option only to
cover over-allotments, if any, incurred in the sale of Shares. To the extent
the Underwriters exercise such option, each of the Underwriters will become
obligated, subject to certain conditions, to purchase such percentage of such
additional shares of Common Stock as is approximately equal to the percentage
of Shares that it is obligated to purchase as shown in the table set forth
above.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Representatives have informed the Company that they do not intend to
confirm sales to any account over which they exercise discretionary
authority.
A Managing Director of CIBC Oppenheimer Corp. acquired $70,000, in Class A
interests upon the capitalization and subsequent private placements of CPFF.
These interests will entitle such person to receive 40,158 shares of Common
Stock (based upon an initial offering price of $15.00) upon the distribution
of ACG shares held by CPFF to CPFF's interest holders. In addition, such
Managing Director of CIBC Oppenheimer Corp. acquired 1,942 shares of Common
Stock for $50.00 upon the capitalization of ACG. CIBC Oppenheimer Corp. is
one of the Representatives.
CIBC Oppenheimer Corp. or one of its affiliates will be the lender under
the Company's proposed credit facility, and will receive certain fees with
respect thereto. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Certain Acquired Companies -- Pro
Forma Results of Operations -- Pro Forma Liquidity and Capital Resources."
Reginald J. Hollinger, a Managing Director and Group Head of the
Telecommunications Investment Banking Group at Paine Webber Incorporated,
will become a director of the Company upon the consummation of the Offering.
See "Management."
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<PAGE>
The Company's executive officers and directors and substantially all of
the stockholders of ACG prior to the Acquisitions, including CPFF, have
agreed that, subject to certain exceptions, during the one-year Lock-up
Period they will not, and the Company has agreed that for a period of 180
days following the date of this Prospectus, it will not, without the prior
written consent of PaineWebber Incorporated, offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock, or any securities
convertible into, or exerciseable or exchangeable for, Common Stock, except
that the Company may grant options under the Company's stock option and
purchase plans, and may issue shares of Common Stock (i) in connection with
acquisitions, (ii) pursuant to the exercise of options granted under the
Company's stock option and purchase plans or (iii) pursuant to the exercise
of options and warrants outstanding as of the closing of the Offering.
Further, all persons who acquire shares of Common Stock in connection with
the Acquisitions (other than the acquisition of ACG's predecessor) have
agreed with the Company not to offer or sell such shares during the Lock-Up
Period, and the Company has agreed not to waive or amend these agreements
without the prior written consent of PaineWebber Incorporated. In addition,
Rod K. Cutsinger has agreed not to offer or sell any of his shares of Common
Stock for a period ending 18 months after the closing of the Offering,
subject to certain exceptions, without the prior written consent of
PaineWebber Incorporated.
Prior to this Offering, there has been no public market for the Common
Stock of the Company. The initial public offering price was determined
pursuant to negotiations between the Company and the Representatives. Among
the factors considered in determining the initial public offering price, in
addition to prevailing market conditions, were certain financial information
of the Company, the history of, and the prospects for, the Company and the
industry in which it competes, an assessment of the Company's management, its
past and present operations, the prospects for, and timing of, future
revenues of the Company, the present state of the Company's development, and
the above factors in relation to market values and various valuation measures
of other companies engaged in activities similar to the Company. The initial
public offering price set forth on the cover page of this Prospectus should
not, however, be considered an indication of the actual value of the Common
Stock. Such price is subject to change as a result of market conditions and
other factors. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the
public market subsequent to the Offering at or above the initial public
offering price.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may
bid for or purchase Common Stock for the purpose of stabilizing its market
price. The Underwriters also may create a short position for the account of
the Underwriters by selling more Common Stock in connection with the Offering
than they are committed to purchase from the Company, and in such case may
purchase Common Stock in the open market following completion of the Offering
to cover all or a portion of such short position. The Underwriters may also
cover all or a portion of such short position, up to 1,200,000 shares of
Common Stock, by exercising the Underwriters' over-allotment option referred
to above. In addition, PaineWebber Incorporated, on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with
the Underwriters whereby it may reclaim from an Underwriter (or dealer
participating in the Offering) for the account of the other Underwriters, the
selling concession with respect to Common Stock that is distributed in the
Offering but subsequently purchased for the account of the Underwriters in
the open market. Any transactions described in this paragraph may result in
the maintenance of the price of the Common Stock at a level above that which
might otherwise prevail in the open market. None of the transactions
described in this paragraph is required, and, if they are undertaken, they
may be discontinued at any time.
The Company is making application to list the Common Stock on the New York
Stock Exchange, subject to official notice of issuance.
86
<PAGE>
VALIDITY OF COMMON STOCK
The validity of the Common Stock offered hereby will be passed upon for
the Company by Bracewell & Patterson, L.L.P., Houston, Texas, and for the
Underwriters by Morgan, Lewis & Bockius LLP, New York, New York. Bracewell &
Patterson, L.L.P. will receive a premium over their normal hourly billing
rates for the legal services performed by them in connection with the
Offering if the Offering is completed and will accept a substantially reduced
fee payment in the event that the Offering is not completed.
EXPERTS
The audited financial statements of Advanced Communications Group, Inc.,
Great Western Directories, Inc., Feist Long Distance Service, Inc. and
FirsTel, Inc. have been included herein and in the Registration Statement in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon authority of said
firm as experts in accounting and auditing.
The audited financial statements of Valu-Line of Longview, Inc. and
Related Companies included in this Prospectus and elsewhere in the
Registration Statement have been audited by Hein + Associates LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said report.
The audited financial statements of KIN Network, Inc. included in this
Prospectus and elsewhere in the Registration Statement as of and for the year
ended December 31, 1996 have been audited by Sartain Fischbein & Co.,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said reports. The audited financial statements of KIN
Network, Inc. included in this Prospectus and elsewhere in the Registration
Statement as of and for the years ended December 31, 1994 and 1995, have been
audited by Kennedy and Coe LLC, independent public accountants, as indicated
in their report with respect thereto, and are included herein in reliance
upon the authority of said firm as experts in giving said reports.
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements
of the Exchange Act. The Company has filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement (which term shall
include any amendments thereto) on Form S-1 under the Securities Act with
respect to the shares of Common Stock offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the
Common Stock, reference is made to the Registration Statement, including the
exhibits and schedules thereto, copies of which may be examined without
charge at the Commission's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and the regional offices of the Commission located at
7 World Trade Center, New York, New York 10048 and 500 West Madison Street,
14th Floor, Chicago, Illinois 60661. Copies of such materials may be obtained
from the Public Reference Section of the Commission, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at its public reference
facilities in New York, New York and Chicago, Illinois, at prescribed rates,
or on the Internet at http://www.sec.gov. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each statement being qualified in all respects by such reference.
Advanced Communications Group, Inc. is a Delaware corporation,
incorporated as a subsidiary of its predecessor in September 1997, with
principal executive offices located at 390 South Woods Mill Road, Suite 150,
St. Louis, Missouri 63017. The Company's telephone number at that address is
(314) 469-9488. The Company intends to furnish its stockholders annual
reports containing consolidated financial statements examined by an
independent public accounting firm.
87
<PAGE>
GLOSSARY
Access -telecommunications services that permit long distance carriers
to use local exchange facilities to originate and/or terminate long distance
service.
Access Charges -- The fees paid by long distance carriers to local
exchange carriers for originating and terminating long distance calls on
their local network.
AT&T -- AT&T Corp.
ATM -- Asynchronous Transfer Mode is a packet switching technology in
which all data is encapsulated in packets or cells of exactly the same size.
By keeping all packets the same size, packets can be switched and transported
at extremely high speeds with very low delay. Cells travel across the network
in logical paths based on network addresses as permanent virtual circuits or
switched virtual circuits. ATM is principally used for high speed backbones
public and very large private networks. Because of high bandwidths, low delay
and advances in quality of service techniques, ATM is useful for transmitting
combined voice, data, and video.
Ameritech -- Ameritech Corporation.
Bps -- Bits per second; the basic measuring unit of speed in a digital
transmission system; the number of bits that a transmission facility can
convey between a sending location and a receiving location in one second.
Backbone -- The through-portions of a transmission network, as opposed to
spurs which branch off the through-portions.
Bandwidth -- The range of frequencies that can be passed through a medium,
such as glass fibers, without distortion. The greater the bandwidth, the
greater the information-carrying capacity of such medium. For fiber optic
transmission, electronic transmitting devices determine the bandwidth, not
the fibers themselves. Bandwidth is measured in Hertz (analog) or Bps
(digital).
Bell Atlantic -- Bell Atlantic Corporation.
CAP (competitive access provider) -- A company that provides its customers
with an alternative to the local telephone company for local transport of
private line, special access and interstate transport of switched access
telecommunications services.
CLEC --A competitive local exchange carrier.
Collocation -- The ability of a CAP to connect its network to the LECs
central office. Physical collocation occurs when a CAP places its network
connection equipment inside the LEC's central offices. Virtual collocation is
an alternative to physical collocation pursuant to which the LEC permits a
CAP to connect its network to the local exchange company's central offices on
comparable terms, even though the CAP's network connection equipment is not
physically located inside the central offices.
Dedicated Lines -- Local telecommunications lines reserved for use by
particular customers, generally for connection between the customer's
location and on interexchange carrier POP.
Dialing Parity -- The ability of a competing local or toll service
provider to provide telecommunications services in such a manner that
customers have the ability to route automatically, without the use of any
access code, their telecommunications to the service provider of the
customer's designation.
Digital -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies employ
a sequence of these pulses to represent information as opposed to the
continuously variable analog signal. The precise digital numbers minimize
distortion (such as graininess or snow in the case of video transmission, or
static or other background distortion in the case of audio transmission).
DS-0, DS-1, DS-3 -- Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits
(0 and 1) transmitted per second). DS-0 service has a bit rate of 64 kilobits
per second, DS-1 service has a bit rate of 1.544 megabits per second and DS-3
service has a bit rate of 45 megabits per second.
Enhanced Network Services -- Telecommunications services providing digital
connectivity, primarily for data applications, via frame relay, ATM, or
digital interexchange private line facilities. Enhanced network services also
include applications on such networks, including Internet access and other
Internet services.
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Fast Packet Service -- Fast packet service is a transport service for
moving data or digitized voice and video across a defined network. Fast
packet services may include routed, switched or dedicated connections. It
usually refers to frame relay, ATM, or other high bandwidth data transport.
FCC -- Federal Communications Commission.
Feist Long Distance -- Feist Long Distance Service, Inc.
Fiber mile -- The number of route miles installed along a
telecommunications path multiplied by the number of fibers along that path.
FirsTel -- FirsTel, Inc.
Frame Relay -frame relay is a form of packet switching in which data or
voice is converted to packets of varying sizes and routed through a digital
network along permanent virtual circuits or logical paths between
specifically defined network addresses. Frame relay has enjoyed commercial
success as an effective means of connecting local and wide area networks,
connecting business to the Internet, and providing combined voice and data
services between remote locations.
GTE -- GTE Corporation.
General Telephone Operating Companies -- Local exchange carriers
affiliated with GTE Corporation.
Great Western -- Great Western Directories, Inc.
Hertz -- The unit for measuring the frequency with which an
electromagnetic signal cycles through the zero-value state between lowest and
highest states. One Hz (Hertz) equals one cycle per second. kHz (kilohertz)
stands for thousands of Hertz; MHz (megahertz) stands for millions of Hertz.
ILEC -- An incumbent local exchange carrier.
Interconnection -- Interconnection of facilities between or among local
exchange carriers, including potential physical collocation of one carrier's
equipment in the other carrier's premises to facilitate such interconnection.
Interconnection Decision -- The August 1996 order issued by the FCC
implementing the interconnection provisions of the Telecommunications Act.
Portions of this order have been reversed by the U.S. Eighth Circuit Court of
Appeals.
InterLATA -- Telecommunications services originating in a LATA and
terminating outside of that LATA.
IntraLATA -- Telecommunications services originating and terminating in
the same LATA.
ISP -- An Internet service provider.
KINNET -- KIN Network, Inc.
LAN (Local Area Network) -- Computers and peripherals linked together by
short distance facilities, such as wire, cable, fiber, radio signal or lasers
under a common control program. LANs are usually confined to buildings or
campuses. LANs allow users to share file, programs and messaging within the
definition of the network.
LATA (local access and transport area) -- A geographic area composed of
contiguous local exchanges, usually but not always within a single state.
There are approximately 200 LATAs in the United States.
LEC (local exchange carrier) -- A company providing local telephone
services.
Long distance carriers or IXCs (Interexchange carriers) -- Long distance
carriers provide services between local exchanges on an interstate or
intrastate basis. A long distance carrier may offer services over its own or
another carriers' facilities.
Local exchange area -- A geographic area determined by the appropriate
state regulatory authority in which calls generally are transmitted without
toll charges to the calling or called party.
Local Loop -- The local loop is that portion of the local telephone
network that connects the customer's premises to the local exchange carrier's
central office or switching center. This includes all the facilities starting
from the customer premise interface which connects to the inside wiring and
equipment at the customer premise to a terminating point within the switching
wire center.
G-2
<PAGE>
MCI -- MCI Communications Corporation, a corporation that has entered
into a merger agreement to be acquired by WorldCom.
Nodes -- Locations within the network housing electronic equipment and/or
switches which serve as intermediate connection points to send and receive
transmission signals.
Number portability -- The ability of an end user to change local exchange
carriers while retaining the same telephone number.
Off-net -a customer that is not physically connected to one of the
Company's networks but who is accessed through interconnection with a LEC
network.
On-net -a customer that is physically connected to one of the Company's
networks.
OSS or Operational Support System(s) -- An OSS is a combination of manual
business procedures, automated systems, and electronic interfaces which
support the delivery of telecommunications services. OSSs support functions
including customer order management, order processing, facilities
provisioning, customer care, trouble reporting and trouble ticket management,
billing, sales analysis, and product management.
Other Acquired Companies -- Long Distance Management II, Inc., Long
Distance Management of Kansas, Inc., The Switchboard of Oklahoma City, Inc.,
Tele-Systems, Inc. and National Telecom, a sole proprietorship.
Preferred Stock -- The Series A Redeemable Convertible Preferred Stock of
Advanced Communications Group, Inc.
POPs (points of presence) -- Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
Private line -- A dedicated telecommunications connection between end user
locations.
Public switched network -- That portion of a local exchange company's
network available to all users generally on a shared basis (i.e., not
dedicated to a particular user). Traffic along the public switched network is
generally switched at the local exchange company's central offices.
"PUC" or Public Utilities Commission -- A state regulatory body,
established in most states, which regulates utilities, including telephone
companies providing intrastate services.
Reciprocal compensation -- The same compensation of a new competitive
local exchange carrier for termination of a local call by the local exchange
carrier on its network, as the new competitor pays the local exchange carrier
for termination of local calls on the local exchange carrier network.
Resale -- Resale by a provider of telecommunications services (such as a
local exchange carrier) of such services to other providers or carriers on a
wholesale or a retail basis.
Route mile -- The number of miles of the telecommunications path in which
fiber optic cables are installed as it would appear on a network map.
Rural Telephone Finance Cooperative or RTFC -- A not-for-profit
association, having between 300 and 400 members, that makes loans for
telecommunications purposes to its members and others eligible for loans from
the Rural Utility Services department of the Department of Agriculture.
SBC --Parent company of Southwestern Bell.
Self-healing ring -- A self-healing ring is a network design in which the
network backbone consists of a continuous ring connecting a central hub
facility with one or more network nodes (such as customer premises). Traffic
is routed between the hub and each of the nodes simultaneously in both a
clockwise and a counterclockwise direction. In the event of a cable cut or
component failure along one of these paths, traffic will continue to flow
along the alternate path so no traffic is lost. In the event of a
catastrophic node failure, other nodes will be unaffected because traffic
will continue to flow along whichever path (primary or alternate) does not
pass through the affected node. The switch from the primary to the alternate
path will be imperceptible to most users.
Southwestern Bell -- Southwestern Bell Telephone Company.
Special access services -- The lease of private, dedicated
telecommunications lines or "circuits" along the network of a local exchange
company or a CAP, which lines or circuits run to or from the long distance
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<PAGE>
carrier POPs. Examples of special access services are telecommunications
lines running between POPs of a single long distance carrier, from one long
distance carrier POP to the POP of another long distance carrier or from an
end user to a long distance carrier POP.
Sprint -- Sprint Corporation.
Switch -- A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process
of interconnecting circuits to form a transmission path between users.
Switched access transport services -- Transportation of switched traffic
along dedicated lines between the local exchange company central offices and
long distance carrier POPs.
Switched traffic -- Telecommunications traffic along the public switched
network. This traffic is generally switched at the local exchange company's
central offices.
Tele-Systems -- Tele-Systems, Inc.
Trunk -- A telephone circuit with a switch at both ends.
Unbundled Access -- Access to unbundled elements of a telecommunications
services provider's network, including network facilities, equipment,
features, functions and capabilities, at any technically feasible point
within such network.
U S WEST -- U S WEST Communications, Inc.
Valu-Line -- Valu-Line of Longview, Inc.
Virtual LAN -- In general virtual local area networks are logical networks
based on campus or public networks which allow users to share information,
files, and send messages amongst each other based on rules permitting access
by network address. Membership within a Virtual LAN may vary by applications,
security level or other requirement, but may transcend location,
organization, or carrier.
Web Page -- A Web page is a specific address on the Internet supporting
inquiries from Internet users. Web pages usually display to an inquiring
party sophisticated graphics, interactive text, and the ability to link and
download to additional information or data bases maintained either by the Web
page provider or another party. Web pages are used to provide company
information, advertising and to conduct electronic commerce.
WorldCom -- WorldCom, Inc.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
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PAGE
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<S> <C>
ADVANCED COMMUNICATIONS GROUP, INC. UNAUDITED
PRO FORMA COMBINED FINANCIAL STATEMENTS
Basis of Presentation of Unaudited Pro Forma Combined Financial Statements .............. F-3
Unaudited Pro Forma Combined Balance Sheet as of September 30, 1997...................... F-4
Unaudited Pro Forma Combined Statements of Operations for the year ended
December 31, 1996 and the nine months ended September 30, 1997.......................... F-5
Notes to Pro Forma Combined Financial Statements......................................... F-7
ADVANCED COMMUNICATIONS GROUP, INC.
Report of Independent Auditors........................................................... F-13
Consolidated Balance Sheets as of December 31, 1996 and September 30, 1997 (unaudited) .. F-14
Consolidated Statements of Operations for the period from inception to December 31, 1996
and the nine months ended September 30, 1997 (unaudited)................................ F-15
Consolidated Statements of Stockholders' Deficit for the period from inception to
December 31, 1996 and the nine months ended September 30, 1997 (unaudited) ............. F-16
Consolidated Statements of Cash Flows for the period from inception to December 31, 1996
and the nine months ended September 30, 1997 (unaudited)................................ F-17
Notes to Consolidated Financial Statements............................................... F-18
GREAT WESTERN DIRECTORIES, INC. FINANCIAL STATEMENTS
Report of Independent Auditors........................................................... F-22
Balance Sheets as of January 31, 1996, December 31, 1996 and September 30, 1997
(unaudited)............................................................................. F-23
Statements of Operations for the two years ended January 31, 1995 and 1996, the year
ended December 31, 1996, and the nine months ended September 30, 1996 and 1997
(unaudited)............................................................................. F-24
Statements of Stockholders' Equity for the two years ended January 31, 1995 and 1996,
the eleven months ended December 31, 1996, and the nine months ended
September 30, 1997 (unaudited).......................................................... F-25
Statements of Cash Flows for the two years ended January 31, 1995 and 1996, the year
ended December 31, 1996, and the nine months ended September 30, 1996 and 1997
(unaudited)............................................................................. F-26
Notes to Financial Statements............................................................ F-27
VALU-LINE OF LONGVIEW, INC. FINANCIAL STATEMENTS
Report of Independent Auditors........................................................... F-32
Combined Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997
(unaudited)............................................................................. F-33
Combined Statements of Income for the three years ended December 31, 1994, 1995 and
1996, and the nine months ended September 30, 1996 and 1997 (unaudited) ................ F-34
Combined Statements of Stockholders' Equity for the three years ended December 31, 1994,
1995 and 1996, and the nine months ended September 30, 1997 (unaudited) ................ F-35
Combined Statements of Cash Flows for the three years ended December 31, 1994, 1995 and
1996, and the nine months ended September 30, 1996 and 1997 (unaudited) ................ F-36
Notes to Combined Financial Statements................................................... F-37
F-1
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<CAPTION>
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<S> <C>
FEIST LONG DISTANCE SERVICE, INC. FINANCIAL STATEMENTS
Report of Independent Auditors........................................................... F-42
Balance Sheets as of December 31, 1996 and September 30, 1997 (unaudited) ............... F-43
Statements of Operations for the year ended December 31, 1996, and the nine months ended
September 30, 1996 and 1997 (unaudited)................................................. F-44
Statements of Stockholders' Equity for the year ended December 31, 1996, and the nine
months ended September 30, 1997 (unaudited)............................................. F-45
Statements of Cash Flows for the year ended December 31, 1996, and the nine months ended
September 30, 1996 and 1997 (unaudited)................................................. F-46
Notes to Financial Statements............................................................ F-47
FIRSTEL, INC. FINANCIAL STATEMENTS
Report of Independent Auditors........................................................... F-50
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997
(unaudited)............................................................................. F-51
Statements of Operations for the two years ended December 31, 1995 and 1996, and the
nine months ended September 30, 1996 and 1997 (unaudited)............................... F-52
Statements of Stockholders' Deficit for the two years ended December 31, 1995 and 1996,
and the nine months ended September 30, 1997............................................ F-53
Statements of Cash Flows for the two years ended December 31, 1995 and 1996, and the
nine months ended September 30, 1996 and 1997 (unaudited)............................... F-54
Notes to Financial Statements............................................................ F-55
KIN NETWORK, INC. FINANCIAL STATEMENTS
Reports of Independent Auditors.......................................................... F-59
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1996 and 1997
(unaudited)............................................................................. F-61
Statements of Operations for the three years ended December 31, 1994, 1995 and 1996, and
the nine months ended September 30, 1996 and 1997 (unaudited)........................... F-62
Statements of Stockholders' Equity for the three years ended December 31, 1994, 1995 and
1996, and the nine months ended September 30, 1997 (unaudited).......................... F-63
Statements of Cash Flows for the three years ended December 31, 1994, 1995 and 1996, and
the nine months ended September 30, 1996 and 1997 (unaudited)........................... F-64
Notes to Financial Statements............................................................ F-66
</TABLE>
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ADVANCED COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give
effect to the acquisitions by Advanced Communications Group, Inc.
(collectively with its predecessor, which it is acquiring in conjunction with
the acquisitions described below, "ACG") of the outstanding capital stock or,
in certain cases, the assets of Great Western Directories, Inc. ("Great
Western"), Valu-Line of Longview, Inc. and Related Companies ("Valu-Line"),
Feist Long Distance Service, Inc. ("Feist Long Distance"), FirsTel, Inc.
("FirsTel"), Long Distance Management II, Inc. and Long Distance Management
of Kansas, Inc. (collectively, "LDM"), The Switchboard of Oklahoma City, Inc.
("Switchboard"), Tele-Systems, Inc. ("Tele-Systems"), and National Telecom
("National Telecom") and ACG's acquisition of 49% of the outstanding shares
of KIN Network, Inc. ("KINNET") (Great Western, Valu-Line, Feist Long
Distance, FirsTel, LDM, Switchboard, Tele-Systems and National Telecom
collectively, the "Acquired Companies", and LDM, Switchboard, Tele-Systems
and National Telecom collectively, the "Other Acquired Companies"). These
acquisitions (the "Acquisitions") will occur concurrently with and are
conditioned upon the closing of the Offering. The Acquisitions are accounted
for using the purchase method of accounting. With respect to the
Acquisitions, ACG is identified as the accounting acquirer for financial
statement presentation purposes.
The unaudited pro forma combined balance sheet gives effect to the
Acquisitions and the Offering as if they had occurred on September 30, 1997.
The unaudited pro forma combined statements of operations for the year ended
December 31, 1996, and for the nine months ended September 30, 1997, give
effect to these transactions as if they had occurred on January 1, 1996.
The pro forma adjustments are based on estimates, available information
and certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what
ACG's financial position or results of operations would actually have been if
such transactions in fact had occurred on the dates stated above and are not
necessarily representative of ACG's financial position or results of
operations for any future period. Since the Acquired Companies were not under
common control or management, historical combined results of operations may
not be comparable to, or indicative of, future performance. The unaudited pro
forma combined financial statements should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this
Prospectus. See "Risk Factors" included elsewhere herein.
F-3
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ADVANCED COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
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OTHER
GREAT FEIST LONG ACQUIRED
WESTERN VALU-LINE DISTANCE FIRSTEL COMPANIES
------- --------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............. $ 1,318 $ 313 $ 149 $ 62 $ 457
Accounts receivable................... 24,490 1,415 1,769 1,282 1,190
Less allowance...................... (9,628) (25) (143) (29 ) --
------- --------- ---------- ------- ---------
Accounts receivable, net ............. 14,862 1,390 1,626 1,253 1,190
Deferred costs........................ 2,461 -- -- -- --
Prepaid expenses and other............ 391 4 23 801 222
------- --------- ---------- ------- ---------
Total current assets................ 19,032 1,707 1,798 2,116 1,869
Property and equipment, net .......... 1,223 1,226 370 869 262
Intangible assets, net................ -- -- -- -- 65
Equity investment in KINNET........... -- -- -- -- --
Other noncurrent assets............... 19 7 -- 84 4
------- --------- ---------- ------- ---------
Total assets........................ $20,274 $2,940 $2,168 $3,069 $2,200
======= ========= ========== ======= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current maturities of long-term
debt................................. $ -- $ 424 $ 17 $ 147 $ 203
Accounts payable and accrued
expenses............................. 3,568 963 1,108 1,863 391
Current portion of notes payable to
related parties...................... -- -- 659 1,040 --
Obligation for cash portion of
consideration for the Acquisitions .. -- -- -- -- --
Other................................. 2,453 10 -- 7 --
------- --------- ---------- ------- ---------
Total current liabilities........... 6,021 1,397 1,784 3,057 594
Notes payable to related parties, net
of current maturities................ -- -- -- -- --
Long-term debt, net of current
maturities........................... -- 1,082 -- -- 234
------- --------- ---------- ------- ---------
Total liabilities................... 6,021 2,479 1,784 3,057 828
------- --------- ---------- ------- ---------
Stockholders' equity:
Preferred stock...................... -- -- -- -- --
Common stock......................... 1 3 100 1 354
Additional paid-in capital........... -- -- 939 -- --
Retained earnings.................... 14,252 458 (655) 11 1,018
------- --------- ---------- ------- ---------
Total stockholders' equity
(deficit).......................... 14,253 461 384 12 1,372
------- --------- ---------- ------- ---------
Total liabilities and stockholders'
equity............................. $20,274 $2,940 $2,168 $3,069 $2,200
======= ========= ========== ======= =========
<PAGE>
<CAPTION>
POST
PRO FORMA ACQUISITION
HISTORICAL ADJUSTMENTS PRO ADJUSTMENTS
BASIS (SEE NOTE FORMA (SEE NOTE AS
ACG COMBINED 3) COMBINED 3) ADJUSTED
------- ---------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............. $ -- $ 2,299 $ (1,745) $ 554 $ 18,748 $ 19,302
Accounts receivable................... -- 30,146 -- 30,146 -- 30,146
Less allowance...................... -- (9,825) -- (9,825) -- (9,825)
------- ---------- ----------- -------- ----------- --------
Accounts receivable, net ............. -- 20,321 -- 20,321 -- 20,321
Deferred costs........................ -- 2,461 -- 2,461 -- 2,461
Prepaid expenses and other............ -- 1,441 -- 1,441 -- 1,441
------- ---------- ----------- -------- ----------- --------
Total current assets................ -- 26,522 (1,745) 24,777 18,748 43,525
Property and equipment, net .......... 7 3,957 -- 3,957 -- 3,957
Intangible assets, net................ -- 65 105,816 105,881 -- 105,881
Equity investment in KINNET........... -- -- 18,041 18,041 -- 18,041
Other noncurrent assets............... 1,184 1,298 (561) 737 2,253 2,990
------- ---------- ----------- -------- ----------- --------
Total assets........................ $ 1,191 $31,842 $121,551 $153,393 $ 21,001 $174,394
======= ========== =========== ======== =========== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current maturities of long-term
debt................................. $ -- $ 791 $ 194 $ 985 $ (985) $ --
Accounts payable and accrued
expenses............................. 1,551 9,444 101 9,545 (1,322) 8,223
Current portion of notes payable to
related parties...................... 1,856 3,555 (1,582) 1,973 (1,856) 117
Obligation for cash portion of
consideration for the Acquisitions .. -- -- 83,336 83,336 (83,336) --
Other................................. -- 2,470 -- 2,470 -- 2,470
------- ---------- ----------- -------- ----------- --------
Total current liabilities........... 3,407 16,260 82,049 98,309 (87,499) 10,810
Notes payable to related parties, net
of current maturities................ -- -- 17,233 17,233 -- 17,233
Long-term debt, net of current
maturities........................... -- 1,316 -- 1,316 (1,316) --
------- ---------- ----------- -------- ----------- --------
Total liabilities................... 3,407 17,576 99,282 116,858 (88,815) 28,043
------- ---------- ----------- -------- ----------- --------
Stockholders' equity:
Preferred stock...................... -- -- -- -- 1,122 1,122
Common stock......................... -- 459 (459) -- 1 1
Additional paid-in capital........... 47 986 37,812 38,798 108,693 147,491
Retained earnings.................... (2,263) 12,821 (15,084) (2,263) -- (2,263)
------- ---------- ----------- -------- ----------- --------
Total stockholders' equity
(deficit).......................... (2,216) 14,266 22,269 36,535 109,816 146,351
------- ---------- ----------- -------- ----------- --------
Total liabilities and stockholders'
equity............................. $ 1,191 $31,842 $121,551 $153,393 $ 21,001 $174,394
======= ========== =========== ======== =========== ========
</TABLE>
F-4
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
GREAT FEIST LONG
WESTERN VALU-LINE DISTANCE FIRSTEL
--------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications services............ $ -- $11,181 $10,028 $10,355
Yellow page publishing................. 44,324 -- -- --
--------- ----------- ------------ ---------
Total revenues....................... 44,324 11,181 10,028 10,355
Cost of services......................... 21,394 6,036 6,854 7,066
Depreciation and amortization............ 223 819 237 248
--------- ----------- ------------ ---------
Gross profit........................... 22,707 4,326 2,937 3,041
Selling, general and administrative
expenses................................ 14,987 3,572 2,470 2,147
--------- ----------- ------------ ---------
Income (loss) from operations.......... 7,720 754 467 894
Other income (expense):
Other income and expense, net.......... 6,375 73 (2) 35
Interest expense....................... (504) (186) (60) (191)
Equity in earnings (loss) of KINNET ... -- -- -- --
--------- ----------- ------------ ---------
Income (loss) before income taxes ....... 13,591 641 405 738
Provision for income taxes............... 5,295 -- -- --
--------- ----------- ------------ ---------
Net income (loss)........................ $ 8,296 $ 641 $ 405 $ 738
========= =========== ============ =========
Pro forma net income ....................
Accretion of preferred stock (2) .......
Pro forma net income available to common
stockholders ...........................
Pro forma net income per share available
to common stockholders .................
Shares used in computing pro forma
net income per share ...................
<CAPTION>
OTHER HISTORICAL PRO FORMA
ACQUIRED BASIS ADJUSTMENTS PRO FORMA
COMPANIES ACG(1) COMBINED (SEE NOTE 4) COMBINED
----------- -------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications services............ $7,798 -- $39,362 $ 1,728 $ 41,090
Yellow page publishing................. -- -- 44,324 -- 44,324
----------- -------- ------------ ------------- -----------
Total revenues....................... 7,798 -- 83,686 1,728 85,414
Cost of services......................... 4,693 -- 46,043 1,044 47,087
Depreciation and amortization............ 84 -- 1,611 4,500 6,111
----------- -------- ------------ ------------- -----------
Gross profit........................... 3,021 -- 36,032 (3,816) 32,216
Selling, general and administrative
expenses................................ 2,484 649 26,309 657 26,966
----------- -------- ------------ ------------- -----------
Income (loss) from operations.......... 537 (649) 9,723 (4,473) 5,250
Other income (expense):
Other income and expense, net.......... (30) -- 6,451 (3) 6,448
Interest expense....................... (44) (10) (995) 221 (774)
Equity in earnings (loss) of KINNET ... -- -- -- (1,069) (1,069)
----------- -------- ------------ ------------- -----------
Income (loss) before income taxes ....... 463 (659) 15,179 (5,324) 9,855
Provision for income taxes............... 36 -- 5,331 821 6,152
----------- -------- ------------ ------------- -----------
Net income (loss)........................ $ 427 $(659) $ 9,848 $(6,145) $ 3,703
=========== ======== ============ ============= ===========
Pro forma net income .................... 3,703
Accretion of preferred stock (2) ....... 112
-----------
Pro forma net income available to common
stockholders ........................... $ 3,591
===========
Pro forma net income per share available
to common stockholders ................. $ 0.18
===========
Shares used in computing pro forma
net income per share ................... 19,623,113
===========
</TABLE>
- ------------
(1) For the period from inception (June 6, 1996) through December 31,
1996.
(2) Represents accretion of the excess of the liquidation preference over
the carrying value of the Preferred Stock.
F-5
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
GREAT FEIST LONG
WESTERN VALU-LINE DISTANCE FIRSTEL
--------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications services............ $ -- $9,058 $8,965 $9,488
Yellow page publishing................. 35,624 -- -- --
--------- ----------- ------------ ---------
Total revenues....................... 35,624 9,058 8,965 9,488
Cost of services......................... 16,690 5,070 6,044 6,864
Depreciation and amortization............ 168 399 142 202
--------- ----------- ------------ ---------
Gross profit........................... 18,766 3,589 2,779 2,422
Selling, general and administrative
expenses................................ 12,647 2,875 2,404 1,968
--------- ----------- ------------ ---------
Income (loss) from operations.......... 6,119 714 375 454
Other income (expense):
Other income and expense, net.......... 58 64 1 34
Interest expense....................... (50) (103) (33) (116)
Equity in earnings (loss) of KINNET ... -- -- -- --
--------- ----------- ------------ ---------
Income (loss) before income taxes ....... 6,127 675 343 372
Provision for income taxes............... 2,048 -- -- --
--------- ----------- ------------ ---------
Net income (loss)........................ $ 4,079 $ 675 $ 343 $ 372
========= =========== ============ =========
Pro forma net income ....................
Accretion of preferred stock (1) .......
Pro forma net income available to common
stockholders ...........................
Pro forma net income per share available
to common stockholders .................
Shares used in computing pro forma
net income per share....................
<CAPTION>
OTHER HISTORICAL PRO FORMA
ACQUIRED BASIS ADJUSTMENTS PRO FORMA
COMPANIES ACG COMBINED (SEE NOTE 4) COMBINED
----------- ---------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications services............ $5,944 $ -- $33,455 $ -- $ 33,455
Yellow page publishing................. -- -- 35,624 -- 35,624
----------- ---------- ------------ ------------- -----------
Total revenues....................... 5,944 -- 69,079 -- 69,079
Cost of services......................... 2,969 -- 37,637 -- 37,637
Depreciation and amortization............ 84 2 997 3,342 4,339
----------- ---------- ------------ ------------- -----------
Gross profit........................... 2,891 (2) 30,445 (3,342) 27,103
Selling, general and administrative
expenses................................ 1,816 1,462 23,172 -- 23,172
----------- ---------- ------------ ------------- -----------
Income (loss) from operations.......... 1,075 (1,464) 7,273 (3,342) 3,931
Other income (expense):
Other income and expense, net.......... 96 -- 253 -- 253
Interest expense....................... (13) (140) (455) (126) (581)
Equity in earnings (loss) of KINNET ... -- -- -- (657) (657)
----------- ---------- ------------ ------------- -----------
Income (loss) before income taxes ....... 1,158 (1,604) 7,071 (4,125) 2,946
Provision for income taxes............... -- -- 2,048 730 2,778
----------- ---------- ------------ ------------- -----------
Net income (loss)........................ $1,158 $(1,604) $ 5,023 $(4,855) $ 168
=========== ========== ============ ============= ===========
Pro forma net income .................... 168
Accretion of preferred stock (1) ....... 16
-----------
Pro forma net income available to common
stockholders ........................... $ 152
===========
Pro forma net income per share available
to common stockholders ................. $ 0.01
===========
Shares used in computing pro forma
net income per share.................... 19,623,113
===========
</TABLE>
- ------------
(1) Represents accretion of the excess of the liquidation preference over
the carrying value of the Preferred Stock.
F-6
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
ACG was founded to create a regional competitive local exchange carrier
that primarily provides a portfolio of telecommunications services primarily
to business customers in selected service areas of Southwestern Bell and U S
WEST and publishes yellow page directories in selected markets in the Region.
ACG has conducted no operations to date and will consummate the Acquisitions
concurrently with and as a condition to the closing of this Offering.
The historical financial statements reflect the financial position and
results of operations of the Acquired Companies and were derived from the
respective Acquired Companies' financial statements. The acquisition of the
interest in KINNET is accounted for under the equity method of accounting,
and the information with respect to KINNET was derived from its financial
statements. The periods included in these pro forma financial statements for
the individual Acquired Companies and KINNET are for the nine months ended
September 30, 1997, and for the year ended December 31, 1996. The audited
historical financial statements included elsewhere in this Prospectus have
been included in accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 80.
2. ACQUISITION OF ACQUIRED COMPANIES:
Concurrently with and as a condition to the closing of the Offering, ACG
will acquire all of the outstanding capital stock of Great Western,
Valu-Line, Feist Long Distance, FirsTel and Tele-Systems, substantially all
of the assets of LDM, Switchboard and National Telecom, and 49% of the
outstanding capital stock of KINNET pursuant to the Acquisitions. The
Acquisitions are accounted for using the purchase method of accounting with
ACG being treated as the accounting acquirer.
F-7
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The consideration to be paid in the Acquisitions includes (a) cash, (b)
Common Stock, (c) promissory notes, (d) a payable for reimbursement of cash
paid to purchase two companies in September 1997, and (e) options and
warrants to purchase shares of Common Stock. The number of shares of Common
Stock to be issued in the Acquisitions will be determined by dividing the
agreed aggregate amount of $47.5 million by the initial public offering price
of the Common Stock. Therefore the actual number of shares of Common Stock so
issuable will be determinable only after the determination of the initial
public offering price. In determining the amount to be recorded for
accounting purposes for the component of the purchase price attributable to
the shares of Common Stock issuable in the Acquisitions, the value of such
shares was determined to be $38.0 million, which represents a discount of
twenty percent due to restrictions on the sale and transferability of the
shares issued.
The promissory notes issued in the Acquisitions consist of (a) $15.0
million in notes payable two years from the closing of the Acquisitions and
bearing an annual rate of interest of five percent (5%), which notes may be
prepaid at any time and are subordinated to the Company's senior debt (as
defined), (b) $2.0 million in notes convertible into shares of Common Stock
at the initial public offering price, payable two years from the closing of
the Acquisitions and bearing an annual rate of interest of ten percent (10%),
which notes may be prepaid at any time and are subordinated to the Company's
senior debt (as defined), and (c) a $350,000 promissory note payable in three
equal annual installments and bearing an annual interest rate of seven
percent (7%), which note may be prepaid at any time. Pursuant to the terms of
the notes discussed in (a) and (b) above, an event of default would exist if
the Company's senior debt (as defined) exceeds $50.0 million.
At the time the acquisition agreement with Great Western was executed, the
Company issued warrants exercisable for a total of 776,851 shares of Common
Stock. A value of $0.4 million (recorded in the table below under "Other")
has been attributed to these warrants based on a valuation performed at the
time of their issuance. In addition, the Company has agreed to issue at the
closing of the Acquisitions options and warrants which are exercisable for a
total of 637,135 shares of Common Stock. As 598,500 of these options and
warrants (including 500,000 additional warrants which will be issued to
shareholders of Great Western) are exercisable at the initial public offering
price, preliminarily no value has been attributed to them. Upon completion of
a Black-Scholes valuation, any additional value will be recorded as goodwill.
A value of $0.4 million (recorded in the table below under "Other") has been
attributed to the 38,635 other options, which are to be issued in connection
with the closing of the Acquisition of Switchboard, that are exercisable at
one-third of the initial public offering price, but which vest as an entirety
in the 37th month following the Acquisitions.
The following table sets forth the components for accounting purposes of
the consideration with respect to the Acquisitions. The total estimated
purchase price for the Acquisitions of $139.5 million and the related
allocations of the excess purchase price are based upon preliminary estimates
and are subject to certain purchase price adjustments at and following the
closing of the Acquisitions. The table does not reflect the distributions
totaling $1.9 million representing substantially all of the undistributed
earnings of the Acquired Companies that are S Corporations previously taxed
to their stockholders (or in certain cases, amounts equal to the tax payable
by the stockholders on those earnings) and distributable under the relevant
acquisition agreements as of September 30, 1997 (the "S Corporation
Distributions"). However, these amounts are reflected in the pro forma
adjustments as further described in Note 3.
<PAGE>
<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 1,276,851
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 1,326,851
--------- ---------- ------------ ------- -------------
OTHER ACQUIRED COMPANIES:
LDM........................... 3,475 -- -- -- --
Switchboard................... 1,631 -- -- 386 38,635
Telesystems................... -- 960 -- -- 36,000
National Telecom.............. 130 -- 350 -- 12,500
--------- ---------- ------------ ------- -------------
Subtotal.................... 5,236 960 350 386 87,135
--------- ---------- ------------ ------- -------------
Total......................... $83,336 $37,998 $17,350 $854 1,413,986
========= ========== ============ ======= =============
</TABLE>
F-8
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the estimated S Corporation Distributions of $1.9 million
which are expected to be paid to the stockholders of certain of
the Acquired Companies using $1.7 million of cash on hand and a
$0.2 million payable which will be repaid out of proceeds of the
Offering.
(b) Records the related party debt of $659,000 and $1,040,000 that
will be acquired by ACG in connection with the acquisitions of
Feist Long Distance and FirsTel, respectively, and which, as
intercompany debt, will not appear on the Company's consolidated
financial statements.
(c) Records the purchase by ACG of the outstanding capital stock or
substantially all of the assets of the Acquired Companies and the
purchase of 49% of the outstanding capital stock of KINNET, for
consideration consisting of (i) $83.3 million payable in cash,
(ii) shares of Common Stock valued for purposes of computing the
estimated purchase price for accounting purposes at $38.0 million,
(iii) promissory notes for $17.4 million, (iv) other payables for
reimbursement of cash paid to purchase two companies by FirsTel in
September 1997 amounting to $0.1 million, and (v) options or
warrants valued for purposes of computing the estimated purchase
price for accounting purposes at $0.7 million, for a total
estimated purchase price of $139.5 million. In preliminarily
determining the purchase price for accounting purposes, warrants
issued in June 1997 to shareholders of Great Western to purchase
776,851 shares of Common Stock at an exercise price of $6.44 per
share were assigned a value of $0.4 million, based on an outside
appraisal obtained in the month of issuance. No value was assigned
to the options and warrants to be issued upon the consummation of
the Offering that are exercisable at the initial public offering
price (500,000 such warrants to be issued to shareholders of Great
Western, 50,000 such warrants to be issued to shareholders of
FirsTel, 36,000 such options to be issued to shareholders of
Telesystems, and 12,500 such options to be issued to shareholders
of National Telecom). Upon completion of a Black-Scholes
valuation, any additional value will be recorded as goodwill. A
value of $0.4 million was placed on the 38,635 options to be
issued to shareholders of Switchboard upon consummation of the
Offering that are exercisable at one-third of the initial public
offering price, but which vest as an entirety at the end of the
37th month following the Acquisitions. This aggregate purchase
price will result in an excess purchase price of $122.8 million
(including $0.6 million of deferred acquisition costs incurred by
ACG) over the fair value of the net assets acquired of $17.3
million. Of this $122.8 million, $105.8 million relates to the
Acquired Companies and $17.0 million relates to KINNET. The excess
cost has been preliminarily allocated to an undifferentiated pool
of intangible assets to be amortized over a period of 25 years for
pro forma purposes. The Company intends to obtain independent
appraisals of the Acquired Companies and the 49% interest in
KINNET. Upon completion of the appraisal and in accordance with
the terms thereof, the intangible assets in the pool will be
allocated to the appropriate asset classifications, including
customer lists and goodwill.
(d) Records assumed cash proceeds of $120.0 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
September 30, 1997. Offering costs primarily consist of
underwriting discounts and commissions, accounting fees, legal
fees and printing expenses.
(e) Records the payment of the cash portion of the total consideration
($83.3 million).
(f) Records the payment of debt of ACG and the Acquired Companies
which is expected to be paid from the proceeds of the Offering.
(g) Records the payment of $1.75 million with respect to a five-year
noncompetition agreement between Rod K. Cutsinger and the Company
which will be amortized over its term beginning in the period in
which it is paid.
F-9
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(h) Records the issuance of 133,334 shares of Series A Redeemable
Convertible Preferred Stock in consideration of an agreement
entered into with Northwestern Public Service Company to negotiate
in good faith with respect to a strategic alliance. The Preferred
Stock has an aggregate liquidation preference of $2 million, is
convertible into shares of common stock at the initial public
offering price 18 months after the consummation of the initial
public offering and is redeemable, at the option of the Company,
for $1.25 million in the 13th month after the initial public
offering if no strategic alliance has been entered into. The
Preferred Stock has been assigned a value of $1,122,000
representing the estimated fair value on the date of grant based
on an imputed market interest rate of 10%.
F-10
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the unaudited pro forma and
post-acquisition combined balance sheet adjustments at September 30, 1997 (in
thousands):
<TABLE>
<CAPTION>
(A) (B) (C)
---------- --------- ----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents . $(1,745) $ -- $ --
Accounts receivable, net .. -- -- --
Deferred costs............. -- -- --
Prepaid expenses and
other..................... -- -- --
---------- --------- ----------
Total current assets .... (1,745) -- --
Property and equipment,
net....................... -- -- --
Intangible assets, net .... -- -- 105,816
Equity investment in
KINNET ................... -- -- 18,041
Other noncurrent assets ... -- -- (561)
---------- --------- ----------
Total assets............. $(1,745) $ -- $123,296
========== ========= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current maturities of
long-term debt ........... $ 194 $ -- $ --
Accounts payable and
accrued
expenses.................. -- -- 101
Current portion of notes
payable to
related parties........... -- (1,699) 117
Obligation for cash
portion of
consideration in the
Acquisitions.............. -- -- 83,336
---------- --------- ----------
Total current
liabilities............... 194 (1,699) 83,554
Notes payable to related
parties, net
of current maturities .... -- -- 17,233
Long-term debt, net of
current maturities........ -- -- --
---------- --------- ----------
Total liabilities........ 194 (1,699) 100,787
---------- --------- ----------
Stockholders' equity
Preferred stock ......... -- -- --
Common stock............. -- -- (459)
Additional
paid-in-capital........... -- 1,699 36,113
Retained earnings........ (1,939) -- (13,145)
---------- --------- ----------
Total stockholders' equity
(deficit)................. (1,939) 1,699 22,509
---------- --------- ----------
Total liabilities and
stockholders'
equity.................... $(1,745) $ -- $123,296
========== ========= ==========
<PAGE>
<CAPTION>
TOTAL
TOTAL POST-
PRO FORMA ACQUISITION
ADJUSTMENTS (D) (E) (F) (G) (H) ADJUSTMENTS
------------- ---------- ----------- ---------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents . $ (1,745) $108,092 $(83,336) $(4,258) $(1,750) $ -- $ 18,748
Accounts receivable, net .. -- -- -- -- -- -- --
Deferred costs............. -- -- -- -- -- -- --
Prepaid expenses and
other..................... -- -- -- -- -- -- --
------------- ---------- ----------- ---------- ---------- -------- -------------
Total current assets .... (1,745) 108,092 (83,336) (4,258) (1,750) -- 18,748
Property and equipment,
net....................... -- -- -- -- -- -- --
Intangible assets, net .... 105,816 -- -- -- -- -- --
Equity investment in
KINNET ................... 18,041 -- -- -- -- -- --
Other noncurrent assets ... (561) (619) -- -- 1,750 1,122 2,253
------------- ---------- ----------- ---------- ---------- -------- -------------
Total assets............. $121,551 $107,473 $(83,336) $(4,258) $ -- $1,122 $ 21,001
============= ========== =========== ========== ========== ======== =============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current maturities of
long-term debt ........... $ 194 $ -- 4 -- $ (985) $ -- $-- $ (985)
Accounts payable and
accrued
expenses.................. 101 (1,221) -- (101) -- -- (1,322)
Current portion of notes
payable to
related parties........... (1,582) -- -- (1,856) -- -- (1,856)
Obligation for cash
portion of
consideration in the
Acquisitions.............. 83,336 -- (83,336) -- -- -- (83,336)
------------- ---------- ----------- ---------- ---------- -------- -------------
Total current
liabilities............... 82,049 (1,221) (83,336) (2,942) -- -- (87,499)
Notes payable to related
parties, net
of current maturities .... 17,233 -- -- -- -- -- --
Long-term debt, net of
current maturities........ -- -- -- (1,316) -- -- (1,316)
------------- ---------- ----------- ---------- ---------- -------- -------------
Total liabilities........ 99,282 (1,221) (83,336) (4,258) -- -- (88,815)
------------- ---------- ----------- ---------- ---------- -------- -------------
Stockholders' equity
Preferred stock ......... -- -- -- -- -- 1,122 1,122
Common stock............. (459) 1 -- -- -- -- 1
Additional
paid-in-capital........... 37,812 108,693 -- -- -- -- 108,693
Retained earnings........ (15,084) -- -- -- -- -- --
------------- ---------- ----------- ---------- ---------- -------- -------------
Total stockholders' equity
(deficit)................. 22,269 108,694 -- -- -- 1,122 109,816
------------- ---------- ----------- ---------- ---------- -------- -------------
Total liabilities and
stockholders'
equity.................... $121,551 $107,473 $(83,336) $(4,258) $ -- $1,122 $ 21,001
============= ========== =========== ========== ========== ======== =============
</TABLE>
F-11
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
ADJUSTMENTS:
Year Ended December 31, 1996
(a) Reflects the amortization of excess purchase price relating to the
Acquired Companies which has been preliminarily allocated to an
undifferentiated pool of intangible assets to be amortized over a
period of 25 years for pro forma purposes. The Company intends to
obtain independent appraisals of the Acquired Companies. Upon
completion of the appraisals and in accordance with the terms
thereof, the intangible assets in the pool will be allocated to
the appropriate asset classifications, including customer lists
and goodwill. These appraisals may result in changes to the
estimated useful life noted above.
(b) Reflects the equity in losses of KINNET of $388,000 and the
amortization of $681,000 of related excess purchase price which
has been recorded as intangible assets comprised of goodwill to be
amortized over 25 years.
(c) Reflects an increase of $774,000 of interest expense attributable
to debt issued as consideration for the Acquisitions, net of a
reduction of $995,000 in interest expense on debt of the Acquired
Companies which is to be repaid from the proceeds of the Offering.
(d) Reflects the revenue and expenses of two companies acquired by
FirsTel in September 1997.
(e) Reflects the incremental provisions for federal and state income
taxes relating to the other pro forma adjustments and for income
taxes on heretofore S Corporation income.
(f) Reflects the amortization of the five year, $1.1 million strategic
alliance and non-compete agreement entered into with Northwestern
Public Service Company.
F-12
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes unaudited pro forma combined statement of
operations adjustments for the year ended December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
---------- ---------- ------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues--Telecommunications
services..................... $ -- $ -- $ -- $1,728 $ -- $ -- $ 1,728
Cost of services.............. -- -- -- 1,044 -- -- 1,044
Depreciation and
amortization................. 4,233 -- -- 43 -- 224 4,500
---------- ---------- ------- -------- -------- -------- -------------
Gross profit................ (4,233) -- -- 641 -- (224) (3,816)
Selling, general and
administrative
expenses..................... -- -- -- 657 -- -- 657
---------- ---------- ------- -------- -------- -------- -------------
Income (loss) from
operations................... (4,233) -- -- (16) -- (224) (4,473)
Other income (expense):
Other income and expense, net -- -- -- (3) -- -- (3)
Interest expense............ -- -- 221 -- -- -- 221
Equity in earnings of
KINNET....................... -- (1,069) -- -- -- -- (1,069)
---------- ---------- ------- -------- -------- -------- -------------
Income (loss) before income
taxes........................ (4,233) (1,069) 221 (19) -- (224) (5,324)
Provision for income taxes ... -- -- -- -- 821 -- 821
---------- ---------- ------- -------- -------- -------- -------------
Net income (loss)............. $(4,233) $(1,069) $221 $ (19) $(821) $(224) $(6,145)
========== ========== ======= ======== ======== ======== =============
</TABLE>
Nine Months Ended September 30, 1997
(a) Reflects the amortization of excess purchase price relating to the
Acquired Companies which has been preliminarily allocated to an
undifferentiated pool of intangible assets to be amortized over a
period of 25 years for pro forma purposes.
(b) Reflects the equity in losses of KINNET of $146,000 and the
amortization of $511,000 of related excess purchase price which
has been recorded as intangible assets comprised of goodwill to be
amortized over 25 years.
(c) Reflects an increase of $581,000 of interest expense attributable
to debt issued as consideration for the Acquisitions, net of a
reduction of $455,000 in interest expense on debt of the Acquired
Companies which is to be repaid from the proceeds of the Offering.
(d) Reflects the incremental provisions for federal and state income
taxes relating to the other pro forma adjustments and for income
taxes on heretofore S Corporation income.
(e) Reflects the amortization over five years of the Series A
Redeemable Convertible Preferred Stock issued in consideration of
the agreement entered into with Northwestern Public Service
Company.
(f) The Company estimates it will record compensation expense of
approximately $950,000 during the fourth quarter of 1997 related
to options issued in December 1997 to two officers to purchase
300,000 shares of common stock at an exercise price of $2.50 per
share.
F-13
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes unaudited pro forma combined income
statement adjustments for the nine months ended September 30, 1997 (in
thousands):
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
---------- --------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues--
Telecommunications services .. $ -- $ -- $ -- $ -- $ -- $ --
Cost of services.............. -- -- -- -- -- --
Depreciation and
amortization................. 3,174 -- -- -- 168 3,342
---------- --------- -------- -------- -------- -------------
Gross profit................ (3,174) -- -- -- (168) (3,342)
Selling, general and
administrative expenses...... -- -- -- -- -- --
---------- --------- -------- -------- -------- -------------
Income (loss) from
operations................. (3,174) -- -- -- (168) (3,342)
Other income (expense):
Other income and expense,
net........................ -- -- -- -- -- --
Interest expense............ -- -- (126) -- -- (126)
Equity in earnings of
KINNET..................... -- (657) -- -- -- (657)
---------- --------- -------- -------- -------- -------------
Income (loss) before income
taxes........................ (3,174) (657) (126) -- (168) (4,125)
Provision for income taxes ... -- -- -- 730 -- 730
---------- --------- -------- -------- -------- -------------
Net income (loss)............. $(3,174) $ (657) $(126) $(730) $(168) $(4,855)
========== ========= ======== ======== ======== =============
</TABLE>
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Advanced Communications Group, Inc.
We have audited the accompanying consolidated balance sheet of Advanced
Communications Group, Inc. as of December 31, 1996, and the related
consolidated statements of operations, stockholders' deficit, and cash flows
for the period from inception (June 6, 1996) through December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Advanced
Communications Group, Inc. as of December 31, 1996, and the results of its
operations and its cash flows for the period from inception (June 6, 1996)
through December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Houston, Texas
September 15, 1997
F-15
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 33,450 $ --
Employee advances........................................ 1,388 --
-------------- ---------------
Total current assets................................... 34,838 --
Office furniture and equipment, net...................... 8,252 6,515
Other non-current assets................................. 48,480 1,184,230
-------------- ---------------
Total assets........................................... $ 91,570 $ 1,190,745
============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Note payable to stockholder.............................. $ 565,047 $ 1,706,469
Accrued interest payable to stockholder.................. 9,890 149,412
Accounts payable and accrued expenses.................... 148,653 1,551,131
-------------- ---------------
Total current liabilities.............................. 723,590 3,407,012
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $.00001 par, 180,000,000 shares authorized,
8,453,788 shares issued and outstanding................. 84 84
Additional paid-in capital .............................. 26,716 46,716
Accumulated deficit ..................................... (658,820) (2,263,067)
-------------- ---------------
Total stockholders' deficit............................ (632,020) (2,216,267)
-------------- ---------------
Total liabilities and stockholders' deficit................ $ 91,570 $ 1,190,745
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(JUNE 6, 1996) FOR THE NINE
THROUGH MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Revenues............................ $ -- $ --
General and administrative
expenses........................... 648,930 1,462,172
Depreciation and amortization ...... -- 2,481
Interest expense.................... 9,890 139,594
Other (income) loss................. -- --
----------------- ------------------
Loss before income tax benefit ... 658,820 1,604,247
Income tax benefit.................. -- --
----------------- ------------------
Net loss.......................... $658,820 $1,604,247
================= ==================
Net loss per share................ $ .03 $ .07
================= ==================
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (JUNE 6, 1996) THROUGH SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
----------- -------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Initial capitalization....... 8,453,788 $84 $26,716 $ -- $ 26,800
Net loss..................... -- -- -- (658,820) (658,820)
----------- -------- ------------ --------------- ---------------
BALANCES, December 31, 1996 . 8,453,788 84 26,716 (658,820) (632,020)
Issuance of stock warrants
(unaudited)................. -- -- 20,000 -- 20,000
Net loss (unaudited)......... -- -- -- (1,604,247) (1,604,247)
----------- -------- ------------ --------------- ---------------
BALANCES, September 30, 1997
(unaudited)................. 8,453,788 $84 $46,716 $ (2,263,067) $ (2,216,267)
=========== ======== ============ =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(JUNE 6, 1996) FOR THE NINE
THROUGH MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................... $(658,820) $ (1,604,247)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization............................................ -- 2,481
Stock-based compensation expense......................................... -- 20,000
Changes in assets and liabilities:
(Increase) decrease in employee advances................................ (1,388) 1,388
Increase in property and equipment...................................... (8,252) --
Increase in other non-current assets.................................... (48,480) (1,136,494)
Increase in accounts payable and accrued expenses....................... 148,653 1,402,478
----------------- ------------------
Net cash used by operating activities.................................. (568,287) (1,314,394)
----------------- ------------------
Cash flows from financing activities:
Increase in note payable to stockholder.................................. 565,047 1,141,422
Increase in accrued interest payable to stockholder...................... 9,890 139,522
Issuance of common stock................................................. 26,800 --
----------------- ------------------
Net cash provided by financing activities.............................. 601,737 1,280,944
----------------- ------------------
Net increase (decrease) in cash and cash equivalents....................... 33,450 (33,450)
Cash and cash equivalents:
Beginning of period...................................................... -- 33,450
----------------- ------------------
End of period............................................................ $ 33,450 $ --
================= ==================
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997 (UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Advanced Communications Group, Inc. (the "Company") (formerly 1+USA, Inc.)
was incorporated in the State of Delaware in June 1996 to create a regional
competitive local exchange carrier that provides an integrated portfolio of
telecommunications services principally to business customers in selected
service areas of Southwestern Bell and U S WEST. As of September 30, 1997,
the Company intended to acquire the stock or assets of nine operating
companies (the "Acquired Companies") and a 49% interest in another operating
company (collectively, the "Acquisitions") and complete an initial public
offering of its common stock. The Company has not conducted any operations,
and all activities to date have related to the offering and the Acquisitions.
The Company is dependent upon the public offering to complete the
Acquisitions and to repay an obligation it has incurred under a promissory
note made in favor of its major stockholder, Consolidation Partners Founding
Fund, L.L.C. ("CPFF"). There can be no assurance that the Acquisitions will
be completed or that the Company will be able to generate future operating
revenues.
2. ACQUISITIONS OF THE ACQUIRED COMPANIES:
Prior to September 1997, the Company signed definitive agreements pursuant
to which it agreed to acquire in mergers, stock purchases or asset purchases,
all of the outstanding capital stock of Great Western Directories, Inc.,
Valu-Line of Longview, Inc., Feist Long Distance Service, Inc., FirsTel, Inc.
and Tele-Systems, Inc., substantially all of the assets of Long Distance
Management II, Inc., Long Distance Management of Kansas, Inc., The
Switchboard of Oklahoma City, Inc., and National Telecom, a proprietorship,
and 49% of the outstanding capital stock of KIN Network, Inc. The
consideration to be paid by the Company in the Acquisitions was to include
cash, common stock of the Company, notes, and options or warrants to purchase
common stock of the Company and the assumption of debt in the case of two
companies.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Unaudited interim periods -- The interim consolidated financial statements
as of September 30, 1997, and for the nine months then ended are unaudited.
These interim consolidated financial statements have been prepared on the
same basis as the annual financial statements included herewith. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the consolidated balance sheets,
results of operations and cash flows with respect to the interim financial
statements, have been included. The results of operations for the interim
period are not necessarily indicative of the results for the entire fiscal
year.
Principles of consolidation -- The consolidated financial statements
include the accounts of Advanced Communications Group, Inc. and its
wholly-owned subsidiaries which were formed for the sole purpose of acquiring
the stock or assets of the Acquired Companies.
Deferred acquisition and deferred offering costs -- The Company has
deferred certain legal, accounting, appraisal and other costs incurred in
connection with the Acquisitions and the Offering. At December 31, 1996 and
September 30, 1997, deferred acquisition costs amounted to approximately
$40,900 and $560,000, respectively, and deferred offering costs amounted to
$2,700 and $619,000, respectively. At such time as the Company completes the
Acquisitions, deferred acquisition costs will be included in the
determination of excess purchase price. Deferred offering costs will be
charged to additional paid-in capital upon the closing of the Offering.
F-20
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Office furniture and equipment -- Office furniture and equipment are
stated at cost. Depreciation is computed using the straight-line method over
the respective lives of the assets. The estimated useful lives are as
follows:
Furniture and fixtures............. 7 years
Computer equipment and software .... 3 years
Income taxes -- No provision for Federal, state and local income taxes has
been made because the Company has sustained cumulative losses since its
inception in June 1996. A 100% valuation allowance has been established for
the related deferred tax asset.
Net Loss Per Share -- Net loss per share is computed using the weighted
average number of shares outstanding. The weighted average shares outstanding
were 8,453,788 for the period from inception (June 6, 1996) through December
31, 1996 and for the nine months ended September 30, 1997.
Use of Estimates -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
New Accounting Pronouncements -- Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," allows
entities to choose between a new fair value based method of accounting for
employee stock options or similar equity instruments and the current
intrinsic, value-based method of accounting required by Accounting Principles
Board Opinion No. 25 ("APB No. 25"). Entities electing to remain with the
accounting in APB No. 25 must make pro forma disclosures of net income and
earnings per share as if the fair value method of accounting had been
applied. No employee stock options or similar equity instruments were issued
by the Company prior to January 1, 1997. The Company will provide pro forma
disclosure of net income and earnings per share, as applicable in the notes
to future consolidated financial statements.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share". For the Company, SFAS No. 128 will be effective
for the year ended December 31, 1997, but not for any periods ended prior to
that time. SFAS No. 128 simplifies the standards required under current
accounting rules for computing earnings per share and replaces the
presentation of primary earnings per share and fully diluted earnings per
share with a presentation of basic earnings per share ("basic EPS") and
diluted earnings per share ("diluted EPS"). Basic EPS excludes dilution and
is determined by dividing income available to common stockholders by the
weighted average number of common shares outstanding during the period.
Diluted EPS reflects the potential dilution that could occur if securities
and other contracts to issue common stock were exercised or converted into
common stock. Diluted EPS is computed similarly to full diluted earnings per
share under current accounting rules. The implementation of SFAS No. 128 is
not expected to have a material effect on the Company's earnings per share as
determined under current accounting rules.
4. TRANSACTIONS WITH RELATED PARTIES:
COMMON OWNERSHIP AND MANAGEMENT
At December 31, 1996 and September 30, 1997, a total of 8,205,487 shares
of the Company's common stock was owned by CPFF and by two individuals who
then served as directors and officers of both the Company and CPFF and who
own the controlling interest in CPFF.
SUBORDINATED PROMISSORY NOTE IN FAVOR OF CPFF
The Company's activities have been financed through a subordinated note
agreement with CPFF. In September 1996, the Company executed a Subordinated
Promissory Note (the "Note") in favor of CPFF
F-21
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in the principal amount of $1,200,000 and bearing an annual interest rate of
eight (8%) percent. Under its original terms, the principal and accrued
interest under the Note were to be paid in full on the earlier of September
15, 1997, or the date on which the Company's common stock becomes listed or
quoted on a national basis. During the year ended December 31, 1996 and the
nine months ended September 30, 1997, the Company incurred interest expense
of $9,890 and $139,594, respectively, under the Note. In September 1997, the
Company and CPFF amended the terms of the Note to provide for an increase in
the principal balance from $1.2 million to $2.2 million, and to extend the
maturity of the Note to the earlier of December 31, 1998 or the consummation
of the Offering.
STOCK OPTIONS AND WARRANTS
In May 1997 the Company granted to one of its consultants a warrant for
the purchase of 7,769 shares of common stock at an exercise price of $2.57
per share. This warrant is exercisable in whole or in part at any time up to
its expiration date in May 2007. In connection with the issuance of this
warrant, the Company recorded a non-recurring, non-cash compensation expense
of $20,000 reflecting the difference between the exercise price for the
shares and the estimated fair value of the shares at the date of grant.
In June 1997, the Company granted options for the purchase of 775,000
shares of common stock at an exercise price equal to the fair value of a
share of common stock at the date of grant, specifically $2.50 per share, to
three individuals. In December 1997, two of these individuals exchanged their
options to purchase 525,000 shares of common stock for ten-year, fully vested
warrants to purchase a like number of shares of common stock at the same
exercise price.
In June 1997, the Company's Board of Directors approved a Stock Awards
Plan (the "Plan") which provides for the granting or awarding of incentive or
non-qualified stock options, stock appreciation rights, restricted or
deferred stock, dividend equivalents and other incentive awards to directors,
officers, and key employees of the Company. The number of shares of common
stock authorized and reserved for issuance under the Plan is 3,500,000
shares.
Subsequent to September 30, 1997, the Company agreed to make various
grants and awards under the Plan to employees and officers of the Acquired
Companies, to outside directors, and to certain individuals who became
officers of the Company after September 30, 1997. These options are
exercisable at the initial public offering price, and they have various
vesting and termination provisions. Also, the Company agreed to compensate
each of its outside directors with annual option awards for 15,000 shares of
common stock. Under this arrangement, options for 90,000 shares, exercisable
at the initial public offering price, will be issued annually to six outside
directors. In addition, three individuals who become officers of the Company
after September 30, 1997, have been awarded ten-year options for the purchase
of 1,275,000 shares of common stock, consisting of options for the purchase
of 300,000 shares at a price of $2.50 per share and options for the purchase
of 975,000 shares which are exercisable at the initial public offering price.
The Company estimates that it will record compensation expense of
approximately $950,000 during the fourth quarter of 1997 related to the
300,000 options issued at $2.50 per share. Actual compensation expense to be
recorded will be determined upon the completion of a third-party valuation of
the fair value of these options on the date of grant.
OPERATING LEASE AGREEMENT
In January 1997, the Company entered into a four year lease agreement with
CPFF pursuant to which the Company leases furniture and office equipment.
Under this agreement the Company is obligated to make monthly rental payments
to CPFF of $1,163. For the nine months ended September 30, 1997, the Company
recognized approximately $10,000 of rental expense related to this lease
agreement.
5. SUBSEQUENT EVENT
On September 29, 1997, the Company incorporated a new wholly owned
subsidiary under the laws of the State of Delaware. On October 6, 1997, the
Company changed its name to Advanced
F-22
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Communications Corp. and subsequently the new subsidiary changed its name to
Advanced Communications Group, Inc. ("ACG"). As of October 6, 1997 and in
order to facilitate securing requisite regulatory permits, ACG entered into
new definitive agreements to acquire the stock or assets of the Acquired
Companies and a 49% interest in a fiber optic network company that replaced
the various definitive agreements that had been entered into earlier with the
Acquired Companies. In the aggregate, the consideration to be paid by ACG in
the Acquisitions includes $83.3 million in cash, shares of ACG's Common Stock
valued for purposes of computing the estimated purchase price for accounting
purposes at $37.9 million, $17.4 million in promissory notes, and options and
warrants to purchase 1,413,986 shares of ACG's Common Stock.
Also as of October 6, 1997, the Company, ACG and a wholly owned subsidiary
of ACG entered into an Agreement of Merger pursuant to which, after the
consummation of a reverse stock split and concurrently with the closing of
the Acquisitions, the Company will be merged with the subsidiary of ACG, with
the Company as the surviving corporation. In the merger, each share of common
stock of the Company will be converted into one share of Common Stock of ACG,
ACG will succeed to all options and warrants of the Company, and the Company
will become a wholly owned subsidiary of ACG.
On October 10, 1997, ACG filed with the Securities and Exchange Commission
a Registration Statement on Form S-1 relating to the initial public offering
of its Common Stock. The closing of the Acquisitions and the merger of the
Company with the subsidiary of ACG will occur concurrently with, and are a
condition to, the closing of that offering. A portion of the proceeds of that
offering will be used to pay the cash portion of the consideration in the
Acquisitions. ACG has not conducted any operations, and all of its activities
to date have related to the public offering and the Acquisitions.
In January 1998, ACG entered into an agreement with a certain utility
company regarding the possible creation of a strategic alliance. Under the
terms of the agreement, which will be consummated contemporaneously with the
closing of the initial public offering, ACG will issue 133,334 shares of
Series A Redeemable Convertible Preferred Stock (Preferred Stock) with an
aggregate liquidation preference of $2 million. The Preferred Stock is
convertible into shares of common stock at the initial public offering price
eighteen months after the consummation of the initial public offering. The
Preferred Stock does not pay dividends and is not entitled to vote in the
election of directors. If a strategic alliance has not been entered into by
the 13th month after the initial public offering, ACG may, at its option,
redeem the Preferred Stock for total proceeds of $1.25 million.
Also in January 1998, ACG's Board of Directors approved an approximately
1-for-2.574 reverse stock split, subject to stockholder approval. This
reverse stock split has been reflected retroactively for all periods
presented.
ACG is dependent on the public offering to complete the Acquisitions and
to repay an obligation of the Company to CPFF. There can be no assurance that
the Acquisitions will be completed or that ACG will be able to generate
future operating revenues.
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Great Western Directories, Inc.
Amarillo, Texas
We have audited the accompanying balance sheets of Great Western
Directories, Inc. as of January 31, 1996 and December 31, 1996, and the
related statements of operations and cash flows for the years ended January
31, 1995 and 1996 and December 31, 1996, and the related statements of
stockholders' equity for the years ended January 31, 1995 and 1996 and the
eleven months ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Great Western
Directories, Inc. as of January 31, 1996 and December 31, 1996, and the
results of its operations and its cash flows for the years ended January 31,
1995 and 1996 and December 31, 1996 in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
October 2, 1997
F-24
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31, SEPTEMBER 30,
1996 1996 1997
------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash.................................................... $ 31,693 $ 719,268 $ 1,317,877
Accounts receivable..................................... 17,678,787 21,607,728 24,489,630
Less: Allowance for doubtful accounts................... (6,590,847) (8,282,945) (9,628,295)
------------- -------------- ---------------
Net accounts receivable............................. 11,087,940 13,324,783 14,861,335
------------- -------------- ---------------
Income taxes receivable................................. 1,072,378 384,145 384,145
Deferred directory costs................................ 3,436,346 3,052,944 2,460,618
Deferred income taxes................................... 1,085,748 1,627,821 --
Other current assets.................................... 423,400 377,275 7,209
------------- -------------- ---------------
Total current assets................................ 17,137,505 19,486,236 19,031,184
------------- -------------- ---------------
PROPERTY AND EQUIPMENT
Land.................................................... 79,900 79,900 79,900
Building and improvements............................... 640,059 644,061 654,312
Furniture, fixtures and equipment....................... 1,722,500 1,991,215 2,253,623
------------- -------------- ---------------
2,442,459 2,715,176 2,987,835
Less: Accumulated depreciation.......................... (1,400,578) (1,597,008) (1,764,584)
------------- -------------- ---------------
Net property and equipment.......................... 1,041,881 1,118,168 1,223,251
------------- -------------- ---------------
OTHER ASSETS.............................................. 2,391 4,607 18,832
------------- -------------- ---------------
TOTAL ASSETS.............................................. $18,181,777 $20,609,011 $20,273,267
============= ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft.......................................... $ 33,114 $ -- $ --
Accounts payable........................................ 1,378,318 1,393,021 1,626,845
Payable to related parties.............................. 270,246 483,311 172,271
Accrued liabilities..................................... 467,530 1,138,730 1,768,319
Note payable to bank.................................... 2,100,000 -- --
Current maturities of long-term debt.................... 2,109,740 1,849,309 --
Prepayments on directory advertising.................... 3,690,261 3,170,840 2,452,723
------------- -------------- ---------------
Total current liabilities........................... 10,049,209 8,035,211 6,020,158
LONG-TERM DEBT, less current maturities................... 3,531,051 -- --
------------- -------------- ---------------
Total liabilities................................... 13,580,260 8,035,211 6,020,158
------------- -------------- ---------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized shares of 10,000,
1,250 shares issued and outstanding................... 1,250 1,250 1,250
Additional paid-in capital.............................. 5 5 5
Retained earnings....................................... 4,600,262 12,572,545 14,251,854
------------- -------------- ---------------
Total stockholders' equity.......................... 4,601,517 12,573,800 14,253,109
------------- -------------- ---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY..................................... $18,181,777 $20,609,011 $20,273,267
============= ============== ===============
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED YEAR ENDED NINE MONTHS ENDED
JANUARY 31, DECEMBER 31, SEPTEMBER 30,
---------------------------- -------------- ----------------------------
1995 1996 1996 1996 1997
------------- ------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
ADVERTISING REVENUES............... $29,406,843 $36,469,094 $44,324,097 $33,463,165 $35,623,889
COST OF REVENUES
Commissions and other sales
expenses........................ 7,443,762 8,784,336 9,543,696 6,747,684 8,542,611
Publishing, related party........ 94,448 578,223 1,077,795 635,557 843,021
Publishing, other................ 8,807,084 8,944,754 9,333,705 6,718,801 6,345,956
Distribution, related party ..... 558,885 697,250 815,566 332,585 180,907
Distribution, other.............. 828,892 563,362 622,820 676,106 777,332
Depreciation and amortization ... 272,296 228,324 223,434 171,243 167,576
------------- ------------- -------------- ------------- -------------
Total cost of revenues......... 18,005,367 19,796,249 21,617,016 15,281,976 16,857,403
------------- ------------- -------------- ------------- -------------
Gross margin................... 11,401,476 16,672,845 22,707,081 18,181,189 18,766,486
GENERAL AND ADMINISTRATIVE
EXPENSES
Salaries and payroll taxes ...... 4,672,222 5,953,869 6,320,326 4,656,001 5,565,196
Provision for bad debts.......... 2,907,720 3,249,165 4,650,918 3,764,746 3,590,097
Other............................ 3,204,938 3,457,492 4,015,824 3,185,682 3,491,993
------------- ------------- -------------- ------------- -------------
Total general and
administrative expenses....... 10,784,880 12,660,526 14,987,068 11,606,429 12,647,286
------------- ------------- -------------- ------------- -------------
Total operating income......... 616,596 4,012,319 7,720,013 6,574,760 6,119,200
------------- ------------- -------------- ------------- -------------
OTHER INCOME (EXPENSE)
Interest expense................. (216,228) (602,100) (503,768) (449,106) (49,751)
Settlement of litigation, net of
expenses of $318,496............ -- -- 6,281,504 6,281,504 --
Other, net....................... 80,520 66,857 93,587 68,089 57,977
------------- ------------- -------------- ------------- -------------
Total other income (expense) .. (135,708) (535,243) 5,871,323 5,900,487 8,226
------------- ------------- -------------- ------------- -------------
Income before income taxes .... 480,888 3,477,076 13,591,336 12,475,247 6,127,426
PROVISION FOR INCOME TAXES......... 245,497 1,307,290 5,294,596 4,828,254 2,048,117
------------- ------------- -------------- ------------- -------------
NET INCOME......................... $ 235,391 $ 2,169,786 $ 8,296,740 7,646,993 4,079,309
============= ============= ============== ============= =============
NET INCOME PER SHARE............... $ 188.31 $ 1,735.83 $ 6,637.39 $ 6,117.59 $ 3,263.45
============= ============= ============== ============= =============
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
-------- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances, January 31, 1994........................... $1,250 $5 $ 2,287,585 $ -- $ 2,228,840
Cash dividends ($37 per share)....................... -- -- (46,250) -- (46,250)
Net income........................................... -- -- 235,391 -- 235,391
-------- ------------ -------------- ----------- -------------
Balances, January 31, 1995........................... 1,250 5 2,476,726 -- 2,477,981
Cash dividends ($37 per share)....................... -- -- (46,250) -- (46,250)
Net income........................................... -- -- 2,169,786 -- 2,169,786
-------- ------------ -------------- ----------- -------------
Balances, January 31, 1996........................... 1,250 5 4,600,262 -- 4,601,517
Cash dividends ($37 per share)....................... -- -- (46,250) -- (46,250)
Net income (eleven months)........................... -- -- 8,018,533 -- 8,018,533
-------- ------------ -------------- ----------- -------------
Balances, December 31, 1996.......................... 1,250 5 12,572,545 12,573,800
Purchase of treasury stock (31.25 shares, unaudited). -- -- -- (225,000) (225,000)
Issuance of treasury stock (31.25 shares, unaudited). -- -- -- 225,000 225,000
Cash dividends ($480 per share, unaudited) .......... -- -- (600,000) -- (600,000)
Cash dividends ($1,440 per share, unaudited) ........ -- -- (1,800,0000) -- (1,800,000)
Net income (unaudited)............................... -- -- 4,079,309 -- 4,079,309
-------- ------------ -------------- ----------- -------------
Balances, September 30, 1997 (unaudited) ............ $1,250 $5 $ 14,251,854 -- $14,253,109
======== ============ ============== =========== =============
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED YEAR ENDED NINE MONTHS
JANUARY 31, DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------- -------------- ----------------------------
1995 1996 1996 1996 1997
------------- ------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................. $ 235,391 $ 2,169,786 $ 8,296,740 $ 7,646,993 $ 4,079,309
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation and amortization............ 272,296 228,324 223,434 171,243 167,576
Loss on disposal of assets............... -- 72,000 -- -- --
Provision for bad debts.................. 2,907,720 3,249,165 4,650,918 3,764,746 3,590,097
Deferred income taxes.................... (288,362) (68,045) (542,074) (605,855) 1,627,821
Changes in:
Accounts receivable..................... (5,630,561) (7,505,966) (6,707,225) (5,444,897) (5,126,649)
Deferred directory costs................ (402,971) (1,159,636) (696,008) (444,023) 592,326
Income taxes receivable................. 464,836 (755,005) 688,233 1,098,919 --
Accounts payable........................ (84,661) (708,179) (569,983) (1,389,581) (77,216)
Accrued liabilities..................... (471,403) 85,664 886,520 1,075,841 629,589
Prepayments on directory
advertising............................ (198,306) 825,617 (352,931) (668,431) (718,117)
Federal income taxes payable............ -- -- -- 3,177,789 --
Other, net............................... (622,044) 611,754 72,136 30,630 355,841
------------- ------------- -------------- ------------- -------------
Net cash provided (used) by
operating activities................. (3,818,065) (2,954,521) 5,949,760 8,413,374 5,120,577
------------- ------------- -------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ....... (279,140) (116,288) (300,125) (69,555) (272,659)
------------- ------------- -------------- ------------- -------------
Net cash used by investing
activities........................... (279,140) (116,288) (300,125) (69,555) (272,659)
------------- ------------- -------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in bank overdraft..................... -- 33,114 (169,011) (169,011) --
Net borrowings (payments) under note
payable to bank........................... (500,000) 1,800,000 -- (750,000) --
Advances under long-term debt................ 4,500,000 3,000,000 -- 2,100,000 --
Principal payments under long-term debt ..... (33,275) (2,037,364) (4,708,019) (1,750,682) (1,849,309)
Purchase of treasury stock................... -- -- -- -- (225,000)
Issuance of treasury stock................... -- -- -- -- 225,000
Cash dividends paid.......................... (46,250) (46,250) (92,500) (46,250) (2,400,000)
------------- ------------- -------------- ------------- -------------
Net cash provided (used) by
financing activities................. 3,920,475 2,749,500 (4,969,530) (615,943) (4,249,309)
------------- ------------- -------------- ------------- -------------
Net increase (decrease) in
cash................................. (176,730) (321,309) 680,105 7,727,876 598,609
CASH AT BEGINNING OF PERIOD.................. 529,732 353,002 39,163 39,163 719,268
------------- ------------- -------------- ------------- -------------
CASH AT END OF PERIOD........................ $ 353,002 $ 31,693 $ 719,268 $ 7,767,039 $ 1,317,877
============= ============= ============== ============= =============
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest .... $ 216,228 $ 602,100 $ 503,768 $ 449,106 $ 49,751
============= ============= ============== ============= =============
Cash paid during the period for income
taxes....................................... $ -- $ 2,017,092 $ 4,350,000 $ 500,000 $ --
============= ============= ============== ============= =============
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1995 AND 1996, DECEMBER 31, 1996
AND SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature Of Operations And General
Great Western Directories, Inc. (the Company) is an independent telephone
directory publisher that publishes telephone directories in Texas, Oklahoma
and California. Revenues are primarily derived from the sale of advertising
space in the telephone directories. During 1996, the Company changed its
fiscal year from January 31 to December 31. However, the year ended rather
than the eleven months ended December 31, 1996 is presented in the statement
of operations and the statement of cash flows for comparative purposes. As
discussed in note 3, the Company changed from a Subchapter C Corporation for
income tax purposes to a Subchapter S Corporation effective January 1, 1997.
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996 and 1997, are unaudited. These interim financial statements have been
prepared on the same basis as the annual financial statements included
herewith. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the balance sheets,
results of operations and cash flows with respect to the interim financial
statements, have been included. The results of operations for the interim
period are not necessarily indicative of the results for the entire fiscal
year.
Allowance For Doubtful Accounts
The Company maintains an allowance for doubtful accounts based on
management's estimate of the collectibility of all accounts receivable. The
allowance for doubtful accounts is established through a provision for
doubtful accounts charged to expense. Accounts receivable are charged against
the allowance when management believes that the collectibility of the
receivable is unlikely. Recoveries of amounts previously charged off are
credited to the allowance. The Company's accounts receivable are unsecured.
The allowance is subjective in nature and may be adjusted due to changes in
economic conditions.
Property And Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed on accelerated methods over the estimated useful
lives of the assets, which range from 3 to 31 years.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
As discussed in note 3, the Company changed to a Subchapter S Corporation
effective January 1, 1997. The income or loss of a Subchapter S Corporation
is includable in the federal income tax returns of the individual
shareholders.
Fair Value Of Financial Instruments
Fair value estimates are made at discrete points in time based on relevant
market information. These estimates may be subjective in nature and involve
uncertainties and matters of significant judgment, and therefore cannot be
deteremined with precision.
F-29
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company believes that the carrying amounts of its current assets and
current liabilities approximate the fair value of such items due to their
short-term nature.
Revenue And Cost Recognition
Advertising revenues are derived from the sale of advertising space in
telephone directories and are recognized on the date that the directory is
published and delivered. If the estimate of total directory costs exceeds
advertising revenues for a specific telephone directory, a provision is made
for the entire amount of such estimated loss. No provision for estimated
losses was included in the financial statements for the years ended January
31, 1995 and 1996 or December 31, 1996.
Directory costs are deferred until the date that the directory is
published and delivered. Directory costs include all direct costs related to
the publishing of a telephone directory, such as publishing and distribution
expenses and commissions on sales, other sales expenses and depreciation and
amortization. General and administrative costs are charged to expense as
incurred.
Costs incurred with the expansion into new markets include all direct
costs related to the publishing of a first-year telephone directory
(prototype directory). Advertising space in prototype directories is
generally provided to advertisers at no cost; therefore, no advertising
revenues are derived from prototype directories. As the future economical
benefit of the direct costs related to prototype directories cannot be
determined, such direct costs are charged to expense as incurred. The Company
had three prototype directories for the year ended January 31, 1995. Direct
costs related to the prototype directories charged to expense totaled
$4,316,000 for the year ended January 31, 1995. The Company had no prototype
directories for the years ended January 31, 1996 or December 31, 1996.
Nonmonetary Transactions
The Company trades advertising space for goods and services used primarily
for promotional, sales and other business activities. Barter revenue is
recorded when directories are published and barter expense is recorded when
goods and services are received or used. Barter transactions are recorded at
their estimated fair value and are included in the accompanying statements of
operations. Barter revenue aggregated approximately $1,507,000, $1,598,000,
$2,155,000, $1,531,000 (unaudited) and $1,555,000 (unaudited) and barter
expense aggregated approximately $1,042,000, $1,459,000, $1,547,000,
$1,902,000 (unaudited) and $1,224,000 (unaudited) for the years ended January
31, 1995 and 1996, December 31, 1996 and the nine months ended September 30,
1996 and 1997, respectively.
Net Income Per Share
Net income per share is computed using the weighted average number of
shares outstanding during the period of computation. The weighted average
shares outstanding were 1,250 for the years ended January 31, 1995 and 1996
and December 31, 1996 and the nine months ended September 30, 1996 and 1997
(unaudited).
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) DEBT OBLIGATIONS
Note Payable To Bank
The note payable to bank was a $2,500,000 line of credit with outstanding
advances of $2,100,000 at January 31, 1996. At December 31, 1996, the Company
had a $2,000,000 line of credit with a bank with
F-30
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
no outstanding advances. The line of credit bears interest at prime, which
was 8.50% at January 31, 1996 and 8.25% at December 31, 1996. The line is
collateralized by accounts receivable and may be used for general corporate
working capital and other purposes as approved by the bank.
Long-Term Debt
Long-term debt at January 31, 1996 and December 31, 1996 consisted of the
following:
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31,
1996 1996
------------- --------------
<S> <C> <C>
Term note payable to bank, due in monthly installments of $204,000
including interest at prime (8.5% and 8.25% at January 31, 1996
and December 31, 1996, respectively) through July 1997, secured
by accounts receivable............................................ $ 5,495,930 $ 1,849,309
Term note payable to bank, due in monthly installments of $4,133
including interest at 1% over prime (9.5% at January 31, 1996),
secured by certain property....................................... 144,861 --
------------- --------------
Total long-term debt............................................... 5,640,791 1,849,309
Less current maturities............................................ (2,109,740) (1,849,309)
------------- --------------
Long-term debt, less current maturities............................ $ 3,531,051 $ --
============= ==============
</TABLE>
The Company has a letter agreement with a bank relating to a line of
credit and the term note payable. The agreement includes provisions which,
among other things, require the maintenance of specified financial ratios and
other debt covenants. Further, the agreement imposes certain restrictions
with respect to new market expansion, dividend distributions and
contributions to the profit sharing plan. At December 31, 1996, the Company
was not in compliance with certain debt covenants requirements and obtained a
waiver of these covenants through July 31, 1997. The Company paid all debt
obligations on June 15, 1997.
(3) INCOME TAXES
The sources of deferred tax assets and the tax effect of each as of
January 31, 1996 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31,
1996 1996
------------- --------------
<S> <C> <C>
Deferred tax assets--
Allowance for doubtful accounts. $1,085,748 $1,627,821
------------- --------------
Total deferred tax assets .... 1,085,748 1,627,821
============= ==============
</TABLE>
F-31
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes for the years ended January 31, 1995 and
1996 and December 31, 1996 consists of the following components:
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31, DECEMBER 31,
1995 1996 1996
------------- ------------- --------------
<S> <C> <C> <C>
Federal:
Current......................... $ 480,662 $1,262,087 $5,057,155
Deferred........................ (298,468) (68,045) (542,074)
State............................. 63,303 113,248 779,515
------------- ------------- --------------
Total provision for income taxes $ 245,497 $1,307,290 $5,294,596
============= ============= ==============
</TABLE>
A reconciliation of the provision for income taxes for the years ended
January 31, 1995 and 1996 and December 31, 1996 at the statutory federal tax
rate to the Company's actual provision for income taxes is as follows:
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31, DECEMBER 31,
1995 1996 1996
------------- ------------- --------------
<S> <C> <C> <C>
Computed "expected" tax expense............. $168,311 $1,216,977 $4,756,968
Nondeductible expenses...................... 36,039 16,702 30,943
State income taxes, net of federal
benefits................................... 41,147 73,611 506,685
------------- ------------- --------------
Total provision for income taxes............ $245,497 $1,307,290 $5,294,596
============= ============= ==============
</TABLE>
Prior to January 1, 1997, the Company had been a Subchapter C Corporation
for income tax purposes, and therefore paid U.S. Federal income taxes. On
March 15, 1997, the Company filed an election to become a nontaxable
Subchapter S Corporation effective January 1, 1997. The effect of the change
in tax status on the net deferred tax asset and corresponding charge to
income tax expense of approximately $1,600,000 was recognized in the
September 30, 1997 financial statements.
(4) LEASES
The Company leases certain property and equipment under leases classified
as operating leases that expire over the next five years. Rental expense for
all operating leases totaled approximately $400,000, $462,000, $472,000,
$365,000 (unaudited) and $434,000 (unaudited) for the years ended January 31,
1995 and 1996, December 31, 1996 and the nine months ended September 31, 1997
and 1996, respectively. For the five fiscal years subsequent to December 31,
1996, future minimum lease payments under noncancelable operating leases
total $1,029,000 and are approximately $318,000, $282,000, $225,000, $143,000
(unaudited) and $61,000, (unaudited) respectively.
(5) RELATED PARTY TRANSACTIONS
Transactions with related parties include certain publishing and
distribution services with shareholders and entities in which they have an
interest. Purchases of services from these related parties for the years
ended January 31, 1995 and 1996, December 31, 1996 and the nine months ended
September 30, 1996 and 1997 were approximately, $653,000, $1,275,000,
$1,893,000, $968,000 and $1,024,000, respectively. Amounts payable to related
parties at January 31, 1996, December 31, 1996 and September 30, 1997 were
approximately $270,000, $483,000 and $172,000, respectively.
Notes receivable from shareholders at January 31, 1996 and December 31,
1996 included notes totaling approximately $405,000 and $360,000,
respectively, which are included in other current assets and represent
advances to related parties. The notes bear interest at 8% and are secured by
personal property.
F-32
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interest income recognized on related-party notes receivable was not
significant for the years ended January 31, 1995 and 1996 and December 31,
1996. The notes were repaid on June 15, 1997.
(6) PROFIT SHARING PLAN
The Company formed a self-employed profit sharing plan in the year ended
January 31, 1996 that provides certain retirement, disability, death and
termination benefits for eligible employees. The Plan contains a 401(k)
arrangement whereby each participant may elect to contribute a portion of
their salary to the Plan. Each Plan year, the Company may contribute an
amount of matching contributions determined at the Company's discretion. Such
matching contributions are allocated to participants based on the Plan's
provisions. Discretionary Company contributions may also be made. Participant
after-tax contributions are not allowed. The provision for the Company's
matching contributions for the years ended January 31, 1996, December 31,
1996 and the nine months ended September 30, 1997 was approximately $40,000,
$53,000 and $103,000, respectively. No discretionary profit sharing
contributions were made to the Plan for the years ended January 31, 1996 or
December 31, 1996.
(7) LITIGATION
During 1996, the Company settled its lawsuit against a utility
telephone-directory publisher related to, among other things, certain
antitrust violations. Under the terms of the settlement, the Company received
approximately $6,282,000 in cash, net of related expenses, and such amount is
reflected in other income for the year ended December 31, 1996.
At December 31, 1996, the Company was the defendant in a class action
lawsuit filed in Sonoma County, California, alleging, among other things,
breach of contract. Subsequent to December 31, 1996, the lawsuit was settled.
Pending expected court approval, the Company will make approximately $479,000
in refunds and credits to various advertisers, and such amount has been
recognized in the accompanying December 31, 1996 financial statements.
The Company has been involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect
on the company's financial condition, liquidity or results of operations.
(8) SUBSEQUENT EVENT
The Company's shareholders have entered into a stock purchase agreement to
sell all of the issued and outstanding common stock of the Company for a
total consideration consisting of $55,000,000 in cash, a $15,000,000
promissory note, shares of common stock of the purchaser, and 2,500,000
nontransferable common stock warrants of the purchaser. The purchase of the
Company's stock is generally contingent upon the successful completion of an
initial public offering by the purchaser.
F-33
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Valu-Line of Longview, Inc.
Longview, Texas
We have audited the accompanying combined balance sheets of Valu-Line of
Longview, Inc. and Related Companies as of December 31, 1995 and 1996, and
the related combined statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Valu-Line of Longview, Inc. and Related Companies as of December 31, 1995 and
1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Houston, Texas
May 23, 1997
F-34
<PAGE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.................................................... $ 281,703 $ 289,612 $ 312,890
Receivables, net........................................ 986,344 1,021,102 1,389,947
Prepaid expenses........................................ 4,508 8,624 4,113
------------ ------------ ---------------
Total current assets.................................. 1,272,555 1,319,338 1,706,950
PROPERTY AND EQUIPMENT, net............................... 2,341,596 1,650,497 1,226,289
OTHER NONCURRENT ASSETS................................... 7,561 6,615 6,552
------------ ------------ ---------------
Total assets.......................................... $3,621,712 $2,976,450 $2,939,791
============ ============ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable, including current portion of long-term
debt................................................... $ 413,741 $ 384,543 $ 423,910
Current portion of capital lease obligation............. 170,297 -- --
Accounts payable and accrued line costs................. 709,259 743,572 748,567
Accrued payroll and related taxes....................... 53,330 65,053 55,964
Sales, property excise and franchise taxes payable ..... 124,378 149,262 158,682
Customer deposits....................................... 12,312 11,162 9,562
------------ ------------ ---------------
Total current liabilities............................. 1,483,317 1,353,592 1,396,685
NOTES PAYABLE, net of current portion..................... 1,698,486 1,357,011 1,082,392
------------ ------------ ---------------
Total liabilities..................................... 3,181,803 2,710,603 2,479,077
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Common stock, no par value; 102,000 shares authorized;
3,000 shares issued and outstanding.................... 3,000 3,000 3,000
Retained earnings....................................... 436,909 262,847 457,714
------------ ------------ ---------------
Total stockholders' equity............................ 439,909 265,847 460,714
------------ ------------ ---------------
Total liabilities and stockholders' equity ........... $3,621,712 $2,976,450 $2,939,791
============ ============ ===============
</TABLE>
See accompanying notes to these combined financial statements.
F-35
<PAGE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES....................... $13,416,673 $13,330,346 $11,181,125 $8,623,340 $9,058,467
OPERATING EXPENSES:
Line and other direct costs . 6,774,963 7,491,433 6,036,439 4,592,903 5,070,031
Selling, general and
administrative.............. 3,724,582 3,898,106 3,571,468 2,658,506 2,875,098
Depreciation and
amortization................ 399,050 717,631 819,315 615,519 398,548
------------- ------------- ------------- ------------ ------------
Total operating expenses .. 10,898,595 12,107,170 10,427,222 7,866,928 8,343,677
------------- ------------- ------------- ------------ ------------
Income from operations .... 2,518,078 1,223,176 753,903 756,412 714,790
OTHER INCOME (EXPENSE):
Interest expense............. (67,906) (81,579) (185,777) (148,001) (103,491)
Interest income and other,
net......................... 29,943 93,287 72,812 58,659 63,568
------------- ------------- ------------- ------------ ------------
Net income................. $ 2,480,115 $ 1,234,884 $ 640,938 $ 667,070 $ 674,867
============= ============= ============= ============ ============
</TABLE>
See accompanying notes to these combined financial statements.
F-36
<PAGE>
VALU-LINE OF LONGVIEW INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM JANUARY 1, 1994 TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------ RETAINED
SHARES AMOUNT EARNINGS TOTAL
-------- -------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCES, January 1, 1994.................. 3,000 $3,000 $ 402,910 $ 405,910
Net income............................... -- -- 2,480,115 2,480,115
Distributions to stockholders............ -- -- (2,356,000) (2,356,000)
-------- -------- ------------- -------------
BALANCES, December 31, 1994................ 3,000 3,000 527,025 530,025
Net income............................... -- -- 1,234,884 1,234,884
Distributions to stockholders............ -- -- (1,325,000) (1,325,000)
-------- -------- ------------- -------------
BALANCES, December 31, 1995................ 3,000 3,000 436,909 439,909
Net income............................... -- -- 640,938 640,938
Distributions to stockholders............ -- -- (815,000) (815,000)
-------- -------- ------------- -------------
BALANCES, December 31, 1996................ 3,000 3,000 262,847 265,847
Net income (unaudited) .................. -- -- 674,867 674,867
Distributions to stockholders
(unaudited) ............................ -- -- (480,000) (480,000)
-------- -------- ------------- -------------
BALANCES, September 30, 1997 (unaudited) . 3,000 $3,000 $ 457,714 $ 460,714
======== ======== ============= =============
</TABLE>
See accompanying notes to these combined financial statements.
F-37
<PAGE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ --------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income..................... $ 2,480,115 $ 1,234,884 $ 640,938 $ 667,070 $ 674,867
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization. 399,050 717,631 819,315 615,519 398,548
(Increase) decrease in:
Receivables.................. (139,187) 281,235 (34,758) (128,138) (368,845)
Prepaid expenses and other
assets...................... 8,569 19,806 (3,170) 5,408 4,574
Increase (decrease) in:
Accounts payable and accrued
line costs.................. 60,708 53,696 34,313 27,826 4,995
Other current liabilities ... 51,647 (71,602) 35,457 61,303 (1,269)
------------- ------------- ------------- ------------- -----------
Net cash provided by
operations.................. 2,860,902 2,235,650 1,492,095 1,248,988 712,870
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures........... (95,124) (2,375,964) (134,651) (133,042) (55,913)
Other, net..................... 3,016 15,523 6,435 234 81,573
------------- ------------- ------------- ------------- -----------
Net cash provided by (used
in) investing activities ... (92,108) (2,360,441) (128,216) (132,808) 25,660
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on
long-term debt, capital
leases and other notes
payable....................... (494,734) (519,209) (581,123) (477,231) (354,231)
Proceeds from long-term debt
and other notes payable....... 124,890 2,112,950 40,153 40,154 118,979
Distributions to stockholders . (2,356,000) (1,325,000) (815,000) (700,000) (480,000)
------------- ------------- ------------- ------------- -----------
Net cash provided by (used
in) financing activities ... (2,725,844) 268,741 (1,355,970) (1,137,077) (715,252)
------------- ------------- ------------- ------------- -----------
NET INCREASE (DECREASE) IN
CASH............................ 42,950 143,950 7,909 (20,897) 23,278
CASH, beginning of period ...... 94,803 137,753 281,703 281,703 289,612
------------- ------------- ------------- ------------- -----------
CASH, end of period............. $ 137,753 $ 281,703 $ 289,612 $ 260,806 $ 312,890
============= ============= ============= ============= ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid.................. $ 67,906 $ 81,579 $ 185,777 $ 148,001 $ 103,491
Equipment acquired under
capital leases................ $ -- $ 238,683 $ -- $ -- $ --
============= ============= ============= ============= ===========
</TABLE>
See accompanying notes to these combined financial statements.
F-38
<PAGE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Organization -- Valu-Line of Longview, Inc. and Related Companies provide
long distance or "interexchange" services primarily to commercial and
residential customers located in Texas and Arkansas.
Principles of Combination -- The accompanying financial statements include
the combined accounts of Valu-Line of Longview, Inc., Valu-Line of Louisiana,
Inc. and Shared Tenant Services, Inc., which are each owned proportionately
by the same stockholders. All significant intercompany transactions have been
eliminated. Collectively, the entities are referred to as "the Company".
Receivables -- Revenue is recognized as service is rendered. Receivables
include billed and unbilled amounts that are due from customers according to
contractual terms.
Property and Equipment -- Property and equipment is stated at cost, net of
accumulated depreciation and amortization. Maintenance and repairs are
expensed as incurred. Depreciation is calculated using various accelerated
methods over the estimated useful lives of the related assets which range
from 5 to 7 years. Leasehold improvements are amortized over the life of the
lease. Equipment under capital leases is recorded at the present value of
minimum lease payments at the inception of the lease and amortized over the
shorter of the lease term or estimated useful life of the asset. Amortization
of equipment held under capital leases is included in depreciation and
amortization expense. Expenditures to acquire dialers are expensed as
incurred.
Income Taxes -- The Company has elected to be taxed under the provisions
of Subchapter S of the Internal Revenue Code. Under such provisions the
Company does not pay federal corporate income taxes on its taxable income.
The stockholders, therefore, are liable for individual income taxes on the
Company's taxable income.
Concentrations of Credit Risk -- The Company's financial instruments that
are exposed to concentrations of credit risk consist primarily of cash
investments and trade accounts receivable. The Company places its cash and
temporary cash investments with high credit quality banking institutions. At
times such investments may be in excess of the FDIC insurance limit.
Management does not anticipate any losses will arise from this exposure.
Use of Estimates -- The preparation of the Company's financial statements
in conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and the accompanying results.
Actual results could differ from these estimates.
Fair Value of Financial Instruments -- The Company's only financial
instruments are cash, short-term trade receivables and payables, notes
payable and capital lease obligations. Management believes the carrying
amounts of the financial instruments classified as current assets and
liabilities approximate their fair values because of their short-term nature.
Management believes the interest rates on its notes payable and capital lease
obligations represent fair market rates, and therefore their carrying value
approximates fair value.
Cash Equivalents -- For purposes of reporting cash flows, cash equivalents
include highly-liquid investments purchased with a maturity of three months
or less.
Recent Accounting Pronouncements -- The Financial Accounting Standards
Board (FASB) issued SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets And For Long-Lived Assets To Be Disposed of, which is effective for
fiscal years beginning after December 15, 1995. SFAS No. 121 specifies
certain events and circumstances which indicate the cost of an asset or
assets may be impaired, the method by which the evaluation should be
performed, and the method by which writedowns, if any, of the asset or assets
are to be determined and recognized. The adoption of this pronouncement in
1996 did not have a material impact on the Company's financial condition or
operating results.
F-39
<PAGE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The FASB issued SFAS No. 123, Accounting for Stock Based Compensation,
effective for fiscal years beginning after December 31, 1995. This statement
allows companies to choose to adopt the statement's new rules for accounting
for employee stock-based compensation plans. For those companies who choose
not to adopt the new rules, the statement requires disclosures as to what
earnings per share would have been if the new rules had been adopted. The
Company did not grant stock options or any other form of stock-based
compensation during any of the periods included in the accompanying financial
statements.
The FASB issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share, during February 1997. The new statement which is
effective for financial statements issued after December 31, 1997, including
interim periods, establishes standards for computing and presenting earnings
per share. The new statement requires retroactive restatement of all
prior-period earnings per share data presented.
The FASB issued SFAS No. 130, Reporting Comprehensive Income and SFAS No.
131, Disclosures About Segments of an Enterprise and Related Information.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS No. 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be
reported in a financial statement that displays with the same prominence as
other financial statements. SFAS No. 131 supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. SFAS No. 131 establishes
standards on the way that public companies report financial information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance.
SFAS Nos. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any,
the standards may have on the future financial statement disclosures. Results
of operations and financial position, however, will be unaffected by
implementation of these standards.
Unaudited Interim Information -- The accompanying financial information as
of September 30, 1997 and for the nine-month periods ended September 30, 1996
and 1997 has been prepared by the Company without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. The
financial statements reflect all adjustments, consisting of normal recurring
accruals which are, in the opinion of management, necessary to fairly present
such information in accordance with generally accepted accounting principles.
F-40
<PAGE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. RECEIVABLES:
Receivables consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
----------- ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C>
Trade receivables:
Billed........................ $ 805,569 $ 785,457 $1,078,094
Unbilled...................... 205,775 260,645 336,853
----------- ------------ ---------------
1,011,344 1,046,102 1,414,947
Allowance for doubtful
accounts....................... (25,000) (25,000) (25,000)
----------- ------------ ---------------
$ 986,344 $1,021,102 $1,389,947
=========== ============ ===============
</TABLE>
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1995 1996 1997
------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Land.............................. $ 50,622 $ 50,622 $ 38,422
Building.......................... 350,605 350,605 350,605
Switch and network equipment ..... 3,396,746 3,349,534 3,343,083
Vehicles.......................... 229,773 201,121 186,649
Computer equipment................ 208,694 229,759 174,660
Furniture and fixtures............ 45,603 46,365 46,365
Leasehold improvements............ 26,607 26,607 26,607
------------- ------------- ---------------
4,308,650 4,254,613 4,166,391
Less accumulated depreciation and
amortization..................... (1,967,054) (2,604,116) (2,940,102)
------------- ------------- ---------------
$ 2,341,596 $ 1,650,497 $ 1,226,289
============= ============= ===============
</TABLE>
F-41
<PAGE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE:
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to a bank due in monthly
installments ranging from $324 to $926,
including interest ranging from 8.25% to 9.0%
and maturing at various times through 1999.
The notes are collateralized by a switch and
network equipment, computer equipment and
vehicles...................................... $ 98,694 $ 49,128 $ 82,694
Notes payable to a bank due in monthly
installments of $3,456 and $3,970, including
interest at 8.25% and prime, not to exceed
12% (8.75% at September 30, 1997) and
maturing August 2005 and October 1998,
respectively. The notes are collateralized by
land and buildings............................ 388,533 330,826 284,270
Note payable to a bank due in monthly
installments of $33,536, including interest
at prime, not to exceed 12% (8.5% at
September 30, 1997) with a balloon payment on
December 28, 1998. The note is collateralized
by certain switch and network equipment ...... 1,625,000 1,361,600 1,139,338
------------ ------------ ---------------
2,112,227 1,741,554 1,506,302
Less current portion........................... (413,741) (384,543) (423,910)
------------ ------------ ---------------
$1,698,486 $1,357,011 $1,082,392
============ ============ ===============
</TABLE>
Future maturities of notes payable as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
- -------------- -----------
<S> <C>
1997 ........ $ 384,543
1998 ........ 1,154,268
1999 ........ 25,400
2000 ........ 27,600
2001 ........ 30,000
Thereafter .. 119,743
-----------
$1,741,554
===========
</TABLE>
F-42
<PAGE>
VALU-LINE OF LONGVIEW, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES:
Commitments -- The Company was obligated under capital leases for switch
equipment which expired at various dates through 1996. The carrying value of
the leased equipment and related accumulated amortization included in
property and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1995 1996 1997
------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Switch equipment.............. $ 1,244,803 $ 1,244,803 $ 1,244,803
Less accumulated
amortization................. (1,029,983) (1,125,460) (1,170,213)
------------- ------------- ---------------
$ 214,820 $ 119,343 $ 74,590
============= ============= ===============
</TABLE>
The Company leases office space and certain equipment under operating
leases which expire on various dates through the year 2000. Several of the
office leases require the Company to pay its portion of taxes, maintenance
and insurance. Rent expense was $163,732, $175,273 and $102,010 for the years
ended December 31, 1994, 1995 and 1996, respectively, and $60,387 and $70,213
for the nine-month periods ended September 30, 1996 and 1997, respectively.
Future minimum lease payments under noncancelable operating leases with
original terms in excess of one year are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
- -------------- ---------
<S> <C>
1997 ........ $ 63,584
1998 ........ 37,757
1999 ........ 29,757
2000 ........ 21,037
---------
$152,135
=========
</TABLE>
Contingencies -- 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 matters will not have a
material adverse effect on the Company's combined financial condition,
liquidity or results of operations.
The Company has been providing intrastate long distance services to
customers in Arkansas since 1992 without the requisite permit from the state
utility commission. The Company has initiated steps to secure the requisite
permit for such activities and no penalties have been assessed to date. While
the Arkansas regulatory authorities have the power to require the forfeiture
of the approximately $300,000 in revenues generated to September 30, 1997 by
the Company's unlicensed intrastate activities in Arkansas, the Company is
endeavoring to negotiate a reduced penalty.
6. STOCK PURCHASE AGREEMENT:
The Company entered into an agreement under which it will be sold to a
Delaware corporation. The sale is subject to various terms and conditions as
outlined in the agreement, including the requirement that the purchaser
obtain additional equity capital.
F-43
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Feist Long Distance Service, Inc.:
We have audited the accompanying balance sheet of Feist Long Distance
Service, Inc. as of December 31, 1996, and the related statements of
operations, stockholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Feist Long Distance
Service, Inc. as of December 31, 1996, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
August 5, 1997
F-44
<PAGE>
FEIST LONG DISTANCE SERVICE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 21,565 $ 149,151
Accounts receivable, net allowance for doubtful accounts of
$106,280 and $143,208, respectively.............................. 1,190,307 1,625,436
Other current assets.............................................. 7,545 22,903
-------------- ---------------
Total current assets............................................ 1,219,417 1,797,490
PROPERTY AND EQUIPMENT, net......................................... 370,043 370,420
-------------- ---------------
Total assets.................................................... $1,589,460 $2,167,910
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable..................................................... $ 20,323 $ 17,402
Accounts payable.................................................. 647,555 940,429
Accrued expenses.................................................. 72,045 167,035
Notes payable to shareholders..................................... 809,450 659,450
-------------- ---------------
Total current liabilities....................................... 1,549,373 1,784,316
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value; 10,000 shares authorized, issued and
outstanding...................................................... 100,000 100,000
Additional paid-in capital........................................ 938,500 938,500
Accumulated deficit............................................... (998,413) (654,906)
-------------- ---------------
Total stockholders' equity...................................... 40,087 383,594
-------------- ---------------
Total liabilities and stockholders' equity...................... $1,589,460 $2,167,910
============== ===============
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
FEIST LONG DISTANCE SERVICE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------------
1996 1996 1997
-------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES............................ $10,027,743 $7,415,712 $8,964,581
COST OF SERVICES.................... 6,854,333 5,057,038 6,043,871
DEPRECIATION........................ 237,240 170,392 141,745
-------------- ------------ ------------
Gross profit.................... 2,936,170 2,188,282 2,778,965
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 2,469,137 1,706,266 2,404,056
-------------- ------------ ------------
Income from operations.......... 467,033 482,016 374,909
OTHER INCOME (EXPENSE):
Interest expense.................. (60,211) (46,303) (32,873)
Other............................. (1,737) 1,251 1,471
-------------- ------------ ------------
NET INCOME.......................... $ 405,085 $ 436,964 $ 343,507
============== ============ ============
NET INCOME PER SHARE................ $ 40.51 $ 43.70 $ 34.35
============== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
FEIST LONG DISTANCE SERVICE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
-------- ---------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCES, December 31, 1995 . 10,000 $100,000 $938,500 $(1,403,498) $(364,998)
Net income................. -- -- -- 405,085 405,085
-------- ---------- ------------ -------------- ---------------
BALANCES, December 31, 1996 . 10,000 $100,000 $938,500 (998,413) 40,087
Net income (unaudited) .... -- -- -- 343,507 343,507
-------- ---------- ------------ -------------- ---------------
BALANCES, September 30, 1997
(unaudited)................. 10,000 $100,000 $938,500 $ (654,906) $ 383,594
======== ========== ============ ============== ===============
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
FEIST LONG DISTANCE SERVICE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ------------------------
1996 1996 1997
-------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 405,085 $ 436,964 $ 343,507
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation................................ 237,240 170,392 141,745
Changes in assets and liabilities:
Accounts receivable, net.................. (169,468) (273,745) (435,129)
Other current assets...................... 11,916 8,516 (15,358)
Accounts payable.......................... (199,626) (222,788) 292,874
Accrued expenses.......................... (9,695) 63,175 94,990
-------------- ----------- -----------
Net cash provided by operating
activities................................. 275,452 182,514 422,629
-------------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........... (114,576) (66,729) (142,122)
-------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable................... (180,906) (123,299) (152,921)
Proceeds from notes payable................... -- -- --
-------------- ----------- -----------
Net cash used in financing activities ... (180,906) (123,299) (152,921)
-------------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... (20,030) (7,514) 127,586
CASH AND CASH EQUIVALENTS, beginning of period . 41,595 41,595 21,565
-------------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period ....... $ 21,565 $ 34,081 $ 149,151
============== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest ..... $ 60,313 $ -- $ --
============== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
FEIST LONG DISTANCE SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997 (UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Feist Long Distance Service, Inc. (the Company) is headquartered in
Wichita, Kansas and was founded in 1992 to provide long distance and 800
services to business and residential customers in Kansas, Nebraska, Missouri,
Texas and Oklahoma.
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996 and 1997 are unaudited, and certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements,
have been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Cash Equivalents
Cash equivalents consist of short-term investments with an original
maturity of three months or less.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated
using the double declining method over the estimated useful lives of the
assets which range from 3 to 7 years.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S
of the Internal Revenue Code. Accordingly, no provision for federal income
taxes has been provided for by the Company, as the shareholders of the
Company have included the income on their personal income tax returns.
Fair Value of Financial Instruments
Fair value estimates are made at discrete points in time based on relevant
market information. These estimates may be subjective in nature and involve
uncertainties and matters of significant judgment, and therefore cannot be
determined with precision.
The Company believes that the carrying amounts of its current assets and
current liabilities approximate the fair value of such items due to their
short-term nature.
Revenue Recognition
Revenues are recognized as long-distance services are provided.
Net Income Per Share
Net income per share is based on the weighted average number of shares of
common stock outstanding during the respective periods. The weighted average
shares outstanding were 10,000 for the year ended December 31, 1996 and for
the nine months ended September 30, 1996 and 1997 (unaudited).
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
F-49
<PAGE>
FEIST LONG DISTANCE SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, ESTIMATED
1996 1997 USEFUL LIFE
-------------- --------------- --------------
<S> <C> <C> <C>
Machinery and equipment....... $1,394,466 $1,510,818 3 to 5 years
Office equipment.............. 55,368 62,446 7 years
Vehicles...................... 31,900 50,592 5 years
-------------- --------------- --------------
1,481,734 1,623,856
Less accumulated
depreciation................. 1,111,691 1,253,436
-------------- ---------------
$ 370,043 $ 370,420
============== ===============
</TABLE>
(3) NOTES PAYABLE
At December 31, 1996 and September 30, 1997, the Company had notes payable
totaling $809,450 and $659,450, respectively, outstanding to the Company's
eight shareholders. The notes are payable on demand and accrue interest at
5.75%. The Company paid $46,543 in interest expense on these notes payable
for the year ended December 31, 1996.
At December 31, 1996, the Company also had a $16,996 note payable to an
affiliate, Feist Publications, Inc. The note was payable on demand and
accrued interest at 8.83%. The Company paid $3,141 in interest expense on
this note payable for the year ended December 31, 1996.
(4) RELATED PARTY TRANSACTION
The Company leases its office space through a sublease agreement with an
affiliate, Feist Publications, Inc. Rental expense for the year ended
December 31, 1996 and the nine months ended September 30, 1997 amounted to
approximately $45,000 and $62,000, respectively, related to this lease.
(5) DEPENDENCE ON LOCAL EXCHANGE CARRIER
The Company is dependent on local exchange carriers to provide access
service for the origination and termination of its long distance traffic.
Historically, these access charges have made up a significant percentage of
the overall cost of providing long distance service. To the extent that the
access services of the local exchange carriers are used, the Company and its
customers are subject to the quality of service, equipment failures and
service interruptions of the local exchange carriers.
F-50
<PAGE>
FEIST LONG DISTANCE SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) COMMITMENTS AND CONTINGENCIES
The Company leases office space under long-term lease agreements. Future
minimum rental payments under noncancelable long-term leases are as follows:
<TABLE>
<CAPTION>
FISCAL
YEAR AMOUNT
- -------- ---------
<S> <C>
1997 .... $56,568
1998..... 22,692
1999..... 2,850
---------
$82,110
=========
</TABLE>
Total rent expense under all operating leases for the year ended December
31, 1996 and the nine months ended September 30, 1997 was $73,733 and
$72,524, respectively.
The Company has been providing intrastate long distance services to
customers in Missouri for the past 18 months without the requisite permit
from the appropriate regulatory agency. The Company has initiated steps to
secure the requisite permit for such activities and no penalties have been
assessed to date, although the Missouri regulatory authorities have the power
to require the forfeiture of the approximately $250,000 in revenues generated
by the Company's unlicensed intrastate activities in that state.
(7) SUBSEQUENT EVENT (UNAUDITED)
The Company's shareholders have entered into a stock purchase agreement to
sell all of the issued and outstanding common stock of the Company for a
total consideration consisting of $5,000,000 in cash and shares of common
stock of the purchaser. The purchase of the Company's stock is generally
contingent upon the successful completion of an intitial public offering by
the purchaser.
F-51
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
The Stockholders and Board of Directors
FirsTel, Inc.
Sioux Falls, South Dakota
We have audited the accompanying balance sheets of FirsTel, Inc. as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' deficit and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FirsTel, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
September 26, 1997
F-52
<PAGE>
FIRSTEL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash..................................................... $ 43,761 $ 54,128 $ 61,616
Collateral account ...................................... 74,515 -- --
Receivables
Trade, net of allowance of $0, $0, and $29,053,
respectively.......................................... 569,122 640,259 1,056,109
Due from independent contractors....................... 13,420 2,207 --
Other.................................................. 10,361 3,047 196,857
Unbilled services........................................ 399,610 499,679 601,406
Inventory................................................ -- 2,187 96,323
Prepaid expenses......................................... 19,759 23,413 103,714
------------ ------------ ---------------
Total current assets................................... 1,130,548 1,224,920 2,116,025
------------ ------------ ---------------
OTHER ASSETS
Deposit.................................................. 1,150 38,951 80,775
Intangible assets, net of accumulated
amortization............................................ 6,723 5,482 2,780
------------ ------------ ---------------
7,873 44,433 83,555
------------ ------------ ---------------
PROPERTY AND EQUIPMENT
Leasehold improvements................................... 30,632 34,182 34,182
Office furniture and equipment........................... 186,421 263,611 326,892
Network equipment........................................ 576,518 656,069 707,942
Dialers.................................................. 493,288 535,113 585,258
------------ ------------ ---------------
1,286,859 1,488,975 1,654,274
Less accumulated depreciation and amortization .......... (341,629) (585,373) (785,082)
------------ ------------ ---------------
945,230 903,602 869,192
------------ ------------ ---------------
$2,083,651 $2,172,955 $3,068,772
============ ============ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Checks issued but not presented for payment.............. $ 36,466 $ -- $ 332,588
Current maturities of long-term debt..................... 452,110 1,397,834 1,187,068
Accounts payable......................................... 722,090 895,186 1,358,137
Accrued expenses
Taxes, other than income taxes......................... 69,283 58,617 94,713
Interest............................................... 8,769 -- --
Wages.................................................. -- -- 73,848
Other.................................................. 12,104 9,611 3,671
------------ ------------ ---------------
Total current liabilities................................ 1,300,822 2,361,248 3,050,025
------------ ------------ ---------------
OTHER LIABILITIES
Deferred compensation payable ........................... 36,845 26,686 7,177
LONG-TERM DEBT, less current maturities ................... 1,395,821 18,073 --
------------ ------------ ---------------
Total liabilities...................................... 2,733,488 2,406,007 3,057,202
COMMITMENTS AND CONTINGENCIES .............................
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $1 per share; Authorized,
1,000,000 shares; Issued, 1,000 shares.................. 1,000 1,000 1,000
Retained earnings (accumulated deficit).................. (650,837) (234,052) 10,570
------------ ------------ ---------------
(649,837) (233,052) 11,570
------------ ------------ ---------------
$2,083,651 $2,172,955 $3,068,772
============ ============ ===============
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE>
FIRSTEL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- --------------------------
1995 1996 1996 1997
------------ ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES...................... $7,838,345 $10,355,229 $7,658,888 $9,487,892
------------ ------------- ------------ ------------
COST OF REVENUES:
Line costs.................. 5,001,807 6,620,483 4,834,738 6,083,178
Direct labor................ 288,459 393,983 288,204 283,148
Cellular costs.............. -- -- -- 336,122
Dialer costs................ 161,807 191,854 156,053 161,408
Switch costs................ 81,663 101,673 66,926 82,025
Local costs................. -- -- -- 72,049
Other....................... 6,108 5,943 5,513 47,863
------------ ------------- ------------ ------------
5,539,844 7,313,936 5,351,434 7,065,793
------------ ------------- ------------ ------------
GROSS PROFIT.................. 2,298,501 3,041,293 2,307,454 2,422,099
------------ ------------- ------------ ------------
OPERATING EXPENSES:
Selling..................... 926,115 1,107,800 814,192 881,002
General and administrative . 615,923 810,637 583,461 671,484
Sales support............... 183,649 218,525 160,201 326,055
Cellular.................... -- 10,049 -- 90,430
------------ ------------- ------------ ------------
1,725,687 2,147,011 1,557,854 1,968,971
------------ ------------- ------------ ------------
INCOME FROM OPERATIONS........ 572,814 894,282 749,600 453,128
OTHER INCOME (EXPENSE):
Finance charges and
penalties.................. 36,792 34,718 27,001 32,437
Other income................ 5,561 300 300 1,680
Interest expense............ (220,932) (191,076) (145,445) (116,121)
Loss on sale of equipment .. (1,139) (158) -- --
------------ ------------- ------------ ------------
NET INCOME ................... $ 393,096 $ 738,066 $ 631,456 $ 371,124
============ ============= ============ ============
INCOME PER SHARE.............. $ 393.10 $ 738.07 $ 631.46 $ 371.12
============ ============= ============ ============
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE>
FIRSTEL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED TOTAL
------------------ EARNINGS STOCKHOLDERS'
(ACCUMULATED TREASURY EQUITY
SHARES AMOUNT DEFICIT) STOCK (DEFICIT)
-------- -------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1994 ................... 1,000 1,000 $(878,933) $ -- $(877,933)
Distributions ($165.00 per share)............ -- -- (165,000) -- (165,000)
Net income................................... -- -- 393,096 -- 393,096
-------- -------- ------------- ----------- ---------------
BALANCES, DECEMBER 31, 1995.................... 1,000 1,000 (650,837) -- (649,837)
Distributions ($221.28 per share)............ -- -- (221,281) -- (221,281)
Net income................................... -- -- 738,066 -- 738,066
Purchase of 100 shares of treasury stock .... -- -- -- (700,000) (700,000)
Sale of 100 shares of treasury stock ........ -- -- (100,000) 700,000 600,000
-------- -------- ------------- ----------- ---------------
BALANCES, DECEMBER 31, 1996.................... 1,000 1,000 (234,052) -- (233,052)
Distributions ($126.50 per share,
unaudited).................................... -- -- (126,502) -- (126,502)
Net income (unaudited)....................... -- -- 371,124 -- 371,124
-------- -------- ------------- ----------- ---------------
BALANCES, September 30, 1997 (unaudited) ...... 1,000 $1,000 $ 10,570 $ -- $ 11,570
======== ======== ============= =========== ===============
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE>
FIRSTEL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------------
1995 1996 1996 1997
------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 393,096 $ 738,066 $ 631,456 $ 371,124
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 205,890 247,618 182,866 202,412
Provision for bad debts..................... -- -- 27,000 32,000
Write-off of shareholder's receivable ...... -- -- -- --
Loss on sale of equipment................... 1,139 158 -- --
Changes in assets and liabilities:
Receivables................................. (221,079) (52,610) (82,816) (636,506)
Unbilled services........................... (109,796) (100,069) (106,820) (101,727)
Inventory................................... -- (2,187) -- (94,136)
Prepaid expenses............................ (1,638) (3,654) (37,600) (80,301)
Deposits.................................... (150) (37,801) (25,425) (19,200)
Checks issued but not presented for
payment.................................... (139,268) (36,466) (36,466) 332,588
Accounts payable............................ 213,134 173,096 196,521 462,951
Accrued expenses............................ 19,989 (21,928) 77,906 78,432
Deferred compensation payable............... 36,845 (10,159) (5,179) (19,509)
------------ ----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..... 398,162 894,064 821,443 528,128
------------ ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment............... 923 255 -- --
Property and equipment purchases.............. (379,424) (203,162) (166,272) (165,299)
Payments to/from collateral account........... (74,515) 74,515 -- --
Payments for loan origination fees............ (1,443) (2,000) -- --
------------ ----------- ----------- -----------
NET CASH USED BY INVESTING
ACTIVITIES..................................... (454,459) (130,392) (166,272) (165,299)
------------ ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on notes payable................. (99,300) -- -- --
Principal payments on long-term debt,
including capitalized leases................. (134,643) (459,407) (365,547) (333,839)
Proceeds from debt borrowings................. 494,964 27,383 -- 105,000
Distribution payments......................... (165,000) (221,281) (218,121) (126,502)
Purchase of treasury stock.................... -- (700,000) (700,000) --
Sale of treasury stock........................ -- 600,000 600,000 --
------------ ----------- ----------- -----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES .................................... 96,021 (753,305) (683,668) (355,341)
------------ ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH................. 39,724 10,367 (28,497) 7,488
CASH AT BEGINNING OF PERIOD..................... 4,037 43,761 43,761 54,128
------------ ----------- ----------- -----------
CASH AT END OF PERIOD........................... $ 43,761 $ 54,128 $ 15,264 $ 61,616
============ =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period--Interest ........ $ 212,936 $ 199,845 $ 145,445 $ 116,122
============ =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
ACTIVITIES
Short-term debt refinanced.................... $1,400,000 $ -- $ -- $ --
============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE>
FIRSTEL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1996 AND 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
FirsTel, Inc. (the Company), located in Sioux Falls, South Dakota, is a
carrier of long distance, local and cellular telecommunications services. The
Company's service area includes South Dakota, North Dakota, Minnesota, Iowa,
Nebraska, Wyoming, Colorado, and Montana.
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996 and 1997 are unaudited, and certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements,
have been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method)
or market, and consist primarily of cellular phone and other telephone system
equipment.
Unbilled Services
The Company bills in four cycles per month. At the end of each month any
new charges which have not been included in the billing cycles are shown as
unbilled services.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated
using the double declining method over the estimated useful lives of the
assets which range from 5 to 7 years.
Intangible Assets
Organizational costs, stated at cost less accumulated amortization, are
amortized straight-line over 5 years. Loan origination fees, stated at cost
less accumulated amortization, are amortized straight-line over the term of
the loan.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S
of the Internal Revenue Code. Accordingly, no provision for federal income
taxes has been provided for by the Company, as the shareholders of the
Company have included the income on their personal income tax returns.
Fair Value of Financial Instruments
Fair value estimates are made at discrete points in time based on relevant
market information. These estimates may be subjective in nature and involve
uncertainties and matters of significant judgment, and therefore cannot be
determined with precision.
The Company believes that the carrying amounts of its current assets and
current liabilities approximate the fair value of such items due to their
short-term nature.
Revenue Recognition
Revenues are recognized as long-distance, local and cellular services are
provided.
F-57
<PAGE>
FIRSTEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net Income Per Share
Net income per share is based on the weighted average number of shares of
common stock outstanding during the respective periods. The weighted average
shares outstanding were 1,000 for the years ended December 31, 1996 and 1995
and the nine months ended September 30, 1996 and 1997 (unaudited).
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(2) COLLATERAL ACCOUNT
Pursuant to a line of credit agreement with a bank, signed January 4,
1995, the Company directed all receipts to a lockbox established by the bank.
The funds were subsequently deposited into a collateral account and held for
two days. At that time, they became available for use and were transferred to
the regular business account. In 1996, the Company entered into a lockbox
agreement with a different bank. All receipts are directed to a lockbox
established by the bank and are directly deposited to the Company's checking
account daily.
(3) ACQUISITIONS
In September 1997, the Company purchased two telecommunications companies
located in Sioux Falls, South Dakota. The combined purchase price of the two
companies was approximately $1,083,000 payable with notes from the Company
maturing January 31, 1998. Payment of the notes will be with stock issued by
the potential purchaser of the Company, upon the successful completion of an
initial public offering. If the potential purchase of the Company does not
take place by January 31, 1998, the notes will be paid with cash.
(4) INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Organizational costs............ $ 10,206 $ 10,206 $ 10,206
Loan origination fees........... 7,443 9,443 9,443
---------- ---------- ---------------
17,649 19,649 19,649
Less accumulated amortization. (10,926) (14,167) (16,869)
---------- ---------- ---------------
$ 6,723 $ 5,482 $ 2,780
========== ========== ===============
</TABLE>
Amortization expense charged to operations was $8,885 and $3,241,
respectively for the years ended December 31, 1995 and 1996 and $2,702 and
$2,281 for the nine months ended September 30, 1996 and 1997 (unaudited).
(5) CAPITALIZATION
Upon initial capitalization, the Company issued 1,000 shares of its common
stock to the original five stockholders. The stock was recorded at par value
at the date of issuance. In February of 1996, the Company purchased 100
treasury shares for $700,000 and subsequently reissued those shares to a new
shareholder for $600,000. As described in Note 13, the stockholders will
surrender all outstanding shares of the Company stock, concurrent with the
effective date of the merger, and such shares will be canceled.
F-58
<PAGE>
FIRSTEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) LEASES
The Company leases office space, equipment and telephone lines under
long-term lease agreements. The leases for office space, telephone lines and
equipment are operating leases which expire in various years through 1998.
Generally, the Company is required to pay executory costs such as maintenance
and insurance. Rental payments include minimum rentals plus contingent
rentals based on usage.
Rental expense for operating leases for the years ended December 31, 1995
and 1996, and for the nine month periods ended September 30, 1996 and 1997
(unaudited) was $5,051,893, $6,797,857, $4,982,568 and $6,143,566,
respectively.
Capitalized leased assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
---------- ----------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Office furniture and equipment . $ 38,791 $ 85,693 $ 46,902
Harris switches................. 296,536 296,536 296,536
---------- ----------- ---------------
335,327 382,229 343,438
Less accumulated
amortization................... (74,857) (129,796) (139,668)
---------- ----------- ---------------
$260,470 $ 252,433 $ 203,770
========== =========== ===============
</TABLE>
Minimum lease payments for capital and operating leases in future years
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- -----------
<S> <C> <C>
Year ending December 31, 1997............................. $121,447 $450,063
Year ending December 31, 1998............................. 15,666 433,235
Remaining years........................................... -- --
---------- -----------
Total minimum lease payments.............................. 137,113 $883,298
===========
Less interest............................................. (11,206)
----------
Present value of minimum lease payments as of December
31, 1996................................................. $125,907
==========
</TABLE>
(7) LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Capitalized lease obligations, at varying rates of
imputed interest from 10.42% to 18.60%, due in
monthly installments of $10,225, including interest,
through June 1998, secured by leased assets--Note 6 .. $ 177,142 $ 115,907 $ 42,068
$800,000 revolving line of credit payable to bank, due
July 1, 1998, variable rate, 9.5% at December 31,
1996 and 12.05% at December 31, 1995, secured by
substantially all assets of the Company, personal
guarantees of four Company officers, and Company
owned life insurance on an officer of the Company .... 370,789 -- 105,000
Unsecured notes payable to shareholders, at 12%, due
December 31, 1997, subordinated to revolving line .... 1,300,000 1,300,000 1,040,000
------------ ------------- ---------------
1,847,931 1,415,907 1,187,068
Less current maturities................................ (81,321) (1,397,834) (1,187,068)
------------ ------------- ---------------
$1,766,610 $ 18,073 $ --
============ ============= ===============
</TABLE>
F-59
<PAGE>
FIRSTEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The terms of the revolving line of credit include various debt covenants.
At December 31, 1996, the Company was not in compliance with one of these
covenants. As a result, the Company was charged an additional 2% interest
until such time as compliance with all debt covenants was achieved. At
September 30, 1997, the Company is in compliance with all applicable debt
covenants.
Long-term debt maturities are as follows at December 31, 1996:
<TABLE>
<CAPTION>
AMOUNT
------------
<S> <C>
Year ending December 31, 1997......................... $1,397,834
Year ending December 31, 1998......................... 18,073
Thereafter............................................ --
------------
$1,415,907
============
</TABLE>
(8) RELATED PARTY TRANSACTIONS
One of the Company's major shareholders, Fred L. Thurman, is also a
partner in an accounting firm. For the years ending December 31, 1995 and
1996 and for nine months ending September 30, 1996 and 1997, accounting fees
paid to the related company were $27,579, $41,774, $29,676 and $32,727,
respectively.
(9) DEFERRED COMPENSATION PLAN
In 1995, the Company established deferred compensation plans for the
benefit of the shareholders who are also key employees of the Company. The
benefit payable was accrued based on various criteria for each person. The
amount expensed for the years ended December 31, 1995 and 1996 and for the
nine months ended September 30, 1996 and 1997 (unaudited), for such future
obligation were $36,845, $125,541, $86,087 and $49,522, respectively.
(10) RETIREMENT PLAN
In 1996, the Company adopted a qualified 401(k) employee savings and
profit sharing plan which covers all employees who meet eligibility
requirements. Eligible employees may contribute directly to the plan. The
Company matches twenty-five percent (25%) of the employee contribution, not
to exceed one percent of the employee's eligible wages. The Company has the
option to make discretionary contributions to the plan. The Company's
contribution expenses for the year ended December 31, 1996 and the nine
months ended September 30, 1997 (unaudited) were $7,157 and $8,378,
respectively.
(11) DEPENDENCE ON LOCAL EXCHANGE CARRIER
The Company is dependent on local exchange carriers to provide access
service for the origination and termination of its long distance traffic.
Historically, these access charges have made up a significant percentage of
the overall cost of providing long distance service. To the extent that the
access services of the local exchange carriers are used, the Company and its
customers are subject to the quality of service, equipment failures and
service interruptions of the local exchange carriers.
(12) COMMITMENTS AND CONTINGENCIES
In 1996, FirsTel, Inc. signed a long term carrier agreement with MCI Corp.
Included in the agreement is a commitment that FirsTel's monthly usage shall
equal or exceed $225,000. If usage is less FirsTel will pay the actual usage
plus an underutilization charge of 15% of the difference between actual usage
and $225,000.
(13) SUBSEQUENT EVENTS
The Company's stockholders have entered into a stock purchase agreement to
sell all of the issued and outstanding capital stock of the Company for
consideration of $5,000,000 in cash, $2,000,000 in 10% convertible
subordinated notes, common stock of the purchaser and 50,000 warrants to
purchase common stock of the purchaser. The notes payable to stockholders
will be acquired by the purchaser in the acquisition. The transaction is
generally contingent upon the successful completion of an initial public
offering of the purchaser.
F-60
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholder of KIN Network, Inc.:
We have audited the balance sheets of KIN Network, Inc. as of December 31,
1994 and 1995, and the related statements of operations, stockholder's equity
(deficit), and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits. The accompanying financial statements of KIN Network, Inc. as
of and for the year ended December 31, 1996 and as of and for the nine month
periods ended September 30, 1996 and 1997 were not audited by us and,
accordingly, we have not expressed an opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 1994 and 1995 financial statements referred to above
present fairly, in all material respects, the financial position of KIN
Network, Inc. as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
KENNEDY AND COE, LLC
Salina, Kansas
February 23, 1996
F-61
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
KIN Network, Inc.
Salina, Kansas
We have audited the balance sheet of KIN Network, Inc. as of December 31,
1996, and the related statements of operations, stockholder's equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The financial
statements of KIN Network, Inc. as of December 31, 1995, and 1994, were
audited by other auditors whose reports dated February 23, 1996, and March 1,
1995, respectively, expressed unqualified opinions on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present
fairly, in all material respects, the financial position of KIN Network, Inc.
as of December 31, 1996, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
Out audit was conducted for the purpose of forming an opinion on the 1996
basic financial statements taken as a whole. The financial information for
September 30, 1997 and 1996 and for the periods then ended (marked
"unaudited" and accompanying the basic financial statements) is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. Such information has not been subjected to the auditing
procedures applied in the audit of the 1996 basic financial statements, and
accordingly, we express no opinion on it.
SARTAIN FISCHBEIN & CO.
Tulsa, Oklahoma
February 25, 1997
F-62
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------- ---------------
1995 1996 1997
------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................ $ 2,286,360 $ 2,688,775 $ 3,134,624
Receivables:
Trade accounts......................................... 432,780 324,771 661,597
Accrued revenue........................................ 283,648 533,145 394,863
Patronage credits...................................... 351,138 227,259 190,326
Affiliated company..................................... -- -- --
Liberty Cellular, Inc.................................. -- 1,185,538 562,469
Prepaid expenses......................................... 47,914 144,874 169,643
RTFC capital certificates................................ 452,373 251,609 202,498
------------- -------------- ---------------
Total Current Assets....................................... 3,854,213 5,355,971 5,316,020
------------- -------------- ---------------
Property, Plant and Equipment, net......................... 21,408,898 21,821,077 26,063,471
------------- -------------- ---------------
Other Assets
RTFC capital certificates................................ 3,265,963 3,014,351 2,811,853
Deferred income taxes.................................... 6,206,648 3,108,267 25,530
Debt issue costs, net.................................... 68,790 62,290 57,415
Patronage credits receivable............................. 398,266 604,921 607,654
Prepayments on fiber leases.............................. 227,445 197,778 175,528
Organization and other intangible costs, net of
accumulated amortization of $826,801 in 1995, $836,278
in 1996, and $841,407 in 1997........................... 22,265 10,444 2,751
Other assets............................................. 1,300 1,300 --
------------- -------------- ---------------
Total Other Assets......................................... 10,190,677 6,999,351 3,680,731
------------- -------------- ---------------
Totals..................................................... $35,453,788 $ 34,176,399 $ 35,060,222
============= ============== ===============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Current maturities of long-term debt..................... $ 2,518,559 $ 2,892,009 $ 2,892,341
Accounts payable:
Trade.................................................. 198,246 632,519 3,763,209
Liberty Cellular, Inc.................................. 2,649 -- 4,062
Affiliate.............................................. 15,184 66,408 45,009
Accrued expenses......................................... 536,553 515,932 773,003
------------- -------------- ---------------
Total Current Liabilities.................................. 3,271,191 4,106,868 7,477,624
Long-Term Debt, less current maturities.................... 31,655,696 28,763,687 26,574,085
------------- -------------- ---------------
Total Liabilities.......................................... 34,926,887 32,870,555 34,051,709
------------- -------------- ---------------
Stockholder's Equity
Common stock, no par value; authorized 10,000,000
shares; issued and outstanding 300,000 shares .......... 3,000,000 3,000,000 3,000,000
Additional paid in capital............................... 7,500,000 9,071,316 9,071,316
Retained earnings........................................ (9,973,099) (10,765,472) (11,062,803)
------------- -------------- ---------------
Total Stockholder's Equity................................. 526,901 1,305,844 1,008,513
------------- -------------- ---------------
Totals..................................................... $35,453,788 $ 34,176,399 $ 35,060,222
============= ============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- ---------------------------
1994 1995 1996 1996 1997
-------------- -------------- ------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................... $ 3,550,242 $ 6,496,741 $ 8,552,564 $ 6,030,536 $ 8,796,000
Cost of Services................... 2,450,281 3,094,454 2,863,857 2,054,764 2,995,543
-------------- -------------- ------------- ------------- -------------
Gross Profit....................... 1,099,961 3,402,287 5,688,707 3,975,772 5,800,457
-------------- -------------- ------------- ------------- -------------
Expenses
Operating and administrative .... 2,533,095 2,929,555 3,416,589 2,478,742 3,465,761
Depreciation and amortization ... 1,700,096 1,825,297 1,906,094 1,320,656 1,596,567
-------------- -------------- ------------- ------------- -------------
Total Expenses..................... 4,233,191 4,754,852 5,322,683 3,799,398 5,062,328
-------------- -------------- ------------- ------------- -------------
Income (Loss) from Operations ..... (3,133,230) (1,352,565) 366,024 176,374 738,129
Other Income (Expense)
Interest and other income........ 26,532 41,683 80,678 68,933 73,705
Interest, net of patronage
credits......................... (1,616,071) (2,047,215) (1,826,148) (1,383,517) (1,296,265)
-------------- -------------- ------------- ------------- -------------
Net Loss Before Income Taxes ...... (4,722,769) (3,358,097) (1,379,446) (1,138,210) (484,431)
Deferred Income Tax Benefit........ 1,839,803 1,303,549 587,073 426,225 187,100
-------------- -------------- ------------- ------------- -------------
Net Loss........................... $(2,882,966) $(2,054,548) $ (792,373) $ (711,985) $ (297,331)
============== ============== ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Balance, January 1, 1994........ $3,000,000 $ -- $ (5,035,585) $(2,035,585)
Capital Contributions......... -- 1,500,000 -- 1,500,000
Net Loss--1994................ -- -- (2,882,966) (2,882,966)
------------ ------------ --------------- ---------------
Balance, December 31, 1994 ..... 3,000,000 1,500,000 (7,918,551) (3,418,551)
Capital Contributions......... -- 6,000,000 -- 6,000,000
Net Loss--1995................ -- -- (2,054,548) (2,054,548)
------------ ------------ --------------- ---------------
Balance, December 31, 1995 ..... 3,000,000 7,500,000 (9,973,099) 526,901
Capital Contributions......... -- 1,571,316 -- 1,571,316
Net Loss--1996................ -- -- (792,373) (792,373)
------------ ------------ --------------- ---------------
Balance, December 31, 1996 ..... 3,000,000 9,071,316 (10,765,472) 1,305,844
Net Income--September 30,
1997 (Unaudited)............. -- -- (297,331) (297,331)
------------ ------------ --------------- ---------------
Balance, September 30, 1997
(Unaudited).................... $3,000,000 $9,071,316 $(11,062,803) $ 1,008,513
============ ============ =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- ---------------------------
1994 1995 1996 1996 1997
-------------- -------------- ------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net loss................................ $(2,882,966) $(2,054,548) $ (792,373) $ (711,985) $ (297,331)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities
Deferred income taxes.................. (1,839,803) (1,303,549) (587,073) (426,225) (187,100)
Depreciation and amortization.......... 1,700,096 1,825,297 1,906,094 1,320,656 1,596,567
Gain on sale of assets................. -- (2,984) (13,883) (14,604) (9,081)
(Increase) decrease in:
Receivables.......................... (348,783) (140,406) (224,348) (222,564) (336,342)
Prepaid expenses..................... 28,202 1,344 (96,960) (52,235) (24,769)
Other assets......................... 198,041 29,666 29,667 149,056 223,315
Increase (decrease) in:
Accounts payable..................... (636,864) 87,384 273,173 (67,258) 3,049,688
Accrued expenses..................... (300,041) (302,349) (20,621) 604,851 257,071
-------------- -------------- ------------- ------------- -------------
Net Cash Provided By (Used In) Operating
Activities.............................. (4,082,118) (1,860,145) 473,676 579,692 4,272,018
-------------- -------------- ------------- ------------- -------------
Cash Flows from Investing Activities
Repayment of advance................... 1,000,000 -- -- -- --
Additions--property, plant & equip .... (1,203,916) (749,668) (1,545,534) (1,075,816) (5,923,656)
Proceeds from sale of plant............ -- 24,592 40,456 44,463 106,344
-------------- -------------- ------------- ------------- -------------
Net Cash Provided By (Used In)
Investing Activities................... (203,916) (725,076) (1,505,078) (1,031,353) (5,817,312)
-------------- -------------- ------------- ------------- -------------
Cash Flows from Financing Activities
Proceeds from borrowings............... 5,634,998 -- -- -- --
Return of RTFC capital certificates ... -- -- 452,376 452,376 251,609
Principal payments on debt............. (1,821,913) (2,329,374) (2,516,089) (1,866,282) (2,024,981)
Payments on capital leases............. (217,642) (2,470) (2,470) (2,470) (100,625)
Payment by Liberty Cellular, Inc:
Income tax benefit................... -- -- 2,500,000 -- 3,865,140
Capital contributions................ 1,500,000 6,000,000 1,000,000 1,000,000 --
-------------- -------------- ------------- ------------- -------------
Net Cash Provided By (Used In)
Financing Activities................... 5,095,443 3,668,156 1,433,817 (416,376) 1,991,143
-------------- -------------- ------------- ------------- -------------
Net Increase (Decrease) in Cash and Cash
Equivalents............................. 809,409 1,082,935 402,415 (868,037) 445,849
Cash and Cash Equivalents:
Beginning of Period.................... 394,016 1,203,425 2,286,360 2,286,360 2,688,775
-------------- -------------- ------------- ------------- -------------
End of Period.......................... $ 1,203,425 $ 2,286,360 $ 2,688,775 $ 1,418,323 $ 3,134,624
============== ============== ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING & FINANCING ACTIVITIES
Property contributed as capital by
Liberty Cellular, Inc.................. $ -- $ -- $ 571,316 $ -- $ --
Property acquired through increases
in accounts payable--trade............. $ 148,393 $ 25,577 $ 209,675 $ 76,001 $3,308,202
RTFC capital certificates received in
lieu of cash with borrowings........... $ 626,114 $ -- $ -- $ -- $ --
OTHER DISCLOSURES
Interest paid, net of patronage refunds. $1,791,252 $2,290,421 $1,923,165 $1,540,831 $1,445,070
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995, 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: KIN Network, Inc. ("the Company") is a wholly-owned
subsidiary of Liberty Cellular, Inc. ("Liberty").
The Company is constructing and operating a statewide fiber optic network
in Kansas to provide private circuit transport, network toll terminations,
equal access transport and switching, and other services to businesses and
independent telephone companies in Kansas.
ALLOWANCE FOR BAD DEBTS: The Company recognizes bad debts under the
allowance method. As of December 31, 1995, 1996, and September 30, 1996 and
1997, the Company believes that the dollar amount of receivables subject to
the risk of uncollectibility is minimal and has set its allowance for
doubtful accounts at zero.
PROPERTY, PLANT AND EQUIPMENT: Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets.
Repairs and maintenance are expensed as incurred, whereas major improvements
are capitalized.
Depreciation expense on property, plant and equipment charged to
operations was $1,524,492 in 1994, $1,648,377 in 1995, $1,887,774 in 1996,
and $1,583,999 for the nine months ended September 30, 1997.
DEBT ISSUE COSTS: Debt issue costs, which were incurred in 1991, are being
amortized using the straight-line method over the term of the related debt,
which approximates fifteen years. Annual amortization expense charged to
operations was $6,500 in 1994, 1995, and 1996. Expense charged for the nine
months ended September 30, 1997 was $4,875.
INCOME TAXES: The Company and Liberty file consolidated tax returns.
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes.
Deferred tax liabilities are recognized for differences between the basis of
assets and liabilities for financial statement and income tax purposes. The
differences relate primarily to depreciable and amortizable assets (use of
different depreciation and amortization methods and lives for financial
statement and income tax purposes). In addition, deferred tax assets result
from the anticipated benefits attributable to the utilization of the
Company's net operating losses as an offset to Liberty's taxable income on a
consolidated basis. The net deferred tax benefits represent the tax impact of
the future resolution of the above described differences.
ORGANIZATION COSTS AND OTHER INTANGIBLES: The costs of organizing the
Company have been capitalized and are being amortized over a five-year
period. Annual amortization expense charged to operations was $169,105 in
1994, $170,420 in 1995, $11,821 in 1996, and $12,569 for the nine months
ended September 30, 1997.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that could affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates.
CASH EQUIVALENTS: For purposes of the balance sheets and statements of
cash flows, cash equivalents include all highly liquid debt instruments with
original maturities of three months or less.
F-68
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1995 1996 1997
------------- ------------- ---------------
<S> <C> <C> <C>
Borrowings under a $37,183,333 note with Rural Telephone Finance
Cooperative ("RTFC"). The note bears a variable rate of interest
(6.65% as of June 30, 1997) and borrowings under the note are
due in equal quarterly installments of principal and interest
of approximately $1,130,000 beginning November 1993, with the
final payment due August 2006. The note is collateralized by
network telephone plant and revenues...................... $32,659,604 $30,143,515 $28,118,534
Capital lease obligations (described in Note 3) with certain
stockholders (or their affiliates) of Liberty. The obligations
are due in variable annual principal installments, plus interest,
with the final installments due in the year 2006. The obligations
are collateralized by portions of the fiber optic network. $ 1,514,651 $ 1,512,181 1,347,891
------------- ------------- ---------------
34,174,255 31,655,696 29,466,425
Less current maturities.................................... 2,518,559 2,892,009 2,892,340
------------- ------------- ---------------
$31,655,696 $28,763,687 26,574,085
============= ============= ===============
</TABLE>
The note payable to the RTFC contains various covenants pertaining to the
maintenance of net worth, payment of dividends, and debt service coverage. At
December 31, 1996, the Company was in compliance with such covenants.
Estimated maturities on the borrowings with RTFC over the next 5 1/2 years
beginning July 1, 1997 are as follows:
<TABLE>
<S> <C>
1997....................... $1,393,177
1998....................... 2,949,248
1999....................... 3,188,013
2000....................... 3,446,034
2001....................... 3,724,932
2002....................... 4,026,402
</TABLE>
F-69
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments for property under capital leases at September
30, 1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1997 ....................................................... $ 0.00
1998 ....................................................... 345,872
1999 ....................................................... 328,990
2000 ....................................................... 312,110
2001 ....................................................... 295,228
2002 ....................................................... 263,748
After 2002 ................................................. 867,387
------------
Total minimum lease payments ............................... 2,413,335
Less amount representing interest,administration, and
overhead ................................................. 1,065,444
------------
Present value of minimum lease payments, excluding
interest, administration and overhead .................... $1,347,891
Less current maturities .................................... 147,393
------------
$1,200,498
============
</TABLE>
RTFC distributes patronage credits to the Company on an annual basis based
upon annually determined percentages of interest paid by the Company to RTFC.
The amount of patronage credits was $254,879 in 1994, $325,515 in 1995,
$305,346 in 1996, and $107,653 in 1997.
As a condition to the loan agreement, the Company must purchase
non-interest bearing subordinated capital certificates from RTFC in an amount
equal to 10% of each advance under the note. Through December 31, 1995, the
Company had purchased $3,718,336 of RTFC subordinated capital certificates.
Beginning in 1996, as principal payments are made on the underlying debt,
returns of certificate principal amounts are made proportionately in order to
maintain a certificate principal balance equal to 10% of the outstanding loan
balances. RTFC has returned certificates to the Company totaling $452,376 and
$251,609 in 1996 and through September 30, 1997, respectively, leaving
certificate balances totaling $3,014,351 at September 30, 1997.
3. INTEREST EXPENSE
The Company follows the policy of capitalizing interest as a component of
property and equipment constructed for its own use. Total interest incurred
(net of patronage credits) was $1,616,071 in 1994, $2,047,215 in 1995,
$1,826,148 in 1996, and $1,296,265 at September 30, 1997. No significant
interest was capitalized in 1994, 1995, or 1996.
4. LEASING ARRANGEMENTS
CAPITAL LEASES: The Company leases fiber optic cable from certain Liberty
stockholders (or their affiliates) under capital leases expiring in the year
2006. The assets and obligations under capital leases are recorded at the
lower of the present value of the minimum lease payments or the fair value of
the asset. The assets are depreciated over their estimated productive lives.
Depreciation of assets under capital leases is included in depreciation
expense and amounted to $100,598 in 1994, 1995, and 1996, and $75,449 for the
period ended September 30, 1997. Interest expense associated with the
obligations under these leases amounted to $207,706 in 1994, $132,924 in
1995, $132,666 in 1996. Fiber optic cable under capital leases was
$2,091,378, $1,990,780, $1,890,182 and $1,839,883 at December 31, 1994, 1995,
1996 and September 30, 1997, respectively, net of accumulated depreciation of
$322,965 at December 31, 1994, $423,563 at December 31, 1995, $524,161 at
December 31, 1996, and $599,610 for the period ended September 30, 1997.
F-70
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Effective December 31, 1994, the Company re-negotiated the terms of the
capital lease obligations for nine of the ten obligations. The re-negotiated
leases call for the deferral of the principal portion of the lease for a two
year period ending December 31, 1996. At that time the remaining principal
balances on the re-negotiated leases will be repaid evenly over a nine or
ten-year period. The interest rate, which was previously set at 12%, was
re-negotiated for 1995 and 1996 to 8.5% for a majority of the leases and 10%
on the balance of the leases. In 1997, the interest rates on those leases
were re-negotiated at rates ranging from 8.5% to 12% for the remainder of the
lease term.
5. OPERATING LEASES
The Company leases various facilities, circuits and equipment under
operating leases expiring in various years through the year 2004. Minimum
future rental commitments under these operating leases as of September 30,
1997, for each of the next 5 1/2 years and in the aggregate are:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, AMOUNT
- -------------- ---------
<S> <C>
1997 ........ $ 40,808
1998 ........ 26,763
1999 ........ 22,482
2000 ........ 20,510
2001 ........ 17,510
2002 ........ 24,514
After 2002 .. 95,886
---------
$248,473
=========
</TABLE>
The Company also leases circuits on a month-to-month basis from various
interconnect companies.
Total rental expense under operating leases, including leased circuits was
$1,257,260 in 1994, $1,146,694 in 1995, $1,653,971 in 1996, and $1,062,378 at
September 30, 1997.
The Company leases space from Liberty under a year-to-year operating
lease. Total rent expense paid to Liberty was $43,000 in 1996 and $32,250 for
the period ended September 30, 1997.
6. RELATED PARTY TRANSACTIONS
The Company is operated under a management agreement by KINI L.C., which
is related to Liberty through common ownership. Operating and administrative
expenses incurred by the Company through KINI L.C. amounted to $1,682,730,
including $127,401 which was capitalized in 1994, $1,924,084, including
$47,684 which was capitalized, in 1995, and $2,377,223, including $15,329
which was capitalized, in 1996. Beginning January 1, 1997, the management fee
paid to KINI L.C. was increased from 12.5% to 15% under a new operating
agreement. Expenses incurred in 1997 amount to $2,481,315, including $60,352
which was capitalized.
Network revenue includes revenue resulting from services performed for
Liberty which amounted to approximately $482,000 (14% of total network
revenue) in 1994, approximately $1,625,000 (25% of total network revenue) in
1995, approximately $2,810,000 (33% of total network revenue) in 1996, and
approximately $1,926,000 (28% of total network revenue) in 1997. At September
30, 1997, trade accounts receivable and accrued revenue includes
approximately $151,000 due from Liberty.
As part of the capital leases for fiber optic cable with certain
stockholders (or their affiliates), the Company is required to pay fees for
maintenance. Additional fiber optic maintenance costs were also paid to
certain stockholders (or their affiliates). Maintenance costs under these
arrangements were approximately $45,000 in 1994, 1995, 1996 and approximately
$33,750 at September 30, 1997.
F-71
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. CONTINGENCIES
During the course of constructing the statewide fiber-optic network, it
has been necessary for the Company to obtain rights-of-way from property
owners. Outside counsel has advised the Company that the form of a number of
these rights-of-way are defective from a marketable title point of view.
Outside counsel have advised management that at this point they cannot offer
an opinion as to any asset impairment or other outcome resulting from this
situation. In 1992, the Company obtained an indemnification commitment from
the consultants hired by the Company to obtain the rights-of-way, in the
amount of $250,000, which expires over 15 years.
8. INCOME TAXES
Deferred income taxes arise principally due to net operating losses net of
temporary differences in the depreciation of property, plant and equipment.
The Company has net operating losses totaling approximately $15,900,000
expiring in various years through the year 2011, which management believes
will be utilized in the consolidated tax return to offset future taxable
income from the operations of the Company and Liberty.
A reconciliation of the deferred income tax benefit at the federal
statutory rate to the deferred income tax benefit at the effective tax rate
is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------------ ------------ ---------- ---------------
<S> <C> <C> <C> <C>
Deferred income tax benefit computed at
federal statutory rate of 34%.......... $1,605,741 $1,141,753 $469,012 $164,707
State taxes, net of federal benefit .... 228,582 162,532 66,765 19,377
Other................................... 5,480 (736) 51,296 3,016
------------ ------------ ---------- ---------------
$1,839,803 $1,303,549 $587,073 $187,100
============ ============ ========== ===============
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
------------------------------------------ SEPTEMBER 30,
1994 1995 1996 1997
------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Total deferred tax assets--net operating
losses....................................... $ 7,119,644 $8,957,575 $ 6,190,810 $ 4,947,538
Less valuation allowance...................... -- -- -- --
------------- ------------ ------------- ---------------
7,119,644 8,957,575 6,190,810 4,947,538
Total deferred tax liabilities--depreciation . (2,216,545) 2,750,927 (3,082,543) (4,922,008)
------------- ------------ ------------- ---------------
Net deferred tax assets....................... $ 4,903,099 $6,206,648 $ 3,108,267 $ 25,530
============= ============ ============= ===============
</TABLE>
In 1996, Liberty utilized approximately $9,500,000 of the Company's net
operating loss carryforward to offset Liberty's 1996 taxable income. As a
result, Liberty agreed to pay the Company approximately $3,700,000 for the
use of the Company's net operating loss, of which $2,500,000 was paid in
1996. Accounts receivable from Liberty as of December 31, 1996 consists of
the remaining amounts due to the Company for the use of net operating losses.
F-72
<PAGE>
KIN NETWORK, INC.
SALINA, KANSAS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. CREDIT RISK
The Company grants credit to customers, primarily local telephone
companies and local businesses.
The Company has a demand deposit and a repurchase agreement account with a
financial institution. The balance at the financial institution exceeded the
federal insurance limitation of $100,000 at December 31, 1994, 1995, 1996 and
September 30, 1997. However, the financial institution has pledged assets to
secure the repurchase agreement in excess of the federal insurance
limitation.
10. DEFERRED COMPENSATION PLAN
The Company, along with Liberty Cellular, Inc. and KINI, L.C., established
in 1994, a deferred compensation plan for their employees. The plan provides
that the employees will receive additional compensation based upon certain
key operating results of the companies. The total expense under the plan was
$479,198, $1,063,895, and $1,190,761 for the years ended December 31, 1994,
1995, and 1996, respectively. Of the total liability under the plan of
$2,164,646, $387,141 was paid in 1997 and the remaining balance of $1,777,505
deferred to future years. Liberty Cellular, Inc. has assumed all of the
liability and expense under the plan, with the Company contingently liable as
co-signer.
F-73
<PAGE>
INSIDE BACK COVER GRAPHIC:
[Graphic depicting ACG CLEC configuration strategy along with explanation of
strategy as detailed below. Strategy consists of five phases, described as
"Build Smart".]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Phase 1 Phase 2 Phase 3 Phase 4 Phase 5
- ----------------------- ------------------------ ---------------------- ---------------------- ----------------------
Resell LEC local Use Intercity networks Add local service Collocate in Construct local and
service bundled with to aggregate traffic at circuit and packet appropriate LEC mid-haul fiber
L/D, cellular, yellow key switching points switches to key switch central offices to facilities where
pages, Internet access points; use ATM acquire access to economics warrant
and other premium backbone to reduce unbundled local loops
services switching costs
- ----------------------- ------------------------ ---------------------- ---------------------- ----------------------
</TABLE>
<PAGE>
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained
in this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Company or the Underwriters. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the date
hereof or that the information contained herein is correct as of any time
subsequent to its date. This Prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any securities other than the registered
securities to which it relates. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy such securities in any
circumstances in which such offer or solicitation is unlawful.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 11
The Company............................... 24
Dividend Policy........................... 29
Use of Proceeds........................... 29
Capitalization............................ 30
Dilution.................................. 31
Selected Financial Data................... 32
Management's Discussion and Analysis
of Financial Condition and Results of
Operations of Certain Acquired Companies 34
Industry Background and Overview.......... 50
Business.................................. 52
Management................................ 67
Certain Transactions...................... 75
Principal Stockholders.................... 79
Description of Capital Stock.............. 81
Shares Eligible for Future Sale........... 84
Underwriting.............................. 85
Validity of Common Stock.................. 87
Experts................................... 87
Available Information..................... 87
Glossary.................................. G-1
Index to Financial Statements............. F-1
</TABLE>
UNTIL , 1998 [25 DAYS AFTER THE DATE OF THIS PROSPECTUS], ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
8,000,000 SHARES
[ACG LOGO] Advanced
Communications
Group, Inc.
COMMON STOCK
PROSPECTUS
PAINEWEBBER INCORPORATED
CIBC OPPENHEIMER CORP.
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the securities being registered. All amounts are estimates
except for the SEC registration fee, the NASD filing fee and the NYSE filing
fee.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee.................. $ 52,273
NASD filing fee....................... 14,300
NYSE original listing fee............. 150,000
Printing expenses..................... 625,000
Legal fees and expenses............... 2,350,000
Accounting fees and expenses.......... 650,000*
Blue Sky fees and expenses............ 10,000
Transfer Agent's and Registrar's
fees................................. 25,000
Miscellaneous......................... 198,427
-------------
TOTAL .............................. $4,075,000*
</TABLE>
- ------------
* Includes $500,000 paid prior to the consummation of the Offering.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Delaware General Corporation Law
Section 145(a) of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other that an action by or in the
right of the corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe such
person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that such person's conduct was unlawful.
Section 145(b) of the DGCL states that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that
such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including
attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such
person acted in good faith and in a manner such person reasonably believed to
be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the court of Chancery or the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
II-1
<PAGE>
Section 145(c) of the DGCL provides that to the extent that a present or
former director or officer of a corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in
connection therewith.
Section 145(d) of the DGCL states that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be
made by the corporation only as authorized in the specific case upon a
determination that indemnification of the present or former director,
officer, employee or agent is proper in the circumstances because such person
has met the applicable standard of conduct set forth in subsections (a) and
(b). Such determination shall be made with respect to a person who is a
director or officer at the time of such determination (1) by a majority vote
of the directors who are not parties, to such action, suit or proceeding,
even though less than a quorum or (2) by a committee of such directors
designated by a majority of such directors, even though less than a quorum or
(3) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (4) by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the corporation as authorized in
Section 145. Such expenses (including attorneys' fees) incurred by former
directors and officers or other employees and agents may be so paid upon such
terms and conditions, if any, as the corporation deems appropriate.
Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in such person's official capacity and as to
action in another capacity while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the
power to purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against such person and incurred
by such person in any such capacity, or arising out of such person's status
as such, whether or not the corporation would have the power to indemnify
such person against such liability under the provisions of Section 145.
Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who
has ceased to be a director, officer, employee or agent, and shall inure to
the benefit of the heirs, executors and administrators of such a person.
Certificate of Incorporation
The Restated Certificate of Incorporation of the Company provides that a
director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the DGCL or (iv) for any transaction from which the
director derived an improper personal benefit. Any repeal or modification of
such provision of the Restated Certificate of Incorporation by the
stockholders of the Company shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director of
the Company existing at the time of such repeal or modification.
II-2
<PAGE>
The Company's Restated Certificate of Incorporation also provides that
each person who was or is made a party or is threatened to be made a party to
or is involved in any action in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she, or a person of whom he
or she is the legal representative, is or was a director or officer of the
Company or, while a director or officer of the Company, is or was serving at
the request of the Company as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving
as a director, officer, employee or agent, shall be indemnified and held
harmless by the Company to the fullest extent authorized by the DGCL, as the
same exists or may hereafter be amended, against all expense, liability and
loss (including attorneys' fees, judgments, fines, amounts paid or to be paid
in settlement, and excise taxes or penalties arising under the Employee
Retirement Income Security Act of 1974) reasonably incurred or suffered by
such person in connection therewith and such indemnification shall continue
as to a person who has ceased to be a director or officer and shall inure to
the benefit of his or her heirs, executors and administrators; provided,
however, that, except as provided herein, the Company shall indemnify any
such person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part thereof)
was authorized by the Board of Directors. The right to indemnification
conferred in the Restated Certificate of Incorporation shall be a contract
right and shall include the right to be paid by the Company the expenses
incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the DGCL requires, the payment of
such expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the Company
of an undertaking, by or on behalf of such Director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director
or officer is not entitled to be indemnified under the Restated Certificate
of Incorporation or otherwise. The Company may, by action of the Board of
Directors, provide indemnification to employees and agents of the Company
with the same scope and effect as the foregoing indemnification of directors
and officers.
If a claim under the foregoing is not paid in full by the Company within
30 days after a written claim has been received by the Company, the claimant
may at any time thereafter bring suit against the Company to recover the
unpaid amount of the claim and, if successful in whole or in part, the
claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action brought
to enforce a claim for expenses incurred in defending any proceeding in
advance of its final disposition where the required undertaking, if any is
required, has been tendered to the Company) that the claimant has not met the
standards of conduct which make it permissible under the DGCL for the Company
to indemnify the claimant for the amount claimed but the burden of proving
such defense shall be on the Company. Neither the failure of the Company
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
DGCL, nor an actual determination by the Company (including its Board of
Directors, independent legal counsel, or its Stockholders) that the claimant
has not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that the claimant has not met the applicable
standard of conduct.
The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred by the
Restated Certificate of Incorporation shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the Restated Certificate of Incorporation, the Company's
By-Laws, any agreement, any vote of stockholders or disinterested Directors
of the Company or otherwise.
The Company may maintain insurance, at its expense, to protect itself and
any director, officer, employee or agent of the Company or another
corporation, partnership, joint venture, trust or other enterprise against
any such expense, liability or loss, whether or not the Company would have
the power to indemnify such person against such expense, liability or loss
under the DGCL.
II-3
<PAGE>
No amendment, alteration or repeal of, nor the adoption of any provision
inconsistent with, any of the foregoing provisions of the Company's Restated
Certificate of Incorporation, which shall in any manner increase the actual
or potential liability of any director of the Company shall apply to or have
any effect on the liability or alleged liability of any such director for or
with respect to actions or omissions of such director occurring prior to such
amendment, alteration, repeal or adoption.
Notwithstanding that a lesser percentage may be permitted from time to
time by applicable law, none of the foregoing provisions of the Company's
Restated Certificate of Incorporation may be altered, amended or repealed in
any respect, nor may any provision inconsistent therewith be adopted, unless
such alteration, amendment, repeal or adoption is approved by the affirmative
vote of the holders of at least 80 percent of the combined voting power of
the then outstanding shares of voting stock, voting together as a single
class.
Indemnification Agreements
The Company intends to enter into Indemnification Agreements with each of
its directors. The Indemnification Agreements generally are to the same
effect as the charter provisions described above.
Underwriting Agreement
The Underwriting Agreement provides for the indemnification of the
directors and officers of the Company in certain circumstances.
Insurance
The Company intends to maintain liability insurance for the benefit of its
directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On September 17, 1996, the Company's predecessor ("Predecessor") issued
and sold shares of Common Stock, $.00001 par value ("Predecessor Stock"), to
the following parties in the amounts and for the consideration indicated.
These sales were exempt from registration under Section 4(2) of the
Securities Act: CPFF -- 7,768,508 shares for a consideration of $1,000; Rod
K. Cutsinger -- 388,425 shares for a consideration of $10,000; Bradley K.
Cutsinger -- 48,553 shares for a consideration of $1,250; Don Chessher --
100,991 (subsequently reduced to 63,799) shares for a consideration of
$2,600; Jeffrey L. Corl -- 97,106 shares for a consideration of $2,500
(subsequently reduced to 11,653 shares, for a consideration of $300); Frank
Bango -- 97,106 shares for a consideration of $2,500; Louis A. Waters --
97,106 shares for a consideration of $2,500 (subsequently reduced to 7,769
shares for a consideration of $1,000); Ronald Shapss -- 11,653 shares for a
consideration of $300; G. Edward Powell -- 7,769 shares for a consideration
of $200; Fentress Bracewell -- 1,942 shares for a consideration of $50;
Jackson Hines -- 1,942 shares for a consideration of $50; Rod Crosby -- 1,942
shares for a consideration of $50; and Ron Ormand -- 1,942 shares for a
consideration of $50.
On September 19, 1996 the Predecessor issued and sold to CPFF an 8%
promissory note, as amended, due upon the first to occur of the effectiveness
of registration statement relating to the Company's initial underwritten
public offering or December 31, 1998, in a transaction exempt from
registration under Section 4(2) of the Securities Act, no public offering
being involved.
In October 1996, the Predecessor agreed to issue non-transferable
five-year warrants to purchase an aggregate of 16,703 shares of Common Stock
at the initial public offering price per share to the following eight persons
for consulting services rendered in transactions exempt from registration
under Section 4(2) of the Securities Act, no public offering being involved:
II-4
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME SUBJECT TO WARRANTS
- ------------------- -------------------
<S> <C>
Ronald Shapps ...... 9,711
Rod L. Crosby, Jr. 1,942
Ron Ormond ......... 583
Jim Neebling ....... 583
Howard Kra ......... 583
Julius Binetti ..... 1,359
Julius DeVito ...... 1,359
Errol Cvern ........ 583
</TABLE>
On November 7, 1996, the Predecessor issued and sold 38,843 shares of
Predecessor Stock to G. Edward Powell for a consideration of $5,000 in a
transaction exempt from registration under Section 4(2) of the Securities
Act, no public offering being involved.
On January 3, 1997, the Predecessor issued and sold 1,942 shares of
Predecessor Stock to Beverly A. Aden for a consideration of $250 in a
transaction exempt from registration under Section 4(2) of the Securities
Act, no public offering being involved.
On May 2, 1997, the Predecessor issued to Joseph C. Cook, for services
rendered as a consultant, a ten year warrant to purchase 7,769 shares of
Predecessor Stock at a price of $2.57 per share in a transaction exempt from
registration under Section 4(2) of the Securities Act, no public offering
being involved.
On June 12, 1997, in connection with the execution of a related employment
agreement, the Predecessor granted Todd J. Feist a non-transferrable five
year option to purchase 250,000 shares of Predecessor Stock. This transaction
was completed without registration under the Securities Act in reliance upon
the exemption provided by Section 4(2) thereof, no public offering being
involved. These options were issued in exchange for a comparable number of
options issued in mid 1997 by the Predecessor.
On June 16, 1997, the Predecessor issued to the stockholders of Great
Western Directories, Inc. non-transferable, ten-year warrants to purchase
776,851 shares of Predecessor Stock. This transaction was completed without
registration under the Securities Act in reliance upon the exemption afforded
by Section 4(2) of the Securities Act, no public offering being involved.
Pursuant to agreements entered into in May, July and July of 1997,
respectively, the Predecessor issued to Valerie A. Caser, Malcolm F. McNeill
and William McCaughey 872 shares of Common Stock, 3,793 shares of Common
Stock, and warrants to purchase 7,769 shares of Common Stock at a price of
$6.44 per share, respectively, in lieu of compensation for consulting
services in transactions exempt from registration under Section 4(2) of the
Securities Act, no public offering being involved.
On December 29, 1997, the Company issued ten-year warrants to purchase
67,974 shares and 135,949 shares of Common Stock at a price of $2.50 per
share to Brad K. Cutsinger and G. Edward Powell, respectively, in
transactions exempt from registration under the Securities Act, no public
offering being involved. The warrants were issued to Messrs. Cutsinger and
Powell in exchange for employee stock options having the same economic terms.
Pursuant to the Acquisition Agreements filed as Exhibits 2.1 through 2.10
and substantially concurrently with the consummation of the Offering, the
Company has agreed to issue an aggregate of 3,166,468 shares of Common Stock,
$17.4 million in promissory notes, $2.0 million in convertible subordinated
notes and 637,135 warrants or options to purchase Common Stock to the
stockholders of Great Western, Valu-Line, Feist Long Distance, FirsTel,
Tele-Systems and KINNET. These transactions will be completed without
registration under the Securities Act in reliance upon the exemption provided
by Section 4(2) thereof, no public offering being involved.
On October 9, 1997, the Company issued to its parent, Advanced
Communications Corp., 1,000 shares of Common Stock for the consideration of
$1,000. Concurrently with the consummation of the
II-5
<PAGE>
Offering, Advanced Communications Corp. will be merged with a subsidiary of
the Company, will become a subsidiary of the Company, and the stockholders of
Advanced Communications Corp. will receive one share of Common Stock of the
Company for each share of common stock they hold in Advanced Communications
Corp. These transactions will be completed without registration under the
Securities Act in reliance upon the exemption provided by Section 4(2)
thereof, no public offering being involved.
On January 15, 1998, the Company agreed to issue 133,334 shares of Series
A Redeemable Convertible Preferred Stock to Northwestern Growth Corporation
in connection with the negotiation of a strategic alliance. This transaction
was completed without registration under the Securities Act in reliance upon
the exemption provided by Section 4(2) thereof, no public offering being
involved.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS
------ ------------
<S> <C>
*1.1 --Form of Underwriting Agreement.
*2.1 --Restated Stock Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., Great Western Directories, Inc. and the stockholders
of Great Western Directories, Inc.
*2.1A --Amendment No. 1 dated as of January 8, 1998 to the Restated Stock Purchase Agreement filed
as Exhibit 2.1 to the Registration Statement.
2.2 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., ACG Acquisition Corp., Valu-Line of Longview,
Inc. and the shareholders of Valu-Line of Longview, Inc.
*2.2A --Amendment No. 1 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed
as Exhibit 2.2 to the Registration Statement.
*2.2B --Proposed form of Second Amendment dated as of January 13, 1998 to the Agreement and Plan
and Exchanged filed as Exhibit 2.2 to the Registration Statement, including a Form of Escrow
Agreement attached thereto as Annex III.
2.3 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., 1+USA Acquisition Corp., Feist Long Distance
Service, Inc. and the stockholders of Feist Long Distance Service, Inc.
*2.3A --Amendment No. 1 dated as of January 10, 1998 to the Agreement and Plan of Exchange filed
as Exhibit 2.3 to the Registration Statement.
2.4 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., FirsTel, Inc., the stockholders of FirsTel, Inc. and others.
2.4A --Amendment No. 1 dated as of December 15, 1997 to the Agreement and Plan of Exchange filed
as Exhibit 2.4 to the Registration Statement.
*2.4B --Amendment No. 2 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed
as Exhibit 2.4 to the Registration Statement.
2.5 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., ACG Acquisition II Corp., Tele-Systems, Inc.
and the stockholders of Tele-Systems, Inc.
*2.5A --Amendment No. 1 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed
as Exhibit 2.5 to the Registration Statement.
2.6 --Restated Asset Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., Long Distance Management II, Inc. and Robert
Alexander.
*2.6A --Amendment No. 1 dated as of January 8, 1998 to the Restated Asset Purchase Agreement filed
as Exhibit 2.6 to the Registration Statement.
2.7 --Restated Asset Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., Long Distance Management of Kansas, Inc., Robert
Alexander and others.
II-6
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS
------ ------------
<S> <C>
*2.7A --Amendment No. 1 dated as of January 8, 1998 to the Restated Asset Purchase Agreement filed
as Exhibit 2.7 to the Registration Statement.
2.8 --Restated Asset Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., Switchboard of Oklahoma City, Inc. and others.
*2.8A --First Amendment dated as of October 6, 1997 to the Restated Asset Purchase Agreement filed
as Exhibit 2.8 to the Registration Statement.
*2.8B --Second Amendment dated as of January 8, 1998 to the Restated Asset Purchase Agreement filed
as Exhibit 2.8 to the Registration Statement.
2.9 --Restated Asset Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., ACG Acquisition II Corp. and Daniel W. and Cheryl
A. Peters.
*2.9A --Amendment No. 1 dated as of January 8, 1998 to the Restated Asset Purchase Agreement filed
as Exhibit 2.9 to the Registration Statement.
2.10 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., KIN Network, Inc. and Liberty Cellular, Inc.
*2.10A --Amendment No. 1 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed
as Exhibit 2.10 to the Registration Statement.
2.11 --Agreement of Merger dated as of October 9, 1997 among Advanced Communications Group, Inc.,
Advanced Communications Corp. and Advanced Communications Acquisition, Inc.
*2.11A --Amendment No. 1 dated as of January 8, 1998 to the Agreement of Merger filed as Exhibit
2.11 to the Registration Statement.
3.1 --Restated Certificate of Incorporation of ACG.
*3.1A --Form of Amendment to Restated Certificate of Incorporation of ACG.
3.2 --Restated Bylaws of ACG.
*3.3 --Form of Certificate of Designation of Series A Redeemable Convertible Preferred Stock (see
Annex A to Exhibit 10.46).
*4.1 --Form of certificate representing Common Stock.
**5.1 --Opinion of Bracewell & Patterson, L.L.P.
10.1 --ACG 1997 Stock Awards Plan.
*10.1A --Form of Non-Qualified Stock Option Agreement.
10.2 --Non-Qualified Stock Option Plan for Non-Employee Directors.
10.3 --Employment Agreement between ACG and Richard P. Anthony.
10.4 --Form of Employment Agreement between Great Western Directories, Inc. and Richard O'Neal
(see Annex V to Exhibit 2.1).
*10.5 --Form of Employment Agreement between Feist Long Distance Service, Inc. and Todd Feist (see
Annex VII to Exhibit 2.3A).
10.6 --Form of Employment Agreement between Fred L. Thurman and FirsTel, Inc. (see Annex V to Exhibit
2.4).
10.7 --Form of Indemnification Agreement entered into between ACG and each of its executive officers
and directors.
10.9 --Form of Series A Warrant issued to shareholders of Great Western Directories, Inc.
10.10 --Form of Series B Warrant issued to shareholders of Great Western Directories, Inc.
10.11 --Form of Series C Warrant issued to shareholders of Great Western Directories, Inc.
10.12 --Form of Series D Warrant to be issued to shareholders of Great Western Directories, Inc.
(see Annex IV to Exhibit 2.1).
10.13 --Form of 5% Subordinated Note to be issued to shareholders of Great Western Directories,
Inc. (see Annex III to Exhibit 2.1).
10.14 --Form of 10% Convertible Subordinated Note to be issued to shareholders of FirsTel, Inc.
(see Annex III to Exhibit 2.4).
II-7
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS
------ ------------
<S> <C>
10.15 --Management Agreement dated January 1, 1997 between KINI, L.C. and KIN Network, Inc.
10.16 --Sales Agreement Terms and Conditions dated July 16, 1997 between Big Stuff, Inc. and Great
Western Directories, Inc.
10.16A --Supplemental Letter dated December 22, 1997 from Big Stuff, Inc. to Great Western Directories,
Inc. regarding exclusively marketing rights to World Pages in certain areas.
10.17 --Employment Agreement between ACG and William H. Zimmer III.
10.18 --Employment Agreement between ACG and James F. Cragg.
10.19 --Form of Series E Warrant to be issued to certain shareholders of Tele-Systems, Inc.
10.20 --Form of Series F Warrant to be issued to certain shareholders of Tele-Systems, Inc.
10.21 --Form of Series G Warrant to be issued to certain shareholders of FirsTel, Inc. (see Annex
IV to Exhibit 2.4).
10.22 --Form of Series H Warrant to be issued to Daniel W. and Cheryl A. Peters (see Annex IV to
Exhibit 2.9).
10.23 --Form of Series I Warrant to be issued to Daniel W. and Cheryl A. Peters (see Annex V to
Exhibit 2.9).
10.24 --Warrant issued to Joseph C. Cook.
10.25 --Form of Series K Warrant issued to certain consultants.
*10.26 --Form of Series L Warrant issued to G. Edward Powell, Brad K. Cutsinger and William McCaughey.
10.27 --Resale Agreement between Southwestern Bell Telephone Company and Feist Long Distance dated
June 4, 1997 (Oklahoma).
10.28 --Resale Agreement between Southwestern Bell Telephone Company and Feist Long Distance dated
April 4, 1997 (Kansas).
10.29 --Agreement for Service Resale dated as of June 6, 1997 between FirsTel, Inc. and U S West
Communications, Inc. (South Dakota).
10.30 --Agreement for Service Resale dated as of March 19, 1997 between FirsTel, Inc. and U S West
Communications, Inc. (Wyoming).
10.31 --Agreement for Service Resale dated as of October 14, 1997 between FirsTel, Inc. and U S
West Communications, Inc. (Iowa).
10.32 --Agreement for Service Resale dated as of March 19, 1997 between FirsTel, Inc. and U S West
Communications, Inc., as amended by a First Amendment to Agreement for Service Resale, dated
July , 1997 between FirsTel, Inc. and US West Communications, Inc. (North Dakota).
10.33 --Agreement for Service Resale dated as of March 19, 1997 between FirsTel, Inc. and U S West
Communications, Inc., as amended by a Second Amendment to Agreement for Service Resale,
dated November 6, 1997, between FirsTel, Inc. and US West Communications, Inc. (Nebraska).
10.34 --Agreement for Service Resale dated as of August 12, 1997 between FirsTel, Inc. and U S West
Communications, Inc. (Minnesota).
10.35 --Resale Agreement dated as of April 30, 1997, between Southwestern Bell Telephone Company
and Valu-Line of Longview, Inc. (Texas).
10.36 --Resale Agreement dated as of September 12, 1997, between GTE Southwest Incorporated and
Valu-Line Long Distance (Texas).
10.37 --Master Resale Agreement dated as of May 9, 1997, among Valu-Line Long Distance and United
Telephone Company of Texas, Inc. dba Sprint and Central Telephone Company of Texas dba Sprint
and Southwest Incorporated and Valu-Line Long Distance (Texas).
10.38 --Form of Office Expense Agreement by and between Feist Publications, Inc., Feist Systems,
Inc. and Feist Long Distance Service, Inc.
10.39 --Form of Advertisement Agreement by and between Feist Publications, Inc. and Feist Long Distance
Service, Inc. (see Annex IV to Exhibit 2.3).
II-8
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS
------ ------------
<S> <C>
10.40 --Form of InterNet Reseller Agreement by and between Feist Systems, Inc. and Feist Long Distance
Service, Inc.
*10.41 --Form of Standstill Agreement dated as of , 1998 between ACG and Rod K. Cutsinger.
10.42 --Form of Non-Competition Agreement dated as of , 1998 between ACG and Rod K. Cutsinger.
10.43 --Asset Purchase Agreement made and entered into as of September 3, 1997 by and between RAFT,
L.L.C., PAM Oil, Inc., Scott D. Scofield, William Pederson and FirsTel, Inc.
10.44 --Amendment to the Asset Purchase Agreement filed as Exhibit 10.43 to the Registration Statement.
10.45 --Form of Stockholders' Agreement among KIN Network, Inc. and its Stockholders.
*10.46 --Letter Agreement dated January 15, 1998 among Advanced Communications Group, Inc., Northwestern
Public Service Company and Northwestern Growth Corporation.
21.1 --List of subsidiaries of ACG.
*23.1 --Consent of KPMG Peat Marwick LLP.
*23.2 --Consent of KPMG Peat Marwick LLP.
23.3 --Consent of KPMG Peat Marwick LLP.
23.4 --Consent of KPMG Peat Marwick LLP.
23.5 --Consent of Hein + Associates LLP.
23.6 --Consent of Sartain Fischbein & Co.
23.7 --Consent of Kennedy and Coe LLC.
23.8 --Consent of Richard O'Neal to be named as a director.
23.9 --Consent of Todd J. Feist to be named as a director.
23.10 --Consent of Fentress Bracewell to be named as a director.
33.11 --Consent of E. Clarke Garnet to be named as a director.
23.12 --Consent of David Mitchell to be named as a director.
23.13 --Consent of Fred L. Thurman to be named as a director
**23.14 --Consent of Bracewell & Patterson, L.L.P. (to be contained in Exhibit 5.1).
*23.15 --Consent of Reginald J. Hollinger to be named as a director.
24.1 --Power of Attorney (included on the Signature Page of Amendment No. 1 to this Registration Statement).
27.1 --Financial Data Schedule.
27.2 --Financial Data Schedule.
</TABLE>
- ------------
* Filed herewith.
** To be filed by amendment.
All other exhibits are previously filed.
(b) Financial Statement Schedules
All schedules have been omitted because they are not required under the
related instructions, are inapplicable, or the information is included in the
consolidated financial statements.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described in Item 14, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer
II-9
<PAGE>
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that: (i) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as
of the time it was declared effective; (ii) for the purpose of determining
any liability under the Securities Act of 1933, each post-effective amendment
that contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-10
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, ADVANCED
COMMUNICATIONS GROUP, INC. HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION
STATEMENT THERETO TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW YORK, ON JANUARY 16,
1998.
ADVANCED COMMUNICATIONS GROUP, INC.
By: RICHARD P. ANTHONY
-------------------------------------
RICHARD P. ANTHONY
CHAIRMAN OF THE BOARD
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATES INDICATED ON JANUARY 16, 1998.
<TABLE>
<CAPTION>
SIGNATURE CAPACITIES IN WHICH SIGNED
--------- --------------------------
<S> <C>
RICHARD P. ANTHONY
- --------------------------- Chairman of the Board, President and Chief Executive Officer
RICHARD P. ANTHONY and Director (Principal Executive Officer)
WILLIAM H. ZIMMER III
- --------------------------- Chief Financial Officer and Director (Principal Financial
WILLIAM H. ZIMMER III and Accounting Officer)
JAMES F. CRAGG
- --------------------------- Director
JAMES F. CRAGG
*
- --------------------------- Director
ROD K. CUTSINGER
G. EDWARD POWELL
- --------------------------- Director
G. EDWARD POWELL
*By: WILLIAM H. ZIMMER III
- --------------------------- Attorney-in-Fact
WILLIAM H. ZIMMER III
</TABLE>
II-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS PAGE
- ----------- ----------------------------------------------------------------------------------------- ----
<S> <C> <C>
*1.1 --Form of Underwriting Agreement.
*2.1 --Restated Stock Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., Great Western Directories, Inc. and the stockholders
of Great Western Directories, Inc.
*2.1A --Amendment No. 1 dated as of January 8, 1998 to the Restated Stock Purchase Agreement filed
as Exhibit 2.1 to the Registration Statement.
2.2 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., ACG Acquisition Corp., Valu-Line of Longview,
Inc. and the shareholders of Valu-Line of Longview, Inc.
*2.2A --Amendment No. 1 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed as
Exhibit 2.2 to the Registration Statement.
*2.2B --Proposed form of Second Amendment dated as of January 13, 1998 to the Agreement and Plan
and Exchanged filed as Exhibit 2.2 to the Registration Statement, including a Form of Escrow
Agreement attached thereto as Annex III.
2.3 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., 1+USA Acquisition Corp., Feist Long Distance
Service, Inc. and the stockholders of Feist Long Distance Service, Inc.
*2.3A --Amendment No. 1 dated as of January 10, 1998 to the Agreement and Plan of Exchange filed
as Exhibit 2.3 to the Registration Statement.
2.4 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., FirsTel, Inc., the stockholders of FirsTel, Inc. and others.
2.4A --Amendment No. 1 dated as of December 15, 1997 to the Agreement and Plan of Exchange filed
as Exhibit 2.4 to the Registration Statement.
*2.4B --Amendment No. 2 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed as
Exhibit 2.4 to the Registration Statement.
2.5 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., ACG Acquisition II Corp., Tele-Systems, Inc.
and the stockholders of Tele-Systems, Inc.
*2.5A --Amendment No. 1 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed as
Exhibit 2.5 to the Registration Statement.
2.6 --Restated Asset Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., Long Distance Management II, Inc. and Robert
Alexander.
*2.6A --Amendment No. 1 dated as of January 8, 1998 to the Restated Asset Purchase Agreement filed
as Exhibit 2.6 to the Registration Statement.
2.7 --Restated Asset Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., Long Distance Management of Kansas, Inc., Robert
Alexander and others.
*2.7A --Amendment No. 1 dated as of January 8, 1998 to the Restated Asset Purchase Agreement filed
as Exhibit 2.7 to the Registration Statement.
2.8 --Restated Asset Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., Switchboard of Oklahoma City, Inc. and others.
*2.8A --First Amendment dated as of October 6, 1997 to the Restated Asset Purchase Agreement filed
as Exhibit 2.8 to the Registration Statement.
<PAGE>
EXHIBIT
NUMBER DESCRIPTIONS PAGE
- ----------- ----------------------------------------------------------------------------------------- --------
*2.8B --Second Amendment dated as of January 8, 1998 to the Restated Asset Purchase Agreement filed
as Exhibit 2.8 to the Registration Statement.
2.9 --Restated Asset Purchase Agreement dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., ACG Acquisition II Corp. and Daniel W. and Cheryl
A. Peters.
*2.9A --Amendment No. 1 dated as of January 8, 1998 to the Restated Asset Purchase Agreement filed
as Exhibit 2.9 to the Registration Statement.
2.10 --Agreement and Plan of Exchange dated as of October 6, 1997, by and among Advanced Communications
Group, Inc., Advanced Communications Corp., KIN Network, Inc. and Liberty Cellular, Inc.
*2.10A --Amendment No. 1 dated as of January 8, 1998 to the Agreement and Plan of Exchange filed as
Exhibit 2.10 to the Registration Statement.
2.11 --Agreement of Merger dated as of October 9, 1997 among Advanced Communications Group, Inc.,
Advanced Communications Corp. and Advanced Communications Acquisition, Inc.
*2.11A --Amendment No. 1 dated as of January 8, 1998 to the Agreement of Merger filed as Exhibit 2.11
to the Registration Statement.
3.1 --Restated Certificate of Incorporation of ACG.
*3.1A --Form of Amendment to Restated Certificate of Incorporation of ACG.
3.2 --Restated Bylaws of ACG.
*3.3 --Form of Certificate of Designation of Series A Redeemable Convertible Preferred Stock (see
Annex A to Exhibit 10.46).
*4.1 --Form of certificate representing Common Stock.
**5.1 --Opinion of Bracewell & Patterson, L.L.P.
10.1 --ACG 1997 Stock Awards Plan.
*10.1A --Form of Non-Qualified Stock Option Agreement.
10.2 --Non-Qualified Stock Option Plan for Non-Employee Directors.
10.3 --Employment Agreement between ACG and Richard P. Anthony.
10.4 --Form of Employment Agreement between Great Western Directories, Inc. and Richard O'Neal (see
Annex V to Exhibit 2.1).
*10.5 --Form of Employment Agreement between Feist Long Distance Service, Inc. and Todd Feist (see
Annex VII to Exhibit 2.3A).
10.6 --Form of Employment Agreement between Fred L. Thurman and FirsTel, Inc. (see Annex V to Exhibit
2.4).
10.7 --Form of Indemnification Agreement entered into between ACG and each of its executive officers
and directors.
10.9 --Form of Series A Warrant issued to shareholders of Great Western Directories, Inc.
10.10 --Form of Series B Warrant issued to shareholders of Great Western Directories, Inc.
10.11 --Form of Series C Warrant issued to shareholders of Great Western Directories, Inc.
10.12 --Form of Series D Warrant to be issued to shareholders of Great Western Directories, Inc.
(see Annex IV to Exhibit 2.1).
10.13 --Form of 5% Subordinated Note to be issued to shareholders of Great Western Directories, Inc.
(see Annex III to Exhibit 2.1).
10.14 --Form of 10% Convertible Subordinated Note to be issued to shareholders of FirsTel, Inc. (see
Annex III to Exhibit 2.4).
10.15 --Management Agreement dated January 1, 1997 between KINI, L.C. and KIN Network, Inc.
10.16 --Sales Agreement Terms and Conditions dated July 16, 1997 between Big Stuff, Inc. and Great
Western Directories, Inc.
<PAGE>
EXHIBIT
NUMBER DESCRIPTIONS PAGE
- ----------- ----------------------------------------------------------------------------------------- --------
10.16A --Supplemental Letter dated December 22, 1997 from Big Stuff, Inc. to Great Western Directories,
Inc. regarding exclusively marketing rights to World Pages in certain areas.
10.17 --Employment Agreement between ACG and William H. Zimmer III.
10.18 --Employment Agreement between ACG and James F. Cragg.
10.19 --Form of Series E Warrant to be issued to certain shareholders of Tele-Systems, Inc.
10.20 --Form of Series F Warrant to be issued to certain shareholders of Tele-Systems, Inc.
10.21 --Form of Series G Warrant to be issued to certain shareholders of FirsTel, Inc. (see Annex
IV to Exhibit 2.4).
10.22 --Form of Series H Warrant to be issued to Daniel W. and Cheryl A. Peters (see Annex IV to
Exhibit 2.9).
10.23 --Form of Series I Warrant to be issued to Daniel W. and Cheryl A. Peters (see Annex V to Exhibit
2.9).
10.24 --Warrant issued to Joseph C. Cook.
10.25 --Form of Series K Warrant issued to certain consultants.
*10.26 --Form of Series L Warrant issued to G. Edward Powell, Brad K. Cutsinger and William McCaughey.
10.27 --Resale Agreement between Southwestern Bell Telephone Company and Feist Long Distance dated
June 4, 1997 (Oklahoma).
10.28 --Resale Agreement between Southwestern Bell Telephone Company and Feist Long Distance dated
April 4, 1997 (Kansas).
10.29 --Agreement for Service Resale dated as of June 6, 1997 between FirsTel, Inc. and U S West
Communications, Inc. (South Dakota).
10.30 --Agreement for Service Resale dated as of March 19, 1997 between FirsTel, Inc. and U S West
Communications, Inc. (Wyoming).
10.31 --Agreement for Service Resale dated as of October 14, 1997 between FirsTel, Inc. and U S West
Communications, Inc. (Iowa).
10.32 --Agreement for Service Resale dated as of March 19, 1997 between FirsTel, Inc. and U S West
Communications, Inc., as amended by a First Amendment to Agreement for Service Resale, dated
July , 1997 between FirsTel, Inc. and US West Communications, Inc. (North Dakota).
10.33 --Agreement for Service Resale dated as of March 19, 1997 between FirsTel, Inc. and U S West
Communications, Inc., as amended by a Second Amendment to Agreement for Service Resale, dated
November 6, 1997, between FirsTel, Inc. and US West Communications, Inc. (Nebraska).
10.34 --Agreement for Service Resale dated as of August 12, 1997 between FirsTel, Inc. and U S West
Communications, Inc. (Minnesota).
10.35 --Resale Agreement dated as of April 30, 1997, between Southwestern Bell Telephone Company
and Valu-Line of Longview, Inc. (Texas).
10.36 --Resale Agreement dated as of September 12, 1997, between GTE Southwest Incorporated and Valu-Line
Long Distance (Texas).
10.37 --Master Resale Agreement dated as of May 9, 1997, among Valu-Line Long Distance and United
Telephone Company of Texas, Inc. dba Sprint and Central Telephone Company of Texas dba Sprint
and Southwest Incorporated and Valu-Line Long Distance (Texas).
10.38 --Form of Office Expense Agreement by and between Feist Publications, Inc., Feist Systems,
Inc. and Feist Long Distance Service, Inc.
10.39 --Form of Advertisement Agreement by and between Feist Publications, Inc. and Feist Long Distance
Service, Inc. (see Annex IV to Exhibit 2.3).
10.40 --Form of InterNet Reseller Agreement by and between Feist Systems, Inc. and Feist Long Distance
Service, Inc.
<PAGE>
EXHIBIT
NUMBER DESCRIPTIONS PAGE
- ----------- ----------------------------------------------------------------------------------------- --------
*10.41 --Form of Standstill Agreement dated as of , 1998 between ACG and Rod K. Cutsinger.
10.42 --Form of Non-Competition Agreement dated as of , 1998 between ACG and Rod K. Cutsinger.
10.43 --Asset Purchase Agreement made and entered into as of September 3, 1997 by and between RAFT,
L.L.C., PAM Oil, Inc., Scott D. Scofield, William Pederson and FirsTel, Inc.
10.44 --Amendment to the Asset Purchase Agreement filed as Exhibit 10.43 to the Registration Statement.
10.45 --Form of Stockholders' Agreement among KIN Network, Inc. and its Stockholders.
*10.46 --Letter Agreement dated January 15, 1998 among Advanced Communications Group, Inc., Northwestern
Public Service Company and Northwestern Growth Corporation.
21.1 --List of subsidiaries of ACG.
*23.1 --Consent of KPMG Peat Marwick LLP.
*23.2 --Consent of KPMG Peat Marwick LLP.
23.3 --Consent of KPMG Peat Marwick LLP.
23.4 --Consent of KPMG Peat Marwick LLP.
23.5 --Consent of Hein + Associates LLP.
23.6 --Consent of Sartain Fischbein & Co.
23.7 --Consent of Kennedy and Coe LLC.
23.8 --Consent of Richard O'Neal to be named as a director.
23.9 --Consent of Todd J. Feist to be named as a director.
23.10 --Consent of Fentress Bracewell to be named as a director.
33.11 --Consent of E. Clarke Garnet to be named as a director.
23.12 --Consent of David Mitchell to be named as a director.
23.13 --Consent of Fred L. Thurman to be named as a director
**23.14 --Consent of Bracewell & Patterson, L.L.P. (to be contained in Exhibit 5.1).
*23.15 --Consent of Reginald J. Hollinger to be named as a director.
24.1 --Power of Attorney (included on the Signature Page of Amendment No. 1 to this Registration
Statement).
27.1 --Financial Data Schedule.
27.2 --Financial Data Schedule.
</TABLE>
- ------------
* Filed herewith.
** To be filed by amendment.
<PAGE>
________________ Shares
ADVANCED COMMUNICATIONS GROUP, INC.
Common Stock
UNDERWRITING AGREEMENT
___________, 1998
PAINEWEBBER INCORPORATED
CIBC OPPENHEIMER CORP.
As Representatives of the
several Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
Advanced Communications Group, Inc., a Delaware corporation (the
"Company"), proposes to sell an aggregate of _______ shares (the "Firm Shares")
of the Company's Common Stock, $.0001 par value per share (the "Common Stock"),
to you and to the other underwriters named in Schedule I (collectively, the
"Underwriters"), for whom you are acting as representatives (the
"Representatives"). The Company has also agreed to grant to you and the other
Underwriters an option (the "Option") to purchase up to an additional ______
shares of Common Stock (the "Option Shares") on the terms and for the purposes
set forth in Section 1(b). The Firm Shares and the Option Shares are
hereinafter collectively referred to as the "Shares."
The initial public offering price per share for the Shares and the
purchase price per share for the Shares to be paid by the several Underwriters
shall be agreed upon by the Company and the Representatives, acting on behalf
of the several Underwriters, and such agreement shall be set forth in a
separate written instrument substantially in the form of Exhibit A hereto (the
"Price Determination Agreement"). The Price Determination Agreement may take
the form of an exchange of any standard form of written
<PAGE>
telecommunication among the Company and the Representatives and shall specify
such applicable information as is indicated in Exhibit A hereto. The offering
of the Shares will be governed by this Agreement, as supplemented by the Price
Determination Agreement. From and after the date of the execution and delivery
of the Price Determination Agreement, this Agreement shall be deemed to
incorporate, and, unless the context otherwise indicates, all references
contained herein to "this Agreement" and to the phrase "herein" shall be deemed
to include, the Price Determination Agreement.
The Company confirms as follows its agreements with the
Representatives and the several other Underwriters.
1. Agreement to Sell and Purchase.
(a) On the basis of the representations, warranties and agreements
of the Company herein contained and subject to all the terms and conditions of
this Agreement, the Company agrees to sell to each Underwriter named below, and
each Underwriter, severally and not jointly, agrees to purchase from the
Company at the purchase price per share for the Firm Shares to be agreed upon
by the Representatives and the Company in accordance with Section 1(c) or 1(d)
hereof and set forth in the Price Determination Agreement, the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule I, plus such
additional number of Firm Shares which such Underwriter may become obligated to
purchase pursuant to Section 8 hereof. Schedule I may be attached to the Price
Determination Agreement.
(b) Subject to all the terms and conditions of this Agreement, the
Company grants the Option to the several Underwriters to purchase, severally
and not jointly, up to ___ Option Shares from the Company at the same price per
share as the Underwriters shall pay for the Firm Shares. The Option may be
exercised only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time (but not more
than once) on or before the 30th day after the date of this Agreement (or, if
the Company has elected to rely on Rule 430A, on or before the 30th day after
the date of the Price Determination Agreement), upon written or telegraphic
notice (the "Option Shares Notice") by the Representatives to the Company no
later than 12:00 noon, New York City time, at least two and no more than five
business days before the date specified for closing in the Option Shares Notice
(the "Option Closing Date") setting forth the aggregate number of Option Shares
to be purchased and the time and date for such purchase. On the Option Closing
Date, the Company will issue and sell to the Underwriters the number of Option
Shares set forth in the Option Shares Notice, and each Underwriter will
purchase such percentage of the Option Shares as is equal to the percentage of
Firm Shares that such Underwriter is purchasing, as adjusted by the
Representatives in such manner as they deem advisable to avoid fractional
shares.
(c) The initial public offering price per share for the Firm Shares
and the purchase price per share for the Firm Shares to be paid by the several
Underwriters shall be agreed upon and set forth in the Price Determination
Agreement, if the Company
2
<PAGE>
has elected to rely on Rule 430A. In the event such price has not been agreed
upon and the Price Determination Agreement has not been executed by the close
of business on the fourteenth business day following the date on which the
Registration Statement (as hereinafter defined) becomes effective, this
Agreement shall terminate forthwith, without liability of any party to any
other party except that Section 6 shall remain in effect.
(d) If the Company has elected not to rely on Rule 430A, the
initial public offering price per share for the Firm Shares and the purchase
price per share for the Firm Shares to be paid by the several Underwriters
shall be agreed upon and set forth in the Price Determination Agreement, which
shall be dated the date hereof, and an amendment to the Registration Statement
containing such per share price information shall be filed before the
Registration Statement becomes effective.
2. Delivery and Payment. Delivery of the Firm Shares shall be made to
the Representatives [for the accounts of the Underwriters at the office of
PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York
10019], against payment of the purchase price by wire transfer of Federal Funds
or similar same day funds to an account designated in writing by the Company to
PaineWebber Incorporated at least one business day prior to the Closing Date
(as hereinafter defined). Such payment shall be made at 10:00 a.m., New York
City time, on the third business day (or fourth business day, if the Price
Determination Agreement is executed after 4:30 p.m.) after the date on which
the first bona fide offering of the Shares to the public is made by the
Underwriters or at such time on such other date, not later than ten business
days after such date, as may be agreed upon by the Company and the
Representatives (such date is hereinafter referred to as the "Closing Date").
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the offices specified above for the Closing Date at the time and date
(which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form and
shall be registered in such names and in such denominations as the
Representatives shall request at least two business days prior to the Closing
Date or the Option Closing Date, as the case may be, by written notice to the
Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection at least 24 hours prior to the Closing Date or the
Option Closing Date, as the case may be.
The cost of original issue tax stamps, if any, in connection with the
issuance and delivery of the Firm Shares and Option Shares by the Company to
the respective Underwriters shall be borne by the Company. The Company will pay
and save each Underwriter and any subsequent holder of the Shares harmless from
any and all liabilities with respect to or resulting from any failure or delay
in paying Federal and state stamp and
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other transfer taxes, if any, which may be payable or determined to be payable
in connection with the original issuance or sale to such Underwriter of the
Firm Shares and Option Shares.
3. Representations and Warranties of the Company. The Company
represents, warrants and covenants to each Underwriter that:
(a) A registration statement (Registration No. 333-37671) on Form
S-1 relating to the Shares, including a preliminary prospectus and such
amendments to such registration statement as may have been required to the date
of this Agreement, has been prepared by the Company under the provisions of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(collectively referred to as the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. The term "preliminary prospectus" as used herein means a
preliminary prospectus as contemplated by Rule 430 or Rule 430A ("Rule 430A")
of the Rules and Regulations included at any time as part of the registration
statement. Copies of such registration statement and amendments and of each
related preliminary prospectus have been delivered to the Representatives. The
term "Registration Statement" means the registration statement as amended at
the time it becomes or became effective (the "Effective Date"), including
financial statements and all exhibits and any information deemed to be included
by Rule 430A or Rule 434 of the Rules and Regulations. If the Company files a
registration statement to register a portion of the Shares and relies on Rule
462(b) of the Rules and Regulations for such registration statement to become
effective upon filing with the Commission (the "Rule 462 Registration
Statement"), then any reference to the "Registration Statement" shall be deemed
to include the Rule 462 Registration Statement, as amended from time to time.
The term "Prospectus" means the prospectus as first filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is
required, the form of final prospectus included in the Registration Statement
at the Effective Date.
(b) On the Effective Date, the date the Prospectus is first filed
with the Commission pursuant to Rule 424(b) (if required), at the Closing Date
and, if later, the Option Closing Date and when any post-effective amendment to
the Registration Statement becomes effective or any amendment or supplement to
the Prospectus is filed with the Commission, the Registration Statement and the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment or supplement thereto), including the financial
statements included in the Prospectus, did or will comply with all applicable
provisions of the Act and the Rules and Regulations and will contain all
statements required to be stated therein in accordance with the Act and the
Rules and Regulations. On the Effective Date and when any post-effective
amendment to the Registration Statement becomes effective, no part of the
Registration Statement or any such amendment did or will contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. At the Effective Date, the date the Prospectus or any amendment or
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supplement to the Prospectus is filed with the Commission and at the Closing
Date and, if later, the Option Closing Date, the Prospectus did not or will not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
representations and warranties in this Section 3(b) do not apply to any
statements or omissions made in reliance on and in conformity with information
relating to any Underwriter furnished in writing to the Company by the
Representatives specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto. For all purposes of this
Agreement, the amounts of the selling concession and reallowance set forth in
the Prospectus, the last full paragraph on the cover of the Prospectus, and the
penultimate paragraph under the caption "Underwriting" in the Prospectus
constitute the only information relating to any Underwriter furnished in
writing to the Company by the Representatives specifically for inclusion in the
Registration Statement, the preliminary prospectus or the Prospectus. The
Company has not distributed any offering material in connection with the
offering or sale of the Shares other than the Registration Statement, the
preliminary prospectus, the Prospectus or any other materials, if any,
permitted by the Act.
(c) The only subsidiaries (as defined in the Rules and Regulations)
of the Company are Great Western Directories, Inc., Value-Line of Longview,
Inc., First Tel, Inc., Feist Long Distance Service, Inc., and Tele-Systems,
Inc. (the "Subsidiaries"). The Company and each of its Subsidiaries is, and at
the Closing Date will be, a corporation or an entity duly organized or formed,
validly existing and in good standing under the laws of its jurisdiction of
incorporation. The Company and each of its Subsidiaries has, and at the Closing
Date will have, full corporate power and authority to conduct all the
activities conducted by it, to own or lease all the assets owned or leased by
it and to conduct its business as described in the Registration Statement and
the Prospectus. The Company and each of its Subsidiaries is, and at the Closing
Date will be, duly licensed or qualified to do business and in good standing as
a foreign corporation in all jurisdictions in which the nature of the
activities conducted by it or the character of the assets owned or leased by it
makes such licensing or qualification necessary and where the failure to be so
qualified would have a material adverse effect on the Company and its
subsidiaries considered as a whole. All of the outstanding shares of capital
stock of the Subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable and are owned by the Company free and clear of
all liens, encumbrances and claims whatsoever, except as set forth in the
Registration Statement. Except for the stock of the Subsidiaries and of
subsidiaries which, considered in the aggregate as a single subsidiary, would
not constitute a "significant subsidiary" as defined in the Rules and
Regulations or as disclosed in the Registration Statement, the Company does not
own, and at the Closing Date will not own, directly or indirectly, any shares
of stock or any other equity or long-term debt securities of any corporation or
have any equity interest in any firm, partnership, joint venture, association
or other entity. Complete and correct copies of the certificate of
incorporation and of the by-laws of the Company and each of its Subsidiaries
and all amendments thereto have been delivered to the Representatives, and
except for those
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disclosed in the Registration Statement no changes therein will be made
subsequent to the date hereof and prior to the Closing Date or, if later, the
Option Closing Date.
(d) The outstanding shares of Common Stock have been, and the
Shares to be issued and sold by the Company upon such issuance will be, duly
authorized, validly issued, fully paid and nonassessable and will not be
subject to any preemptive or similar right. The description of the Common Stock
in the Registration Statement and the Prospectus is, and at the Closing Date
will be, complete and accurate in all material respects. Except as set forth in
the Prospectus, the Company does not have outstanding, and at the Closing Date
will not have outstanding, any options to purchase, or any rights or warrants
to subscribe for, or any securities or obligations convertible into, or any
contracts or commitments to issue or sell, any shares of Common Stock, any
shares of capital stock of any Subsidiary or any such warrants, convertible
securities or obligations.
(e) The financial statements and schedules included in the
Registration Statement or the Prospectus present fairly the consolidated
financial condition of the Company and the financial condition of certain of
the Subsidiaries and KIN Network Inc. as of the respective dates thereof and
the consolidated results of operations and cash flows of the Company and the
results of operations and cash flows of such Subsidiaries and KIN Network Inc.
for the respective periods covered thereby, all in conformity with generally
accepted accounting principles applied on a consistent basis throughout the
entire period involved, except as otherwise disclosed in the Prospectus. The
pro forma financial statements and other pro forma financial information
included in the Registration Statement or the Prospectus (i) present fairly in
all material respects the information shown therein, (ii) have been prepared in
accordance with the Commission's rules and guidelines with respect to pro forma
financial statements and (iii) have been properly computed on the bases
described therein. The assumptions used in the preparation of the pro forma
financial statements and other pro forma financial information included in the
Registration Statement or the Prospectus are reasonable and the adjustments
used therein are appropriate to give effect to the transactions or
circumstances referred to therein. No other financial statements or schedules
are required by the Act or the Rules and Regulations to be included in the
Registration Statement or the Prospectus. KPMG Peat Marwick LLP, Hein +
Associates LLP, Kennedy and Coe, LLC and Sartain Fischbein & Co. (the
"Accountants") who have reported on such financial statements and schedules,
are independent accountants with respect to the Company as required by the Act
and the Rules and Regulations. The statements included in the Registration
Statement with respect to the Accountants pursuant to Item 509 of Regulation
S-K of the Rules and Regulations are true and correct in all material respects.
(f) The Company maintains a system of internal accountings control
sufficient to provide reasonable assurance that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets;
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(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(g) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and prior to the Closing
Date, except as set forth in or contemplated by the Registration Statement and
the Prospectus, (i) there has not been and will not have been any change in the
capitalization of the Company, or any materially adverse change in the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company and its Subsidiaries considered as a
whole, arising for any reason whatsoever, (ii) neither the Company nor any of
its Subsidiaries has incurred nor will it incur any material liabilities or
obligations, direct or contingent, nor has it entered into nor will it enter
into any material transactions other than pursuant to this Agreement and the
transactions referred to herein and (iii) the Company has not and will not have
paid or declared any dividends or other distributions of any kind on any class
of its capital stock.
(h) The Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company," as such terms are defined in the Investment Company Act of 1940, as
amended.
(i) Except as set forth in the Registration Statement and the
Prospectus, there are no actions, suits or proceedings pending or threatened
against or affecting the Company or any of its Subsidiaries or any of their
respective officers in their capacity as such, before or by any Federal or
state court, commission, regulatory body, administrative agency or other
governmental body, domestic or foreign, wherein an unfavorable ruling, decision
or finding might materially and adversely affect the Company and its
Subsidiaries, or their business, properties, business prospects, condition
(financial or otherwise) or results of operations, considered as a whole.
(j) Except as set forth in the Registration Statement, and except
as would not have a materially adverse effect on the Company and its
Subsidiaries considered as a whole, the Company and each of its Subsidiaries
has, and at the Closing Date will have, (i) all governmental licenses, permits,
consents, orders, approvals and other authorizations necessary to carry on its
business as currently conducted and as described in the Prospectus, (ii)
complied in all respects with all laws, regulations and orders applicable to it
or its business and (iii) performed all its obligations required to be
performed by it, and is not, and at the Closing Date will not be, in default,
under any indenture, mortgage, deed of trust, voting trust agreement, loan
agreement, bond, debenture, note agreement, lease, contract or other agreement
or instrument (collectively, a "contract or other agreement") to which it is a
party or by which its property is bound or affected. To the best knowledge of
the Company, neither the Company nor any of its Subsidiaries is a party to any
contract or other agreement in which the other party is in default in any
respect thereunder that would
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be materially adverse to the Company and its Subsidiaries considered as a
whole. Neither the Company nor any of its Subsidiaries is, nor at the Closing
Date will any of them be, in violation of any provision of its certificate of
incorporation or by-laws.
(k) No consent, approval, authorization or order of, or any filing
or declaration with, any court or governmental agency or body is required in
connection with the authorization, issuance, transfer, sale or delivery of the
Shares by the Company, in connection with the execution, delivery and
performance of this Agreement by the Company or in connection with the taking
by the Company of any action contemplated hereby, except such as have been
obtained under the Act or the Rules and Regulations and such as may be required
under state securities or Blue Sky laws or the by-laws and rules of the
National Association of Securities Dealers, Inc. (the "NASD") in connection
with the purchase and distribution by the Underwriters of the Shares.
(l) The Company has full corporate power and authority to enter
into this Agreement. This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding agreement of the
Company and is enforceable against the Company in accordance with the terms
hereof. The performance of this Agreement and the consummation of the
transactions contemplated hereby and the application of the net proceeds from
the offering and sale of the Shares in the manner set forth in the Prospectus
under "Use of Proceeds" will not result in the creation or imposition of any
lien, charge or encumbrance upon any of the assets of the Company or any of its
Subsidiaries pursuant to the terms or provisions of, or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
or give any other party a right to terminate any of its obligations under, or
result in the acceleration of any obligation under, the certificate of
incorporation or by-laws of the Company or any of its Subsidiaries, any
material contract or other agreement to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries or
any of its properties is bound or affected, or violate or conflict with any
judgment, ruling, decree, order, statute, rule or regulation of any court or
other governmental agency or body applicable to the business or properties of
the Company or any of its Subsidiaries.
(m) The Company and each of its Subsidiaries has good title to all
properties and assets described in the Prospectus as owned by it, free and
clear of all liens, charges, encumbrances or restrictions, except such as are
described in the Prospectus or are not material to the business of the Company
and its Subsidiaries considered as a whole. The Company and each of its
Subsidiaries has valid, subsisting and enforceable leases for the properties
described in the Prospectus as leased by it, with such exceptions as are not
material and do not materially interfere with the use made and proposed to be
made of such properties by the Company and such Subsidiaries.
(n) Except as set forth in the Registration Statement, and except
as would not have a materially adverse effect on the Company and its
Subsidiaries considered as a whole, the Company and its Subsidiaries (i) are in
compliance with any and
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all applicable federal, state and local laws and regulations relating to
telecommunications ("Telecommunications Laws"), (ii) have received all permits,
licenses or other approvals required of them under applicable
Telecommunications Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or
approval.
(o) There is no document or contract of a character required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement which is not described or filed as
required. All such contracts to which the Company or any Subsidiary is a party
have been duly authorized, executed and delivered by the Company or such
Subsidiary, constitute valid and binding agreements of the Company or such
Subsidiary and are enforceable against the Company or such Subsidiary in
accordance with the terms thereof.
(p) No statement, representation, warranty or covenant made by the
Company in this Agreement or made in any certificate or document required by
this Agreement to be delivered to the Representatives was or will be, when
made, inaccurate, untrue or incorrect in any material respect.
(q) Neither the Company nor any of its directors, officers or
controlling persons has taken, directly or indirectly, any action intended, or
which might reasonably be expected, to cause or result, under the Act or
otherwise, in, or which has constituted, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Shares.
(r) No holder of securities of the Company has rights to the
registration of any securities of the Company because of the filing of the
Registration Statement.
(s) Prior to the Closing Date, the Shares will be duly authorized
for listing by the New York Stock Exchange upon official notice of issuance.
(t) Except as would not have a materially adverse effect on the
Company and its Subsidiaries considered as a whole, the Company and its
Subsidiaries are in compliance with all federal, state and local employment and
labor laws, including, but not limited to, laws relating to non-discrimination
in hiring, promotion and pay of employees, and no labor dispute with the
employees of the Company or any Subsidiary exists or, to the knowledge of the
Company, is imminent or threatened; and the Company is not aware of any
existing, imminent or threatened labor disturbance by the employees of any of
its principal suppliers, manufacturers or contractors that could result in a
material adverse effect on the condition (financial or otherwise) or on the
earnings, business, properties, business prospects or operations of the Company
and its Subsidiaries, taken as a whole.
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(u) Except as would not have a materially adverse effect on the
Company and its Subsidiaries considered as a whole, the Company and its
Subsidiaries own, or are licensed or otherwise have the right to use, the
material patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary
or confidential information, systems or procedures), trademarks, services marks
and trade names (collectively, "patent and proprietary rights") presently
employed by them or which are necessary in connection with the conduct of the
business now operated by them, and neither the Company nor any of its
Subsidiaries has received any written notice or otherwise has actual knowledge
of any infringement of or conflict with asserted rights of others or any other
claims with respect to any patent or proprietary rights, or of any basis for
rendering any patent and proprietary rights invalid or inadequate to protect
the interest of the Company or any of its Subsidiaries.
(v) Neither the Company nor any of its Subsidiaries nor, to the
Company's knowledge, any employee or agent of the Company or any Subsidiary has
made any payment of funds of the Company or any Subsidiary or received or
retained any funds in violation of any law, rule or regulation or of a
character required to be disclosed in the Prospectus.
(w) The Company has complied, and until the completion of the
distribution of the Shares will comply, with all of the provisions of
(including, without limitation, filing all forms required by) Section 517.075
of the Florida Securities and Investor Protection Act and Regulation 3E-900.001
issued thereunder with respect to the offering and sale of the Shares.
(x) The Company and its Subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
imposing liability or standards of conduct concerning any Hazardous Material
(as hereinafter defined) ("Environmental Laws"), (ii) have received all
permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance with Environmental Laws, failure to
receive required permits, licenses or other approvals or failure to comply with
the terms and conditions of such permits, licenses or approvals would not,
individually or in the aggregate result in a material adverse effect on the
condition (financial or otherwise) or on the earnings, business, properties,
business prospects or operations of the Company and its Subsidiaries, taken as
a whole. The term "Hazardous Material" means (A) any "hazardous substance" as
defined by the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, (B) any "hazardous waste" as defined by the Resource
Conservation and Recovery Act, as amended, (C) any petroleum or petroleum
product, (D) any polychlorinated biphenyl and (E) any pollutant or contaminant
or hazardous, dangerous, or toxic chemical, material, waste or substance
regulated under or within the meaning of any other Environmental Law.
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(y) The Company maintains insurance with respect to its properties
and business of the types and in amounts generally deemed adequate for its
business and consistent with insurance coverage maintained by similar companies
and businesses, all of which insurance is in full force and effect.
(z) The Company has filed all material federal, state and foreign
income and franchise tax returns and has paid all taxes shown as due thereon,
other than taxes which are being contested in good faith and for which adequate
reserves have been established in accordance with generally accepted accounting
principles ("GAAP"); and the Company has no knowledge of any material tax
deficiency which has been or might be asserted or threatened against the
Company. There are no tax returns of the Company or any of its Subsidiaries
that are currently being audited by state, local or federal taxing authorities
or agencies (and with respect to which the Company or any Subsidiary has
received notice), where the findings of such audit, if adversely determined,
would result in a material adverse effect on the condition (financial or
otherwise) or on the earnings, business, properties, business prospects or
operations of the Company and its Subsidiaries, taken as a whole.
(aa) With respect to each employee benefit plan, program and
arrangement (including, without limitation, any "employee benefit plan" as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) maintained or contributed to by the Company, or with
respect to which the Company could incur any liability under ERISA
(collectively, the "Benefit Plans"), no event has occurred and, to the best
knowledge of the Company, there exists no condition or set of circumstances, in
connection with which the Company could be subject to any liability under the
terms of such Benefit Plan, applicable law (including, without limitation,
ERISA and the Internal Revenue Code of 1986, as amended) or any applicable
agreement that could materially adversely affect the business, properties,
business prospects, condition (financial or otherwise) or results of operations
of the Company and its Subsidiaries, taken as a whole.
4. Agreements of the Company. The Company agrees with the several
Underwriters as follows:
(a) The Company will not, either prior to the Effective Date or
thereafter during such period as the Prospectus is required by law to be
delivered in connection with sales of the Shares by an Underwriter or dealer,
file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Representatives within a reasonable period of time prior to the filing thereof
and the Representatives shall not have objected thereto in good faith.
(b) The Company will use its best efforts to cause the Registration
Statement to become effective, and will notify the Representatives promptly,
and will confirm such advice in writing, (1) when the Registration Statement
has become
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effective and when any post-effective amendment thereto becomes effective, (2)
of any request by the Commission for amendments or supplements to the
Registration Statement or the Prospectus or for additional information, (3) of
the issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or the initiation of any proceedings for that
purpose or the threat thereof, (4) of the happening of any event during the
period mentioned in the second sentence of Section 4(e) that in the judgment of
the Company makes any statement made in the Registration Statement or the
Prospectus untrue in any material respect or that requires the making of any
changes in the Registration Statement or the Prospectus in order to make the
statements therein, in light of the circumstances in which they are made, not
misleading in any material respect and (5) of receipt by the Company or any
representative or attorney of the Company of any other communication from the
Commission relating to the Company, the Registration Statement, any preliminary
prospectus or the Prospectus. If at any time the Commission shall issue any
order suspending the effectiveness of the Registration Statement, the Company
will make every reasonable effort to obtain the withdrawal of such order at the
earliest possible moment. The Company will use its best efforts to comply with
the provisions of and make all requisite filings with the Commission pursuant
to Rule 430A and to notify the Representatives promptly of all such filings.
(c) The Company will furnish to the Representatives, without
charge, two signed copies of the Registration Statement and of any
post-effective amendment thereto, including financial statements and schedules,
and all exhibits thereto and will furnish to the Representatives, without
charge, for transmittal to each of the other Underwriters, a copy of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules but without exhibits.
(d) The Company will comply with all the provisions of any
undertakings contained in the Registration Statement.
(e) On the Effective Date, and thereafter from time to time, the
Company will deliver to each of the Underwriters, without charge, as many
copies of the Prospectus or any amendment or supplement thereto as the
Representatives may reasonably request. The Company consents to the use of the
Prospectus or any amendment or supplement thereto by the several Underwriters
and by all dealers to whom the Shares may be sold, both in connection with the
offering or sale of the Shares and for any period of time thereafter during
which the Prospectus is required by law to be delivered in connection
therewith. If during such period of time any event shall occur which in the
judgment of the Company or counsel to the Underwriters should be set forth in
the Prospectus in order to make any statement therein, in the light of the
circumstances under which it was made, not misleading in any material respect,
or if it is necessary to supplement or amend the Prospectus to comply with law,
the Company will forthwith prepare and duly file with the Commission an
appropriate supplement or amendment thereto, and will deliver to each of the
Underwriters, without charge, such number of copies thereof as the
Representatives may reasonably request.
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(f) Prior to any public offering of the Shares by the Underwriters,
the Company will cooperate with the Representatives and counsel to the
Underwriters in connection with the registration or qualification of the Shares
for offer and sale under the securities or Blue Sky laws of such jurisdictions
as the Representatives may request; provided, that in no event shall the
Company be obligated to qualify to do business in any jurisdiction where it is
not now so qualified or to take any action which would subject it to general
service of process in any jurisdiction where it is not now so subject.
(g) During the period of five years commencing on the Effective
Date, the Company will furnish to the Representatives and each other
Underwriter who may so request copies of such financial statements and other
periodic and special reports as the Company may from time to time distribute
generally to the holders of any class of its capital stock, and will furnish to
the Representatives and each other Underwriter who may so request a copy of
each annual or other report it shall be required to file with the Commission.
(h) The Company will make generally available to holders of its
securities as soon as may be practicable but in no event later than the last
day of the fifteenth full calendar month following the calendar quarter in
which the Effective Date falls, an earnings statement (which need not be
audited but shall be in reasonable detail) for a period of 12 months ended
commencing after the Effective Date, and satisfying the provisions of Section
11(a) of the Act (including Rule 158 of the Rules and Regulations).
(i) Whether or not the transactions contemplated by this Agreement
are consummated or this Agreement is terminated, the Company will pay, or
reimburse if paid by the Representatives, all costs and expenses incident to
the performance of the obligations of the Company under this Agreement,
including but not limited to costs and expenses of or relating to (1) the
preparation, printing and filing of the Registration Statement and exhibits to
it, each preliminary prospectus, the Prospectus and any amendment or supplement
to the Registration Statement or the Prospectus, (2) the preparation and
delivery of certificates representing the Shares, (3) the word processing,
printing and reproduction of this Agreement, the Agreement Among Underwriters,
any Dealer Agreements and any Underwriters' Questionnaire, (4) furnishing
(including costs of shipping, mailing and courier) such copies of the
Registration Statement, the Prospectus and any preliminary prospectus, and all
amendments and supplements thereto, as may be reasonably requested for use in
connection with the offering and sale of the Shares by the Underwriters or by
dealers to whom Shares may be sold, (5) the listing of the Shares on the New
York Stock Exchange, (6) any filings required to be made by the Underwriters
with the NASD, and the fees, disbursements and other charges of counsel for the
Underwriters in connection therewith, (7) the registration or qualification of
the Shares for offer and sale under the securities or Blue Sky laws of such
jurisdictions designated pursuant to Section 4(f), including the fees,
disbursements and other charges of counsel to the Underwriters in connection
therewith, and the preparation and printing of preliminary, supplemental and
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final Blue Sky memoranda, (8) counsel to the Company, (9) the transfer agent
for the Shares and (10) the Accountants.
(j) If this Agreement shall be terminated by the Company pursuant
to any of the provisions hereof (otherwise than pursuant to Section 8) or if
for any reason the Company shall be unable to perform its obligations
hereunder, the Company will reimburse the several Underwriters for all
out-of-pocket expenses (including the fees, disbursements and other charges of
counsel to the Underwriters) reasonably incurred by them in connection
herewith.
(k) The Company will not at any time, directly or indirectly, take
any action intended, or which might reasonably be expected, to cause or result
in, or which will constitute, stabilization of the price of the shares of
Common Stock to facilitate the sale or resale of any of the Shares.
(l) The Company will apply the net proceeds from the offering and
sale of the Shares to be sold by the Company in the manner set forth in the
Prospectus under "Use of Proceeds" and shall file such reports with the
Commission with respect to the sale of the Shares and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the
Act.
(m) Except as provided in this Agreement, during the period of 180
days commencing at the Closing Date, the Company will not, without the prior
written consent of PaineWebber Incorporated, directly or indirectly, sell,
offer to sell, grant any option for the sale of, or otherwise dispose of or
file any shelf registration statement or any registration other than the
Registration Statement with the Commission for any Common Stock or securities
convertible into or exercisable or exchangeable for Common Stock, other than to
the Underwriters pursuant to this Agreement and other than pursuant to employee
or director benefit plans, provided, that the Company will not grant options to
purchase shares of Common Stock pursuant to such employee or director benefit
plans at a price less than the initial public offering price, except that the
Company may (i) issue on the Closing Date the shares of Common Stock to be
issued in connection with the acquisitions to be consummated on the Closing
Date, as described in the Registration Statement, so long as the certificates
issued to such purchasers set forth the legends relating to the one-year
restrictions on the sale or disposition of such shares provided for in the
agreements related to such acquisitions (and the Company hereby agrees with the
Representatives that for a period of 365 days after the Closing Date ("Lock-Up
Period"), without written consent of PaineWebber Incorporated, the Company will
not agree to waive or amend such restrictions on sale or disposition), (ii)
issue shares of Common Stock ("Acquisition Shares") during the Lock-Up Period
in connection with additional acquisitions so long as the purchasers of such
Acquisition Shares agree to be bound by the lock-up agreement with the
Representatives in the form set forth in Exhibit B to the effect that they will
not, except as provided therein, without written consent of PaineWebber
Incorporated, sell, contract to sell or otherwise dispose of any of such shares
at any time
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before the expiration of the Lock-Up Period and the certificates evidencing
such Acquisition Shares bear a legend to such effect, (iii) issue shares of
Common Stock during the Lock-Up Period pursuant to the (x) conversion of the
Company's convertible notes ("Convertible Notes"), and (y) exercise of warrants
("Warrants"), and (z) options ("Options") issued by the Company as described in
the Registration Statement, so long as the certificates representing such
Convertible Notes, Warrants and Options issued in connection with the
acquisitions to be consummated on the Closing Date and any shares of Common
Stock issued upon conversion or exercise thereof set forth the legends relating
to the one-year restrictions on the sale or disposition of such shares provided
for in the agreements related to such acquisitions (and the Company hereby
agrees with the Representatives that during the Lock-Up Period, without written
consent of PaineWebber Incorporated, the Company will not agree to waive or
amend such restrictions on sale or disposition), and (iv) grant awards and
permit the exercise of awards granted pursuant to the Company's 1997 Stock
Awards Plan and its Non-Qualified Stock Option Plan for Non-Employee
Directors.
(n) The Company will cause each of its executive officers,
directors and each beneficial owner of more than 5% of the outstanding shares
of Common Stock other than Rod K. Cutsinger to enter into agreements with the
Representatives in the form set forth in Exhibit B to the effect that they will
not, except as provided therein, for a period of 365 days after the
commencement of the public offering of the Shares, without the prior written
consent of PaineWebber Incorporated, sell, contract to sell or otherwise
dispose of any of such shares (other than pursuant to employee stock option
plans or in connection with other employee incentive compensation
arrangements).
(o) Rod K. Cutsinger shall have entered into an agreement with the
Representatives in the form set forth in Exhibit C to the effect that he will
not, except as provided therein, for a period of eighteen months after the
Closing, without the prior written consent of PaineWebber Incorporated, sell,
contract to sell or otherwise dispose of any shares of Common Stock held by
him.
5. Conditions of the Obligations of the Underwriters. In addition to
the execution and delivery of the Price Determination Agreement, the
obligations of each Underwriter hereunder are subject to the following
conditions:
(a) Notification that the Registration Statement has become
effective shall be received by the Representatives not later than 5:00 p.m.,
New York City time, on the date of this Agreement or at such later date and
time as shall be consented to in writing by the Representatives and all filings
required by Rule 424 of the Rules and Regulations and Rule 430A shall have been
made.
(b) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall be pending or threatened by the Commission, (ii) no order
suspending the effectiveness of the
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Registration Statement or the qualification or registration of the Shares under
the securities or Blue Sky laws of any jurisdiction shall be in effect and no
proceeding for such purpose shall be pending before or threatened by the
Commission or the authorities of any such jurisdiction, (iii) any request for
additional information on the part of the staff of the Commission or any such
authorities shall have been complied with to the satisfaction of the staff of
the Commission or such authorities and (iv) after the date hereof no amendment
or supplement to the Registration Statement or the Prospectus shall have been
filed unless a copy thereof was first submitted to the Representatives and the
Representatives did not object thereto in good faith, and the Representatives
shall have received certificates, dated the Closing Date and the Option Closing
Date and signed by the Chief Executive Officer of the Company and the Chief
Financial Officer of the Company (who may, as to proceedings threatened, rely
upon the best of their information and belief), to the effect of clauses (i),
(ii) and (iii).
(c) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, (i) there shall not have been,
and no development shall have occurred which could reasonably be expected to
result in, a material adverse change in the general affairs, business, business
prospects, properties, management, condition (financial or otherwise) or
results of operations of the Company and its Subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of business, in
each case other than as set forth in or contemplated by the Registration
Statement and the Prospectus and (ii) neither the Company nor any of its
Subsidiaries shall have sustained any loss or interference with its business or
properties material to the Company and its Subsidiaries taken as a whole from
fire, explosion, flood or other casualty, whether or not covered by insurance,
or from any labor dispute or from any court or legislative or other
governmental action, order or decree, which is not set forth in the
Registration Statement and the Prospectus, if in the judgment of the
Representatives any such development makes it impracticable or inadvisable to
consummate the sale and delivery of the Shares by the Underwriters at the
initial public offering price.
(d) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there shall have been no
litigation or other proceeding instituted against the Company or any of its
Subsidiaries or any of their respective officers or directors in their
capacities as such, before or by any Federal, state or local court, commission,
regulatory body, administrative agency or other governmental body, domestic or
foreign, in which litigation or proceeding an unfavorable ruling, decision or
finding would materially and adversely affect the business, properties,
business prospects, condition (financial or otherwise) or results of operations
of the Company and its Subsidiaries taken as a whole.
(e) Each of the representations and warranties of the Company
contained herein shall be true and correct in all material respects at the
Closing Date and, with respect to the Option Shares, at the Option Closing
Date, as if made at the Closing Date and, with respect to the Option Shares, at
the Option Closing Date, and all covenants
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<PAGE>
and agreements herein contained to be performed on the part of the Company and
all conditions herein contained to be fulfilled or complied with by the Company
at or prior to the Closing Date and, with respect to the Option Shares, at or
prior to the Option Closing Date, shall have been duly performed, fulfilled or
complied with.
(f) The Representatives shall have received an opinion, dated the
Closing Date and, with respect to the Option Shares, the Option Closing Date,
and satisfactory in form and substance to counsel for the Underwriters, from
Bracewell & Patterson L.L.P., counsel to the Company, to the effect set forth
in Exhibit D.
(g) The Representatives shall have received an opinion, dated the
Closing Date and the Option Closing Date, from Morgan, Lewis & Bockius LLP,
counsel to the Underwriters, with respect to the Registration Statement, the
Prospectus and this Agreement, which opinion shall be satisfactory in all
respects to the Representatives.
(h) On the date of the Prospectus, the Accountants shall have
furnished to the Representatives a letter, dated the date of its delivery,
addressed to the Representatives and in form and substance satisfactory to the
Representatives, confirming that they are independent accountants with respect
to the Company as required by the Act and the Rules and Regulations and, in the
case of KPMG Peat Marwick LLP, with respect to the financial and other
statistical and numerical information contained in the Registration Statement.
At the Closing Date and, as to the Option Shares, the Option Closing Date, KPMG
Peat Marwick LLP shall have furnished to the Representatives a letter, dated
the date of its delivery, which shall confirm, on the basis of a review in
accordance with the procedures set forth in their letter, that nothing has come
to their attention during the period from the date of the letter referred to in
the prior sentence to a date (specified in the letter) not more than five days
prior to the Closing Date and the Option Closing Date which would require any
change in their letter dated the date of the Prospectus, if it were required to
be dated and delivered at the Closing Date and the Option Closing Date.
(i) At the Closing Date and, as to the Option Shares, the Option
Closing Date, there shall be furnished to the Representatives an accurate
certificate, dated the date of its delivery, signed by each of the Chief
Executive Officer and the Chief Financial Officer of the Company, in form and
substance satisfactory to the Representatives, to the effect that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus and (A) as of the date of such
certificate, such documents are true and correct in all material respects and
do not omit to state a material fact required to be stated therein or necessary
in order to make the statements therein not untrue or misleading and (B) since
the Effective Date, no event has occurred as a result of which it is necessary
to amend or supplement the Prospectus in order to make the statements therein
not untrue or misleading in any material respect;
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(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the time
such certificate is delivered, true and correct in all material respects;
(iii) Each of the covenants required herein to be performed by
the Company on or prior to the delivery of such certificate has been duly,
timely and fully performed and each condition herein required to be complied
with by the Company on or prior to the date of such certificate has been duly,
timely and fully complied with; and
(iv) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, (A) there has not been,
and no development has occurred which could reasonably be expected to result
in, a material adverse change in the general affairs, business, business
prospects, properties, management, condition (financial or otherwise) or
results of operations of the Company and its Subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of business, in
each case other than as set forth in or contemplated by the Registration
Statement and the Prospectus and (B) neither the Company nor any of its
Subsidiaries has sustained any loss or interference with its business or
properties material to the Company and its Subsidiaries taken as a whole from
fire, explosion, flood or other casualty, whether or not covered by insurance,
or from any labor dispute or from any court or legislative or other
governmental action, order or decree, which is not set forth in the
Registration Statement and the Prospectus.
(j) On or prior to the Closing Date, the Representatives shall have
received the executed agreements referred to in Section 4(n).
(k) The Shares shall be qualified for sale in such states as the
Representatives may reasonably request, each such qualification shall be in
effect and not subject to any stop order or other proceeding on the Closing
Date and the Option Closing Date.
(l) Prior to the Closing Date, the Shares shall have been duly
authorized for listing by the New York Stock Exchange upon official notice of
issuance.
(m) The National Association of Securities Dealers, Inc. shall have
approved the underwriting terms and arrangements and such approval shall not
have been withdrawn or limited.
(n) The Company shall have furnished to the Representatives such
certificates, in addition to those specifically mentioned herein, as the
Representatives may have reasonably requested as to the accuracy and
completeness at the Closing Date and the Option Closing Date of any statement
in the Registration Statement or the Prospectus as to the accuracy at the
Closing Date and the Option Closing Date of the
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representations and warranties of the Company herein, as to the performance by
the Company of its obligations hereunder, or as to the fulfillment of the
conditions concurrent and precedent to the obligations hereunder of the
Representatives.
6. Indemnification.
(a) The Company will indemnify and hold harmless each Underwriter,
the directors, officers, employees and agents of each Underwriter and each
person, if any, who controls each Underwriter within the meaning of Section 15
of the Act or Section 20 of the Exchange Act from and against any and all
losses, claims, liabilities, expenses and damages (including, but not limited
to, any and all investigative, legal and other expenses reasonably incurred in
connection with, and any and all amounts paid in settlement of, any action,
suit or proceeding between any of the indemnified parties and any indemnifying
parties or between any indemnified party and any third party, or otherwise, or
any claim asserted), as and when incurred, to which any Underwriter, or any
such person, may become subject under the Act, the Exchange Act or other
Federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, liabilities, expenses or damages arise out of
or are based on (i) any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus, the Registration
Statement or the Prospectus or any amendment or supplement to the Registration
Statement or the Prospectus or in any application or other document executed by
or on behalf of the Company or based on written information furnished by or on
behalf of the Company filed in any jurisdiction in order to qualify the Shares
under the Securities Laws thereof or filed with the Commission, (ii) the
omission or alleged omission to state in such document a material fact required
to be stated in it or necessary to make the statements in it not misleading or
(iii) any act or failure to act or any alleged act or failure to act by any
Underwriter in connection with, or relating in any manner to, the Shares or the
offering contemplated hereby, and which is included as part of or referred to
in any loss, claim, liability, expense or damage arising out of or based upon
matters covered by clause (i) or (ii) above (provided that the Company shall
not be liable under this clause (iii) to the extent it is finally judicially
determined by a court of competent jurisdiction that such loss, claim,
liability, expense or damage resulted directly from any such acts or failures
to act undertaken or omitted to be taken by such underwriter through its gross
negligence or willful misconduct); provided that the Company will not be liable
to the extent that such loss, claim, liability, expense or damage arises from
the sale of the Shares in the public offering to any person by an Underwriter
and (A) is based on an untrue statement or omission or alleged untrue statement
or omission made in reliance on and in conformity with information relating to
any Underwriter furnished in writing to the Company by the Representatives on
behalf of any Underwriter expressly for inclusion in the Registration
Statement, any preliminary prospectus or the Prospectus or (B) results solely
from an untrue statement of a material fact contained in, or the omission of a
material fact from, such preliminary prospectus, which untrue statement or
omission was completely corrected in the Prospectus (as then amended or
supplemented), if the Company shall sustain the burden of proving that the
Underwriters sold Shares to the person alleging such loss, claim,
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<PAGE>
liability, expense or damage without sending or giving, at or prior to the
written confirmation of such sale, a copy of the Prospectus (as then amended or
supplemented) provided that the Company had previously furnished copies thereof
to the Underwriters within a reasonable amount of time prior to such sale or
such confirmation, and the Underwriters failed to deliver the corrected
Prospectus, if required by law to have so delivered it and if delivered would
have been a complete defense against the person asserting such loss, claim,
liability, expense or damage. This indemnity agreement will be in addition to
any liability that the Company might otherwise have.
(b) Each Underwriter will indemnify and hold harmless the Company,
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, each director of the Company and
each officer of the Company who signs the Registration Statement to the same
extent as the foregoing indemnity from the Company to each Underwriter, but
only insofar as losses, claims, liabilities, expenses or damages arise out of
or are based on any untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information relating to any
Underwriter furnished in writing to the Company by the Representatives on
behalf of such Underwriter expressly for use in the Registration Statement, the
Preliminary Prospectus or the Prospectus. This indemnity will be in addition to
any liability that each Underwriter might otherwise have; provided, however,
that in no case shall any Underwriter be liable or responsible for any amount
in excess of the underwriting discounts and commissions received by such
Underwriter.
(c) Any party that proposes to assert the right to be indemnified
under this Section 6 will, promptly after receipt of notice of commencement of
any action against such party in respect of which a claim is to be made against
an indemnifying party or parties under this Section 6, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission so to notify such indemnifying party will not
relieve it from any liability that it may have to any indemnified party under
the foregoing provisions of this Section 6 unless, and only to the extent that,
such omission results in the forfeiture of substantive rights or defenses by
the indemnifying party. If any such action is brought against any indemnified
party and it notifies the indemnifying party of its commencement, the
indemnifying party will be entitled to participate in and, to the extent that
it elects by delivering written notice to the indemnified party promptly after
receiving notice of the commencement of the action from the indemnified party,
jointly with any other indemnifying party similarly notified, to assume the
defense of the action, with counsel satisfactory to the indemnified party, and
after notice from the indemnifying party to the indemnified party of its
election to assume the defense, the indemnifying party will not be liable to
the indemnified party for any legal or other expenses except as provided below
and except for the reasonable costs of investigation subsequently incurred by
the indemnified party in connection with the defense. The indemnified party
will have the right to employ its own counsel in any such action, but the fees,
expenses and other charges of such counsel will be at the expense of such
indemnified party unless (1) the employment of counsel by the indemnified party
has
20
<PAGE>
been authorized in writing by the indemnifying party, (2) the indemnified party
has reasonably concluded (based on advice of counsel) that there may be legal
defenses available to it or other indemnified parties that are different from
or in addition to those available to the indemnifying party, (3) a conflict or
potential conflict exists (based on advice of counsel to the indemnified party)
between the indemnified party and the indemnifying party (in which case the
indemnifying party will not have the right to direct the defense of such action
on behalf of the indemnified party) or (4) the indemnifying party has not in
fact employed counsel to assume the defense of such action within a reasonable
time after receiving notice of the commencement of the action, in each of which
cases the reasonable fees, disbursements and other charges of counsel will be
at the expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable
fees, disbursements and other charges of more than one separate firm admitted
to practice in such jurisdiction at any one time for all such indemnified party
or parties. All such fees, disbursements and other charges will be reimbursed
by the indemnifying party promptly as they are incurred. An indemnifying party
will not be liable for any settlement of any action or claim effected without
its written consent (which consent will not be unreasonably withheld). No
indemnifying party shall, without the prior written consent of each indemnified
party, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action or proceeding relating to the matters
contemplated by this Section 6 (whether or not any indemnified party is a party
thereto), unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising or
that may arise out of such claim, action or proceeding. Notwithstanding any
other provision of this Section 6 (c), if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel, such indemnifying party agrees that it shall
be liable for any settlement effected without its written consent if (i) such
settlement is entered into more than 45 days after receipt by such indemnifying
party of the aforesaid request, (ii) such indemnifying party shall have
received notice of the terms of such settlement at least 30 days prior to such
settlement being entered into and (iii) such indemnifying party shall not have
reimbursed such indemnified party in accordance with such request prior to the
date of such settlement.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 6 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company or the Underwriters, the
Company and the Underwriters will contribute to the total losses, claims,
liabilities, expenses and damages (including any investigative, legal and other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted, but after
deducting any contribution received by the Company from persons other than the
Underwriters, such as persons who control the Company within the meaning of the
Act, officers of the Company who signed the Registration Statement and
directors of the Company, who also may be liable for contribution) to which the
Company and any one or
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more of the Underwriters may be subject in such proportion as shall be
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. If, but only if, the
allocation provided by the foregoing sentence is not permitted by applicable
law, the allocation of contribution shall be made in such proportion as is
appropriate to reflect not only the relative benefits referred to in the
foregoing sentence but also the relative fault of the Company, on the one hand,
and the Underwriters, on the other, with respect to the statements or omissions
which resulted in such loss, claim, liability, expense or damage, or action in
respect thereof, as well as any other relevant equitable considerations with
respect to such offering. Such relative fault shall be determined by reference
to whether the untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Representatives on behalf of the Underwriters,
the intent of the parties and their relative knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and the Underwriters agree that it would not be just and equitable if
contributions pursuant to this Section 6(d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, liability, expense or
damage, or action in respect thereof, referred to above in this Section 6(d)
shall be deemed to include, for purpose of this Section 6(d), any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 6(d), no Underwriter shall be required to contribute
any amount in excess of the underwriting discounts and commissions received by
it and no person found guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) will be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute as provided in this Section 6(d) are
several in proportion to their respective underwriting obligations and not
joint. For purposes of this Section 6(d), any person who controls a party to
this Agreement within the meaning of the Act will have the same rights to
contribution as that party, and each officer of the Company who signed the
Registration Statement will have the same rights to contribution as the
Company, subject in each case to the provisions hereof. Any party entitled to
contribution, promptly after receipt of notice of commencement of any action
against such party in respect of which a claim for contribution may be made
under this Section 6(d), will notify any such party or parties from whom
contribution may be sought, but the omission so to notify will not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have under this Section 6 (d). Except for a settlement entered
into pursuant to the last sentence of Section 6 (c) hereof, no party will be
liable for
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contribution with respect to any action or claim settled without its written
consent (which consent will not be unreasonably withheld).
(e) The indemnity and contribution agreements contained in this
Section 6 and the representations and warranties of the Company contained in
this Agreement shall remain operative and in full force and effect regardless
of (i) any investigation made by or on behalf of the Underwriters, (ii)
acceptance of the Shares and payment therefore or (iii) any termination of this
Agreement.
7. Termination. The obligations of the several Underwriters under this
Agreement may be terminated at any time on or prior to the Closing Date (or,
with respect to the Option Shares, on or prior to the Option Closing Date), by
notice to the Company from the Representatives, without liability on the part
of any Underwriter to the Company, if, prior to delivery and payment for the
Shares (or the Option Shares, as the case may be), in the sole judgment of the
Representatives, (i) there has been, since the respective dates as of which
information is given in the Registration Statement, any material adverse change
in the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company and its Subsidiaries
considered as a whole, (ii) trading in any of the equity securities of the
Company shall have been suspended by the Commission, the NASD, by an exchange
that lists the Shares or by the Nasdaq Stock Market, (iii) trading in
securities generally on the New York Stock Exchange or the Nasdaq Stock Market
shall have been suspended or limited or minimum or maximum prices shall have
been generally established on such exchange or over the counter market, or
additional material governmental restrictions, not in force on the date of this
Agreement, shall have been imposed upon trading in securities generally by such
exchange or by order of the Commission or the NASD or any court or other
governmental authority, (iv) a general banking moratorium shall have been
declared by either Federal or New York State authorities or (v) any material
adverse change in the financial or securities markets in the United States or
in political, financial or economic conditions in the United States or any
outbreak or material escalation of hostilities or declaration by the United
States of a national emergency or war or other calamity or crisis shall have
occurred, the effect of any of which is such as to make it, in the sole
judgment of the Representatives, impracticable or inadvisable to market the
Shares on the terms and in the manner contemplated by the Prospectus.
8. Substitution of Underwriters. If any one or more of the
Underwriters shall fail or refuse to purchase any of the Firm Shares which it
or they have agreed to purchase hereunder, and the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase is not more than one-tenth of the aggregate number of Firm
Shares, the other Underwriters shall be obligated, severally, to purchase the
Firm Shares which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase, in the proportions which the number of Firm Shares
which they have respectively agreed to purchase pursuant to Section 1 bears to
the aggregate number of Firm Shares which all such non-defaulting Underwriters
have so
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agreed to purchase, or in such other proportions as the Representatives may
specify; provided that in no event shall the maximum number of Firm Shares
which any Underwriter has become obligated to purchase pursuant to Section 1 be
increased pursuant to this Section 8 by more than one-ninth of the number of
Firm Shares agreed to be purchased by such Underwriter without the prior
written consent of such Underwriter. If any Underwriter or Underwriters shall
fail or refuse to purchase any Firm Shares and the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase exceeds one-tenth of the aggregate number of the Firm
Shares and arrangements satisfactory to the Representatives and the Company for
the purchase of such Firm Shares are not made within 48 hours after such
default, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or the Company for the purchase or sale of any
Shares under this Agreement. In any such case either the Representatives or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. Any action taken pursuant to this Section 8 shall
not relieve any defaulting Underwriter from liability in respect of any default
of such Underwriter under this Agreement.
9. Miscellaneous. Notice given pursuant to any of the provisions of
this Agreement shall be in writing and, unless otherwise specified, shall be
mailed or delivered (a) if to the Company, at the office of the Company,
________________ Attention: Richard P. Anthony, or (b) if to the Underwriters,
to the Representatives at the offices of PaineWebber Incorporated, 1285 Avenue
of the Americas, New York, New York 10019, Attention: Reginald J. Hollinger,
Corporate Finance Department. Any such notice shall be effective only upon
receipt. Any notice under Section 7 or 8 may be made by telex or telephone, but
if so made shall be subsequently confirmed in writing.
This Agreement has been and is made solely for the benefit of the
several Underwriters and the Company and of the controlling persons, directors
and officers referred to in Section 6, and their respective successors and
assigns, and no other person shall acquire or have any right under or by virtue
of this Agreement. The term "successors and assigns" as used in this Agreement
shall not include a purchaser, as such purchaser, of Shares from any of the
several Underwriters.
All representations, warranties and agreements of the Company
contained herein or in certificates or other instruments delivered pursuant
hereto, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any of its controlling
persons and shall survive delivery of and payment for the Shares hereunder.
Any action required or permitted to be taken by the Representatives
under this Agreement may be taken by them jointly or by PaineWebber
Incorporated.
24
<PAGE>
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS
PRINCIPLES OF SUCH STATE.
This Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
The Company and the Underwriters each hereby irrevocably waive any
right they may have to a trial by jury in respect of any claim based upon or
arising out of this Agreement or the transactions contemplated hereby.
This Agreement may not be amended or otherwise modified or any
provision hereof waived except by an instrument in writing signed by the
Representatives and the Company.
Please confirm that the foregoing correctly sets forth the agreement
among the Company and the several Underwriters.
Very truly yours,
ADVANCED COMMUNICATIONS GROUP, INC.
By:
--------------------------------
Title:
Confirmed as of the date first
above mentioned:
PAINEWEBBER INCORPORATED
CIBC OPPENHEIMER CORP.
Acting on behalf of themselves
and as the Representatives of the
other several Underwriters
named in Schedule I hereof.
By: PAINEWEBBER INCORPORATED
25
<PAGE>
By:
-------------------------------
Title:
CIBC OPPENHEIMER CORP.
By:
-------------------------------
By:
-------------------------------
SCHEDULE I
UNDERWRITERS
Number of
Name of Firm Shares
Underwriters to be Purchased
- ------------ ---------------
PaineWebber Incorporated
CIBC Oppenheimer Corp.
1
<PAGE>
Total......................................
---------------
---------------
2
<PAGE>
EXHIBIT A
ADVANCED COMMUNICATIONS GROUP, INC.
- ---------------------
PRICE DETERMINATION AGREEMENT
- -----------------------------
[Date]
PAINEWEBBER INCORPORATED
CIBC OPPENHEIMER CORP.
As Representatives of the several Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Dear Sirs:
Reference is made to the Underwriting Agreement, dated ______, 1998
(the "Underwriting Agreement"), among Advanced Communications Group, Inc., a
Delaware corporation (the "Company") and the several Underwriters named in
Schedule I thereto or hereto (the "Underwriters"), for whom PaineWebber
Incorporated and CIBC Oppenheimer Corp. are acting as representatives (the
"Representatives"). The Underwriting Agreement provides for the purchase by the
Underwriters from the Company, subject to the terms and conditions set forth
therein, of an aggregate of ________ shares (the "Firm Shares") of the
Company's common stock, par value $.0001 per share. This Agreement is the Price
Determination Agreement referred to in the Underwriting Agreement.
Pursuant to Section 1 of the Underwriting Agreement, the undersigned
agrees with the Representatives as follows:
<PAGE>
The initial public offering price per share for the Firm Shares shall
be $_____________.
The purchase price per share for the Firm Shares to be paid by the
several Underwriters shall be $_______ representing an amount equal to the
initial public offering price set forth above, less $______ per share.
The Company represents and warrants to each of the Underwriters that
the representations and warranties of the Company set forth in Section 3 of the
Underwriting Agreement are accurate as though expressly made at and as of the
date hereof.
As contemplated by the Underwriting Agreement, attached as Schedule I
is a completed list of the several Underwriters, which shall be a part of this
Agreement and the Underwriting Agreement.
THIS AGREEMENT SHALL BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK
WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES OF SUCH STATE.
If the foregoing is in accordance with your understanding of the
agreement among the Underwriters and the Company, please sign and return to the
Company a counterpart hereof, whereupon this instrument along with all
counterparts and together with
2
<PAGE>
the Underwriting Agreement shall be a binding agreement among the Underwriters
and the Company in accordance with its terms and the terms of the Underwriting
Agreement.
Very truly yours,
ADVANCED COMMUNICATIONS GROUP, INC.
By:
---------------------------
Title:
Confirmed as of the date
first above mentioned:
PAINEWEBBER INCORPORATED
CIBC OPPENHEIMER CORP.
Acting on behalf of themselves
and as the Representatives
of the other several Underwriters
named in Schedule I hereof.
By: PAINEWEBBER INCORPORATED
By:
---------------------------
Title:
CIBC OPPENHEIMER CORP.
By:
---------------------------
By:
---------------------------
3
<PAGE>
EXHIBIT B
[DATE]
PAINEWEBBER INCORPORATED
CIBC OPPENHEIMER CORP.
As Representatives of the
several Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Dear Sirs:
In consideration of the agreement of the several Underwriters, for
which PaineWebber Incorporated and CIBC Oppenheimer Corp. (the
"Representatives") intend to act as Representatives to underwrite a proposed
public offering (the "Offering") of ____ shares of Common Stock, par value
$.0001 per share (the "Common Stock") of Advanced Communications Group, Inc., a
Delaware corporation, as contemplated by a registration statement with respect
to such shares filed with the Securities and Exchange Commission on Form S-1
(Registration No. 333-37671), the undersigned hereby agrees that the
undersigned will not, except for transfers to immediate family members, or to
charities or charitable foundations or similar entities, who, in each case,
agree to be bound in writing by the restrictions set forth herein (or trusts
for the benefit of the undersigned or family members the trustees of which so
agree in writing), or, in the case of Consolidation Partners Founding Fund,
L.L.C., distributions of shares of Common Stock in accordance with its charter
and regulations to holders of its Class A and Class B Interests, so long as the
certificates representing the shares so distributed bear legends with respect
to the restrictions on transfer imposed on such shares, for a period of 365
days after the Closing without the prior written consent of PaineWebber
Incorporated, offer to sell, sell, contract to sell, grant any option to sell,
or otherwise dispose of, or require the Company to file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
to register any shares of Common Stock, or in the case of persons signing this
agreement or agreements in writing to be bound hereby,
<PAGE>
securities convertible into or exchangeable for Common Stock or warrants or
other rights to acquire shares of Common Stock of which the undersigned is
now[, or may in the future become,] the beneficial owner within the meaning of
Rule 13d-3 under the Securities Exchange Act of 1934) (other than pursuant to
employee or director stock option plans or in connection with other employee
incentive compensation arrangements).
Very truly yours,
By:
--------------------------------
Print Name:
------------------------
2
<PAGE>
EXHIBIT C
[DATE]
PAINEWEBBER INCORPORATED
CIBC OPPENHEIMER CORP.
As Representatives of the
several Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Dear Sirs:
In consideration of the agreement of the several Underwriters, for
which PaineWebber Incorporated and CIBC Oppenheimer Corp. (the
"Representatives") intend to act as Representatives to underwrite a proposed
public offering (the "Offering") of ____ shares of Common Stock, par value
$.0001 per share (the "Common Stock") of Advanced Communications Group, Inc., a
Delaware corporation, as contemplated by a registration statement with respect
to such shares filed with the Securities and Exchange Commission on Form S-1
(Registration No. 333-37671), the undersigned hereby agrees that the
undersigned will not, except for transers to immediate family members, or to
charities or charitable trusts or foundations or similar entities, who, in each
case, agree in writing to be bound by the restrictions set forth herein (or
trusts for the benefit of the undersigned or family members of which trusts the
trustees so agree in writing), and except for transfers or dispositions
described in the Registration Statement, for a period of eighteen months after
the Closing, without the prior written consent of PaineWebber Incorporated,
offer to sell, sell, contract to sell, grant any option to sell, or otherwise
dispose of, or require the Company to file with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933 to
register any shares of Common Stock or securities convertible into or
exchangeable for Common Stock or warrants or other rights to acquire shares of
Common Stock of which the undersigned is now, or may in the future become, the
beneficial owner within the meaning of Rule 13d-3 under the Securities Exchange
Act of 1934 (other than pursuant to option plans or in connection with other
employee incentive compensation arrangements).
<PAGE>
Very truly yours,
By:
-------------------------------
Print Name: Rod K. Cutsinger
2
<PAGE>
EXHIBIT D
Form of Opinion of
Counsel to the Company
The Company and each of its Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has full corporate power and authority to
conduct all the activities conducted by it, to own or lease all the assets
owned or leased by it and to conduct its business as described in the
Registration Statement and the Prospectus. The Company is the sole record owner
and, to the best of our knowledge after due inquiry, the sole beneficial owner
of all of the capital stock of each of its Subsidiaries.
All of the outstanding shares of Common Stock have been, and the
Shares, when paid for by the Underwriters in accordance with the terms of the
Agreement, will be, duly authorized, validly issued, fully paid and
nonassessable and will not be subject to any preemptive or similar right under
(i) the General Corporation Law of the State of Delaware, (ii) the Company's
certificate of incorporation or by-laws or (iii) any instrument, document,
contract or other agreement specifically referred to in the Registration
Statement or any instrument, document, contract or agreement filed as an
exhibit to the Registration Statement. Except as described in the Registration
Statement or the Prospectus, to the best of our knowledge after due inquiry,
there is no commitment or arrangement to issue, and there are no outstanding
options, warrants or other rights calling for the issuance of, any share of
capital stock of the Company or any Subsidiary to any person or any security or
other instrument that by its terms is convertible into, exercisable for or
exchangeable for capital stock of the Company.
No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required in
connection with the authorization, issuance, transfer, sale or delivery of the
Shares by the Company, in connection with the execution, delivery and
performance of the Agreement by the Company or in connection with the taking by
the Company of any action contemplated thereby [or, if so required, all such
consents, approvals, authorizations and orders, [specifying the same] have been
obtained and are in full force and effect], except such as have been obtained
under the Act and the Rules and Regulations and such as may be required under
state securities or "Blue Sky" laws or by the by-laws and rules of the NASD in
connection with the purchase and distribution by the Underwriters of the Shares
to be sold by the Company.
The authorized, issued and outstanding capital stock of the Company is
as set forth in the Registration Statement and the Prospectus under the caption
"Capitalization." The
<PAGE>
description of the Common Stock contained in the Prospectus is complete and
accurate in all material respects. The form of certificate used to evidence the
Common Stock is in due and proper form and complies with all applicable
statutory requirements.
The Registration Statement and the Prospectus comply in all material
respects as to form with the requirements of the Act and the Rules and
Regulations (except that we express no opinion as to financial statements,
schedules and other financial and statistical data contained in the
Registration Statement or the Prospectus).
To the best of our knowledge after due inquiry, any instrument,
document, lease, license, contract or other agreement (collectively,
"Documents") required to be described or referred to in the Registration
Statement or the Prospectus has been described or referred to therein as
required and any Document required to be filed as an exhibit to the
Registration Statement has been filed as an exhibit thereto or has been
incorporated as an exhibit by reference in the Registration Statement.
To the best of our knowledge after due inquiry, except as disclosed in
the Registration Statement or the Prospectus, no person or entity has the right
to require the registration under the Act of shares of Common Stock or other
securities of the Company by reason of the filing or effectiveness of the
Registration Statement.
Except as set forth in the Registration Statement and the Prospectus
or as will not have a material adverse effect on the Company and its
Subsidiaries considered as a whole, each of the Company and the Subsidiaries
has all permits, licenses or other authorizations required by the FCC or
relevant state regulatory authorities required to provide the local and long
distance telecommunications services described as being provided by it in the
Registration Statement and the Prospectus.
To the best of our knowledge after due inquiry, neither the Company
nor any of the Subsidiaries is in violation of, or default with respect to, any
federal or state Telecommunications Law, except as set forth in the
Registration Statement and the Prospectus or such as do not have a material
adverse effect on the Company and its Subsidiaries considered as a whole.
Except as set forth in the Registration Statement, to the best of our
knowledge after due inquiry, (a) there is no decision, decree, or order that
has been issued by the FCC or any relevant state regulatory agency against or
in respect of the Company or the Subsidiaries, or any of the FCC and state
licenses held by the Subsidiaries, that would reasonably be expected to impair
materially the operations of the Company and the Subsidiaries taken as a whole,
and (b) there is no notice of violation, proceeding, claim, investigation, or
other action by or before the FCC or any
2
<PAGE>
relevant state regulatory agency pending or threatened in writing that is
specifically directed against or in respect of the Company and the
Subsidiaries, or any of the FCC licenses and state licenses held by the Company
and the Subsidiaries, that would reasonably be expected to result in the
revocation of any such FCC or state licenses, to impair the operations of the
Company and the Subsidiaries or to result in any assessment, fine or penalty
against the Company or the Subsidiaries, in each case, material to the Company
and its Subsidiaries considered as a whole.
The statements appearing in the Prospectus under the captions "Risk
Factors -- Implications of Telecommunications Act and Other Regulation" and
"Business -- Regulation," to the extent that they constitute summaries of
statutes, regulations or legal or governmental proceedings are accurate in all
material respects.
In rendering the opinions referred to in paragraphs
[telecommunications permits and Telecommunications Laws], we have consulted
with and relied in part upon the advice of other legal counsel who we believe
to be experts with respect to such matters.
The Company has full corporate power and authority to enter into the
Agreement, and the Agreement has been duly authorized, executed and delivered
by the Company, is a valid and binding agreement of the Company and, except for
the indemnification and contribution provisions thereof, as to which we express
no opinion, is enforceable against the Company in accordance with the terms
thereof.
The execution and delivery by the Company of, and the performance by
the Company of its agreements in, the Agreement do not and will not (i) violate
the certificate of incorporation or by-laws of the Company, (ii) breach or
result in a default under, cause the time for performance of any obligation to
be accelerated under, or result in the creation or imposition of any lien,
charge or encumbrance upon any of the assets of the Company or any of its
Subsidiaries pursuant to the terms of, (x) any material indenture, mortgage,
deed of trust, loan agreement, bond, debenture, note agreement, capital lease
or other evidence of indebtedness of which we have knowledge after due inquiry,
(y) any voting trust arrangement or any contract or other agreement to which
the Company is a party that restricts the ability of the Company to issue
securities and of which we have knowledge after due inquiry or (z) any Document
filed as an exhibit to the Registration Statement, (iii) breach or otherwise
violate any existing obligation of the Company under any court or
administrative order, judgment or decree of which we have knowledge after due
inquiry or (iv) violate applicable provisions of any statute or regulation of
the State of Texas or the United States or of the General Corporation Law of
the State of Delaware.
The Company is not an "investment company" or an "affiliated person"
of, or "promoter" or "principal underwriter" for, an "investment company," as
such terms are defined in the Investment Company Act of 1940, as amended.
3
<PAGE>
The Shares have been duly authorized for listing by the New York
Exchange upon official notice of issuance.
We hereby confirm to you that we have been advised by the Commission
that the Registration Statement has become effective under the Act and that to
the best of our knowledge after due inquiry no order suspending the
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose has been instituted or is pending, threatened or contemplated.
We hereby further confirm to you that except as set forth in or
contemplated by the Registration Statement and the Prospectus, to the best of
our knowledge after due inquiry, there are no actions, suits, proceedings or
investigations pending or overtly threatened in writing against the Company or
any of its Subsidiaries, or any of their respective officers or directors in
their capacities as such, before or by any court, governmental agency or
arbitrator which (i) seek to challenge the legality or enforceability of the
Agreement, (ii) seek to challenge the legality or enforceability of any of the
Documents filed as exhibits to the Registration Statement, (iii) seek damages
or other remedies with respect to any of the Documents filed as exhibits to the
Registration Statement, except as set foth in or contemplated by the
Registration Statement or as would not have a material adverse effect on the
Company and its Subsidiaries considered as a whole, (iv) except as set forth in
or contemplated by the Registration Statement and the Prospectus, seek money
damages which would be material to the Company and its Subsidiaries considered
as a whole or seek to impose criminal penalties upon the Company, any of its
Subsidiaries or any of their respective officers or directors in their
capacities as such and of which we have knowledge or (v) seek to enjoin any of
the business activities of the Company or any of its Subsidiaries that are
material to the Company and its Subsidiaries considered as a whole or the
transactions described in the Prospectus and of which we have knowledge.
We have participated in conferences with officers and other
representatives of the Company, its auditors, and your representatives at which
the contents of the Registration Statement and the Prospectus and related
matters were discussed. Based upon such participation and review, and relying
as to materiality in part upon the factual statements of officers and other
representatives of the Company, we advise you that no facts have come to our
attention that have caused us to believe that the Registration Statement
(except for the financial statements, schedules and related data and other
financial or statistical data as to which we have not been asked to comment),
at the time it became effective, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the Prospectus
(except for the financial statements, schedules and related data and other
financial or statistical data, as to which we have not been asked to comment),
as of the date of such Prospectus or as of the data hereof, contained an untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the
5
<PAGE>
circumstances under which they were made, not misleading. However, because the
primary purpose of our engagement was not to confirm factual matters or
financial or accounting matters and because of the wholly or partially
non-legal character of many of the statements contained in the Registration
Statement and the Prospectus, we are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus (except to the extent
expressly set forth in paragraphs ___ and ___ above [Capitalization and
statements under specified sections]), and we have not independently verified
the accuracy, completeness or fairness of such statements (except as
aforesaid). Without limiting the foregoing, we assume no responsibility for,
have not independently verified and have not been asked to comment on the
accuracy, completeness or fairness of the financial statements, schedules and
other financial or statistical data included in the Registration Statement or
the exhibits to the Registration Statement, and we have not examined the
accounting, financial or other records from which such financial statements,
schedules and other financial or statistical data and information were derived.
We note that, although certain portions of the Registration Statement
(including financial statements and related data) have been included herein on
the authority of "experts" within the meaning of the 1933 Act, we are not
experts with respect to any portion of the Registration Statement, including,
without limitation, such financial statements and related data and other
financial or accounting data included therein.
The foregoing opinion is subject to the qualification that the
enforceability of the Agreement may be: (i) subject to bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally; and (ii) subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding at law or in equity)
including principles of commercial reasonableness or conscionability and an
implied covenant of good faith and fair dealing.
This letter is furnished by us solely for your benefit in connection
with the transactions referred to in the Agreement and may not be circulated
to, or relied upon by, any other person.
The foregoing opinion will be limited to the laws of the United
States, the State of Texas, and the General Corporation Law of the State of
Delaware and, with respect to paragraphs [telecommunications permits and
Telecommunications Laws], Telecommunications Laws of the United States and the
Telecommunications Laws of the States of Kansas, Minnesota, Nebraska, North
Dakota, Oklahoma, South Dakota and Texas. In rendering the opinions with
respect to organization, qualification and corporate power and authority of the
Subsidiaries, counsel may rely, to the extent they deem such reliance proper,
on the opinions (in form and substance reasonably satisfactory to Underwriters'
counsel) of other counsel reasonably acceptable to Underwriters' counsel as to
matters governed by the laws of jurisdictions other than the United States and
the State of Texas, and as to matters of fact, upon certificates of officers of
the Company, the
5
<PAGE>
Subsidiaries and of government officials; provided Underwriters and their
counsel may rely on such opinions and that such counsel shall state that the
opinion of any other counsel is in form and scope satisfactory to such counsel
and they believe that they are justified in relying on such opinions. Copies of
all such opinions and certificates shall be furnished to counsel to the
Underwriters on the Closing Date.
Solely for purposes of their opinion pursuant to the Underwriting
Agreement, Morgan, Lewis & Bockius LLP, counsel to the several Underwriters may
rely on paragraphs [telecommunications permits and Telecommunications Laws].
6
<PAGE>
EXECUTION COPY
- -------------------------------------------------------------------------------
RESTATED STOCK PURCHASE AGREEMENT
dated as of the 6th day of October, 1997
by and among
ADVANCED COMMUNICATIONS GROUP, INC.
(PURCHASER)
and
ADVANCED COMMUNICATIONS CORP.
(OLD ACG)
and
GREAT WESTERN DIRECTORIES, INC.
(COMPANY)
and
RICHARD O'NEAL, LARRY BALDWIN, STEVE SPARKS,
RON BALDWIN AND RONNIE EMANUEL
(STOCKHOLDERS)
- -------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
1. DEFINITIONS..............................................................................................3
2. PURCHASE, SALE AND EXCHANGE..............................................................................9
2.1 Consideration for Execution of Original Agreement...............................................9
2.2 Consideration for Shares........................................................................9
2.3 Underlying Principles..........................................................................10
2.4 Post Closing Payment...........................................................................10
2.5 Section 351 Exchange Plan......................................................................12
2.6 Certain Effects of OLD ACG Merger..............................................................12
3. CLOSING.................................................................................................12
4. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF COMPANY AND STOCKHOLDERS.......................13
4.1 Due Organization...............................................................................13
4.2 Authorization..................................................................................13
4.3 Capital Stock of Company.......................................................................13
4.4 Options, etc...................................................................................14
4.5 No Bonus Shares................................................................................14
4.6 Subsidiaries...................................................................................14
4.7 Predecessor Status; etc........................................................................14
4.8 Spinoff by the Company.........................................................................14
4.9 Financial Statements...........................................................................14
4.10 Liabilities and Obligations....................................................................15
4.11 Permits and Intangibles........................................................................16
4.12 Environmental Matters..........................................................................16
4.13 Significant Customers; Material Contracts and Commitments......................................17
4.14 Real Property..................................................................................18
4.15 Employee Plans.................................................................................18
4.16 Employee Plans and Compliance with ERISA.......................................................19
4.17 Conformity with Law; Litigation................................................................20
4.18 Tax Matters....................................................................................20
4.19 No Violations..................................................................................22
4.20 Absence of Changes............................................................................22
4.21 Accounts and Notes Receivable..................................................................24
4.22 Personal Property..............................................................................24
4.23 Insurance......................................................................................25
-ii-
<PAGE>
4.24 Intellectual Property..........................................................................25
4.25 Labor Relations................................................................................25
4.26 Disclosure.....................................................................................26
4.27 Prohibited Activities..........................................................................26
4.28 Draft Registration Statement...................................................................26
5. ADDITIONAL REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF STOCKHOLDERS........................26
5.1 Authority......................................................................................26
5.2 Preemptive Rights..............................................................................27
5.3 Tax Matters....................................................................................27
5.4 No Retained Rights.............................................................................27
6. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF PURCHASER AND OLD ACG..........................27
6.1 Due Organization...............................................................................27
6.2 Authorization..................................................................................27
6.3 Capital stock..................................................................................28
6.4 Transactions in Capital Stock, Organization Accounting.........................................28
6.5 Subsidiaries...................................................................................28
6.6 Financial Statements...........................................................................28
6.7 Liabilities and Obligations....................................................................29
6.8 Conformity with Law; Litigation................................................................29
6.9 No Violations..................................................................................29
6.10 Securities.....................................................................................30
6.11 Business; Real Property; Material Agreement....................................................30
6.12 Tax Matters....................................................................................30
6.13 Draft Registration Statement...................................................................31
7. OTHER COVENANTS PRIOR TO CLOSING........................................................................31
7.1 Access and Cooperation; Due Diligence; Audits..................................................31
7.2 Conduct of Business Pending Closing............................................................32
7.3 Prohibited Activities..........................................................................33
7.4 Exclusivity....................................................................................34
7.5 Notification of Certain Matters................................................................34
7.6 Amendment of Schedules.........................................................................35
7.7 Compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"Hart-Scott Act")..............................................................................35
7.8 Further Assurance..............................................................................35
-iii-
<PAGE>
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS ....................................................36
8.1 Representations and Warranties; Performance of Obligations.....................................36
8.2 Satisfaction...................................................................................36
8.3 No Litigation..................................................................................36
8.4 Opinion of Counsel.............................................................................36
8.5 Consents and Approvals.........................................................................36
8.6 Good Standing Certificates.....................................................................37
8.7 No Material Adverse Change.....................................................................37
8.8 Secretary's Certificates.......................................................................37
8.9 Closing of IPO.................................................................................37
8.10 Employment Agreements..........................................................................37
8.11 Section 1362(E)(3) Election....................................................................37
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER........................................................37
9.1 Representations and Warranties; Performance of Obligations.....................................38
9.2 No Litigation..................................................................................38
9.3 Company's Secretary's Certificate..............................................................38
9.4 No Material Adverse Effect.....................................................................38
9.5 Stockholders' Release..........................................................................38
9.6 Satisfaction...................................................................................39
9.7 Opinion of Counsel.............................................................................39
9.8 Consents and Approvals.........................................................................39
9.9 Good Standing Certificates.....................................................................39
9.10 FIRPTA Certificate.............................................................................39
9.11 Closing of IPO.................................................................................39
9.12 Employment Agreements..........................................................................39
9.13 Licensing Arrangements.........................................................................40
10. CERTAIN TAX AND EMPLOYEE BENEFIT MATTERS................................................................40
10.1 Preparation and Filing of Tax Returns..........................................................40
10.2 Preservation of Employee Benefit Plans.........................................................40
11. TERMINATION OF AGREEMENT................................................................................41
12. NONDISCLOSURE OF CONFIDENTIAL INFORMATION...............................................................41
12.1 Company and Stockholders.......................................................................41
12.2 Purchaser......................................................................................42
12.3 Damages........................................................................................43
12.4 Survival.......................................................................................43
-iv-
<PAGE>
13. NONCOMPETITION..........................................................................................43
13.1 Prohibited Activities..........................................................................43
13.2 Damages........................................................................................44
13.3 Reasonable Restraint...........................................................................44
13.4 Severability, Reformation......................................................................45
13.5 Independent Covenant...........................................................................45
13.6 Materiality....................................................................................45
14. TRANSFER PROHIBITIONS AND RESTRICTIONS..................................................................45
14.1 Warrants. ....................................................................................45
14.2 Purchaser Stock................................................................................46
14.3 Legend.........................................................................................46
15. INVESTMENT REPRESENTATIONS..............................................................................46
15.1 Compliance With Law............................................................................46
15.2 Economic Risk, Sophistication..................................................................47
16. REGISTRATION RIGHTS.....................................................................................48
16.1 PiggyBack Registration Rights..................................................................48
16.2 Demand Registration Rights.....................................................................48
16.3 Registration Procedures........................................................................49
16.4 Other Registration Matters.....................................................................51
16.5 Indemnification................................................................................52
16.6 Contribution...................................................................................55
16.7 Availability of Rule 144.......................................................................56
17. GENERAL.................................................................................................56
17.1 Cooperation....................................................................................56
17.2 Successors and Assigns.........................................................................56
17.3 Entire Agreement...............................................................................56
17.4 Counterparts...................................................................................57
17.5 Brokers and Agents.............................................................................57
17.6 Expenses.......................................................................................57
17.7 Notices........................................................................................57
17.8 Governing Law..................................................................................59
17.9 Exercise of Rights and Remedies................................................................59
17.10 Time...........................................................................................59
17.11 Reformation and Severability...................................................................59
17.12 Remedies Cumulative............................................................................59
17.13 Captions.......................................................................................59
-v-
<PAGE>
17.14 Public Statements..............................................................................60
17.15 Amendments and Waivers.........................................................................60
-vi-
</TABLE>
<PAGE>
RESTATED STOCK PURCHASE AGREEMENT
THIS RESTATED STOCK PURCHASE AGREEMENT (the "Agreement") is made as
of the 6th day of October, 1997, by and among ADVANCED COMMUNICATIONS GROUP,
INC., a Delaware corporation organized in September 1997 ("Purchaser"),
ADVANCED COMMUNICATIONS CORP. (formerly named Advanced Communications Group,
Inc.), a Delaware corporation organized in June 1996 ("Old ACG"), GREAT
WESTERN DIRECTORIES, INC., a Texas corporation ("Company"), and RICHARD
O'NEAL, LARRY BALDWIN, STEVE SPARKS, RON BALDWIN and RONNIE EMANUEL
(individually, a "Stockholder" and collectively, the "Stockholders"), the
owners of 1,250 shares of Common Stock, $1.00 par value, of Company ("Company
Stock"), representing all the capital stock of Company issued and outstanding
on the date of this Agreement ("Shares").
RECITALS
WHEREAS, Old ACG has entered into agreements for, or
negotiated the terms of, the acquisition by merger, asset purchase or
stock purchase of ten companies (or interests therein) engaged in
various aspects of the telecommunications industry ("Founding
Companies") for voting capital stock and other consideration,
including cash, one of such agreements being the Stock Purchase
Agreement dated as of June 16, 1997 among Old ACG, the Company and
the Stockholders ("Original Agreement"); and
WHEREAS, Old ACG issued to Stockholders on June 16, 1997,
non-transferable warrants to purchase an aggregate of 2,000,000
shares of Old ACG's Common Stock, $.00001 par value,
contemporaneously with the execution and delivery of the Original
Agreement; and
WHEREAS, Old ACG intended to close the acquisition of the
Founding Companies substantially contemporaneously with the
consummation of an initial underwritten public offering of its common
stock; and
WHEREAS, the executive officers of Old ACG have determined
that it is desirable for licensing and other regulatory purposes to
restructure the acquisitions of the Founding Companies; and
WHEREAS, as the initial step in the implementation of the
restructured proposal, Old ACG formed Purchaser as a new Delaware
corporation in September 1997 to serve as the
<PAGE>
vehicle for the acquisition of the Founding Companies substantially
contemporaneously with the consummation of an initial underwritten
public offering ("IPO") of Common Stock, $.0001 par value, of
Purchaser ("Purchaser Stock") at the price to the public reflected in
the final prospectus of Purchaser relating to the IPO ("IPO Price");
and
WHEREAS, under the restructured proposal, contemporaneously
with the consummation of the IPO and as part of a single transaction,
the stockholders of the Founding Companies, including Stockholders
and Old ACG, will transfer, by stock or asset purchase or reverse
triangular merger, the stock or substantially all the assets of
certain companies and other assets in which they own an interest to
Purchaser in exchange for voting capital stock of Purchaser and other
consideration, including cash, voting stock, options, warrants,
notes, convertible notes and other property of Purchaser, under
circumstances that will constitute a tax-free transfer of property
under Section 351 of the Internal Revenue Code of 1986, as amended,
and the rules and regulations thereunder ("Code"), to the extent of
their receipt of voting capital stock of Purchaser; and
WHEREAS, substantially contemporaneously with the execution
of this Agreement and in order to document the integrated Section 351
exchange plan contemplated herein, (a) Old ACG, the other Founding
Companies, their stockholders and others are amending and restating
their respective acquisition agreements; and (b) Purchaser and Old
ACG are entering into a merger agreement pursuant to which Old ACG
will become a wholly-owned subsidiary of Purchaser substantially
contemporaneously with the consummation of the IPO; and
WHEREAS, it is contemplated that prior to the consummation
of the IPO, Old ACG will effect an approximately one-for-two reverse
stock split, the exact magnitude of which will be dependent upon the
ultimate post IPO valuation of Purchaser by the managing underwriters
in the IPO and the anticipated IPO Price; and
WHEREAS, the IPO, the acquisitions of the Founding Companies
and Old ACG are described in the Registration Statement on Form S-1
of Purchaser (draft of October 2, 1997), a copy of which is attached
to this Agreement as Annex I ("Draft Registration Statement"); and
WHEREAS, Purchaser, Old ACG, Company and the Stockholders
desire to amend and restate the Original Agreement in its entirety
and transform it into this Agreement; and
WHEREAS, Purchaser desires to acquire all the Shares
directly from Stockholders for the consideration set forth in Section
2.2 of this Agreement, and Stockholders have
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<PAGE>
agreed to sell the Shares to Purchaser on the terms and subject to
the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and of the
mutual representations, warranties, covenants and agreements herein
contained, the parties hereby agree as follows:
1. DEFINITIONS
Unless the context otherwise requires, capitalized terms used in this
Agreement or in any schedule, or annex attached hereto and not otherwise
defined shall have the following meanings for all purposes of this Agreement:
"Affiliates" has the meaning set forth in Section 4.8.
"Agreed Rate" means the prime rate of interest reported in The Wall
Street Journal on the Closing Date.
"Agreement" has the meaning set forth in the first paragraph of this
Agreement.
"Annex" means each Annex attached hereto that represents a document
relevant to the transactions contemplated in this Agreement.
"Arbitrator" has the meaning set forth in Section 2.4(iii).
"Balance Sheet Date" has the meaning set forth in Section 4.9.
"Cash Report" has the meaning set forth in Section 2.4(ii).
"Charter Documents" means the Certificate of Incorporation, Articles
of Incorporation or other instrument pursuant to which any
corporation, partnership or other business entity that is a signatory
to this Agreement was formed or organized in accordance with
applicable law.
"Closing" has the meaning set forth in Section 3.
"Closing Date" has the meaning set forth in Section 3.
"Code" has the meaning set forth in the sixth recital of this
Agreement.
-3-
<PAGE>
"Company" has the meaning set forth in the first paragraph of this
Agreement.
"Company Financial Statements" has the meaning set forth in Section
4.9.
"Company Operating Profit" means, as of any date, the amount by which
Company's revenues for the period beginning on January 1, 1997 and
ending on the date such determination is being made exceed the costs
and expenses (other than deferred income Taxes) appropriately
deducted in the computation of profit and loss for such period in
accordance with generally accepted accounting principles.
"Company Stock" has the meaning set forth in the first paragraph of
this Agreement.
"Controlled Group" has the meaning set forth in Section 4.16.
"Deemed Closing Date" means the the Closing Date, except if the
Closing occurs after December 31, 1997, in which case it means
December 31, 1997.
"Disputed Matter" has the meaning set forth in Section 2.4(ii).
"Distributable Cash" means, as of any date or for any period, all
collected cash balances of Company in excess of the level required to
support the ongoing operations of the Company in accordance with
prudent business practices so as not to require the infusion of
additional working capital.
"Draft Registration Statement" has the meaning set forth in the ninth
recital of this Agreement.
"Environmental Laws" has the meaning set forth in Section 4.12.
"ERISA" has the meaning set forth in Section 4.15.
"Final Cash Report" has the meaning set forth in Section 2.4(iv).
"Founding Companies" has the meaning set forth in the first recital
of this Agreement.
"Founding Stockholders" has the meaning set forth in Section 16.2.
-4-
<PAGE>
"Hazardous Wastes" and "Hazardous Substances" have the meanings set
forth in Section 4.12.
"Hart-Scott Act" has the meaning set forth in Section 7.7.
"Initial Disclosure Date" means March 31, 1997.
"Intellectual Property" means all patents, trademarks, service marks,
copyrights and applications therefor, all tradenames, brand names,
logos, inventions, discoveries, improvements, processes,
technologies, know-how, formulae, drawings, specifications, trade
secrets, plans, computer software (including source codes and other
documentation thereof), files, programs, notebooks and records, all
other proprietary, technical and other information, data and
intellectual property, and all licenses, permits and other rights to
use the foregoing, whether patentable or unpatentable, used or held
for use in or associated with the ownership of Company's assets, or
the conduct of Company's business (or, if Company does not own any
such proprietary, technical or other information, data and
intellectual property, a paid-up or royalty-free, irrevocable
license, permit or other right to use the same), including, without
limitation, the Intellectual Property described in Schedule 4.24, but
expressly excluding the technology owned by Big Stuff, Inc. relating
to the colorizing of yellow pages and the generation of world wide
web pages except to the extent that Company is licensed to use such
technology
"IPO" has the meaning set forth in the fifth recital of this
Agreement.
"IPO Price" has the meaning set forth in the fifth recital of this
Agreement.
"IRS" or "Internal Revenue Service" means the Internal Revenue
Service of the Department of the Treasury.
"June Balance Sheet" has the meaning set forth in Section 4.9.
"Leases" means all real and personal property leased by Company and
used, useful or held for use in connection with Company's business.
"Liens" has the meaning set forth in Section 4.3.
"Material Adverse Effect" has the meaning set forth in Section 4.1.
-5-
<PAGE>
"Material Documents" has the meaning set forth in Section 4.19.
"Measurement Period" has the meaning set forth in Section 2.4(ii).
"Notes" means the Purchaser's 5% Subordinated Notes due [Closing
Date], 1999 in the original principal amount of $15 million and
substantially in the form of Annex III.
"Old ACG" has the meaning set forth in the first paragraph of this
Agreement.
"Old ACG Financial Statements" has the meaning set forth in Section
6.6.
"OLD ACG Merger" means the reverse triangular merger of OLD ACG with
a wholly-owned subsidiary of Purchaser, pursuant to which Old ACG
will become a wholly owned subsidiary of Purchaser.
"Old Warrants" means the Series A Warrants, the Series B Warrants and
the Series C Warrants.
"Person" means an individual, a corporation, a partnership, an
association, a limited liability company, a joint stock company, a
trust, or other unincorporated organization.
"Prohibited Activities" has the meaning set forth in Paragraph 4.27.
"Proscribed Business" has the meaning set forth in Section 13.1.
"Purchaser" has the meaning set forth in the first paragraph of this
Agreement.
"Purchaser Charter Documents" has the meaning set forth in Section
6.1.
"Purchaser Documents" has the meaning set forth in Section 6.9.
"Purchaser Stock" has the meaning set forth in the fifth recital of
this Agreement.
"Qualified Plans" has the meaning set forth in Section 4.16.
Restricted Payment" means any declaration or payment of any dividend
or distribution in respect of the capital stock of Company or any
direct or indirect redemption, purchase or other acquisition of any
of the capital stock of Company.
-6-
<PAGE>
"Registrable Securities" means (i) the shares of Purchaser Stock
acquired by Stockholders constituting part of the Stock Component and
(ii) the shares of Warrant Stock acquired by the holders of Warrants
upon the exercise thereof.
"Restricted Securities" has the meaning set forth in introductory
paragraph to Section 15.
"Returns" means any returns, reports or statements (including any
information returns) required to be filed for purposes of a
particular Tax.
"Schedule" means each Schedule attached hereto, which shall reference
the relevant sections of this Agreement, on which parties hereto
disclose information as part of their respective representations,
warranties, covenants and agreements.
"SEC" means the United States Securities and Exchange Commission.
"Section 351 Exchange Plan" means the Section 351 Exchange Plan in
the form of Annex II.
"Series A Warrants" means the 666,666 non-transferrable Warrants,
substantially in the form of Annex IV to the Original Agreement, to
purchase a like number of shares of Purchaser Stock on the terms set
forth therein at an initial exercise price of $2.50 per share.
"Series B Warrants" means the 666,667 non-transferrable Warrants,
substantially in the form of Annex V to the Original Agreement, to
purchase a like number of shares of Purchaser Stock on the terms set
forth therein at an initial exercise price of $2.50 per share.
"Series C Warrants" means the 666,667 non-transferrable Warrants,
substantially in the form of Annex VI to the Original Agreement, to
purchase a like number of shares of Purchaser Stock on the terms set
forth therein at an initial exercise price of $2.50 per share.
"Series D Warrants" means the 500,000 non-transferable Warrants,
substantially in the form of Annex IV, to purchase a like number of
shares of Purchaser Stock on the terms set forth therein at an
initial exercise price equal to the IPO Price.
"Series D Warrant Stock" means the shares of Purchaser Stock issuable
upon the exercise of the Series D Warrants.
"Shares" has the meaning set forth in the first paragraph of this
Agreement;
-7-
<PAGE>
"Stock Component" has the meaning set forth in Section 2.2.
"Stockholder" and "Stockholders" have the meanings set forth in the
first paragraph of this Agreement.
"Subsidiaries" means, with respect to any Person, any corporation or
other organization, whether incorporated or unincorporated, of which
(i) such Person or any other Subsidiary of such Person is a general
partner (excluding partnerships, the general partnership interests of
which held by such Person or any Subsidiary of such Person do not
have a majority of the voting interests in such partnership) or (ii)
at least a majority of the securities or other interests having by
their terms ordinary voting power to elect a majority of the Board of
Directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned or
controlled by such Person, by any one or more of its Subsidiaries, or
by such Person and one or more of its Subsidiaries; provided,
however, that under no circumstances shall Big Stuff, Inc. be deemed
to be a Subsidiary of Company or any Stockholder.
"Tax" or "Taxes" means all Federal, state, local or foreign net or
gross income, gross receipts, net proceeds, sales, use, ad valorem,
value added, franchise, bank shares, withholding, payroll,
employment, excise, property, deed, stamp, alternative or add on
minimum, environmental or other taxes, assessments, duties, fees,
levies or other governmental charges of any nature whatever, whether
disputed or not, together with any interest, penalties, additions to
tax or additional amounts with respect thereto.
"TBCA" means the Texas Business Corporation Act.
"Termination Date" has the meaning set forth in Section 13.1.
"Territory" has the meaning set forth in Section 13.1(i).
"Transfer Taxes" has the meaning set forth in Section 17.6.
"Warrants" means the Old Warrants and the Series D Warrants.
"Warrant Stock" means shares of Purchaser Stock issued upon the
exercise of the Warrants.
"1933 Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
-8-
<PAGE>
2. PURCHASE, SALE AND EXCHANGE
2.1 Consideration for Execution of Original Agreement. Pursuant to
the terms of the Original Agreement and contemporaneously with the execution
and delivery hereof, Purchaser issued to each Stockholder, in consideration of
such Stockholder's execution and delivery of the Original Agreement, the
number of Old Warrants of each series set forth below opposite the name of
such Stockholder:
<TABLE>
<CAPTION>
Number of Old Warrants
-------------------------------------------
Name of Stockholder Series A Series B Series C
- ------------------- -------- -------- --------
<S> <C> <C> <C>
Richard O'Neal 500,000 500,000 500,000
Larry Baldwin 100,000 100,000 100,000
Steve Sparks 33,333 33,333 33,334
Ron Baldwin 33,333 33,334 33,333
Ronnie Emanuel - - -
------- ------- -------
Total 666,666 666,667 666,667
</TABLE>
2.2 Consideration for Shares. Pursuant to the terms of this Agreement
and subject to the remaining provisions of this Section 2, at the Closing, (x)
Stockholders will transfer, convey, assign and deliver to Purchaser the
Shares, together with stock powers duly endorsed by Stockholders so that the
Shares may be duly registered in Purchaser's name, and (y) Purchaser will
acquire the Shares from Stockholders for an aggregate consideration of $55
million in immediately available funds, $15 million principal amount of Notes,
500,000 Series D Warrants and such number of shares of Purchaser Stock
(rounded to the nearest whole share) as shall be determined by dividing $10
million by the IPO Price ("Stock Component"). The number of Shares to be
exchanged by each Stockholder and the amount of cash and the other
consideration deliverable to each Stockholder are set forth below opposite the
name of such Stockholder:
-9-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL NUMBER OF NUMBER OF
NUMBER OF AMOUNT OF AMOUNT OF SERIES D SHARES OF
NAME OF STOCKHOLDER SHARES CASH NOTES WARRANTS PURCHASER STOCK (1)
------------------- ------ ---- ----- -------- -------------------
<S> <C> <C> <C> <C> <C>
Richard O'Neal 700.00 $30,800,000 $8,400,000 280,000 56%
Larry Baldwin 312.50 $13,750,000 $3,750,000 125,000 25%
Steve Sparks 87.50 $3,850,000 $1,050,000 35,000 7%
Ron Baldwin 87.50 $3,850,000 $1,050,000 35,000 7%
Ronnie Emanuel 62.50 $2,750,000 $750,000 25,000 5%
TOTAL 1,250.00 $55,000,000 $15,000,000 500,000 100%
</TABLE>
2.3 Underlying Principles. The aggregate consideration payable by
Purchaser to Stockholders for the Shares was negotiated based upon the
assumptions and agreements that (x) Company will have no outstanding
obligation for the repayment of borrowed money as of the Closing Date (it
being understood for this purpose that accounts payable incurred in the
ordinary course of business do not constitute obligations for the repayment of
borrowed money) and (y) Company is permitted to make Restricted Payments to
Stockholders through the earlier to occur of the Closing Date or December 31,
1997 in an aggregate amount not exceeding the lesser of Company Operating
Profit or Distributable Cash.
2.4 Post Closing Payment.
(i) As promptly as practicable after the end of the calendar
month in which the Deemed Closing Date occurs, Purchaser will post
all entries and close Company's books as of the end of such month.
Financial statements for Company as of the Deemed Closing Date will
be prepared based upon the assumption that Company's profit and loss
for the month in which the Deemed Closing Date occurs will be
allocated between Purchaser and Stockholders based upon the number of
days in the month that each owned or is deemed to have owned the
Company Stock. Purchaser's first day of ownership of the Company
Stock will be the Closing Date, unless the Closing does not occur by
December 31, 1997, in which case Purchaser's first day of ownership
will be deemed to be January 1, 1997.
- -----------------------
(1) Expressed as a percentage of the Stock Component.
-10-
<PAGE>
(ii) As promptly as practicable following the preparation of
Company's financial statements as of the Deemed Closing Date, and in
no event later than the last day of the month next following the
month in which the Deemed Closing Date occurs, Purchaser shall
prepare and submit to Stockholders a schedule setting forth the
Company Operating Profit for the period beginning on January 1, 1997
and ending on either (aa) the date preceding the Closing Date or (bb)
if the Closing does not occur by December 31, 1997, then December 31,
1997 (the "Measurement Period"), the Distributable Cash generated
during the Measurement Period and the Restricted Payments made by
Company to Stockholders during the Measurement Period (the "Cash
Report"). Representative of Stockholders shall have access to
Company's books and records in order to verify the accuracy of the
Cash Report. The parties shall endeavor to resolve any disagreements
relating to the Cash Report by the end of the second calendar month
following the month in which the Deemed Closing Date occurs. If all
disagreements relating to the Cash Report cannot be resolved by the
parties, all matters in dispute (collectively, the "Disputed Matter")
shall be resolved by arbitration as set forth in Section 2.4(iii).
(iii) Any Disputed Matter shall be promptly submitted to and
reviewed by Deloitte & Touche LLP, or other nationally recognized
independent accounting firm mutually acceptable to Stockholders and
Purchaser ("Arbitrator"). The Arbitrator shall consider only the
Disputed Matter and shall act promptly to resolve in writing the
Disputed Matter. The Arbitrator's decision with respect to the
Disputed Matter shall be final and binding on Stockholders and
Purchaser. Stockholders and Purchaser shall each be responsible for
and pay one-half of the fees and expenses of the Arbitrator. Each
party shall be responsible for and pay its own expenses incurred in
connection with the resolution of any Disputed Matter.
(iv) As promptly as practicable following the first to occur
of (x) an agreement between Purchaser and Stockholders with respect
to the accuracy of the Cash Report or (y) a decision by the
Arbitrator with respect to the appropriate figures for inclusion in
the Cash Report (in either event, the "Final Cash Report"), the
following action shall be taken:
(1) If the amount of Distributable Cash generated
during the Measurement Period (as reflected in the Final
Cash Report) exceeds the aggregate Restricted Payments made
to Stockholders during the Measurement Period (as reflected
in the Final Cash Report), the excess, together with simple
interest thereon from the Closing Date at the Agreed Rate
(calculated on the basis of a 365-day year), shall be
promptly remitted by Purchaser to Stockholders on a pro rata
basis; or
-11-
<PAGE>
(2) If the aggregate Restricted Payments made to
Stockholders during the Measurement Period (as reflected in
the Final Cash Report) exceeds the amount of Distributable
Cash generated during the Measurement Period (as reflected
in the Final Cash Report), the excess, together with simple
interest thereon from the Closing Date at the Agreed Rate
(calculated on the basis of a 365-day year), shall be
promptly remitted by Stockholders to Purchaser. The
obligations of Stockholders to remit such funds shall be
joint and several.
(v) Stockholders have filed a request with the IRS for a tax
refund in respect of Company's 1996 tax year. To the extent that such
refund is not received by Company prior to the preparation of the
Cash Report but is received prior to the payment of the funds
contemplated by Section 2.4(iv), the Cash Report or Final Cash
Report, as the case may be, shall be amended to include the amount of
such refund in the amount of Distributable Cash generated during the
Measurement Period as reflected thereon. In the event that the
foregoing refund is received by Company subsequent to the payment of
the funds contemplated by Section 2.4(iv), Purchaser shall remit such
refund pro rata to Stockholders promptly, but in no event later than
five days after its receipt.
2.5 Section 351 Exchange Plan. By executing this Agreement, each
Stockholder is deemed to have approved and adopted the Section 351 Exchange
Plan to the same extent as if he had subscribed his signature thereon.
2.6 Certain Effects of OLD ACG Merger. The Old ACG Merger will be
effected substantially contemporaneously with the consummation of the IPO.
Upon the consummation of the Old ACG Merger, the Old Warrants shall become
exercisable for Purchaser Stock upon the same terms and conditions as they
were exercisable for Old ACG Stock immediately prior to t he Old ACG Merger.
3. CLOSING
The closing of the transactions contemplated by this Agreement
("Closing") shall take place on the date of the closing of the sale of shares
of the Purchaser Stock in the IPO, or such other date as the parties hereto
may designate (the "Closing Date"), at such place in New York City as the
parties may mutually agree.
-12-
<PAGE>
4. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF
COMPANY AND STOCKHOLDERS
Company and Stockholders, jointly and severally, represent, warrant,
covenant and agree (i) that all of the following representations and
warranties in this Section 4 are true at the date of this Agreement and,
subject to Section 7.6, shall be true at the Closing Date and (ii) that all of
the covenants and agreements in this Section 4 shall be materially complied
with or performed at and as of the Closing Date. None of the representations,
warranties, covenants and agreements set forth in this Section 4 shall survive
the Closing Date. For purposes of this Section 4, the term Company shall mean
and refer to Company and all of its Subsidiaries, if any.
4.1 Due Organization. Company is a corporation duly organized,
validly existing and in good standing under the laws of the state of Texas,
and is duly authorized and qualified to do business and is in good standing
under the laws of each jurisdiction where such qualification is required
except (i) as set forth on Schedule 4.1 or (ii) where the failure to be so
authorized or qualified would not have a material adverse effect on the
business, operations, affairs, prospects, properties, assets or condition
(financial or otherwise), of Company (as used herein with respect to Company
or with respect to any other Person, a "Material Adverse Effect"). Schedule
4.1 contains a list of all such jurisdictions in which Company is authorized
or qualified to do business. True, complete and correct copies of the Charter
Documents and Bylaws, each as amended, of Company are attached hereto as
Schedule 4.1. The stock records of Company as heretofore made available to
Purchaser, are correct and complete in all material respects. There are no
minutes in the possession of Company or any Stockholder which have not been
made available to Purchaser, and all of such minutes are correct and complete
in all material respects.
4.2 Authorization. Company has all requisite corporate power and
authority to enter into this Agreement and to perform its obligations
hereunder. The execution and delivery by Company of this Agreement and its
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action of Company. This Agreement has been duly
executed and delivered by Company and is a valid and binding obligation of
Company, enforceable against Company in accordance with its terms.
4.3 Capital Stock of Company. The authorized capital stock of Company
consists of 10,000 shares of Company Stock, of which 1,250 shares are issued
and outstanding and owned of record and beneficially by Stockholders in the
amounts set forth in Section 2.1; and, as of the Closing Date, such shares
will be owned free and clear of all mortgages, liens, security interests,
pledges, voting trusts, restrictions, encumbrances and claims of every kind
(collectively, the "Liens"). All of the issued and outstanding shares of
Company Stock (i) have been duly authorized
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<PAGE>
and validly issued and (ii) are fully paid and nonassessable. Further, none of
such shares was issued in violation of the preemptive rights of any past or
present stockholder.
4.4 Options, etc. Except as set forth on Schedule 4.4, Company has
not acquired any Company Stock since January 1, 1994. No option, warrant,
call, conversion right or commitment of any kind exists which obligates
Company to issue any of its authorized but unissued capital stock. Company has
no obligation (contingent or otherwise) to purchase, redeem or otherwise
acquire any of its equity securities or any interests therein or to pay any
dividend (other than discretionary cash dividends payable with respect to the
Company Stock) or make any distribution in respect thereof. Neither the voting
stock structure of Company nor the relative ownership of shares among any of
its stockholders has been altered or changed in contemplation of the
transactions contemplated by this Agreement.
4.5 No Bonus Shares. None of the outstanding shares of Company Stock
was issued pursuant to awards, grants or bonuses.
4.6 Subsidiaries. Except as set forth on Schedule 4.6, Company has no
Subsidiaries; Company does not presently own, of record or beneficially, or
control, directly or indirectly, any capital stock, securities convertible
into capital stock or any other equity interest in any Person; and Company is
not directly or indirectly, a participant in any joint venture, partnership or
other non-corporate entity.
4.7 Predecessor Status; etc. Set forth in Schedule 4.7 is a listing
of all names of all predecessor companies of Company, including the names of
any entities acquired by Company (by stock purchase, merger or otherwise) or
owned by Company or from whom Company previously acquired material assets in
excess of $250,000, in any case, since January 1, 1991. Except as disclosed on
Schedule 4.7, Company has not been, within such period of time, a Subsidiary
or division of another corporation or a part of an acquisition which was later
rescinded.
4.8 Spinoff by the Company. Except as set forth on Schedule 4.8,
there has not been any sale, spin-off or split-up of material assets in excess
of $250,000 of either Company or any other Person that directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with, Company ("Affiliates") since January 1, 1994.
4.9 Financial Statements. Attached hereto as Schedule 4.9 are copies
of the following financial statements of Company (the "Company Financial
Statements"): audited Balance Sheets as of January 31, 1996 and December 31,
1996, unaudited Balance Sheets as of January 31, 1995 and June 30, 1997 ("June
Balance Sheet"), audited Statements of Operations and Cash Flows in each
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case for the fiscal years ended January 31, 1995 and 1996 and December 31,
1996, audited Statements of Stockholders' Equity for the fiscal years ended
January 31, 1995 and 1996 and the eleven months ended December 31, 1996,
unaudited Statements of Operations and Cash Flows and for the six months ended
June 30, 1997 and 1996 (June 30, 1997 being hereinafter referred to as the
"Balance Sheet Date"), unaudited statements of Stockholders' Equity for the
six months ended June 30, 1997 and the related notes thereto. The audited
Company Financial Statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods indicated (except as noted thereon or on Schedule 4.9). The unaudited
Company Financial Statements were prepared in accordance with the books and
records of Company in accordance with accounting principles consistently
applied. Company's Balance Sheets present fairly the financial position of
Company as of the dates indicated thereon, and Company's Statements of
Operations, Stockholder's Equity and Cash Flows included in the Company
Financial Statements present fairly the results of operations for the periods
indicated thereon in accordance with generally accepted accounting principles.
Company's Financial Statements at and for the fiscal periods ended December
31, 1996 and January 31, 1995 and 1996 have been examined by Clifton Gunderson
PLLC, independent public accountants.
4.10 Liabilities and Obligations. Company has no material liabilities
of any kind, character or description, whether accrued, absolute, secured or
unsecured, contingent or otherwise, that are not reflected on the June Balance
Sheet or otherwise reflected in the Company Financial Statements at the
Balance Sheet Date. Company has no indebtedness or any other obligation
outstanding under any loan agreements, indemnity or guaranty agreements,
bonds, mortgages, Liens, pledges or other security agreements. Except as set
forth on Schedule 4.10, since the Initial Disclosure Date, Company has not
incurred any material liabilities of any kind, character and description,
whether accrued, absolute, secured or unsecured, contingent or otherwise,
other than liabilities incurred in the ordinary course of business. Company
has also disclosed to Purchaser on Schedule 4.10, in the case of those
contingent liabilities related to pending or threatened litigation or other
liabilities which are not fixed or otherwise accrued or reserved, the
following information:
(i) a summary description of the liability together with the
following:
(x) copies of all relevant documentation relating
thereto;
(y) amounts claimed and any other action or relief
sought; and
(z) name of claimant and all other parties to the
claim, suit or proceeding;
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(ii) the name of each court or agency before which such
claim, suit or proceeding is pending;
(iii) the date such claim, suit or proceeding was
instituted; and
(iv) a good faith and reasonable estimate of the maximum
amount, if any, which is likely to become payable with respect to
each such liability.
4.11 Permits and Intangibles. Company holds all licenses, franchises,
permits and other governmental authorizations the absence of any of which
could have a Material Adverse Effect on its business, and Company has
delivered to Purchaser an accurate list and summary description (which is set
forth on Schedule 4.11) of all such licenses, franchises, permits and other
governmental authorizations, including titles, certificates, trademarks, trade
names, patents, patent applications and copyrights owned or held by Company
(including interests in software or other technology systems, programs and
intellectual property) (it being understood and agreed that a list of all
environmental permits and other environmental approvals is set forth on
Schedule 4.12). To the knowledge of Company, the licenses, franchises, permits
and other governmental authorizations listed on Schedules 4.11 and 4.12 are
valid in all material respects, and Company has not received any notice that
any governmental authority intends to cancel, terminate or not renew any such
license, franchise, permit or other governmental authorization. Company has
conducted and is conducting its business in substantial compliance with the
requirements, standards, criteria and conditions set forth in the licenses,
franchises, permits and other governmental authorizations listed on Schedules
4.11 and 4.12 and is not in violation of any of the foregoing except where
such non-compliance or violation would not have a Material Adverse Effect on
Company. Except as specifically provided in Schedule 4.11, the transactions
contemplated by this Agreement will not result in a material default under or
a material breach or violation of, or materially adversely affect the rights
and benefits afforded to Company by, any such license, franchise, permit or
government authorization.
4.12 Environmental Matters. Except as set forth on Schedule 4.12, (i)
Company has substantially complied with and is in compliance with all Federal,
state, local and foreign statutes (civil and criminal), laws, ordinances,
regulations, rules, notices, permits, judgments, orders and decrees applicable
to it or any of its properties, assets, operations and businesses relating to
environmental protection (collectively "Environmental Laws") including,
without limitation, Environmental Laws relating to air, water, land and the
generation, storage, use, handling, transportation, treatment or disposal of
Hazardous Wastes and Hazardous Substances including petroleum and petroleum
products (as such terms are defined in any applicable Environmental Law); (ii)
Company has obtained and substantially adhered to all necessary permits and
other approvals necessary to treat, transport, store, dispose of and otherwise
handle Hazardous Wastes and
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Hazardous Substances, a list of all of which permits and approvals is set
forth on Schedule 4.12 and reported to the appropriate authorities, to the
extent required by all Environmental Laws, all past and present sites owned
and operated by Company where Hazardous Wastes or Hazardous Substances have
been treated, stored, disposed of or otherwise handled; (iii) there have been
no releases or threats of releases (as defined in Environmental Laws) at,
from, in or on any property owned or operated by Company except as permitted
by Environmental Laws; (iv) no on-site or off-site location to which Company
has transported or disposed of Hazardous Wastes and Hazardous Substances or
arranged for the transportation of Hazardous Wastes and Hazardous Substances,
which site is the subject of any Federal, state, local or foreign enforcement
action or any other investigation, could lead to any material claim against
Company for any clean-up cost, remedial work, damage to natural resources,
property damage or personal injury, including, but not limited to, any claim
under the comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended; and (v) Company has no contingent liability in connection
with any release of any Hazardous Waste or Hazardous Substance into the
environment.
4.13 Significant Customers; Material Contracts and Commitments.
Company has delivered to Purchaser an accurate list (which is set forth on
Schedule 4.13) of all significant customers, or Persons that are sources of a
significant number of customers, it being understood and agreed that a
"significant customer," for purposes of this Section 4.13, means a customer
(or Person) (i) representing 2% or more of Company's annual revenues as of the
Initial Disclosure Date or (ii) reasonably expected to represent 2% or more of
Company's revenues during the twelve-month period ending March 31, 1998.
Except to the extent set forth on Schedule 4.13, none of Company's significant
customers (or Persons that are sources of a significant number of customers)
has canceled or substantially reduced or, to the knowledge of Company, is
currently attempting or threatening to cancel a contract or substantially
reduce utilization of the services provided by Company. Company has listed on
Schedule 4.13 all material contracts, commitments and similar agreements to
which Company is a party or by which it or any of its properties are bound
(including, but not limited to, contracts with significant customers, joint
venture or partnership agreements, contracts with any labor organizations,
strategic alliances and options to purchase land), other than agreements
listed on other Schedules to this Agreement, (x) in existence as of the
Initial Disclosure Date and (y) entered into since the Initial Disclosure
Date, and in each case has delivered true, complete and correct copies of such
agreements to Purchaser. Company has complied with all material commitments
and obligations pertaining to it, and is not in material default under any
contract or agreement listed on Schedule 4.13 and no notice of default under
any such contract or agreement has been received. Company has also indicated
on Schedule 4.13 a summary description of all plans or projects involving the
acquisition of any personal property, business or assets requiring, in any
event, the payment of more than $50,000 by Company.
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4.14 Real Property. Company has good and insurable title to the real
property owned or leased by it and used or held for use in its business,
subject to no Lien except for:
(w) Liens reflected on Schedule 4.10 as securing specified
liabilities (with respect to which no material default exists);
(x) Liens for current taxes not yet payable and assessments
not in default;
(y) easements for utilities serving the property only; and
(z) easements, covenants and restrictions and other
exceptions to title shown of record in the office of the County
Clerks in which the properties, assets and leasehold estates are
located which do not adversely affect in any material respect the
current use of the property.
All Leases by Company are in full force and effect in all material respects
and constitute valid and binding agreements of the parties (and their
successors) thereto in accordance with their respective terms.
4.15 Employee Plans. Schedule 4.15 represents an accurate list of all
employee benefit plans of Company, including all employment agreements and
other agreements or arrangements containing "golden parachute" or other
similar provisions, and deferred compensation agreements, and classifications
of employees covered thereby as of the Initial Disclosure Date. Except for the
employee benefit plans, if any, described on Schedule 4.15, Company does not
sponsor, maintain or contribute to any plan program, fund or arrangement that
constitutes an "employee pension benefit plan," and Company does not have any
obligation to contribute to or accrue or pay any benefits under any deferred
compensation or retirement funding arrangement on behalf of any employee or
employees (such as, for example, and without limitation, any individual
retirement account or annuity, any "excess benefit plan" (within the meaning
of Section 3(36) of the Employee Retirement Income Security Act of 1974, as
amended "ERISA") or any non-qualified deferred compensation arrangement). For
the purposes of this Agreement, the term "employee pension benefit plan" shall
have the same meaning as is given that term in Section 3(2) of ERISA. Company
has not sponsored, maintained or contributed to any employee pension benefit
plan other than the plans set forth on Schedule 4.15, nor is Company required
to contribute to any retirement plan pursuant to the provisions of any
collective bargaining agreement establishing the terms and conditions or
employment of any of Company's employees.
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Company is not now, nor as a result of its past activities can it
reasonably be expected to become, liable to the Pension Benefit Guaranty
Corporation (other than for premium payments) or to any multiemployer employee
pension benefit plan under the provisions of Title IV of ERISA.
All employee benefit plans listed on Schedule 4.15 and the
administration thereof are in substantial compliance with their terms and all
applicable provisions of ERISA and the regulations issued thereunder, as well
as with all other applicable Federal, state and local statutes, ordinances and
regulations.
All accrued contribution obligations of Company with respect to any
plan listed on Schedule 4.15 have either been fulfilled in their entirety or
are fully reflected on the balance sheet of Company as of the Balance Sheet
Date.
4.16 Employee Plans and Compliance with ERISA. All employee benefit
plans listed on Schedule 4.15 that are intended to qualify (the "Qualified
Plans") under Section 401(a) of the Code are, and have been so qualified and
have been determined by the Internal Revenue Service to be so qualified, and
copies of such determination letters (other than in the case of defined
contribution plans sponsored by unaffiliated financial institutions) are
included as part of Schedule 4.15. Except as disclosed on Schedule 4.15, all
reports and other documents required to be filed with any governmental agency
or distributed to plan participants or beneficiaries (including, but not
limited to, actuarial reports, audits or tax returns) have been timely filed
or distributed, and copies thereof are included as part of Schedule 4.15.
Neither any Stockholder nor any such plan listed in Schedule 4.15, nor Company
has engaged in any transaction prohibited under the provisions of Section 4975
of the Code or Section 406 of ERISA. No employee benefit plan listed on
Schedule 4.15 has incurred an accumulated funding deficiency, as defined in
Section 412(a) of the Code and Section 302(1) of ERISA; and Company has not
incurred (i) any liability for excise tax or penalty payable to the Internal
Revenue Service or (ii) any liability to the Pension Benefit Guaranty
Corporation (other than for premium payments). Furthermore:
(v) there have been no terminations or discontinuance of
contributions to any Qualified Plan intended to qualify under Section
401(a) of the Code without notice to and approval by the Internal
Revenue Service;
(w) no plan listed on Schedule 4.15 that is subject to the
provisions of Title IV of ERISA has been terminated;
(x) there have been no "reportable events" (as that phrase
is defined in Section 4043 of ERISA) with respect to employee benefit
plans listed in Schedule 4.15;
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(y) Company has not incurred liability under Section 4062 of
ERISA; and
(z) no circumstances exist pursuant to which Company could
reasonably be expected to have any direct or indirect liability
whatsoever (including, but not limited to, any liability to any
multiemployer plan or the Pension Benefit Guaranty Corporation under
Title IV of ERISA or to the Internal Revenue Service for any excise
tax or penalty, or being subject to any statutory Lien to secure
payment of any such liability) with respect to any plan now or
heretofore maintained or contributed to by any entity other than
Company that is, or at any time was, a member of a "controlled group"
(as defined in Section 412(n)(6)(B) of the Code) that includes
Company.
The transactions contemplated by this Agreement together with any amounts paid
or payable by Company or any member of the Controlled Group has not resulted
in and will not result in payments to "disqualified individuals" (as defined
in Section 280G(c) of the Code) of Company or any member of the Controlled
Group which, individually or in the aggregate will constitute "excess
parachute payments" (as defined in Section 280G(b) of the Code) resulting in
the imposition of the excise tax under Section 4999 of the Code or the
disallowance of deductions under Section 280G of the Code.
4.17 Conformity with Law; Litigation. Except to the extent set forth
on Schedule 4.17, Company is not in violation of any law or regulation or any
order of any court or Federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality having
jurisdiction over Company which would have a Material Adverse Effect; and
except to the extent set forth on Schedule 4.17, there are no material claims,
actions, suits or proceedings, commenced or, to the knowledge of Company,
threatened, against or affecting Company, at law or in equity, or before or by
any Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality having jurisdiction over Company and
no notice of any claim, action, suit or proceeding, whether pending or
threatened, has been received by Company or any Stockholder. Company has
conducted and is conducting its business in substantial compliance with the
requirements, standards, criteria and conditions set forth in applicable
Federal, state and local statutes, ordinances, permits, licenses, orders,
approvals, variances, rules and regulations, including all such permits,
licenses, orders and other governmental approvals set forth on schedules to
this Agreement, and is not in violation of any of the foregoing which might
have a Material Adverse Effect.
4.18 Tax Matters.
(i) Company is, as of the date first set forth above, taxed
under Subchapter S of the Code and will remain so through the Deemed
Closing Date. Stockholders have filed all
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income Tax Returns that they were required to file with respect to
Company, and Company has filed all Tax Returns that it was required
to file. All such Tax Returns filed by Company were correct and
complete in all material respects. All Taxes owed by Company (whether
or not shown on any Tax Return) have been paid. Except as set forth
on Schedule 4.18, Company is not currently the beneficiary of any
extension of time within which to file any Tax Return. Since January
1, 1994, no claim with respect to Company has been made by an
authority in a jurisdiction where Company does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There
is no Lien affecting any of Company's assets that arose in connection
with any failure or alleged failure to pay any Tax.
(ii) Company has withheld and paid all Taxes required to
have been withheld and paid in connection with amounts paid or owing
to any employee, independent contractor, creditor, stockholder or
other party.
(iii) Company does not expect any authority to assess any
material amount of additional Taxes against Company for any period
for which Tax Returns have been filed. There is no material dispute
or claim concerning any Tax liability of Company either claimed or
raised by any authority in writing or as to which Company has
knowledge based upon direct inquiry by any agent of such authority.
Schedule 4.18(iii) lists all income Tax Returns of Company for
taxable periods ended on or after January 1, 1992, indicates those
Tax Returns of which Company is aware that have been audited and
indicates those Tax Returns that currently are the subject of audit.
Company has delivered to Purchaser correct and complete copies of all
Tax Returns, examination reports and statements of deficiencies
assessed against or agreed to by Company for any taxable period ended
on or after January 1, 1993.
(iv) Except as set forth on Schedule 4.18(iv), neither
Stockholders nor Company has waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to a
Tax assessment or deficiency.
(v) Company has not filed a consent under Section 341(f) of
the Code concerning collapsible corporations. Company has not made
any payments, is not obligated to make any
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payments and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
fully deductible under Section 280G of the Code.
(vi) Except as set forth on Schedule 4.18(vi), none of
Company's assets secures any debt, the interest on which is
tax-exempt under Section 103(a) of the Code. None of Company's assets
are "tax-exempt use property" within the meaning of Section 168(h) of
the Code. The transactions contemplated by this Agreement are not
subject to Tax withholding pursuant to the provisions of Section 3406
or Subchapter A of Chapter 3 of the Code or any other provision of
applicable law.
(vii) Company has not received a ruling from any taxing
authority or entered into any agreement regarding Taxes with any
taxing authority that would, individually or in the aggregate, apply
to Company after the Closing Date.
4.19 No Violations. Company is not in violation of its Charter
Documents. Neither Company nor, to the knowledge of Company, any other party
thereto, is in material default under any Lease, instrument, agreement,
license, or permit set forth on any schedule to this Agreement, or any other
material agreement to which it is a party or by which its properties are bound
(the "Material Documents"); and, except as set forth in Schedule 4.19, (i) the
rights and benefits of Company under the Material Documents will not be
materially adversely affected by the transactions contemplated hereby and (ii)
the execution of this Agreement and the performance of the obligations
hereunder and the consummation of the transactions contemplated hereby will
not result in any material violation or breach or constitute a material
default under, any of the terms or provisions of the Material Documents or the
Charter Documents. Except as set forth on Schedule 4.19, none of the Material
Documents requires notice to, or the consent or approval of, any governmental
agency or other third party with respect to any of the transactions
contemplated hereby in order to remain in full force and effect in all
material respects, and consummation of the transactions contemplated hereby
will not give rise to any right to termination, cancellation or acceleration
or loss of any material right or benefit. Except as set forth on Schedule
4.19, to the knowledge of Company, none of the Material Documents prohibits
the use or publication by Company or Purchaser of the name of any other party
to such Material Document, and none of the Material Documents prohibits or
restricts Company from freely providing services to any other customer or
potential customer of Company, any of the Other Founding Companies or
Purchaser.
4.20 Absence of Changes. Since the Initial Disclosure Date, except as
set forth on Schedule 4.20, there has not been:
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(i) any material adverse change in the financial condition,
assets, liabilities (contingent or otherwise), income or business of
Company;
(ii) any damage, destruction or loss (whether or not covered
by insurance) materially adversely affecting the properties or
business of Company;
(iii) any change in the authorized capital of Company or its
outstanding securities or any change in its ownership interests or
any grant of any options, warrants, calls, conversion rights or
commitments;
(iv) any Restricted Payment in an amount in excess of the
lesser of Company Operating Profit and Distributable Cash;
(v) any increase in the compensation, bonus, sales
commissions or fee arrangement payable or to become payable by
Company to any of its officers, directors, Stockholders, employees,
consultants or agents, except for ordinary and customary bonuses and
salary increases for employees in accordance with past practice;
(vi) any work interruptions, labor grievances or labor
claims filed, or any other similar labor event or condition of any
character, materially adversely affecting the business of Company;
(vii) any sale or transfer, or any agreement to sell or
transfer, any material assets, property or rights of Company to any
Person, including, without limitation, any Stockholder and its
Affiliates outside the ordinary course of business of Company;
(viii) any cancellation, or agreement to cancel, any
indebtedness or other obligation owing to Company, including without
limitation any indebtedness or obligation of any Stockholder or any
Affiliate thereof outside the ordinary course of business of Company;
(ix) any plan, agreement or arrangement granting any
preferential right to purchase or acquire any interest in any of the
assets, property or rights of Company or requiring consent of any
party to the transfer and assignment of any such assets, property or
rights;
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(x) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire, any property, right or asset
outside of the ordinary course of the Company's business;
(xi) any waiver of any material rights or claims of Company;
(xii) any material breach, amendment or termination of any
contract, agreement, license, permit or other right to which Company
is a party;
(xiii) any transaction by Company outside the ordinary
course of its business;
(xiv) any cancellation or termination of a material contract
with a customer or client prior to the scheduled termination date; or
(xv) any other distribution of property or assets by Company
outside the ordinary course of Company's business;
4.21 Accounts and Notes Receivable. As of May 31, 1997, Company's
accounts and notes receivable (including receivables from and advances to
employees and Stockholders or their Affiliates) were $49.9 million, of which
no single account represented more than $333,944. Except to the extent
reflected on Schedule 4.21, such accounts, notes and other receivables are
collectible, net of reserves reflected in the June Balance Sheet.
4.22 Personal Property. Company has delivered to Purchaser a
depreciation schedule (which is set forth on Schedule 4.22) which includes (i)
all personal property included (or that will be included) in "depreciable
plant, property and equipment" on the balance sheet of Company, (ii) all
personal property owned by Company with a value in excess of $50,000 (x) as of
the Initial Disclosure Date and (y) acquired since the Initial Disclosure Date
and (iii) all Leases and agreements in respect of personal property,
including, in the case of each of (i), (ii) and (iii), (1) true, complete and
correct copies of all such Leases and (2) an indication as to which assets are
currently owned, or were formerly owned, by the Stockholders, relatives of the
Stockholders, or Affiliates of Company. Except as set forth on Schedule 4.22,
(a) all personal property used by Company in its business is either owned by
Company or leased by Company pursuant to a Lease included on Schedule 4.22,
(b) all of the personal property listed on Schedule 4.22 is in good working
order and condition, ordinary wear and tear excepted and (c) all Leases and
agreements included on Schedule 4.22 are, to the knowledge of Company and
Stockholders, in full force and effect and constitute valid and binding
agreements of the parties (and their successors) thereto in accordance with
their respective terms.
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4.23 Insurance. Company has delivered to Purchaser, as set forth on
and attached to Schedule 4.23, (i) an accurate list as of the Initial
Disclosure Date of all insurance policies carried by Company, (ii) an accurate
list of all insurance loss runs on workers compensation claims received for
the past three policy years and (iii) true, complete and correct copies of all
insurance policies currently in effect. Such insurance policies evidence all
of the insurance that Company is required to carry pursuant to all of its
contracts and other agreements and pursuant to all applicable laws or that
management of Company otherwise believes is prudent and appropriate to insure
against the risks inherent in Company's business in accordance with customary
industry practices. All of such insurance policies are currently in full force
and effect and shall remain in full force and effect through the Closing Date.
No insurance carried by Company has ever been canceled by the insurer, and
Company has never been denied coverage.
4.24 Intellectual Property. Except as set forth in Schedule 4.24,
Company either owns or has the right to use by license, sublicense, agreement,
or permission all of Company's inventions, improvements, domestic and foreign
patents and applications therefor, customer lists, copyrights, copyright
registrations and applications therefor, trademarks, tradenames, service
marks, trade dress, logos, rights in computer software, and all rights granted
or retained in licenses under any of the foregoing which are used in
connection with the conduct of Company's business as presently conducted.
Except as set forth on Schedule 4.24, none of the Intellectual Property which
is used in connection with the conduct of Company's business is, or has been
in the past five years involved in, or the subject of, any pending or, to the
knowledge of Company, threatened infringement, interference, opposition or
similar action, suit or proceeding or, to the knowledge of Company, has
otherwise been challenged in any way. Except as set forth on Schedule 4.24,
the Intellectual Property will afford Purchaser the right to use all
technology, know-how, technical and other information, data and other
intellectual property, whether patentable or unpatentable, and whether owned
by Company, any other Person or others, necessary for the conduct of Company's
business in a manner consistent with Company's prior practice. The license
fees, royalties and other amounts payable by Company in connection with the
use of the Intellectual Property, together with the terms and conditions on
which and periods for which such amounts are payable, are described in
Schedule 4.24. Any licenses fees, royalties or other amounts payable as a
result of the consummation of the transactions contemplated by this Agreement
shall be paid by Purchaser.
4.25 Labor Relations. Except as set forth on Schedule 4.25, Company
is not a party to any collective bargaining agreement; and there are no
controversies pending or, to Company's knowledge, threatened between Company
and any of its current or former employees or any labor or other collective
bargaining unit representing any current or former employee of Company that
could reasonably be expected to result in a labor strike, dispute, slow-down
or work stoppage or otherwise have a Material Adverse Effect. Company is not
aware of any organizational effort
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presently being made or threatened by or on behalf of any labor union with
respect to employees of Company. To Company's knowledge, no executive, key
employee or group of employees of Company has any plan to terminate employment
with Company.
4.26 Disclosure. This Agreement, including the Schedules and Annexes
hereto, together with all other documents and information made available to
Purchaser and its representatives in writing pursuant hereto, present fairly
the business and operations of Company for the time periods with respect to
which such information was requested. Company's rights under the documents
delivered pursuant hereto would not be materially adversely affected by, and
no statement made herein would be rendered untrue in any material respect by,
any other document to which Company is a party, or to which its properties are
subject, or by any other fact or circumstance regarding Company (which fact or
circumstance was, or should reasonably, after due inquiry, have been known to
Company) that is not disclosed pursuant hereto or thereto.
4.27 Prohibited Activities. Except as set forth on Schedule 4.27,
Company has not, between the Initial Disclosure Date and the date of this
Agreement, taken any of the actions set forth in Section 7.3 ("Prohibited
Activities").
4.28 Draft Registration Statement. The text of, and the financial
statements and other financial information contained in, the Draft
Registration Statement, insofar as they were provided by the Company expressly
for inclusion therein but not otherwise, are true, accurate and complete in
all material respects and do not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
5. ADDITIONAL REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS OF STOCKHOLDERS
Each Stockholder further, severally and not jointly, represents
warrants, covenants and agrees (i) that all of the following representations
and warranties in this Section 5 are true at the date of this Agreement and,
subject to Section 7.6, shall be true at the Closing Date and (ii) that all of
the covenants and agreements in this Section 5 shall be complied with or
performed at and as of the Closing Date. The representations, warranties,
covenants and agreements set forth in this Section 5 shall not survive the
Closing Date.
5.1 Authority. Each Stockholder has the full legal right, power and
authority to enter into this Agreement. This Agreement has been executed and
delivered by each Stockholder and constitutes a legal, valid and binding
obligation of such Stockholder.
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5.2 Preemptive Rights. Each Stockholder does not have, or hereby
waives, any preemptive or other right to acquire Company Stock or Purchaser
Stock that such Stockholder has or may have had other than the rights of such
Stockholder to acquire Purchaser Stock upon the exercise of Warrants.
5.3 Tax Matters. Each Stockholder has been advised by his counsel
that certain aspects of the transactions contemplated by this Agreement
qualify for the deferral of gain pursuant to Section 351 of the Code.
5.4 No Retained Rights. No Stockholder will retain any right after
the Closing in any Company Stock to be transferred by him at the Closing but,
to the extent that such right may exist upon the consummation of the Closing,
such right shall be deemed to have been released and extinguished.
6. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF
PURCHASER AND OLD ACG
Purchaser and Old ACG, jointly and severally, represent, warrant,
covenant and agree (i) that all of the following representations and
warranties in this Section 6 are true at the date of this Agreement and,
subject to Section 7.6, shall be true at the Closing Date and that all of the
covenants and agreements in this Section 6 shall be complied with or performed
at and as of the Closing Date. The representations, warranties, covenants and
agreements set forth in this Section 6 shall not survive the Closing Date.
6.1 Due Organization. Purchaser and Old ACG each is a corporation
duly organized, validly existing and in good standing under the laws of the
state of Delaware, and is duly authorized and qualified to do business under
all applicable laws, regulations, ordinances and orders of public authorities
to carry on its business in the places and in the manner as now conducted,
except where the failure to be so authorized or qualified would not have a
Material Adverse Effect. True, complete and correct copies of the Charter
Documents and By-laws, each as amended, of Purchaser and Old ACG
(collectively, the "Purchaser Charter Documents") are attached hereto as
Schedule 6.1.
6.2 Authorization. Each of Purchaser and Old ACG has all requisite
corporate power and authority to enter into this Agreement and to perform its
obligations hereunder. The execution and delivery by each of Purchaser and Old
ACG of this Agreement and its consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action of
Purchaser and Old ACG. This Agreement has been duly executed and delivered by
each of
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Purchaser and Old ACG and is a valid and binding obligation of each of
Purchaser and Old ACG, enforceable against each of them in accordance with its
terms.
6.3 Capital stock. The authorized capital stock of Old ACG is as set
forth on Schedule 6.3. All of the issued and outstanding shares of the capital
stock of Old ACG (i) have been duly authorized and validly issued, (ii) are
fully paid and nonassessable, (iii) are owned of record and beneficially by
the Persons set forth on Schedule 6.3, and (iv) were offered, issued, sold and
delivered by Old ACG in compliance with all applicable state and Federal laws
concerning the offer, issuance, sale and delivery of securities. Further, none
of such shares was issued in violation of the preemptive rights of any past or
present stockholder of Old ACG. Subject only to changes resulting from the
consummation of the reverse stock split referred to in the eight recital of
this Agreement and the consummation of Purchaser's acquisition of Old ACG in
the reverse triangular merger, the capitalization of Purchaser will be
identical to the capitalization of Old ACG immediately prior to the
consummation of the IPO.
6.4 Transactions in Capital Stock, Organization Accounting. Except as
set forth on Schedule 6.3 or contemplated to be issued in connection with the
acquisition of the Founding Companies, (i) no option, warrant, call,
conversion right or commitment of any kind exists which obligates Old ACG to
issue any of its authorized but unissued capital stock and (ii) Old ACG has no
obligation (contingent or otherwise) to purchase, redeem or otherwise acquire
any of its equity securities or any interests therein or to pay any dividend
or make any distribution in respect thereof. Schedule 6.3 also includes
complete and accurate copies of all stock option or stock purchase plans,
including a list, accurate as of the date hereof, of all outstanding options,
warrants or other rights to acquire shares of capital stock of Old ACG.
6.5 Subsidiaries. Neither Purchaser nor Old ACG has any Subsidiaries,
except for each of the companies identified on Schedule 6.5. Except as set
forth in the preceding sentence, neither Purchaser nor Old ACG presently owns,
of record or beneficially, or controls, directly or indirectly, any capital
stock, securities convertible into capital stock or any other equity interest
in any corporation, association or business entity, and neither Purchaser nor
Old ACG, directly or indirectly, is a participant in any joint venture,
partnership or other non-corporation entity.
6.6 Financial Statements. Attached hereto as Schedule 6.6 are copies
of the following financial statements of Old ACG, which reflect the results of
its operations from inception in June 1996 (the "Old ACG Financial
Statements"): Old ACG's audited Balance Sheet as of December 31, 1996 and its
unaudited Balance Sheet as of June 30, 1997, and audited Statements of
Operations, Stockholder's Equity and Cash Flows and related notes thereto for
the period from June 10, 1996 through December 31, 1996 and unaudited
Statements of Operations, Stockholder's Equity and Cash
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Flows for the six months ended June 30, 1997. The audited Old ACG Financial
Statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the period indicated
(except as noted thereon or on Schedule 6.6). The unaudited Old ACG Financial
Statements were prepared in accordance with the books and records of Old ACG
in accordance with accounting principles consistently applied. Old ACG's
Balance Sheets present fairly the financial position of Old ACG as of the
dates indicated thereon, and Old ACG's Statements of Operations, Stockholder's
Equity and Cash Flows included in the Old ACG Financial Statements present
fairly the results of operations for the periods indicated thereon in
accordance with generally accepted accounting principles. Old ACG's Financial
Statements at and for the period ended December 31, 1996 have been examined by
KPMG Peat Marwick LLP, independent public accountants.
6.7 Liabilities and Obligations. Except as set forth on Schedule 6.7,
neither Purchaser nor Old ACG has any material liabilities, contingent or
otherwise, except as set forth in or contemplated by this Agreement or the
Draft Registration Statement and except for fees incurred in connection with
the transactions contemplated hereby and thereby.
6.8 Conformity with Law; Litigation. Except to the extent set forth
on Schedule 6.8, or in the Draft Registration Statement, neither Purchaser nor
Old ACG is in violation of any law or regulation or any order of any court or
Federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality having jurisdiction over it which would have
a Material Adverse Effect; and except to the extent set forth on Schedule 6.8,
or in the Draft Registration Statement, there are no material claims, actions,
suits or proceedings, pending or, to the knowledge of either Purchaser or Old
ACG, threatened, against or affecting either Purchaser or Old ACG, at law or
in equity, or before or by any Federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality having
jurisdiction over it and no notice of any claim, action, suit or proceeding,
whether pending or threatened, has been received. Each of Purchaser and Old
ACG has conducted and is conducting is businesses in substantial compliance
with the requirements, standards, criteria and conditions set forth in
applicable Federal, state and local statutes, ordinances, permits, licenses,
orders, approvals, variances, rules and regulations and is not in violation of
any of the foregoing which might have a Material Adverse Effect.
6.9 No Violations. Neither Purchaser nor Old ACG is in violation of
any Purchaser Charter Document. Neither Purchaser nor Old ACG, nor to the
knowledge of Purchaser or Old ACG, any other party thereto, is in default
under any Lease, instrument, agreement, license, or permit to which Purchaser
or Old ACG is a party, or by which Purchaser or Old ACG or any of its
properties, are bound (collectively, the "Purchaser Documents"); and (i) the
rights and benefits of
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Purchaser and Old ACG under the Purchaser Documents will not be adversely
affected by the transactions contemplated hereby and (ii) the execution of
this Agreement and the performance of the obligations hereunder and the
consummation of the transactions contemplated hereby will not result in any
material violation or breach or constitute a default under, any of the terms
or provisions of the Purchaser Documents or the Purchaser Charter Documents.
Except as set forth on Schedule 6.9, none of the Purchaser Documents requires
notice to, or the consent or approval of, any governmental agency or other
third party with respect to any of the transactions contemplated hereby in
order to remain in full force and effect, and consummation of the transactions
contemplated hereby will not give rise to any right to termination,
cancellation or acceleration or loss of any right or benefit.
6.10 Securities. The execution and delivery by Purchaser of the
Series D Warrants and the Notes have been duly authorized by all necessary
corporate action of Purchaser. Upon the execution and delivery of the Series D
Warrants and the Notes at the Closing in accordance with the terms of this
Agreement, the Series D Warrants and the Notes will be valid and binding
obligations of Purchaser, enforceable against Purchaser in accordance with
their terms. The shares of Purchaser Stock comprising the Stock Component and
the Series D Warrant Stock have been duly authorized and reserved for issuance
and such shares, when issued upon the consummation of the transaction
contemplated by this Agreement and upon the exercise of the Series D Warrants
in accordance with the terms thereof, respectively, will be validly issued,
fully paid and nonassessable.
6.11 Business; Real Property; Material Agreement. Old ACG was formed
in June 1996, and Purchaser was formed in September 1997. Neither Purchaser
nor Old ACG has conducted any material business since the date of its
inception, except raising capital and in connection with this Agreement and
similar agreements with Founding Companies. Except as disclosed on Schedule
6.11, neither Purchaser nor Old ACG owns or has at any time owned any real
property or any material personal property or is a party to any other material
agreement.
6.12 Tax Matters.
(i) Old ACG has filed all Tax Returns that it was required
to file. All such Tax Returns filed by Old ACG were correct and
complete in all material respects. All Taxes owed by Old ACG (whether
or not shown on any Tax Return) have been paid. Old ACG is not
currently the beneficiary of any extension of time within which to
file any Tax Return. Since Old ACG's formation in June 1996 , no
claim with respect to Old ACG has been made by an authority in a
jurisdiction where Old ACG does not file Tax Returns that it is or
may
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be subject to taxation by that jurisdiction. There is no Lien
affecting any of Old ACG's assets that arose in connection with any
failure or alleged failure to pay any Tax.
(ii) Old ACG has withheld and paid all Taxes required to
have been withheld and paid in connection with amounts paid or owing
to any employee, independent contractor, creditor, stockholder or
other party.
(iii) Old ACG does not expect any authority to assess any
material amount of additional Taxes against it for any period for
which Tax Returns have been filed. There is no material dispute or
claim concerning any Tax liability of Old ACG either claimed or
raised by any authority in writing or as to which Old ACG has
knowledge based upon direct inquiry by any agent of such authority.
6.13 Draft Registration Statement. The text of, and the financial
statements and other financial information contained in, the Draft
Registration Statement, insofar as they relate to Purchaser or Old ACG but not
otherwise, are true, accurate and complete in all material respects and do not
include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading.
7. OTHER COVENANTS PRIOR TO CLOSING
7.1 Access and Cooperation; Due Diligence; Audits.
(i) Between the date of this Agreement and the Closing Date,
Company will afford to the officers and authorized representatives of
Purchaser access to all of Company's sites, properties, books and
records and will furnish Purchaser with such additional financial and
operating data and other information as to the business and
properties of Company as Purchaser may from time to time reasonably
request. Company will cooperate with Purchaser, its representatives,
auditors and counsel in the preparation of any documents or other
material that may be required in connection with any documents or
materials required by this Agreement. Purchaser will cause all
information obtained in connection with the negotiation and
performance of this Agreement to be treated as confidential in
accordance with the provisions of Section 12.
(ii) Between the date of this Agreement and the Closing,
Purchaser will afford to the officers and authorized representatives
of Company and Stockholders access to all sites, properties, books
and records of Purchaser, Old ACG and the other Founding Companies,
and will furnish Company and Stockholders with such additional
financial and
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operating data and other information as to the business and
properties of Purchaser, Old ACG and the other Founding Companies as
Company and Stockholders may from time to time reasonably request.
Purchaser will cooperate with Company and Stockholders, their
representatives, auditors and counsel in the preparation of any
documents or other material which may be required in connection with
any documents or materials required by this Agreement. Company and
Stockholders will cause all information obtained in connection with
the negotiation and performance of this Agreement to be treated as
confidential in accordance with the provisions of Section 12.
(iii) Company agrees to permit an independent accounting
firm selected by Purchaser to audit and render a report on the
Company Financial Statements, provided that all the costs and
expenses of such audits are paid by Purchaser.
7.2 Conduct of Business Pending Closing. Unless otherwise approved in
writing by Purchaser, between the date of this Agreement and the Closing Date,
Company will:
(i) carry on business in substantially the same manner as it
has heretofore;
(ii) maintain its properties and facilities, including those
held under Lease, in as good working order and condition as at
present, ordinary wear and tear excepted;
(iii) perform in all material respects all of its
obligations under agreements relating to or affecting its respective
assets, properties or rights;
(iv) keep in full force and effect in all material respects
the present insurance policies or other comparable insurance
coverage;
(v) use its reasonable efforts to maintain and preserve its
business organization intact, retain its respective present key
employees and maintain its respective relationships with suppliers,
customers and others having business relationships with it;
(vi) maintain present Lease instruments and not enter into
new or amended Lease or debt instruments;
(vii) maintain or reduce present salaries and commission
levels for all officers, directors, employees and agents except for
ordinary and customary bonus and salary increases for employees in
accordance with prior practices; and
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(viii) maintain material compliance with all material
permits, laws, rules and regulations, consent orders, and all other
orders of applicable courts, regulatory agencies and similar
governmental authorities;
7.3 Prohibited Activities. Between the date of this Agreement and the
Closing Date, Company, will not, without prior written consent of Purchaser:
(i) make any change in its Charter Documents or By-laws;
(ii) issue any securities, options, warrants, calls,
conversion rights or commitments relating to its securities of any
kind;
(iii) make any Restricted Payment in excess of the lesser of
Company Operating Profit and Distributable Cash;
(iv) merge or consolidate or agree to merge or consolidate
with or into any other Person;
(v) commit a material breach or amend or terminate any
material agreement, permit, license or other right;
(vi) enter into any contract or commitment or incur or agree
to incur any liability or make any capital expenditures, except if it
is in the normal course of business (consistent with past practice)
or involves an amount not in excess of $50,000;
(vii) create, assume or permit to exist any Lien upon any
asset or property whether now owned or hereafter acquired, except (x)
with respect to purchase money Liens incurred in connection with the
acquisition of equipment with an aggregate cost not in excess of
$50,000 necessary or desirable for the conduct of its business, (y)
(1) Liens for Taxes either not yet due or being contested in good
faith and by appropriate proceedings (and for which contested Taxes
adequate reserves have been established and are being maintained) or
(2) materialmen's, mechanics', workers', repairmen's, employees' or
other like Liens arising in the ordinary course of business, or (3)
Liens set forth on any Schedule to this Agreement;
(viii) sell, assign, lease or otherwise transfer or dispose
of any property or equipment except in the normal course of business;
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(ix) negotiate for the acquisition of any business or the
start-up of any new business;
(x) waive any material right or claim; provided that it may
negotiate and adjust bills in the course of good faith disputes with
customers in a manner consistent with past practice; or
(xi) enter into any other transaction outside the ordinary
course of its business or prohibited hereunder.
7.4 Exclusivity. Neither any Stockholder, nor Company, nor any agent,
officer, director, trustee or any representative of any of the foregoing will,
during the period commencing on the date of this Agreement and ending with,
the earlier to occur of the Closing Date or the termination of this Agreement
in accordance with its terms, directly/or indirectly:
(i) solicit or initiate the submission of proposals or
offers from any Person for,
(ii) participate in any discussions pertaining to, or
(iii) furnish any information to any Person other than
Purchaser or its authorized agents relating to
any acquisition or purchase of all or a material amount of the assets of, or
any equity interest in, Company or any merger, consolidation or business
combination of Company.
7.5 Notification of Certain Matters. Stockholders and Company shall
give prompt notice to Purchaser of (i) the occurrence or non-occurrence of any
event the occurrence or non-occurrence of which would likely cause any
representation or warranty of Company or Stockholders contained herein to be
untrue or inaccurate in any material respect at or prior to the Closing Date
and (ii) any material failure of Stockholders or Company to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied
by such Person hereunder as of such date. Purchaser shall give prompt notice
to Company and Stockholders of (i) the occurrence or non-occurrence of any
event the occurrence or non-occurrence of which would likely cause any
representation or warranty of Purchaser and Old ACG contained herein to be
untrue or inaccurate in any material respect at or prior to the Closing Date
and (ii) any material failure of Purchaser or Old ACG to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied
by it hereunder as of such date. The delivery of any notice pursuant to this
Section 7.5 shall not be deemed to (i) modify the representations or
warranties hereunder of the party delivering such notice, which modification
may only be made pursuant to Section 7.6, (ii) modify the conditions set forth
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in Sections 8 and 9, or (iii) limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
7.6 Amendment of Schedules. Each party hereto agrees that, with
respect to the representations and warranties of such party contained in this
Agreement, such party shall have the continuing obligation until the Closing
to supplement or amend promptly the Schedules with respect to any matter
hereafter arising or discovered which, if existing or known at the date of
this Agreement, would have been required to be set forth or described in the
Schedules. Notwithstanding the foregoing sentence, no amendment or supplement
to a Schedule prepared by Company, Stockholders, Purchaser or Old ACG that
constitutes or reflects an event or occurrence that would have a Material
Adverse Effect may be made unless Purchaser and Old ACG or Stockholders and
Company, as the case may be, consents to such amendment or supplement. For all
purposes of this Agreement, including without limitation for purposes of
determining whether the conditions set forth in Sections 8.1 and 9.1 have been
fulfilled, the Schedules shall be deemed to be the Schedules as amended or
supplemented pursuant to this Section 7.6. No party to this Agreement shall be
liable to any other party if this Agreement shall be terminated pursuant to
the provisions of Section 11.1(v). Neither the entry by Purchaser into any
other agreement after the date hereof for the acquisition of one or more
companies involved in or assets associated with the telecommunication
business, yellow page publishing business or related activities nor the
performance by Purchaser of its obligations thereunder shall be deemed to
require the amendment to or a supplementation of any Schedule hereto.
7.7 Compliance with the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 (the "Hart-Scott Act"). All parties to this Agreement hereby recognize
that compliance with the Hart-Scott Act will be required in connection with
the transactions contemplated herein. Accordingly, (i) each of the parties
hereto agrees to cooperate and use its best efforts to comply with the
Hart-Scott Act; (ii) such compliance by Company and Stockholders shall be
deemed a condition precedent in addition to the conditions precedent set forth
in Section 9 of this Agreement, and such compliance by Purchaser shall be
deemed a condition precedent in addition to the conditions precedent set forth
in Section 8 of this Agreement; (iii) the parties agree to cooperate and use
their best efforts to cause all filings required under the Hart-Scott Act to
be made; and (iv) Purchaser shall be responsible for all filing fees under the
Hart-Scott Act.
7.8 Further Assurance. The parties hereto agree to execute and
deliver, or cause to be executed and delivered, such further instruments or
documents or take such other action as may be reasonably necessary or
convenient to carry out the transactions contemplated by this Agreement.
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8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS
The obligations of Stockholders with respect to actions to be taken
on the Closing Date are subject to the satisfaction or waiver on or prior to
the Closing Date of all of the following conditions. Upon Closing, all
conditions not satisfied shall be deemed to have been waived:
8.1 Representations and Warranties; Performance of Obligations. All
representations and warranties of Purchaser and Old ACG contained in this
Agreement shall be true and correct in all material respects as of the Closing
Date with the same effect as though such representations and warranties had
been made on and as of such date; all of the terms, covenants and conditions
of this Agreement to be complied with or performed by Purchaser and Old ACG on
or before the Closing Date shall have been duly complied with or performed in
all material respects; and a certificate to the foregoing effect dated the
Closing Date, and signed by the President or any Vice President of each of
Purchaser and Old ACG shall have been delivered to Stockholders.
8.2 Satisfaction. All actions, proceedings, instruments and documents
required to carry out this Agreement or incidental hereto and all other
related legal matters shall be reasonably satisfactory to Stockholders and
their counsel.
8.3 No Litigation. No action or proceeding before a court or any
other governmental agency or body shall have been instituted or threatened to
restrain or prohibit the transactions contemplated herein and no governmental
agency or body shall have taken any other action or made any request of
Company or Stockholders as a result of which Stockholders deems it inadvisable
to proceed with the transactions hereunder.
8.4 Opinion of Counsel. Stockholders shall have received an opinion
from counsel for Purchaser and Old ACG, dated the Closing Date, in the form
and substance reasonably acceptable to Stockholders, relating to, insofar as
Purchaser and Old ACG are concerned, as the case may be, (a) the
authorization, execution, delivery, performance and enforceability of the
Agreement, the Series D Warrants and the Notes, (b) the consummation of the
transactions contemplated herein and (c) such other legal matters as
Stockholders may reasonably request.
8.5 Consents and Approvals. All necessary consents of and filings
with any governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made.
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8.6 Good Standing Certificates. Purchaser shall have delivered to
Stockholders a certificate, dated as of a date no later than ten days prior to
the Closing Date, duly issued by the Delaware Secretary of State and, unless
waived by Stockholders, in each state in which Purchaser is authorized to do
business, showing that Purchaser is in good standing and authorized to do
business and that all state franchise and/or income Tax Returns and Taxes for
Purchaser, for all periods prior to the Closing Date have been filed and paid
to the extent required.
8.7 No Material Adverse Change. No event or circumstance shall have
occurred with respect to Purchaser that would constitute a Material Adverse
Effect.
8.8 Secretary's Certificates. Stockholders shall have received a
certificate or certificates, dated the Closing Date and signed by the
Secretary of each of Purchaser and Old ACG, certifying the completeness and
accuracy of the attached copies of Purchaser's Charter Documents (including
amendments thereto), By-Laws (including amendments thereto), and resolutions
of the board of directors approving Purchaser's and Old ACG's entering into
this Agreement and its consummation of the transactions contemplated hereby.
8.9 Closing of IPO. The sale by Purchaser of shares of Purchaser
Stock in the IPO shall have closed prior to or substantially contemporaneously
with the consummation of the transactions contemplated herein.
8.10 Employment Agreements. Richard O'Neal shall have been afforded
an opportunity to enter into an employment agreement substantially in the form
of Annex V providing for an annual minimum salary of $300,000, Larry Baldwin
shall have been afforded an opportunity to enter into an employment agreement
substantially in the form of Annex VI providing for an annual minimum salary
of $175,000 and Steve Sparks and Ron Baldwin each shall have been afforded an
opportunity to enter into an employment agreement substantially in the form of
Annex VII providing for an annual minimum salary of $155,000 and $155,000,
respectively.
8.11 Section 1362(E)(3) Election. Stockholders and Purchaser shall
have executed a ss. 1362(E)(3) election for filing with the IRS relating to
the allocation of profits for tax year 1997 upon the disqualification of
Company as a Subchapter S corporation.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
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The obligations of Purchaser with respect to actions to be taken on
the Closing Date are subject to the satisfaction or waiver on or prior to the
Closing Date of all of the following conditions. Upon Closing, all conditions
not satisfied shall be deemed to have been waived.
9.1 Representations and Warranties; Performance of Obligations. All
the representations and warranties of Company and Stockholders contained in
this Agreement shall be true and correct in all material respects as of the
Closing Date with the same effect as though such representations and
warranties had been made on and as of such date; all of the terms, covenants
and conditions of this Agreement to be complied with or performed by Company
and Stockholders on or before the Closing Date shall have been duly performed
or complied with in all material respects; and Company and Stockholders each
shall have delivered to Purchaser a certificate dated the Closing Date and
signed by them to such effect.
9.2 No Litigation. No action or proceeding before a court or any
other governmental agency or body shall have been instituted or threatened to
restrain or prohibit the transactions contemplated herein and no governmental
agency or body shall have taken any other action or made any request of
Purchaser as a result of which the management of Purchaser deems it
inadvisable to proceed with the transactions hereunder.
9.3 Company's Secretary's Certificate. Purchaser shall have received
a certificate, dated the Closing Date and signed by the Secretary of Company,
certifying the completeness and accuracy of the attached copies of Company's
Charter Documents (including amendments thereto), By-Laws (including
amendments thereto), and resolutions of the board of directors approving the
Company's entering into this Agreement and the consummation of the
transactions contemplated hereby.
9.4 No Material Adverse Effect. No event or circumstance shall have
occurred with respect to Company which would constitute a Material Adverse
Effect, and Company shall not have suffered any material loss or damages to
any of its properties or assets, whether or not covered by insurance, which
change, loss or damage materially affects or impairs the ability of Company to
conduct its business.
9.5 Stockholders' Release. Stockholders shall have delivered to
Purchaser an instrument dated the Closing Date releasing (i) Company from any
and all claims of Stockholders (including those under existing agreements) and
(ii) the obligations of Purchaser and Old ACG to Stockholders, except in each
case for the obligations arising under this Agreement, the transactions
contemplated by this Agreement and as otherwise listed on Schedule 9.5.
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9.6 Satisfaction. All actions, proceedings, instruments and documents
required to carry out the transactions contemplated by this Agreement or
incidental hereto and all other related legal matters shall have been
reasonably satisfactory to Purchaser and its counsel.
9.7 Opinion of Counsel. Purchaser shall have received an opinion from
counsel to Stockholders, dated the Closing Date, in the form and substance
reasonably acceptable to Purchaser, relating to, insofar as Company and
Stockholder are concerned, (a) the authorization, execution, delivery,
performance and enforceability of the Agreement, (b) the consummation of the
transactions contemplated herein and (c) such other matters as Purchaser may
reasonably request.
9.8 Consents and Approvals. All necessary consents of and filings
with any governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made; and all
required consents and approvals of third parties shall have been obtained.
9.9 Good Standing Certificates. Company shall have delivered to
Purchaser a certificate, dated as of a date no earlier than ten days prior to
the Closing Date, duly issued by the appropriate governmental authority in
Company's state of incorporation and, unless waived by Purchaser, in each
state in which Company is authorized to do business, showing Company is in
good standing and authorized to do business and that all state franchise
and/or income Tax Returns and Taxes for Company for all periods prior to the
Closing have been filed and paid.
9.10 FIRPTA Certificate. Each Stockholder shall have delivered to
Purchaser a certificate to the effect that he is not a foreign Person under
Section 1.1445-2(b) of the Treasury regulations.
9.11 Closing of IPO. The sale by Purchaser of shares of Purchaser
Stock in the IPO shall have closed prior to or substantially contemporaneously
with the consummation of the transactions contemplated by this Agreement.
9.12 Employment Agreements. Richard O'Neal shall have executed and
delivered an employment agreement with Company substantially in the form of
Annex V providing for an annual minimum salary of $300,000, Larry Baldwin
shall have been afforded an opportunity to enter into an employment agreement
with the Company substantially in the form of Annex VI providing for an annual
minimum salary of $175,000 and Steve Sparks and Ron Baldwin each shall have
entered into an employment agreement with Company substantially in the form of
Annex VII providing for an annual minimum salary of $155,000 and $155,000,
respectively.
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9.13 Licensing Arrangements. The licensing arrangements between Big
Stuff, Inc. and Company relating to the colorizing of yellow pages and the
reselling of world wide web sites shall have been documented on terms
satisfactory to Purchaser.
10. CERTAIN TAX AND EMPLOYEE BENEFIT MATTERS
10.1 Preparation and Filing of Tax Returns.
(i) Stockholders shall file or cause to be filed all
separate Federal income Tax Returns (and any state and local Tax
Returns filed on the basis similar to that of S corporations under
Federal income Tax rules) of Company for all taxable periods that end
on or before the Closing Date. Each Stockholder shall pay or cause to
be paid all Tax liabilities (in excess of all amounts already paid
with respect thereto or properly accrued or reserved with respect
thereto on the Company Financial Statements) shown by such Returns to
be due.
(ii) Purchaser shall file or cause to be filed all separate
Returns of, or that include, Company for all taxable periods ending
after the Closing Date.
(iii) Each party hereto shall, and shall cause its
Subsidiaries and Affiliates to, provide to each of the other parties
hereto such cooperation and information as any of them reasonably may
request in filing any Return, amended Return or claim for refund,
determining a liability for Taxes or a right to refund of Taxes or in
conducting any audit or other proceeding in respect of Taxes. Such
cooperation and information shall include providing copies of all
relevant portions of relevant Returns, together with relevant
accompanying schedules and work papers, relevant documents relating
to rulings or other determinations by Taxing authorities and relevant
records concerning the ownership and Tax basis of property, which
such party may possess. Each party shall make its employees
reasonably available on a mutually convenient basis at its cost to
provide explanation of any documents or information so provided.
Subject to the preceding sentence, each party required to file
Returns pursuant to this Agreement shall bear all costs of filing
such Returns.
10.2 Preservation of Employee Benefit Plans. Following the Closing
Date, Purchaser shall not terminate any health insurance, life insurance or
401(k) plan in effect at Company until such time as Purchaser is able to
replace such plan with a plan that is applicable to Purchaser and all of its
then existing Subsidiaries; provided that Purchaser shall have no obligation
to provide
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replacement plans that have the same terms and provisions as the existing
plans; provided, further, that any new health insurance plan shall provide for
coverage for preexisting conditions.
11. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time prior to the Closing
Date solely:
(i) by mutual consent of Stockholders and the board of directors of
Purchaser;
(ii) by Stockholders, on the one hand, or by Purchaser (acting
through its board of directors), on the other hand, if the transactions
contemplated by this Agreement to take place at the Closing shall not have
been consummated by January 31, 1998, unless the failure of such transactions
to be consummated is due to the willful failure of the party seeking to
terminate this Agreement to perform any of its obligations under this
Agreement to the extent required to be performed by it prior to or on the
Closing Date;
(iii) by Stockholders, on the one hand, or by Purchaser on the other
hand, if, prior to October 16, 1997, a registration statement on Form S-1
relating to the IPO has not been filed by Purchaser with the SEC pursuant to
the 1933 Act;
(iv) by Stockholders, on the one hand, or by Purchaser, on the other
hand, if a material breach or default shall be made by the other party or
parties in the observance or in the due and timely performance of any of the
material covenants, agreements or conditions contained herein, and the curing
of such default shall not have been made on or before the Closing Date; or
(v) by Stockholders, on the one hand, or by Purchaser, on the other
hand, if either such party or parties declines to consent to an amendment or
supplement to a Schedule proposed by the other party or parties pursuant to
Section 7.6 because such proposed amendment constitutes or reflects an event
or occurrence that would have a Material Adverse Effect on the party or
parties proposing the same.
12. NONDISCLOSURE OF CONFIDENTIAL INFORMATION
12.1 Company and Stockholders. Company and Stockholders recognize and
acknowledge that they had in the past, currently have, and in the future may
have, access to certain confidential information of Purchaser and Old ACG,
such as operational policies, and pricing and cost policies that are valuable,
special and unique assets of Purchaser and Old ACG. Company and Stockholders
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agree that they will not disclose such confidential information to any Person
for any purpose or reason whatsoever, except (i) to authorized representatives
of Purchaser and (ii) to counsel and other advisers; provided that such
advisers (other than counsel) agree to the confidentiality provisions of this
Section 12.1, unless (x) such information becomes known to the public
generally through no fault of Company and Stockholders, (y) disclosure is
required by law or the order of any governmental authority under color of law;
provided, that prior to disclosing any information pursuant to this clause
(y), Company and Stockholders, if possible, shall give immediate prior written
notice thereof to Purchaser and provide Purchaser with the opportunity to
contest such disclosure, or (z) the disclosing party reasonably believes that
such disclosure is required in connection with the defense of a lawsuit
against the disclosing party. In the event of a breach or threatened breach by
either Company or any Stockholder of the provisions of this Section 12.1,
Purchaser shall be entitled to an injunction (without the posting of bond or
proof of actual damages) restraining Company or any Stockholder, as the case
may be, from disclosing, in whole or in part, such confidential information.
Nothing herein shall be construed as prohibiting Purchaser from pursuing any
other available remedy for such breach or threatened breach, including the
recovery of damages. In the event the transactions contemplated by this
Agreement are not consummated, Company and Stockholders (including their
representatives, advisors and legal counsel) shall within ten business days
after a request from Purchaser, deliver all copies of the confidential
information of Purchaser in their possession in any form whatsoever
(including, but not limited to, reports, memoranda or other materials prepared
by Company and Stockholders or their representatives, advisors or legal
counsel at their direction).
12.2 Purchaser. Each of Purchaser and Old ACG recognizes and
acknowledges that it has in the past, currently has and in the future may
have, prior to the Closing, access to certain confidential information of
Company, such as operational policies, and pricing and cost policies that are
valuable, special and unique assets of Company. Each of Purchaser and Old ACG
agrees that, prior to the Closing, or if the transactions contemplated by this
Agreement are not consummated, it will not disclose such confidential
information to any Person for any purpose or reason whatsoever, except (i) to
authorized representatives of Company, other Founding Companies or any
Stockholder; and (ii) to counsel and other advisers; provided that such
advisers (other than counsel) agree to the confidentiality provisions of this
Section 12.2, unless (x) such information becomes known to the public
generally through no fault of Purchaser and Old ACG (y) disclosure is required
by law or the order of any governmental authority under color of law;
provided, that prior to disclosing any information pursuant to this clause
(y), Purchaser shall, if possible, give immediate prior written notice thereof
to Company and provide Company with the opportunity to contest such
disclosure, or (z) the disclosing party reasonably believes that such
disclosure is required in connection with the defense of a lawsuit against the
disclosing party. In the event of a breach or
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threatened breach by Purchaser or Old ACG of the provisions of this Section
12.2, Company shall be entitled to an injunction (without the posting of bond
or proof of actual damages) restraining Purchaser or Old ACG from disclosing,
in whole or in part, such confidential information. Nothing herein shall be
construed as prohibiting Company from pursuing any other available remedy for
such breach or threatened breach, including the recovery of damages. In the
event the transactions contemplated by this Agreement are not consummated,
Purchaser and Old ACG (including its representatives, advisors and legal
counsel) shall within ten business days after a request from Company, deliver
all copies of the confidential information of Company in their possession in
any form whatsoever (including, but not limited to, any reports, memoranda, or
other materials prepared by either Purchaser or Old ACG or its
representatives, advisors or legal counsel at its direction).
12.3 Damages. Because of the difficulty of measuring economic losses
as a result of the breach of the foregoing covenants in Section 12.1 and 12.2
and because of the immediate and irreparable damage that would be caused for
which no other adequate remedy exists, the parties hereto agree that, in the
event of a breach by any of them of the foregoing covenants, the covenant may
be enforced against another party by injunction and restraining order.
12.4 Survival. The obligations of the parties under this Article 12
shall survive the termination of this Agreement for a period of three years
from the Closing Date or the termination of this Agreement pursuant to Section
11.
13. NONCOMPETITION
13.1 Prohibited Activities. Each of the Stockholders will not, for a
period of 36 calendar months following the date of cessation of his employment
with Company after the Closing Date ("Termination Date") in the case of
Messrs. O'Neal, Larry Baldwin, Steve Sparks or Ron Baldwin and following the
Closing Date in the case of Ronnie Emanuel, for any reason whatsoever,
directly or indirectly, for himself or on behalf of or in conjunction with any
other Person:
(i) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in a managerial capacity, whether as an employee,
independent contractor, consultant or advisor, or as a sales representative,
in the sale or marketing of any yellow page publishing, telecommunication
services and natural gas or electrical goods and services (collectively, the
"Proscribed Business"), within the States of Arkansas, California, Kansas,
Missouri, Oklahoma and Texas (the "Territory");
(ii) call upon any Person within the Territory who is employee of
Purchaser (including the Subsidiaries thereof) in a sales representative or
managerial capacity for the purpose or with the
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intent of enticing such employee away from or out of the employ of Purchaser
(including the Subsidiaries thereof); provided that each Stockholder shall be
permitted to call upon and hire immediate family members;
(iii) call upon any Person which is or which has been, within one
year prior to the Closing Date or the Termination Date, as the case may be, a
customer of Purchaser (including the Subsidiaries thereof), or of Company
within the Territory, for the purpose of soliciting or selling products or
services in direct competition with Purchaser (including the Subsidiaries
thereof) within the Territory;
(iv) call upon any prospective acquisition candidate, on any
Stockholder's own behalf or on behalf of any competitor of Purchaser
(including the Subsidiaries thereof) engaged in a Proscribed Business, which
candidate, to the actual knowledge of such Stockholder after due inquiry, was
called upon by Purchaser (including the Subsidiaries thereof) or for which, to
the actual knowledge of such Stockholder after due inquiry, Purchaser (or any
Subsidiary thereof) made an acquisition analysis, for the purpose of acquiring
such entity; or
(v) disclose existing or prospective customers of Company to any
Person for any reason or purpose whatsoever except to the extent that Company
has in the past disclosed such information to the public for valid business
reasons.
Notwithstanding the above, the foregoing covenants shall not be
deemed to prohibit any Stockholder from acquiring and holding as a passive
investment not more than five percent of the capital stock of a competing
business whose stock is traded on a national securities exchange or the
National Association of Securities Dealers' Automated Quotation System.
13.2 Damages. Because of the difficulty of measuring economic losses
to Purchaser as a result of a breach of any of the foregoing covenants, and
because of the immediate and irreparable damage that could be caused to
Purchaser for which it would have no other adequate remedy, each Stockholder
agrees that any of the foregoing covenants may be enforced by Purchaser in the
event of breach by such Stockholder, by injunction and restraining order.
13.3 Reasonable Restraint. It is agreed by the parties hereto that
the foregoing covenants in this Section 13 impose a reasonable restraint on
Stockholders in light of the activities and business of Purchaser (including
the Subsidiaries thereof) on the date of the execution of this Agreement and
the reasonably foreseeable plans of Purchaser.
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13.4 Severability, Reformation. The covenants in this Section 13 are
severable and separate, and the unenforceability of any specific covenant
shall not affect the provisions of any other covenant. Moreover, in the event
any court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention
of the parties that such restrictions be enforced to the fullest extent the
court deems reasonable, and the Agreement shall thereupon be automatically
reformed.
13.5 Independent Covenant. All of the covenants in this Section 13
shall be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of any
Stockholder against Purchaser (including the Subsidiaries thereof), whether
predicated on this Agreement or otherwise, shall not constitute a defense to
the enforcement by Purchaser of such covenants. It is specifically agreed that
the period of 36 calendar months stated at the beginning of this Section 13,
during which the agreements and covenants of each Stockholder made in this
Section 13 shall be effective, shall be computed by excluding from such
computation any time during which such Stockholder is in violation of any
provision of this Section 13. The covenants contained in this Section 13 shall
not be affected by any breach of any other provision hereof by any party
hereto and shall become void if the transactions contemplated by this
Agreement are not consummated.
13.6 Materiality. Stockholders hereby agree that the covenants set
forth in this Section 14 are a material and substantial part of the
transactions contemplated by this Agreement.
14. TRANSFER PROHIBITIONS AND RESTRICTIONS
14.1 Warrants. STOCKHOLDERS ACKNOWLEDGE THAT THE WARRANTS ARE
NON-TRANSFERRABLE AND HENCE CANNOT BE SOLD, ASSIGNED, EXCHANGED, TRANSFERRED,
ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF BY ANY
STOCKHOLDER EXCEPT (I) PURSUANT TO THE LAWS OF DESCENT AND DISTRIBUTION, (II)
IN CONNECTION WITH A TENDER OFFER OR EXCHANGE OFFER FOR ALL THE PURCHASER
STOCK OR (III) TO A STOCKHOLDER'S LINEAL DESCENDANTS, OR TRUSTS CREATED FOR
THEIR BENEFIT, IN EACH CASE ONLY IF THE TRANSFEREE AGREES TO BE BOUND BY THE
TERMS OF THIS SECTION 14. In addition, Stockholders further acknowledge that
for a period of one year from the date of the original issuance of any Warrant
Stock upon the exercise of a Warrant, except pursuant to Section 16, no
Stockholder may sell, assign, exchange, transfer, encumber, pledge,
distribute, appoint, or otherwise dispose of any Warrant Stock. The Warrant
Stock delivered to the Stockholders upon exercise of the Warrants will bear a
legend substantially in the form set forth in Section 14.3 and contain such
other information as Purchaser may deem necessary or appropriate.
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14.2 Purchaser Stock. Except for transfers to immediate family
members who agree to be bound by the restrictions set forth in this Section
14.2 (or trusts for the benefit of the Stockholders or family members, the
trustees of which so agree), for a period of one year from the Closing, except
pursuant to Section 16, none of the Stockholders shall sell, assign, exchange,
transfer, encumber, pledge, distribute, appoint, or otherwise dispose of any
Purchaser Stock received by the Stockholders in the transaction contemplated
herein. The Purchaser Stock delivered to the Stockholders pursuant to Section
2 of this Agreement will bear a legend substantially in the form set forth in
Section 14.3 and contain such other information as Purchaser may deem
necessary or appropriate:
14.3 Legend. The following legend satisfies the requirements of
Sections 14.1 and 14.2:
THIS SECURITY MAY NOT BE SOLD, ASSIGNED, EXCHANGED, TRANSFERRED, ENCUMBERED,
PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF, AND THE ISSUER SHALL
NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE,
TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION
PRIOR TO [FIRST ANNIVERSARY OF DATE OF ORIGINAL ISSUANCE]. UPON THE WRITTEN
REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS
RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) AFTER
THE DATE SPECIFIED ABOVE.
15. INVESTMENT REPRESENTATIONS
Stockholders acknowledge that the Notes, the shares of Purchaser Stock
comprising the Stock Component and the Warrant Stock (collectively "Restricted
Securities") will not be registered under the 1933 Act and therefore may not
be resold without compliance with the requirements of the 1933 Act and
applicable state securities laws. All of the Restricted Securities will be
acquired by Stockholders solely for their own respective accounts, for
investment purposes only, and not with a view to the distribution thereof.
15.1 Compliance With Law. Stockholders represent, warrant, covenant
and agree that none of the Restricted Securities will be offered, sold,
assigned, exchanged, transferred, encumbered, distributed, appointed or
otherwise disposed of except after full compliance with all of the applicable
provisions of the 1933 Act and the rules and regulations of the SEC thereunder
and the provisions of applicable state securities laws and regulations. All
the Restricted Securities shall bear the following legend in addition to the
legend required under Section 14 of this Agreement:
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THE [SHARES/NOTES] REPRESENTED BY THIS SECURITY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE
SECURITIES LAWS (COLLECTIVELY, THE "ACTS") AND MAY NOT BE SOLD OR OTHERWISE
TRANSFERRED UNLESS AND UNTIL (A) THE [SHARES/NOTES] REPRESENTED BY THIS
SECURITY SHALL HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND APPLICABLE STATE SECURITIES LAWS (COLLECTIVELY, THE "ACTS") OR
(B) THE HOLDER OF THE [SHARES/NOTES] REPRESENTED BY THIS SECURITY PROVIDES THE
ISSUER WITH (X) AN UNQUALIFIED WRITTEN OPINION OF LEGAL COUNSEL, WHICH COUNSEL
AND OPINION (IN FORM AND SUBSTANCE) SHALL BE REASONABLY SATISFACTORY TO THE
ISSUER, TO THE EFFECT THAT THE PROPOSED DISPOSITION OF THE [SHARES/NOTES]
REPRESENTED BY THIS SECURITY MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE
ACTS OR (Y) SUCH OTHER EVIDENCE AS MAY BE REASONABLY SATISFACTORY TO THE
ISSUER THAT THE PROPOSED DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION
UNDER THE ACTS.
15.2 Economic Risk, Sophistication. Each Stockholder represents that
he has received, has read and understands the Draft Registration Statement,
and in particular the risk factors described therein. Each Stockholder further
represents that he is able to bear the economic risk of an investment in the
Restricted Securities and can afford to sustain a total loss of such
investment and either (i) has such knowledge and experience in financial and
business matters that he is capable of evaluating the merits and risks of the
proposed investment in Purchaser or (ii) together with the senior executives
of the Company, with whom he has consulted, has such knowledge and experience
in financial and business matters that he is capable of evaluating the merits
and risks of the proposed investment in Purchaser. Stockholders have had an
adequate opportunity to ask questions and receive answers from the officers of
Purchaser and the Company concerning any and all matters relating to the
transactions described herein including, without limitation, the background
and experience of the current and proposed officers and directors of
Purchaser, the plans for the operations of the business of Purchaser and any
plans for additional acquisitions and the like. Stockholders have asked any
and all questions in the nature described in the preceding sentence and all
questions have been answered to their satisfaction. Purchaser agrees to afford
Stockholders another opportunity to ask similar questions regarding Purchaser
prior to any exercise of their Warrants. At the time of any such exercise,
Purchaser may, as a condition to the issuance of any Warrant Stock upon the
exercise of Warrants, require the reaffirmation of the statements contained in
this Section 15.2 by the Stockholder seeking to exercise Warrants.
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16. REGISTRATION RIGHTS
16.1 PiggyBack Registration Rights. Whenever Purchaser proposes to
register any Purchaser Stock for its own or the account of others under the
1933 Act for a public offering other than (i) any registration of shares to be
used as consideration for acquisitions of additional businesses by Purchaser
and (ii) registrations relating to employee benefit plans, Purchaser shall
give each Stockholder then owning Registrable Securities that has not been
registered under the 1933 Act prompt written notice of its intent to do so.
Upon the written request of any such Stockholder given within 15 days after
receipt of such notice, Purchaser shall cause to be included in such
registration all Registrable Securities which any Stockholder requests;
provided, however, if Purchaser is advised in writing in good faith by any
managing underwriter of an underwritten offering of the securities being
offered pursuant to any registration statement under this Section 16.1 that
the number of shares to be sold by Persons other than Purchaser is greater
than the number of such shares which can be offered without adversely
affecting the offering, Purchaser may reduce pro rata the number of shares
offered for the accounts of such Persons (based upon the number of shares held
by such Person) to a number deemed satisfactory by such managing underwriter.
16.2 Demand Registration Rights. At any time after the first
anniversary of the Closing Date, Stockholders or their permitted transferees
("Founding Stockholders") holding a majority of the Registrable Securities
then outstanding (but not less than 500,000 shares), which shares have not
been previously registered or sold and which shares are not entitled to be
sold under Rule 144(k) (or any similar or successor provision) promulgated
under the 1933 Act, may request in writing that Purchaser file a registration
statement under the 1933 Act covering the registration of such shares of
Registrable Securities issued to and held by the Founding Stockholders or
their permitted transferees (a "Demand Registration"). Within ten days of the
receipt of such request, Purchaser shall give written notice of such request
to all other Founding Stockholders and shall, as soon as practicable but in no
event later than 45 days after notice from the Founding Stockholders
requesting such registration, file and use its best efforts to cause to become
effective a registration statement covering all such shares. Purchaser shall
be obligated to effect only one Demand Registration for all Founding
Stockholders; provided, however, that Purchaser shall not be deemed to have
satisfied its obligation under this Section 16.2 unless and until a Demand
Registration covering all shares of Registrable Securities requested to be
registered has been filed and become effective under the 1933 Act and has
remained current and effective for not less than 90 days (or such shorter
period as is required to complete the distribution and sale of all shares
registered thereunder).
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Notwithstanding the foregoing paragraph, following such a demand a
majority of the disinterested directors of Purchaser (i.e. directors who have
not demanded or elected to sell shares in any such public offering) may defer
the filing of the registration statement for a 30 day period.
If at the time of any request for a Demand Registration Purchaser has
formulated plans to file within 60 days after such request a registration
statement covering the sale of any of its securities in a public offering
under the 1933 Act, no registration of Registrable Securities shall be
initiated under this Section 16.2 until 90 days after the effective date of
such registration statement unless Purchaser is no longer proceeding
diligently to secure the effectiveness of such registration statement;
provided that Purchaser shall provide the Founding Stockholders the right to
participate in such public offering pursuant to, and subject to, Section 16.1.
16.3 Registration Procedures. All expenses incurred in connection
with the registrations under this Section 16 (including all registration,
filing, qualification, legal, printing and accounting fees, but excluding
underwriting commissions and discounts), shall be borne by Purchaser. In
connection with registrations under Sections 16.1 and 16.2 Purchaser will, as
expeditiously as practicable:
(i) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become and remain effective;
provided that Purchaser may discontinue any registration of its
securities that is being effected pursuant to Section 16.2 at any
time prior to the effective date of the registration statement
relating thereto.
(ii) Prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to such
registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement
effective for a period as may be requested by the Stockholders
holding a majority of the Registrable Securities covered thereby not
exceeding 90 days and to comply with the provisions of the 1933 Act
with respect to the disposition of all securities covered by such
registration statement during such period in accordance with the
intended methods of disposition by the seller or sellers thereof set
forth in such registration statement; provided, that before filing a
registration statement or prospectus relating to the sale of
Registrable Securities, or any amendments or supplements thereto,
Purchaser will furnish to counsel to each holder of Registrable
Securities covered by such registration statement or prospectus,
copies of all documents proposed to be filed, which documents will be
subject to the review of such
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counsel, and Purchaser will give reasonable consideration in good
faith to any comments of such counsel.
(iii) Furnish to each holder of Registrable Securities
covered by the registration statement and to each underwriter, if
any, of such Registrable Securities, such number of copies of a
preliminary prospectus and prospectus for delivery in conformity with
the requirements of the 1933 Act, and such other documents, as such
Person may reasonably request, in order to facilitate the public sale
or other disposition of the Registrable Securities.
(iv) Use its best efforts to register or qualify the
Registrable Securities covered by such registration statement under
such other securities or blue sky laws of such jurisdictions as each
seller shall reasonably request, and do any and all other acts and
things which may be reasonably necessary or advisable to enable such
seller to consummate the disposition of the Registrable Securities
owned by such seller, in such jurisdictions, except that Purchaser
shall not for any such purpose be required (x) to qualify to do
business as a foreign corporation in any jurisdiction where, but for
the requirements of this Section 16.3(iv), it is not then so
qualified, or (y) to subject itself to taxation in any such
jurisdiction, or (z) to take any action which would subject it to
general or unlimited service of process in any such jurisdiction
where it is not then so subject.
(v) Use its best efforts to cause the Registrable Securities
covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be
necessary to enable the seller or sellers thereof to consummate the
disposition of such Registrable Securities.
(vi) Immediately notify each seller of Registrable
Securities covered by such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the
1933 Act within the appropriate period mentioned in Section 16.3(ii),
if Purchaser becomes aware that the prospectus included in such
registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then
existing, and, at the request of any such seller, deliver a
reasonable number of copies of an amended or supplemental prospectus
as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities, each prospectus shall not
include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances
then existing.
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(vii) Otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC and make generally
available to its security holders, in each case as soon as
practicable, but not later than 45 calendar days after the close of
the period covered thereby (90 calendar days in case the period
covered corresponds to a fiscal year of the Purchaser), an earnings
statement of Purchaser which will satisfy the provisions of Section
11 (a) of the 1933 Act.
(viii) Use its best efforts in cooperation with the
underwriters to list such Registrable Securities on each securities
exchange as they may reasonably designate.
(ix) In the event the offering is an underwritten offering,
use its best efforts to obtain a "cold comfort" letter from the
independent public accountants for Purchaser in customary form and
covering such matters of the type customarily covered by such
letters.
(x) Execute and deliver all instruments and documents
(including in an underwritten offering an underwriting agreement in
customary form) and take such other actions and obtain such
certificates and opinions as the Stockholders holding a majority of
the shares of Registrable Securities covered by the Registration
Statement may reasonably request in order to effect an underwritten
public offering of such Registrable Securities.
(xi) Make available for inspection by the seller of such
Registrable Securities covered by such registration statement, by any
underwriter participating in any disposition to be effected pursuant
to such registration statement and by any attorney, accountant or
other agent retained by any such seller or any such underwriter, all
pertinent financial and other records, pertinent corporate documents
and properties of Purchaser, and cause all of Purchaser's officers,
directors and employees to supply all information reasonably
requested by any such seller, underwriter, attorney, accountant or
agent in connection with such registration statement.
(xii) Obtain for delivery to the underwriter or agent an
opinion or opinions from counsel for Purchaser in customary form and
in form and scope reasonably satisfactory to such underwriter or
agent and its counsel.
16.4 Other Registration Matters.
(i) Each Stockholder holding shares of Registrable
Securities covered by a Registration Statement referred to in this
Section 16 will, upon receipt of any notice from
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Purchaser of the happening of any event of the kind described in
Section 16.3(vi), forthwith discontinue disposition of the
Registrable Securities pursuant to the registration statement
covering such Registrable Securities until such holder's receipt of
the copies of the supplemented or amended prospectus contemplated by
Section 16.3(vi).
(ii) If a registration pursuant to Section 16.1 or 16.2
involves an underwritten offering, each of Larry Baldwin, Steve
Sparks and Ron Baldwin agrees, if his shares of Registrable
Securities are included in such registration, and Richard O'Neal
agrees, whether or not his shares of Registrable Securities are
included in such registration, not to effect any public sale or
distribution, including any sale pursuant to Rule 144 under the 1933
Act, of any Registrable Securities, or of any security convertible
into or exchangeable or exercisable for any Registrable Securities
(other than as part of such underwritten offering), without the
consent of the managing underwriter, during a period commencing seven
calendar days before and ending 180 calendar days (or such lesser
number as the managing underwriter shall designate) after the
effective date of such registration. Similarly, each of the
Stockholders agrees not to effect any sale or distribution, including
any sale pursuant to the registration rights provided in Section
16.1, of any Registrable Securities, or of any security convertible
into or exchangeable or exercisable for any Registrable Securities,
without the consent of the managing underwriter of the IPO during a
period commencing on the effective date of the Draft Registration
Statement and ending 365 calendar days (or such lesser number as such
managing underwriter shall designate) after such effective date.
16.5 Indemnification.
(i) In the event of any registration of any securities of
Purchaser under the 1933 Act pursuant to Section 16.1 or 16.2,
Purchaser will, and it hereby agrees to, indemnify and hold harmless,
to the extent permitted by law, each seller of any Registrable
Securities covered by such registration statement, each Affiliate of
such seller and their respective directors, officers, employees and
agents or general and limited partners (and directors, officers,
employees and agents thereof) and, if such seller is a portfolio or
investment fund, its investment advisors or agents, each other Person
who participates as an underwriter in the offering or sale of such
securities and each other Person, if any, who controls such seller or
any such underwriter within the meaning of the 1933 Act, as follows:
(x) against any and all loss, liability, claim,
damage or expense whatsoever arising out of or based upon an
untrue statement or alleged untrue statement of a material
fact contained in any registration statement (or any
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<PAGE>
amendment or supplement thereto), including all documents
incorporated therein by reference, or the omission or
alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein
not misleading, or arising out of an untrue statement or
alleged untrue statement of a material fact contained in any
preliminary prospectus or prospectus (or any amendment or
supplement thereto) or the omission or alleged omission
therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading;
(y) against any and all loss, liability, claim,
damage and expense whatsoever to the extent of the aggregate
amount paid in settlement of any litigation, or
investigation or proceeding by any governmental agency or
body, commenced or threatened, or of any claim whatsoever
based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, if such
settlement is effected with the written consent of
Purchaser; and
(z) against any and all expense reasonably incurred
by them in connection with investigating, preparing or
defending against any litigation, or investigation or
proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue
statement or mission to the extent that any such expense is
not paid under subsection (x) or (y) above;
Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such seller or any such
director, officer, employee, agent, general or limited partner,
investment advisor or agent, underwriter or controlling Person and
shall survive the transfer of such securities by such seller.
(ii) Purchaser may require, as a condition to including any
Registrable Securities in any registration statement filed in
accordance with Section 16.1 or 16.2, that Purchaser shall have
received an undertaking reasonably satisfactory to it from the
prospective seller of such Registrable Securities or any underwriter,
to indemnify and hold harmless (in the same manner and to the same
extent as set forth in Section 16.5(i)) Purchaser with respect to any
statement or alleged statement in or omission or alleged omission
from such registration statement, any preliminary, final or summary
prospectus contained therein, or any amendment or supplement, if such
statement or alleged statement or omission or alleged omission was
made in reliance upon and in conformity with written information
furnished
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<PAGE>
to Purchaser by or on behalf of such seller or underwriter
specifically stating that it is for use in the preparation of such
registration statement, preliminary, final or summary prospectus or
amendment or supplement. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of
Purchaser or any such director, officer or controlling Person and
shall survive the transfer of such securities by such seller. In that
event, the obligations of the Purchaser and such sellers pursuant to
this Section 16.5 are to be several and not joint; provided, however,
that, with respect to each claim pursuant to this Section 16.5,
Purchaser shall be liable for the full amount of such claim, and each
such seller's liability under this Section 16.5 shall be limited to
an amount equal to the net proceeds (after deducting the underwriting
discount and expenses) received by such seller from the sale of
Registrable Securities held by such seller pursuant to this
Agreement.
(iii) Promptly after receipt by an indemnified party
hereunder of written notice of the commencement of any action or
proceeding involving a claim referred to in this Section 16.5, such
indemnified party will, if a claim in respect thereof is to be made
against an indemnifying party, give written notice to such
indemnifying party of the commencement of such action; provided,
however, that the failure of any indemnified party to give notice as
provided herein shall not relieve the indemnifying party of its
obligations under this Section 16.5, except to the extent (not
including any such notice of an underwriter) that the indemnifying
party is materially prejudiced by such failure to give notice. In
case any such action is brought against an indemnified party, unless
in such indemnified party's reasonable judgment a conflict of
interest between such indemnified and indemnifying parties may exist
in respect of such claim (in which case the indemnifying party shall
not be liable for the fees and expenses of more than one firm of
counsel selected by holders of a majority of the shares of
Registrable Securities included in the offering or more than one firm
of counsel for the underwriters in connection with any one action or
separate but similar or related actions), the indemnifying party will
be entitled to participate in and to assume the defense thereof,
jointly with any other indemnifying party similarly notified, to the
extent that it may wish with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to
such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently
incurred by such indemnifying party in connection with the defense
thereof, provided that the indemnifying party will not agree to any
settlement without the prior consent of the indemnified party (which
consent shall not be unreasonably withheld) unless such settlement
requires no more than a monetary payment for which the indemnifying
party agrees to indemnify the indemnified party and includes a full,
unconditional and complete release of the indemnified party;
provided, however, that the
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<PAGE>
indemnified party shall be entitled to take control of the defense of
any claim as to which, in the reasonable judgment of the indemnifying
party's counsel, representation of both the indemnifying party and
the indemnified party would be inappropriate under the applicable
standards of professional conduct due to actual or potential
differing interests between them. In the event that the indemnifying
party does not assume the defense of a claim pursuant to this Section
16.5(iii), the indemnified party will have the right to defend such
claim by all appropriate proceedings, and will have control of such
defense and proceedings, and the indemnified party shall have the
right to agree to any settlement without the prior consent of the
indemnifying party. Each indemnified party shall, and shall cause its
legal counsel to, provide reasonable cooperation to the indemnifying
party and its legal counsel in connection with its assuming the
defense of any claim, including the furnishing of the indemnifying
party with all papers served in such proceeding. In the event that an
indemnifying party assumes the defense of an action under this
Section 16.5(iii), then such indemnifying party shall, subject to the
provisions of this Section 16.5, indemnify and hold harmless the
indemnified party from any and all losses, claims, damages or
liabilities by reason of such settlement or judgment.
(iv) Purchaser and each seller of Registrable Securities
shall provide for the foregoing indemnity (with appropriate
modifications) in any underwriting agreement with respect to any
required registration or other qualification of securities under any
federal or state law or regulation of any governmental authority.
16.6 Contribution. In order to provide for just and equitable
contribution in circumstances under which the indemnity contemplated by
Section 16.5 is for any reason not available or insufficient for any reason to
hold harmless an indemnified party in respect of any losses, claims, damages
or liabilities referred to therein, the parties required to indemnify by the
terms thereof shall contribute to the aggregate losses, liabilities, claims,
damages and expenses of the nature contemplated by such indemnity agreement
incurred by Purchaser, any seller of Registrable Securities and one or more of
the underwriters, except to the extent that contribution is not permitted
under Section 11 (f) of the 1933 Act. In determining the amounts which the
respective parties shall contribute, there shall be considered the relative
benefits received by each party from the offering of the Registrable
Securities by taking into account the portion of the proceeds of the offering
realized by each, and the relative fault of each party by taking into account
the parties' relative knowledge and access to information concerning the
matter with respect to which the claim was asserted, the opportunity to
correct and prevent any statement or omission and any other equitable
considerations appropriate under the circumstances. Purchaser and each Person
selling securities agree with each other that no seller of Registrable
Securities shall be required to contribute any
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<PAGE>
amount in excess of the amount such seller would have been required to pay to
an indemnified party if the indemnity under Section 16.5(ii) were available.
Purchaser and each such seller agree with each other and the underwriters of
the Registrable Securities, if requested by such underwriters, that it would
not be equitable if the amount of such contribution were determined by pro
rata or per capita allocation (even if the underwriters were treated as one
entity for such purpose) or for the underwriters' portion of such contribution
to exceed the percentage that the underwriting discount bears to the initial
public offering price of the Registrable Securities. For purposes of this
Section 16.6, each Person, if any, who controls an underwriter within the
meaning of Section 15 of the 1933 Act shall have the same rights to
contribution as such underwriter, and each director and each officer of
Purchaser who signed the registration statement, and each Person, if any, who
controls Purchaser or a seller of Registrable Securities within the meaning of
Section 15 of the 1933 Act shall have the same rights to contribution as
Purchaser or a seller of Registrable Securities, as the case may be.
16.7 Availability of Rule 144. Purchaser shall not be obligated to
register shares of Registrable Securities held by any Stockholder at any time
when the resale provisions of Rule 144(k) (or any similar or successor
provision) promulgated under the 1933 Act are available to such Stockholder.
17. GENERAL
17.1 Cooperation. Company, Stockholders and Purchaser shall deliver
or cause to be delivered to each other on the Closing Date and at such other
times and places as shall be reasonably agreed to, such additional instruments
as the any of the others may reasonably request for the purpose of carrying
out this Agreement.
17.2 Successors and Assigns. This Agreement and the rights of the
parties hereunder may not be assigned (except (i) by operation of law or (ii)
by Purchaser to one of its wholly-owned Subsidiaries, under circumstances that
does not relieve Purchaser of its obligations under this Agreement), and any
such unpermitted purported assignment shall be void and of no legal force and
effect..
17.3 Entire Agreement. This Agreement (including the Schedules and
Annexes) and the documents delivered pursuant hereto constitute the entire
agreement and understanding among the Company, Stockholders, Purchaser and Old
ACG, and supersede any prior agreement and understanding relating to the
subject matter of this Agreement. This Agreement, upon execution and delivery,
constitutes a valid and binding agreement of the parties hereto enforceable in
accordance with its terms and may be modified or amended only by a written
instrument executed by Company,
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<PAGE>
Stockholders, Purchaser and Old ACG, acting through their respective officers
or representatives, duly authorized by their respective Boards of Directors in
the cases of Company, Purchaser and Old ACG. Any disclosure made on any
Schedule delivered pursuant hereto shall be deemed to have been disclosed for
purposes of any other Schedule required hereby; provided that each party to
this Agreement shall make a good faith effort to cross reference disclosures,
as necessary or advisable, between related Schedules.
17.4 Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
17.5 Brokers and Agents. Except as disclosed on Schedule 17.5, each
party represents and warrants that it employed no broker or agent in
connection with this transaction and agrees to indemnify the other parties
hereto against all loss, cost, damage or expense arising out of claims for
fees or commission of brokers employed or alleged to have been employed by
such indemnifying party.
17.6 Expenses. Whether or not the transactions herein contemplated
shall be consummated, Purchaser will pay the fees, expenses and disbursements
of Purchaser, Old ACG and Company and their respective agents,
representatives, accountants and counsel incurred in connection with the
subject matter of this Agreement and any amendments thereto, including all
costs and expenses incurred in the performance and compliance with all
conditions to be performed by Purchaser, Old ACG and Company under this
Agreement. Stockholders shall pay all sales, use, transfer, real property
transfer, gains, stock transfer and other similar taxes ("Transfer Taxes")
imposed in connection with the sale of shares of Company Stock owned by them
to Purchaser, the fees and expenses of Stockholders' legal counsel and all
other costs and expenses incurred by Stockholders in their performance and
compliance with all conditions to be performed by them under this Agreement.
17.7 Notices. All notices of communications required or permitted
hereunder shall be in writing, addressed to the party to be notified, and may
be given by (i) depositing the same in United States mail, postage prepaid and
registered or certified with return receipt requested, (ii) by telecopying the
same if receipt thereof is confirmed or (iii) by delivering the same in person
to an officer or agent of such party.
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<PAGE>
(x) If to Purchaser or Old ACG, addressed to Purchaser at:
Advanced Communications Group, Inc.
3355 West Alabama
Suite 580
Houston, Texas 77098
Attn: Rod K. Cutsinger
Telecopy No.: 713-599-0222
with a copy to:
Bracewell & Patterson, L.L.P.
South Tower Pennzoil Place
711 Louisiana, Suite 2900
Houston, Texas 77002-2781
Attn: Edgar J. Marston III
Telecopy No.: 713-221-1212
(y) If to Stockholders, addressed to them at:
(Name of Stockholder)
Great Western Directories, Inc.
2400 Lakeview Drive, Suite 109
Amarillo, Texas 79109
Telecopy No.: 806-359-2998
(z) If to Company, addressed to it at:
Great Western Directories, Inc.
2400 Lakeview Drive, Suite 109
Amarillo, Texas 79109
Attn: Richard O'Neal
Telecopy No.: 806-359-2998
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<PAGE>
with a copy to:
McAfee & Taft
Tenth Floor, Two Leadership Square
211 North Robinson
Oklahoma City, Oklahoma 73102-7103
Attn: Jerry A. Warren
Telecopy No.: 405-235-0439
or to such other address or counsel as any party hereto shall specify pursuant
to this Section 17.7 from time to time.
17.8 Governing Law. This Agreement shall be construed in accordance
with the laws of the State of Texas.
17.9 Exercise of Rights and Remedies. Except as otherwise provided
herein, no delay of or omission in the exercise of any right, power or remedy
accruing to any party as a result of any breach or default by any other party
under this Agreement shall impair any such right, power or remedy, nor shall
it be construed as a waiver of or acquiescence in any such breach or default,
or of any similar breach or default occurring later; nor shall any waiver of
any single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
17.10 Time. Time is of the essence with respect to this Agreement.
17.11 Reformation and Severability. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
practicable, be modified in such manner as to be valid, legal and enforceable
but so as to most nearly retain the intent of the parties, and if such
modification is not possible, such provision shall be severed from this
Agreement; and in either case the validity, legality and enforceability of the
remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.
17.12 Remedies Cumulative. No right, remedy or election given by any
term of this Agreement shall be deemed exclusive but each shall be cumulative
with all other rights, remedies and elections available at law or in equity.
17.13 Captions. The headings of this Agreement are inserted for
convenience only, shall not constitute a part of this Agreement or be used to
construe or interpret any provision hereof.
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17.14 Public Statements. The parties hereto shall consult with each
other and no party shall issue any public announcement or statement with
respect to the transactions contemplated hereby without the consent of the
other parties, unless the party desiring to make such announcement or
statement, after seeking such consent from the other parties, obtains advice
from legal counsel that a public announcement or statement is required by
applicable law.
17.15 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived only
with the written consent of Company, Stockholders, Purchaser and Old ACG. Any
amendment or waiver effected in accordance with this Section 17.15 shall be
binding upon each of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
ADVANCED COMMUNICATIONS GROUP, INC.
BY:
--------------------------------------------
NAME: ROD K. CUTSINGER
TITLE: CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ADVANCED COMMUNICATIONS CORP.
BY:
--------------------------------------------
NAME: ROD K. CUTSINGER
TITLE: CHAIRMAN AND CHIEF EXECUTIVE OFFICER
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GREAT WESTERN DIRECTORIES, INC.
BY:
--------------------------------------------
NAME: RICHARD O'NEAL
TITLE: PRESIDENT
-----------------------------------------------
RICHARD O'NEAL
-----------------------------------------------
LARRY BALDWIN
-----------------------------------------------
STEVE SPARKS
-----------------------------------------------
RON BALDWIN
-----------------------------------------------
RONNIE EMANUEL
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ANNEX I
DRAFT REGISTRATION STATEMENT
(separately provided)
<PAGE>
ANNEX II
ADVANCED COMMUNICATIONS GROUP, INC.
SECTION 351 EXCHANGE PLAN
The Board of Directors of Advanced Communications Group, Inc., a
Delaware corporation organized in September 1997 ("Company"), has adopted this
Section 351 Exchange Plan effective as of October 3, 1997 ("Exchange Plan") in
order to comply with the requirements of Section 351 of the Internal Revenue
Code of 1986, as amended, and the rules and regulations promulgated thereunder
("Code"), and for purposes of defining the rights of various persons who may
make future transfers of voting capital stock and other consideration,
including cash and other assets (the items transferred being collectively
referred to herein as the "Assets") to the Company, all as more particularly
set forth below:
WHEREAS, the Company intends to acquire outstanding shares of capital
stock of certain corporations and other assets and acquire the outstanding
capital stock of ACG, Inc., a Delaware corporation, in a reverse triangular
merger, all as part of an integrated transaction as more particularly
described in the Company's Registration Statement in Form S-1 (draft of
October 2, 1997) ("Draft Registration Statement") relating to its initial
underwritten public offering ("IPO"), the foregoing acquisitions being
hereinafter collectively referred to as the "Acquisitions"; and
WHEREAS, the various transactions comprising the Acquisitions will
occur substantially concurrently upon the consummation of the IPO;
NOW THEREFORE, in order to obtain the Assets, the Company may elect
to exchange, as a part of a single plan, shares of its voting capital stock
and other consideration, including cash, warrants, options and promissory
notes, for such Assets as shall be transferred to the Company by one or more
of the following individuals and entities: (i) the existing shareholders of
the predecessor to the Company in a reverse triangular merger; (ii) certain
holders of capital stock of other corporations or other assets that shall be
acquired by the Company pursuant to the Acquisitions; (iii) certain other
persons or entities who may assist the Company in the Acquisitions or in the
manufacture and or marketing of its products, (iv) purchasers of the Company's
capital stock in the IPO; and (v) certain other financial investors; and
FURTHERMORE, it is the expectation of the Company (without making any
representation with respect thereto) that the parties contributing such Assets
to the Company as part of the
<PAGE>
Acquisitions and the IPO will possess immediately after the completion of the
Acquisitions, at least 80% of the total combined voting power of all classes
of capital stock of the Company entitled to vote and at least 80% of the total
number of shares of all other classes of capital stock of the Company; and
FURTHERMORE, it is also the intention of the Company (without making
any representation with respect thereto) that the foregoing transfers of
Assets to the Company shall qualify as tax free within the provisions of
Section 351 of the Code; provided, however, that the Company does not assume
any liability or responsibility to any holder of capital stock of the Company
or any other person or entity in the event Section 351 of the Code does not
apply to such transfers of Assets; and
FURTHERMORE, it is the expectation of the Company that the parties to
the Acquisitions and the IPO will contribute Assets to the Company in the
approximate amounts contemplated by the Draft Registration Statement in
exchange for the voting capital stock, and other consideration, including
cash, options, warrants and promissory notes of the Company, in the
approximate amounts contemplated by the Draft Registration Statement.
The shares of voting capital stock and other consideration, including
cash, options, warrants and promissory notes of the Company, deliverable in
the Acquisitions may be subject to adjustment in accordance with the various
acquisition agreements between the Company and the contributing parties. This
Exchange Plan shall not obligate any party to any Acquisition to consummate
such Acquisition other than upon the terms of the definitive acquisition
agreement executed by such party with respect to such Acquisition.
By the execution of the acquisition agreement to which this Exchange
Plan is attached as Annex II, each of the contributing parties thereto
evidences such party's agreement with and adoption of this Exchange Plan.
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<PAGE>
ANNEX III
Advanced Communications Group, Inc.
$
5% SUBORDINATED NOTE DUE [ANNIVERSARY DATE OF CLOSING], 1999
DATED: , 1997
------------------
THE SECURITIES REPRESENTED HEREBY WERE NOT ISSUED IN A TRANSACTION
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS.
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED
FOR INVESTMENT AND MAY NOT BE SOLD OR TRANSFERRED UNLESS
SUCH SALE OR TRANSFER IS COVERED BY AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS OR, IN THE OPINION OF COUNSEL TO THE
ISSUER, IS EXEMPT FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT
AND SUCH LAWS.
--------------------
Advanced Communications Group, Inc., a Delaware corporation organized
in September 1997 (the "Company"), for value received, hereby promises to pay
to , or registered assigns, the principal sum of
Dollars ($ ) in one installment on [anniversary date of closing],
1999, in such coin or currency of the United States of America as at the time
of payment shall be legal tender for the payment of public and private debts,
and to pay to the registered holder hereof interest from the date hereof,
annually on [anniversary date of closing] of each year commencing [anniversary
date of closing], 1998, on said principal sum, in like coin and currency, at a
rate per annum of five percent (5%), to Noteholder until payment of said
principal sum has been made or duly provided for; provided, however, that
payment of interest may be made at the option of the Company by wire transfer
of funds to such bank account in the United States as shall be designated in
writing to the Company by the registered holder hereof or by check mailed to
the
<PAGE>
address of the registered holder hereof as such address shall appear in the
Note Register maintained by the Company. Interest shall be calculated on the
basis of a 360-day year of twelve 30-day months.
ARTICLE 1.
Defined Terms
SECTION a. Defined Terms. Unless the context otherwise requires,
capitalized terms used herein shall have the meanings ascribed to them in
Article IX.
ARTICLE 2.
General Provisions
SECTION a. Mutilated Destroyed, Lost or Stolen Note. In case this
Note shall become mutilated or be destroyed, lost or stolen, the Company in
its discretion may execute and deliver a new Note, in exchange and
substitution for the mutilated Note or in lieu of and in substitution for the
Note destroyed, lost or stolen. In every case the Noteholder shall furnish to
the Company such security or indemnity as may be required by it to save the
Company harmless, and, in every case of destruction, loss or theft the
Noteholder shall also furnish to the Company evidence to its satisfaction of
the destruction, loss or theft of this Note and of the ownership thereof. Upon
issuance of any substituted Note, the Company may require the payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in relation thereto and other expenses connected therewith.
SECTION b. Transfer and Registration of Notes. This Note may be
presented for transfer by surrender hereof at the office of the Company
maintained for that purpose in accordance with the provisions of Section 4.02,
duly endorsed or accompanied by a written instruction of transfer in form
satisfactory to the Company, duly executed by the holder hereof or his
attorney duly authorized in writing. This Note may be transferred in whole,
but not in part. The Company will have no obligation to transfer this Note
unless its requirements are met and such transfer complies with the legend on
the first page of this Note. By its acceptance of this Note, the holder hereof
acknowledges the restrictions on transfer of this Note set forth herein, and
agrees that it will transfer this Note only as provided herein.
The Company shall not be required to register the transfer of this
Note (i) during a period beginning at the opening of business on a day which
is 15 days before the mailing of a notice of redemption of this Note and
ending on the close of business on the day of such mailing, or (ii) if this
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<PAGE>
Note has been selected for redemption in whole or in part pursuant to Article
III, except the unredeemed portion of this Note if being redeemed in part.
The Company shall keep or cause to be maintained at the office of the
Company maintained in accordance with the provisions of Section 4.02 a
register (herein sometimes referred to as the "Note Register") in which,
subject to such reasonable regulations as it may prescribe, the Company shall
register the Notes (as defined below).
SECTION c. Aggregate Principal Amount of Notes. This Note is one of a
duly authorized issue of Notes of the Company known as its 5% Subordinated
Notes due [anniversary date of closing], 1999, limited to the aggregate
principal amount of Fifteen Million and No/100 Dollars ($15,000,000.00). As
used herein, the term "Notes" refers to all of such issue of Notes.
SECTION d. Amendment of Notes. Each of the Notes may be amended with
the written consent of the holders of at least a majority in outstanding
principal amount of the Notes; provided that without the written consent of
the holder of this Note, no amendment shall (i) reduce the rate or change the
time for payment of interest on this Note, (ii) reduce the principal of or
change the maturity of this Note, (iii) amend Section 6.01, or (iv) make any
change in Article VII that adversely affects the rights of the holder of this
Note. After an amendment becomes effective, it shall bind the holders and
every subsequent holder of Notes, even if notation of the amendment is not
made on any Note. However, the Company may place an appropriate notation
regarding an amendment on any Note thereafter executed.
ARTICLE 3.
Redemption of Note
SECTION a. Redemption Price. The Company may, at its option, redeem
all or from time to time any part of this Note, upon notice as set forth in
Section 3.02 at a redemption price equal to the principal amount to be
redeemed, together with accrued and unpaid interest on the principal amount to
be redeemed to the date fixed for redemption.
SECTION b. Notice of Redemption. If the Company shall desire to
exercise the right to redeem all or any part of this Note pursuant to Section
3.01, it shall fix a date for redemption and shall mail a notice of such
redemption at least 10 days prior to the date fixed for redemption to the
holder of this Note at the last address of such holder as the same appears on
the Note Register. Such mailing shall be by first class mail. The notice if
mailed in the manner herein provided shall be conclusively presumed to have
been duly given, whether or not the holder receives such notice. In any case,
failure to give such notice by mail or any defect in the notice to the holder
of this Note shall not affect the validity of the proceedings for the
redemption of this Note.
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<PAGE>
Each such notice of redemption shall be given in the name of the
Company and shall specify the date fixed for redemption, the principal amount
to be redeemed, the redemption price at which this Note or portion hereof is
to be redeemed, the place of payment, that payment will be made upon
presentation and surrender of this Note and that interest accrued to the date
fixed for redemption will be paid as specified in such notice, and that on and
after said date fixed for redemption interest hereon or on the portions hereof
to be redeemed will cease to accrue. If this Note is to be redeemed in part
only, the notice of redemption shall also state that on and after the date
fixed for redemption, upon surrender of this Note, a new Note in aggregate
principal amount equal to the unredeemed portion hereof will be issued without
charge to the holder.
SECTION c. Payment of Note Called for Redemption. If notice of
redemption has been given as above provided, this Note or the portion of this
Note with respect to which such notice has been given shall become due and
payable on the date and at the place stated in such notice at the applicable
redemption price, together with interest accrued and unpaid to the date fixed
for redemption, and on and after such date (unless the Company shall default
in the payment of this Note or portion hereof to be redeemed at such
redemption price, together with interest accrued to such date) interest on
this Note or portion hereof so called for redemption shall cease to accrue,
and this Note or portion hereof so called for redemption shall be deemed not
to be outstanding and shall not be entitled to any benefit under this Note
except to receive payment of such redemption price, together with accrued
interest to the date fixed for redemption. On presentation and surrender of
this Note on or after the date fixed for redemption at the place of payment in
such notice specified, this Note or the specified portion hereof to be
redeemed shall be paid and redeemed by the Company at the applicable
redemption price, together with interest accrued thereon to the date fixed for
redemption.
ARTICLE 4.
Particular Covenants of the Company
SECTION a. Payment of Principal and Interest on Note. The Company
covenants and agrees that it will duly and punctually pay or cause to be paid
the principal of and the interest on this Note at the place, at the respective
times and in the manner provided herein.
SECTION b. Office for Notices and Payments etc. So long as this Note
remains outstanding, the Company will maintain in the City of Houston, Texas,
an office or agency where this Note may be presented for payment, an office or
agency where this Note may be presented for registration of transfer or
exchange as herein provided, and an office or agency where notices and demands
to or upon the Company in respect of this Note may be served. Until otherwise
designated by the Company in a written notice such offices or agencies shall
be the executive offices of the Company.
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<PAGE>
SECTION c. Limitation on Senior Debt. The Company covenants and
agrees that as long as this Note is outstanding it will not permit the
aggregate amount of Senior Indebtedness outstanding to exceed Fifty Million
and No/100 Dollars ($50,000,000.00).
ARTICLE 5.
Immunity of Incorporators, Stockholders,
Officers and Directors
SECTION a. Note Solely Corporate Obligations. No recourse for the
payment of the principal of or interest on this Note, or for any claim based
hereon or otherwise in respect hereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in this Note, or because of
the creation of any indebtedness represented hereby, shall be had against any
incorporator, stockholder, officer or director, as such, past, present or
future, of the Company or of any successor corporation, either directly or
through the Company or any successor corporation, whether by virtue of any
constitution, statute, or rule of law, or by the enforcement of any assessment
or penalty or otherwise; it being expressly understood that all such liability
is hereby expressly waived and released as a condition of, and as a
consideration for, the execution of this Note.
ARTICLE 6.
Remedies in Event of Default
SECTION a. Event of Default. In case one or more of the following
Events of Default shall have occurred and be continuing:
i. default in the payment of any installment of interest
upon this Note as and when the same shall become due and payable, and
continuance of such default for a period of 30 days; or
ii. default in the payment of the principal of this Note as
and when the same shall become due and payable either at maturity,
upon redemption, by declaration or otherwise; or
iii. failure on the part of the Company duly to observe or
perform any covenants or agreements (other than a covenant or
agreement the breach or a default in the performance of which is
elsewhere in this Section 6.01 specifically dealt with) on the part
of the Company that continues for a period of 30 days after the date
on which written notice (such written notice to state it is a "Notice
of Default" hereunder) of such failure, requiring the Company
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<PAGE>
to remedy the same, shall have been given to the Company and each
holder of any Senior Indebtedness and each entity committed or
obligated to issue or fund any Senior Indebtedness (provided that
such holder or entity has previously given the holders of the Notes
written notice to the effect that it is a holder of Senior
Indebtedness or an entity committed or obligated to issue or fund
Senior Indebtedness (as the case may be) and that such holder or
entity requests that it be given any such notice) by the holder
hereof; or
iv. without the consent of the Company, a court having
jurisdiction shall enter an order for relief with respect to the
Company under the Bankruptcy Code or without the consent of the
Company a court having jurisdiction shall enter a judgment, order or
decree adjudging the Company a bankrupt or insolvent, or enter an
order for relief for reorganiza tion, arrangement, adjustment or
composition of or in respect of the Company under the Bankruptcy Code
or applicable state insolvency law and the continuance of any such
judgment, order or decree unstayed and in effect for a period of 90
consecutive days; or
v. the Company shall institute proceedings for entry of an
order for relief with respect to the Company under the Bankruptcy
Code or for an adjudication of insolvency, or shall consent to the
institution of bankruptcy or insolvency proceedings against it, or
shall file a petition seeking, or seek or consent to reorganization,
arrangement, composition or relief under the Bankruptcy Code or any
applicable state law, or shall consent to the filing of such petition
or to the appointment of a receiver, custodian, liquidator, assignee,
trustee, sequestrator or similar official (other than a custodian
pursuant to 8 Delaware Code ss.226 or any similar statute under other
state laws) of the Company or of substantially all of its property,
or the Company shall make a general assignment for the benefit of
creditors as recognized under the Bankruptcy Code; or
vi. default in the payment of any principal of or interest
on any Senior Indebtedness or on any Pari Passu Debt as and when the
same shall become due and payable and such failure is not cured
within the applicable grace period, if any, or any Senior
Indebtedness or any Pari Passu Debt having an outstanding principal
balance of at least $500,000 shall be declared to be due and payable
prior to the stated maturity thereof;
then and in each and every such case, unless the principal of this Note shall
have already become due and payable, the holders of a majority in outstanding
principal amount of Notes ("Majority Holders") by notice in writing to the
Company and each holder of any Senior Indebtedness and each entity committed
or obligated to issue or fund any Senior Indebtedness (provided that such
holder or entity has previously given the holders of the Notes written notice
to the effect that it is a holder of Senior Indebtedness or an entity
committed or obligated to issue or fund Senior Indebtedness (as the case may
be) and that such holder or entity requests that it be given any such notice),
may declare the principal of all Notes and any accrued interest to the date of
declaration to be due and payable
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<PAGE>
immediately, and upon any such declaration the same shall become and shall be
immediately due and payable, subject to Article VII.
SECTION b. Remedies Cumulative and Continuing. All powers and
remedies given by this Article VI to the holders of the Notes shall, to the
extent permitted by law, be deemed cumulative and not exclusive of any other
thereof or of any other powers and remedies available to such holders, by
judicial proceedings or otherwise, to enforce the performance or observance of
the covenants and agreements contained in the Notes, and no delay or omission
of any holder to exercise any right or power accruing upon any default
occurring and continuing as aforesaid, shall impair any such right or power,
or shall be construed to be a waiver of any such default or an acquiescence
therein; and every power and remedy given by this Article VI or by law to the
holders of the Notes may be exercised from time to time, and as often as shall
be deemed expedient, by such holders.
SECTION c. Waiver of Presentment, Demand, Etc. Except as provided
herein, the Company hereby waives presentment and demand for payment, protest,
notice of protest and nonpayment, notice of the intention to accelerate,
notice of acceleration, and agrees that its liability on this Note shall not
be affected by any renewal or extension in the time of payment hereof, by any
indulgences, and hereby consents to any and all renewals, extensions,
indulgences, releases, or changes, regardless of the number of such renewals,
extensions, indulgences, releases, or changes.
ARTICLE 7.
Subordination of Note
SECTION a. Agreement of Subordination. The Company irrevocably
covenants and agrees, and the holder of this Note, by his acceptance thereof,
likewise irrevocably covenants and agrees, that the payment of the principal
of and interest on this Note is hereby expressly subordinated, to the extent
and in the manner hereinafter set forth, to the prior payment in full of all
Senior Indebtedness. The provisions of this Article VII are made for the
benefit of the holders of Senior Indebtedness, and such holders shall, at any
time, be entitled to enforce such provisions against the Company or the holder
hereof. No holder of any Senior Indebtedness shall be deemed to owe any
fiduciary duty or any other obligation to any holder of this Note now or at
any time hereafter.
SECTION b. Payment Over of Proceeds Upon Dissolution, etc. (a) In the
event of (x) any insolvency, bankruptcy, receivership, liquidation,
reorganization, readjustment, composition or other similar proceeding relative
to the Company or its creditors or its property, (y) any proceeding for
voluntary liquidation, dissolution or other winding up of the Company whether
or not involving insolvency or bankruptcy proceedings, or (z) any assignment
for the benefit of creditors or any marshaling of the assets of the Company,
then and in any such event,
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<PAGE>
(1) all Senior Indebtedness (including interest
accruing on such Senior Indebtedness after the date of
filing a petition or other action commencing any such
proceeding) shall first be paid in full, or have provision
made for payment in full to the reasonable satisfaction of
the holder of any Senior Indebtedness, before the holder of
this Note shall be entitled to receive any payment on
account of the principal of or interest on the indebtedness
evidenced by this Note, and
(2) any payment or distribution of assets of the
Company of any kind or character, whether in cash, property
or securities (other than securities of the Company or any
other corporation provided for by a plan of reorganization
or readjustment, provided the rights of the holders of
Senior Indebtedness are not altered by such reorganization
or readjustment, the payment of which is subordinate, at
least to the extent provided in this Article VII with
respect to this Note, to the payment of all Senior
Indebtedness at the time outstanding and to the payment of
all securities issued in exchange therefor to the holders of
Senior Indebtedness at the time outstanding), to which the
holder of this Note would be entitled except for the
provisions of this Article VII, shall be paid by the
liquidating trustee or agent or other person making such
payment or distribution, whether a trustee in bankruptcy, a
receiver or liquidating trustee or other trustee or agent,
directly to the holders of Senior Indebtedness or their
representative or representatives or to the trustee or
trustees under any indenture under which any instruments
evidencing any of such Senior Indebtedness may have been
issued, ratably according to the aggregate amounts remaining
unpaid on account of the principal of and premium, if any,
and interest on, the Senior Indebtedness held or represented
by each, to the extent necessary to make payment in full of
all Senior Indebtedness remaining unpaid and/or outstanding
(as the case may be), after giving effect to any concurrent
payment or distribution, or provision therefor, to the
holders of such Senior Indebtedness.
ii. No payments on account of principal of or interest on
this Note shall be made unless full payment of amounts then due for
principal of (including any sinking fund payment), premium, if any,
and interest on all Senior Indebtedness has been made or otherwise
duly provided for to the reasonable satisfaction of each holder of
any Senior Indebtedness.
iii. In the event and during the continuation of any default
or event of default in respect of any Senior Indebtedness or under
any agreement under which any Senior Indebtedness was issued
continuing beyond the period of grace, if any, specified in such
agreement, then, unless and until such default shall have been cured
or waived or shall have
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<PAGE>
ceased to exist, no payment shall be made by the Company and no
application of funds shall be made with respect to the principal of
or interest on this Note.
iv. In the event that, notwithstanding the foregoing, any
payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities (other than
securities of the Company or any other corporation provided for by a
plan of reorganization or readjustment, provided that the rights of
the holders of Senior Indebtedness are not altered by such
reorganization or readjustment, the payment of which is subordinate,
at least to the extent provided in this Article VII with respect to
this Note, to the payment of all Senior Indebtedness at the time
outstanding and to the payment of all securities issued in exchange
therefor to the holders of Senior Indebtedness at the time
outstanding), shall be received by the holder of this Note during the
continuance of any event specified in Sections 7.02(a), 7.02(b) or
7.02(c) prohibiting such payment and before all Senior Indebtedness
is paid in full or provision made for its payment to the reasonable
satisfaction of each holder of any Senior Indebtedness, such payment
or distribution (subject to Section 7.04) shall be immediately paid
by the holder hereof over to the holders of Senior Indebtedness (or
their representative or representatives or to the trustee or trustees
under any indenture under which any instruments evidencing any of
such Senior Indebtedness may have been issued), upon their written
request remaining unpaid or unprovided for as provided in the
foregoing subsection (ii) of Section 7.02(a), for application to the
payment of such Senior Indebtedness until all such Senior
Indebtedness shall have been paid in full, after giving effect to any
concurrent payment or distribution, or provision therefor, to the
holders of such Senior Indebtedness.
v. Subject to the payment in full of all Senior Indebtedness
and the irrevocable and complete termination of all commitments and
obligations to issue or fund any Senior Indebtedness (and not before
such time), the holder of this Note shall be subrogated equally and
ratably with the holders of all other Notes to all rights of the
holders of Senior Indebtedness to receive payments or distributions
of cash, property or securities of the Company applicable to the
Senior Indebtedness until the principal of and interest on this Note
shall be paid in full; and, for purposes of such subrogation, no
payments or distributions to the holders of Senior Indebtedness of
cash, property or securities distributable or paid over to the
holders of Senior Indebtedness under the provisions hereof to which
the holder of this Note or other Notes would be entitled except for
the provisions of this Article VII shall, as between the Company, its
creditors other than the holders of Senior Indebtedness, and the
holder of this Note or of other Notes, be deemed to be a payment by
the Company to or on account of the Senior Indebtedness, it being
understood that the provisions of this Article VII are and are
intended solely for the purposes of defining the relative rights of
the holder of this Note, the holders of other Notes and the holders
of the Senior Indebtedness.
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<PAGE>
vi. Nothing contained in this Article VII or elsewhere in
this Note is intended to or shall impair, as between the Company, its
creditors other than the holders of Senior Indebtedness (and the
entities committed or obligated to issue or fund any Senior
Indebtedness), and the holder of this Note, the obligation of the
Company, which is absolute and unconditional, to pay to the holder
hereof the principal of and interest hereon, as and when the same
shall become due and payable in accordance with the terms hereof, or
is intended to or shall affect the relative rights of the holder
hereof and other creditors of the Company other than the holders of
the Senior Indebtedness (and the entities committed or obligated to
issue or fund any Senior Indebtedness), nor shall anything in this
Note prevent the holder from exercising all remedies otherwise
permitted by applicable law upon the happening of any Event of
Default under this Note, subject to the rights, if any, under this
Article VII of the holders of Senior Indebtedness (and the entities
committed or obligated to issue or fund any Senior Indebtedness) in
respect of cash, property or securities of the Company received upon
the exercise of any such remedy.
vii. Without notice to or the consent of the holder of this
Note, the holders of the Senior Indebtedness or the entities
committed or obligated to issue or fund any Senior Indebtedness may
at any time and from time to time, without impairing or releasing the
subordination herein made, change the manner, place or terms of
payment, or change or extend the time of payment of or renew or alter
the Senior Indebtedness or the commitment or obligation to issue or
fund any Senior Indebtedness, or amend or supplement in any manner
any instrument evidencing the Senior Indebtedness or the commitment
or obligation to issue or fund any Senior Indebtedness, any agreement
pursuant to which the Senior Indebtedness was issued or incurred or
any instrument securing or relating to the Senior Indebtedness or the
commitment or obligation to issue or fund any Senior Indebtedness;
release any person liable in any manner for the payment or collection
of the Senior Indebtedness; exercise or refrain from exercising any
rights in respect of the Senior Indebtedness against the Company or
any other person; apply any money or other property paid by any
person or released in any manner to the Senior Indebtedness; accept
or release any security for the Senior Indebtedness; sell, exchange,
release or otherwise deal with any property pledged, mortgaged or
otherwise securing Senior Indebtedness; or exercise or refrain from
exercising any rights against the Company or any other person; all
without thereby impairing in any respect the rights of such holders
of Senior Indebtedness as provided in this Article VII.
SECTION c. No Waiver of Subordination Provision. No right of any
present or future holder of any Senior Indebtedness of the Company to enforce
subordination, as herein provided, shall at any time in any way be prejudiced
or impaired by any act or failure to act on the part of the Company or by any
act or failure to act, in good faith, by any such holder, or by any
noncompliance
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<PAGE>
by the Company with the terms, provisions and covenants of this Note,
regardless of any knowledge thereof any such holder may have or be otherwise
charged with.
SECTION d. Payments to Noteholder. Nothing contained in this Article
VII or elsewhere in this Note, shall, however, affect the obligation of the
Company to make, or prevent the Company from making, at any time, except as
provided in Section 7.02, payments of principal of or interest on this Note.
SECTION e. Authorization of Noteholder to Company to Effect
Subordination. The holder of this Note by his acceptance hereof irrevocably
authorizes and directs the Company on his behalf to take such action as may be
necessary or appropriate to effectuate the subordination provided in this
Article VII and appoints the Company his attorney-in-fact for such purpose.
SECTION f. All Provisions of Note Qualified by Article VII.
Notwithstanding anything herein contained to the contrary, all the provisions
of this Note shall, except as otherwise provided herein, be subject to the
provisions of this Article VII, so far as the same may be applicable thereto.
ARTICLE 8.
Miscellaneous Provisions
SECTION a. Successors and Assigns of Company Bound. All the
covenants, stipulations, promises and agreements in this Note contained by or
in behalf of the Company shall bind its successors and assigns, whether so
expressed or not.
SECTION b. Notice to Noteholder. When this Note provides for notice
to the holder of any event, such notice shall be sufficiently given (unless
otherwise expressly herein provided) if in writing and mailed, first class,
postage prepaid, to the holder at his address as it appears on the Note
Register, not later than the latest date, and not earlier than the earliest
date, prescribed for the giving of such notice. Any notice which is mailed to
the holder in the manner herein provided shall be conclusively presumed to
have been duly given. Where this Note provides for notice in any manner, such
notice may be waived in writing by the person entitled to receive such notice,
either before or after the event, and such waiver shall be the equivalent of
such notice.
SECTION C. TEXAS CONTRACT. THIS NOTE SHALL BE DEEMED TO BE A CONTRACT
MADE UNDER THE LAWS OF THE STATE OF TEXAS, AND FOR ALL PURPOSES SHALL BE
CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE.
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<PAGE>
SECTION d. Legal Holidays. In any case where the date of maturity of
interest on or principal of this Note or the date fixed for redemption of this
Note shall not be a Business Day, then payment of interest on or principal of
this Note need not be made on such date, but may be made on the next
succeeding Business Day with the same force and effect as if made on the date
of maturity or the date fixed for redemption, and no interest shall accrue for
the period after such prior date.
SECTION e. Severability. In case any provision of this Note shall be
invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
ARTICLE 9.
Definitions
SECTION a. Definitions. The terms defined in this Section 9.01
(except as herein otherwise expressly provided or unless the context otherwise
requires) for all purposes of this Note shall have the respective meanings
specified in this Section 9.01.
"Bankruptcy Code" shall mean the United States Bankruptcy Code, 11
United States Code ss. 101 et seq. or any successor statute thereto.
"Business Day" shall mean any day except a Saturday, a Sunday or a
day on which banking institutions in the City of Houston, Texas are authorized
or required by law to close.
"Indebtedness" shall mean the following, whether outstanding on the
date hereof or hereafter created, incurred, assumed or guaranteed, (a) the
principal of, premium if any, and interest on (i) indebtedness of the Company
for money borrowed, (ii) indebtedness of the Company evidenced by bonds,
notes, debentures or similar obligations, (iii) capitalized lease obligations,
(iv) indebtedness or obligations incurred, assumed or guaranteed by the
Company in connection with the acquisition or improvement of any property or
asset or the acquisition by it or by a Subsidiary of any business, (v)
indebtedness of others of the kinds described in the preceding clauses (i),
(ii), (iii), and (iv), assumed or guaranteed by the Company or in effect
guaranteed by the Company through an agreement to purchase or otherwise, (vi)
obligations which would be classified as liabilities on the balance sheet of
the Company in accordance with generally accepted accounting principles,
evidencing the purchase price for the acquisition of assets of any kind,
tangible or intangible, by the Company or a Subsidiary, except in the ordinary
course of business, and (b) any increases, refundings, renewals,
rearrangements or extensions of and amendments, modifications and supplements
to any indebtedness, liability or obligation described in clause (a) above.
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<PAGE>
"Junior Indebtedness" shall mean Indebtedness which, by the terms of
the instrument by which such Indebtedness is created or evidenced, ranks
junior and subordinate in right of payment to the Notes.
"Note" shall mean this Note and any Note issued on exchange or
transfer hereof.
"Noteholder," "holder of this Note" or other similar terms mean any
person in whose name at the time this Note shall be registered in the Note
Register kept for that purpose in accordance with the terms hereof.
"Pari Passu Debt" shall mean any Indebtedness other than (a) Senior
Indebtedness and (b) Junior Indebtedness.
"Senior Bank Lenders" means any commercial lending institution or
group of commercial lending institutions that are or become parties to the
Company's principal working capital, acquisition financing or long-term debt
credit facilities.
"Senior Indebtedness" shall mean whether outstanding on the date
hereof or hereafter created, incurred, assumed or guaranteed, the principal
of, premium if any, and interest on Indebtedness for money borrowed by the
Company in an aggregate amount not exceeding Fifty Million and No/100 Dollars
($50,000,000.00) and owed to Senior Bank Lenders.
"Subsidiary" shall mean any corporation of which the Company, or the
Company and one or more Subsidiaries, or any one or more Subsidiaries,
directly or indirectly own voting securities entitling the holders thereof to
elect a majority of the directors, either at all times or so long as there is
no default or contingency which permits the holders of any other class or
classes of securities to vote for the election of one or more directors.
IN WITNESS WHEREOF, the Company has caused this instrument to be
executed by a duly authorized officer and has caused a facsimile or its
corporate seal to be imprinted hereon.
ADVANCED COMMUNICATIONS GROUP, INC.
[SEAL]
By:
--------------------------------
Name:
--------------------------
Title:
-------------------------
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ANNEX IV
ADVANCED COMMUNICATIONS GROUP, INC.
NON-TRANSFERRABLE SERIES D WARRANT
Total Number of Series A Warrants: 500,000 Warrant No. D
Number of Series A Warrants represented by this Warrant Certificate:
This Warrant Certificate certifies that, for value received,
is the registered holder of the number of Warrants set forth above. Each
Warrant entitles the holder thereof, at any time or from time to time after
the closing and (b) on or before the Expiration Date, to purchase from the
Company one fully paid and nonassessable share of Common Stock at the Exercise
Price, subject to adjustment as provided herein.
"Acts" means the Securities Act of 1933, as amended, and applicable
state securities laws.
"Agreement" means the Restated Stock Purchase Agreement dated as of
October 1, 1997 by and among Company, Old ACG, Great Western and certain
individuals, including the initial registered holder of this Warrant
Certificate.
"Board of Directors" means the board of directors of the Company (or
any authorized committee thereof).
"Closing" means the consummation of the purchase and sale of the
outstanding capital stock of Great Western as contemplated by the Agreement.
"Closing Date" means the date upon which the Closing occurs.
"Common Stock" means the Common Stock, $.00001 par value per share,
of the Company, or such other class of securities as shall then represent the
common equity of the Company.
"Common Stock Equivalent" means any Convertible Security or any
warrant, option or other right to subscribe for or purchase Common Stock or
any Convertible Security, other than pursuant to Employee Benefit Plans.
<PAGE>
"Company" means Advanced Communications Group, Inc., a Delaware
corporation organized in September 1997.
"Conversion Securities" means the Common Stock or other securities or
property purchasable on the exercise of the Warrants.
"Convertible Security" means any security or evidence of indebtedness
that is convertible into or exchangeable for Common Stock.
"Employee Benefit Plans" means all thrift plans, stock purchase
plans, stock bonus plans, stock option plans, employee stock ownership plans
and other incentive or profit sharing arrangements for the benefit of
employees.
"Exercise Price," subject in all circumstances to adjustment in
accordance with Section 3, means $ [IPO Price].
"Expiration Date" means 5:00 p.m., Houston Time on the fifth
anniversary of the closing Date.
"Great Western" means Great Western Directories, Inc., a Texas
corporation.
"Market Price" means the average Price per share of Common Stock for
the 20 Trading Days immediately preceding the date of authorization of the
issuance of any shares of Common Stock by the Board of Directors.
"Old ACG" means ACG, Inc. (formerly Advanced Communications Group,
Inc.), a Delaware corporation organized in June 1996.
"Price" on any day means the reported last sale price per share of
Common Stock regular way on such day or, in case no such sale takes place on
such day, the average of the reported closing bid and asked prices regular
way, in each case on the New York Stock Exchange, or, if the Common Stock is
not listed or admitted to trading on such Exchange, on the American Stock
Exchange, or, if the Common Stock is not listed or admitted to trading on such
Exchange, on the principal national securities exchange on which the Common
Stock is listed or admitted to trading, or, if the Common Stock is not listed
or admitted to trading on any national securities exchange, the average of the
closing bid and asked prices in the over-the-counter market as reported by the
National Association of Securities Dealers' Automated Quotation System, or, if
not so reported, as reported by the National Quotation Bureau, Incorporated,
or any successor thereof, or, if not so reported, the average of the closing
bid and asked prices as furnished by any member of the National Association of
Securities Dealers, Inc. selected from time to time by the Company for that
purpose; or, in all other
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<PAGE>
cases, the value established by the Board of Directors in good faith; and the
"average" Price per share for any period shall be determined by dividing the
sum of the Prices determined for each Trading Day in such period by the number
of Trading Days in such period.
"Trading Day" means a day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is open
for the transaction of business or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, a Monday, Tuesday,
Wednesday, Thursday or Friday on which banking institutions in New York City
are not authorized or obligated by law or executive order to close.
"Warrants" means the Series D Warrants represented by this Warrant
Certificate.
"Warrant Shares" means the shares of Common Stock and other
securities, property or cash receivable upon the exercise of the Warrants.
1. EXERCISE OF WARRANTS. (a) The Warrants evidenced by this Warrant
Certificate may be exercised in whole or in part by presentation and surrender
at the office of the Company specified herein of (i) this Warrant Certificate
with the Election To Exercise duly completed and executed, and (ii) payment of
the Exercise Price as then in effect, by bank draft or cashier's check, for
the number of Warrants being exercised. If the holder of this Warrant
Certificate at any time exercises less than all the Warrants evidenced by this
Warrant Certificate, the Company shall issue to such holder a Warrant
Certificate identical in form to this Warrant Certificate, but evidencing a
number of Warrants equal to the number of Warrants originally represented by
this Warrant Certificate less the number of Warrants previously exercised.
(b) To the extent that the Warrants evidenced by this
Warrant Certificate have not been exercised at or prior to the Expiration
Date, such Warrants shall expire and the rights of the holder shall become
void and of no effect.
2. RESTRICTIONS ON TRANSFER. THE WARRANTS EVIDENCED BY THIS WARRANT
CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED, TRANSFERRED, ENCUMBERED,
PLEDGED, DISTRIBUTED OR OTHERWISE DISPOSED OF EXCEPT IN THE LIMITED INSTANCES
PROVIDED IN SECTION 14 OF THE AGREEMENT. ACCORDINGLY, SUCH WARRANTS HAVE NOT
BEEN REGISTERED UNDER THE ACTS IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION
PROVISIONS THEREOF. The holder hereof acknowledges that the Conversion
Securities may not be directly or indirectly sold, transferred or otherwise
disposed of in violation of the provisions of the Acts. Any purported sale,
transfer or other disposition of this Warrant Certificate, the Warrants
evidenced hereby or the Conversion Securities in violation of this provision
shall be void and the Company shall not be required to recognize the same.
Compliance with this provision is the responsibility of the holder. Each
certificate representing Conversion Securities shall bear a legend
substantially similar to the bold-faced legend appearing in Section 15 of the
Agreement. Reference
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<PAGE>
is made to Sections 14, 15 and 16 of the Agreement that relate to the
non-transferability of the Warrants, the type of legend that shall be
imprinted on Conversion Securities and the rights of the holders of Conversion
Securities to secure registration of their securities under the Acts under
certain circumstances. Such sections are incorporated by reference herein. The
Company shall deem and treat the registered holder of this Warrant Certificate
as the true and lawful owner of the Warrants evidenced hereby for all
purposes, any claims of another person to the contrary notwithstanding.
3. ANTIDILUTION ADJUSTMENTS. The shares of Common Stock purchasable
on exercise of the Warrants evidenced by this Warrant Certificate are shares
of Common Stock as constituted as of the Closing Date. The number and kind of
securities purchasable on the exercise of the Warrants evidenced by this
Warrant Certificate, and the Exercise Price, shall be subject to adjustment
from time to time upon the happening of certain events, as follows:
(a) Mergers, Consolidations and Reclassifications. In case
of any reclassification or change of outstanding securities issuable upon
exercise of the Warrants evidenced by this Warrant Certificate at any time
after the Closing Date (other than a change in par value, or from par value to
no par value, or from no par value to par value or as a result of a
subdivision or combination to which paragraph (b) of this Section 3 applies),
or in case of any consolidation or merger of the Company with or into another
corporation (other than a merger with another corporation in which the Company
is the surviving corporation and which does not result in any reclassification
or change [other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination to which paragraph (b) of this Section 3 applies] in the
securities issuable upon exercise of this Warrant), the holder of the Warrants
evidenced by this Warrant Certificate shall have, and the Company, or such
successor corporation or other entity, shall covenant in the constituent
documents effecting any of the foregoing transactions that such holder does
have, the right to obtain upon the exercise of the Warrants evidenced by this
Warrant Certificate, in lieu of each share of Common Stock, other securities,
money or other property theretofore issuable upon exercise of a Warrant, the
kind and amount of shares of stock, other securities, money or other property
receivable upon such reclassification, change, consolidation or merger by a
holder of the shares of Common Stock, other securities, money or other
property issuable upon exercise of a Warrant if the Warrants evidenced by this
Warrant Certificate had been exercised immediately prior to such
reclassification, change, consolidation or merger. The constituent documents
effecting any such reclassification, change, consolidation or merger shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided in paragraph (a) of this Section 3.
The provisions of paragraph (a) of this Section 3 shall similarly apply to
successive reclassifications, changes, consolidations or mergers.
(b) Subdivisions and Combinations. If the Company, at any
time after the Closing Date, shall subdivide its shares of Common Stock into a
greater number of shares (or pay to any holders of securities of the Company a
dividend payable in, or make any other distribution
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<PAGE>
of, Common Stock), the Exercise Price in effect immediately prior to such
subdivision shall be proportionately reduced, and the number of shares of
Common Stock purchasable upon exercise of the Warrants evidenced by this
Warrant Certificate shall be proportionately increased, as at the effective
date of such subdivision, dividend or distribution or if the Company shall
take a record of holders of its Common Stock for such purpose, as at such
record date, whichever is earlier. If the Company, at any time after the
Closing Date, shall combine its shares of Common Stock into a smaller number
of shares, the Exercise Price in effect immediately prior to such combination
shall be proportionately increased, and the number of shares of Common Stock
purchasable upon exercise of the Warrants evidenced by this Warrant
Certificate shall be proportionately reduced, as at the effective date of such
combination, or if the Company shall take a record of holders of its Common
Stock for purposes of such combination, as at such record date, whichever is
earlier.
(c) Certain Issuances of Securities. If the Company at any
time after the Closing Date shall issue any additional shares of Common Stock
(otherwise than as provided in paragraphs (a) through (b) of this Section 3)
at a price per share less than the Market Price, then the Exercise Price upon
each such issuance shall be adjusted to that price determined by multiplying
the Exercise Price by a fraction:
i. the numerator of which shall be the sum of (1)
the number of shares of Common Stock outstanding immediately prior to
the issuance of such additional shares of Common Stock multiplied by
the Market Price, and (2) the consideration, if any, received and
deemed received by the Company upon the issuance of such additional
shares of Common Stock, and
ii. the denominator of which shall be the Market
Price multiplied by the total number of shares of Common Stock
outstanding immediately after the issuance of such additional shares
of Common Stock.
No adjustments of the Exercise Price shall be made under paragraph
(c) of this Section 3 upon the issuance of any additional shares of Common
Stock that (v) are issued pursuant to Employee Benefit Plans that otherwise
would cause an adjustment under paragraph (c) of this Section 3; provided that
the aggregate number of shares of Common Stock so issued (including the shares
issued pursuant to any options, rights or warrants or convertible or
exchangeable securities issued under such Employee Benefit Plans containing
the right to purchase shares of Common Stock) pursuant to Employee Benefit
Plans shall not exceed 10% of the Company's outstanding Common Stock (on a
fully diluted basis using the treasury stock method) at the time of such
issuance; (w) are issued pursuant to any Other Warrant or Common Stock
Equivalent (i) which was outstanding on the Closing Date or (ii) if upon the
issuance of any such Common Stock Equivalent, any such adjustments shall
previously have been made pursuant to paragraph (d) of this Section 3 or (iii)
if no adjustment was required pursuant to paragraph (d) of this Section 3.
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<PAGE>
(d) Common Stock Equivalents. If the Company shall, after
the Closing Date, issue any Common Stock Equivalent, or if, after any such
issuance, the price per share for which additional shares of Common Stock may
be issuable thereunder is amended, then the Exercise Price upon each such
issuance or amendment shall be adjusted as provided in paragraph (c) of this
Section 3 on the basis that (i) the maximum number of additional shares of
Common Stock issuable pursuant to all such Common Stock Equivalents shall be
deemed to have been issued as of the earlier of (a) the date on which the
Company shall enter into a firm contract for the issuance of such Common Stock
Equivalent, or (b) the date of actual issuance of such Common Stock
Equivalent; and (ii) the aggregate consideration for such maximum number of
additional shares of Common Stock shall be deemed to be the minimum
consideration received and receivable by the Company for the issuance of such
additional shares of Common Stock pursuant to such Common Stock Equivalent;
provided, however, that no adjustment shall be made pursuant to paragraph (d)
of this Section 3 unless the consideration received and receivable by the
Company per share of Common Stock for the issuance of such additional shares
of Common Stock pursuant to such Common Stock Equivalent is less than the
Market Price. No adjustment of the Exercise Price shall be made under
paragraph (d) of this Section 3 upon the issuance of any Convertible Security
which is issued pursuant to the exercise of any warrants or other subscription
or purchase rights therefor, if any adjustment shall previously have been made
in the Exercise Price then in effect upon the issuance of such warrants or
other rights pursuant to paragraph (d) of this Section 3.
(e) Miscellaneous. The following provisions shall be
applicable to the making of adjustments in the Exercise Price hereinbefore
provided in this Section 3:
i. The consideration received by the Company shall
be deemed to be the following: (I) to the extent that any additional
shares of Common Stock or any Common Stock Equivalent shall be issued
for cash consideration, the consideration received by the Company
therefor, or, if such additional shares of Common Stock or Common
Stock Equivalent are offered by the Company for subscription, the
subscription price, or, if such additional shares of Common Stock or
Common Stock Equivalent are sold to underwriters or dealers for
public offering without a subscription offering, the initial public
offering price, in any such case excluding any amounts paid or
receivable for accrued interest or accrued dividends and without
deduction of any compensation, discounts, commissions or expenses
paid or incurred by the Company for and in the underwriting of, or
otherwise in connection with, the issue thereof; (II) to the extent
that such issuance shall be for a consideration other than cash,
then, except as herein otherwise expressly provided, the fair value
of such consideration at the time of such issuance as determined in
good faith by the Board of Directors, as evidenced by a certified
resolution of such Board of Directors delivered to the holder of this
Warrant Certificate setting forth such determination. The
consideration for any additional shares of Common Stock issuable
pursuant to any Common Stock Equivalent shall be the consideration
received by the Company for issuing such Common Stock
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<PAGE>
Equivalent, plus the additional consideration payable to the Company
upon the exercise, conversion or exchange of such Common Stock
Equivalent. In case of the issuance at any time of any additional
shares of Common Stock or Common Stock Equivalent in payment or
satisfaction of any dividend upon any class of stock other than
Common Stock, the Company shall be deemed to have received for such
additional shares of Common Stock or Common Stock Equivalent (which
shall not be deemed to be a dividend payable in, or other
distribution of, Common Stock under paragraph (b) of this Section 3)
consideration equal to the amount of such dividend so paid or
satisfied.
ii. Upon the expiration of the right to convert,
exchange or exercise any Common Stock Equivalent the issuance of
which effected an adjustment in the Exercise Price, if any such
Common Stock Equivalent shall not have been converted, exercised or
exchanged, the number of shares of Common Stock deemed to be issued
and outstanding because they were issuable upon conversion, exchange
or exercise of any such Common Stock Equivalent shall no longer be
computed as set forth above, and the Exercise Price shall forthwith
be readjusted and thereafter be the price which it would have been
(but reflecting any other adjustments in the Exercise Price made
pursuant to the provisions of paragraph (c) of this Section 3 after
the issuance of such Common Stock Equivalent) had the adjustment of
the Exercise Price made upon the issuance or sale of such Common
Stock Equivalent been made on the basis of the issuance only of the
number of additional shares of Common Stock actually issued upon
exercise, conversion or exchange of such Common Stock Equivalent and
thereupon only the number of additional shares of Common Stock
actually so issued shall be deemed to have been issued and only the
consideration actually received by the Company (computed as in
subparagraph (i) of paragraph (e) of this Section 3) shall be deemed
to have been received by the Company.
iii. The number of shares of Common Stock at any
time outstanding shall not include any shares thereof then directly
or indirectly owned or held by or for the account of the Company or
its Subsidiaries (as defined in the Agreement).
iv. For the purposes of this Section 3, the term
"shares of Common Stock" shall mean shares of (i) the class of stock
designated as the Common Stock of the Company at the Closing Date or
(ii) any other class of stock resulting from successive changes or
reclassifications of such shares consisting solely of changes in par
value, or from par value to no par value, or from no par value to par
value. If at any time, because of an adjustment pursuant to paragraph
(a) of this Section 3, the Warrants shall entitle the holders to
purchase any securities other than shares of Common Stock, thereafter
the number of such other securities so purchasable upon exercise of
each Warrant and the Exercise Price of such securities shall be
subject to adjustment from time to time in a manner and on terms as
nearly
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<PAGE>
equivalent as practicable to the provisions with respect to the
Warrant Shares contained in this Section 3.
(f) Calculation of Exercise Price. The Exercise Price in
effect from time to time shall be calculated to four decimal places
and rounded to the nearest thousandth.
4. NOTICE OF ADJUSTMENT TO EXERCISE PRICE. Whenever the Exercise
Price is required to be adjusted as provided in Section 3, the Company shall
forthwith compute the adjusted Exercise Price and shall prepare and mail to
the holder hereof a certificate setting forth such adjusted Exercise Price and
showing in reasonable detail the facts upon which such adjustment is based.
5. VOLUNTARY REDUCTION. The Company may make such decreases in the
Exercise Price as shall be determined by it, as evidenced by a certified
resolution of the Board of Directors delivered to the holders, to be advisable
to avoid or diminish any income tax to the holder resulting from any dividend
or distribution of stock or issuance of rights or warrants to purchase or
subscribe for stock or from any event treated as such for income tax purposes.
Whenever the Exercise Price is reduced, the Company shall mail to the holder a
notice of the reduction at least 15 days before the date the reduced Exercise
Price takes effect, stating the reduced Exercise Price and the period for
which such reduced Exercise Price will be in effect.
6. NOTICES TO WARRANT HOLDER. In the event:
(a) of any consolidation or merger to which the Company is a
party and for which approval of any stockholders of the Company is required,
or of the conveyance or sale of all or substantially all of the assets of the
Company, or of any reclassification or change of the Common Stock or other
securities issuable upon exercise of the Warrants (other than a change in par
value, or from par value to no par value, or from no par value to par value or
as a result of a subdivision or combination), or a tender offer or exchange
offer for all shares of Common Stock (or other securities issuable upon the
exercise of the Warrants); or
(b) the Company shall declare any dividend (or any other
distribution) on the Common Stock, other than regular cash dividends; or
(c) the Company shall authorize the granting to the holders
of Common Stock of rights or warrants to subscribe for or purchase any shares
of any class or series of capital stock; or
(d) of the voluntary or involuntary dissolution, liquidation
or winding up of the Company;
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<PAGE>
then the Company shall cause to be sent to the holder hereof, at
least 30 days prior to the applicable record date hereinafter specified, or
promptly in the case of events for which there is no record date, a written
notice stating (x) the date for the determination of the holders of record of
shares of Common Stock (or other securities issuable upon the exercise of the
Warrants) entitled to receive any such dividends or other distribution, (y)
the initial expiration date set forth in any tender offer or exchange offer
for shares of Common Stock (or other securities issuable upon the exercise of
the Warrants), or (z) the date on which any such consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up is expected to
become effective or consummated, and the date as of which it is expected that
holders of record of shares of Common Stock (or other securities issuable upon
the exercise of the Warrants) shall be entitled to exchange such shares for
securities or other property, if any, deliverable upon such reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding up. Failure to give such notice or any defect therein shall not affect
the legality or validity of any distribution, right, option, warrant,
issuance, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up, or the vote upon any action.
7. REPORTS TO HOLDERS. The Company will cause to be delivered, by
first-class mail, postage prepaid, to the holder at such holder's address
appearing hereon, or such other address as the holder shall specify, a copy of
any reports delivered by the Company to the holders of Common Stock.
8. COVENANTS OF THE COMPANY. The Company covenants and agrees that:
(a) Until the Expiration Date, the Company shall at
all times reserve and keep available, free from preemptive rights, out of the
aggregate of its authorized but unissued Common Stock (and other securities),
for the purpose of enabling it to satisfy any obligation to issue shares of
Common Stock (and other securities) upon the exercise of the Warrants
evidenced by this Warrant Certificate, the number of shares of Common Stock
(and other securities) issuable upon the exercise of such Warrants.
(b) All Common Stock (and other securities) which
may be issued upon exercise of the Warrants evidenced by this Warrant
Certificate shall upon issuance be validly issued, fully paid, non-assessable
and free from all taxes, liens and charges with respect to the issuance
thereof.
9. NO RIGHTS AS STOCKHOLDER. The holder of the Warrants evidenced by
this Warrant Certificate shall not, by virtue of holding such Warrants, be
entitled to any rights of a stockholder of the Company either at law or in
equity, and the rights of the holder of the Warrants evidenced by this Warrant
Certificate are limited to those expressed herein.
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<PAGE>
10. NOTICES. All notices provided for hereunder shall be in writing
and may be given by registered or certified mail, return receipt requested,
telex, telegram, telecopier, air courier guaranteeing overnight delivery of
personal delivery, if to the holder at the following address:
Great Western Directories, Inc.
2400 Lakeview Drive, Suite 109
Amarillo, Texas 79109
and, if to the Company:
Advanced Communications Group, Inc.
3355 West Alabama, Suite 580
Houston, Texas 77098
Attention: Chairman and Chief Executive Officer
Telecopier: (713) 622-9600
11. GOVERNING LAW. This Warrant Certificate shall be governed by and
construed in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate
to be executed this day of , 1997 by its Chairman and Chief
Executive Officer, thereunto duly authorized.
ADVANCED COMMUNICATIONS GROUP, INC.
By:
-------------------------------------
Rod K. Cutsinger
Chairman and Chief Executive Officer
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<PAGE>
ELECTION TO EXERCISE
[To be executed on exercise of the Warrants evidenced by this Warrant
Certificate]
TO: Advanced Communications Group, Inc.
The undersigned, the holder of the Warrants evidenced by the attached
Warrant Certificate, hereby irrevocably elects to exercise Warrants, and
herewith makes payment of ($ ) representing the aggregate
Exercise Price thereof, and requests that the certificate representing the
securities issuable hereunder be issued in the name of and
delivered to , whose address is .
Dated:
----------- -----------------------------------
-----------------------------------
Signature(s) of Registered Holder(s)
Note: The above signature(s) must
correspond with the name as
written on the face of this
Warrant Certificate in every
particular, without alteration or
enlargement or any change
whatsoever.
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<PAGE>
ANNEX V
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into on ,
1997, by Richard O'Neal ("Executive") and Great Western Directories, Inc.,
a Texas corporation ("Company") (collectively referred to as the "Parties").
Company and Executive agree as follows:
1. Employment.
In consideration of the mutual covenants and agreements contained in this
Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are acknowledged by Executive and Company, Company
employs Executive, and Executive accepts employment subject to the terms and
conditions of this Agreement. The Company is a wholly-owned subsidiary of
Advanced Communications Group, Inc., a Delaware corporation ("ACG"). Unless
the context otherwise clearly requires, all references to ACG in this
Agreement shall include ACG, Company and ACG's other subsidiaries.
2. Term.
This Agreement shall commence and become effective on the date hereof and end
on the third anniversary of the date hereof. Such term of employment may be
renewed for successive periods of one year thereafter upon the mutual
agreement of the Parties. For purposes of this Agreement, "Remaining Term"
shall mean the number of months (or portion thereof) remaining between the
date such determination is made and the then scheduled expiration date of this
Agreement.
3. Compensation and other Benefits.
3.1 As compensation for his services to Company under this
Agreement, Company shall pay to Executive during the term of
this Agreement a base salary ("Base Salary") of not less
than $300,000 per annum, payable in equal bi-weekly
installments, subject only to such payroll and withholding
deductions as may be required by law and other deductions
applied generally to other executives of Company for any
executive benefit plans.
3.2 Executive will be entitled to a reasonable period of paid
vacation annually during the term of this Agreement
consistent with historical practice.
<PAGE>
3.3 Executive shall receive benefits commensurate with his level
of employment under any health plan of ACG.
3.4 Executive shall be entitled to the use of a Company credit
card for Company related expenses.
3.5 After the first twelve consecutive months of employment
under this Agreement, and after every consecutive
twelve-month period thereafter, Executive shall be eligible
to receive a potential cash bonus up to 50% of Executive's
Base Salary ("Bonus") to be based upon his performance as
determined by the Compensation Committee of the Board of
Directors ("Compensation Committee") of ACG. Executive
agrees that the decision as to whether to award a Bonus, the
percentage amount thereof and the Executive's Base Salary
(but in no event less than $300,000) for each subsequent
year will be made by the Compensation Committee and will be
based upon the criteria set by such committee.
3.6 Executive will be awarded 150,000 options to acquire common
stock in ACG at a price equal to the price to public
reflected in the final prospectus relating to ACG's initial
underwritten public offering of its common stock. The
options shall have a term of five years and shall become
exercisable in 25% increments on each anniversary date of
the date of this Agreement. Accordingly, the options shall
become fully vested four years from the date of this
Agreement. The options shall, except as provided herein, be
subject to such terms and conditions as may be prescribed by
the Compensation Committee.
4. Duties and Extent of Service.
Executive shall hold the office of President of Company. Executive agrees to
perform the duties incidental to his position, as amplified from time to time
by the Chief Executive Officer of ACG and in a manner consistent with the
discharge of such duties prior to the purchase of Company by ACG. Executive's
office shall be located at 2400 Lakeview Drive, Amarillo, Texas. Executive
shall devote such time, attention, and energy to the business of Company as
he, in his sole discretion, believes is reasonably necessary for him to supply
overall strategic direction to the Company, but in no event shall Executive be
required to devote more time, attention and energy to the affairs of Company
than he devoted prior to the date of this Agreement. In no event, however,
shall Executive take any action inconsistent with Executive's relationship and
responsibilities as a Company executive, or
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<PAGE>
which is intended, or may be reasonably expected, to harm the reputation,
business, prospects, or operations of ACG.
5. Protection of Confidential Information and Executive Non-Competition.
5.1 Executive recognizes and acknowledges that he will have
access to certain confidential information and trade secrets
of ACG ("Confidential Information"). Such Confidential
Information includes, but is not limited to: customer names;
contracts; products purchased by customers; production
capabilities and processes; customer account and credit
data; referral sources; computer programs and software;
information relating to confidential or secret designs,
processes, formulae, plans, devices, or materials of ACG;
business and marketing plans, confidential information and
trade secrets relating to the distribution and marketing of
ACG's products and services; patents pending; confidential
characteristics of ACG's products and services; customer
comments; troubleshooting requirements; product and service
development; market development; manuals written by ACG;
management, accounting, and reporting systems, procedures,
and programs; contracts, leases, marketing agreements, sales
executive compensation information, plans, and programs;
marketing and financial analysis, plans, research, programs,
and related information and data; forms, agreements, and
legal documents; regulatory and supervisory reports;
correspondence; statements; corporate books and records; and
other similar information; provided, however, that
Confidential Information shall not include any of the
foregoing insofar as they relate to Big Stuff, Inc.
5.2 Executive acknowledges and agrees that this Confidential
Information constitutes valuable, special, and unique
property of ACG.
5.3 Executive will not, at any time during or after the term of
this Agreement or his employment with Company, disclose any
Confidential Information to any person, firm, partnership,
association, company, corporation or other entity
(collectively, a "Person") for any reason or purpose.
5.4 The foregoing restrictions shall not apply to: (a) any
information in Executive's possession before its disclosure
to Executive by ACG; or (b) information that is or shall
lawfully be published or become part of the general
knowledge through no act or omission of Executive. The
Confidential Information disclosed to Executive under this
Agreement is not within the foregoing exceptions merely
because such information is embraced by more general
information in the public domain or in Executive's
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<PAGE>
possession, or merely because portions thereof are in the
public domain or in Executive's possession.
5.5 To protect the confidentiality of the Confidential
Information, Executive further agrees that while employed by
Company and for a period of 36 calendar months immediately
after the termination of this Agreement or his employment
with Company, regardless of whether such termination of
employment is voluntary or involuntary, he will not, for
himself, or on behalf of any other Person, (i) generally
compete in any manner whatsoever with ACG or solicit,
accept, divert, or take away from ACG the business of any
Person; (ii) directly or indirectly induce or attempt to
influence any executive, officer, director, consultant,
agent, vendor or other entity related to ACG to terminate
his or her employment or association in any manner
whatsoever with ACG; or (iii) engage in the sale or
marketing of yellow page publishing services,
telecommunication services and natural gas or electrical
goods and services in the States of Arkansas, California
Kansas, Missouri, Oklahoma or Texas ("Proscribed Territory")
during the term of this Agreement or Executive's employment
with Company; provided, however, that notwithstanding the
foregoing, Executive shall be relieved of the limitations
imposed upon his activities by this Paragraph 5.5 in the
event that his employment is terminated pursuant to
subparagraph (d), (e) and (g) of Paragraph 6.1. The
territory in which Executive shall not compete with ACG as
outlined in this Paragraph 5.5 shall consist of the
Proscribed Territory.
5.6 Executive understands and acknowledges that, due to the
unique nature of the products and services provided by ACG
and the need for sales personnel to have a relatively high
degree of technical knowledge concerning these products and
services, employment by Company for sales and management,
including the special training, knowledge, and confidential
information that has been or will be acquired in the course
of such employment, will give Executive distinct and
substantial advantages for potential sales and management
activities concerning such products and services. Executive
further understands and acknowledges that: because of the
definition of products and services covered by this
Agreement, the highly specialized nature of those products
and services, the limited size and number of business
entities in the business of developing and/or selling those
products and services, and the much more numerous
opportunities for Executive to work in his trade with
respect to products and services not covered by this
Agreement, the limitations as to time and geographic area
contained in Paragraph 5.5 are reasonable and are not unduly
onerous on Executive. Executive therefore agrees that the
limitations as to time, geographic area,
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<PAGE>
and scope of activity contained in Paragraph 5.5 do not
impose a greater restraint than is necessary to protect the
Confidential Information, goodwill, and other business
interests of ACG. Executive also agrees that in light of the
facts acknowledged above, the substantial investment of ACG
in acquiring and developing its business and providing
special training to Executive, and the certain and
substantial harm that ACG would suffer if Executive were to
engage in any of the activities described in Paragraph 5.5,
ACG's need for the protection afforded by Paragraph 5.5 is
greater than any hardship Executive might experience by
complying with its terms. Executive also agrees that, if any
provision of the covenant set forth in Paragraph 5.5 is
found to be invalid in part or whole, ACG may elect, but
shall not be required, to have such provision reformed,
whether as to time, geographic area, scope of activity, or
otherwise, as and to the extent required for its validity
under applicable law, and, as so reformed, such provisions
shall be enforceable.
5.7 Executive acknowledges that a violation or attempted
violation on his part of any provision in this Paragraph 5
will cause irreparable damage to ACG. Accordingly, in the
event of a breach or threatened breach by Executive of the
provisions of this Paragraph 5, Executive agrees that ACG
shall be entitled as a matter of right to an injunction, out
of any court of competent jurisdiction, restraining any
violation or further violation of such agreements by
Executive or his agents, without showing any evidence of
actual monetary loss resulting from such breach, including,
but not limited to, restraining Executive from using or
disclosing, in whole or in part, such Confidential
Information or trade secrets; rendering any services to any
Person to whom any of such information may have been
disclosed or is threatened to be disclosed; and/or violating
the non-competition provision. Nothing herein shall be
construed as prohibiting ACG from pursuing any other
remedies available to it for such breach or threatened
breach, including the recovery of damages and attorneys'
fees from Executive.
6. Termination of Employment.
6.1 Executive's employment under this Agreement shall terminate
on the occurrence of any of the following events:
(a) End of Term: If the term of employment under the
Agreement or any term of renewal ends.
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(b) Death or Disability of Executive: If Executive dies
or becomes disabled (i.e., such that he no longer
is reasonably able to perform his duties as
contemplated by this Agreement), Company shall pay
to Executive, or to the estate of Executive if he
dies, in a lump sum that part of his Base Salary
which would otherwise be payable to Executive
during the Remaining Term, after giving effect to
accrued sick leave benefits and accrued vacation
time, if any. Upon such payment, as well as
applicable insurance benefits, if any, all
obligations of Company to Executive or his estate
shall be fully satisfied, and this Agreement shall
terminate.
(c) Voluntary Resignation of Executive: If Executive
voluntarily resigns prior to the end of the term of
this Agreement, this Agreement shall terminate
immediately, and Company shall pay to Executive
that part of his Base Salary which would otherwise
be payable to Executive through the effective date
of his resignation. Upon such payment, all
obligations in any manner whatsoever of Company to
Executive shall be fully satisfied.
(d) Coerced Resignation of Executive. If Executive
resigns prior to the end of the term of this
Agreement under circumstances that he reasonably
believes were contrived by Company in order to
elicit his resignation, and if the Compensation
Committee of ACG's Board of Directors in good faith
concludes that Executive's belief is well-founded,
Company will continue to provide Executive with his
monthly compensation and benefits for the Remaining
Term.
(e) Change in Ownership, Management, or Executive's
Responsibilities: If there is a change in the
ownership of Company or the senior management staff
of ACG, and either of these changes significantly
alters Executive's job responsibilities or
compensation, Executive may resign from his
position within 60 days of such a change. If
Executive resigns pursuant to this paragraph,
Company will continue to provide Executive with his
monthly compensation and benefits for the Remaining
Term.
(f) Termination by the Company "With Cause." If
Executive (i) violates any provision of this
Agreement; (ii) fails to perform the services
required of him pursuant to this Agreement; (iii)
commits acts of fraud or dishonesty against ACG;
(iv) is convicted of a crime other than a routine
traffic violation; (v) violates any policies of ACG
as
-6-
<PAGE>
outlined in any ACG policy handbook; and/or (vi)
fails, in the reasonable opinion of the
Compensation Committee of ACG's Board of Directors,
to devote sufficient time to the affairs of Company
to merit his continued retention as President of
Company. Company may terminate the employment of
Executive with cause. If Executive is terminated
"with cause," Executive shall not be entitled to
receive any further salary or benefits under this
Agreement other than payment for that part of
Executive's compensation that would otherwise be
payable to Executive through the last date of his
employment with Company. Upon such payment, all
obligations of Company to Executive shall be fully
satisfied, and this Agreement will terminate.
Executive shall not be entitled to receive any
accrued vacation pay if his termination is "with
cause."
(g) Termination by the Company Without Cause. In the
event Company terminates Executive's employment for
any reason other than described in (f) above,
Executive shall be entitled to that part of the
Base Salary and benefits payable to Executive
through the last date of his employment and such
compensation and benefits shall continue thereafter
for the Remaining Term.
6.2 Termination of this Agreement shall not relieve Executive of
any continuing obligations expressly provided in this
Agreement, including, without limitation, those set forth in
Paragraphs 5.1 through 5.6.
6.3 Upon confirmation by Company or determination by arbitration
pursuant to Section 9, that Executive was terminated
pursuant to a coerced resignation pursuant to Section
6.1(d), a change in control pursuant to Section 6.1(e), or a
termination without cause pursuant to Section 6.1(g), any
employee stock options held by Executive to purchase
outstanding securities of ACG shall become fully vested.
7. Return of ACG Property.
7.1 All data, drawings, documents, contracts, computerized data,
information printouts, and tapes, tape recordings,
documents, data, accounting records, personnel files,
computer terminals, equipment, and other records and written
material prepared or compiled by Executive or furnished to
Executive while in the employ of Company shall be the sole
and exclusive property of ACG, and none of such data,
drawings or other records and written material, or copies
thereof, shall be retained by Executive upon termination of
his
-7-
<PAGE>
employment. This ACG property shall not be removed from
Company premises without Company's prior written consent.
7.2 Upon termination of this Agreement or whenever requested by
Company, Executive immediately shall deliver to Company all
of the ACG property or any of ACG's documents in Executive's
possession or under Executive's control, including, but not
limited to, all documents or data, Confidential Information,
accounting records, computer terminals, data, discs,
printouts and tapes and accounting machines provided by
Company. No copies of any such data shall be retained by
Executive.
8. Notices.
Any notice required or permitted to be given under this Agreement shall be in
writing and addressed to Executive at 2400 Lakeview Drive, Suite 109,
Amarillo, Texas 79109, and to Company, c/o Rod K. Cutsinger, 3355 West
Alabama, Suite 580, Houston, Texas 77098, or to such other address as either
party shall designate by written notice to the other. Notices may be sent by
messenger or by registered or certified mail, postage prepaid, addressed to
the party or parties to be notified, with return receipt requested. Notices
sent by messenger shall be deemed received upon their actual receipt of the
party to whom they are directed. Notices sent by registered or certified mail
shall be deemed received on the third day following their deposit with the
United States Postal Service.
9. Arbitration.
Exclusive jurisdiction with respect to any dispute, controversy, or claim
brought by Executive or Company concerning the subject matter contained in
this Agreement (other than action by Company seeking an injunction pursuant to
Paragraph 5.7), including, but not limited to, Executive's employment,
termination from, and/or affiliation with Company, shall be settled by
arbitration in Denver, Colorado, in accordance with the Employment Dispute
Resolution Rules of the American Arbitration Association, and judgment upon
the award rendered by the arbitrator may be entered in any court having
jurisdiction. In reaching his or her decision, the arbitrator shall have no
authority to change or modify any provision of this Agreement. Any and all
charges that may be made for the cost of the arbitration and the fees and
expenses of the arbitrator shall be borne equally by the parties; attorneys'
fees and witness expenses shall be borne by the party incurring them.
-8-
<PAGE>
10. Miscellaneous.
10.1 The rights and obligations of Company under this Agreement
shall inure to the benefit of and shall be binding upon the
successors and assigns of Company. This Agreement shall be
binding upon the Executive and his agents, heirs, executors,
administrators and legal representatives. The rights and
obligations of Executive hereunder shall not be assignable
by Executive.
10.2 This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
10.3 This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original and all of which
shall constitute one instrument.
10.4 This Agreement contains the entire agreement of the parties
pertaining to the subject matter hereof and supersedes all
prior agreements, understandings, negotiations and
discussions, whether oral or written, and there are no other
warranties, representations, covenants or agreements among
Company, Executive and Rod K. Cutsinger in connection with
the subject matter hereof.
10.5 The waiver by Company of a breach of any provision of this
Agreement by Executive shall not operate or be construed as
a waiver by Company of any subsequent breach by Executive.
10.6 If a court of competent jurisdiction shall adjudge to be
invalid any clause, sentence, subparagraph, paragraph or
section of this Agreement, such judgment or decree shall not
affect, impair, invalidate, or nullify the remainder of this
Agreement, but the effect thereof shall be confined to the
clause, sentence, subparagraph, paragraph, or section so
adjudged to be invalid.
The parties have executed this Agreement to be effective as of the
day and year first above written.
-9-
<PAGE>
GREAT WESTERN DIRECTORIES, INC.
By
-------------------------------- --------------------------------
Rod K. Cutsinger Richard O'Neal
Its: Chairman and Chief Executive Officer
"COMPANY" "EXECUTIVE"
-10-
<PAGE>
ANNEX VI
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into on ,
1997, by Larry Baldwin ("Executive") and Great Western Directories, Inc.,
a Texas corporation ("Company") (collectively referred to as the "Parties").
Company and Executive agree as follows:
1. Employment.
In consideration of the mutual covenants and agreements contained in this
Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are acknowledged by Executive and Company, Company
employs Executive, and Executive accepts employment subject to the terms and
conditions of this Agreement. The Company is a wholly-owned subsidiary of
Advanced Communications Group, Inc., a Delaware corporation ("ACG"). Unless
the context otherwise clearly requires, all references to ACG in this
Agreement shall include ACG, Company and ACG's other subsidiaries.
2. Term.
This Agreement shall commence and become effective on the date hereof and end
on the third anniversary of the date hereof. Such term of employment may be
renewed for successive periods of one year thereafter upon the mutual
agreement of the Parties.
3. Compensation and other Benefits.
3.1 As compensation for his services to Company under this
Agreement, Company shall pay to Executive during the term of
this Agreement a base salary ("Base Salary") of not less
than $175,000 per annum, payable in equal bi-weekly
installments, subject only to such payroll and withholding
deductions as may be required by law and other deductions
applied generally to other executives of Company for any
executive benefit plans.
3.2 Executive will be entitled to a reasonable period of paid
vacation annually during the term of this Agreement
consistent with historical practice.
3.3 Executive shall receive benefits commensurate with his level
of employment under any health plan of ACG.
<PAGE>
3.4 Executive shall be entitled to the use of a Company credit
card for Company related expenses.
3.5 After the first twelve consecutive months of employment
under this Agreement, and after every consecutive
twelve-month period thereafter, Executive shall be eligible
to receive a potential cash bonus up to 50% of Executive's
Base Salary ("Bonus") to be based upon his performance as
determined by the Compensation Committee of the Board of
Directors ("Compensation Committee") of ACG. Executive
agrees that the decision as to whether to award a Bonus, the
percentage amount thereof and the Executive's Base Salary
(but in no event less than $175,000) for each subsequent
year will be made by the Compensation Committee and will be
based upon the criteria set by such committee.
3.6 Executive will be awarded 87,000 options to acquire common
stock in ACG at a price equal to the price to public
reflected in the final prospectus relating to ACG's initial
underwritten public offering of its common stock. The
options shall have a term of five years and shall become
exercisable in 25% increments on each anniversary date of
the date of this Agreement. Accordingly, the options shall
become fully vested four years from the date of this
Agreement. The options shall, except as provided herein, be
subject to such terms and conditions as may be prescribed by
the Compensation Committee.
4. Duties and Extent of Service.
Executive shall hold the office of of Company. Executive agrees to
perform the duties incidental to his position, as determined from time to time
by the Chief Executive Officer of ACG. Executive shall devote such time,
attention, and energy to the business of Company as are required to perform
his duties and representatives hereunder and shall not during the term of this
Agreement be engaged, directly or indirectly, in any other business activity
if pursued for gain, profit, or other pecuniary advantage without the prior
written consent of the Chief Executive Officer of ACG. In any event, however,
Executive shall not take any action inconsistent with Executive's relationship
and responsibilities as a Company executive, or take any action which is
intended, or may be reasonably expected, to harm the reputation, business,
prospects, or operations of ACG.
-2-
<PAGE>
5. Protection of Confidential Information and Executive Non-Competition.
5.1 Executive recognizes and acknowledges that he will have
access to certain confidential information and trade secrets
of ACG ("Confidential Information"). Such Confidential
Information includes, but is not limited to: customer names;
contracts; products purchased by customers; production
capabilities and processes; customer account and credit
data; referral sources; computer programs and software;
information relating to confidential or secret designs,
processes, formulae, plans, devices, or materials of ACG;
business and marketing plans, confidential information and
trade secrets relating to the distribution and marketing of
ACG's products and services; patents pending; confidential
characteristics of ACG's products and services; customer
comments; troubleshooting requirements; product and service
development; market development; manuals written by ACG;
management, accounting, and reporting systems, procedures,
and programs; contracts, leases, marketing agreements, sales
executive compensation information, plans, and programs;
marketing and financial analysis, plans, research, programs,
and related information and data; forms, agreements, and
legal documents; regulatory and supervisory reports;
correspondence; statements; corporate books and records; and
other similar information.
5.2 Executive acknowledges and agrees that this Confidential
Information constitutes valuable, special, and unique
property of ACG.
5.3 Executive will not, at any time during or after the term of
this Agreement or his employment with Company, disclose any
Confidential Information to any person, firm, partnership,
association, company, corporation or other entity
(collectively, a "Person") for any reason or purpose.
5.4 The foregoing restrictions shall not apply to: (a) any
information in Executive's possession before its disclosure
to Executive by ACG; or (b) information that is or shall
lawfully be published or become part of the general
knowledge through no act or omission of Executive. The
Confidential Information disclosed to Executive under this
Agreement is not within the foregoing exceptions merely
because such information is embraced by more general
information in the public domain or in Executive's
possession; or merely because portions thereof are in the
public domain or in Executive's possession.
5.5 To protect the confidentiality of the Confidential
Information, Executive further agrees that while employed by
Company and for a period of 36 calendar months immediately
after the termination of this Agreement or his
-3-
<PAGE>
employment with Company, regardless of whether such
termination of employment is voluntary or involuntary, he
will not, for himself, or on behalf of any other Person (i)
generally compete in any manner whatsoever with ACG or
solicit, accept, divert, or take away from ACG the business
of any Person; (ii) directly or indirectly induce or attempt
to influence any executive, officer, director, consultant,
agent, vendor or other entity related to ACG to terminate
his or her employment or association in any manner
whatsoever with ACG; or (iii) engage in the sale or
marketing of yellow page publishing services,
telecommunication services and natural gas or electrical
goods and services in the States of Arkansas, California,
Kansas, Missouri, Oklahoma or Texas ("Proscribed Territory")
during the term of this Agreement or Executive's employment
with Company. The territory in which Executive shall not
compete with ACG as outlined in this Paragraph 5.5 shall
consist of the Proscribed Territory.
5.6 Executive understands and acknowledges that, due to the
unique nature of the products and services provided by ACG
and the need for sales personnel to have a relatively high
degree of technical knowledge concerning these products and
services, employment by Company for sales and management,
including the special training, knowledge, and confidential
information that has been or will be acquired in the course
of such employment, will give Executive distinct and
substantial advantages for potential sales and management
activities concerning such products and services. Executive
further understands and acknowledges that: because of the
definition of products and services covered by this
Agreement, the highly specialized nature of those products
and services, the limited size and number of business
entities in the business of developing and/or selling those
products and services, and the much more numerous
opportunities for Executive to work in his trade with
respect to products and services not covered by this
Agreement, the limitations as to time and geographic area
contained in Paragraph 5.5 are reasonable and are not unduly
onerous on Executive. Executive therefore agrees that the
limitations as to time, geographic area, and scope of
activity contained in Paragraph 5.5 do not impose a greater
restraint than is necessary to protect the Confidential
Information, goodwill, and other business interests of ACG.
Executive also agrees that in light of the facts
acknowledged above, the substantial investment of ACG in
acquiring and developing its business and providing special
training to Executive, and the certain and substantial harm
that ACG would suffer if Executive were to engage in any of
the activities described in Paragraph 5.5, ACG's need for
the protection afforded by Paragraph 5.5 is greater than any
hardship Executive might experience by complying with its
terms. Executive also agrees that, if any provision of the
covenant set forth in Paragraph 5.5 is
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<PAGE>
found to be invalid in part or whole, ACG may elect, but
shall not be required, to have such provision reformed,
whether as to time, geographic area, scope of activity, or
otherwise, as and to the extent required for its validity
under applicable law, and, as so reformed, such provisions
shall be enforceable.
5.7 Executive acknowledges that a violation or attempted
violation on his part of any provision in this Paragraph 5
will cause irreparable damage to ACG. Accordingly, in the
event of a breach or threatened breach by Executive of the
provisions of this Paragraph 5, Executive agrees that ACG
shall be entitled as a matter of right to an injunction, out
of any court of competent jurisdiction, restraining any
violation or further violation of such agreements by
Executive or his agents, without showing any evidence of
actual monetary loss resulting from such breach, including,
but not limited to, restraining Executive from using or
disclosing, in whole or in part, such Confidential
Information or trade secrets; rendering any services to any
Person to whom any of such information may have been
disclosed or is threatened to be disclosed; and/or violating
the non-competition provision. Nothing herein shall be
construed as prohibiting ACG from pursuing any other
remedies available to it for such breach or threatened
breach, including the recovery of damages and attorneys'
fees from Executive.
6. Termination of Employment.
6.1 Executive's employment under this Agreement shall terminate
on the occurrence of any of the following events:
(a) End of Term: If the term of employment under the
Agreement or any term of renewal ends.
(b) Death or Disability of Executive: If Executive dies
or becomes disabled (i.e., such that he no longer
is reasonably able to perform his duties as
contemplated by this Agreement), Company shall pay
to Executive, or to the estate of Executive if he
dies, that part of his Base Salary which would
otherwise be payable to Executive through the end
of the month in which his death or disability
occurs, after giving effect to accrued sick leave
benefits and accrued vacation time, if any. Upon
such payment, as well as applicable insurance
benefits, if any, all obligations of Company to
Executive or his estate shall be fully satisfied,
and this Agreement shall terminate.
-5-
<PAGE>
(c) Resignation of Executive: If Executive resigns
prior to the end of the term of this Agreement,
this Agreement shall terminate immediately, and
Company shall pay to Executive that part of his
Base Salary which would otherwise be payable to
Executive through the effective date of his
resignation. Upon such payment, all obligations in
any manner whatsoever of Company to Executive shall
be fully satisfied.
(d) Change in Ownership, Management, or Executive's
Responsibilities: If there is a change in the
ownership of Company or the senior management staff
of ACG, and either of these changes significantly
alters Executive's job responsibilities or
compensation, Executive may resign from his
position within 60 days of such a change. If
Executive resigns pursuant to this paragraph,
Company will continue to provide Executive with his
monthly compensation and benefits for a period of
one year after the initial date of any such change.
Upon completion of such payments, all obligations
in any manner whatsoever of Company to Executive
shall be fully satisfied.
(e) Termination by the Company "With Cause." If
Executive (i) violates any provision of this
Agreement; (ii) fails to perform the services
required of him pursuant to this Agreement; (iii)
commits acts of fraud or dishonesty against ACG;
(iv) is convicted of a crime other than a routine
traffic violation; and/or (v) violates any policies
of ACG as outlined in any ACG policy handbook,
Company may terminate the employment of Executive
with cause. If Executive is terminated "with
cause," Executive shall not be entitled to receive
any further salary or benefits under this Agreement
other than payment for that part of Executive's
compensation that would otherwise be payable to
Executive through the last date of his employment
with Company. Upon such payment, all obligations of
Company to Executive shall be fully satisfied, and
this Agreement will terminate. Executive shall not
be entitled to receive any accrued vacation pay if
his termination is "with cause."
(f) Termination by the Company Without Cause. In the
event Company terminates Executive's employment for
any reason other than described in (e) above,
Executive shall be entitled to that part of the
Base Salary and benefits payable to Executive
through the last date of his employment and such
compensation and benefits shall continue thereafter
for a period of six months from termination. Upon
completion of such payments, all obligations in any
manner whatsoever of Company to Executive shall be
fully satisfied.
-6-
<PAGE>
6.2 Termination of this Agreement shall not relieve Executive of
any continuing obligations expressly provided in this
Agreement, including, without limitation, those set forth in
Paragraphs 5.1 through 5.6.
7. Return of ACG Property.
7.1 All data, drawings, documents, contracts, computerized data,
information printouts, and tapes, tape recordings,
documents, data, accounting records, personnel files,
computer terminals, equipment, and other records and written
material prepared or compiled by Executive or furnished to
Executive while in the employ of Company shall be the sole
and exclusive property of ACG, and none of such data,
drawings or other records and written material, or copies
thereof, shall be retained by Executive upon termination of
his employment. This ACG property shall not be removed from
Company premises without the Company's prior written
consent.
7.2 Upon termination of this Agreement or whenever requested by
Company, Executive immediately shall deliver to Company all
of the ACG property or any of ACG's documents in Executive's
possession or under Executive's control, including, but not
limited to, all documents or data, Confidential Information,
accounting records, computer terminals, data, discs,
printouts and tapes and accounting machines provided by
Company. No copies of any such data shall be retained by
Executive.
8. Notices.
Any notice required or permitted to be given under this Agreement shall be in
writing and addressed to Executive at , ,
, , and to Company, c/o Rod K. Cutsinger, 3355 West Alabama,
Suite 580, Houston, Texas 77098, or to such other address as either party
shall designate by written notice to the other. Notices may be sent by
messenger or by registered or certified mail, postage prepaid, addressed to
the party or parties to be notified, with return receipt requested. Notices
sent by messenger shall be deemed received upon their actual receipt of the
party to whom they are directed. Notices sent by registered or certified mail
shall be deemed received on the third day following their deposit with the
United States Postal Service.
-7-
<PAGE>
9. Arbitration.
Exclusive jurisdiction with respect to any dispute, controversy, or claim
brought by Executive or Company concerning the subject matter contained in
this Agreement (other than action by Company seeking an injunction pursuant to
Paragraph 5.7), including, but not limited to, Executive's employment,
termination from, and/or affiliation with Company, shall be settled by
arbitration in Denver, Colorado in accordance with the Employment Dispute
Resolution Rules of the American Arbitration Association, and judgment upon
the award rendered by the arbitrator may be entered in any court having
jurisdiction. In reaching his or her decision, the arbitrator shall have no
authority to change or modify any provision of this Agreement. Any and all
charges that may be made for the cost of the arbitration and the fees and
expenses of the arbitrator shall be borne equally by the parties; attorneys'
fees and witness expenses shall be borne by the party incurring them.
10. Miscellaneous.
10.1 The rights and obligations of Company under this Agreement
shall inure to the benefit of and shall be binding upon the
successors and assigns of Company. This Agreement shall be
binding upon the Executive and his agents, heirs, executors,
administrators and legal representatives. The rights and
obligations of Executive hereunder shall not be assignable
by Executive.
10.2 This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
10.3 This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original and all of which
shall constitute one instrument.
10.4 This Agreement contains the entire agreement of the parties
pertaining to the subject matter hereof and supersedes all
prior agreements, understandings, negotiations and
discussions, whether oral or written, and there are no other
warranties, representations, covenants or agreements among
Company, Executive and Rod K. Cutsinger in connection with
the subject matter hereof.
10.5 The waiver by Company of a breach of any provision of this
Agreement by Executive shall not operate or be construed as
a waiver by Company of any subsequent breach by Executive.
-8-
<PAGE>
10.6 If a court of competent jurisdiction shall adjudge to be
invalid any clause, sentence, subparagraph, paragraph or
section of this Agreement, such judgment or decree shall not
affect, impair, invalidate, or nullify the remainder of this
Agreement, but the effect thereof shall be confined to the
clause, sentence, subparagraph, paragraph, or section so
adjudged to be invalid.
The parties have executed this Agreement to be effective as of the
day and year first above written.
GREAT WESTERN DIRECTORIES, INC.
By
------------------------------------ ------------------------------------
Rod K. Cutsinger
Its: Chairman and Chief Executive Officer
"COMPANY" "EXECUTIVE"
-9-
<PAGE>
ANNEX VII
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into on ,
1997, by ("Executive") and Great Western Directories,
Inc., a Texas corporation ("Company") (collectively referred to as the
"Parties"). Company and Executive agree as follows:
1. Employment.
In consideration of the mutual covenants and agreements contained in this
Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are acknowledged by Executive and Company, Company
employs Executive, and Executive accepts employment subject to the terms and
conditions of this Agreement. The Company is a wholly-owned subsidiary of
Advanced Communications Group, Inc., a Delaware corporation ("ACG"). Unless
the context otherwise clearly requires, all references to ACG in this
Agreement shall include ACG, Company and ACG's other subsidiaries.
2. Term.
This Agreement shall commence and become effective on the date hereof and end
on the third anniversary of the date hereof. Such term of employment may be
renewed for successive periods of one year thereafter upon the mutual
agreement of the Parties.
3. Compensation and other Benefits.
3.1 As compensation for his services to Company under this
Agreement, Company shall pay to Executive during the term of
this Agreement a base salary ("Base Salary") of not less
than $ per annum, payable in equal bi-weekly
installments, subject only to such payroll and withholding
deductions as may be required by law and other deductions
applied generally to other executives of Company for any
executive benefit plans.
3.2 Executive will be entitled to a reasonable period of paid
vacation annually during the term of this Agreement
consistent with historical practice.
3.3 Executive shall receive benefits commensurate with his level
of employment under any health plan of ACG.
<PAGE>
3.4 Executive shall be entitled to the use of a Company credit
card for Company related expenses.
4. Duties and Extent of Service.
Executive shall hold the office of of Company. Executive agrees to
perform the duties incidental to his position, as determined from time to time
by the Chief Executive Officer of ACG. Executive shall devote such time,
attention, and energy to the business of Company as are required to perform
his duties and representatives hereunder and shall not during the term of this
Agreement be engaged, directly or indirectly, in any other business activity
if pursued for gain, profit, or other pecuniary advantage without the prior
written consent of the Chief Executive Officer of ACG. In any event, however,
Executive shall not take any action inconsistent with Executive's relationship
and responsibilities as a Company executive, or take any action which is
intended, or may be reasonably expected, to harm the reputation, business,
prospects, or operations of ACG.
5. Protection of Confidential Information and Executive Non-Competition.
5.1 Executive recognizes and acknowledges that he will have
access to certain confidential information and trade secrets
of ACG ("Confidential Information"). Such Confidential
Information includes, but is not limited to: customer names;
contracts; products purchased by customers; production
capabilities and processes; customer account and credit
data; referral sources; computer programs and software;
information relating to confidential or secret designs,
processes, formulae, plans, devices, or materials of ACG;
business and marketing plans, confidential information and
trade secrets relating to the distribution and marketing of
ACG's products and services; patents pending; confidential
characteristics of ACG's products and services; customer
comments; troubleshooting requirements; product and service
development; market development; manuals written by ACG;
management, accounting, and reporting systems, procedures,
and programs; contracts, leases, marketing agreements, sales
executive compensation information, plans, and programs;
marketing and financial analysis, plans, research, programs,
and related information and data; forms, agreements, and
legal documents; regulatory and supervisory reports;
correspondence; statements; corporate books and records; and
other similar information.
5.2 Executive acknowledges and agrees that this Confidential
Information constitutes valuable, special, and unique
property of ACG.
5.3 Executive will not, at any time during or after the term of
this Agreement or his employment with Company, disclose any
Confidential Information to any
-2-
<PAGE>
person, firm, partnership, association, company, corporation
or other entity (collectively, a "Person") for any reason or
purpose.
5.4 The foregoing restrictions shall not apply to: (a) any
information in Executive's possession before its disclosure
to Executive by ACG; or (b) information that is or shall
lawfully be published or become part of the general
knowledge through no act or omission of Executive. The
Confidential Information disclosed to Executive under this
Agreement is not within the foregoing exceptions merely
because such information is embraced by more general
information in the public domain or in Executive's
possession; or merely because portions thereof are in the
public domain or in Executive's possession.
5.5 To protect the confidentiality of the Confidential
Information, Executive further agrees that while employed by
Company and for a period of 36 calendar months immediately
after the termination of this Agreement or his employment
with Company, regardless of whether such termination of
employment is voluntary or involuntary, he will not, for
himself, or on behalf of any other Person (i) generally
compete in any manner whatsoever with ACG or solicit,
accept, divert, or take away from ACG the business of any
Person; (ii) directly or indirectly induce or attempt to
influence any executive, officer, director, consultant,
agent, vendor or other entity related to ACG to terminate
his or her employment or association in any manner
whatsoever with ACG; or (iii) engage in the sale or
marketing of yellow page publishing services,
telecommunication services and natural gas or electrical
goods and services in the States of Arkansas, California,
Kansas, Missouri, Oklahoma or Texas ("Proscribed Territory")
during the term of this Agreement or Executive's employment
with Company. The territory in which Executive shall not
compete with ACG as outlined in this Paragraph 5.5 shall
consist of the Proscribed Territory.
5.6 Executive understands and acknowledges that, due to the
unique nature of the products and services provided by ACG
and the need for sales personnel to have a relatively high
degree of technical knowledge concerning these products and
services, employment by Company for sales and management,
including the special training, knowledge, and confidential
information that has been or will be acquired in the course
of such employment, will give Executive distinct and
substantial advantages for potential sales and management
activities concerning such products and services. Executive
further understands and acknowledges that: because of the
definition of products and services covered by this
Agreement, the highly specialized nature of those products
and services, the limited size and number of business
-3-
<PAGE>
entities in the business of developing and/or selling those
products and services, and the much more numerous
opportunities for Executive to work in his trade with
respect to products and services not covered by this
Agreement, the limitations as to time and geographic area
contained in Paragraph 5.5 are reasonable and are not unduly
onerous on Executive. Executive therefore agrees that the
limitations as to time, geographic area, and scope of
activity contained in Paragraph 5.5 do not impose a greater
restraint than is necessary to protect the Confidential
Information, goodwill, and other business interests of ACG.
Executive also agrees that in light of the facts
acknowledged above, the substantial investment of ACG in
acquiring and developing its business and providing special
training to Executive, and the certain and substantial harm
that ACG would suffer if Executive were to engage in any of
the activities described in Paragraph 5.5, ACG's need for
the protection afforded by Paragraph 5.5 is greater than any
hardship Executive might experience by complying with its
terms. Executive also agrees that, if any provision of the
covenant set forth in Paragraph 5.5 is found to be invalid
in part or whole, ACG may elect, but shall not be required,
to have such provision reformed, whether as to time,
geographic area, scope of activity, or otherwise, as and to
the extent required for its validity under applicable law,
and, as so reformed, such provisions shall be enforceable.
5.7 Executive acknowledges that a violation or attempted
violation on his part of any provision in this Paragraph 5
will cause irreparable damage to ACG. Accordingly, in the
event of a breach or threatened breach by Executive of the
provisions of this Paragraph 5, Executive agrees that ACG
shall be entitled as a matter of right to an injunction, out
of any court of competent jurisdiction, restraining any
violation or further violation of such agreements by
Executive or his agents, without showing any evidence of
actual monetary loss resulting from such breach, including,
but not limited to, restraining Executive from using or
disclosing, in whole or in part, such Confidential
Information or trade secrets; rendering any services to any
Person to whom any of such information may have been
disclosed or is threatened to be disclosed; and/or violating
the non-competition provision. Nothing herein shall be
construed as prohibiting ACG from pursuing any other
remedies available to it for such breach or threatened
breach, including the recovery of damages and attorneys'
fees from Executive.
6. Termination of Employment.
6.1 Executive's employment under this Agreement shall terminate
on the occurrence of any of the following events:
-4-
<PAGE>
(a) End of Term: If the term of employment under the
Agreement or any term of renewal ends.
(b) Death or Disability of Executive: If Executive dies
or becomes disabled (i.e., such that he no longer
is reasonably able to perform his duties as
contemplated by this Agreement), Company shall pay
to Executive, or to the estate of Executive if he
dies, that part of his Base Salary which would
otherwise be payable to Executive through the end
of the month in which his death or disability
occurs, after giving effect to accrued sick leave
benefits and accrued vacation time, if any. Upon
such payment, as well as applicable insurance
benefits, if any, all obligations of Company to
Executive or his estate shall be fully satisfied,
and this Agreement shall terminate.
(c) Resignation of Executive: If Executive resigns
prior to the end of the term of this Agreement,
this Agreement shall terminate immediately, and
Company shall pay to Executive that part of his
Base Salary which would otherwise be payable to
Executive through the effective date of his
resignation. Upon such payment, all obligations in
any manner whatsoever of Company to Executive shall
be fully satisfied.
(d) Change in Ownership, Management, or Executive's
Responsibilities: If there is a change in the
ownership of Company or the senior management staff
of ACG, and either of these changes significantly
alters Executive's job responsibilities or
compensation, Executive may resign from his
position within 60 days of such a change. If
Executive resigns pursuant to this paragraph,
Company will continue to provide Executive with his
monthly compensation and benefits for a period of
one year after the initial date of any such change.
Upon completion of such payments, all obligations
in any manner whatsoever of Company to Executive
shall be fully satisfied.
(e) Termination by the Company "With Cause." If
Executive (i) violates any provision of this
Agreement; (ii) fails to perform the services
required of him pursuant to this Agreement; (iii)
commits acts of fraud or dishonesty against ACG;
(iv) is convicted of a crime other than a routine
traffic violation; and/or (v) violates any policies
of ACG as outlined in any ACG policy handbook,
Company may terminate the employment of Executive
with cause. If Executive is terminated "with
cause," Executive shall not be entitled to receive
any further salary or benefits under this Agreement
other than payment for that part of Executive's
compensation that would otherwise be
-5-
<PAGE>
payable to Executive through the last date of his
employment with Company. Upon such payment, all
obligations of Company to Executive shall be fully
satisfied, and this Agreement will terminate.
Executive shall not be entitled to receive any
accrued vacation pay if his termination is "with
cause."
(f) Termination by the Company Without Cause. In the
event Company terminates Executive's employment for
any reason other than described in (e) above,
Executive shall be entitled to that part of the
Base Salary and benefits payable to Executive
through the last date of his employment and such
compensation and benefits shall continue thereafter
for a period of six months from termination. Upon
completion of such payments, all obligations in any
manner whatsoever of Company to Executive shall be
fully satisfied.
6.2 Termination of this Agreement shall not relieve Executive of
any continuing obligations expressly provided in this
Agreement, including, without limitation, those set forth in
Paragraphs 5.1 through 5.6.
7. Return of ACG Property.
7.1 All data, drawings, documents, contracts, computerized data,
information printouts, and tapes, tape recordings,
documents, data, accounting records, personnel files,
computer terminals, equipment, and other records and written
material prepared or compiled by Executive or furnished to
Executive while in the employ of Company shall be the sole
and exclusive property of ACG, and none of such data,
drawings or other records and written material, or copies
thereof, shall be retained by Executive upon termination of
his employment. This ACG property shall not be removed from
Company premises without the Company's prior written
consent.
7.2 Upon termination of this Agreement or whenever requested by
Company, Executive immediately shall deliver to Company all
of the ACG property or any of ACG's documents in Executive's
possession or under Executive's control, including, but not
limited to, all documents or data, Confidential Information,
accounting records, computer terminals, data, discs,
printouts and tapes and accounting machines provided by
Company. No copies of any such data shall be retained by
Executive.
-6-
<PAGE>
8. Notices.
Any notice required or permitted to be given under this Agreement shall be in
writing and addressed to Executive at , ,
, , and to Company, c/o Rod K. Cutsinger, 3355 West Alabama,
Suite 580, Houston, Texas 77098, or to such other address as either party
shall designate by written notice to the other. Notices may be sent by
messenger or by registered or certified mail, postage prepaid, addressed to
the party or parties to be notified, with return receipt requested. Notices
sent by messenger shall be deemed received upon their actual receipt of the
party to whom they are directed. Notices sent by registered or certified mail
shall be deemed received on the third day following their deposit with the
United States Postal Service.
9. Arbitration.
Exclusive jurisdiction with respect to any dispute, controversy, or claim
brought by Executive or Company concerning the subject matter contained in
this Agreement (other than action by Company seeking an injunction pursuant to
Paragraph 5.7), including, but not limited to, Executive's employment,
termination from, and/or affiliation with Company, shall be settled by
arbitration in Denver, Colorado in accordance with the Employment Dispute
Resolution Rules of the American Arbitration Association, and judgment upon
the award rendered by the arbitrator may be entered in any court having
jurisdiction. In reaching his or her decision, the arbitrator shall have no
authority to change or modify any provision of this Agreement. Any and all
charges that may be made for the cost of the arbitration and the fees and
expenses of the arbitrator shall be borne equally by the parties; attorneys'
fees and witness expenses shall be borne by the party incurring them.
10. Miscellaneous.
10.1 The rights and obligations of Company under this Agreement
shall inure to the benefit of and shall be binding upon the
successors and assigns of Company. This Agreement shall be
binding upon the Executive and his agents, heirs, executors,
administrators and legal representatives. The rights and
obligations of Executive hereunder shall not be assignable
by Executive.
10.2 This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
10.3 This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original and all of which
shall constitute one instrument.
10.4 This Agreement contains the entire agreement of the parties
pertaining to the subject matter hereof and supersedes all
prior agreements, understandings,
-7-
<PAGE>
negotiations and discussions, whether oral or written, and
there are no other warranties, representations, covenants or
agreements among Company, Executive and Rod K. Cutsinger in
connection with the subject matter hereof.
10.5 The waiver by Company of a breach of any provision of this
Agreement by Executive shall not operate or be construed as
a waiver by Company of any subsequent breach by Executive.
10.6 If a court of competent jurisdiction shall adjudge to be
invalid any clause, sentence, subparagraph, paragraph or
section of this Agreement, such judgment or decree shall not
affect, impair, invalidate, or nullify the remainder of this
Agreement, but the effect thereof shall be confined to the
clause, sentence, subparagraph, paragraph, or section so
adjudged to be invalid.
The parties have executed this Agreement to be effective as of the
day and year first above written.
GREAT WESTERN DIRECTORIES, INC.
By
------------------------------------ -----------------------------------
Rod K. Cutsinger
Its: Chairman and Chief Executive Officer
"COMPANY" "EXECUTIVE"
-8-
<PAGE>
FIRST AMENDMENT TO RESTATED STOCK PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO RESTATED STOCK PURCHASE AGREEMENT (this
"Amendment"), made as of the 8th day of January, 1998, by and among ADVANCED
COMMUNICATIONS GROUP, INC., a Delaware corporation organized in September 1997,
ADVANCED COMMUNICATIONS CORP. (formerly named Advanced Communications Group,
Inc.), a Delaware corporation organized in June 1996, GREAT WESTERN
DIRECTORIES, INC., a Texas corporation, and RICHARD O'NEAL, LARRY BALDWIN,
STEVE SPARKS, RON BALDWIN and RONNIE EMANUEL, amends the Restated Stock
Purchase Agreement dated as of October 6, 1997 among the parties (the "Restated
Agreement"; and as amended hereby, the "Agreement").
RECITALS
WHEREAS, the parties wish to extend the date by which the
transactions contemplated by this Agreement to take place at the
Closing shall occur; and
WHEREAS, all capitalized terms not otherwise defined herein
have the meanings ascribed to them in the Restated Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties, covenants and agreements herein
contained, and other consideration, the receipt and sufficiency of
which is acknowledged, the parties hereby agree as follows:
1. EXTENSION OF CLOSING DATE.
The phrase, "January 31, 1998," in Section 11(ii) of the Restated
Agreement is deleted and replaced by the phrase, "February 20, 1998."
2. MISCELLANEOUS
2.1 Counterparts. For the convenience of the parties, any number of
counterparts of this Amendment may be executed by any one or more parties
hereto, and each such executed counterpart shall be, and shall be deemed to be,
an original, but all of which shall constitute, and shall be deemed to
constitute, in the aggregate but one and the same instrument. A facsimile copy
of a signature page to this Amendment shall be accorded the same force and
effect as a manually executed original counterpart of a signature page to this
Amendment.
2.2 Integration Clause. The Restated Agreement, as modified by this
Amendment, represents the final agreement among the parties relating to its
subject matter and may not be
<PAGE>
contradicted by evidence of prior, contemporaneous, or subsequent oral
agreements of the parties. There are no unwritten oral agreements between the
parties.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
ADVANCED COMMUNICATIONS GROUP, INC.
BY: /s/ RICHARD P. ANTHONY
----------------------------------------
NAME: RICHARD P. ANTHONY
TITLE: CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ADVANCED COMMUNICATIONS CORP.
BY: /s/ ROD K. CUTSINGER
----------------------------------------
NAME: ROD K. CUTSINGER
TITLE: CHAIRMAN AND CHIEF EXECUTIVE OFFICER
GREAT WESTERN DIRECTORIES, INC.
BY: /s/ RICHARD O'NEAL
----------------------------------------
NAME: RICHARD O'NEAL
TITLE: PRESIDENT
/s/ RICHARD O'NEAL
-------------------------------------------
RICHARD O'NEAL
-2-
<PAGE>
/s/ LARRY BALDWIN
-------------------------------------------
LARRY BALDWIN
/s/ STEVE SPARKS
-------------------------------------------
STEVE SPARKS
/s/ RON BALDWIN
-------------------------------------------
RON BALDWIN
/s/ RONNIE EMANUEL
-------------------------------------------
RONNIE EMANUEL
-3-
<PAGE>
FIRST AMENDMENT TO AGREEMENT AND PLAN OF EXCHANGE
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF EXCHANGE (this
"Amendment"), made as of the 8th day of January, 1998, by and among ADVANCED
COMMUNICATIONS GROUP, INC., a Delaware corporation organized in September 1997,
ADVANCED COMMUNICATIONS CORP. (formerly named Advanced Communications Group,
Inc.), a Delaware corporation organized in June 1996, ACG ACQUISITION CORP., a
Delaware corporation, VALU-LINE OF LONGVIEW, INC., a Texas corporation, and
DAVID M. MITCHELL, BOB DAMUTH, RICHARD ROPER, ANNE ROPER and CLARENCE FRIAR,
amends the Agreement and Plan of Exchange dated as of October 6, 1997 among the
parties (the "Restated Agreement"; and as amended hereby, the "Agreement").
RECITALS
WHEREAS, the parties wish to extend the date by which the
transactions contemplated by this Agreement to take place at the
Closing shall occur; and
WHEREAS, all capitalized terms not otherwise defined herein
have the meanings ascribed to them in the Restated Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties, covenants and agreements herein
contained, and other consideration, the receipt and sufficiency of
which is acknowledged, the parties hereby agree as follows:
1. EXTENSION OF CLOSING DATE.
The phrase, "January 31, 1998," in Section 11.1(ii) of the Restated
Agreement is deleted and replaced by the phrase, "February 20, 1998."
2. MISCELLANEOUS
2.1 Counterparts. For the convenience of the parties, any number of
counterparts of this Amendment may be executed by any one or more parties
hereto, and each such executed counterpart shall be, and shall be deemed to be,
an original, but all of which shall constitute, and shall be deemed to
constitute, in the aggregate but one and the same instrument. A facsimile copy
of a signature page to this Amendment shall be accorded the same force and
effect as a manually executed original counterpart of a signature page to this
Amendment.
<PAGE>
2.2 Integration Clause. The Restated Agreement, as modified by this
Amendment, represents the final agreement among the parties relating to its
subject matter and may not be contradicted by evidence of prior,
contemporaneous, or subsequent oral agreements of the parties.
There are no unwritten oral agreements between the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
ADVANCED COMMUNICATIONS GROUP, INC.
BY: /s/ RICHARD P. ANTHONY
-----------------------------------------
NAME: RICHARD P. ANTHONY
TITLE: CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ADVANCED COMMUNICATIONS CORP.
BY: /s/ ROD K. CUTSINGER
-----------------------------------------
NAME: ROD K. CUTSINGER
TITLE: CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ACG ACQUISITION CORP.
BY: /s/ BRAD K. CUTSINGER
-----------------------------------------
NAME: BRAD K. CUTSINGER
TITLE: PRESIDENT
-2-
<PAGE>
VALU-LINE OF LONGVIEW, INC.
BY:
-----------------------------------------
NAME:
TITLE:
STOCKHOLDERS:
/s/ DAVID M. MITCHELL
--------------------------------------------
DAVID M. MITCHELL
/s/ BOB DAMUTH
--------------------------------------------
BOB DAMUTH
/s/ ANNE ROPER
--------------------------------------------
ANNE ROPER
/s/ RICHARD ROPER
--------------------------------------------
RICHARD ROPER
/s/ CLARENCE FRIAR
--------------------------------------------
CLARENCE FRIAR
-3-
<PAGE>
SECOND AMENDMENT TO AGREEMENT AND PLAN OF EXCHANGE
THIS SECOND AMENDMENT TO AGREEMENT AND PLAN OF EXCHANGE (this "Amendment"),
made as of the 13th day of January, 1998, by and among ADVANCED COMMUNICATIONS
GROUP, INC., a Delaware corporation organized in September 1997, ADVANCED
COMMUNICATIONS CORP. (formerly named Advanced Communications Group, Inc.), a
Delaware corporation organized in June 1996, ACG ACQUISITION CORP., a Delaware
corporation, VALU-LINE OF LONGVIEW, INC., a Texas corporation, and DAVID M.
MITCHELL, BOB DAMUTH, RICHARD ROPER, ANNE ROPER and CLARENCE FRIAR, amends the
Agreement and Plan of Exchange dated as of October 6, 1997, as amended by the
First Amendment to Agreement and Plan of Exchange dated January 8, 1998, among
the parties (the "Restated Agreement"; and as amended hereby, the "Agreement").
RECITALS
WHEREAS, the parties are aware that the Company is subject to certain
potentially significant liabilities with respect to its acts and omissions
in the State of Arkansas;
WHEREAS, the parties wish to modify the Restated Agreement to provide
for the escrow of a portion of the Stock Component so that it may be
applied toward compensating Parent for amounts which it or the Company may
need to expend to satisfy such liabilities; and
WHEREAS, all capitalized terms not otherwise defined herein have the
meanings ascribed to them in the Restated Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties, covenants and agreements herein contained, and
other good and valuable consideration, the receipt and sufficiency of which
is acknowledged, the parties hereby agree as follows:
1. AMENDMENT OF SECTION 2.
1.1 The first sentence of Section 2 is deleted and is replaced by the
following:
Pursuant to the terms of this Agreement, at the Closing, (x)
Stockholders will transfer, convey, assign and deliver to Parent the
Shares, together with stock powers duly endorsed by Stockholders so
that the Shares may be duly registered in Parent's name, and (y)
Parent will acquire the Shares from Stockholders for an aggregate
<PAGE>
consideration of (i) $6.6 million in immediately available funds, (ii)
such number of shares of Parent Stock (rounded to the nearest whole
share) as shall be determined by dividing $4.92 million by the IPO
Price ("Stock Component") and (iii) subject to the terms of the of an
escrow agreement in the form attached hereto as Annex III (the "Escrow
Agreement"), a proportion, not to exceed 100%, of the number of shares
of Parent Stock (rounded to the nearest whole share) as shall be
determined by dividing $280,000 by the IPO Price (the "Escrowed
Shares"). The parties agree that in connection with the Closing,
Parent, the Stockholders and an institution selected by Stockholders
and reasonably acceptable to Parent (as escrow agent) will enter into
the Escrow Agreement, and Parent will forthwith deposit with such
institution, as escrow agent, a certificate representing the Escrowed
Shares. Such shares shall be registered in the name of such escrow
agent and be maintained and disbursed strictly in accordance with the
terms of the Escrow Agreement.
2. ADDITION OF SECTION 7.11.
2.1 The following is added as Section 7.11 of the Agreement:
7.11. Arkansas Liability. Stockholders and the Company will continue
to make good faith efforts to obtain authority for the Company to conduct
telecommunications business in Arkansas and to settle the contingent
liabilities arising from the Company's violation of the laws and
regulations of the State of Arkansas, including without limitation its
failure to pay taxes, charges and impositions associated with doing
telecommunications business in that state. Prior to the Closing, the
Stockholders will pay (or will cause the Company to pay from cash otherwise
distributable by the Company to the Stockholders pursuant to this
Agreement), all expenses, attorneys' fees (other than the fees accrued
through January 13, 1998 from services rended by Bourland, Smith, Wall &
Wenzel), and other costs which the Company or the Shareholders or any of
their agents or attorneys accrued or incurred at any time prior to the
Closing in connection with such efforts.
3. ADDITION OF SECTION 8.11.
3.1 The following is added as Section 8.11 of the Agreement:
-2-
<PAGE>
8.11. Delivery of Escrow Agreement. Parent shall have executed and
delivered to Stockholders an agreement in the form attached hereto as Annex
III.
4. MODIFICATION OF SECTION 17.6.
4.1 The following sentence is appended to Section 17.6 of the Restated
Agreement: "The foregoing provisions of this Section 17.6 are subject to
and qualified by the terms of Section 7.11, Section 9.14, and the
provisions of the Escrow Agreement."
5. ADDITION OF SECTION 9.14.
5.1 The following is added as Section 9.14 of the Agreement:
9.14. Delivery of Escrow Agreement. The Stockholders shall have
executed and delivered to Parent an agreement in the form attached hereto
as Annex III. Stockholders agree that, for a period ending six months after
the Closing, they will hold Parent and the Company harmless from any and
all expenses and costs referenced in Section 7.11 that accrued through the
Closing.
6. ADDITION OF ANNEX III.
6.1 Annex III hereto is hereby added as Annex III to the Restated
Agreement.
7. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS.
7.1 Stockholders jointly and severally represent and warrant that, to
their knowledge and the knowledge of the Company, the January 9, 1998 letter
from N. M. Norton to the Arkansas Public Service Commission sets forth an
approximate, but materially accurate, calculation of the revenues earned by the
Company with respect to services rendered in the State of Arkansas and the
Longview LATA.
7.2 The parties agree and understand that obtaining authorization in
Arkansas and establishing a positive working relationship with the Arkansas
regulatory authorities is of great practical importance to the Company and
Parent. Consequently, after the Closing, the Company may take the actions it
determines in good faith are necessary or advisable in connection with the
resolution of its Arkansas liabilities. The Company shall have the sole
authority to litigate, negotiate
-3-
<PAGE>
and resolve, by settlement or otherwise, the foregoing matters. In the event
that the Company initiates or is otherwise subject to any contested legal or
administrative action regarding such liabilities, each Stockholder shall render
reasonable assistance to Parent and the Company in connection therewith.
Without limiting the foregoing, each Stockholder agrees to execute and deliver,
or cause to be executed and delivered, such further instruments, documents and
affidavits and to take such other action as may be reasonably necessary or
convenient in connection with such actions.
8. MISCELLANEOUS
8.1 Counterparts. For the convenience of the parties, any number of
counterparts of this Amendment may be executed by any one or more parties
hereto, and each such executed counterpart shall be, and shall be deemed to be,
an original, but all of which shall constitute, and shall be deemed to
constitute, in the aggregate but one and the same instrument. A facsimile copy
of a signature page to this Amendment shall be accorded the same force and
effect as a manually executed original counterpart of a signature page to this
Amendment.
8.2 Integration Clause. The Restated Agreement, as modified by this
Amendment, represents the final agreement among the parties relating to its
subject matter and may not be contradicted by evidence of prior,
contemporaneous, or subsequent oral agreements of the parties. There are no
unwritten oral agreements between the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year first above written.
ADVANCED COMMUNICATIONS GROUP, INC.
BY:
--------------------------------
NAME: RICHARD P. ANTHONY
TITLE: CHAIRMAN AND CHIEF
EXECUTIVE OFFICER
-4-
<PAGE>
ADVANCED COMMUNICATIONS CORP.
BY:
--------------------------------
NAME: ROD K. CUTSINGER
TITLE: CHAIRMAN AND CHIEF
EXECUTIVE OFFICER
ACG ACQUISITION CORP.
BY:
--------------------------------
NAME: BRAD K. CUTSINGER
TITLE: PRESIDENT
VALU-LINE OF LONGVIEW, INC.
BY:
--------------------------------
NAME:
TITLE:
STOCKHOLDERS:
-----------------------------------
DAVID M. MITCHELL
-----------------------------------
BOB DAMUTH
-5-
<PAGE>
-----------------------------------
ANNE ROPER
-----------------------------------
RICHARD ROPER
-----------------------------------
CLARENCE FRIAR
-6-
<PAGE>
FIRST AMENDMENT TO
AGREEMENT AND PLAN OF EXCHANGE
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF EXCHANGE (this
"Amendment"), made as of the 10th day of January, 1998, by and among ADVANCED
COMMUNICATIONS GROUP, INC., a Delaware corporation organized in September 1997,
ADVANCED COMMUNICATIONS CORP. (formerly named Advanced Communications Group,
Inc.), a Delaware corporation organized in June 1996, 1+ USA V ACQUISITION
CORP., a Delaware corporation, FEIST LONG DISTANCE SERVICE, INC., a Kansas
corporation, and THOMAS J. FEIST, ROBERTA FEIST, JAY A. FEIST, TODD J. FEIST,
JILL FEIST UTZ, PAULA FEIST ALEFS, KATHY J. FEIST and JODI L. FEIST, the only
Stockholders of the Company, amends the Agreement and Plan of Exchange dated as
of October 6, 1997 among the parties (the "Restated Agreement"; and as amended
hereby, the "Agreement").
RECITALS
WHEREAS, the parties wish to extend the date by which the
transactions contemplated by this Agreement to take place at the
Closing shall occur, to amend the cash portion of the purchase price,
and to reflect certain other agreements among them; and
WHEREAS, all capitalized terms not otherwise defined herein
have the meanings ascribed to them in the Restated Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties, covenants and agreements herein
contained, and other consideration, the receipt and sufficiency of
which is acknowledged, the parties hereby agree as follows:
1. AMENDMENT TO SECTION 2
1.1 The phrase "$5 million in immediately available funds" in Section
2 is deleted and is replaced by the phrase "$1.5 million in immediately
available funds."
1.2 The phrase "Sections 9.11, 9.13, 9.l5, and 9.16" in Section 2 is
deleted and is replaced by the phrase "Sections 9.11, 9.13, 9.15, 9.16 and
9.17."
<PAGE>
1.3 The column headed "Amount of Cash Deliverable" in the chart in
Section 2 is modified as follows:
NAME OF STOCKHOLDER AMOUNT OF CASH
DELIVERABLE
Thomas J. Feist $ 300,000
Roberta Feist 300,000
Jay A. Feist 150,000
Todd J. Feist 150,000
Jill Feist Utz 150,000
Paula Feist Alefs 150,000
Kathy J. Feist 150,000
Jodi L. Feist 150,000
TOTAL $ 1,500,000
2. ADDITION OF SECTION 8.10.
2.1 The following is added as Section 7.10 of the Agreement:
7.10. Employment Agreement. Concurrently with the execution
of this Amendment, each party referenced in the Employment Agreement
set forth as Annex VII hereto shall execute and deliver a copy of the
same to the other parties thereto.
3. ADDITION OF SECTION 8.10.
3.1 The following is added as Section 8.10 of the Agreement:
8.10. Agreement Regarding Oklahoma City. Purchaser shall have
executed and delivered to FPI an agreement in the form attached hereto
as Annex VI.
-2-
<PAGE>
4. ADDITION OF SECTION 9.17
4.1 The following is added as Section 9.17 of the Agreement:
9.17. Agreement Regarding Oklahoma City. FPI shall have
executed and delivered to Purchaser an agreement in the form attached
hereto as Annex VI.
5. EXTENSION OF CLOSING DATE.
The phrase, "January 31, 1998," in Section 11.1(ii) of the Restated
Agreement is deleted and replaced by the phrase, "February 20, 1998."
6. AMENDMENT OF 12.1.
6.1 The phrase "Each of the Stockholders will not" in the first
sentence of Section 12.1 is deleted and replaced by the phrase, "Except as
otherwise provided in Annex VI, each of the Stockholders will not."
7. MISCELLANEOUS
7.1 Counterparts. For the convenience of the parties, any number of
counterparts of this Amendment may be executed by any one or more parties
hereto, and each such executed counterpart shall be, and shall be deemed to be,
an original, but all of which shall constitute, and shall be deemed to
constitute, in the aggregate but one and the same instrument. A facsimile copy
of a signature page to this Amendment shall be accorded the same force and
effect as a manually executed original counterpart of a signature page to this
Amendment.
7.2 Integration Clause. The Restated Agreement, as modified by this
Amendment, represents the final agreement among the parties relating to its
subject matter and may not be contradicted by evidence of prior,
contemporaneous, or subsequent oral agreements of the parties. There are no
unwritten oral agreements between the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
-3-
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
By: /s/ Richard P. Anthony
-----------------------------------------
Name: Richard P. Anthony
Title: Chairman and Chief Executive Officer
ADVANCED COMMUNICATIONS CORP.
By: /s/ Rod K. Cutsinger
-----------------------------------------
Name: Rod K. Cutsinger
Title: Chairman and Chief Executive Officer
1+ USA V ACQUISITION CORP.
By: /s/ Brad K. Cutsinger
-----------------------------------------
Name: Brad K. Cutsinger
Title: President
FEIST LONG DISTANCE SERVICE, INC.
By: /s/ Roberta Feist
-----------------------------------------
Name: Roberta Feist
Title: Chairman of the Board
By: /s/ Todd J. Feist
-----------------------------------------
Name: Todd J. Feist
Title: President
-4-
<PAGE>
STOCKHOLDERS:
/s/ Thomas J. Feist
-------------------------------------
Thomas J. Feist
/s/ Roberta Feist
-------------------------------------
Roberta Feist
/s/ Jay A. Feist
-------------------------------------
Jay A. Feist
/s/ Todd J. Feist
-------------------------------------
Todd J. Feist
/s/ Jill Feist Utz
-------------------------------------
Jill Feist Utz
/s/ Paula Feist Alefs
-------------------------------------
Paula Feist Alefs
/s/ Kathy J. Feist
-------------------------------------
Kathy J. Feist
/s/ Jodi L. Feist
-------------------------------------
Jodi L. Feist
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ANNEX VI
ADVERTISEMENT AND RESALE AGREEMENT
THIS ADVERTISEMENT AND RESALE AGREEMENT, executed this _____ day of
____________, 1998, is by and between Feist Publications, Inc., a Kansas
corporation, and Advanced Communications Group, Inc., a Delaware corporation.
The parties hereto agree:
1. Definitions.
1.1 "ACG" means Advanced Communications Group, Inc. and its
Affiliates.
1.2 "Affiliate" means any natural person or entity who
directly or through one or more intermediaries controls, is
controlled by or is under common control with a party hereto.
1.3 "FPI" means Feist Publications Inc. and its Affiliates.
1.4 "Service" means only long distance telephone service,
local telephone service, Internet access services, and
cellular telephone services.
1.5 "Term" means the period commencing as of the date first
set forth above and ending on the fifth anniversary thereof.
1.6 "Territory" means Oklahoma City and its greater
metropolitan area.
2. Advertisement. FPI agrees that, during the Term, it will
publish at no cost to ACG eight white pages of forward text
information furnished by ACG from time to time in front of
each telephone directory that FPI publishes covering all or
any portion of the Territory. The copy for such pages
supplied by ACG shall in general be copy used to familiarize
prospective customers of ACG of the various Services it
offers and to provide them with instructions on how to use
and order such Services. The text shall be inserted before
the "telephone companies" portion of the forward white pages
text in such directories and shall be subject to FPI
approval, which shall not be unreasonably withheld or
delayed, as to its content.
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3. Noncompetition Agreement.
3.1 FPI agrees that during the Term it will not provide,
sell, resell, solicit or encourage the purchase of or
otherwise participate in or derive any remuneration or
economic benefit from the sale, resale or provision of
Services in the Territory, except that FPI may solicit for
ACG customers to which ACG may provide such Services. As
compensation for soliciting customers for ACG, ACG will pay
to FPI a one-time fee of $10 for each new customer for which
FPI provides to ACG a duly executed letter of authorization
or other satisfactory documentation from such customer
subscribing for Services from ACG. FPI acknowledges that ACG
will also be actively soliciting customers for Services in
the Territory. ACG shall have the right to establish from
time to time, in its discretion, reasonable terms and
conditions concerning the solicitation of such Services.
3.2 ACG makes no warranty, representation, guaranty or
indemnity concerning the Services FPI may elect to solicit
for ACG pursuant to this paragraph 3, and without limiting
the foregoing in any way, any implied warranties (including
without limitation the implied warranties of merchantability,
fitness for a particular purpose and good and workmanlike
manner) are hereby excluded. FPI agrees that ACG's liability
(under breach of contract, negligence, strict liability or
otherwise), if any, for any damages relating to the sale,
provision of or failure to provide Services will in no event
include consequential, incidental, indirect, special or other
damages of any kind including loss of profits, even if the
other party has been advised of the likelihood of the
occurrence of such damages.
3.3 Subject to such reasonable terms and conditions as ACG
may establish from time to time, ACG hereby grants to FPI a
revocable, nonexclusive right to use in the Territory, for
the sole purpose of soliciting customers for ACG's Services
as provided above, the trademarks used by ACG in selling the
Services. FPI shall use no other marks in connection with the
solicitation of customers for ACG's Services.
4. Standstill. ACG agrees that, during the Term, it shall not
publish a yellow pages telephone directory covering any
portion of the Territory. Nothing in this paragraph 4 shall
prohibit ACG from continuing to publish during the Term any
yellow page directory in publication by ACG as of December
31, 1997.
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5. Saving Clause. The parties acknowledge: (i) that the covenant
set forth in the paragraph above is necessary to induce the
shareholders of Feist Long Distance Service Inc., who also
the owners of FPI, to enter into the Agreement and Plan of
Exchange dated as of October 6, 1997, as amended by the First
Amendment to Agreement and Plan of Exchange dated as of the
date first set forth above; (ii) that such covenant is
intended solely to protect the shareholders' legitimate
interests in preserving the value of the portion of their
business not sold to ACG, and (iii) that such covenant has
been and shall be limited to the maximum extent necessary to
protect such interests. If, however, a court of competent
jurisdiction shall adjudge to be invalid or illegal any
clause, sentence, subparagraph, paragraph or section of this
Agreement, such judgment or decree shall not affect, impair,
invalidate, or nullify the remainder of this Agreement, but
the effect thereof shall be confined to the clause, sentence,
subparagraph, paragraph, or section so adjudged to be
invalid.
6. Miscellaneous.
6.1 Nothing in this Agreement shall be construed to create
any franchise, joint venture, trust or commercial partnership
or any other partnership or employment relationship for any
purpose whatsoever.
6.2 This Agreement shall be governed by and construed in
accordance with the laws of the State of Oklahoma (without
regard to Oklahoma's principles of conflicts of laws) and of
the United States of America.
6.3 Neither party may assign any of its rights or duties
under this Agreement without the prior written consent of the
other party. The Agreement shall inure to the benefit of and
be binding upon the parties to this Agreement and their
respective successors and permitted assigns.
6.4 Neither party hereto shall be liable to the other for
failure to perform any of its obligations hereunder to the
extent performance is prevented due to force majeure. "Force
majeure" shall mean causes that are beyond the reasonable
control of the party claiming force majeure and that could
not have been avoided or prevented by reasonable foresight,
planning or implementation of the party claiming force
majeure. Such causes shall include but not be limited to acts
of God, war (declared or undeclared), insurrections,
hostilities, strikes or lockouts (other than strikes by or
lockouts of such party's employees, which strikes or
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<PAGE>
lockouts shall be deemed not to be force majeure events),
riots, fire, storm, power failure, and interference or
hindrance by any governmental authority.
6.5 THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT AND
UNDERSTANDING OF THE PARTIES HERETO IN RESPECT OF THE SUBJECT
MATTER CONTAINED HEREIN AND SUPERSEDES ALL PRIOR AGREEMENTS,
CONSENTS AND UNDERSTANDINGS RELATING TO SUCH SUBJECT MATTER.
THE PARTIES AGREE THAT THERE IS NO ORAL OR OTHER AGREEMENT
BETWEEN THE PARTIES WHICH HAS NOT BEEN INCORPORATED INTO THIS
AGREEMENT. This Agreement may be modified or amended only by
a duly authorized written instrument executed by the parties
hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
ADVANCED COMMUNICATIONS GROUP, INC.
By:
---------------------------------------
Name: Richard P. Anthony
Title: Chairman and Chief Executive Officer
FEIST PUBLICATIONS, INC.
By:
---------------------------------------
Name: Tom Feist
Title: President
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<PAGE>
ANNEX VII
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is entered into as of
January ____, 1998 by and between Todd J. Feist (the "Employee") and Feist Long
Distance Service, Inc., a Kansas corporation (the "Company") (collectively
referred to as the "Parties") for the benefit of the Parties, 1+ USA V
Acquisition Corp., a Delaware corporation ("Acquisition Subsidiary"), Advanced
Communications Corp. ("Corp.") and Advanced Communications Group, Inc.
RECITALS
WHEREAS, pursuant to an Agreement and Plan of Merger, as amended by
Amendment No. 1 thereto (as amended, the "Original Merger Agreement"),
Acquisition Subsidiary and Employee entered into an Employment Agreement dated
June 12, 1997 (the "Original Employment Agreement") which contemplated a merger
(the "Merger") between Feist Long Distance Service, Inc. and the Acquisition
Subsidiary, which is a wholly owned subsidiary of Advanced Communications Corp.
(formerly named Advanced Communications Group, Inc.);
WHEREAS, the parties amended and restated the Original Merger
Agreement pursuant to an Agreement and Plan of Exchange dated as of October 6,
1997 by and among Advanced Communications Group, Inc., Advanced Communications
Corp., Acquisition Subsidiary, Feist, Thomas J. Feist, Roberta Feist and
certain other stockholders of Feist, as amended by the First Amendment to
Agreement and Plan of Exchange dated as of the date hereof (collectively, the
"Restated Acquisition Agreement");
WHEREAS, the Restated Acquisition Agreement superseded all provisions
relating to the Merger and now provides for the acquisition of all of the
issued and outstanding shares of Feist by a subsidiary of Advanced
Communications Corp. named Advanced Communications Group, Inc.;
WHEREAS, the parties wish to terminate the Original Employment
Agreement and replace it with the terms and provisions of this Agreement
effective upon the initial public offering of the common stock of Advanced
Communications Group, Inc.;
WHEREAS, all defined terms used herein that are not otherwise defined
herein shall have the meanings assigned them in the Restated Acquisition
Agreement;
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is acknowledged by both parties, Company and Employee
agree as follows:
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<PAGE>
1. Termination of Employment.
1.1 The Original Employment Agreement and Employee's employment
pursuant thereto are hereby terminated, without any further
action by any of the parties, effective upon the consummation
of the initial public offering of common stock, $.0001 par
value, of Advanced Communications Group, Inc. (the
"Offering"). The parties agree that Employee shall not be
entitled to any compensation or benefits whatsoever as a
result of his termination other than payment of his salary of
$1,000 per month accrued through the date of termination.
Accordingly, the parties agree that upon such termination,
Employee shall be deemed to have released and waived all his
claims, contingent or matured, known or unknown against
Acquisition Subsidiary or Corp. under the Original Employment
Agreement, except for any claims for unpaid salary accrued
prior to the termination of the Original Employment Agreement
and his employment.
1.2 In consideration of the mutual covenants and agreements
contained in this Agreement and for other good and valuable
consideration, the receipt and sufficiency of which are
acknowledged by Employee and the Company, and effective upon
the Offering, the Company employs Employee, and Employee
accepts employment subject to the terms and conditions of
this Agreement. Further, effective upon the Offering, this
Agreement will supersede and replace the existing employment
agreement between the Company and Employee, and no
compensation or other consideration thereunder that has not
accrued prior to the date of termination shall be payable to
Employee as a result of its termination. Unless the context
otherwise clearly requires, all references to ACG in this
Agreement shall include Advanced Communications Group, Inc.,
ACG Corp., Acquisition Subsidiary, and ACG's subsidiaries
from time to time, including Feist.
2. Term.
This following provisions of this Agreement shall commence and become
effective on the Closing Date and shall end on the fifth anniversary thereof.
Such term of employment may be renewed for successive periods of one year
thereafter upon the mutual agreement of the Parties.
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<PAGE>
3. Compensation and other Benefits.
3.1 As compensation for his services to the Company under this
Agreement, the Company shall pay to Employee during the term
of this Agreement a base salary ("Base Salary") of not less
than $110,000 per annum, payable in equal semi-monthly
installments, subject only to such payroll and withholding
deductions as may be required by law and other deductions
applied generally to employees of ACG for any employee
benefit plans.
3.2 After the first twelve consecutive months of employment after
the Closing Date, and after every consecutive twelve-month
period thereafter, Employee shall be eligible to receive a
potential cash bonus up to 63% of Employee's Base Salary
("Bonus") to be based upon his performance as determined by
the Compensation Committee of the Board of Directors
("Compensation Committee") of ACG. The standards required to
be met by Employee to qualify for the cash bonus potential
will be communicated to Employee prior to the commencement of
such twelve-month period, beginning in 1998. Employee agrees
that the decision as to whether to award a Bonus and the
percentage amount thereof will be made by the Compensation
Committee and will be based upon the criteria set by such
committee.
3.3 Employee will be entitled to two weeks of paid vacation
annually during the term of this Agreement.
3.4 Pursuant to the Original Agreement, Employee was awarded
250,000 options to acquire common stock in ACG Corp. for a
price of $2.50 per share. These options are hereby canceled
and surrendered. In substitution therefor, the Acquisition
Subsidiary and Corp. will cause Advanced Communications
Group, Inc. to award Employee 250,000 options to acquire
Advanced Communications Group, Inc. common stock, par value
$.0001, having a term of ten years, and exercisable six
months after the date of the Offering; provided, however,
that the vesting of such options will be accelerated in the
event of the termination of Employee's employment hereunder
pursuant to Section 6.1(d), and in the event of any other
termination no options shall vest after the date of
termination. The options shall, except as provided herein, be
granted pursuant to ACG's 1997 Stock Awards Plan, which is
substantively identical to the copy of Corp's 1997 Stock
Awards Plan heretofore delivered to Employee.
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<PAGE>
3.5 Employee shall receive benefits commensurate with his level
of employment under any health plan of ACG.
3.6 If ACG completes an initial underwritten public offering of
ACG common stock, par value $.0001 per share (the "IPO")
prior to February 20, 1998, the Company shall pay the
Employee a one-time bonus of $50,000 within two weeks after
the closing of the IPO.
4. Duties and Extent of Service.
Employee shall hold the office of President of the Company. In addition,
Employee shall serve Advanced Communications Group, Inc. at no additional
compensation as its Vice President -- Kansas/Telecommunication Services Group.
Employee agrees to perform the duties incidental to his positions, as
determined from time to time by the Chief Executive Officer of Advanced
Communications Group, Inc. Employee shall devote such time, attention, and
energy to the business of ACG as are required to perform his duties and
responsibilities hereunder and shall not after the Closing Date and during the
remaining term of this Agreement be engaged, directly or indirectly, in any
other business activity if pursued for gain, profit, or other pecuniary
advantage without the prior written consent of the Chief Executive Officer of
Advanced Communications Group, Inc.; provided, however, that Employee shall be
permitted to continue to serve as a member of the Board of Directors of Feist
Publications, Inc. and receive compensation for serving in such capacity. In
any event, after the Closing Date, Employee shall not take any action
inconsistent with Employee's relationship and responsibilities as an employee
of the Company and ACG or take any action which is intended, or may be
reasonably expected, to harm the reputation, business, prospects, or operations
of ACG.
5. Protection of Confidential Information and Employee Non-Competition.
5.1 Employee recognizes and acknowledges that he will have access
to certain confidential information and trade secrets of ACG
("Confidential Information"). Such Confidential Information
includes, but is not limited to: customer names; contracts;
products purchased by customers; production capabilities and
processes; customer account and credit data; referral
sources; computer programs and software; names and
information relating to potential acquisition candidates;
financing sources and other business relationships;
information relating to confidential or secret designs,
processes, formulae, plans, devices, or materials of ACG's
business and marketing plans, confidential information and
trade secrets relating to the distribution and marketing of
ACG's products and services; patents
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<PAGE>
pending; confidential characteristics of ACG's products and
services; customer comments; troubleshooting requirements;
product and service development; market development; manuals
written by ACG; management, accounting, and reporting
systems, procedures, and programs; off net contracts, leases,
marketing agreements, sales employee compensation
information, plans, and programs; marketing and financial
analysis, plans, research, programs, and related information
and data; forms, agreements, and legal documents; regulatory
and supervisory reports; correspondence; statements;
corporate books and records; and other similar information.
5.2 Employee acknowledges and agrees that this Confidential
Information constitutes valuable, special, and unique
property of ACG.
5.3 Employee will not, at any time during or after the term of
this Agreement or his employment with ACG, disclose any
Confidential Information to any person, firm, corporation,
association, or other entity for any reason or purpose.
5.4 The foregoing restrictions shall not apply to: (a) any
information in Employee's possession before its disclosure to
Employee by ACG or the Company or (b) information that is or
shall lawfully be published or become part of the general
knowledge through no act or omission of Employee. The
Confidential Information disclosed to Employee under this
Agreement is not within the foregoing exceptions merely
because such information is embraced by more general
information in the public domain or in Employee's possession
or merely because portions thereof are in the public domain
or in Employee's possession.
5.5 To protect the confidentiality of the Confidential
Information, Employee further agrees that while employed by
ACG and for a period of three years immediately after the
termination of this Agreement or his employment with ACG,
regardless of whether such termination of employment is
voluntary or involuntary, he will not, for himself, or on
behalf of any other person, firm, partnership, company, or
corporation (i) generally compete in any manner whatsoever
with ACG or solicit, accept, divert, or take away from ACG
the business of any person, company, or business; (ii)
directly or indirectly induce or attempt to influence any
employee, officer, director, consultant, agent, vendor or
other entity related to ACG to terminate his or her
employment or association in any manner whatsoever with ACG;
or (iii) engage in any commercial or technical activity
involving the development, formulation, manufacture,
production, distribution, marketing or
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<PAGE>
sale of any product and services that ACG designs, produces,
manufactures, distributes, markets or sells during the term
of this Agreement or Employee's employment with ACG. The
prescribed territory in which Employee shall not compete with
ACG as outlined in this Paragraph 5.5 shall consist of all of
those areas of the United States in which ACG is doing
business at the time of Employee's termination of employment.
Notwithstanding anything to the contrary in this Paragraph
5.5, the provisions of this Paragraph 5.5 shall not apply to
Employee (a) until the Closing Date and (b) if the Company
declines to renew this Agreement upon the expiration of its
stated term. The obligations of Employee pursuant to this
Agreement are additional to the obligations described in
Sections 12 and 13 of the Restated Acquisition Agreement.
5.6 Employee understands and acknowledges that, due to the unique
nature of the products and services provided by ACG and the
need for sales personnel to have a relatively high degree of
technical knowledge concerning these products and services,
employment by ACG, including the special training, knowledge,
and confidential information that will be acquired in the
course of such employment, will give Employee distinct and
substantial advantages for potential sales activities
concerning such products and services. Employee further
understands and acknowledges that: because of the definition
of products and services covered by this Agreement, the
highly specialized nature of those products and services, the
limited size and number of business entities in the business
of developing and/or selling those products and services, and
the much more numerous opportunities for Employee to work in
his trade with respect to products and services not covered
by this Agreement, the limitations as to time and geographic
area contained in Paragraph 5.5 are reasonable and are not
unduly onerous on Employee. Employee therefore agrees that
the limitations as to time, geographic area, and scope of
activity contained in Paragraph 5.5 do not impose a greater
restraint than is necessary to protect the Confidential
Information, goodwill, and other business interests of ACG.
Employee also agrees that in light of the facts acknowledged
above, the substantial investment of ACG in developing its
business and providing special training to Employee, and the
certain and substantial harm that ACG would suffer if
Employee were to engage in any of the activities described in
Paragraph 5.5, ACG's need for the protection afforded by
Paragraph 5.5 is greater than any hardship Employee might
experience by complying with its terms. Employee also agrees
that, if any provision of the covenant set forth in Paragraph
5.5 is found to be invalid in part or whole, ACG may elect,
but shall not be required, to have such provision reformed,
whether as
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to time, geographic area, scope of activity, or otherwise, as
and to the extent required for its validity under applicable
law, and, as so reformed, such provisions shall be
enforceable.
5.7 Employee acknowledges that a violation or attempted violation
on his part of any provision in this Paragraph 5 may cause
irreparable damage to ACG. Accordingly, in the event of a
breach or threatened breach by Employee of the provisions of
this Paragraph 5, Employee agrees that ACG shall be entitled
as a matter of right to an injunction, out of any court of
competent jurisdiction, restraining any violation or further
violation of such agreements by Employee or his agents,
without showing any evidence of actual monetary loss
resulting from such breach, including, but not limited to,
restraining Employee from using or disclosing, in whole or in
part, such Confidential Information or trade secrets;
rendering any services to any person, firm, corporation, or
other entity to whom any of such information may have been
disclosed or is threatened to be disclosed; and/or violating
the non-competition provision. Nothing herein shall be
construed as prohibiting ACG from pursuing any other remedies
available to it for such breach or threatened breach,
including the recovery of damages and attorneys' fees from
Employee.
6. Termination of Employment.
6.1 Employee's employment under this Agreement shall terminate on
the occurrence of any of the following events:
(a) End of Term: If the term of employment under the
Agreement or any term of renewal ends.
(b) Death or Disability of Employee: If Employee dies or
becomes disabled such that he no longer is
reasonably able to perform his duties as
contemplated by this Agreement, the Company shall
pay to Employee, or to the estate of Employee if he
dies, that part of his Base Salary which would
otherwise be payable to Employee through the end of
the month in which his death or disability occurs,
after giving effect to accrued sick leave benefits
and accrued vacation time, if any. Upon such
payment, as well as applicable insurance benefits,
if any, all obligations of ACG to the Employee or
his estate shall be fully satisfied, and this
Agreement shall terminate.
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(c) Resignation of Employee: If Employee resigns prior
to the end of the term of this Agreement, this
Agreement shall terminate immediately, and the
Company shall pay to Employee that part of his Base
Salary which would otherwise be payable to Employee
through the effective date of his resignation. Upon
such payment, all obligations in any manner
whatsoever of ACG to Employee shall be fully
satisfied.
(d) Change in Ownership, Management, or Employee's
Responsibilities: If there is a change in the
ownership or management of ACG after the Closing
Date, and either of these changes significantly
alters Employee's job responsibilities or
compensation, Employee may resign from his positions
within 60 days of such a change. If Employee resigns
pursuant to this paragraph, the Company will
continue to provide Employee with his monthly
compensation for a period of one year after the
initial date of any such change. Employee is not
entitled to receive any Bonus if he resigns as
provided in this paragraph. For the period after
Employee's resignation during which Employee will be
paid, Employee will not have any authority to act on
behalf of the Company.
(e) Termination by the Company "With Cause" If Employee
(i) violates any provision of this Agreement; (ii)
fails to perform the services required of him
pursuant to this Agreement; (iii) commits acts of
fraud or dishonesty against ACG; (iv) is convicted
of a crime other than a routine traffic violation;
and/or (v) violates any policies of ACG as outlined
in any ACG policy handbook, ACG may terminate the
employment of Employee with cause. If Employee is
terminated "with cause," Employee shall not be
entitled to receive any further salary or benefits
under this Agreement other than payment for that
part of Employee's compensation that would otherwise
be payable to Employee through the last date of his
employment with ACG. Upon such payment, all
obligations of ACG to Employee shall be fully
satisfied, and this Agreement will terminate.
Employee shall not be entitled to receive any Bonus
or accrued vacation pay if his termination is "with
cause."
(f) Termination by the Company Without Cause. In the
event the Company terminates Employee's employment
for any reason other than described in (e) above,
Employee shall be entitled to that part of the Base
Salary payable to Employee through the last date of
his employment and such
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compensation shall continue thereafter for a period
of six (6) months from termination.
6.2 Termination of this Agreement shall not relieve Employee of
any continuing obligations expressly provided in this
Agreement, including, without limitation, those set forth in
Paragraphs 5.1 through 5.6.
7. Return of ACG Property.
7.1 All data, drawings, documents, contracts, computerized data,
information printouts, and tapes, tape recordings, documents,
data, accounting records, personnel files, computer
terminals, equipment, and other records and written material
prepared or compiled by Employee or furnished to Employee
while in the employ of ACG shall be the sole and exclusive
property of ACG, and none of such data, drawings or other
records and written material, or copies thereof, shall be
retained by Employee upon termination of his employment. This
ACG property shall not be removed from ACG premises without
ACG's prior written consent.
7.2 Upon termination of this Agreement or whenever requested by
ACG, Employee immediately shall deliver to ACG all of the ACG
property or any of ACG's documents in Employee's possession
or under Employee's control, including, but not limited to,
all documents or data, Confidential Information, accounting
records, computer terminals, data, discs, printouts and
tapes, accounting machines, and all office furniture and
fixtures, supplies, equipment, and other personal property
placed in the office of ACG. No copies of any such data shall
be retained by Employee.
8. Notices.
Any notice required or permitted to be given under this Agreement shall be in
writing and addressed to Employee at 10201 Peppertree, Wichita, Kansas 67226,
and to the Company, c/o Rod K. Cutsinger, 3355 West Alabama, Suite 580,
Houston, Texas 77098, or to such other address as either party shall designate
by written notice to the other. Notices may be sent by messenger or by
registered or certified mail, postage prepaid, addressed to the party or
parties to be notified, with return receipt requested. Notices sent by
messenger shall be deemed received upon their actual receipt of the party to
whom they are directed. Notices sent by registered or certified mail shall be
deemed received on the third day following their deposit with the United States
Postal Service.
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9. Arbitration.
Exclusive jurisdiction with respect to any dispute, controversy, or claim
brought by ACG or Employee concerning the subject matter contained in this
Agreement, including, but not limited to, Employee's employment, termination
from, and/or affiliation with ACG, shall be settled by arbitration in Houston,
Texas, in accordance with the Employment Dispute Resolution Rules of the
American Arbitration Association, and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction. In reaching his or
her decision, the arbitrator shall have no authority to change or modify any
provision of this Agreement. Any and all charges that may be made for the cost
of the arbitration and the fees and expenses of the arbitrator shall be borne
equally by the parties; attorneys' fees and witness expenses shall be borne by
the party incurring them.
10. Miscellaneous.
10.1 The rights and obligations of ACG under this Agreement shall
inure to the benefit of and shall be binding upon the
successors and assigns of ACG. This Agreement shall be
binding upon the Employee and his agents, heirs, executors,
administrators and legal representatives. The rights and
obligations of Employee hereunder shall not be assignable by
Employee.
10.2 This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
10.3 This Agreement may be executed in multiple counterparts, each
of which shall be deemed an original and all of which shall
constitute one instrument.
10.4 This Agreement contains the entire agreement of the parties
pertaining to the subject matter hereof and supersedes all
prior agreements, understandings, negotiations and
discussions, whether oral or written, and there are no other
warranties, representations, covenants or agreements among
ACG, the Employee and Rod K. Cutsinger in connection with the
subject matter hereof.
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10.5 The waiver by ACG of a breach of any provision of this
Agreement by Employee shall not operate or be construed as a
waiver by ACG of any subsequent breach by Employee.
10.6 If a court of competent jurisdiction shall adjudge to be
invalid any clause, sentence, subparagraph, paragraph or
section of this Agreement, such judgment or decree shall not
affect, impair, invalidate, or nullify the remainder of this
Agreement, but the effect thereof shall be confined to the
clause, sentence, subparagraph, paragraph, or section so
adjudged to be invalid.
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The Parties have executed this Agreement to be effective as of the day
and year first above written.
FEIST LONG DISTANCE SERVICE, INC.
- ----------------------------------- -----------------------------------
By: Todd J. Feist Todd J. Feist
Its: President
"COMPANY" "EMPLOYEE"
The following corporations execute this Agreement to evidence their awareness
of and consent to its terms:
ADVANCED COMMUNICATIONS GROUP, INC.
- -----------------------------------
Name: Richard P. Anthony
Title: Chairman
ADVANCED COMMUNICATIONS CORP.
- -----------------------------------
Name: Rod K. Cutsinger
Title: Chairman
1+ USA ACQUISITION V CORP.
- -----------------------------------
Name: Rod K. Cutsinger
Title: Chairman
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SECOND AMENDMENT TO AGREEMENT AND PLAN OF EXCHANGE
THIS SECOND AMENDMENT TO AGREEMENT AND PLAN OF EXCHANGE (this
"Amendment"), made as of the 8th day of January, 1998, by and among ADVANCED
COMMUNICATIONS GROUP, INC., a Delaware corporation organized in September 1997,
FIRSTEL, INC., a South Dakota corporation, and FRED L. THURMAN, JAMES E. PERRY,
W. BRADLEY VAN LEUR, WALLACE JANSMA, MARK VANDERBERGE, TELE-TECH, INC. AND
RAFT, L.L.C., and SCOTT D. SCOFIELD, WILLIAM PEDERSON, AND JERRY R. NOONAN,
amends the Agreement and Plan of Exchange dated as of October 6, 1997 among the
parties (the "Original Agreement"), as amended by the Amendment to Agreement
and Plan of Exchange executed as of December 15, 1997 (the "First Amendment")
(collectively, the "Agreement").
RECITALS
WHEREAS, the parties wish to extend the date by which the
transactions contemplated by this Agreement to take place at the
Closing shall occur; and
WHEREAS, all capitalized terms not otherwise defined herein
have the meanings ascribed to them in the Original Agreement, as
amended by the First Amendment;
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties, covenants and agreements herein
contained, and other consideration, the receipt and sufficiency of
which is acknowledged, the parties hereby agree as follows:
1. EXTENSION OF CLOSING DATE.
The phrase, "January 31, 1998," in Section 13.1(iii) of the Original
Agreement is deleted and replaced by the phrase, "February 20, 1998."
2. MISCELLANEOUS
2.1 Counterparts. For the convenience of the parties, any number of
counterparts of this Second Amendment may be executed by any one or more
parties hereto, and each such executed counterpart shall be, and shall be
deemed to be, an original, but all of which shall constitute, and shall be
deemed to constitute, in the aggregate but one and the same instrument. A
facsimile copy of a signature page to this Second Amendment shall be accorded
the same force and effect as a manually executed original counterpart of a
signature page to this Second Amendment.
<PAGE>
2.2 Integration Clause. The Original Agreement, as modified by the
First Amendment and this Amendment, represents the final agreement among the
parties relating to its subject matter and may not be contradicted by evidence
of prior, contemporaneous, or subsequent oral agreements of the parties. There
are no unwritten oral agreements between the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
ADVANCED COMMUNICATIONS GROUP, INC.
By: /s/ Richard P. Anthony
------------------------------------------
Name: Richard P. Anthony
Title: Chairman and Chief Executive Officer
FIRSTEL, INC.
By: /s/ Fred L. Thurman
------------------------------------------
Name: Fred L. Thurman
Title: President and Chief Executive Officer
-2-
<PAGE>
STOCKHOLDERS:
/s/ Fred L. Thurman
---------------------------------------------
Fred L. Thurman
/s/ James E. Perry
---------------------------------------------
James E. Perry
/s/ W. Bradley Van Leur
---------------------------------------------
W. Bradley Van Leur
/s/ Wallace Jansma
---------------------------------------------
Wallace Jansma
/s/ Mark VanderBerge
---------------------------------------------
Mark VanderBerge
-3-
<PAGE>
NEW STOCKHOLDERS:
TELE-TECH, INC.
By:
------------------------------------------
Name:
Title:
RAFT, L.L.C.
By:
------------------------------------------
Name:
Title:
BENEFICIAL OWNERS:
/s/ Jerry R. Noonan
---------------------------------------------
Jerry R. Noonan
/s/ Scott D. Scofield
---------------------------------------------
Scott D. Scofield
/s/ William Pederson
---------------------------------------------
William Pederson
-4-
<PAGE>
PRINCIPALS OF BOLES, KNOP &
COMPANY LLC
/s/ John M. Boles
---------------------------------------------
John M. Boles
/s/ J. Richard Knop
---------------------------------------------
J. Richard Knop
MONTROSS, INC.
By: /s/ James R. Meadows, Jr.
------------------------------------------
Name: James R. Meadows, Jr.
Title: President
/s/ Richard R. Miller
---------------------------------------------
Richard R. Miller
-5-
<PAGE>
FIRST AMENDMENT TO AGREEMENT AND PLAN OF EXCHANGE
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF EXCHANGE (this
"Amendment"), made as of the 8th day of January, 1998, by and among ADVANCED
COMMUNICATIONS GROUP, INC., a Delaware corporation organized in September 1997,
ADVANCED COMMUNICATIONS CORP. (formerly named Advanced Communications Group,
Inc.), a Delaware corporation organized in June 1996, ACG ACQUISITION II CORP.,
a Delaware corporation, TELE-SYSTEMS, INC., a Kansas corporation, and DAVID
MITCHELL, EARL BROWN, CRAIG MCILVAIN, BOB PAGE and GARY GAMM, the only
stockholders of the Company, amends the Agreement and Plan of Exchange dated as
of October 6, 1997 among the parties (the "Restated Agreement"; and as amended
hereby, the "Agreement").
RECITALS
WHEREAS, the parties wish to extend the date by which the
transactions contemplated by this Agreement to take place at the
Closing shall occur; and
WHEREAS, all capitalized terms not otherwise defined herein
have the meanings ascribed to them in the Restated Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties, covenants and agreements herein
contained, and other consideration, the receipt and sufficiency of
which is acknowledged, the parties hereby agree as follows:
1. EXTENSION OF CLOSING DATE.
The phrase, "January 31, 1998," in Section 13.1(ii) of the Restated
Agreement is deleted and replaced by the phrase, "February 20, 1998."
2. MISCELLANEOUS
2.1 Counterparts. For the convenience of the parties, any number of
counterparts of this Amendment may be executed by any one or more parties
hereto, and each such executed counterpart shall be, and shall be deemed to be,
an original, but all of which shall constitute, and shall be deemed to
constitute, in the aggregate but one and the same instrument. A facsimile copy
of a signature page to this Amendment shall be accorded the same force and
effect as a manually executed original counterpart of a signature page to this
Amendment.
<PAGE>
2.2 Integration Clause. The Restated Agreement, as modified by this
Amendment, represents the final agreement among the parties relating to its
subject matter and may not be contradicted by evidence of prior,
contemporaneous, or subsequent oral agreements of the parties. There are no
unwritten oral agreements between the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
ADVANCED COMMUNICATIONS GROUP, INC.
BY: /s/ RICHARD P. ANTHONY
---------------------------------------
NAME: RICHARD P. ANTHONY
TITLE: CHAIRMAN AND CHIEF EXECUTIVE OFFICER
TELE-SYSTEMS, INC.
BY: /s/ EARL BROWN
---------------------------------------
NAME: EARL BROWN
TITLE: PRESIDENT AND CHIEF EXECUTIVE OFFICER
STOCKHOLDERS:
/s/ DAVID MITCHELL
------------------------------------------
DAVID MITCHELL
/s/ EARL BROWN
------------------------------------------
EARL BROWN
/s/ CRAIG MCILVAIN
------------------------------------------
CRAIG MCILVAIN
-2-
<PAGE>
/s/ BOB PAGE
------------------------------------------
BOB PAGE
/s/ GARY GAMM
------------------------------------------
GARY GAMM
ADVANCED COMMUNICATIONS CORP.
BY: /s/ ROD K. CUTSINGER
---------------------------------------
NAME: ROD K. CUTSINGER
TITLE: CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ACG ACQUISITION II CORP.
BY: /s/ ROD K. CUTSINGER
---------------------------------------
NAME: ROD K. CUTSINGER
TITLE: PRESIDENT
-3-
<PAGE>
FIRST AMENDMENT TO RESTATED ASSET PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO RESTATED ASSET PURCHASE AGREEMENT (this
"Amendment"), made as of the 8th day of January, 1998, by and among ADVANCED
COMMUNICATIONS GROUP, INC., a Delaware corporation organized in September 1997,
ADVANCED COMMUNICATIONS CORP., (formerly named Advanced Communications Group,
Inc.), a Delaware corporation organized in June 1996, LONG DISTANCE MANAGEMENT
II, INC., an Oklahoma corporation, and BOBBY ALEXANDER, an individual resident
of Oklahoma, amends the Restated Asset Purchase Agreement dated as of October
6, 1997 among the parties (the "Restated Agreement"; and as amended hereby, the
"Agreement").
RECITALS
WHEREAS, the parties wish to extend the date by which the
transactions contemplated by this Agreement to take place at the
Closing shall occur; and
WHEREAS, all capitalized terms not otherwise defined herein
have the meanings ascribed to them in the Restated Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties, covenants and agreements herein
contained, and other consideration, the receipt and sufficiency of
which is acknowledged, the parties hereby agree as follows:
1. EXTENSION OF CLOSING DATE.
The phrase, "January 31, 1998," in Sections 2.7 and 10.1(vi) of the
Restated Agreement is deleted and replaced by the phrase, "February 20, 1998,"
in each instance.
2. MISCELLANEOUS
2.1 Counterparts. For the convenience of the parties, any number of
counterparts of this Amendment may be executed by any one or more parties
hereto, and each such executed counterpart shall be, and shall be deemed to be,
an original, but all of which shall constitute, and shall be deemed to
constitute, in the aggregate but one and the same instrument. A facsimile copy
of a signature page to this Amendment shall be accorded the same force and
effect as a manually executed original counterpart of a signature page to this
Amendment.
2.2 Integration Clause. The Restated Agreement, as modified by this
Amendment, represents the final agreement among the parties relating to its
subject matter and may not be
<PAGE>
contradicted by evidence of prior, contemporaneous, or subsequent oral
agreements of the parties. There are no unwritten oral agreements between the
parties.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
PURCHASER:
ADVANCED COMMUNICATIONS GROUP, INC.
By: Richard P. Anthony
----------------------------------------
Name: Richard P. Anthony
Title: Chairman and Chief Executive Officer
ADVANCED COMMUNICATIONS CORP.
By: /s/ Rod K. Cutsinger
----------------------------------------
Name: Rod K. Cutsinger
Title: Chairman and Chief Executive Officer
SELLER:
LONG DISTANCE MANAGEMENT II, INC.
By: /s/ Bobby Alexander
----------------------------------------
Name: Bobby Alexander
Title: President
-2-
<PAGE>
SHAREHOLDER:
/s/ Bobby Alexander
-------------------------------------------
Bobby Alexander
-3-
<PAGE>
FIRST AMENDMENT TO RESTATED ASSET PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO RESTATED ASSET PURCHASE AGREEMENT (this
"Amendment"), made as of the 8th day of January, 1998, by and among ADVANCED
COMMUNICATIONS GROUP, INC., a Delaware corporation organized in September 1997,
ADVANCED COMMUNICATIONS CORP., (formerly named Advanced Communications Group,
Inc.), a Delaware corporation organized in June 1996, LONG DISTANCE MANAGEMENT
OF KANSAS, INC., an Oklahoma corporation, and BOBBY ALEXANDER, MARK BEALL, and
CAROL COASH, amends the Restated Asset Purchase Agreement dated as of October
6, 1997 among the parties (the "Restated Agreement"; and as amended hereby, the
"Agreement").
RECITALS
WHEREAS, the parties wish to extend the date by which the
transactions contemplated by this Agreement to take place at the
Closing shall occur; and
WHEREAS, all capitalized terms not otherwise defined herein
have the meanings ascribed to them in the Restated Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties, covenants and agreements herein
contained, and other consideration, the receipt and sufficiency of
which is acknowledged, the parties hereby agree as follows:
1. EXTENSION OF CLOSING DATE.
The phrase, "January 31, 1998," in Sections 2.7 and 9.1(vi) of the
Restated Agreement is deleted and replaced by the phrase, "February 20, 1998,"
in each instance.
2. MISCELLANEOUS
2.1 Counterparts. For the convenience of the parties, any number of
counterparts of this Amendment may be executed by any one or more parties
hereto, and each such executed counterpart shall be, and shall be deemed to be,
an original, but all of which shall constitute, and shall be deemed to
constitute, in the aggregate but one and the same instrument. A facsimile copy
of a signature page to this Amendment shall be accorded the same force and
effect as a manually executed original counterpart of a signature page to this
Amendment.
<PAGE>
2.2 Integration Clause. The Restated Agreement, as modified by this
Amendment, represents the final agreement among the parties relating to its
subject matter and may not be contradicted by evidence of prior,
contemporaneous, or subsequent oral agreements of the parties.
There are no unwritten oral agreements between the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
PURCHASER:
ADVANCED COMMUNICATIONS GROUP, INC.
By: /s/ Richard P. Anthony
--------------------------------------
Name: Richard P. Anthony
Title: Chairman and Chief Executive Officer
ADVANCED COMMUNICATIONS CORP.
By: /s/ Rod K. Cutsinger
--------------------------------------
Name: Rod K. Cutsinger
Title: Chairman and Chief Executive Officer
SELLER:
LONG DISTANCE MANAGEMENT OF
KANSAS, INC.
By: /s/ Bobby Alexander
--------------------------------------
Name: Bobby Alexander
Title: President
-2-
<PAGE>
SHAREHOLDERS:
/s/ Bobby Alexander
--------------------------------------
Bobby Alexander
/s/ Mark Beall
--------------------------------------
Mark Beall
/s/ Carol Coash
--------------------------------------
Carol Coash
-3-
<PAGE>
- -------------------------------------------------------------------------------
FIRST AMENDMENT TO
RESTATED ASSET PURCHASE AGREEMENT
dated as of the 6th day of October, 1997
by and between
ADVANCED COMMUNICATIONS GROUP, INC.
(PURCHASER)
and
ADVANCED COMMUNICATIONS CORP.
(OLD ACG)
and
SWITCHBOARD OF OKLAHOMA CITY, INC.
(SELLER)
and
MARK BEALL, DONALD HUNTER, CHARLES JOHNSON AND
JAMES HUNTER, AS ATTORNEY-IN-FACT FOR JAMIE HUNTER, A MINOR
(SHAREHOLDERS)
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
1. AMENDMENTS ............................................................. 1
1.1 Amendment of Section 3.17 ......................................... 1
1.2 Addition of Section 8.6 ........................................... 2
2. MISCELLANEOUS .......................................................... 3
2.1 Counterparts ...................................................... 3
2.2 Status of Agreement ............................................... 3
2.3 Integration Clause ................................................ 3
<PAGE>
FIRST AMENDMENT TO RESTATED ASSET PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO RESTATED ASSET PURCHASE AGREEMENT (the "Agreement")
is executed as of January 7, 1998 but effective for all purposes as of the 6th
day of October, 1997, by and between ADVANCED COMMUNICATIONS GROUP, INC., a
Delaware corporation organized in September 1997 ("Purchaser"), ADVANCED
COMMUNICATIONS CORP., (formerly named Advanced Communications Group, Inc.), a
Delaware corporation organized in June 1996 ("Old ACG"), SWITCHBOARD OF
OKLAHOMA CITY, INC., an Oklahoma corporation ("Seller"), and each of MARK
BEALL, DONALD HUNTER, CHARLES JOHNSON AND JAMES HUNTER, AS ATTORNEY-IN-FACT FOR
JAMIE HUNTER, A MINOR (individually, a "Shareholder" and, collectively, the
"Shareholders"), the owners of all the issued and outstanding shares of capital
stock of Seller.
RECITALS
WHEREAS, the parties entered into a Restated Asset Purchase Agreement
(the "Original Agreement") dated as of October 6, 1997; and
WHEREAS, the parties wish to amend the Original Agreement to reflect
the Seller's status as a Subchapter S corporation and to supplement the
related representations and warranties accordingly; and
WHEREAS, all capitalized terms used herein and in the Original
Agreement, unless otherwise defined herein, shall have the meanings given
them in the Original Agreement;
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties, covenants and agreements herein contained, the
parties hereby agree as follows:
1. AMENDMENTS
1.1 Amendment of Section 3.17(i). The phrase "Subchapter C" marked in pen
in the first sentence of Section 3.17 is deleted and the phrase "Subchapter S"
is substituted therefor.
1.2 Addition to Section 3.17(i). There is added as Section 3.17(viii) of
the Original Agreement:
Except as set forth on Schedule 3.17, there are no examinations in progress
or claims against it for Federal, state and other Taxes for any period or
periods prior to and including the Balance Sheet Date and no notice of any
claim for Taxes, whether pending or threatened, has been received. All Tax
(whether or not shown on any Tax return) owed by the Seller, any member of
an affiliated or consolidated group which includes or included the Seller
or with respect to any payment made or deemed made by the Seller has been
paid. The amounts shown as accruals for Taxes on the Seller
<PAGE>
Financial Statements are sufficient for the payment of all Taxes of the
kinds indicated for all fiscal periods ended on or before that date. The
Seller made an election to be taxed under the provisions of Subchapter S of
the Code and has not, within the past five years, been taxed under the
provisions of Subchapter C of the Code. The Seller has a taxable year ended
December 31 and has not made an election to retain a fiscal year other than
December 31 under Section 444 of the Code. The Seller's methods of
accounting have not changed in the past five years. The Seller is not an
investment company as defined in Section 351(e)(1) of the Code. The
representations and warranties set forth in this paragraph shall,
notwithstanding the introductory paragraph of Section 3, survive until such
time as the limitations period has run for all Tax periods ended on or
prior to the Closing Date.
1.3 Addition of Section 8.6. The following is added as Section 8.6 of the
Original Agreement:
8.6 Preparation and Filing of Tax Returns
(i) The Shareholders shall file or cause to be filed all separate
Federal income Tax Returns (and any state and local Tax Returns filed on
the basis similar to that of S corporations under Federal income Tax rules)
of the Seller for all taxable periods. Each Stockholder shall pay or cause
to be paid all Tax liabilities (in excess of all amounts already paid with
respect thereto or properly accrued or reserved with respect thereto on the
Seller Financial Statements) shown by such Returns to be due.
(ii) Each party hereto shall, and shall cause its subsidiaries and
affiliates to, provide to each of the other parties hereto such cooperation
and information as any of them reasonably may request in filing any Return,
amended Return or claim for refund, determining a liability for Taxes or a
right to refund of Taxes or in conducting any audit or other proceeding in
respect of Taxes. Such cooperation and information shall include providing
copies of all relevant portions of relevant Returns, together with relevant
accompanying schedules and work papers, relevant documents relating to
rulings or other determinations by taxing authorities and relevant records
concerning the ownership and Tax basis of property, which such party may
possess. Each party shall make its employees reasonably available on a
mutually convenient basis at its cost to provide explanation of any
documents or information so provided. Subject to the preceding sentence,
each party required to file Returns pursuant to this Agreement shall bear
all costs of filing such Returns.
-2-
<PAGE>
2. MISCELLANEOUS
2.1 Counterparts. For the convenience of the parties, any number of
counterparts of this Amendment may be executed by any one or more parties
hereto, and each such executed counterpart shall be, and shall be deemed to be,
an original, but all of which shall constitute, and shall be deemed to
constitute, in the aggregate but one and the same instrument. A facsimile copy
of a signature page to this Amendment shall be accorded the same force and
effect as a manually executed original counterpart of a signature page to this
Amendment.
2.2 Status of Agreement. The Original Agreement in the form originally
executed and delivered by the parties thereto and as specifically modified and
amended as set forth in this Amendment, shall remain in full force and effect.
2.3 Integration Clause. The Original Agreement, as modified by this
Agreement, represents the final agreement among the parties relating to its
subject matter and may not be contradicted by evidence of prior,
contemporaneous, or subsequent oral agreements of the parties. There are no
unwritten oral agreements between the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
PURCHASER:
ADVANCED COMMUNICATIONS GROUP, INC.
By:
-----------------------------------
Name: Richard P. Anthony
Title: Chairman and Chief Executive
Officer
-3-
<PAGE>
ADVANCED COMMUNICATIONS CORP.
By:
-----------------------------------
Name: Rod K. Cutsinger
Title: Chairman and Chief Executive
Officer
SELLER:
SWITCHBOARD OF OKLAHOMA
CITY, INC.
By:
-----------------------------------
Name: Mark Beall
Title: President
SHAREHOLDERS:
--------------------------------------
Mark Beall
--------------------------------------
Donald Hunter
--------------------------------------
Charles Johnson
-4-
<PAGE>
--------------------------------------
James Hunter, as Attorney-in-Fact for
Jamie Hunter, a Minor
-5-
<PAGE>
SECOND AMENDMENT TO RESTATED ASSET PURCHASE AGREEMENT
THIS SECOND AMENDMENT TO RESTATED ASSET PURCHASE AGREEMENT
(this "Second Amendment"), made as of the 8th day of January, 1998, by and
among ADVANCED COMMUNICATIONS GROUP, INC., a Delaware corporation organized in
September 1997, ADVANCED COMMUNICATIONS CORP., (formerly named Advanced
Communications Group, Inc.), a Delaware corporation organized in June 1996,
SWITCHBOARD OF OKLAHOMA CITY, INC., an Oklahoma corporation, and each of MARK
BEALL, DONALD HUNTER, CHARLES JOHNSON AND JAMES HUNTER, AS ATTORNEY-IN-FACT FOR
JAMIE HUNTER, A MINOR, amends the Restated Asset Purchase Agreement dated as of
October 6, 1997 among the parties (the "Restated Agreement"), as amended by the
First Amendment to Restated Asset Purchase Agreement executed as of January 7,
1998 (the "First Amendment") (collectively, the "Agreement").
RECITALS
WHEREAS, the parties wish to extend the date by which the
transactions contemplated by this Agreement to take place at the
Closing shall occur; and
WHEREAS, all capitalized terms not otherwise defined herein
have the meanings ascribed to them in the Restated Agreement, as
amended by the First Amendment;
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties, covenants and agreements herein
contained, and other consideration, the receipt and sufficiency of
which is acknowledged, the parties hereby agree as follows:
1. EXTENSION OF CLOSING DATE.
The phrase, "January 31, 1998," in Sections 2.7 and 9.1(vi) of the
Restated Agreement is deleted and replaced by the phrase, "February 20, 1998,"
in each instance.
2. MISCELLANEOUS
2.1 Counterparts. For the convenience of the parties, any number of
counterparts of this Second Amendment may be executed by any one or more
parties hereto, and each such executed counterpart shall be, and shall be
deemed to be, an original, but all of which shall constitute, and shall be
deemed to constitute, in the aggregate but one and the same instrument. A
facsimile copy of a signature page to this Second Amendment shall be accorded
the same force and effect as a manually executed original counterpart of a
signature page to this Second Amendment.
<PAGE>
2.2 Integration Clause. The Restated Agreement, as modified by the
First Amendment and this Amendment, represents the final agreement among the
parties relating to its subject matter and may not be contradicted by evidence
of prior, contemporaneous, or subsequent oral agreements of the parties. There
are no unwritten oral agreements between the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment as of the day and year first above written.
PURCHASER:
ADVANCED COMMUNICATIONS GROUP, INC.
By: /s/ Richard P. Anthony
------------------------------------------
Name: Richard P. Anthony
Title: Chairman and Chief Executive Officer
ADVANCED COMMUNICATIONS CORP.
By: /s/ Rod K. Cutsinger
------------------------------------------
Name: Rod K. Cutsinger
Title: Chairman and Chief Executive Officer
SELLER:
SWITCHBOARD OF OKLAHOMA
CITY, INC.
By: /s/ Mark Beall
------------------------------------------
Name: Mark Beall
Title: President
-2-
<PAGE>
SHAREHOLDERS:
/s/ Mark Beall
----------------------------------------------
Mark Beall
/s/ Donald Hunter
----------------------------------------------
Donald Hunter
/s/ Charles Johnson
----------------------------------------------
Charles Johnson
/s/ James Hunter
----------------------------------------------
James Hunter, as Attorney-in-Fact for
Jamie Hunter, a Minor
-3-
<PAGE>
FIRST AMENDMENT TO RESTATED ASSET PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO RESTATED ASSET PURCHASE AGREEMENT
(this "Amendment"), made as of the 8th day of January, 1998, by and among ACG
ACQUISITION II CORP. a Delaware corporation, ADVANCED COMMUNICATIONS GROUP,
INC., a Delaware corporation organized in September 1997, ADVANCED
COMMUNICATIONS CORP. (formerly named Advanced Communications Group, Inc.), a
Delaware corporation organized in June 1996, DANIEL W. PETERS and wife CHERYL
A. PETERS, individuals residing in Kansas, amends the Restated Asset Purchase
Agreement dated as of October 6, 1997 among the parties (the "Restated
Agreement"; and as amended hereby, the "Agreement").
RECITALS
WHEREAS, the parties wish to extend the date by which the
transactions contemplated by this Agreement to take place at the
Closing shall occur; and
WHEREAS, all capitalized terms not otherwise defined herein
have the meanings ascribed to them in the Restated Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties, covenants and agreements herein
contained, and other consideration, the receipt and sufficiency of
which is acknowledged, the parties hereby agree as follows:
1. EXTENSION OF CLOSING DATE.
The phrase, "January 31, 1998," in Section 9.1(ii) of the Restated
Agreement is deleted and replaced by the phrase, "February 20, 1998."
2. MISCELLANEOUS
2.1 Counterparts. For the convenience of the parties, any number of
counterparts of this Amendment may be executed by any one or more parties
hereto, and each such executed counterpart shall be, and shall be deemed to be,
an original, but all of which shall constitute, and shall be deemed to
constitute, in the aggregate but one and the same instrument. A facsimile copy
of a signature page to this Amendment shall be accorded the same force and
effect as a manually executed original counterpart of a signature page to this
Amendment.
<PAGE>
2.2 Integration Clause. The Restated Agreement, as modified by this
Amendment, represents the final agreement among the parties relating to its
subject matter and may not be contradicted by evidence of prior,
contemporaneous, or subsequent oral agreements of the parties.
There are no unwritten oral agreements between the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
PURCHASER:
ACG ACQUISITION II CORP.
By: /s/ Rod K. Cutsinger
---------------------------------------
Name: Rod K. Cutsinger
Title: President
PARENT:
ADVANCED COMMUNICATIONS GROUP, INC.
By: /s/ Richard P. Anthony
---------------------------------------
Name: Richard P. Anthony
Title: Chairman and Chief Executive Officer
OLD ACG:
ADVANCED COMMUNICATIONS CORP.
By: /s/ Rod K. Cutsinger
---------------------------------------
Name: Rod K. Cutsinger
Title: Chairman and Chief Executive Officer
-2-
<PAGE>
SELLERS:
/s/ Daniel W. Peters
------------------------------------------
Daniel W. Peters
/s/ Cheryl A. Peters
------------------------------------------
Cheryl A. Peters
-3-
<PAGE>
FIRST AMENDMENT TO
RESTATED STOCK PURCHASE AND EXCHANGE AGREEMENT
THIS FIRST AMENDMENT TO RESTATED STOCK PURCHASE AND
EXCHANGE AGREEMENT (this "Amendment"), made as of the 8th day of January, 1998,
by and among ADVANCED COMMUNICATIONS GROUP, INC., a Delaware corporation
organized in September 1997, ADVANCED COMMUNICATIONS CORP. (formerly named
Advanced Communications Group, Inc.), a Delaware corporation organized in June
1996, KIN NETWORK, INC., a Kansas corporation, and LIBERTY CELLULAR, INC., a
Kansas corporation, amends the Restated Stock Purchase and Exchange Agreement
dated as of October 6, 1997 among the parties (the "Restated Agreement"; and as
amended hereby, the "Agreement").
RECITALS
WHEREAS, the parties wish to extend the date by which the
transactions contemplated by this Agreement to take place at the
Closing shall occur; and
WHEREAS, all capitalized terms not otherwise defined herein
have the meanings ascribed to them in the Restated Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties, covenants and agreements herein
contained, and other consideration, the receipt and sufficiency of
which is acknowledged, the parties hereby agree as follows:
1. EXTENSION OF CLOSING DATE.
The phrase, "January 31, 1998," in Section 11.1(ii) of the Restated
Agreement is deleted and replaced by the phrase, "February 20, 1998."
2. MISCELLANEOUS
2.1 Counterparts. For the convenience of the parties, any number of
counterparts of this Amendment may be executed by any one or more parties
hereto, and each such executed counterpart shall be, and shall be deemed to be,
an original, but all of which shall constitute, and shall be deemed to
constitute, in the aggregate but one and the same instrument. A facsimile copy
of a signature page to this Amendment shall be accorded the same force and
effect as a manually executed original counterpart of a signature page to this
Amendment.
<PAGE>
2.2 Integration Clause. The Restated Agreement, as modified by this
Amendment, represents the final agreement among the parties relating to its
subject matter and may not be contradicted by evidence of prior,
contemporaneous, or subsequent oral agreements of the parties.
There are no unwritten oral agreements between the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
ADVANCED COMMUNICATIONS GROUP, INC.
BY: /s/ ROD K. CUTSINGER
----------------------------------------
NAME: RICHARD P. ANTHONY
TITLE: CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ADVANCED COMMUNICATIONS CORP.
BY: /s/ ROD K. CUTSINGER
----------------------------------------
NAME: ROD K. CUTSINGER
TITLE: CHAIRMAN AND CHIEF EXECUTIVE OFFICER
KIN NETWORK, INC.
BY: /s/ E. CLARKE GARNETT
----------------------------------------
NAME: E. CLARKE GARNETT
TITLE: PRESIDENT
-2-
<PAGE>
LIBERTY CELLULAR, INC.
BY: /s/ E. CLARKE GARNETT
----------------------------------------
NAME: E. CLARKE GARNETT
TITLE: PRESIDENT
-3-
<PAGE>
FIRST AMENDMENT TO AGREEMENT OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT OF MERGER (this "Amendment"), made
as of the 8th day of January, 1998, by and among ADVANCED COMMUNICATIONS GROUP,
INC., a Delaware corporation organized in September 1997, ADVANCED
COMMUNICATIONS GROUP ACQUISITION, INC., a Delaware corporation, and ADVANCED
COMMUNICATIONS CORP. (formerly named Advanced Communications Group, Inc.), a
Delaware corporation organized in June 1996, amends the Agreement of Merger
dated as of October 6, 1997 among the parties (the "Original Agreement"; and as
amended hereby, the "Agreement").
RECITALS
WHEREAS, the parties wish to extend the date by which the
Merger and the other actions contemplated by this Agreement to take
place at the Closing shall occur; and
WHEREAS, all capitalized terms not otherwise defined herein
have the meanings ascribed to them in the Original Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties, covenants and agreements herein
contained, and other consideration, the receipt and sufficiency of
which is acknowledged, the parties hereby agree as follows:
1. EXTENSION OF CLOSING DATE.
The phrase, "January 31, 1998," in Section 12.1(iii) of the Original
Agreement is deleted and replaced by the phrase, "February 20, 1998."
2. MISCELLANEOUS
2.1 Counterparts. For the convenience of the parties, any number of
counterparts of this Amendment may be executed by any one or more parties
hereto, and each such executed counterpart shall be, and shall be deemed to be,
an original, but all of which shall constitute, and shall be deemed to
constitute, in the aggregate but one and the same instrument. A facsimile copy
of a signature page to this Amendment shall be accorded the same force and
effect as a manually executed original counterpart of a signature page to this
Amendment.
2.2 Integration Clause. The Original Agreement, as modified by this
Amendment, represents the final agreement among the parties relating to its
subject matter and may not be
<PAGE>
contradicted by evidence of prior, contemporaneous, or subsequent oral
agreements of the parties. There are no unwritten oral agreements between the
parties.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
ADVANCED COMMUNICATIONS GROUP, INC.
By: /s/ Richard P. Anthony
--------------------------------------------
Name: Richard P. Anthony
Title: Chairman and Chief Executive Officer
ADVANCED COMMUNICATIONS GROUP
ACQUISITION, INC.
By: /s/ Rod K. Cutsinger
--------------------------------------------
Name: Rod K. Cutsinger
Title: Chairman and Chief Executive Officer
ADVANCED COMMUNICATIONS CORP.
By: /s/ Rod K. Cutsinger
--------------------------------------------
Name: Rod K. Cutsinger
Title: Chairman and Chief Executive Officer
-2-
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
Advanced Communications Group, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Company"), DOES HEREBY CERTIFY:
FIRST: That pursuant to Section 242(b) of the General Corporation Law
of the State of Delaware ("GCL"), the directors of Advanced Communications duly
and unanimously adopted resolutions proposing the amendment of the Restated
Certificate of Incorporation of the Company filed October 9, 1997 (the
"Restated Certificate"), and the sole shareholder of the Company approved such
resolutions by written consent pursuant to Section 228 of the GCL. The
resolutions setting forth the amendment are as follows:
RESOLVED, that the Restated Certificate be amended by
changing Article VI, Section 3, by deleting the word "twelve" and
substituting the word "fourteen"; and further
RESOLVED, that Article VI, Section 4, of the Restated
Certificate be amended by deleting such section and replacing it in
its entirety by the following:
Section 4. Tenure. Effective upon the due consummation of the
Corporations's initial underwritten public offering of its
Voting Stock, the Directors, other than those who may be
elected by the holders of any series of Preferred Stock,
shall be divided, with respect to the time for which they
severally hold office, into three classes, as nearly equal in
number as is reasonably possible, with the term of office of
the first class to expire at the next annual meeting of
Stockholders thereafter, the term of office of the second
class to expire at the second annual meeting of Stockholders
thereafter and the term of office of the third class to
expire at the third annual meeting of Stockholders
thereafter, with each Director to hold office until his or
her successor shall have been duly elected and qualified. At
each annual meeting of Stockholders, commencing with such
first annual meeting after such initial underwritten public
offering, (i) Directors
<PAGE>
elected to succeed those Directors whose terms then expire
shall be elected for a term of office to expire at the third
succeeding annual meeting of Stockholders after their
election, with each Director to hold office until his or her
successor shall have been duly elected and qualified, and
(ii) if authorized by a resolution of the Board of Directors,
Directors may be elected to fill any vacancy on the Board of
Directors, regardless of how such vacancy shall have been
created.
SECOND: That said amendment was duly proposed and adopted in
accordance with the provisions of Sections 242(b) and 228 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this certificate to be
signed by Richard P. Anthony, its Chairman of the Board and President, as of
the 10th day of January, 1998.
Richard P. Anthony
President
-2-
<PAGE>
COMMON STOCK INCORPORATED UNDER THE LAWS
PAR VALUE $0.0001 OF THE STATE OF DELAWARE
NUMBER SHARES
ACG CUSIP 00751B 10 6
THIS CERTIFICATE IS TRANSFERABLE IN SEE REVERSE FOR CERTAIN DEFINITIONS
NEW YORK, NY AND JERSEY CITY, NJ
ADVANCED COMMUNICATIONS GROUP, INC.
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
Advanced Communications Group, Inc. transferable on the books of the
Corporation in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate is not valid unless
countersigned by the Transfer Agent and registered by the Registrar.
In Witness Whereof, said Corporation has caused this Certificate to be
signed in facsimile by its duly authorized officers and its Corporate Seal to
be affixed in facsimile.
[ACG LOGO] CERTIFICATE OF STOCK [SEAL]
Dated:
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER
& TRUST COMPANY
TRANSFER AGENT
AND REGISTRAR
[GRAPHIC OMITTED] [GRAPHIC OMITTED] BY
CHAIRMAN AND CHIEF
EXECUTIVE OFFICER TREASURER AUTHORIZED SIGNATURE
<PAGE>
[ACG LOGO]
Pursuant to Section 151(F) of the Delaware General Corporation Law, the
Corporation will furnish without charge to each stockholder who so requests
the powers, designations, preferences, and relative participating, optional
or other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
Such request may be made to the Corporation or the Transfer Agent.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as through they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - _____Custodian_____
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts
to Minors Act
JT TEN - as joint tenants with right ____________________
of survivorship and not as (State)
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received, _________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE:
_____________________________________________________________________________
_____________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS
INCLUDING POSTAL ZIP CODE OF ASSIGNEE
______________________________________________________________________________
______________________________________________________________________________
_______________________________________________________________________ Shares
of the stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the promises.
Dated _____________________
x _____________________________
NOTICE: (SIGNATURE)
THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRES-
POND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF [arrow]
THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTER-
ATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER. x _____________________________
(SIGNATURE)
--------------------------------
THE SIGNATURE(S) SHOULD BE
GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17ad15
____________________________________
SIGNATURE(S) GUARANTEED BY:
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
This Nonqualified Stock Option Agreement ("Option Agreement") is
between Advanced Communications Group, Inc., a Delaware corporation (the
"Company"), and ___________________ ("Optionee"), who agree as follows:
Section 1. Introduction. The Company has heretofore adopted the
Advanced Communications Group, Inc. 1997 Stock Awards Plan (the "Plan") for the
purpose of allowing key employees of the Company and its Affiliates (as defined
in the Plan) to acquire and maintain stock ownership in the Company and to
provide such key employees with additional incentive and reward opportunities
designed to enhance the profitable growth of the Company. The Company, acting
through the Compensation Committee (the "Committee") of its Board of Directors
(the "Board"), has determined that its interests will be advanced by the
issuance to Optionee of a nonqualified stock option under the Plan.
Section 2. Option. Subject to the terms and conditions contained
herein, the Company hereby irrevocably grants to Optionee the right and option
("Option") to purchase from the Company ____________ (__________) shares of the
Company's common stock, $.0001 par value ("Stock"), at a price per share equal
to ___________________________________ per share.
Section 3. Option Period. The Option is granted on ________, ______
("Date of Grant"). The Option herein granted may be exercised by Optionee in
whole or in part at any time during a __________ period beginning on the Date
of Grant (the "Option Period"), subject to the limitation that the Option shall
not be exercisable for more than a percentage of the aggregate number of shares
offered by this Option in accordance with the following schedule:
Date of Percentage of
Exercise Shares Purchasable
-------- ------------------
Notwithstanding anything in this Option Agreement to the contrary, the
Committee, in its sole discretion may waive the foregoing schedule of vesting
and upon written notice to Optionee, accelerate the earliest date or dates on
which any of the Options granted hereunder are exercisable.
Section 4. Procedure for Exercise. The Option herein granted may be
exercised by the delivery by Optionee of written notice to the Secretary of the
Company setting forth the number of
<PAGE>
shares of Stock with respect to which the Option is being exercised. The notice
shall be accompanied by, at the election of the Optionee, (i) cash, cashier's
check, bank draft, or postal or express money order payable to the order of the
Company, (ii) certificates representing shares of Stock theretofore owned by
Optionee duly endorsed for transfer to the Company, or (iii) any combination of
the preceding, equal in value to the aggregate exercise price. Notice may also
be delivered by telecopy provided that the exercise price of such shares is
received by the Company via wire transfer on the same day the telecopy
transmission is received by the Company. The notice shall specify the address
to which the certificates for such shares are to be mailed. An option to
purchase shares of Stock in accordance with this Plan, shall be deemed to have
been exercised immediately prior to the close of business on the date (i)
written notice of such exercise and (ii) payment in full of the exercise price
for the number of share for which Options are being exercised, are both
received by the Company and Optionee shall be treated for all purposes as the
record holder of such shares of Stock as of such date.
As promptly as practicable after receipt of such written notice and
payment, the Company shall deliver to Optionee certificates for the number of
shares with respect to which such Option has been so exercised, issued in
Optionee's name or such other name as Optionee directs; provided, however, that
such delivery shall be deemed effected for all purposes when a stock transfer
agent of the Company shall have deposited such certificates in the United
States mail, addressed to Optionee at the address specified pursuant to this
Section 4.
In addition, Optionee may exercise the Option by delivering a written
notice to the Secretary of the Company, directing (a) an immediate market sale
or margin loan respecting all or a part of the shares of Stock to which he is
entitled upon exercise of the Option pursuant to an extension of credit by the
Company to Optionee of the exercise price, (b) the delivery of the shares of
Stock from the Company directly to a brokerage firm, and (c) the delivery of
the exercise price from the sale or margin loan proceeds from the brokerage
firm directly to the Company.
Section 5. Termination of Employment. If Optionee ceases to be
employed by the Company or its Affiliates for any reason any Option which is
exercisable on the date of such termination of employment may be exercised at
any time during the Option Period.
Section 6. Disability or Death. In the event that Optionee dies or is
determined to be disabled while Optionee is employed by the Company, the
options previously granted to Optionee may be exercised (to the extent Optionee
would have been entitled to do so at the date of death or the determination of
disability) at any time and from time to time, within the Option Period after
such death or determination of disability, by the Optionee, the guardian of
Optionee's estate, the executor or administrator of Optionee's estate or by the
person or persons to whom Optionee's rights under this Option Agreement shall
pass by will or the laws of descent and distribution, but in no event may the
Option be exercised after its expiration under the terms of this Option
Agreement. An Optionee
-2-
<PAGE>
shall be deemed to be disabled if, in the opinion of a physician selected by
the Committee, Optionee is incapable of performing services for the Company of
the kind Optionee was performing at the time the disability occurred by reason
of any medically determinable physical or mental impairment which can be
expected to result in death or to be of long, continued and indefinite
duration. The date of determination of disability for purposes hereof shall be
the date of such determination by such physician.
Section 7. Transferability. This Option shall not be transferable by
Optionee otherwise than by Optionee's will or by the laws of descent and
distribution or pursuant to a transfer which is incident to a divorce, as
described in Code Section 1041(a). During the lifetime of Optionee, the Option
shall be exercisable only by Optionee or his authorized legal representative.
Any heir or legatee of Optionee shall take rights herein granted subject to the
terms and conditions hereof. No such transfer of this Option Agreement to heirs
or legatees of Optionee shall be effective to bind the Company unless the
Company shall have been furnished with written notice thereof and a copy of
such evidence as the Committee may deem necessary to establish the validity of
the transfer and the acceptance by the transferee or transferees of the terms
and conditions hereof.
Section 8. No Rights as Shareholder. Optionee shall have no rights as
a shareholder with respect to any shares of Stock covered by this Option
Agreement until the Option is exercised by written notice and accompanied by
payment as provided in Section 4 of this Option Agreement.
Section 9. Extraordinary Corporate Transactions. The existence of
outstanding Options shall not affect in any way the right or power of the
Company or its shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or
any issue of debt or equity securities ahead of or affecting Stock or the
rights thereof, or the dissolution or liquidation of the Company, or any sale,
lease, exchange or other disposition of all or any part of its assets or
business, or any other corporate act or proceedings, whether of a similar
character or otherwise. If the Company effects a subdivision or consolidation
by the Company, the number of shares of Stock with respect to which the Option
may be exercised shall be adjusted in accordance with Section XII(a) of the
Plan. If the Company recapitalizes or otherwise changes its capital structure,
the number of shares of Stock subject to the Option shall be determined
pursuant to Section XII(b) of the Plan. In the event of a "Change of Control"
(as defined in the Plan), the Options granted hereunder shall immediately vest
and become exercisable and shall be governed by Section XII(c) of the Plan.
Section 10. Changes in Capital Structure. If the outstanding shares of
Stock or other securities of the Company, or both, for which the Option is then
exercisable shall at any time be changed by reason of recapitalization,
reorganization, merger, consolidation, combination, exchange or other relevant
change in capitalization not otherwise provided for by Section 9 of this Option
-3-
<PAGE>
Agreement, the Option shall be subject to adjustment by the Committee at its
discretion as to the number and price of shares of Stock subject to the Option.
Section 11. Compliance With Securities Laws. Upon the acquisition of
any shares pursuant to the exercise of the Option herein granted, Optionee (or
any person acting under Section 7 of this Option Agreement) will enter into
such written representations, warranties and agreements as the Company may
reasonably request in order to comply with applicable securities laws or with
this Option Agreement.
Section 12. Compliance With Laws. Notwithstanding any of the other
provisions hereof, Optionee agrees that he will not exercise the Option granted
hereby, and that the Company will not be obligated to issue any shares pursuant
to this Option Agreement, if the exercise of the Option or the issuance of such
shares of Stock would constitute a violation by Optionee or by the Company of
any provision of any law or regulation of any governmental authority.
Section 13. Withholding of Tax. To the extent that the exercise of
this Option or the disposition of shares of Stock acquired by exercise of this
Option results in compensation income to Optionee for federal or state income
tax purposes, Optionee shall pay to the Company at the time of such exercise or
disposition (or such other time as the law permits if Optionee is subject to
Section 16(b) of the Securities Exchange Act of 1934, as amended) such amount
of money as the Company may require to meet its obligation under applicable tax
laws or regulations; and, if Optionee fails to do so, the Company is authorized
to withhold from any cash remuneration then or thereafter payable to Optionee,
any tax required to be withheld by reason of such resulting compensation income
or the Company may otherwise refuse to issue or transfer any shares otherwise
required to be issued or transferred pursuant to the terms hereof.
Section 14. No Right to Employment or Directorship. Optionee shall be
considered to be in the employment of the Company so long as he remains an
employee of the Company or its Affiliates. Any questions as to whether and when
there has been a termination of such employment and the cause of such
termination shall be determined by the Committee, and its determination shall
be final. Nothing contained herein shall be construed as conferring upon
Optionee the right to continue in the employ of the Company, nor shall anything
contained herein be construed or interpreted to limit the "employment at will"
relationship between Optionee and the Company.
Section 15. Resolution of Disputes. As a condition of the granting of
the Option hereby, Optionee, and Optionee's heirs, personal representatives and
successors agree that any dispute or disagreement which may arise hereunder
shall be determined by the Committee in its sole discretion and judgment, and
that any such determination and any interpretation by the Committee of the
terms of this Option Agreement shall be final and shall be binding and
conclusive, for all purposes, upon the Company, Optionee, and Optionee's heirs,
personal representatives and successors.
-4-
<PAGE>
Section 16. Legends on Certificate. The certificates representing the
shares of Stock purchased by exercise of the Option will be stamped or
otherwise imprinted with legends in such form as the Company or its counsel may
require with respect to any applicable restrictions on sale or transfer and the
stock transfer records of the Company will reflect stop-transfer instructions
with respect to such shares.
Section 17. Notices. Every notice hereunder shall be in writing and
shall be given by registered or certified mail. All notices of the exercise of
any Option hereunder shall be directed to Advanced Communications Group, Inc.,
___________________________________, Attention: Secretary. Any notice given by
the Company to Optionee directed to Optionee at the address on file with the
Company shall be effective to bind Optionee and any other person who shall
acquire rights hereunder. The Company shall be under no obligation whatsoever
to advise Optionee of the existence, maturity or termination of any of
Optionee's rights hereunder and Optionee shall be deemed to have familiarized
himself or herself with all matters contained herein and in the Plan which may
affect any of Optionee's rights or privileges hereunder.
Section 18. Construction and Interpretation. Whenever the term
"Optionee" is used herein under circumstances applicable to any other person or
persons to whom this award, in accordance with the provisions of Section 7
hereof, may be transferred, the word "Optionee" shall be deemed to include such
person or persons.
Section 19. Agreement Subject to Plan. This Option Agreement is
subject to the Plan. The terms and provisions of the Plan (including any
subsequent amendments thereto) are hereby incorporated herein by reference
thereto. In the event of a conflict between any term or provision contained
herein and a term or provision of the Plan, the applicable terms and provisions
of the Plan will govern and prevail. All definitions of words and terms
contained in the Plan shall be applicable to this Option Agreement.
Section 20. Binding Effect. This Option Agreement shall be binding
upon and inure to the benefit of any successors to the Company and all persons
lawfully claiming under Optionee as provided herein.
-5-
<PAGE>
IN WITNESS WHEREOF, this Nonqualified Stock Option Agreement has been
executed as of the ____ of _________, ______.
ADVANCED COMMUNICATIONS GROUP, INC.
By:
---------------------------------
[Name of Chief Executive Officer]
Chief Executive Officer
OPTIONEE
------------------------------------
[Name of optionee]
-6-
<PAGE>
THE WARRANTS REPRESENTED BY THIS WARRANT CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS
(COLLECTIVELY, THE "ACTS") AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT PURSUANT TO
THE ACTS OR IN RELIANCE ON AN OPINION, REASONABLY SATISFACTORY TO ADVANCED
COMMUNICATIONS GROUP, INC. IN FORM AND SUBSTANCE, OF COUNSEL REASONABLY
ACCEPTABLE TO SUCH COMPANY, THAT SUCH SALE, PLEDGE OR OTHER TRANSFER IS BEING
MADE IN RELIANCE ON AN EXEMPTION FROM THE ACTS.
WARRANT
Total Number of Series L Warrants: 545,000 Warrant No. L-
Number of Series L Warrants Represented by
This Warrant Certificate: ________, subject to adjustment(1)
This Warrant Certificate certifies that, in consideration of the
rescission of the Nonqualified Stock Option Agreement dated as of June 16, 1997
between Advanced Communications Group, Inc and _____________, and for other
value received,
is the registered holder of the number of Warrants (the "Warrants") set forth
above. Each Warrant entitles the holder thereof, (a) after the IPO Date and
from time to time thereafter but (b) on or before the Expiration Date, to
purchase from the Company one fully paid and nonassessable share of Common
Stock at the Exercise Price, subject to adjustment as provided herein.
"ACG Corp." means Advanced Communications Corp., a Delaware
corporation organized in June, 1996 that was formerly named Advanced
Communications Group, Inc.
"Board of Directors" means the board of directors of the Company (or
any authorized committee thereof).
"Common Stock" means the Common Stock, $.0001 par value per share, of
the Company, or such other class of securities as shall then represent the
common equity of the Company.
- --------------
(1) Notwithstanding any provision herein to the contrary, the parties
agree that since the warrants granted hereby are granted in substitution for an
option granted by ACG Corp., (i) any stock split or other change in the
capitalization of ACG Corp. prior to the consummation of the reverse triangular
merger among the Company, ACG Corp. and Advanced Communications Group
Acquisition, Inc. shall be treated for the purposes of this Warrant Certificate
as a stock split or other change in the capitalization of the Company for the
purpose of the number of shares subject to this Warrant Certificate but not
for the purpose of the Exercise Price, and (ii) except for the matters
described in (i), no antidilution adjustments shall be made pursuant to
Section 3 prior the consummation of the initial public offering of the Common
Stock and the acquisition transactions associated therewith (including the
acquisition of ACG Corp.).
<PAGE>
"Company" means Advanced Communications Group, Inc., a Delaware
corporation organized in September, 1997.
"Exercise Price," subject in all circumstances to adjustment in
accordance with Section 3 and Footnote 1, means $2.50.
"Expiration Date" means 5:00 p.m., Houston Time on June 16, 2007.
"IPO Date" means the date upon which the initial public offering of
the Common Stock and the acquisitions contemplated in connection therewith are
consummated.
"Issuance Date" means December 15, 1997.
"Price" on any day means the reported last sale price per share of
Common Stock regular way on such day or, in case no such sale takes place on
such day, the average of the reported closing bid and asked prices regular way,
in each case on the New York Stock Exchange, or, if the Common Stock is not
listed or admitted to trading on such Exchange, on the American Stock Exchange,
or, if the Common Stock is not listed or admitted to trading on such Exchange,
on the principal national securities exchange on which the Common Stock is
listed or admitted to trading, or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, the average of the
closing bid and asked prices in the over-the-counter market as reported by the
National Association of Securities Dealers' Automated Quotation System, or, if
not so reported, as reported by the National Quotation Bureau, Incorporated, or
any successor thereof, or, if not so reported, the average of the closing bid
and asked prices as furnished by any member of the National Association of
Securities Dealers, Inc. selected from time to time by the Company for that
purpose; or, in all other cases, the value established by the Board of
Directors in good faith; and the "average" Price per share for any period shall
be determined by dividing the sum of the Prices determined for each Trading Day
in such period by the number of Trading Days in such period.
"Trading Day" means a day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is open for
the transaction of business or, if the Common Stock is not listed or admitted
to trading on any national securities exchange, a Monday, Tuesday, Wednesday,
Thursday or Friday on which banking institutions in New York City are not
authorized or obligated by law or executive order to close.
"Warrant Shares" means the shares of Common Stock and other
securities, property or cash receivable upon the exercise of the Warrants.
-2-
<PAGE>
"Warrants" means the Series L Warrants represented by this Warrant
Certificate.
1. EXERCISE OF WARRANTS. (a) The Warrants evidenced by this Warrant
Certificate may be exercised in whole or in part, after the IPO Date, by
presentation and surrender at the office of the Company specified herein of (i)
this Warrant Certificate with the Election To Exercise duly completed and
executed, and (ii) payment of the Exercise Price as then in effect, by bank
draft or cashier's check, for the number of Warrants being exercised. If the
holder of this Warrant Certificate at any time exercises less than all the
Warrants evidenced by this Warrant Certificate, the Company shall issue to such
holder a Warrant Certificate identical in form to this Warrant Certificate, but
evidencing a number of Warrants equal to the number of Warrants originally
represented by this Warrant Certificate less the number of Warrants previously
exercised. Likewise, upon the presentation and surrender of this Warrant
Certificate at the office of the Company and at the request of the holder, the
Company will, at the option of the holder, issue to the holder in substitution
for this Warrant Certificate one or more warrant certificates in identical form
and for an aggregate number of Warrants equal to the number of Warrants
evidenced by this Warrant Certificate.
(b) To the extent that the Warrants evidenced by this Warrant
Certificate have not been exercised at or prior to the Expiration Date, such
Warrants shall expire and the rights of the holder shall become void and of no
effect.
2. RESTRICTIONS ON TRANSFER. The Warrants evidenced hereby have not
been registered under the Securities Act of 1933, as amended, or under any
state securities law (collectively, the "Acts"), in reliance on exemptions from
the registration provisions thereof. The holder hereof acknowledges that the
Warrants evidenced hereby and the Common Stock or other securities or property
purchasable on the exercise of the Warrants (collectively, the "Conversion
Securities") may not be directly or indirectly sold, transferred or otherwise
disposed of in violation of the provisions of the Acts. Any purported sale,
transfer or other disposition of this Warrant Certificate, the Warrants
evidenced hereby or the Conversion Securities in violation of this provision
shall be void and the Company shall not be required to recognize the same.
Compliance with this provision is the responsibility of the holder. Each
certificate representing Conversion Securities shall bear a legend
substantially similar to the bold-faced legend appearing at the head of this
Warrant Certificate. The Company shall deem and treat the registered holder of
this Warrant Certificate as the true and lawful owner of the Warrants evidenced
hereby for all purposes, any claims of another person to the contrary
notwithstanding.
In addition, the holder of this Warrant further agrees and
acknowledges that for a period of one year from the date of the original
issuance of any Conversion Securities issued upon the exercise of a Warrant
such holder may not -- except in full compliance with all of the applicable
provisions of the Securities Act of 1933, as amended, and the rules and
regulations of the Securities and
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Exchange Commission thereunder and the provisions of applicable state
securities laws and regulations -- sell, assign, exchange, transfer, encumber,
pledge, distribute, appoint, or otherwise dispose of any Conversion Securities.
3. ANTIDILUTION ADJUSTMENTS. The shares of Common Stock purchasable on
exercise of the Warrants evidenced by this Warrant Certificate are shares of
Common Stock as constituted as of the Issuance Date. The number and kind of
securities purchasable on the exercise of the Warrants evidenced by this
Warrant Certificate, and the Exercise Price, shall be subject to adjustment
from time to time upon the happening of certain events, as follows:
(a) Mergers, Consolidations and Reclassifications. In case of
any reclassification or change of outstanding securities issuable upon exercise
of the Warrants evidenced by this Warrant Certificate (other than a change in
par value, or from par value to no par value, or from no par value to par value
or as a result of a subdivision or combination to which paragraph (b) of this
Section 3 applies), or in case of any consolidation or merger of the Company
with or into another corporation (other than a merger with another corporation
in which the Company is the surviving corporation and which does not result in
any reclassification or change [other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a
subdivision or combination to which paragraph (b) of this Section 3 applies] in
the securities issuable upon exercise of this Warrant), the holder of the
Warrants evidenced by this Warrant Certificate shall have, and the Company, or
such successor corporation or other entity, shall covenant in the constituent
documents effecting any of the foregoing transactions that such holder does
have, the right to obtain upon the exercise of the Warrants evidenced by this
Warrant Certificate, in lieu of each share of Common Stock, other securities,
money or other property theretofore issuable upon exercise of a Warrant, the
kind and amount of shares of stock, other securities, money or other property
receivable upon such reclassification, change, consolidation or merger by a
holder of the shares of Common Stock, other securities, money or other property
that were issuable upon exercise of a Warrant had the Warrants evidenced by
this Warrant Certificate been exercised immediately prior to such
reclassification, change, consolidation or merger. The constituent documents
effecting any such reclassification, change, consolidation or merger shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided in paragraph (a) of this Section 3. The
provisions of paragraph (a) of this Section 3 shall similarly apply to
successive reclassifications, changes, consolidations or mergers.
(b) Subdivisions and Combinations. If the Company, at any
time after the Issuance Date, shall subdivide its shares of Common Stock into a
greater number of shares (or pay to any holders of securities of the Company a
dividend payable in, or make any other distribution of, Common Stock), the
Exercise Price in effect immediately prior to such subdivision shall be
proportionately reduced, and the number of shares of Common Stock purchasable
upon exercise of
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the Warrants evidenced by this Warrant Certificate shall be proportionately
increased, as at the effective date of such subdivision, dividend or
distribution or if the Company shall take a record of holders of its Common
Stock for such purpose, as at such record date, whichever is earlier. If the
Company at any time shall combine its shares of Common Stock into a smaller
number of shares, the Exercise Price in effect immediately prior to such
combination shall be proportionately increased, and the number of shares of
Common Stock purchasable upon exercise of the Warrants evidenced by this
Warrant Certificate shall be proportionately reduced, as at the effective date
of such combination, or if the Company shall take a record of holders of its
Common Stock for purposes of such combination, as at such record date,
whichever is earlier.
(c) Certain Issuances of Securities. If the Company at any
time after the IPO Date shall issue any additional shares of Common Stock
(otherwise than as provided in paragraphs (a) through (b) of this Section 3) at
a price per share less than the average Price per share of Common Stock for the
20 trading days immediately preceding the date of the authorization of such
issuance (the "Market Price") by the Board of Directors, then the Exercise
Price upon each such issuance shall be adjusted to that price determined by
multiplying the Exercise Price by a fraction:
i. the numerator of which shall be the sum of (1)
the number of shares of Common Stock outstanding immediately prior to
the issuance of such additional shares of Common Stock multiplied by
the Market Price, and (2) the consideration, if any, received and
deemed received by the Company upon the issuance of such additional
shares of Common Stock, and
ii. the denominator of which shall be the Market
Price multiplied by the total number of shares of Common Stock
outstanding immediately after the issuance of such additional shares
of Common Stock.
No adjustments of the Exercise Price shall be made under paragraph (c)
of this Section 3 upon the issuance of any additional shares of Common Stock
that:
(v) are issued pursuant to thrift plans, stock purchase plans, stock
bonus plans, stock option plans, employee stock ownership plans and
other incentive or profit sharing arrangements for the benefit of
employees ("Employee Benefit Plans") that otherwise would cause an
adjustment under paragraph (c) of this Section 3; provided that the
aggregate number of shares of Common Stock so issued (including the
shares issued pursuant to any options, rights or warrants or
convertible or exchangeable securities issued under such Employee
Benefit Plans containing the right to purchase shares of Common Stock)
pursuant to Employee Benefit Plans shall not exceed 10% of the
Company's outstanding Common Stock (on a fully diluted basis using the
treasury stock method) at the time of such issuance;
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(w) are issued pursuant to any Common Stock Equivalent (as defined in
paragraph (d) of this Section 3) of the Company or ACG Corp. (i) which
was or will foreseeably be outstanding on the IPO Date or (ii) if upon
the issuance of any such Common Stock Equivalent, any such adjustments
shall previously have been made pursuant to paragraph (d) of this
Section 3 or (iii) if no adjustment was required pursuant to paragraph
(d) of this Section 3.
(d) Common Stock Equivalents. If the Company shall, after the
IPO Date, issue any security or evidence of indebtedness which is convertible
into or exchangeable for Common Stock ("Convertible Security"), or any warrant,
option or other right to subscribe for or purchase Common Stock or any
Convertible Security, other than pursuant to Employee Benefit Plans (together
with Convertible Securities, "Common Stock Equivalent"), or if, after any such
issuance, the price per share for which additional shares of Common Stock may
be issuable thereunder is amended, then the Exercise Price upon each such
issuance or amendment shall be adjusted as provided in paragraph (c) of this
Section 3 on the basis that (i) the maximum number of additional shares of
Common Stock issuable pursuant to all such Common Stock Equivalents shall be
deemed to have been issued as of the earlier of (a) the date on which the
Company shall enter into a firm contract for the issuance of such Common Stock
Equivalent, or (b) the date of actual issuance of such Common Stock Equivalent;
and (ii) the aggregate consideration for such maximum number of additional
shares of Common Stock shall be deemed to be the minimum consideration received
and receivable by the Company for the issuance of such additional shares of
Common Stock pursuant to such Common Stock Equivalent; provided, however, that
no adjustment shall be made pursuant to paragraph (d) of this Section 3 unless
the consideration received and receivable by the Company per share of Common
Stock for the issuance of such additional shares of Common Stock pursuant to
such Common Stock Equivalent is less than the Market Price. No adjustment of
the Exercise Price shall be made under paragraph (d) of this Section 3 upon the
issuance of any Convertible Security which is issued pursuant to the exercise
of any warrants or other subscription or purchase rights therefor, if any
adjustment shall previously have been made in the Exercise Price then in effect
upon the issuance of such warrants or other rights pursuant to paragraph (d) of
this Section 3.
(e) Miscellaneous. The following provisions shall be
applicable to the making of adjustments in the Exercise Price hereinbefore
provided in this Section 3:
i. The consideration received by the Company shall
be deemed to be the following: (I) to the extent that any additional
shares of Common Stock or any Common Stock Equivalent shall be issued
for cash consideration, the consideration received by the Company
therefor, or, if such additional shares of Common Stock or Common
Stock Equivalent are offered by the Company for subscription, the
subscription price, or, if such additional shares of Common Stock or
Common Stock Equivalent are sold to underwriters or dealers for public
offering without a subscription offering, the initial public offering
price,
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in any such case excluding any amounts paid or receivable for accrued
interest or accrued dividends and without deduction of any
compensation, discounts, commissions or expenses paid or incurred by
the Company for and in the underwriting of, or otherwise in connection
with, the issue thereof; (II) to the extent that such issuance shall
be for a consideration other than cash, then, except as herein
otherwise expressly provided, the fair value of such consideration at
the time of such issuance as determined in good faith by the Board of
Directors, as evidenced by a certified resolution of the Board of
Directors delivered to the holder of this Warrant Certificate setting
forth such determination. The consideration for any additional shares
of Common Stock issuable pursuant to any Common Stock Equivalent shall
be the consideration received by the Company for issuing such Common
Stock Equivalent, plus the additional consideration payable to the
Company upon the exercise, conversion or exchange of such Common Stock
Equivalent. In case of the issuance at any time of any additional
shares of Common Stock or Common Stock Equivalent in payment or
satisfaction of any dividend upon any class of stock other than Common
Stock, the Company shall be deemed to have received for such
additional shares of Common Stock or Common Stock Equivalent (which
shall not be deemed to be a dividend payable in, or other distribution
of, Common Stock under paragraph (b) of this Section 3) consideration
equal to the amount of such dividend so paid or satisfied.
ii. Upon the expiration of the right to convert,
exchange or exercise any Common Stock Equivalent the issuance of which
effected an adjustment in the Exercise Price, if any such Common Stock
Equivalent shall not have been converted, exercised or exchanged, the
number of shares of Common Stock deemed to be issued and outstanding
because they were issuable upon conversion, exchange or exercise of
any such Common Stock Equivalent shall no longer be computed as set
forth above, and the Exercise Price shall forthwith be readjusted and
thereafter be the price which it would have been (but reflecting any
other adjustments in the Exercise Price made pursuant to the
provisions of paragraph (c) of this Section 3 after the issuance of
such Common Stock Equivalent) had the adjustment of the Exercise Price
made upon the issuance or sale of such Common Stock Equivalent been
made on the basis of the issuance only of the number of additional
shares of Common Stock actually issued upon exercise, conversion or
exchange of such Common Stock Equivalent and thereupon only the number
of additional shares of Common Stock actually so issued shall be
deemed to have been issued and only the consideration actually
received by the Company (computed as in subparagraph (i) of paragraph
(e) of this Section 3) shall be deemed to have been received by the
Company.
iii. The number of shares of Common Stock at any
time outstanding shall not include any shares thereof then directly or
indirectly owned or held by or for the account of the Company or its
subsidiaries.
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<PAGE>
iv. For the purposes of this Section 3, the term
"shares of Common Stock" shall mean, except as otherwise provided in
Footnote 1, shares of (i) the class of stock designated as the Common
Stock of the Company at the Issuance Date or (ii) any other class of
stock resulting from successive changes or reclassifications of such
shares consisting solely of changes in par value, or from par value to
no par value, or from no par value to par value. If at any time,
because of an adjustment pursuant to paragraph (a) of this Section 3,
the Warrants shall entitle the holders to purchase any securities
other than shares of Common Stock, thereafter the number of such other
securities so purchasable upon exercise of each Warrant and the
Exercise Price of such securities shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Warrant Shares
contained in this Section 3.
(f) Calculation of Exercise Price. The Exercise Price in
effect from time to time shall be calculated to four decimal places
and rounded to the nearest thousandth.
4. NOTICE OF ADJUSTMENT TO EXERCISE PRICE. Whenever the Exercise Price
is required to be adjusted as provided in Section 3, the Company shall
forthwith compute the adjusted Exercise Price and shall prepare and mail to the
holder hereof a certificate setting forth such adjusted Exercise Price and
showing in reasonable detail the facts upon which such adjustment is based.
5. VOLUNTARY REDUCTION. (a) The Company may at its option, but shall
not be obligated to, at any time during the term of the Warrants, reduce the
then current Exercise Price by any amount selected by the Board of Directors;
provided that if the Company elects so to reduce the then current Exercise
Price, such reduction shall be irrevocable during its effective period and
remain in effect for a minimum of 20 days following the date of such election,
after which time the Company may, at its option, reinstate the Exercise Price
in effect prior to such reduction. Whenever the Exercise Price is reduced, the
Company shall mail to the holder a notice of the reduction at least 15 days
before the date the reduced Exercise Price takes effect, stating the reduced
Exercise Price and the period for which such reduced Exercise Price will be in
effect.
(b) The Company may make such decreases in the Exercise
Price, in addition to those required or allowed by this Section 5, as shall be
determined by it, as evidenced by a certified resolution of the Board of
Directors delivered to the holders, to be advisable to avoid or diminish any
income tax to the holder resulting from any dividend or distribution of stock
or issuance of rights or warrants to purchase or subscribe for stock or from
any event treated as such for income tax purposes.
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<PAGE>
6. NOTICES TO WARRANT HOLDER. In the event that, after the IPO Date:
(a) of any consolidation or merger to which the Company is a
party and for which approval of any stockholders of the Company is required, or
of the conveyance or sale of all or substantially all of the assets of the
Company, or of any reclassification or change of the Common Stock or other
securities issuable upon exercise of the Warrants (other than a change in par
value, or from par value to no par value, or from no par value to par value or
as a result of a subdivision or combination), or a tender offer or exchange
offer for shares of Common Stock (or other securities issuable upon the
exercise of the Warrants); or
(b) the Company shall declare any dividend (or any other
distribution) on the Common Stock, other than regular cash dividends; or
(c) the Company shall authorize the granting to the holders
of Common Stock of rights or warrants to subscribe for or purchase any shares
of any class or series of capital stock; or
(d) of the voluntary or involuntary dissolution, liquidation
or winding up of the Company;
then the Company shall cause to be sent to the holder hereof, at least
30 days prior to the applicable record date hereinafter specified, or promptly
in the case of events for which there is no record date, a written notice
stating (x) the date for the determination of the holders of record of shares
of Common Stock (or other securities issuable upon the exercise of the
Warrants) entitled to receive any such dividends or other distribution, (y) the
initial expiration date set forth in any tender offer or exchange offer for
shares of Common Stock (or other securities issuable upon the exercise of the
Warrants), or (z) the date on which any such consolidation, merger, conveyance,
transfer, dissolution, liquidation or winding up is expected to become
effective or consummated, and the date as of which it is expected that holders
of record of shares of Common Stock (or other securities issuable upon the
exercise of the Warrants) shall be entitled to exchange such shares for
securities or other property, if any, deliverable upon such reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding up. Failure to give such notice or any defect therein shall not affect
the legality or validity of any distribution, right, option, warrant, issuance,
consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding up, or the vote upon any action.
7. REPORTS TO HOLDERS. The Company will cause to be delivered, by
first-class mail, postage prepaid, to the holder at such holder's address
appearing hereon, or such other address as the holder shall specify, a copy of
any reports delivered by the Company to the holders of Common Stock.
8. COVENANTS OF THE COMPANY. The Company covenants and agrees that:
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(a) Prior to thirty (30) days after the IPO Date and until
the Expiration Date, the Company shall at all times reserve and keep available,
free from preemptive rights, out of the aggregate of its authorized but
unissued Common Stock (and other securities), for the purpose of enabling it to
satisfy any obligation to issue shares of Common Stock (and other securities)
upon the exercise of the Warrants evidenced by this Warrant Certificate, the
number of shares of Common Stock (and other securities) issuable upon the
exercise of such Warrants.
(b) The Company shall pay all expenses, taxes (other than
stock transfer taxes or charges) and other charges payable in connection with
the preparation, issuance and delivery of new warrant certificates on transfer
of the Warrants evidenced by this Warrant Certificate.
(c) All Common Stock (and other securities) which may be
issued upon exercise of the Warrants evidenced by this Warrant Certificate
shall upon issuance be validly issued, fully paid, non-assessable and free from
all taxes, liens and charges with respect to the issuance thereof.
(d) The Company shall not be required to pay any tax or
charge imposed in connection with any transfer involved
in the issuance of any certificate representing shares
of Common Stock (and other securities) in any name
other than that of the registered holder hereof, and in
such case the Company shall not be required to issue or
deliver any certificate representing shares of Common
Stock (and other securities) until such tax or other
charge has been paid or it has been established to the
Company's satisfaction that no such tax or charge is
due.
9. NO RIGHTS AS STOCKHOLDER. The holder of the Warrants evidenced by
this Warrant Certificate shall not, by virtue of holding such Warrants, be
entitled to any rights of a stockholder of the Company either at law or in
equity, and the rights of the holder of the Warrants evidenced by this Warrant
Certificate are limited to those expressed herein.
10. NOTICES. All notices provided for hereunder shall be in writing
and may be given by registered or certified mail, return receipt requested,
telex, telegram, telecopier, air courier guaranteeing overnight delivery of
personal delivery, if to the holder at the following address:
--------------------------
--------------------------
--------------------------
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and, if to the Company:
Advanced Communications Group, Inc.
3355 West Alabama, Suite 580
Houston, Texas 77098
Attention: Chairman and Chief Executive Officer
Telecopier: (713) 622-0222
11. GOVERNING LAW. This Warrant Certificate shall be governed by and
construed in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be executed this _____ day of December, 1997 by Rod K. Cutsinger, its Chairman
and Chief Executive Officer, thereunto duly authorized.
ADVANCED COMMUNICATIONS GROUP, INC.
By:
------------------------------------
Rod K. Cutsinger
Chairman and Chief Executive Officer
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ELECTION TO EXERCISE
[To be executed on exercise of the Warrants
evidenced by this Warrant Certificate]
TO: Advanced Communications Group, Inc.
The undersigned, the holder of the Warrants evidenced by the attached
Warrant Certificate, hereby irrevocably elects to exercise Warrants, and
herewith makes payment of ____________________ ($___________________________)
representing the aggregate Exercise Price thereof, and requests that the
certificate representing the securities issuable hereunder be issued in the
name of _____________________ and delivered to _____________________________,
whose address is __________________________.
Dated: _________ ______________________________________
----------------------------------------
Signature(s) of Registered Holder(s)
Note: The above signature(s) must
correspond with the name as written on
the face of this Warrant Certificate in
every particular, without alteration or
enlargement or any change whatsoever.
- -------------------------------------------------------------------------------
TRANSFER FORM
[To be executed only upon transfer of the Warrants
evidenced by this Warrant Certificate]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ______________________________________________________ the
Warrants represented by the within Warrant Certificate, together with all
right, title and interest therein, and does hereby irrevocably constitute and
appoint _____________________________________ Attorney-in-Fact, to transfer
same on the books of the Company with full power of substitution in the
premises.
Dated: _________ ______________________________________
----------------------------------------
Signature(s) of Registered Holder(s)
Note: The above signature(s) must
correspond with the name as written on
the face of this Warrant Certificate in
every particular, without alteration or
enlargement or any change whatsoever.
WITNESS:
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STANDSTILL AGREEMENT
Standstill Agreement ("Agreement") dated as of ____________ __, 1998
between Advanced Communications Group, Inc. (the "Company"), a Delaware
corporation and Mr. Rod K. Cutsinger, a resident in the State of Texas.
WHEREAS, the Company intends to conduct an initial public offering of
its shares of common stock ("Shares") in conjunction with the consummation of
the acquisition of certain target companies (the "Transaction").
WHEREAS, the Company and Cutsinger are entering into this Agreement to
establish certain arrangements with respect to the relationships between them.
WHEREAS, the Company and Cutsinger believe that these arrangements
will be in the best interests of the Company and all of its stockholders
including Cutsinger.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the
following meanings:
1.1 The terms "beneficial ownership", "person" and "group" shall have
the respective meanings ascribed to such terms pursuant to Regulation 13D-G
adopted by the Securities and Exchange Commission (the "SEC") under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect
on the date hereof. The term "affiliate" shall have the meaning ascribed to
such term pursuant to Rule 12b-2 under the Exchange Act, as in effect on the
date hereof.
1.2 "Company Voting Securities" shall mean, collectively, common
stock, any preferred stock of the Company that is entitled to vote generally
for the election of directors, any other class or series of Company securities
that is entitled to vote generally for the election of directors and any other
securities, warrants, options or rights of any nature (whether or not issued by
the Company) that are convertible into, exchangeable for, or exercisable for
the purchase of, or otherwise give the holder thereof any rights in respect of,
common stock, Company preferred stock that is entitled to vote generally for
the election of directors, or any other class or series of Company securities
that is entitled to vote generally for the election of directors.
1.3 "Consolidation Partners" shall mean Consolidation Partners L.L.C.,
a Texas limited liability company.
<PAGE>
1.4 "CPFF" shall mean Consolidated Partners Founding Fund, L.L.C., a
Texas limited liability company.
1.5 "Cutsinger" shall mean (i) Rod K. Cutsinger, and (ii) any
affiliate of Rod K. Cutsinger (excluding any member of his immediate family)
1.6 "Disinterested Directors" means directors of the Company who have
no financial interest in and are not otherwise associated with CPFF,
Consolidated Partners and any other affiliate of Cutsinger, and who are
"disinterested directors" as that term is used in Section 144 of the Delaware
General Corporate Law.
1.7 "Effective Date" means the Closing Date as defined in the
Underwriting Agreement, dated as of 1998 between the Company and PaineWebber
Incorporated and CIBC Oppenheimer Corp., as Representatives of the several
Underwriters.
1.8 The "Maximum Permitted Voting Power" at any measurement date shall
mean all Company Voting Securities owned by Cutsinger, that are outstanding as
of the date hereof or issued by the Company after the date hereof, pursuant to
a stock split or a stock dividend or upon exercise of options granted under the
Company's Non-Qualified Stock Option Plan for Non-Employee Directors.
1.9 The "Termination Date" means the earliest of (i) the third
anniversary of the Effective Date, (ii) the date on which Rod K. Cutsinger is
removed as a director of the Company without his prior written consent, or
(iii) unless he has previously tendered his written resignation as a director
of the Company or a statement that he does not wish to stand for election as a
director of the Company in the year 2000, the date in the year 2000 on which
Rod K. Cutsinger ceases to be a member of the Board of Directors of the
Company.
ARTICLE II
STANDSTILL
2.1 Acquisition of Company Voting Securities. Prior to the Termination
Date, Cutsinger shall not, directly or indirectly (through CPFF, Consolidation
Partners or otherwise), acquire, offer to acquire, agree to acquire, become the
beneficial owner of or obtain any rights in respect of any Company Voting
Securities, by purchase or otherwise, or take any action in furtherance
thereof, if the effect of such acquisition, agreement or other action would be
(either immediately or upon consummation of any such acquisition, agreement or
other action, or expiration of any period of time provided in any such
acquisition, agreement or other action) to increase the aggregate beneficial
ownership of Company Voting Securities by Cutsinger to such number of Company
Voting Securities that have greater than the Maximum Permitted Voting Power.
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2.2 Proxy Solicitations, etc. Prior to the Termination Date, Cutsinger
shall not solicit proxies, assist any other person in any way, directly or
indirectly (through CPFF, Consolidation Partners or otherwise), in the
solicitation of proxies, become a "participant" in a "solicitation" or assist
any "participant" in a "solicitation" (as such terms are defined in Rule 14a-1
of Regulation 14A under the Exchange Act) in opposition to nominees for
directors proposed by the Board of Directors of the Company or submit any
proposal for the vote of stockholders of the Company.
2.3 No Voting Trusts, Pooling Agreements, or Formation of "Groups".
Prior to the Termination Date, Cutsinger shall not (i) form, join or in any
other way participate in a partnership, pooling agreement, syndicate, voting
trust or other "group" with respect to Company Voting Securities (other than
Consolidation Partners) or (ii) enter into any agreement or arrangement or
otherwise act in concert with any other person other than the Company or
Consolidation Partners for the purpose of acquiring, holding, voting or
disposing of Company Voting Securities.
2.4 No Solicitation of Bidders. Prior to the Termination Date,
Cutsinger shall not directly or indirectly (through CPFF, Consolidation
Partners or otherwise) assist, encourage or induce any person to bid for or
acquire outstanding Company Voting Securities in any transaction or series of
related transactions (except or may be approved by a majority of the
Disinterested Directors).
2.5 Non-Circumvention. Prior to the Termination Date, Cutsinger shall
not take any action, alone or in concert with any other person to circumvent
the limitations of the provisions of Articles II and III of this Agreement.
Prior to the Termination Date, Cutsinger shall not (i) present to the Company
or to any third party any proposal that can reasonably be expected to result in
any increase beyond the Maximum Permitted Voting Power of Company Voting
Securities beneficially owned in the aggregate by Cutsinger, (ii) publicly
suggest or announce his willingness or desire to engage in a transaction or
group of transactions that would result in any increase beyond the Maximum
Permitted Voting Power of Company Voting Securities beneficially owned in the
aggregate by Cutsinger, or (iii) initiate, request, induce or attempt to induce
or give encouragement to any other person to initiate any proposal that can
reasonably be expected to result in any increase beyond the Maximum Permitted
Voting Power of Company Voting Securities beneficially owned in the aggregate
by Cutsinger.
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<PAGE>
ARTICLE III
VOTING OF COMPANY SECURITIES AND RELATED MATTERS
3.1 Board Election. Prior to the Termination Date, Cutsinger shall
vote all Company Voting Securities owned of record by Cutsinger, and shall
cause all Company Voting Securities owned beneficially by Cutsinger to be
voted, with respect to the election or removal of directors of Company, or any
other matter that may be presented to the stockholders of the Company that
would relate to a possible change of control of the Company in accordance with
the recommendations of a majority of Disinterested Directors.
3.2 Stockholders Meetings. Prior to the Termination Date, Cutsinger
shall be present, in person or by proxy, at all meetings of stockholders of the
Company so that all Company Voting Securities owned of record or beneficially
owned by Cutsinger may be counted for the purpose of determining the presence
of a quorum at such meetings.
ARTICLE IV
MISCELLANEOUS
4.1 Term of Agreement; Certain Provisions Regarding Termination. This
Agreement shall have a term from the Effective Date until the Termination Date,
and shall not be terminated for whatever reason until the Termination Date.
4.2 Remedies.
(1) Cutsinger and the Company acknowledge and agree that (i) the
provisions of this Agreement are reasonable and necessary to protect the proper
and legitimate interests of the parties hereto, and (ii) the parties would be
irreparably damaged in the event any of the provisions of this Agreement were
not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that each party shall be entitled to
preliminary and permanent injunctive relief to prevent breaches of the
provisions of this Agreement by the other party (or its affiliates) without the
necessity of proving actual damages or of posting any bond, and to enforce
specifically the terms and provisions hereof and thereof in any court of the
United States or any state thereof having jurisdiction, which rights shall be
cumulative and in addition to any other remedy to which the parties may be
entitled hereunder or at law or equity.
(2) In addition to any other remedy the Company may have under this
Agreement or in law or equity, if Cutsinger shall acquire or transfer any
Company Voting Securities in violation of this Agreement, such Company Voting
Securities which are in excess of the number permitted to be owned or
controlled by Cutsinger or which have been transferred by Cutsinger in
violation of the provisions of this Agreement may not be voted by the owner
thereof or any proxy therefor.
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<PAGE>
4.3 Additional Cutsinger Parties; Several Obligations. All of the
liabilities and obligations under this Agreement of Cutsinger shall be joint
and several. Each member of Cutsinger that shall become or have the right to
become the beneficial owner, within the meaning and scope of Section 1.1
hereof, of Company Voting Securities shall, promptly upon becoming such owner
or holder, execute and deliver to the Company a joinder agreement, agreeing to
be legally bound by this Agreement to the same extent as if it had signed this
Agreement as an original signatory as a member of Cutsinger; provided that
failure to execute such an agreement shall not excuse such member's
non-compliance with any provision of this Agreement. No member of Cutsinger
shall transfer securities to another member of Cutsinger unless the transferee
shall agree to be bound by this Agreement in the manner specified above in this
Section 4.3.
4.4 Notices. All notices, and other communications hereunder shall be
in writing and shall be deemed given if delivered personally, sent by
documented overnight delivery service or, to the extent receipt is confirmed,
facsimile, to the appropriate address or facsimile number set forth below (or
at such other address or facsimile number for a party as shall be specified by
like notice):
if to Cutsinger:
with copy to:
if to the Company:
4.5 Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions shall remain in full force and effect and shall in no way be
affected, impaired or invalidated. The parties hereto agree that they will use
their best efforts at all times to support and defend this Agreement.
-5-
<PAGE>
4.6 Amendments. This Agreement may be amended only by an agreement in
writing signed by each of the parties hereto; provided, however, that any
amendment executed by the Company must prior thereto be approved by a majority
of the Disinterested Directors.
4.7 Governing Law. This Agreement shall be governed and controlled as
to validity, enforcement, interpretation, construction, effect and in all other
respects by the internal laws of the State of Delaware without regard to its
conflict of law rules and principles.
4.8 Descriptive Headings. Descriptive headings are for convenience
only and shall not control or affect the meaning or construction of any
provision of this Agreement.
4.9 Counterparts; Facsimile Signatures. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
bears the signatures of each of the parties hereto. This Agreement may be
executed in any number of counterparts, each of which shall be an original as
against the party whose signature appears thereon, or on whose behalf such
counterpart is executed, but all of which taken together shall be one and the
same agreement. A facsimile copy of a signature of a party to this Agreement or
any such counterpart shall be fully effective as if an original signature.
4.10 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the successors and assigns of the
parties hereto, but in no event shall be binding upon the purchaser of any
Company Voting Securities from Cutsinger.
-6-
<PAGE>
IN WITNESS WHEREOF, Advanced Communications Group, Inc. and Rod K.
Cutsinger have executed this Standstill Agreement as of the date first above
written.
Cutsinger
----------------------------------
By: Rod K. Cutsinger
Advanced Communications Group, Inc.
-----------------------------------
By: Richard P. Anthony, Chairman,
President and Chief Executive
Officer
-7-
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
390 SOUTH WOODS MILL ROAD, SUITE 150
ST. LOUIS, MISSOURI 63017
January 15, 1998
Northwestern Public Service Company
33 Third Street, S.E.
Huron, South Dakota 57350
Gentlemen:
Advanced Communications Group, Inc., a Delaware corporation ("ACG"), and
Northwestern Public Service Company, a Delaware corporation ("Northwestern"),
have agreed to negotiate in good faith to enter into a definitive agreement
on commercially reasonable terms with respect to a strategic alliance between
ACG and Northwestern (the "Strategic Alliance Agreement"). In consideration
of Northwestern's agreement to so negotiate in good faith and its willingness
to permit ACG to disclose the existence of this agreement, ACG has agreed to
issue to Northwestern Growth Corporation ("NGC") shares of a new series of
ACG preferred stock contemporaneously with the closing (the "Closing") of
ACG's proposed initial public offering of 8,000,000 shares of common stock,
par value $.0001 per share (the "Common Stock") with respect to which ACG has
filed a Registration Statement on Form S-1, as amended (File No. 333-37671)
(the "Registration Statement"). Our agreements with respect to these matters
are as follows:
1. ACG and Northwestern will negotiate in good faith to agree upon, execute
and deliver the Strategic Alliance Agreement (more fully described below)
pursuant to which ACG and its subsidiaries will, among other things, have
the exclusive right to sell their telecommunications services, which are
expected to include long distance service, local service, Internet access
and other services, yellow page services, cellular and other wireless
services and data transmission services ("Telecommunications Services"), to
the electric utility and natural gas customers of Northwestern in the
states of South Dakota and Nebraska (the "Customers"), provided that the
rates charged by ACG for these services are competitive with the rates
charged by other providers of similar services in the relevant market. The
Strategic Alliance Agreement will also contain mutually satisfactory
provisions with respect to the following matters:
A. ACG's access to Northwestern's rights-of-way for the purpose of
stringing or laying fiber optic cables (to the extent Northwestern is
able to grant such access without additional cost to Northwestern).
B. Northwestern's receipt of a negotiated fee with respect to ACG
Telecommunications Services purchased by the Customers (which fee
shall be adjusted from time to time to reflect the appropriate market
conditions).
C. Subject to Northwestern's existing contractual commitments, ACG will
also have the right to provide Northwestern's Telecommunications
Services, provided that the pricing and other terms of service
(including quality) are competitive with those otherwise available to
Northwestern.
D. Northwestern's assistance and cooperation with ACG in its efforts to
sell Telecommunications Services to the Customers, including, without
limitation, providing customer lists, introductions and bill stuffers,
subject to receipt by Northwestern of any necessary regulatory
approvals, with any incremental costs of providing such information
and services to be taken into account in the negotiations referred to
in paragraph B above.
E. The scope and duration of Northwestern's agreement not to compete with
ACG.
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<PAGE>
2. Upon the Closing, ACG will issue to NGC a number of shares of ACG Series A
Redeemable Convertible Preferred Stock (the "Preferred Stock"), equal to
the amount determined by dividing $2,000,000 by the initial public offering
price of the Common Stock, which will have the terms set forth on the
Certificate of Designation attached hereto as Annex A (the "Certificate of
Designation").
3. As provided in the Certificate of Designation, if ACG and Northwestern have
not entered into the Strategic Alliance Agreement prior to the first
anniversary date of the Closing, ACG shall have the right at any time
during the next month (the 13th month following the Closing) to redeem all
of the Preferred Stock for an aggregate redemption price of $1,250,000.
Prior to the earlier of the execution of the Strategic Alliance Agreement
or the end of the 13th month following the Closing, NGC may not transfer or
otherwise dispose of any of the Preferred Stock.
4. Northwestern agrees (on its behalf and on behalf of NGC) that, until the
expiration of three years from the date of this agreement, it will not
without the prior written approval of ACG or its Board of Directors (a) in
any manner acquire or make any proposal to acquire, directly or indirectly,
any securities, or any direct or indirect rights to acquire any securities,
or any property, of ACG or any of its subsidiaries; (b) propose to enter
into, directly or indirectly, any merger, business combination or other
extraordinary transaction involving ACG or any of its subsidiaries or the
purchase, directly or indirectly, a material portion of the assets of ACG
or any of its subsidiaries; (c) make, or in any way participate, in any
"solicitation" of "proxies" to vote (as those terms are used in the rules
of the Securities and Exchange Commission) any voting securities of ACG or
act, alone or in concert with others, to seek to control or influence the
management, Board of Directors or policies of ACG; (d) form, join or in any
way participate in a "group" as defined in Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended, in connection with any of the
foregoing; (e) enter into or disclose any intention, plan or arrangement
inconsistent with the forgoing; or (f) advise, assist or encourage any
other persons in connection with any of the foregoing. Further,
Northwestern agrees to advise ACG promptly of any inquiry or proposal made
to it or to NGC with respect to any of the foregoing. Northwestern also
agrees (on its behalf and on behalf of NGC) during such period not to (a)
request ACG (or its directors, officers, employees, or agents), directly or
indirectly, to amend or waive any provisions of this paragraph (including
this sentence) or (b) take any action which might require ACG to make a
public announcement regarding the possibility of a business combination or
merger. The agreement set forth in this paragraph shall remain in full
force and effect during the entire three year period, whether or not a
Strategic Alliance Agreement is negotiated, executed or delivered.
5. NGC represents and warrants that it is able to bear the economic risk of an
investment in the Preferred Stock and can afford to sustain a total loss of
such investment, and NGC has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of
NGC's proposed investment in ACG. NGC understands that an investment in the
Preferred Stock is very speculative and involves a high degree of risk. NGC
also represents and warrants that: (a) it has received and reviewed a copy
of the Registration Statement and is generally familiar with the
transactions described therein; (b) it confirms that it has had its access
to the books, records, plants, facilities, properties, personnel and
officers of ACG and the Acquired Companies for the purpose of conducting an
investigation of the financial condition, corporate status, business,
properties and assets of ACG and the Acquired Companies prior to its
execution of this Agreement; (c) it has had an adequate opportunity to ask
questions and receive answers from the officers of ACG and the Acquired
Companies (as defined in the Registration Statement) concerning any and all
matters relating to the transactions described in this Agreement, the
Acquisitions (as defined in the Registration Statement) and the
Registration Statement including, without limitation, the background and
experience of the current and proposed officers and directors of ACG and
the Acquired Companies, the plans for the operations of the business of ACG
and the Acquired Companies; (d) it has asked any and all questions in the
nature described in clause (c) above and all questions have been answered
to its satisfaction; and (e) it is acquiring the Preferred Stock and the
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<PAGE>
Common Stock issuable upon the conversion thereof for its own account, for
investment and not with a view to, or for offer or resale in connection
with, a distribution thereof within the meaning of the Securities Act or a
distribution thereof in violation of any applicable state securities laws.
Northwestern does not object to the inclusion of the proposed disclosures
substantially in the form set forth on Annex B in Amendment No. 2 to the
Registration Statement.
If this letter correctly reflects our understanding with respect to the
matters set forth herein, kindly sign one original of this letter and return
it to the undersigned, at which time it will become a binding agreement
between us. The other counterpart is for your records.
Although this letter does constitute a binding agreement between us, it does
not contain all matters upon which agreement must be reached in the Strategic
Alliance Agreement, and does not constitute a binding agreement with respect
to those matters. Any such binding agreement with respect to the Strategic
Alliance Agreement will only arise as a result of the negotiation, execution
and delivery of a written Strategic Alliance Agreement between ACG and
Northwestern having terms and conditions satisfactory to both. Neither party
to this letter may bring any claim or action against the other as a result of
a failure in good faith to agree on or enter into the Strategic Alliance
Agreement.
Very truly yours,
Advanced Communications Group, Inc.
By: /s/ Richard P. Anthony
-------------------------------
Richard P. Anthony
Chairman, President and
Chief Executive Officer
AGREED AND ACCEPTED
January 15, 1998
Northwestern Public Service Company
By:
-------------------------------
Authorized Officer
Northwestern Growth Corporation
By:
-------------------------------
Authorized Officer
3
<PAGE>
ANNEX A
CERTIFICATE OF DESIGNATION
OF
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
OF
ADVANCED COMMUNICATIONS GROUP, INC.
Advanced Communications Group, Inc., a Delaware corporation (the
"Corporation"), does hereby certify that the following resolution was duly
adopted on January , 1998 by the Board of Directors of the Corporation (the
"Board of Directors") either at a meeting duly convened and held or by
unanimous written consents of all Directors executed pursuant to authority
conferred upon the Board of Directors by the provisions of the Certificate of
Incorporation of the Corporation that authorize the issuance of up to
20,000,000 shares of preferred stock, par value $.0001 per share ("Preferred
Stock"):
BE IT RESOLVED, that the issuance of a series of Preferred Stock of
Advanced Communications Group, Inc. (the "Corporation") is hereby
authorized, and the designation, powers, preferences and relative,
participating, optional and other special rights, and qualifications,
limitations and restrictions thereof, of the shares of said series, in
addition to those set forth in the Certificate of Incorporation of the
Corporation, are hereby fixed as follows:
SECTION 1. DESIGNATION. The distinctive serial designation of said
series shall be "Series A Redeemable Convertible Preferred Stock"
(hereinafter called "Series A"). Each share of Series A shall be
identical in all respects with all other shares of Series A.
SECTION 2. NUMBER OF SHARES. The number of shares in Series A shall be
, which number may from time to time be increased (but not in
excess of the total number of authorized shares of Preferred Stock) or
decreased (but not below the number of shares of Series A then
outstanding) by the Board of Directors. Shares of Series A that are
redeemed, purchased or otherwise acquired by the Corporation or
converted into Common Stock shall be cancelled and shall revert to
authorized but unissued shares of Preferred Stock undesignated as to
series.
SECTION 3. DEFINITIONS. As used herein with respect to Series A, the
following terms shall have the following meanings:
(a) The term "junior stock" shall mean the Common Stock and any other
class or series of stock of the Corporation hereafter authorized
over which Series A has preference or priority in the
distribution of assets on any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation.
(b) The term "parity stock" shall mean any other class or series of
stock of the Corporation hereafter authorized which ranks on a
parity with Series A in the distribution of assets on any
voluntary or involuntary liquidation, dissolution or winding up
of the Corporation.
(c) The term "senior stock" shall mean any other class or series of
stock of the Corporation hereafter authorized which ranks ahead
of the Series A in the distribution of assets on any voluntary or
involuntary liquidation, dissolution or winding up of the
Corporation.
(d) The term "business day" shall mean each Monday, Tuesday,
Wednesday, Thursday or Friday on which banking institutions in
New York City are not authorized or obligated by law or executive
order to close.
SECTION 4. DIVIDENDS. The holders of shares of Series A shall not be
entitled to receive, nor shall the Board of Directors declare,
dividends on the shares of Series A.
SECTION 5. LIQUIDATION RIGHTS. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of
the Corporation, then, before any distribution or payment shall be
made to the holders of any junior stock, but after all distributions
and payments shall be made to the holders of senior stock, the holders
of shares of Series A shall be entitled to be paid in full an amount
equal to [the initial public offering price of the Common Stock] per
share (the "Liquidation Amount").
<PAGE>
If upon any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation, the assets distributable
to the holders of Series A and the holders of all parity stock shall
be insufficient to permit the payment in full to such holders of all
preferential amounts payable to them, then the entire assets of the
Corporation then distributable, after distribution of amounts payable
with respect to the senior stock, shall be distributed ratably among
the holders of Series A and the holders of all parity stock in
proportion to the respective amounts that would be payable on a per
share basis if such assets were sufficient to permit payment in full
of all preferential amounts.
If the Liquidation Amount shall have been paid in full to each holder
of shares of Series A, the remaining assets of the Corporation shall
be distributed among the holders of junior stock, according to their
respective rights and preferences and in each case according to their
respective numbers of shares.
For the purposes of this Section 5, the consolidation or merger of the
Corporation with any other corporation shall not be deemed to
constitute a voluntary or involuntary liquidation, dissolution or
winding up of the Corporation.
SECTION 6. REDEMPTION. If, by [the date occurring twelve months after
the closing of the Corporation's initial underwritten public offering
of its Common Stock], the Corporation and Northwestern Public Service
Company, a Delaware corporation, have not entered into the written
Strategic Alliance Agreement contemplated by the letter agreement
among the Corporation, Northwestern Public Service Company and
Northwestern Growth Corporation dated January 15, 1998, then the
Corporation, at the option of the Board of Directors, may redeem in
whole the shares of Series A upon notice given as hereinafter
specified, at a redemption price per share equal to 62.5% of the
Liquidation Amount. If, by [the date occurring thirteen months after
the closing of the Corporation's initial underwritten public offering
of its Common Stock], the Corporation shall not have mailed notice of
the redemption of all shares of Series A as provided below, then the
Corporation's right to redeem the Series A shall thereupon expire.
Notice of every redemption of shares of Series A shall be mailed by
first class mail, postage prepaid, addressed to the holders of record
of the shares to be redeemed at their respective last addresses as
they shall appear on the books of the Corporation. Such mailing shall
be at least five days and not more than 30 days prior to the date
fixed for redemption. Any notice which is mailed in the manner herein
provided shall be conclusively presumed to have been duly given,
whether or not the stockholder receives such notice, and failure duly
to give such notice by mail, or any defect in such notice, to any
holder of shares of Series A designated for redemption shall not
affect the validity of the proceedings for the redemption of any other
shares of Series A.
If notice of redemption shall have been duly given, and if on or
before the redemption date specified therein all funds necessary for
such redemption shall have been set aside by the Corporation, separate
and apart from its other funds, in trust for the pro rata benefit of
the holders of the shares called for redemption, so as to be and
continue to be available therefor, then, notwithstanding that any
certificate for shares so called for redemption shall not have been
surrendered for cancellation, on and after such redemption date, all
shares so called for redemption shall no longer be deemed outstanding
and all rights with respect to such shares shall forthwith on such
redemption date cease and terminate, except only the right of the
holders thereof to receive the amount payable on redemption thereof,
without interest. Any funds so deposited and unclaimed at the end of
three years from such redemption date shall, to the extent permitted
by law, be released or repaid to the Corporation, after which time the
holders of the shares so called for redemption shall look only to the
Corporation for payment thereof.
SECTION 7. CONVERSION RIGHTS. Each holder of shares of Series A shall
have the right, at such holder's option, to convert such shares into
shares of Common Stock of the Corporation at any time following the
date occurring eighteen months after the closing of the Corporation's
initial underwritten public offering of its Common Stock (the "IPO
Date") on and subject to the following terms and conditions:
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<PAGE>
(a) Each share of Series A shall be convertible at the principal
office of the Corporation and at such other office or offices, if
any, as the Board of Directors may designate, into such number of
fully paid and non-assessable shares (calculated as to each
conversion to the nearest 1/100th of a share) of Common Stock of
the Corporation, as shall be determined by dividing the
Liquidation Amount by the "conversion price"; provided, however,
that the conversion price shall be adjusted in certain instances
as provided in paragraph (d) below. The conversion price is
initially the Liquidation Amount.
(b) In order to convert shares of Series A into Common Stock the
holder thereof shall surrender at the office or offices
hereinabove mentioned the certificate or certificates therefor,
duly endorsed or assigned to the Corporation or in blank, and
give written notice to the Corporation at said office or offices
that such holder elects to convert such shares. No payment or
adjustment shall be made upon any conversion on account of any
unpaid or accrued dividends on account of any dividends on the
Common Stock issued upon conversion.
Shares of Series A shall be deemed to have been converted
immediately prior to the close of business on the day of the
surrender of the certificates for such shares for conversion in
accordance with the foregoing provisions, and the person or
persons entitled to receive the Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder
or holders of such Common Stock at such time. As promptly as
practicable on or after the conversion date, the Corporation
shall issue and shall deliver at such office a certificate or
certificates for the number of full shares of Common Stock
issuable upon such conversion, together with payment in lieu of
any fraction of a share, as hereinafter provided, to the person
or persons entitled to receive the same.
(c) No fractional shares of Common Stock shall be issued upon
conversion of shares of Series A, but, instead of any fraction of
a share which would otherwise be issuable, the Corporation shall
pay cash in respect of such fraction in an amount equal to the
same fraction of the Closing Price (as defined below) on the date
on which the certificate or certificates for such shares were
duly surrendered for conversion, or, if such date is not a
Trading Day (as defined below), on the next Trading Day.
(d) The conversion price shall be deemed to be proportionately
adjusted from time to time as follows:
(i) In case the Corporation shall (A) pay a dividend or make
a distribution on its outstanding Common Stock in shares of its
capital stock, (B) subdivide its outstanding Common Stock into a
greater number of shares, (C) combine its outstanding Common
Stock into a smaller number of shares or (D) issue by
reclassification of its Common Stock (whether pursuant to a
merger or consolidation or otherwise) any other shares of the
Corporation, the holder of any shares of Series A surrendered for
conversion after the record date fixed by the Board of Directors
for such dividend, distribution, subdivision, combination or
reclassification shall be entitled to receive the aggregate
number and kind of shares of capital stock of the Corporation
which, if such shares of Series A had been converted immediately
prior to such record date at the conversion price then in effect,
such holder would have been entitled to receive by virtue of such
dividend, distribution, subdivision, combination or
reclassification; and the conversion price shall be deemed to
have been adjusted after such record date to apply to such
aggregate number and kind of shares. Such adjustment shall be
made whenever any of the events listed above shall occur.
(ii) In case the Corporation shall fix a record date for
issuing to all holders of Common Stock rights or warrants
expiring within 45 days entitling them to subscribe for or
purchase Common Stock at a price per share less than the current
market price per share (as determined pursuant to clause (iv)
below) on such record date, the conversion price in effect from
and after such record date shall be reduced so that it
3
<PAGE>
shall be equal to the price determined by multiplying the
conversion price in effect immediately prior to such record date
by a fraction, of which the numerator shall be the number of
shares of Common Stock outstanding on such record date plus the
number of shares of Common Stock which the aggregate offering
price of the total number of shares of Common Stock so offered
for subscription or purchase would purchase at such current
market price and of which the denominator shall be the number of
shares of Common Stock outstanding on such record date plus the
number of additional shares of Common Stock so offered for
subscription or purchase. For the purpose of this clause (ii),
the issuance of rights or warrants to subscribe for or purchase
securities convertible into Common Stock shall be deemed to be
the issuance of rights or warrants to purchase the Common Stock
into which such securities are convertible at an aggregate
offering price equal to the aggregate offering price of such
securities plus the minimum aggregate amount (if any) payable
upon conversion of such securities into Common Stock. Such
adjustment shall be made successively whenever such a record date
is fixed. In case such rights or warrants are not issued after
such a record date has been fixed, the conversion price shall be
readjusted to the conversion price which would have been in
effect if such record date had not been fixed.
(iii) In case the Corporation shall fix a record date for
the distribution to all holders of Common Stock (whether pursuant
to a merger or consolidation or otherwise) of assets (excluding
cash dividends out of retained earnings), or rights to subscribe
(excluding those referred to in clause (ii) above), then in each
such case the conversion price in effect from and after such
record date shall be adjusted so that the same shall be equal to
the price determined by multiplying the conversion price in
effect immediately prior to such record date by a fraction, of
which the numerator shall be the current market price per share
(determined as provided in clause (iv) below) of the Common Stock
on such record date less the fair market value (as determined by
the Board of Directors, whose determination in good faith shall
be conclusive) of the portion of the evidences of indebtedness or
assets so distributed or of such rights to subscribe applicable
to one share of Common Stock and of which the denominator shall
be such current market price per share of Common Stock. Such
adjustment shall be made whenever any such a record date is
fixed. In case such distribution is not made after such a record
date has been fixed, the conversion price shall be readjusted to
the conversion price which would have been in effect if such
record date had not been fixed.
(iv) For the purpose of any computation under clauses (ii)
and (iii) above, the current market price per share of Common
Stock on any date shall be deemed to be the average of the daily
Closing Prices for 30 consecutive Trading Days selected by the
Corporation commencing not less than 10 nor more than 45 Trading
Days before the date in question.
(v) In case the Corporation shall be a party to any
transaction (including, without limitation, a merger,
consolidation, sale of all or substantially all of the
Corporation's assets, liquidation or recapitalization of the
Common Stock, but excluding any transaction to which clauses (i),
(ii) or (iii) above applies) in which the previously outstanding
Common Stock shall be changed into or exchanged for different
securities of the Corporation or common stock or other securities
of another corporation or interests in a noncorporate entity or
other property (including cash) or any combination of any of the
foregoing, then, as a condition of the consummation of such
transaction, lawful and adequate provision shall be made so that
each holder of shares of Series A shall be entitled, upon
conversion, to an amount per share of Series A equal to (A) the
aggregate amount of stock, securities, cash or any other property
(payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged, times (B) the
number of shares of Common Stock into which a share of Series A
is convertible immediately prior to the consummation of such
transaction.
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<PAGE>
(vi) In any case in which this subsection (d) shall require
that an adjustment as a result of any event become effective from
and after a record date, the Corporation may elect to defer until
after the occurrence of such event (A) issuing to the holder of
any shares of Series A converted after such record date and
before the occurrence of such event the additional shares of
Common Stock issuable upon such conversion over and above the
shares issuable on the basis of the conversion price in effect
immediately prior to adjustment and (B) paying to such holder any
amount in cash in lieu of a fractional share of Common Stock
pursuant to subsection (c) above. In lieu of the shares of the
issuance of which is deferred pursuant to item (A) above, the
Corporation shall issue or cause one of its transfer agents to
issue due bills or other appropriate evidence of the right to
receive such shares.
(vii) Any adjustment in the conversion price otherwise
required by this Section 7 to be made may be postponed until the
date of the next adjustment otherwise required to be made if such
adjustment (together with any other adjustments postponed
pursuant to this paragraph (vii) and not theretofore made) would
not require an increase or decrease of more than 1% in such
price. All calculations under this subsection (d) shall be made
to the nearest cent or to the nearest 1/100th of a share, as the
case may be.
(viii) In case at any time, as a result of an adjustment
made pursuant to paragraph (i) above, the holder of any shares of
Series A thereafter surrendered for conversion shall become
entitled to receive any shares of capital stock of the
Corporation other than Common Stock, thereafter the number of
such other shares so receivable upon conversion of such shares of
Series A shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in
paragraphs (i) to (vii), inclusive, above, and the other
provisions of this subsection (d) with respect to the Common
Stock shall apply on like terms to any such other shares.
(ix) The Board of Directors may in its discretion make such
reductions in the conversion price, in addition to those required
by this subsection (d), as shall be determined by the Board of
Directors to be advisable in order to avoid taxation so far as
practicable of any dividend of stock or stock rights or any event
treated as such for Federal income tax purposes to the
recipients. The Board of Directors shall have the power to
resolve any ambiguity or correct any error in this subsection
(d), and its action in so doing shall be final and conclusive.
(e) Whenever the conversion price is adjusted as herein provided:
(i) The Corporation shall compute the adjusted conversion
price in accordance with this Section 7 and shall cause to be
prepared a certificate signed by the Corporation's treasurer
setting forth the adjusted conversion price and showing in
reasonable detail the facts upon which such adjustment is based,
and such certificate shall forthwith be filed with each transfer
agent for the shares of Series A; and
(ii) A notice stating that the conversion price has been
adjusted and setting forth the adjusted conversion price shall,
as soon as practicable, be mailed to the holders of record of
outstanding shares of Series A.
(f) In case:
(i) The Corporation shall declare a dividend or other
distribution on its Common Stock payable otherwise than in cash
out of retained earnings or in obligations to pay cash out of
retained earnings; or
(ii) The Corporation shall authorize the issuance to the
holders of its Common Stock of rights or warrants entitling them
to subscribe for or purchase any shares of capital stock or any
class or any other subscription rights or warrants; or
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<PAGE>
(iii) Of any reclassification of the capital stock of the
Corporation (other than a subdivision or combination of its
outstanding shares of Common Stock), or of any consolidation or
merger to which the Corporation is a party and for which approval
of any stockholders of the Corporation is required, or of the
sale, transfer or other disposition of all or substantially all
of the assets of the Corporation; or
(iv) Of the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation;
then the Corporation shall cause to be filed with each transfer agent
for the shares of Series A and shall cause to be mailed to the holders
of record of the outstanding shares of Series A, at least 20 days (or
10 days in any case specified in clause (i) or (ii) above) prior to
the applicable record or effective date hereinafter specified, a
notice stating (x) the date as of which the holders of record of
Common Stock to be entitled to such dividend, distribution, rights or
warrants are to be determined, or (y) the date on which such
reclassification, consolidation, merger, sale, transfer, disposition,
liquidation, dissolution or winding up is expected to become
effective, and the date as of which it is expected that holders of
record of Common Stock shall be entitled to exchange their shares for
securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer, disposition,
liquidation, dissolution or winding up. Failure to give notice as
required by this subsection (f), or any defect therein, shall not
affect the legality or validity of any such dividend, distribution,
right, warrant, reclassification, consolidation, merger, sale,
transfer, disposition, liquidation, dissolution or winding up, or the
vote on any action margin authorizing such.
(g) The Corporation shall at all times reserve and keep available, free
from preemptive rights, out of its authorized but unissued Common
Stock, for the purpose of issuance upon conversion of shares of Series
A, the full number of shares of Common Stock then deliverable upon the
conversion of all shares of Series A then outstanding.
(h) The Corporation will pay any and all taxes that may be payable in
respect of the issuance or delivery of shares of Common Stock on
conversion of shares of Series A pursuant hereto. The Corporation
shall not, however, be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of
shares of Common Stock in a name other than that in which the shares
of Series A so converted were registered, and no such issuance or
delivery shall be made unless and until the person requesting such
issuance has paid to the Corporation the amount of any such tax or has
established to the satisfaction of the Corporation that such tax has
been paid.
(i) For the purpose of this Section 7, the term "Common Stock" shall
include any stock of any class or series of the Corporation which has
no preference or priority in the payment of dividends or in the
distribution of assets in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation and which is
not subject to redemption by the Corporation. However, shares issuable
upon conversion of shares of Series A shall include only shares of the
class designated as Common Stock as of the original date of issuance
of shares of Series A or shares of the Corporation of any classes or
series resulting from any reclassification or reclassifications
thereof and which have no preference or priority in the payment of
dividends or in the distribution of assets in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation and which are not subject to redemption by the
Corporation, provided that if at any time there shall be more than one
such resulting class or series, the shares of each such class and
series then so issuable shall be substantially in the proportion which
the total number of shares of such class and series resulting from all
such reclassifications bears to the total number of shares of all such
classes and series resulting from all such reclassifications.
6
<PAGE>
(j) As used in this Section 7, the term "Closing Price" on any day shall
mean the reported last sale price per share of Common Stock regular
way on such day or, in case no such sale takes place on such day, the
average of the reported closing bid and asked prices regular way, in
each case on the New York Stock Exchange, or, if the Common Stock is
not listed or admitted to trading on such Exchange, on the American
Stock Exchange, or, if the Common Stock is not listed or admitted to
trading on such Exchange, on the principal national securities
exchange on which the Common Stock is listed or admitted to trading,
or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, the average of the closing bid and asked
prices in the over-the-counter market as reported by the National
Association of Securities Dealers' Automated Quotation System, or, if
not so reported, as reported by the National Quotation Bureau,
Incorporated, or any successor thereof, or, if not so reported, the
average of the closing bid and asked prices as furnished by any member
of the National Association of Securities Dealers, Inc. selected from
time to time by the Corporation for that purpose; or, in all other
cases, the value established by the Board of Directors in good faith;
and the term "Trading Day" shall mean a day on which the principal
national securities exchange on which the Common Stock is listed or
admitted to trading is open for the transaction of business or, if the
Common Stock is not listed or admitted to trading on any national
securities exchange, a Monday, Tuesday, Wednesday, Thursday, or Friday
on which banking institutions in New York City are not authorized or
obligated by law or executive order to close.
(k) The certificate of any independent firm of public accountants of
recognized standing selected by the Board of Directors shall be
presumptive evidence of the correctness of any computation made under
this Section 7.
SECTION 8. NO VOTING RIGHTS. The holders of Series A shall be entitled to
no votes per share, except as otherwise required by law or by the
Corporation's certificate of incorporation.
SECTION 9. LIMITED TRANSFERABILITY OF SERIES A. Until the earlier to occur
of (i) the date occurring thirteen months after the initial underwritten
public offering of the Corporation's Common Stock or (ii) the execution and
delivery of the written Strategic Alliance Agreement referenced in Section
6 above, the Series A and the rights represented thereby are not
transferable -regardless of whether such transfer occurs by foreclosure or
grant of a lien, pledge, or other security interest therein, other
volitional act, operation of law, or otherwise. Any attempt to transfer an
interest in any shares of Series A in violation of the foregoing is void.
SECTION 10. OTHER RIGHTS. The shares of Series A shall not have any powers,
preferences on relative, participating, optional or other special rights,
or qualifications, limitations or restrictions thereof, other than as set
forth herein.
IN WITNESS WHEREOF, Advanced Communications Group, Inc. has caused this
certificate to be signed by its undersigned duly authorized officer this day
of , 1998.
ADVANCED COMMUNICATIONS GROUP, INC.
BY:
-------------------------------
RICHARD P. ANTHONY
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
7
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ANNEX B
The Company and Northwestern Public Service Company ("Northwestern") have
entered into an agreement (the "Agreement") regarding the possible creation
of a strategic alliance that would permit ACG to market its
telecommunications services to that utility's approximately 100,000 electric
and natural gas business and residential customers in South Dakota and
Nebraska. Under the terms of the Agreement, which will be consummated
contemporaneously with the Closing of the Offering, ACG will issue a number
of shares of its Series A Redeemable Convertible Preferred Stock ("Preferred
Stock") with an aggregate liquidation preference of $2 million to
Northwestern Growth Corporation ("NGC"), a wholly-owned subsidiary of
Northwestern, in exchange for, among other things, Northwestern's commitment
to negotiate in good faith a strategic alliance upon commercially reasonable
terms ("Northwestern Alliance"). Pursuant to the proposed Northwestern
Alliance, ACG would have the exclusive right to market its telecommunications
services to the customers of Northwestern and to have access to
Northwestern's rights-of-way for the purpose of laying fiber optic cables.
Subject to existing contractual commitments, ACG would also have the right to
supply all of Northwestern's telecommunications services on competitive
terms. Northwestern would cooperate with ACG in soliciting Northwestern's
customers and receive a percentage of the telecommunications revenues
generated by ACG sales to such customers. The Agreement contains a three-year
standstill agreement by Northwestern and NGC with respect to ACG containing
customary terms and conditions, regarding, among other things, mergers and
acquisitions, tender offers, proxy contests, joining groups or encouraging
others with respect to such matters.
The Preferred Stock becomes convertible into shares of Common Stock at the
initial public offering price eighteen months after the consummation of this
Offering, does not pay any dividends and is not entitled to vote in the
election of directors. If the Northwestern Alliance has not been signed by
the first anniversary date of the closing of the Offering, ACG can redeem the
shares of Preferred Stock as an entirety for $1.25 million on or prior to the
thirteenth monthly anniversary of the Closing.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our report on the financial statements of
Advanced Communications Group, Inc. as of December 31, 1996 and for the
period from inception (June 6, 1996) through December 31, 1996, dated
September 15, 1997, included herein, in this Registration Statement on Form
S-1 and the reference to our Firm under the heading "Experts".
KPMG PEAT MARWICK LLP
Houston, Texas
January 15, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our report on the financial statements of Feist
Long Distance Service, Inc. as of and for the year ended December 31, 1996,
dated August 5, 1997, included herein, in this Registration Statement on Form
S-1 and the reference to our Firm under the heading "Experts".
KPMG PEAT MARWICK LLP
Houston, Texas
January 15, 1998
<PAGE>
EXHIBIT 23.15
CONSENT TO BE NAMED AS A DIRECTOR
OF
ADVANCED COMMUNICATIONS GROUP, INC.
The undersigned, Reginald J. Hollinger, hereby consents to be named as a
director of Advanced Communications Group, Inc. (the "Company") in Amendment
No. 2 to the Registration Statement on Form S-1 to be filed by the Company
with the Securities and Exchange Commission.
Dated: January 14, 1998
/s/ Reginald J. Hollinger
-----------------------------------
REGINALD J. HOLLINGER
