ADVANCED COMMUNICATIONS GROUP INC/DE/, 10-K405/A, 1998-04-30

ADVANCED COMMUNICATIONS GROUP INC/DE/
10-K405/A, 1998-04-30
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<PAGE> 1
FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ------------ to ---------------

Commission file Number 001-13875

ADVANCED COMMUNICATIONS GROUP, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 76-0549396
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

390 SOUTH WOODS MILL ROAD, SUITE 150, ST. LOUIS, MISSOURI 63017
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (314) 205-8668

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
$.0001 PAR VALUE COMMON STOCK NEW YORK STOCK EXCHANGE, INC.
(registered pursuant to Section 12(b) on February 12, 1998)

Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90
days. [ ] Yes [ X ] No

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]

The aggregate market value of the voting stock held by nonaffiliates of
the registrant, based upon the closing price of such stock on March 27, 1998,
as reported by the New York Stock Exchange, was approximately $175.6 million.

The number of shares outstanding of the registrant's Common Stock as of
March 27, 1998 was approximately 19.6 million shares.

---------------------------------------------

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Company's Registration Statement on Form S-1
(Securities Act file number 333-37671) including the Prospectus dated
February 12, 1998 and filed with the Securities and Exchange Commission
pursuant to Rule 424(b) of Regulation C promulgated thereunder, is
incorporated herein by reference.

<PAGE> 2

<TABLE>
INDEX

<S> <C>
PART I

Item 1. Business 1
Item 2. Properties 2
Item 3. Legal Proceedings 2
Item 4. Submission of Matters to a Vote Of Security Holders 2

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters 3
Item 6. Selected Financial Data 5
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
Item 8. Financial Statements and Other Supplementary Data 7
Item 9. Changes and Disagreements With Accountants on Accounting and
Financial Disclosure 18

PART III

Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners and Management 26
Item 13. Certain Relationships and Related Transactions 27

PART IV

Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 32

</TABLE>

i
<PAGE> 3

PART I

ITEM 1. BUSINESS

Advanced Communications Group, Inc. ("ACG") was incorporated in Delaware
in September 1997 as a subsidiary of a predecessor company that was
ultimately named Advanced Communications Corp. ("ACC"). ACC was formed in
June 1996, and had previously been named Advanced Communications Group, Inc.
By September 1997, ACC had entered into acquisition agreements to acquire a
number of companies in various aspects of the telecommunications business. In
October 1997, in order to facilitate these acquisitions, ACG entered into new
definitive agreements to acquire the stock or assets of six
telecommunications service providers, one yellow page publisher, two
telephone equipment sales and maintenance companies, ACC, and a 49% interest
in a company owning a fiber optic network (collectively, the "Acquisitions").
Shortly thereafter, ACG filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission (the "Commission") with respect to an
initial public offering ("IPO") of its common stock, par value $.0001 per
share ("Common Stock"). The Registration Statement, as amended, was declared
effective on February 12, 1998. On February 18, 1998, ACG consummated the IPO
and the Acquisitions, including a merger of ACC into a subsidiary of ACG
pursuant to which ACC became a wholly-owned subsidiary of ACG. Hereafter,
unless the context otherwise indicates, references herein to (i) "ACG" refer
to ACG 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. Prior to February 1998, ACG had not conducted any
operations other than those relating to the IPO and the Acquisitions.
Consequently, the financial statements included herein relate only to ACG.
The Company will file a Quarterly Report on Form 10Q which will include,
among other things, financial statements reflecting the operations of the
Company from February 18, 1998 through March 31, 1998. The Company will also
file an amendment to Current Report on Form 8-K/A by May 4, 1998, to reflect,
among other things, results of operations for the Acquired Companies for the
year ended December 31, 1997, as well as pro forma combined financial
statements as of December 31, 1997. At the time such Form 8-K/A is filed, the
Company also intends to amend this Annual Report on Form 10-K to reflect the
information in such Form 8-K/A.

In the Acquisitions, the Company acquired 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. In the aggregate, the consideration paid by the
Company in the Acquisitions included $83.8 million in cash, 3,383,589 shares
of Common Stock, $17.4 million in promissory notes, and options and warrants
to purchase 1,393,213 shares of Common Stock.

The Company was founded to create a regional competitive local exchange
carrier that provides an integrated portfolio of telecommunications services
principally to business customers in selected service areas of Southwestern
Bell Telephone Company and U S WEST Communications, Inc.

<PAGE> 4

A copy of the Company's Registration Statement on Form S-1 (Registration
No. 333-37671) as amended by Amendment No. 3, in the form it was declared
effective by the Commission (the "Registration Statement"), without Exhibits,
is filed herewith as Exhibit 99.1, and the Prospectus included therein is
referred to herein as the "Prospectus." The information appearing in the
Prospectus under the captions "Prospectus Summary," "Risk Factors," "The
Company," "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," "Industry Background and
Overview," and "Business" is incorporated herein by reference. Unless otherwise
defined herein, capitalized terms used herein shall have the same meaning as
defined in the Prospectus.

ITEM 2. PROPERTIES

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.

ITEM 3. LEGAL PROCEEDINGS

The information appearing in the Prospectus under the caption "Risk
Factors -- Recently Instituted Litigation Against an Acquired Company," the
final paragraph under the caption "Certain Transactions -- Other Organizational
Matters" (with respect to which, as of March 30, 1998, no negotiated
settlement had been reached and Richard O'Neal had delivered to Consolidation
Partners Founding Fund, L.L.C. ("CPFF") a demand for binding arbitration),
the caption "Certain Transactions -- Additional Background Information," the
caption "Contingencies" in note 5 of the Notes to Combined Financial
Statements of Valu-Line of Longview, Inc. and Related Companies, and the final
paragraph in note 6 of the Notes to Financial Statements of Feist Long
Distance Service, Inc. is incorporated herein by reference.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On October 9, 1997, the sole stockholder of ACG approved by written
consent the adoption of the Advanced Communications Group, Inc. 1997 Stock
Awards Plan and the Advanced Communications Group, Inc. Non-Qualified Stock
Option Plan for Non-Employee Directors.

2
<PAGE> 5
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company is authorized to issue 180,000,000 shares of Common Stock,
par value $.0001 per share (the "Common Stock") and 20,000,000 shares of
preferred stock, par value $.0001 per share (the "Preferred Stock"). In
February 1998, the Company's Board of Directors approved an approximately
1-for-2.645 reverse stock split. At March 27, 1998, 19,615,874 shares of Common
Stock and 142,857 shares of Series A Redeemable Convertible Preferred Stock
were outstanding.

As of March 27, 1998, there were 75 record owners of the Common Stock.
On that date, the closing price of the Common Stock on the NYSE was $16.4375.

DIVIDEND POLICY

No dividends have been paid on the Common Stock since ACG's inception.
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, any
restrictions that may be imposed by any credit facilities or other future
indebtedness and such other factors as the Board of Directors deems relevant.
Any credit facility which the Company may obtain for working capital
requirements in the foreseeable future may place limitations on the payment
of dividends (except for dividends payable in Common Stock and certain
preferred stock). The Company is exploring alternatives with respect to
credit facilities.

USE OF PROCEEDS OF INITIAL PUBLIC OFFERING

The Registration Statement on Form S-1 relating to the Common Stock sold
in the IPO was declared effective on February 12, 1998. The IPO, for which
PaineWebber Incorporated and CIBC Oppenheimer acted as managing underwriters,
commenced on that date and has terminated. Pursuant to the Registration
Statement, the Company registered the sale of $138,000,000 of Common Stock.
In the IPO, the Company sold 8,000,000 shares of Common Stock at an initial
public offering price of $14.00 per share, for an aggregate initial public
offering price of $112,000,000. The amount of expenses incurred for the
Company's account in connection with the IPO for aggregate underwriting
discounts and commissions, estimated other expenses and estimated total
expenses (including underwriting discounts and commissions) were,
respectively, $7,840,000, approximately $4,075,000 (including $500,000 of
accounting fees paid prior to the consummation of the IPO) and approximately
$11,915,000 (including $500,000 of accounting fees paid prior to the
consummation of the IPO). The net proceeds to the Company from the sale of
the shares of Common Stock in the IPO, after deducting underwriting

3
<PAGE> 6
discounts and commissions and estimated offering expenses payable by the
Company, was $99.9 million. Of those net proceeds, $73.8 million was used to
pay the aggregate cash portion of the purchase price for the Acquired
Companies, $10.0 million was used to make a direct cash investment in KIN
Network, Inc., a fiber optic network company, and the remaining net proceeds
were used for (i) the repayment of outstanding principal amount of indebtedness
and certain other payables of the Acquired Companies (approximately $2.3
million); (ii) the repayment of outstanding principal amount of indebtedness of
the Company to CPFF (which until it distributes shares of Common Stock to its
interest owners pursuant to its regulations will be the largest holder of
Common Stock) (approximately $3.2 million); (iii) a one-time payment to Rod K.
Cutsinger, the founder and a director of the Company, as consideration for a
five-year non-competition agreement ($1.75 million); and (iv) working capital
and other general corporate purposes. Shareholders of the Acquired Companies
who became executive officers or directors of the Company upon the
consummation of the Acquisitions received approximately $35.6 million of the
cash purchase price paid in the Acquisitions.

RECENT SALES OF UNREGISTERED SECURITIES

On January 3, 1997, the Predecessor issued and sold 1,890 shares of
Predecessor Stock to Beverly A. Aden for a consideration of $250 in a
transaction exempt from registration under Section 4(2) of the Securities
Act, no public offering being involved.

On May 2, 1997, the Predecessor issued to Joseph C. Cook, for services
rendered as a consultant, a ten year warrant to purchase 7,561 shares of
Predecessor Stock at a price of $2.65 per share in a transaction exempt from
registration under Section 4(2) of the Securities Act, no public offering
being involved.

On June 12, 1997, in connection with the execution of a related
employment agreement, the Predecessor granted Todd J. Feist a
non-transferable five year option to purchase 250,000 shares of Predecessor
Stock. This transaction was completed without registration under the
Securities Act in reliance upon the exemption provided by Section 4(2)
thereof, no public offering being involved. These options were issued in
exchange for a comparable number of options issued in mid 1997 by the
Predecessor.

On June 16, 1997, the Predecessor issued to the stockholders of Great
Western Directories, Inc. non-transferable, ten-year warrants to purchase
756,078 shares of Predecessor Stock. This transaction was completed without
registration under the Securities Act in reliance upon the exemption afforded
by Section 4(2) of the Securities Act, no public offering being involved.

Pursuant to agreements entered into in May, June and July of 1997,
respectively, the Predecessor issued to Valerie A. Casey, Malcolm F. McNeill
and William McCaughey 849 shares of Common Stock, 3,692 shares of Common
Stock, and warrants to purchase 7,561 shares of Common Stock at a price of
$6.61 per share, respectively, in lieu of compensation for consulting
services in transactions exempt from registration under Section 4(2) of the
Securities Act, no public offering being involved.

On December 29, 1997, the Company issued ten-year warrants to purchase
66,157 shares and 132,314 shares of Common Stock at a price of $2.50 per
share to Brad K. Cutsinger and G. Edward Powell, respectively, in
transactions exempt from registration under the Securities Act, no public
offering being involved. The warrants were issued to Messrs. Cutsinger and
Powell in exchange from employee stock options having the same economic
terms.

Pursuant to the Acquisition Agreements filed as Exhibits 2.1 through
2.10 and substantially concurrently with the consummation of the Offering,
the Company has agreed to issue an aggregate of 3,392,644 shares of Common
Stock, $17.4 million in promissory notes, $2.00 million in convertible
subordinated notes and 637,135 warrants or options to purchase Common Stock
to the stockholders of Great Western, Valu-Line, Feist Ling 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.

4
<PAGE> 7

On October 9, 1997, the Company issued to its parent, Advanced
Communication Corp., 1,000 shares of Common Stock for the consideration of
$1,000. Concurrently with the consummation of the Offering, Advanced
Communications Corp. will be merged with a subsidiary of the Company, will
become a subsidiary of the Company, and the stockholders of Advanced
Communications Corp. will receive one share of Common Stock of the Company
for each share of common stock they hold in Advanced Communications Corp.
These transactions will be completed without registration under the
Securities Act in reliance upon the exemption provided by Section 4(2)
thereof, no public offering being involved.

On January 15, 1998, the Company agreed to issue 142,857 shares of
Series A Redeemable Convertible Preferred Stock to Northwestern Growth
Corporation in connection with the negotiation of a strategic alliance. This
transaction was completed without registration under the Securities Act in
reliance upon the exemption provided by Section 4(2) thereof, no public
offering being involved.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data for ACG has been derived from the
audited financial statements of ACG. Because the Acquisitions were not
consummated until February 18, 1998, no effect is given to them in the
financial statements presented herein.

<TABLE>
<CAPTION>
PERIOD FROM INCEPTION YEAR ENDED
(JUNE 6, 1996) THROUGH DECEMBER 31,
DECEMBER 31, 1996 1997
(In Thousands, except per share date)
<S> <C> <C>
Statement of Operations Data:
Revenues $ -- $ --
Selling, general and administrative expenses 649 2,940
Net loss 659 3,200
Net loss per share<F1> $0.08 $ 0.39

Balance Sheet Data:
Cash and cash equivalents $ 33 $ --
Working capital (deficit) (689) (5,239)
Total assets 92 2,695
Total debt 575 3,141
Stockholders' deficit (632) (2,544)

<FN>
<F1>Restated for February 1998 1-for-2.645 reverse stock split.
</TABLE>

5
<PAGE> 8

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS FOR THE PERIOD FROM INCEPTION (JUNE 6, 1996) TO
DECEMBER 31, 1996 COMPARED WITH THE TWELVE MONTHS ENDED DECEMBER 31, 1997.

General and administrative expense. General and administrative expense
increased by $2,291,539 from $648,930 during the period from inception (June
6, 1996) to December 31, 1996, to $2,940,469 for the year ended December 31,
1997. During 1997, stock option and warrant compensation expense, consulting
expense, employee compensation expense, and legal fees increased by $870,000,
$304,520, $410,444, and $425,901, respectively, accounting for $2,010,865 or
88% of the above increase in general and administrative expense. The increase
in stock option and warrant compensation expense is primarily attributable to
options for 300,000 shares of Common Stock granted to two senior officers of
the Company in December 1997. These options are exercisable at a price of
$2.50 per share and fully vest over a three month period from the date of
grant. The increase in consulting expense is due largely to fees paid to a
management recruiting firm for services in connection with placing the
Company's senior management team. Employee compensation expense increased
primarily as a result of signing bonuses and fourth quarter salaries paid to
the Company's new senior officers. The increase in legal fees is attributable
to additional legal services performed in connection with the negotiation and
preparation of the Company's agreements covering the Acquisitions and related
matters.

LIQUIDITY AND CAPITAL RESOURCES

For the twelve months ended December 31, 1997, net cash used in
operating and investing activities was largely offset by net cash provided
from financing activities, specifically from borrowings under a note payable
to CPFF, a major stockholder of the Company. During 1997, the Company
increased its borrowings under this note by $2,309,562 to $2,874,609. Related
interest expense increased during the year by $256,217. Drawings under this
note represented essentially the Company's sole source of funding pending its
initial public offering. The IPO was successfully completed in February 1998,
enabling the Company to substantially repay its indebtedness to CPFF and to
close the Acquisitions.

YEAR 2000

Many computer software systems, as well as certain hardware and
equipment containing date sensitive data, were structured to utilize a
two-digit year field, meaning, among other things, that they may not be able
to properly recognize dates in the year 2000. This could result in
significant system and equipment failures. 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. Unanticipated problems in
any of the above areas, or the Company's inability to implement

6
<PAGE> 9
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. It is not possible to quantify the aggregate cost to the Company with
respect to customers and suppliers with Year 2000 problems. The Company is
currently in the planning stages of developing new data processing systems
throughout its organization for management, operating and financial
information.

OTHER MATTERS

The information in the Prospectus appearing under the captions "Risk
Factors" and "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" are incorporated herein by
reference. This document contains or incorporates by reference 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 the
information in the Prospectus appearing under the caption "Risk Factors."

ITEM 8. FINANCIAL STATEMENTS AND OTHER SUPPLEMENTARY DATA

<TABLE>
INDEX TO FINANCIAL STATEMENTS

<S> <C>
Report of KPMG Peat Marwick LLP Independent Auditors 8

Consolidated Balance Sheets at December 31, 1996 and 1997 9

Consolidated Statements of Operations for the period from inception (June 6,
1996) through December 31, 1996 and for the year ended December 31, 1997 10

Consolidated Statements of Changes in Stockholders' Deficit for the period
from inception (June 6, 1996) through December 31, 1996 and for the year ended
December 31, 1997 11

Consolidated Statements of Cash Flows for the period from inception (June 6,
1996) through December 31, 1996 and for the year ended December 31, 1997 12

Notes to Consolidated Financial Statements 13
</TABLE>

7
<PAGE> 10

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Advanced Communications Group, Inc.

We have audited the accompanying consolidated balance sheets of Advanced
Communications Group, Inc. as of December 31, 1996 and 1997, and the related
consolidated statements of operations, changes in stockholders' deficit, and
cash flows for the period from inception (June 6, 1996) through December 31,
1996 and for the year ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Advanced
Communications Group, Inc. as of December 31, 1996 and 1997, and the results
of its operations and its cash flows for the period from inception (June 6,
1996) through December 31, 1996 and for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Houston, Texas
March 23, 1998

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<PAGE> 11
<TABLE>
ADVANCED COMMUNICATIONS GROUP, INC.

CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS December 31, December 31,
1996 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 33,450 $ --
Employee advance 1,388 --
--------- -----------
Total Current Assets 34,838 --
Office furniture and equipment, net 8,252 5,966
Other non-current assets 48,480 2,688,976
--------- -----------

Total Assets $ 91,570 $ 2,694,942
========= ===========

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities:
Note payable to stockholder $ 565,047 $ 2,874,609
Accrued interest payable to stockholder 9,890 266,107
Accounts payable and accrued expenses 148,653 2,098,433
--------- -----------

Total Current Liabilities 723,590 5,239,149
--------- -----------

Commitments and Contingencies -- --
--------- -----------

Stockholders' Deficit:
Common stock, $.00001 par, 180,000,000 shares authorized,
8,227,736 and 8,232,276 shares issued and outstanding, respectively 82 82
Additional paid-in capital 26,718 1,314,566
Accumulated deficit (658,820) (3,858,855)
--------- -----------
Total stockholders' deficit (632,020) (2,544,207)
--------- -----------

Total liabilities and stockholders' deficit $ 91,570 $ 2,694,942
========= ===========

See accompanying notes to consolidated financial statements.

</TABLE>

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<PAGE> 12
<TABLE>
ADVANCED COMMUNICATIONS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
For the period
from inception
(June 6, 1996) For the year
through ended
December 31, December 31,
1996 1997
-------------- ------------
<S> <C> <C>
Revenues $ -- $ --

General and administrative expenses 648,930 2,940,469
Depreciation and amortization -- 3,277
Interest expense 9,890 256,289
-------- ----------
Loss before income tax benefit 658,820 3,200,035
Income tax benefit -- --
-------- ----------

Net loss $658,820 $3,200,035
======== ==========

Basic and diluted loss per share $ .08 $ .39
======== ==========

See accompanying notes to consolidated financial statements.

</TABLE>

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<PAGE> 13
<TABLE>
ADVANCED COMMUNICATIONS GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (JUNE 6, 1996) THROUGH DECEMBER 31, 1997

Common stock Additional Total
------------ Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Initial capitalization 8,227,736 $ 82 $ 26,718 $ -- $ 26,800
Net loss -- -- -- (658,820) (658,820)
--------- ---- ---------- ----------- -----------

BALANCES, December 31, 1996 8,227,736 82 26,718 (658,820) (632,020)
Issuance of stock options and warrants -- -- 1,237,000 -- 1,237,000
Issuance of stock for services performed 4,540 -- 50,848 -- 50,848
Net loss -- -- -- (3,200,035) (3,200,035)
--------- ---- ---------- ----------- -----------

BALANCES, December 31, 1997 8,232,276 $ 82 $1,314,566 $(3,858,855) $(2,544,207)
========= ==== ========== =========== ===========

See accompanying notes to consolidated financial statements
</TABLE>

11
<PAGE> 14
<TABLE>
ADVANCED COMMUNICATIONS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the period
From inception
(June 6, 1996) For the year
through December ended December
31, 1996 31, 1997
---------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(658,820) $(3,200,035)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization -- 3,277
Stock-based compensation expense -- 870,000
Changes in assets and liabilities:
(Increase) decrease in employee advances (1,388) 1,388
Increase in property and equipment (8,252) --
--------- -----------
Net cash used by operating activities (668,460) (2,325,370)
--------- -----------

Cash flow from investing activities:
Increase in other non-current assets (48,480) (2,223,639)
--------- -----------
Cash flows from financing activities:
Increase in accounts payable and accrued expenses 148,653 1,949,780
Increase in note payable to stockholder 565,047 2,309,562
Increase in accrued interest payable to stockholder 9,890 256,217
Issuance of common stock 26,800 --
--------- -----------

Net cash provided by financing activities 750,390 4,515,559
--------- -----------

Net increase (decrease) in cash and cash equivalents 33,450 (33,450)
Cash and cash equivalents:
Beginning of period -- 33,450
--------- -----------

End of period $ 33,450 $ --
========= ===========

Summary of significant non-cash activities:
Deferred acquisition costs paid for through
issuance of common stock and warrants $ -- $ 417,848
========= ===========
See accompanying notes to consolidated financial statements.
</TABLE>

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<PAGE> 15

ADVANCED COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND DECEMBER 31, 1997

1. ORGANIZATION AND BUSINESS:

In 1997, the Company signed definitive agreements pursuant to which it
agreed to acquire all of the outstanding capital stock of Great Western
Directories, Inc., Valu-Line of Longview, Inc., Feist Long Distance Service,
Inc., FirsTel, Inc. and Tele-Systems, Inc., substantially all of the assets of
Long Distance Management II, Inc., Long Distance Management of Kansas, Inc.,
The Switchboard of Oklahoma City, Inc., and National Telecom, a
proprietorship, and 49% of the outstanding capital stock of KIN Network, Inc.
("Acquisitions"). The consideration to be paid by the Company in the
Acquisitions includes $83.8 million in cash, shares of the Company's Common
Stock valued for purposes of computing the estimated purchase price for
accounting purposes at $37.9 million, $17.4 million in promissory notes, and
options and warrants to purchase 1,393,213 shares of the Company's Common
Stock.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Deferred acquisition and deferred offering costs -- The Company has
deferred certain legal, accounting, appraisal and other costs incurred in
connection with the Acquisitions and the IPO. At December 31, 1996 and 1997,
deferred acquisition costs amounted to approximately $40,900 and $929,000,
respectively, and deferred offering costs amounted to $2,700 and

13
<PAGE> 16
$1,756,800, respectively. At such time as the Acquisitions are completed,
deferred acquisition costs will be included in the determination of excess
purchase price. Deferred offering costs will be charged to additional paid-in
capital upon the closing of the IPO.

Office furniture and equipment -- Office furniture and equipment are
stated at cost. Depreciation is computed using the straight-line method over
the respective lives of the assets. The estimated useful lives are as
follows:

Furniture and fixtures 7 years

Computer equipment and software 3 years

Income taxes -- No provision for Federal, state and local income taxes
has been made because the Company has sustained cumulative losses since its
inception in June 1996. A 100% valuation allowance has been established for
the related deferred tax asset.

Net Loss Per Share -- The Company has adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", which replaces the presentation of primary earnings per share and
fully diluted earnings per share with a presentation of basic earnings per
share ("Basic EPS") and diluted earnings per share ("Diluted EPS"). Basic EPS
excludes dilution and is determined by dividing income available to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS reflects the potential dilution that could
occur if securities and other contracts to issue common stock were exercised
or converted into common stock. Adoption of SFAS No. 128 did not change EPS
as previously reported for 1996.

The weighted average shares outstanding were 8,227,736 for the period
from inception (June 6, 1996) through December 31, 1996 and 8,230,006 for the
year ended December 31, 1997. In calculating diluted EPS for the year ended
December 31, 1997, options to purchase 1,525,000 shares of common stock at
exercise prices ranging from $2.50 to $14.00 per share, and warrants to
purchase 1,296,199 shares of common stock at exercise prices ranging from
$2.50 to $6.61 per share were outstanding during part of 1997 but were not
included in the computation of diluted EPS due to their antidilutive effect.

Use of Estimates -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.

Stock Based Compensation -- SFAS No. 123, "Accounting for Stock-Based
Compensation," allows entities to choose between a new fair value based
method of accounting for employee stock options or similar equity instruments
and the current intrinsic, value-based method of accounting required by
Accounting Principles Board Opinion No. 25 ("APB No. 25"). The Company has
elected to remain with the accounting in APB No. 25 and has included in

14
<PAGE> 17
these financial statements pro forma disclosures of net loss and net loss per
share as if the fair value method of accounting had been applied. No employee
stock options or similar equity instruments were issued by the Company prior to
January 1, 1997.

3. TRANSACTIONS WITH RELATED PARTIES:

COMMON OWNERSHIP AND MANAGEMENT

At December 31, 1996 and 1997, a total of 7,986,074 shares and
7,915,192 shares, respectively, of the Company's Common Stock was owned by
Consolidation Partners Founding Fund, L.L.C., ("CPFF") and by individuals who
then served as directors of both the Company and CPFF and who own the
controlling interest in CPFF.

SUBORDINATED PROMISSORY NOTE IN FAVOR OF CPFF

The Company's activities have been financed through a subordinated note
agreement with CPFF. In September 1996, the Company executed a Subordinated
Promissory Note (the "Note") in favor of CPFF in the principal amount of
$1,200,000 and bearing an annual interest rate of eight (8%) percent. Under
its original terms, the principal and accrued interest under the Note were to
be paid in full on the earlier of September 15, 1997, or the date on which
the Company's common stock became listed or quoted on a national basis.
During 1996 and 1997, the Company incurred interest expense of $9,890 and
$256,289, respectively, under the Note. Between September 1997 and February
1998, the Company and CPFF amended the terms of the Note three times to
provide for increases in the principal balance to $3,230,000, and to extend
the maturity of the Note to the earlier of December 31, 1998 or the
consummation of the IPO. At December 31, 1997 and 1996, the principal balance
under the Note was approximately $565,000 and $2,875,000, respectively. In
connection with the IPO in February 1998, the entire Note balance was
repaid.

STOCK OPTIONS AND WARRANTS

In May 1997 the Company granted to one of its consultants a warrant for
the purchase of 7,561 shares of common stock at an exercise price of $2.65
per share. This warrant is exercisable in whole or in part at any time up to
its expiration date in May 2007. In connection with the issuance of this
warrant, the Company recorded a non-recurring, non-cash compensation expense of
$20,000 reflecting the difference between the exercise price for the shares
and the estimated fair value of the warrant at the date of grant.

In connection with the Great Western Directories, Inc. ("Great
Western") acquisition agreement, the Company issued warrants to purchase
756,078 shares of common stock at $6.61 per share. Based on an independent
appraisal, the fair value of these warrants was determined to be $367,000 on
the date of grant, which was recorded as deferred acquisition costs by the
Company.

15
<PAGE> 18

In June 1997, the Company granted options for the purchase of 775,000
shares of common stock at an exercise price equal to the fair value of a
share of common stock at the date of grant, specifically $2.50 per share, to
three individuals. In December 1997, two of these individuals exchanged their
options to purchase 525,000 shares of common stock for ten-year, fully vested
warrants to purchase a like number of shares of common stock at the same
exercise price.

EMPLOYEE AND DIRECTOR STOCK OPTIONS

In June 1997, the Company's Board of Directors approved a Stock Awards
Plan (the "Plan") which provides for the granting or awarding of incentive or
non-qualified stock options, stock appreciation rights, restricted or deferred
stock, dividend equivalents and other incentive awards to directors,
officers, and key employees of the Company. The number of shares of common
stock authorized and reserved for issuance under the Plan is 3,500,000
shares.

During 1997, the Company agreed to make various grants and awards under
the Plan to employees and officers of the Acquired Companies, and to certain
individuals who became officers of the Company. These options will be
exercisable at the initial offering price and have various vesting and
termination provisions. In addition, the Company has agreed to compensate
each of its outside directors with an option award for 15,000 shares of
common stock upon election to the board and an additional option award of
5,000 shares of common stock upon each subsequent re-election of the
director. At December 31, 1997, no director options had yet been granted.

During December 1997, the Company awarded to three of its officers
ten-year options to purchase 1,275,000 shares of common stock, consisting of
options for 300,000 shares exercisable at $2.50 per share which vest in full
at the end of three months, and options for 975,000 shares of common stock
exercisable at the initial public offering price ($14.00) which vest in three
equal increments on the first three anniversaries of the date of grant.
During the year ended December 31, 1997, the Company recognized $850,000 of
compensation expense related to these options.

At December 31, 1997, there were 2,225,000 additional shares available
for grant under the Plan. The per share weighted-average value of stock
options granted during 1997 was $8.63 using the Black-Scholes model with the
following assumptions: weighted-average risk-free interest rate of 6.50%,
expected life of 10 years, expected volatility of 60%, and an expected
dividend yield of zero percent.

The Company applies APB Opinion No. 25 in accounting for the Plan.
Accordingly, apart from the compensation expense referred to above, the
Company has not recognized compensation expense related to the issuance of
options for the purchase of its common stock. Had the Company determined
compensation expense based on the fair value at the date of grant for its
stock options under SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:

16
<PAGE> 19
<TABLE>
<CAPTION>
1997
<S> <C>
Net loss:
As reported $3,200,035
Pro forma $5,972,195

Basic and diluted loss per share:
As reported $0.39
Pro forma $0.73
</TABLE>

At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual lives of the options was $2.50 to $14.00 per share and
10 years, respectively. No options were exercisable at December 31, 1997.
Stock option activity during the periods indicated is as follows:

<TABLE>
<CAPTION>
Number of Weighted average
Shares Exercise price
--------- -----------------
<S> <C> <C>
Balance, December 31, 1996 -- $ --

Options granted 1,275,000 11.29
--------- ------

Balance, December 31, 1997 1,275,000 $11.29
========= ======
</TABLE>

OTHER COMMITMENTS

In January 1997, the Company entered into a four year lease agreement
with CPFF pursuant to which the Company leases furniture and office
equipment. Under this agreement the Company is obligated to make monthly
rental payments to CPFF of $1,163. For the year ended December 31, 1997, the
Company recognized approximately $14,000 of rental expense related to this
lease agreement.

The Company has entered into six-year employment agreements with three
officers of the Company. These agreements provide for annual salaries plus
potential bonuses and stock option grants as determined by the Compensation
Committee of the Board of Directors.

5. SUBSEQUENT EVENTS:

In January 1998, the Company entered into an agreement with a certain
utility company regarding the possible creation of a strategic alliance.
Under the terms of the agreement, which was consummated contemporaneously
with the closing of the initial public offering, the Company issued 142,857
shares of Series A Redeemable Convertible Preferred Stock ("Preferred
Stock") with an aggregate liquidation preference of $2 million. The
Preferred Stock is convertible into shares of common stock at the initial
public offering price $14.00) eighteen months after the consummation of the
initial public offering. The Preferred Stock does not pay

17
<PAGE> 20
dividends and is not entitled to vote in the election of directors. If a
strategic alliance has not been entered into by the 13th month after the
initial public offering, the Company may, at its option, redeem the Preferred
Stock for total proceeds of $1.25 million. The Company has discussed, and
continues to discuss, similar strategic alliances with other utility companies.

In February 1998, the Company's Board of Directors approved an
approximately 1-for-2.645 reverse stock split, subject to stockholder approval.
This reverse stock split has been reflected retroactively for all periods
presented.

In February 1998, the Company completed an initial public offering of
8,000,000 shares of its common stock, and closed on the Acquisitions.
Proceeds from the IPO, net of offering costs, were $99.9 million of which
$83.8 million was paid to acquire the Acquired Companies, $5.5 million was
paid to retire debt of the Company and the Acquired Companies, and $1.75
million was paid to a stockholder for a five-year non-compete agreement.
Stockholders of the Acquired Companies who became executive officers or
directors of the Company upon the consummation of the Acquisitions received
approximately $35.6 million of the cash purchase price paid in the
Acquisitions.

Prior to the pricing of the IPO, Richard O'Neal, the principal
shareholder of Great Western, expressed disagreement with the effect of the
reverse stock split on certain warrants that had been issued to the
stockholders of Great Western at the time of the execution of the initial
acquisition agreement between the Company and Great Western (the "Warrants").
CPFF and Mr. O'Neal agreed to engage in good faith negotiations to determine
the type and amount of any consideration appropriately payable by CPFF to the
holders of the Warrants following the consummation of the IPO. As of March
30, 1998, no negotiated settlement had been reached and Mr. O'Neal had
delivered to CPFF a demand for binding arbitration. CPFF has agreed not to
effect any distribution of the Company's Common Stock to its interest owners
prior to the resolution of these matters. The resolution of this matter is
solely between CPFF and the principal shareholder of Great Western. The
Company shall have no liability with respect to the resolution of this
matter and no additional Common Stock or equivalents will be issued in
connection therewith. In no event shall any assets of the Company be used
too satisfy any negotiated settlement or arbitration award.

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

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<PAGE> 21

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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.

TERM
AS
DIRECTOR
NAME AGE<F1> POSITION(S) WITH COMPANY EXPIRES
- ---------------------- ------- ------------------------ --------
<S> <C> <C> <C>
Richard P. Anthony 49 Chairman of the Board, President and 2000
Chief Executive Officer

James F. Cragg 46 Executive Vice President, Sales and 1998
Marketing and Director

William H. Zimmer III 44 Executive Vice President, Chief Financial 1999
Officer, Treasurer, Secretary and Director

Richard O'Neal<F2> 57 President -- Directory Services Group and 1999
Director

Fred L. Thurman<F2> 47 President -- Telecommunications Services 2000
Group and Director

Todd J. Feist<F2> 33 Vice President -- Telecommunications Services 1999
Group Central Region and Director

Rod K. Cutsinger 54 Director 2000

Fentress Bracewell 76 Director 1998

E. Clarke Garnett 37 Director 1999

Reginald J. Hollinger<F2><F3><F4> 34 Director 2000

David M. Mitchell 49 Director 1998

G. Edward Powell 61 Director 1998
</TABLE>

VOTING ARRANGEMENTS

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<PAGE> 22
expires on the first to occur of the tenth anniversary of the closing of the
consummation of the Offering or the reduction of Liberty's ownership of Common
Stock below 100,000 shares. Mr. Rod K. Cutsinger has agreed to vote his shares
of Common Stock in favor of Liberty's designee nominated by the Board. Mr.
Garnett has been designated by Liberty as its initial director nominee.

In the acquisition agreement relating to Valu-Line, ACG's Board, subject
to its fiduciary obligations, agreed to place David M. Mitchell on its Board
and renominate Mr. Mitchell as a director from time to time as long as he
owns at lest 100,000 shares of Common Stock at the time of such renomination.

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 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

20
<PAGE> 23
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--Telecommunications Services Group
Central Region 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
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

21
<PAGE> 24
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.

ITEM 11. EXECUTIVE COMPENSATION

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

22
<PAGE> 25

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 non-qualified 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, February 18,
1998, each of Messrs. Fentress Bracewell, Rod K. Cutsinger, E. Clarke
Garnett, Reginald J. Hollinger, G. Edward Powell and David M. Mitchell were
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.

ITEM 11. 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 Marketing 175,000

23
<PAGE> 26

William H. Zimmer III Executive Vice President, Chief Financial Officer, 185,000
Secretary and Treasurer

Richard O'Neal President--Directory Services Group 300,000

Fred L. Thurman President--Telecommunications Services Group 175,000
</TABLE>

EMPLOYMENT AGREEMENTS

Mr. Richard P. Anthony 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, which increased 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 non-competition 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
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

24
<PAGE> 27

period upon his termination. The employment agreement also provides for a one
year post-termination non-competition 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 non-competition 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 non-competition covenants. Mr.
Feist is also entitled to receive a bonus of $50,000 upon consummation of the
Offering.

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

25
<PAGE> 28
of a change in control of the Company. In mid-1977, the Board of the Company's
predecessor granted a similar option to Todd J. Feist covering 250,000 shares
of its common stock upon his employment by an acquisition subsidiary of the
Company. Prior to the consummation of the Offering, Mr. Feist exchanged this
option for a substantially identical option to purchase 250,000 shares of
Common Stock issued under the Plan. Prior to the consummation of the Offering,
Messrs. Powell and Brad Cutsinger also exchanged their options for ten-year,
fully vested warrants to purchase a like number of shares of Common Stock at
the same exercise price. In late 1997, the Company granted options to purchase
an aggregate of 1,275,000 shares of Common Stock to Messrs. Richard P. Anthony,
James F. Cragg and William H. Zimmer III as described under "--Employment
Agreements." Contemporaneously with the closing of the Offering, the Board
intends to grant (i) five year options to purchase 150,000 shares, and 150,000
shares, respectively, to Richard O'Neal and Fred L. Thurman, and (ii) an
aggregate of approximately 500,000, shares of Common Stock to the other
officers and employees of various Acquired Companies at an exercise equal to
the initial public offering price per share. These options will vest in equal
increments over three to five year periods from the date of grant.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 27, 1998
by (a) each of the executive officers of the Company, (b) each of the
Company's directors, (c) all executive officers and directors of the Company
as a group, and (d) each other person (or group or affiliated persons) who is
known by the Company to own beneficially 5% or more of the Company's Common
Stock.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
AFTER OFFERING, AS ADJUSTED
---------------------------
NAME<F1> NUMBER <F2> PERCENT <F2>
- -------- ----------- ------------
<S> <C> <C>
Richard P. Anthony 197,255<F3> 1.0%

James F. Cragg 197,255<F4> 1.0

William H. Zimmer III --- --

Richard O'Neal 680,000<F5> 3.4

Fred L. Thurman 243,746<F6> 1.2

Todd J. Feist 71,429 <F*>

Rod K. Cutsinger 5,576,458<F7> 28.4

Fentress Bracewell 1,890 <F*>

E. Clarke Garnett 714,736<F8> 3.6

Reginald J. Hollinger --- --

David M. Mitchell 185,714 1.0

G. Edward Powell 238,984<F9> 1.2

CPFF --- --

Consolidation Partners 5,231,300 26.7

Executive officers and directors as a 8,107,467<F10> 39.8
group (6 persons and 12 persons,
respectively)

<FN>

<F*>Percentage of shares beneficially owned is less than 1.0%

<F1> 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.

<F2> 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.

<F3> Includes 150,000 shares of Common Stock subject to stock options issued
by the Company that are immediately exercisable.

<F4> Includes 150,000 shares of Common Stock subject to stock options issued
by the Company that are immediately exercisable.

<F5> Includes warrants to purchase 280,000 shares of Common Stock at the
initial public offering price. A Trustee for Mr. O'Neal's children
owns non-transferable, ten-year warrants to purchase 567,059 shares
of Common Stock, one-third of which warrants become exercisable on
the first, second and third anniversaries of the consummation of the
Offering.

<F6> Includes 13,513 shares of Common Stock issuable upon exercise of a
warrant at $14.00 per share and 39,498 shares of Common Stock issuable
upon conversion of a 10% convertible note issued by the Company,
convertible at $14.00 per share.

<F7> Includes 5,231,300 shares of Common Stock owned by Consolidation
Partners, a limited liability company in which Rod K. Cutsinger and his
wife beneficially own of record 80% of the interests. The remaining
interests are beneficially owned by trusts for the benefit of the
Cutsingers' two adult children, including Brad K. Cutsinger, over which
Rod K. Cutsinger has sole voting and dispositive power.

<F8> Includes 714,286 shares of Common Stock owned by Liberty, the owner of
51% of KINNET, as to which E. Clarke Garnett disclaims any
beneficial interest.

<F9> Includes 132,314 shares of Common Stock which Mr. Powell has the right
to acquire upon the exercise of warrants which are fully exercisable
and a number of shares of Common Stock not to exceed 61,302 shares
which are expected to be distributed to Mr. Powell by CPFF promptly
after resolution of the arbitration between CPFF and the former
shareholders of Great Western.

<F10> Includes 765,325 shares of Common Stock which such persons have the
right to acquire upon the exercise of options and warrants which are
immediately exercisable.
</TABLE>

26
<PAGE> 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

THE ACQUISITIONS

Simultaneously with the consummation of the Offering, ACG acquired 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 became a wholly-owned subsidiary of the
Company. The aggregate consideration paid by ACG in the Acquisitions includes
approximately $83.8 million in cash, 3,383,589 shares of Common Stock, $17.4
million in promissory notes and 1,393,213 warrants or options to purchase
Common Stock. Of the aggregate consideration, $30.8 million, $0.2 million,
$3.3 million and $1.4 million in cash, was paid to Messrs. O'Neal, Feist,
Mitchell and Thurman, respectively, 400,000, 71,429, 175,714 and 190,735
shares of Common Stock were issued to Messrs. O'Neal, Feist, Mitchell and
Thurman, respectively; $8.4 million in subordinated notes were issued to
Mr. O'Neal; $552,983 in convertible subordinated notes were 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 were issued to Mr.
O'Neal and Mr. Thurman, respectively.

On June 16, 1997, ACG's predecessor issued to the five stockholders of
Great Western, as consideration for their execution of a definitive
acquisition agreement, three series of non-transferable, ten-year warrants to
purchase an aggregate of 756,078 shares of Common Stock at an exercise price
of $6.61 per share, subject to adjustment to protect against dilution. The
warrants of each series become exercisable upon the first, second and third
anniversary dates of the consummation of the Offering. Of these, Mr. O'Neal
received warrants to purchase an aggregate of 567,059 shares of Common Stock.

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 million.

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.

27
<PAGE> 30

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 resolution of the arbitration involving
the principal shareholder of CPFF and Great Western as more particularly
described in the next paragraph, it is expected that 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. 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 in the IPO.

Richard O'Neal, the principal shareholder of Great Western expressed
disagreement with the effect of the reverse stock split on certain warrants
that had been issued to the stockholders of Great Western at the time of the
execution of the initial acquisition agreement between ACG and Great Western
(the "Warrants"). CPFF and Mr. O'Neal agreed to engage in good faith
negotiations to determine the type and amount of any consideration
appropriately payable by CPFF to the holders of the Warrants following the
consummation of the Offering. CFPP and Mr. O'Neal agreed that if a negotiated
settlement could not be reached within 45 days after the closing of the
Offering, the matter would be referred to binding arbitration and the cost of
such arbitration would be borne by CPFF. CPFF agrees not to effect any
distribution of ACG common stock to its interest owners prior to the
resolution of these matters. The resolution of this matter is solely between
CPFF and the principal shareholder of Great Western. ACG shall have no
liability with respect to the resolution of this matter and no additional ACG
common shares or equivalents will be issued in connection herewith. In no
event shall any assets of ACG be used to satisfy any negotiated settlement or
arbitration award. The Company understands that this matter has been
referred to arbitration.

INITIAL CAPITALIZATION

In connection with its initial capitalization on September 17,1996,
ACG's predecessor issued and sold an aggregate of 8,227,736 (net of
subsequent repurchases) shares of its common stock, of which 7,560,780
shares, 378,039 shares, 47,255 shares, 94,510 shares, 7,561 shares and 1,890
shares were acquired by CPFF, Rod K. Cutsinger, Brad K. Cutsinger, Frank
Bango (a former director of ACG), G. Edward Powell and Fentress Bracewell for
$1,000, $10,000, $1,250, $2,500. $200 and $50, respectively. At the same time
CPFF agreed to loan the Company $1.2 million (increased to $3.2 million
through January 12, 1998) pursuant to an 8% promissory note payable upon the
earlier of the effectuation of an initial public offering by ACG or December
31, 1998. This promissory note, together with accrued interest thereon, was
repaid from the net proceeds of the Offering.

28
<PAGE> 31

Between October 14, 1996 and January 3, 1997, ACG's predecessor issued
and sold 39,694 shares of common stock at $0.05 per share, of which 37,804
shares were sold to G. Edward Powell for an aggregate of $5,000. During the
same period, ACG's predecessor agreed to issue to eight persons for services
rendered five year warrants to purchase an aggregate of 16,256 shares of
Common Stock at the initial public offering price per share, subject to
adjustments to protect against dilution. Additionally, on May 2, 1997 ACG's
predecessor issued a ten-year non-transferrable warrant to purchase 7,560
shares of its common stock at $2.65 per share, subject to adjustment to
protect against dilution, to a consultant in consideration for services
rendered to the Company. In July 1997, the Company agreed to issue a similar
warrant to purchase 7,560 shares of Common Stock at $6.61 to another
consultant. Pursuant to agreements entered into in May and July 1997, the
Company has agreed to issue an aggregate of 4,540 shares of Common Stock,
valued at $6.61 per share, to two consultants in lieu of compensation. With
respect to certain other option and warrant grants, see Item 11, "Executive
Compensation--Option Grants." In December 1997 Rod K. Cutsinger
privately placed an aggregate of 70,882 shares of his Common Stock with
Richard P. Anthony and another investor at a price of $5.29 per share and
agreed to privately place an additional 47,256 shares of Common Stock with
James F. Cragg at the same price.

VOTING ARRANGEMENTS

In the acquisition agreement relating to the investment in KINNET,
Liberty (the former owner of 100%, and the present owner of the remaining
51%, of the stock of KINNET) agreed, until the tenth anniversary date of the
consummation of the Offering, to be present in person or by proxy at all
meetings of stockholders of ACG for quorum purposes. Additionally, Liberty
has agreed, among other things, not to initiate or solicit stockholders to
become participants in any proxy solicitation or induce or attempt to induce
others to initiate a tender offer, exchange offer or other change in control
of ACG. ACG's Board has also agreed, subject to its fiduciary obligations, to
nominate as a director an individual designated by Liberty that is reasonably
qualified to serve on the board of directors of a publicly held corporation.
This obligation expires on the first to occur of the tenth anniversary of the
closing of the consummation of the IPO 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

29
<PAGE> 32
$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, LC. 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 K1NNET'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 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 Plaintiffs seek in excess of $10 million in actual damages,
punitive damages in an unspecified amount, and injunctive relief. The
Defendants

30
<PAGE> 33
believe that the claims against them are without merit. The Defendants have
filed counterclaims alleging that the Plaintiffs willfully violated the rules
and regulations of the FCC by illegally switching customers' long distance
service without their authorization, that the Plaintiffs breached their
fiduciary duties to Defendants, and that the Plaintiffs defrauded Defendants in
materially diminishing the value of the assets sold to Nationwide by Vadacom
and frustrating the consummation of a public offering that potentially could
have been substantially remunerative to Vadacom's shareholders. The Defendants
have asked the court to impose a constructive trust over the shares of
Nationwide stock owned by its three shareholders. All activity in the case has
now been stayed by reason of Nationwide's Chapter 11 bankruptcy proceedings
initiated in 1997. Mr. Cutsinger's efforts to settle the case earlier this year
were not successful. On February 10, 1998, Nationwide filed a motion for
expedited consideration of Nationwide's application to substitute counsel in
order to facilitate the pursuit of claims against Mr. Cutsinger essentially
similar to those asserted in the Lyle Cox litigation described below.

In addition, as a result of Mr. Cutsinger's substantial ownership
position in Vadacom and Nationwide's operation of Vadacom's assets following
the acquisition, both Mr. Cutsinger and Vadacom have been sued or threatened
with suit for breach of contract claims by long distance carriers, customers
and others, for failure to pay outstanding commercial accounts, ad valorem
taxes and promissory notes and for other causes of action. Some of these
claims relate directly to the operation of Vadacom's assets following their
acquisition by Nationwide. Mr. Cutsinger believes that the claims against him
personally are without merit, and he intends to contest them vigorously.
While in the past Mr. Cutsinger has expended substantial sums of his own
money financing Vadacom's defense of these claims, he reserves the right to
cease doing so. In such event, Vadacom may seek protection from such
litigants and its creditors under applicable bankruptcy law.

In early January 1998, legal counsel for the assignee of a defaulted
promissory note issued by Vadacom in the original principal amount of
approximately $80,000 which is the subject of a pending lawsuit (Lyle Cox v.
Vadacom Inc. No. 97-25464, Dist. Ct. of Harris County, 152nd Judicial
District of Texas) wrote Mr. Cutsinger's legal counsel a letter and alleged
that Mr. Cutsinger "has transferred assets that constitute fraudulent
transfers with respect to the creditors of Vadacom, Inc. These transfers have
been to companies owned by Mr. Cutsinger and his family. One of these
companies is [ACG]". Counsel for the plaintiff states that his client
intends to either (i) place Vadacom in involuntary bankruptcy, (ii) sue Mr.
Cutsinger, his family, ACG and Consolidation Partners, or (iii) seek a
temporary injunction. Mr. Cutsinger categorically denies that any Vadacom
assets were fraudulently transferred and believes that the foregoing
allegations are wholly without merit.

At the request of the representatives of the underwriters in the
recently completed IPO and in consideration of the Company's payment of $1.75
million from the proceeds of the Offering, Mr. Cutsinger entered 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 the Prospectus for the IPO in those portions of
the Region in which the Company operates at that date.

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> 34

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. FINANCIAL STATEMENTS

Item 8 of this report lists certain financial statements of ACG.

2. FINANCIAL STATEMENT SCHEDULES

No schedules are included because they are not applicable or the
required information is shown in the financial statements or notes thereto.

(b) REPORTS OF FORM 8-K

There were no reports on Form 8-K filed in the quarter ended December 31,
1997.

See the Exhibit Index attached hereto. Unless otherwise indicated
below, each exhibit listed is incorporated by reference to the like-numbered
exhibit to the Company's Registration Statement on Form S-1 (Registration No.
333-37671).

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this first amendment on
Form 10-K/A to its Report on Form 10-K for the fiscal year ended December 31,
1997, to be signed on its behalf by the undersigned, thereunto duly
authorized.

ADVANCED COMMUNICATIONS GROUP, INC.

By: /s/ RICHARD P. ANTHONY
------------------------------
Richard P. Anthony
Chairman of the Board
President and Chief
Executive Officer

Dated: April 30, 1998

32
<PAGE> 35

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS
- ------- ------------
<C> <S>
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.

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.

2.2B Form of Second Amendment dated as of February 11, 1998 to the Agreement and
Plan and Exchanged filed as Exhibit 2.2, including a Form of Escrow Agreement
attached thereto as Annex III.

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.

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.

2.4B Amendment No. 2 dated as of January 8, 1998 to the Agreement and Plan of
Exchange filed as Exhibit 2.4.

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.

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.

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.

33
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EXHIBIT
NUMBER DESCRIPTIONS
- ------- ------------

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.

2.8B Second Amendment dated as of January 8, 1998 to the Restated Asset Purchase
Agreement filed as Exhibit 2.8.

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.

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.

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.

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).

34
<PAGE> 37

EXHIBIT
NUMBER DESCRIPTIONS
- ------- ------------

<F*>10.1 ACG 1997 Stock Awards Plan.

<F*>10.1A Form of Non-Qualified Stock Option Agreement.

<F*>10.2 Non-Qualified Stock Option Plan for Non-Employee Directors.

<F*>10.3 Employment Agreement between ACG and Richard P. Anthony.

<F*>10.4 Form of Employment Agreement between Great Western Directories, Inc. and
Richard O'Neal (see Annex V to Exhibit 2.1).

<F*>10.5 Form of Employment Agreement between Feist Long Distance Service, Inc. and
Todd Feist (see Annex VII to Exhibit 2.3A).

<F*>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.

10.12 Form of Series D Warrant issued to shareholders of Great Western Directories, Inc.
(see Annex IV to Exhibit 2.1).

10.13 Form of 5% Subordinated Note issued to shareholders of Great Western
Directories, Inc. (see Annex III to Exhibit 2.1).

10.14 Form of 10% Convertible Subordinated Note 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.

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.

<F*>10.17 Employment Agreement between ACG and Williams H. Zimmer III.

<F*>10.18 Employment Agreement between ACG and James F. Cragg.

10.19 Form of Series E Warrant issued to certain shareholders of Tele-Systems, Inc.

10.20 Form of Series F Warrant issued to certain shareholders of Tele-Systems, Inc.

10.21 Form of Series G Warrant issued to certain shareholders of Tele-Systems, Inc. (see
Annex IV to Exhibit 2.4).

10.22 Form of Series H Warrant issued to Daniel W. And Cheryl A. Peters (see Annex IV
to Exhibit 2.9).

10.23 Form of Series I Warrant issued to Daniel W. And Cheryl A. Peters (see Annex V
to Exhibit 2.9).

10.24 Warrant issued to Joseph C. Cook.

10.25 Form of Series K Warrant issued to certain consultants.

10.26 Form of Series L Warrant issued to G. Edward Powell and Brad K. Cutsinger.

10.27 Resale Agreement between Southwestern Bell Telephone Company and Feist Long
Distance dated June 4, 1997 (Oklahoma).

10.28 Resale Agreement between Southwestern Bell Telephone Company and Feist Long
Distance dated April 4, 1997 (Kansas).

35
<PAGE> 38

EXHIBIT
NUMBER DESCRIPTIONS
- ------- ------------

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 U S 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
U S 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.

10.41 Form of Standstill Agreement dated as of February , 1998 between ACG and
Rod K. Cutsinger.

10.42 Form of Non-Competition Agreement dated as of February , 1998 between ACG
and Rod K. Cutsinger.

10.43 Asset Purchase Agreement made and entered into as of September 3, 1997 by and
between RAFT, L.L.C., PAM Oil, Inc., Scott D. Scofield, William Pederson and
FirsTel, Inc.

10.44 Amendment to the Asset Purchase Agreement filed as Exhibit 10.43.

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.

36
<PAGE> 39

EXHIBIT
NUMBER DESCRIPTIONS
- ------- ------------

10.47 Form of Series M Warrant issued to William McCaughey.

10.48 Form of Stock Option and Put Agreement issued to Mark Beall.

21.1 List of subsidiaries of ACG.

27.1 Financial Data Schedule incorporated by reference as Exhibit 27.1
of the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 and filed with the Securities and Exchange
Commission on March 31, 1998.

99.1 Amendment No. 3 to Registration Statement on Form S-1 of ACG (Registration
No. 333-37671), in the form declared effective, without exhibits incorporated
by reference in Exhibit 99 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 and filed with the Securities and Exchange
Commission on March 31, 1998.

<FN>
<F*> Compensatory plan or management arrangement.

</TABLE>