10-K/A 1 d87695a1e10-ka.txt AMENDMENT NO. 1 TO FORM 10-K FOR FYE 12/31/99 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 1999 FORM 10-K/A (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, 1999 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 NO. 0-27683 Amerivision Communications, Inc. (Exact name of registrant as specified in its charter) OKLAHOMA 73-1378798 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5900 MOSTELLER DRIVE, SUITE 1800 73112 OKLAHOMA CITY, OKLAHOMA (Zip Code) (Address of principal executive offices) (405) 600-3800 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REQUESTED ------------------- --------------- NONE N/A Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.10 par value (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 [ ] No [X] 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. [ ] At May 22, 2001, there were 842,727 shares of Common Stock of the Company. DOCUMENTS INCORPORATED BY REFERENCE NONE ================================================================================ 2 extension. The Damoose Note matures in April 2001 and can be extended, at Mr. Damoose's option, for an additional three years on the same terms and conditions. In connection with the issuance of the Damoose Note, the Company has issued Mr. Damoose warrants to purchase 400 shares of Common Stock for $0.01 per share. The Company believes that the terms and conditions of the Damoose Loan and Damoose Note were at least as favorable as the Company could have obtained in an arm's length transaction with an unaffiliated third party. Additionally, Mr. Damoose is affiliated with a non-profit organization that receives financial support from the Company in exchange for promotion of the Company's products and services. During the years ended December 31, 1998 and 1999, the Company paid this organization $-0- and $175,000, respectively. From 1997 until October 1998, Mr. Halliday, the President, Chief Executive Officer and a director of the Company, was a partner in the law firm of WRF and Mr. Halliday continues to serve as Of Counsel with WRF for matters, which do not involve the Company. In 1997, 1998 and 1999, the Company paid WRF $69,000, $741,000 and $767,000, respectively, for legal fees and expenses. Mr. Halliday does not share in or otherwise benefit from the legal fees paid to WRF by the Company. WRF billed the Company its standard billing rates for work performed for the Company. In addition, Messrs. Halliday, Damoose and Sekulow received and are entitled to receive certain other payments from the Company more particularly described in Item 11 above. OTHER MISCELLANEOUS TRANSACTIONS In 1997, the Company entered into twenty-five year sales representative agreements with twenty-five of its key sales representatives, including, Tom Anderson, Mr. Thompson's son-in-law; Diana Riske, Mr. Telling's daughter; and Jeff Cato, Mr. Freeny's son-in-law. The agreements provide that the sales representatives will receive a commission of 3% of the net domestic billings of customers who subscribe to the Company's telecommunication services either directly or indirectly through any subscriber, business or organization procured as a result of the sales representatives contact with such subscriber, business or organization. In addition, the sales representatives will receive a commission of 1% of the net domestic billings of customers subscribed through any sales representative of the Company recruited by the sales representative. The sales representatives will receive substantially all of the payments under these agreements if they die or are terminated, with or without cause, during the term of the agreement. Another sales representative who also had a twenty-five year sales representative agreement, David Dalton, has received salary and commissions of $936,800, $757,255 and $667,585 for each of 1997, 1998 and 1999 under his agreement. For 1997, 1998 and 1999, Mr. Anderson, Ms. Riske and Mr. Cato received salary and commissions of approximately $232,000, $206,000 and $150,000; $99,000, $55,000 and $93,000; and $94,000, $134,000 and $133,000, respectively. In April 1998, Mr. Anderson resigned as an employee of the Company and, pursuant to the terms of a separation agreement with Mr. Anderson, the Company will pay him 100% of all amounts under his agreement until the Company completes an initial public offering, at which point he will receive 75% of such amounts for as long as the customer continues long distance service with the Company. In January 1999, all but ten of the sales representatives, who still had twenty-five year sales representative agreements, including Mr. Dalton and Ms. Riske, entered into new agreements with terms no longer than six years. In July 1999, Mr. Cato voluntarily agreed to terminate his contract and continues to work for the Company as a salaried employee. Of the remaining nine sales representatives with twenty-five year agreements, the Company settled with five of them and will make payments that will conclude by September 2002, and terminated the agreements with the other four. With respect to these four former sales representatives, the Company is obligated to pay them commissions for twenty-five years from the date of their termination. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements The Financial Statements listed below are filed as part of this Form 10-K following the signature page hereof beginning on page F-1. Index to Consolidated Financial Statement Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1998 and 1999 39 3 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1998 and 1999 Consolidated Statements of Stockholders' Deficiency for the Years Ended December 31, 1997, 1998 and 1999 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999 Notes to Consolidated Financial Statements (b) Exhibits 3.1 - Certificate of Incorporation of the Company 3.2 - Bylaws of the Company 3.3 - Secretary certificate regarding amended and restated bylaws 4.1 - Form of certificate representing shares of the Company's common stock 4.2 - Form of Type A Redemption Agreement 4.3 - Form of Type B Redemption Agreement 4.4 - Form of Type C Redemption Agreement 4.5 - Form of Type D Redemption Agreement 4.6 - Form of Convertible Note 4.7 - Promissory Note dated April 20, 1999, payable by the Company to C.A.S.E., Inc. 4.8 - Promissory Note dated April 20, 1999, payable by the Company to John Damoose 10.1 - Agreement, dated as of April 13, 1998, between the Company and Carl Thompson 10.2 - First Amendment to April 13, 1998 Agreement between Amerivision Communications, Inc. and Carl Thompson, dated as of December 31, 1998, among the Company, Carl Thompson and Willeta Thompson 10.3 - Amended and Restated Employment Agreement, dated as of May 24, 1999 between the Company and Stephen D. Halliday 10.4 - Amended and Restated Stock Agreement, dated as of May 24, 1999, among the Company, Jay A. Sekulow and Tracy Freeny 10.5 - Amended and Restated Stock Agreement, dated as of May 24, 1999, among the Company, John Damoose and Tracy Freeny 10.6 - Employment Agreement, dated as of May 24, 1999, between the Company and John E. Telling 10.7 - Employment Agreement dated as of May 24, 1999 between the Company and Tracy Freeny 10.8 - Reaffirmation of Commitments made in Employment Agreement of Stephen D. Halliday dated as of June 30, 1999 10.9 - Reaffirmation of Commitments made in Stock Agreement of Jay A. Sekulow dated as of June 30, 1999 10.10 - Agreement effective January 1, 1999, between the Company and VisionQuest 10.11 - Telemarketing Services Agreement, effective as of January 1, 1999 Between the Company and VisionQuest 10.12 - Clarification to Agreement, effective as of June 9, 1999, by and Between the Company and VisionQuest 10.13 - Asset Purchase Agreement, dated as of April 30, 1999, among Hebron, the Company, Tracy Freeny, Carl Thompson and S. T. Patrick. 10.14 - Lease/License Agreement, dated as of April 30, 1999 between Hebron and the Company. 10.15 - Form of Promissory Note payable by the Company to Hebron (form to be used with respect to Switch Note and Internet Note) 10.16 - Promissory Note dated February 1, 1999, in the original principal amount of $2,274,416 payable by the Company to Hebron 10.17 - Capital Stock Escrow and Disposition Agreement dated April 30, 1999 among Tracy C. Freeny, Hebron and Bush Ross Gardner Warren & Rudy, P.A. 10.18 - Loan and Security Agreement dated as of February 4, 1999 between 10.18.1 - Amendment Number One to Loan and Security Agreement dated as of October 12, 1999 between the Company and Coast Business Credit 10.18.2 - Amendment Number Two to Loan and Security Agreement dated as of May 10, 2000 between the Company and Coast Business Credit 10.19** - Telecommunications Services Agreement dated April 20, 1999 by and between the Company and WorldCom Network Services, Inc. 10.20** - Program Enrollment Terms dated April 20, 1999 between the Company and WorldCom Network Services, Inc. 10.21 - Security Agreement dated April 20, 1999 by and between the Company and WorldCom Network Services, Inc. 10.22 - Letter Agreement dated July 14, 1999 between the Company and Tracy C. Freeny 10.23 - Employment Agreement dated December 31, 1998, between the Company and Kerry Smith 10.24 - Letter Agreement dated as of December 31, 1999 between the Company and John Telling 10.25 - Royalty Agreement dated as of January 1, 1999 between the Company and Regency Productions, Inc.
40 4 10.26 - Royalty Agreement effective as of January 1, 1999 between the Company and Christian Advocates Serving Evangelism, Inc. 10.27 - Stock Incentive Plan 21.1 - List of subsidiaries of the Company 27.1 - Financial Data Schedule
** Information from this agreement has been omitted because the Company has requested confidential treatment. The information has been filed separately with the Securities and Exchange Commission. *** Incorporated by reference to the Company's Registration Statement on FORM 10/A and FORM 10, as appropriate. 41 5 SIGNATURES Pursuant to the requirements of the Section 13 of Securities Exchange Act of 1934, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. AMERIVISION COMMUNICATIONS, INC. Date: May 25, 2001 By: /s/ Stephen D. Halliday ------------------------ Stephen D. Halliday President and Chief Executive Officer By: /s/ David E. Grose ------------------- David E. Grose Vice President and Chief Financial Officer (Principal Financial Officer) By: /s/ Jay Sekulow --------------- Jay Sekulow Vice Chairman of the Board and Director By: /s/ John Damoose ---------------- John Damoose Director By: /s/ Tracy Freeny ---------------- Tracy Freeny Chairman and Director 42 6 Audited Consolidated Financial Statements AMERIVISION COMMUNICATIONS, INC. As of December 31, 1998 and 1999, and for the Years Ended December 31, 1997, 1998 and 1999 Independent Auditors' Report.................................................F-1 Consolidated Balance Sheets..................................................F-2 Consolidated Statements of Operations........................................F-4 Consolidated Statements of Stockholders' Deficiency..........................F-5 Consolidated Statements of Cash Flows........................................F-6 Notes to Consolidated Financial Statements...................................F-8
7 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders AmeriVision Communications, Inc. Oklahoma City, Oklahoma We have audited the accompanying consolidated balance sheets of AmeriVision Communications, Inc. as of December 31, 1998 and 1999, and the related consolidated statements of operations, stockholders' deficiency, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe 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 AmeriVision Communications, Inc. at December 31, 1998 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. As more fully discussed in Note O to the financial statements, subsequent to the issuance of the Company's 1999 financial statements and our report thereon dated March 31, 2000, the Company's management and Board of Directors determined that the original employment and stock agreements entered into with certain of its officers and directors had not been considered. In addition, the Company did not properly account for certain shares of its common stock, for which redemption was outside of its control. In our original report we expressed an unqualified opinion on the 1999 financial statements and our opinion on the revised statements, as expressed herein, remains unqualified. /s/ Cole & Reed, P.C. Oklahoma City, Oklahoma March 31, 2000, except for Notes N and O, for which the effective date is December 6, 2000 F-1 8 CONSOLIDATED BALANCE SHEETS (dollars in thousands) AMERIVISION COMMUNICATIONS, INC.
December 31 1998 1999 ------------- ------------- (Restated) (Restated) ASSETS CURRENT ASSETS Cash and cash equivalents $ 635 $ 991 Accounts receivable, net of allowance for uncollectible accounts of $393 and $500 at December 31, 1998 and 1999, 16,058 16,743 Receivables from related parties 152 -- Investment in and note receivable from affiliate 578 -- Prepaid expenses and other current assets 231 428 ------------- ------------- TOTAL CURRENT ASSETS 17,654 18,162 OTHER ASSETS Property and equipment, net 1,118 5,775 Net deferred income tax benefits 5,577 3,600 Covenants not to compete 546 3,200 Asset held for disposal 500 -- Other assets 179 357 ------------- ------------- 7,920 12,932 TOTAL ASSETS $ 25,574 $ 31,094 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. F-2 9 CONSOLIDATED BALANCE SHEETS (dollars in thousands)--Continued AMERIVISION COMMUNICATIONS, INC.
December 31 1998 1999 ------------ ------------ (Restated) (Restated) LIABILITIES AND STOCKHOLDERS' DEFICIENCY CURRENT LIABILITIES Revolving line of credit $ -- $ 20,880 Accounts payable and accrued expenses 21,532 14,029 Accounts payable to related parties 3,232 -- Borrowings under accounts receivable based credit facilities 7,964 -- Accrued interest payable 292 5 Short-term notes payable to individuals 5,268 553 Loans and notes payable to related parties, current portion 686 2,657 Current portion of other notes payable and capital lease obligations 2,315 2,300 ------------ ------------ TOTAL CURRENT LIABILITIES 41,289 40,424 LONG-TERM DEBT TO RELATED PARTIES, net of current portion 4,218 5,425 ACCRUED DISTRIBUTIONS TO RELATED PARTY 3,225 3,201 LONG-TERM DEBT, net of current portion 1,046 3,694 REDEEMABLE COMMON STOCK, carried at redemption value 1,755 1,639 Shares outstanding at December 31, 1998: 15,737 Shares outstanding at December 31, 1999: 15,537 COMMON STOCK SUBJECT TO RESCISSION 1,685 469 STOCKHOLDERS' DEFICIENCY Common Stock--par value $0.10 per share, 82 82 authorized 1,000,000 shares total issued and outstanding: December 31, 1998: 839,127 December 31, 1999: 838,927 net of redeemable shares and shares subject to rescission: December 31, 1998: 823,390 December 31, 1999: 823,390 Additional paid-in capital 8,816 10,228 Unearned compensation (465) (317) Retained earnings (deficit) (36,077) (33,751) ------------ ------------ TOTAL STOCKHOLDERS' DEFICIENCY (27,644) (23,758) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 25,574 $ 31,094 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 10 CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except share and per share amounts) AMERIVISION COMMUNICATIONS, INC.
Years Ended December 31 1997 1998 1999 ------------- ------------- ------------- (Restated) (Restated) NET SALES $ 113,351 $ 124,232 $ 114,661 OPERATING EXPENSES Cost of telecommunication services 44,711 48,787 53,050 Cost of telecommunication services provided by related parties 13,529 14,736 1,469 Selling, general and administrative expenses 44,530 49,523 47,645 Selling, general and administrative expenses to related parties 5,893 6,805 -- Depreciation and amortization 683 2,102 2,899 ------------- ------------- ------------- TOTAL OPERATING EXPENSES 109,346 121,953 105,063 ------------- ------------- ------------- INCOME FROM OPERATIONS 4,005 2,279 9,598 OTHER INCOME (EXPENSE) Interest expense and other finance charges (3,245) (4,993) (4,873) Interest expense and other finance charges to related parties (924) (974) (698) (Loss) recovery on loans and other receivables -- (552) 182 Net gain (loss) on long-lived assets -- (215) (103) Equity in income (losses) of affiliates (99) 41 -- Other income 14 59 95 ------------- ------------- ------------- (4,254) (6,634) (5,397) ------------- ------------- ------------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) (249) (4,355) 4,201 INCOME TAX EXPENSE (BENEFIT) 92 (700) 1,977 ------------- ------------- ------------- NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (341) (3,655) 2,224 ------------- ------------- ------------- NET INCOME (LOSS) $ (341) $ (3,655) $ 2,224 ============= ============= ============= BASIC EARNINGS (LOSS) PER SHARE $ (1.01) $ (4.32) $ 2.83 ============= ============= ============= DILUTED EARNINGS (LOSS) PER SHARE $ (1.01) $ (4.43) $ 2.35 ============= ============= ============= Weighted average number of shares outstanding Basic earnings (loss) per share 799,398 804,045 823,390 ============= ============= ============= Diluted earnings (loss) per share 799,398 825,004 947,531 ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements. F-4 11 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (dollars in thousands) AMERIVISION COMMUNICATIONS, INC.
Nonredeemable Common Stock -------------------------- Additional Retained Number of Paid-in Unearned Earnings Shares Amount Capital Compensation (Deficit) Total ------------ ----------- ---------- ------------ ---------- ---------- BALANCE AT JANUARY 1, 1997 (Restated) 789,926 $ 79 $ 3,121 $ -- $ (26,134) $ (22,934) Acquisition and cancellation of nonredeemable common stock (100) -- (5) -- (10) (15) Expiration of redemption obligations applicable to redeemable common stock 10,617 1 686 -- -- 687 Expiration of potential rescission claims on nonredeemable common stock -- -- 2,892 -- -- 2,892 Accretion of redemption value of redeemable common stock -- -- -- -- (470) (470) Distributions to nonredeemable stockholders ($7.54 per share) -- -- -- -- (5,646) (5,646) Net loss -- -- -- -- (341) (341) ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1997 (Restated) 800,443 80 6,694 -- (32,601) (25,827) Expiration of redemption obligations applicable to redeemable common stock 199 -- 19 -- -- 19 Expiration of potential rescission claims on nonredeemable common stock 1,530 -- -- 1,530 Decrease in redemption value of redeemable common stock -- 179 179 Shares reserved for restricted stock awards to Company officer and directors 22,748 2 545 (547) -- -- Vesting of restricted stock awards and stock options 28 82 -- 110 Net loss -- -- -- -- (3,655) (3,655) ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1998 (Restated) 823,390 82 8,816 (465) (36,077) (27,644) Decrease in redemption value of redeemable common stock -- -- -- -- 102 102 Expiration of potential rescission claims on nonredeemable common stock 1,216 -- -- 1,216 Shares reserved for detachable stock warrants issued with convertible notes -- -- 158 -- -- 158 Vesting of restricted stock awards and stock options -- -- 38 148 -- 186 Net income -- -- -- -- 2,224 2,224 ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1999 (Restated) 823,390 $ 82 $ 10,228 $ (317) $ (33,751) $ (23,758) ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-5 12 CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) AMERIVISION COMMUNICATIONS, INC.
Years Ended December 31 1997 1998 1999 ------------ ------------ ------------ (Restated) (Restated) OPERATING ACTIVITIES Net income (loss) $ (341) $ (3,655) $ 2,224 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation of property and equipment 611 464 1,890 Amortization of intangible assets 72 1,638 1,009 Equity in undistributed net (income) losses of affiliates 99 (41) -- Losses on other receivables -- 552 -- Impairment loss (recovery) on asset held for disposal -- 215 (22) Loss on disposal of fixed assets -- -- 125 Deferred income tax expense (benefit) 92 (700) 1,977 Issuance of detachable stock warrants -- -- 158 Stock compensation expense -- 110 186 Changes in assets and liabilities: Decrease (increase) in operating assets: Accounts receivable (5,575) 2,187 (685) Sale of accounts receivable 2,435 -- -- Receivables from related parties (503) 351 152 Other receivables (85) 194 -- Prepaid expenses and other assets 20 (62) 709 Increase (decrease) in operating assets: Accounts payable and accrued expenses 518 5,412 (7,503) Accounts payable to related parties 1,221 410 (1,597) Interest payable (188) 43 (287) ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,624) 7,118 (1,664) INVESTING ACTIVITIES Purchases of property and equipment (337) (353) (2,983) Deposits paid on fixed assets -- -- (355) Proceeds from sale of fixed assets -- -- -- Proceeds from sale of asset held for disposal -- -- 522 Release of investments pledged 85 55 10 Advances and loans to related parties (670) -- -- Repayments from related parties -- 150 -- ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (922) (148) (2,806) FINANCING ACTIVITIES Proceeds of loans from related parties 3,699 1,554 262 Repayments of loans and other obligations to related parties (4,324) (3,051) (1,297) Net increase (decrease) in borrowings under line of credit arrangements 6,790 (2,850) 12,916 Loan closing fees paid -- (169) (345) Proceeds from notes payable and long-term debt 590 250 2,553 Repayment of notes and leases payable (224) (304) (4,510) Proceeds from short-term notes payable to individuals 773 150 -- Repayment of short-term notes payable to individuals (322) (444) (4,715) Accrued distributions paid to related party -- (242) (24) Distributions paid to other stockholders (4,906) (1,090) -- Redemptions of common stock (68) (154) (14) ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,008 (6,350) 4,826 ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (538) 620 356 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 553 15 635 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15 $ 635 $ 991 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-6 13 CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)--Continued AMERIVISION COMMUNICATIONS, INC.
Years Ended December 31 1997 1998 1999 ---------- ---------- ---------- (Restated) (Restated) SUPPLEMENTAL CASH FLOW DISCLOSURES Interest and other finance charges paid $ 4,357 $ 5,924 $ 5,521 ========== ========== ========== Income taxes paid $ -- $ -- $ 60 ========== ========== ========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquisition of assets and increase in liability to related company $ -- $ 192 $ -- ========== ========== ========== Assets acquired by incurring capital lease obligations $ 375 $ 70 $ 351 ========== ========== ========== Assets acquired by incurring capital lease obligations and notes payable to related parties $ -- $ -- $ 2,983 ========== ========== ========== Conversion of redeemable common stock to subordinated note payable $ -- $ 928 $ -- ========== ========== ========== Issuance of shares for restricted stock awards to Company directors $ -- $ 547 $ -- ========== ========== ========== Exchange of investment in common stock and note receivable for lease of telemarketing facility and equipment $ -- $ -- $ 578 ========== ========== ========== Conversion of trade payables to related party to notes payable to related party $ -- $ 1,224 $ 1,635 ========== ========== ========== Termination settlement obligations to former officer and employees $ -- $ 2,184 $ 3,834 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-7 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Description of Business: AmeriVision Communications, Inc. (the "Company") was incorporated in Oklahoma on March 15, 1991. The Company provides long distance telecommunications services to subscribers throughout the United States, and completes subscriber calls to all directly dialable locations worldwide. The Company is a predominantly switchless long distance reseller, and obtains the majority of its switching and long haul transmission of its service from WorldCom, Inc. ("WorldCom"). Beginning in 1996, Hebron Communications Corporation ("Hebron"), a related party, also began providing the Company with a portion of its switching and transmission services. Hebron leases switching facilities in Oklahoma City and Chicago. Both WorldCom and Hebron bill the Company, at contractual per-minute rates, which vary depending on the time, distance, and type of call, for the combined usage of the Company's nationwide base of customers. Effective February 1, 1999, the Company assumed operations of the switches. In 1998, the Company began developing an internet access service product, and in July 1999, began marketing the service, which includes an optional filter. Principles of Consolidation: The Company owns 100% of the common stock of AmeriTel Communications, Inc. and AmeriVision Network, Inc. Neither of these companies has any operations nor any assets or liabilities. Accounting Estimates: The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Cash Equivalents: The Company defines cash equivalents as highly liquid, short-term investments with an original maturity of three months or less. Investments pledged as collateral for loans are not considered cash equivalents. Accounts Receivable: The Company bills its customers either directly, through billing agreements with Local Exchange Carriers ("LEC"), or through two unrelated billing and collection companies, collectively referred to as the Billing Agents, which bill the customer through LECs with which the Company does not have a LEC billing agreement. At December 31, 1998 and 1999, approximately 69% and 75%, respectively, of the Company's total accounts receivable were from LECs or Billing Agents. In addition, approximately 8% of total accounts receivable at both December 31, 1998 and 1999, respectively, were attributable to revenues earned in December of the respective year but not billed to the customers until the normal billing dates in January of the following year. Property and Equipment: Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is provided using straight-line and accelerated methods over the estimated useful lives of the assets. Estimated lives range from three to seven years for equipment, and five to seven years for other fixed assets. Maintenance and repairs are charged to expense as incurred. F-8 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued Asset Held for Disposal: The Company's asset held for disposal at December 31, 1998, is carried at the lower of book value or fair value, less estimated costs to sell. Advertising Costs: Advertising and telemarketing costs are expensed as incurred, and totaled approximately $9,942, $11,912 and $4,640 during the years ended December 31, 1997, 1998 and 1999, respectively. Investment in and Note Receivable from Affiliate: At December 31, 1998, the investment in and note receivable from affiliate included the underlying book value of the Company's 13.25% ownership in VisionQuest Marketing Services, Inc. ("VisionQuest"), and the balance due related to a note receivable from VisionQuest. As discussed in Note B, the Company and VisionQuest terminated their business relationship effective January 1, 1999. Interest Expense and Other Finance Charges: Interest expense and other finance charges included interest incurred on short-term and long-term borrowings, interest and related fees on the Company's line of credit facilities, and interest, penalties and late charges on amounts payable to vendors and taxing authorities. Revenue Recognition: The Company recognizes telecommunications revenues when the Company's customers make long distance telephone calls from their business or residential telephones or by using the Company's telephone calling cards. Income from prepaid telephone calling cards is recognized as the telephone service is utilized. Income from internet service is recognized in the month that the service is provided. Deferred Loan Closing Costs: Costs incurred in connection with the Company's revolving credit facility with a financial institution have been capitalized and are being amortized over the term of the credit facility. Royalty Payments to Non-profit Organizations: The Company pays royalties of approximately 10% of a customer's commissionable long distance revenues to a non-profit organization. This royalty payment is included in selling, general and administrative expenses. Concentrations of Credit Risk: Financial instruments that potentially subject the Company to concentrations of credit risk include accounts receivable from customers and accounts payable to its carrier. The Company's customer base is distributed throughout the United States, and the Company does not require any collateral from its customers. Although significant portions of the Company's revenues are billed through the Billing Agents and LECs, the ultimate collectibility of these accounts is dependent upon the status of the individual customer. There are no significant concentrations of revenues or accounts receivable among individual customers. F-9 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued Concentrations of Credit Risk, continued: The Company enlists the support of non-profit organizations to promote the Company's services in return for the Company's royalty payment. The loss of the support of one or more significant non-profit organizations could have a material, adverse impact on the Company's results of operations. Approximately 44%, 42%, and 40% of the Company's net sales during the years ended December 31, 1997, 1998 and 1999, respectively, were earned from customers that have designated the ten (10) most significant non-profit organizations as recipients of the Company's royalty payment. The Company purchases the majority of its long distance switching and network services from WorldCom. The Company maintains deposits at financial institutions that at times exceed federally insured limits. Management does not believe there is any significant risk of loss associated with this concentration of credit. Redeemable Common Stock: Redeemable common stock is carried at its redemption value. Redemption value includes the proceeds received upon issuance of the common stock, and is increased by accretions resulting from the Company's agreement to redeem the stock at cost plus annual rates of return, as specified in the redemption agreements (see Note H). The carrying value is reduced by quarterly returns of capital payments made to the holders of redeemable common stock, and by the redemption price paid to each selling stockholder. As the redemption options expire, as more fully discussed in Note H, the principal amounts invested by the individual stockholders are reclassified as nonredeemable common stock. Nonredeemable Common Stock: Nonredeemable common stock consists of stock issued to certain officers upon formation of the Company, and to other stockholders with whom the Company had not executed a redemption agreement. Nonredeemable common stock also includes the principal amounts invested by stockholders whose redemption options have expired. As discussed in Notes H and I to the financial statements, certain of the Company's nonredeemable common stock is characterized as Common Stock Subject to Rescission in the Company's consolidated balance sheets. Income Taxes: Income tax expense is based on pretax financial accounting income. The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. This method also requires the recognition of future tax benefits such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not. F-10 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued Earnings (Loss) Per Share: The Company presents basic and diluted earnings (loss) per share. Basic earnings (loss) per share is computed by dividing earnings (losses) available to nonredeemable common stockholders by the weighted average number of nonredeemable shares outstanding during the year. Diluted earnings (loss) per share reflect per share amounts that would have resulted if dilutive potential nonredeemable common stock had been converted to nonredeemable common stock. Potential nonredeemable common stock includes redeemable common stock, stock warrants, stock options and convertible notes payable. For 1997, conversions of potential nonredeemable common stock were not included in the computation of earnings (loss) per share, however, since they would have resulted in an antidilutive effect. Covenants Not to Compete: Covenants not to compete are discounted to their present value based upon the terms of the agreement, and are being amortized over the effective period of the covenant, generally 2 to 4 years. Fair Values of Financial Instruments: The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents--The carrying amount of cash and cash equivalents approximates its fair value, because of the short maturities of such instruments. Short and long-term debt--Based upon the Company's current incremental borrowing rates and the general short-term nature of most debt, the carrying amount of short and long-term debt approximates its fair value. Redeemable Common Stock--The Company believes that the fair value of its redeemable common stock is not significantly different from its carrying amount. The redeemable common stock is not traded in the open market. Stock-Based Compensation: The Company accounts for stock-based compensation plans with employees in accordance with Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees", and its various interpretations. Under APB 25, the Company recognizes compensation expense equal to the difference between the fair value of the common stock at the date of the grant and the exercise price of the option. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", prescribes the recognition of compensation expense based on the fair value of options on the grant date, but allows companies to apply APB 25 if certain pro forma disclosures are made assuming hypothetical fair value method application. See Note K for pro forma disclosures required by SFAS No. 123 plus additional information on the Company's stock-based compensation plans. The Company accounts for stock option plans with nonemployees in accordance with SFAS No. 123. Reclassifications: Certain amounts in the prior year financial statements have been reclassified to conform to the presentation used in the current year. F-11 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE B--RELATED PARTY TRANSACTIONS Transaction with Company Founders The two founders of the Company acquired their original shares of Common Stock upon formation of the Company without payment of cash consideration. These shares represent substantially all of the shares of Common Stock owned by each of the two founders. From 1994 through 1997, the Company declared quarterly distributions to all of its stockholders, including distributions of $3,910 to one founder and $1,368 to the other founder. The distributions were accrued on the same per share basis as paid to all other stockholders of the Company. Through December 31, 1997, distributions totaling $444 and $160 had been paid to the two founders. In 1998 and 1999, the Company paid accrued distributions of $241 and $24, respectively, to one founder, leaving a remaining balance accrued at December 31, 1999 of $3,201. In 1998, the Company paid accrued distributions totaling $273 to the other founder until his resignation from the Company in April 1998. The Company then began paying this founder the accrued distributions in connection with his separation agreement with the Company, as described below. At December 31, 1999, the remaining balance payable pursuant to the separation agreement was $98. In a letter agreement dated July 14, 1999, the Company and one of the founders, currently Chairman of the Board of Directors, agreed to defer payment of such amounts owed to this founder until such time as the Company's financial condition further improved and it had funds available, legally and in good business practice, to pay any such accrued distributions. In consideration for this deferral and in consideration of subordination of the accrued distributions to the Company's credit facility (see Note D), the Company agreed to pay this founder in addition to such founder's salary, $300 per year, until the payment of the accrued distributions was resumed and, if resumed, all amounts previously paid pursuant to the agreement would be credited against his accrued distributions. During 1999, the Company paid the Chairman $150 pursuant to this agreement. In April 1998, the Company's other founder resigned. This individual was an officer and director at the time of his resignation. In connection with his resignation, the Company and this founder agreed to the following: o The Company agreed to pay the accrued distributions, totaling $935 at the time of his resignation, in the amount of $40 per month. At December 31, 1999, the remaining balance payable was $98. o The Company also agreed to pay this founder $20 per month for the remainder of his life, in exchange for the former officer's agreement to (1) not compete with the Company for one year from the date of the agreement, (2) agree to take no actions significantly detrimental to the Company (other than competition), and (3) waive any claims against the Company as of the date of the agreement. F-12 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE B--RELATED PARTY TRANSACTIONS--Continued Transactions with Company Founders, Continued The Company recorded a liability of $2,184 as of the date of the agreement, based upon the present value of the obligation over the expected life of the former officer at the date of the agreement. The Company also recorded a covenant not to compete of $2,184 at the date of the agreement, and amortized this covenant over the one-year term. In 1995 and 1996, one of the Company's founders, who is currently Chairman of the Board of Directors, and at that time the President and a director of the Company; the other founder, now resigned from the Company, at that time Senior Vice President and a director of the Company; and the latter founder's wife sold 21,204 shares of Company Common Stock to 100 individuals at the aggregate price of approximately $2,480. The selling price ranged from $40 per share to $150 per share, averaging $117 per share. The sales of the stock were originally intended to be issuances of Company stock. The proceeds of the sales were deposited by the Company, and original stock certificates were issued by the Company to the stockholders. The Company also issued redemption agreements to substantially all of the purchasing stockholders (see Note H for a description of the redemption agreements). These redemption agreements obligated the Company to buy back the stock at the original purchase price plus a guaranteed return, as specified in the agreements. Subsequently, the sales of the stock were characterized as sales of the founders' shares. The founders and the related family member then classified the transactions as loans from them to the Company. The loans carried an interest rate of 8% per annum, and matured two years from the date of issuance. The Company repaid these notes payable to the founders and related family member in 1997 and 1998, and all such notes have been repaid in full. In connection with the above transactions, the Company has redeemed 5,278 shares and paid a total of $1,060 through December 31, 1999, to the stockholders that originally purchased the common stock from the Company. The amounts paid consisted of $790 for the amounts originally paid by the stockholders and $270 for the specified rate of return, as described in the agreements. Of the total redemptions, approximately $780 was redeemed in 1998, and total payments in 1998 and 1999 pursuant to these redemptions was $42 and $1,006, respectively. Through 1998, the two founders received sales commissions from the Company, which were based on the amount of revenues the Company earned from certain customers. The total amount of commissions was approximately 5% of the revenues generated from all customers of the Company for which no other sales agent or representative of the Company was receiving a commission. The total commissions from such sales were split among the two founders and a third individual. In 1997 and 1998, commissions paid to the two founders totaled $440 and $331, respectively. F-13 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE B--RELATED PARTY TRANSACTIONS--Continued Transactions with Other Officers and Directors A member of the Company's Board of Directors is affiliated with or controls several organizations that participate in transactions with the Company. In connection with the Company's 10% royalty program, the Company incurred approximately $775, $1,060, and $1,107 of royalty expenses in 1997, 1998 and 1999 to organizations affiliated with or controlled by this director. The Company also incurred advertising expenses of $1,803, $1,918, and $1,908 in 1997, 1998 and 1999, respectively, to organizations affiliated with or controlled by this director. These organizations also earned sales commissions in addition to the 10% royalty payments. During the years ended December 31, 1998 and 1999, sales commissions earned by these organizations totaled approximately $497 and $102, respectively. In 1999, the Company terminated the existing sales agreements and entered into new agreements. The new agreements provide for the Company to pay the organizations an aggregate of $1,491 over three years, in exchange for the organizations' release of all prior claims and obligations, and an agreement not to compete with the Company over the term of the agreements. The Company paid $497 in 1999, pursuant to these agreements. The Company accrued the present value of the obligations and is amortizing the noncompete agreements over the term of the agreements. The liability to these organizations is included in the financial statement caption Notes Payable and Long-Term Debt to Related Parties, and is further described in Note F below. In December 1999, a Company officer and director, who is also the President of Hebron, resigned from the Company. In connection with his termination agreement, the Company agreed to pay the former director $1,359 over four (4) years, in exchange for the director agreeing not to compete with the Company over that term. The Company accrued the present value of this obligation and is amortizing the noncompete agreement over the term of the agreement. The liability to the former director is included in Notes Payable and Long-Term Debt to Related Parties, and is further described in Note F. A member of the Company's Board of Directors is affiliated with a non-profit organization that receives financial support from the Company in exchange for promotion of the Company's products and services. During the year ended December 31, 1999, the Company paid this organization $175. No such amounts were paid in 1997 or 1998. During the years ended December 31, 1997, 1998 and 1999, the Company expended approximately $69, $741 and $767, respectively, to a law firm in which the Company's current President and CEO is a former partner. The CEO continues to serve as Of Counsel for the law firm in matters that do not involve the Company. The CEO does not share in or otherwise benefit from the legal fees paid to the law firm by the Company. The law firm bills the Company at its standard hourly rates for services provided to the Company. F-14 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE B--RELATED PARTY TRANSACTIONS--Continued VisionQuest VisionQuest was related to the Company through common ownership, management, and family relationships. Through June 30, 1998, the Company and its two founders collectively owned approximately 60% of the outstanding common stock of VisionQuest. In addition, the Company's two founders served on the Board of Directors of VisionQuest, and the son-in-law of one of the founders is the president of VisionQuest, and also a member of the VisionQuest Board of Directors. As a result of this relationship, the Company was accounting for its investment in VisionQuest using the equity method of accounting through June 30, 1998. Effective July 1, 1998, VisionQuest acquired all of the VisionQuest common stock owned by the founder that resigned in April 1998, thus reducing the Company's effective ownership percentage in VisionQuest to 48% of the outstanding common stock. Members of VisionQuest management owned the remaining 52%. After this transaction, the Company no longer had the ability to significantly influence the management or operations of VisionQuest, and discontinued using the equity method of accounting as of July 1, 1998. The carrying amount of the Company's investment as of that date was $58. As discussed below, the Company and VisionQuest terminated all of their business relationships effective January 1, 1999. The Company utilized VisionQuest as its provider of telemarketing services from 1993 through December 31, 1998. Total amounts paid to VisionQuest for telemarketing services during the years ended December 31, 1997 and 1998, were approximately $5,242 and $6,209, respectively. Telemarketing expenses incurred in 1998 included the direct costs of telemarketing services provided by VisionQuest to the Company during 1998, plus reimbursement of all of VisionQuest's operating expenses and corporate overhead. From January 1997 to October 1997, the Company paid approximately $1,330 to VisionQuest related to direct operating expenses incurred by VisionQuest. In November 1997, the Company and VisionQuest, in anticipation of a merger of the Company and VisionQuest, agreed that a portion of the operating expenses should be repaid to the Company. As a result, in April 1998, and effective December 31, 1997, VisionQuest signed a note payable to the Company, totaling $670, to repay these expenses. In June 1998, VisionQuest repaid $150 of this note to the Company. The merger did not occur and as a result, the balance of $520 was canceled effective January 1, 1999. This was as part of an agreement to terminate all business relationships between the two companies, as discussed below. F-15 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE B--RELATED PARTY TRANSACTIONS--Continued VisionQuest, Continued As a result of the Company's payment of VisionQuest's corporate payroll and operating expenses in 1997 and 1998, the Company paid VisionQuest a higher rate for its telemarketing services than VisionQuest charged independent third parties. The Company also paid VisionQuest a higher rate for telemarketing services than the Company could have obtained in an arms-length transaction with an unaffiliated third party that provides the same telemarketing services. The Company believes that the amounts it paid to VisionQuest for telemarketing services were higher than what it could have obtained in an arms-length transaction from an unaffiliated third party by as much as $1,000 and $3,000 in 1997 and 1998, respectively. Effective January 1, 1999, the Company and VisionQuest mutually terminated their business relationship. The Company acquired from VisionQuest the rights to use all of the assets located in VisionQuest's Tahlequah, Oklahoma telemarketing center, from January 1, 1999 through September 30, 1999, in exchange for all of the Company's ownership interests in VisionQuest, all of the Company President's ownership interests in VisionQuest (which were transferred to the Company for no consideration immediately prior to the transfer), and cancellation of the note receivable between the Company and VisionQuest. The agreement also provided for a release of all claims and obligations between the two companies. Upon transfer of the stock and cancellation of the note receivable, the Company reclassified its investment in and note receivable from VisionQuest, totaling $578, to a prepaid operating lease, and amortized the amount to expense over the term of the agreement. Hebron Hebron was incorporated in November 1995 to provide switching network services to the Company. Hebron has a relationship with the Company through partially integrated management. The Company's Chairman and the former Senior Vice President served on Hebron's Board of Directors from its inception in November 1995 until their resignation in November 1996. In addition, the President of Hebron served on the Company's Board of Directors from October 1998 through December 1999 and another Company director is also on Hebron's Board of Directors. Cost of sales in 1997, 1998 and 1999 includes approximately $13,529, $14,736 and $1,469, respectively, of telecommunications services provided by Hebron. In 1997, Hebron charged the Company a higher rate for the switched one-plus interstate and intrastate services it provided to the Company than the Company could have obtained from its primary carrier. The higher rates were the result of the Company's primary carrier lowering its rates in 1997. The Company believes that the amounts it paid to Hebron for telecommunication services in 1997 were approximately $1,000 higher than what it could have obtained from its primary carrier. Effective January 1998, Hebron agreed to lower its rates so that they matched those of the Company's primary carrier. F-16 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE B--RELATED PARTY TRANSACTIONS--Continued Hebron, Continued Hebron also charged the Company interest of 18% per annum on the accounts payable for telecommunication services that are over 55 days from the invoice date. This interest rate is comparable to the rate charged by the Company's primary carrier. During 1997, 1998 and 1999, the Company incurred interest expense of approximately $35, $129 and $22, respectively, related to past due accounts payable invoices. The Company's principal operating and administrative offices are located in an office building owned by Hebron. Total rent expense incurred to Hebron was approximately $110, $380 and $583 in 1997, 1998 and 1999, respectively. From December 1996 through October 1998, Hebron provided the Company with an account receivable line of credit facility (the "Hebron Loan Program"). The Hebron Loan Program provided for the Company to pay 18% interest on the amounts advanced under the credit facility, plus fees of 2% of billings processed and 2 cents per call record. As a result of the stated interest rate and the fees, the effective interest rate of this financing arrangement was approximately 58% in 1996, 1997 and 1998. This effective interest rate was higher than what the Company could have obtained in an arrangement with independent third parties. The Company incurred total interest and other related financing costs of approximately $805 and $885 in 1997 and 1998, respectively, under the Hebron Loan Program. At December 31, 1998, all advances under the Hebron Loan Program credit facility had been repaid. Receivables from related parties of $152 at December 31, 1998, consists of amounts that had been withheld as a reserve for interest and escrow fees under the Hebron Loan Program but which were reimbursed to the Company in January 1999. In 1997 and through July 1998, the Company transmitted a portion of its accounts receivables through one of its Billing Agents through an account maintained at the Billing Agent under Hebron's name. Hebron charged the Company a fee equal to 2% of the net revenues transmitted under this arrangement. The total fees incurred by the Company in 1997 and 1998 were approximately $135 and $101, respectively. In 1997 and 1998, Hebron periodically made loans to the Company for working capital purposes. The loans generally carried an interest rate of 10%. Total interest expense incurred on loans made by Hebron to the Company was approximately $46 and $6, respectively, during the years ended December 31, 1997 and 1998. At December 31, 1998, the Company owed Hebron $3,892 for telecommunications and other services incurred through that date. In addition, the Company agreed to reimburse Hebron for costs and expenses totaling approximately $563 incurred by Hebron in connection with the development of an internet service product. At December 31, 1998, $1,224 of this liability has been reclassified as a long-term obligation, as a result of the transactions described below. F-17 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE B--RELATED PARTY TRANSACTIONS--Continued Hebron, Continued Effective February 1, 1999, the Company and Hebron entered into an asset purchase agreement (the "Hebron APA"). Under the terms of the Hebron APA, the Company agreed to: (1) pay Hebron for all expenses that Hebron incurred prior to January 31, 1999, related to the switch network, and convert the balance owed to Hebron for telecommunications services previously provided, totaling approximately $2,300, to a note payable, (2) reimburse Hebron for its costs and expenses incurred on the Company's behalf in connection with the development of an internet service product, totaling approximately $584, and acquire the rights to the assets and assume all of the related lease obligations incurred by Hebron in connection with the internet service product, totaling approximately $1,200, and (3) purchase all of the switch assets at their net book value, assume all of the related switch lease obligations totaling approximately $1,300, and issue a note payable to Hebron for the net amount of $567. In connection with the Hebron APA, the Company issued a promissory note payable to Hebron totaling approximately $2,300 for item (1) discussed above. This note payable has been subordinated to the Company's credit facility described in Note D. Effective April 1, 2000 the Hebron APA was closed, and, the Company issued notes payable for the internet and switch assets, which were also subordinated to the Company's credit facility. Pursuant to a lease license agreement between the Company and Hebron, the Company assumed operations of the switch and internet assets effective February 1, 1999. Under the terms of the lease license agreement, the Company and Hebron agreed that Hebron would transfer to the Company custody and control of the switch and internet assets, and the Company shall hold and operate such assets as if the Company owned the assets. The terms of the lease license agreement also provided that the Company will assume all of the rights and obligations associated with owning and operating the switch and internet assets. The lease license agreement also provides that the Company will pay Hebron a monthly fee equal to the amount of interest that is payable on the switch and internet assets. Accordingly, the Company has recorded the assets and the related lease and note payable obligations in its financial statements effective February 1, 1999, and the statement of operations from February 1999 forward reflect the costs of operating those switches and internet assets. F-18 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE C--PROPERTY AND EQUIPMENT Property and equipment consists of the following:
December 31 1998 1999 ---------- ---------- Computer and telephone equipment $ 2,477 $ 3,150 Billing system -- 355 Switch equipment -- 1,938 Internet equipment 98 1,169 Leasehold Improvement 30 734 Other fixed assets 119 523 ---------- ---------- 2,724 7,869 Less accumulated depreciation 1,606 2,094 ---------- ---------- $ 1,118 $ 5,775 ========== ==========
As discussed in Note B above, the Company recorded the Oklahoma City and Chicago switches and the internet assets effective February 1, 1999. The total cost of these assets acquired by assuming the related lease obligations and issuing notes payable to Hebron for the net book value was approximately $2,926. The total cost of all assets held under capital lease obligations was $493 and $3,776 at December 31, 1998 and 1999, respectively. Accumulated depreciation of leased equipment was approximately $160 and $1,468 at December 31, 1997 and 1998, respectively. Depreciation expense on property and equipment, including depreciation on assets held under capital leases, was approximately $611, $464, and $1,890 during the years ended December 31, 1997, 1998, and 1999, respectively. In 1998, the Company determined that the carrying amount of the office building it owned but was no longer utilizing was impaired. The Company reduced the carrying amount from $715 to $500, which was the estimated fair value of the building based upon an appraisal, less the estimated costs to sell the building. The Company recognized a loss of $215 in 1998. In February 1999, the Company sold the building for $522, and realized a recovery of $22. NOTE D--LINE OF CREDIT ARRANGEMENTS The Company has a $30,000 line of credit facility (the "Credit Facility") with a financial institution. Borrowing availability is based upon collections multiples and earnings ratios, subject to the maximum line of credit. At December 31, 1999, the Company could borrow up to the full amount of the $30,000 availability under the Credit Facility. The outstanding balance at December 31, 1999, was $20,880. F-19 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE D--LINE OF CREDIT ARRANGEMENTS--Continued The Credit Facility matures on January 30, 2003, and carries an interest rate of prime plus 3.5%. The stated interest rate at December 31, 1999, was 11.5%. The weighted average effective interest rate in 1999, which includes amortization of loan origination costs, was 14.0%. The Credit Facility is secured by substantially all of the Company's assets, including accounts receivable and the Company's customer base. The Credit Facility is classified as a current liability in the Company's financial statements, because under the terms of the agreement, the Company is required to maintain a lockbox, and apply collections from customers to the outstanding amounts under the Credit Facility, and because the terms of the agreement provide the lender with the discretionary ability to declare the note due and payable. The Company incurred $169 and $345 in loan closing fees in 1998 and 1999, respectively, in connection with the Credit Facility. These fees are included in other assets and are being amortized over the term of the Credit Facility. In connection with closing the Credit Facility, several of the Company's creditors agreed to subordinate the Company's obligations to them in favor of the financial institution providing the Credit Facility. These creditors include Patrick Enterprises, Hebron, two members of the Company's Board of Directors, and a Company founder. Repayment of these obligations is limited as specified in the loan and security agreement between the Company and the financial institution. The total outstanding debt owed to subordinated creditors as of December 31, 1999, was approximately $5,259. In addition, one of the Company's founders agreed to subordinate accrued distributions, totaling $3,201 at December 31, 1999, in favor of the Credit Facility. The Credit Facility contains various financial and other covenants with which the Company must comply, including a minimum net worth requirement, as defined in the agreement, of negative ($12,000), restrictions on asset acquisitions, restrictions on the payment of dividends, and restrictions on principal and interest payments to subordinated creditors. At December 31, 1999, the Company was not in compliance with the restrictions on principal payments to certain subordinated creditors. However, the Company received a letter from the lender waiving the deficiencies. In 1997 and 1998, the Company had various line of credit arrangements with Hebron, as described in Note B, and with various unrelated third parties. The aggregate outstanding balance on the lines of credit was $7,964 at December 31, 1998. The effective interest rates ranged from 12.5% with one lender to 58% with Hebron during both 1997 and 1998. The average effective interest rates for all of the various agreements were approximately 28% and 18% in 1997 and 1998, respectively. As discussed in Note B, the line of credit arrangement with Hebron was discontinued in October 1998, and all outstanding advances had been paid in full as of December 31, 1998. The Company repaid the other credit facilities in full upon closing of the Credit Facility in February 1999. F-20 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE E--SHORT-TERM NOTES PAYABLE TO INDIVIDUALS Short-term notes payable to individuals consist of the following:
December 31 1998 1999 -------------- --------------- Convertible notes payable $ 421 $ 399 Advance payment loan program notes 4,077 154 Direct bill program notes 770 - -------------- --------------- $ 5,268 $ 553 ============== ===============
Convertible Notes Payable: In 1995, the Company issued promissory notes payable to approximately seventy-five (75) individuals, substantially all of which are convertible to common stock. These notes generally have no specified maturity date and are convertible to common stock at the option of the Company. Interest accrues at 10% and is payable quarterly. All of these notes are classified as current liabilities. The individual notes contain varying terms with regard to the conversion agreements. Some of the notes do not specify any conversion terms other than they are convertible at the option of the Company. Other notes specify that the conversion will be based on a specific price per share. Notes Payable - Advance Payment Loan Program: In November 1995, the Company initiated an Advance Payment Loan Program (APLP), under which individuals have lent the Company money to finance working capital needs. Although the loan agreements indicated that the loans were to be secured by accounts receivable from the LECs, no security agreements were perfected and all of the Company's LEC accounts receivables are pledged under the Company's Credit Facility, as discussed in Note D. Therefore, these loans are effectively unsecured. Interest on the APLP notes is 18% per annum, payable quarterly. In June 1999, the Company repaid in full the outstanding balances of substantially all lenders with a balance of $10 or less. In October 1999, the Company offered the remaining lenders to either (a) have their balances paid in full or (b) options to convert their notes to subordinated debt under various terms. Such conversions would be subject to the lenders qualifying as accredited investors. Substantially all of the investors chose to either have their notes repaid or did not respond to the Company's offer, and the Company repaid these amounts in December 1999. F-21 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE E--SHORT-TERM NOTES PAYABLE TO INDIVIDUALS--Continued Notes Payable - Direct Bill Program: In the fourth quarter of 1997, the Company obtained a series of loans from third parties, for the purpose of financing working capital operations. The loan agreements indicate that the security for the loans are the Company's accounts receivable arising from its customers which are billed directly by the Company, although no security agreements were perfected. These loans bore interest at rates of 20% to 25% per annum, payable quarterly. All of these notes were repaid in full in June 1999. NOTE F--NOTES PAYABLE AND LONG-TERM DEBT Related Parties Notes payable and long-term debt to related parties consists of the following:
December 31 1998 1999 ---------- ---------- Loan payable to a Company founder, made May 1998, unsecured, no specified interest rate or maturity date, balance paid in full in 1999 $ 98 $ -- Accrued distributions payable to a Company founder, unsecured, no stated interest rate, monthly payments of $40 until paid in full, subordinated to the Credit Facility in February 1999 575 98 Accrued termination obligation payable to a Company founder, effective April 1998, payment terms of $20 per month with an imputed interest rate of 11.25% over his estimated life at the date of the agreement, unsecured 2,169 2,161
F-22 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE F--NOTES PAYABLE AND LONG-TERM DEBT--Continued Related Parties, Continued Accrued payable to former Company director and current President of Hebron, effective December 1999, payment terms of $42 per month beginning in January 2000, and $21 per month beginning January 2001 through May 2004, imputed interest rate of 11.75%, unsecured $ -- $ 1,120 Accrued payable to Christian Advocates Serving Evangelism (C.A.S.E.), an organization affiliated with a Company director, effective January 1999, payment terms of $33 per month beginning in January 2000 through December 2001, imputed interest rate of 11.75%, unsecured -- 708 Accrued payable to Regency Productions, a company affiliated with a Company director, effective January 1999, payment terms of $9 per month beginning in January 2000 through December 2001, imputed interest rate of 11.75%, unsecured -- 183 Note payable to C.A.S.E., dated July 1997, unsecured, subordinated to the Credit Facility, restructured in April 1999, as described below 688 850 Note payable to Company director, dated June 2, 1998, unsecured, subordinated to Credit Facility, restructured in April 1999, as described below 150 100 Note payable to Hebron, dated February 1, 1999, with an original principal amount of $2,274, interest rate of 12.5% through November 1999, increased to 16.25% effective December 1999, subordinated to Credit Facility, monthly interest only payments plus specified prepayments of principal not to exceed $1,234 through March 2000, balance due August 1, 2000, secured by 50,000 shares of Company common stock owned by a Company founder -- 1,711 Payable to Hebron converted to note payable effective February 1, 1999, as described above 1,224 --
F-23 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE F--NOTES PAYABLE AND LONG-TERM DEBT--Continued Related Parties, Continued Note payable to Hebron for switch assets, effective upon closing of transaction, initial interest rate of 12.5%, interest only payments for 12 months, matures 18 months from effective date $ -- $ 567 Note payable to Hebron for internet assets and reimbursement of related expenses, effective upon closing of transaction, initial interest rate of 12.5%, interest only payments for 12 months, matures 18 months from effective date -- 584 ------------ ------------ 4,904 8,082 Amounts due within one year 686 2,657 ------------ ------------ $ 4,218 $ 5,425 ============ ============
In April 1999, the note payable with C.A.S.E. was restructured. The new note provided for additional advances of approximately $260, bringing the total outstanding balance to $850, and monthly interest only payments at 10% for five years, with the unpaid principal due at maturity in April 2004. The lender has the option to convert the note to common stock at a per share price equal to the lower of (1) the fair market value of the common stock on January 1, 1998, as determined by an appraisal, or (2) the lowest publicly traded price of the common stock three months following the establishment of a public trading market for the common stock. The terms of the agreement also provide for the Company to issue the organization warrants to purchase 3,400 shares of Company common stock at a strike price of $0.01 per share. In connection with the warrants, the Company valued the warrants using a minimum value of $41.50 dollars per share. The value was based upon an appraised value of the Company's common stock as of June 30, 1999. The Company does not believe that the appraised value of its common stock as of June 30, 1999 differed significantly from what the results of an appraisal in April 1999 would have been. Accordingly, the Company recorded paid-in-capital and a corresponding charge to interest and other financing charges of $141 for the stock warrants. As a result of the stated interest rate in the note and the costs associated with the warrants, the effective interest rate of this agreement is 15.7%. The note payable to the Company director was also restructured in April 1999. The balance was paid down to $100, and the new payment terms provide for monthly interest only payments at 10%, with the unpaid principal due in April 2001. The note may be extended for an additional three years at the option of the lender. This note also contains conversion options similar to the ones described above. The terms of the agreement also provide for the Company to issue the director warrants to purchase 400 shares of Company common stock at a strike price of $0.01 per share. In connection with the warrants, the Company valued the warrants using a minimum value of $41.50 dollars per share, based upon the same appraisal described above. Accordingly, the Company recorded paid-in-capital and a corresponding charge to interest and other financing charges of $17 for the stock warrants. As a result of the stated interest rate in the note and the costs associated with the warrants, the effective interest rate of this agreement is 15.9%. F-24 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE F--NOTES PAYABLE AND LONG-TERM DEBT--Continued Other Notes Payable, Long-Term Debt and Capital Lease Obligations: Notes payable, long-term debt and capital lease obligations to others consists of the following:
December 31 1998 1999 ---------- ---------- Notes payable to unaffiliated companies and third parties, dated at various dates in 1996 through 1998, described in the agreements as being secured by the Company's customer base or direct bill accounts receivable, but not perfected, agreements totaling $1,205 contained the personal guaranties of the Company founders, interest of 18% payable monthly (one note had a stated interest rate of 25% payable quarterly), all notes were repaid in full during 1999 $ 1,655 $ -- Loans payable to two individuals, originating in December 1997 and May 1998, maturing in December 2005 and May 2006, monthly payments of $8 in the aggregate, including interest with an effective rate of approximately 58% 183 182 Note payable to seller of building, secured by first mortgage on office building, monthly payments of $10 including interest at 10%, matures April 1, 2001 (repaid upon sale of building in February 1999) 245 -- Note payable to individual, interest at 18% payable monthly, principal due upon maturity in January 2000, subordinated to the Credit Facility, secured by 50,000 shares of Company common stock owned by a Company founder, restructured in January 2000 with the Company making a $500 principal reduction, and the balance of the note allocated among two individuals with a new maturity date of January 2001, effective interest rates reduced to 15%, no change in security -- 2,500 Note payable to individual for redemption of 5,000 shares of Type D redeemable common stock, imputed interest rate of 14%, payable in monthly installments with the balance paid in full in August 1999, subordinated to the Credit Facility 928 --
F-25 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE F--NOTES PAYABLE AND LONG-TERM DEBT--Continued Other Notes Payable, Long-Term Debt and Capital Lease Obligations, Continued: Accrued obligations payable to former salesmen, effective at various dates from June 1999 through September 1999, aggregate monthly payments of $46 per month with imputed interest rate of 10.5%, maturing at various dates from April 2002 through September 2002, unsecured $ -- $ 1,213 Capital lease obligation for telephone system, effective February 1997 with subsequent amendments, effective interest rate of 21.5%, payable in monthly installments of $16 through August 2002 315 352 Capital lease obligation for internet equipment, assumed from Hebron, monthly payments of $39 through June 2001, effective interest rate of 12% -- 666 Capital lease obligation for switch equipment, assumed from Hebron, monthly payments of $26 through December 2000, effective interest rate of 13.25% -- 368 Capital lease obligation for switch equipment, assumed from Hebron, monthly payments of $20 through March 2002, effective interest rate of 12% -- 473 Other notes payable and capital lease obligations 35 240 ---------- ---------- 3,361 5,994 Amounts due within one year 2,315 2,300 ---------- ---------- $ 1,046 $ 3,694 ========== ==========
Future maturities of notes payable and long-term debt as of December 31, 1999, are as follows:
Related Parties Others Total --------------- --------------- --------------- 2000 $ 2,657 $ 2,300 $ 4,957 2001 1,910 3,129 5,039 2002 213 401 614 2003 237 41 278 2004 959 49 1,008 Thereafter 2,106 74 2,180 --------------- --------------- --------------- $ 8,082 $ 5,994 $ 14,076 =============== =============== ===============
F-26 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE G--INCOME TAXES Income tax expense (benefit) consists of the following:
1997 1998 1999 --------------- --------------- ---------------- Current Federal and state $ - $ - $ - Deferred Federal and state 92 (700) 1,977 --------------- --------------- ---------------- $ 92 $ (700) $ 1,977 =============== =============== ================
At December 31, 1999, the Company has net operating loss carryforwards totaling approximately $5,100 that may be used to offset future taxable income. These net operating loss carryforwards expire in the years 2009 through 2014. Income tax expense (benefit) for the years ended December 31, 1997, 1998 and 1999, differs from the expected rate of 34% for the following reasons:
1997 1998 1999 --------- --------- --------- Federal income tax (benefit) at statutory rate (34.0) (34.0) 34.0 Expenses and losses not providing a tax benefit 81.9 8.7 2.3 Change in valuation allowance -- 14.9 5.1 State income tax (benefit), net (5.5) (5.7) 5.7 --------- --------- --------- 42.4 (16.1) 47.1 ========= ========= =========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:
December 31 1998 1999 ---------- ---------- Tax effect of future tax deductible items Allowance for uncollectible receivables $ 158 $ 200 Deferred telemarketing costs 2,516 858 Accrued termination obligation 650 865 Depreciable assets 75 153 Loss carryforwards 2,228 2,271 Other reserves and settlements 600 118 ---------- ---------- Total deferred tax assets 6,227 4,465 Less valuation allowance (650) (865) ---------- ---------- Net deferred tax asset $ 5,577 $ 3,600 ========== ==========
F-27 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE G--INCOME TAXES--Continued The Company believes that the improvements in its operating results, as discussed in Note J, provides sufficient positive evidence to indicate that it is more likely than not that it will realize the net deferred tax benefit of $3,600 recorded in the financial statements. The Company's actual operating results in 1999 and projections for future taxable income provide for full utilization of the deferred tax asset, net of the valuation allowance, over the periods in which the temporary differences are anticipated to reverse. At December 31, 1998 and 1999, the Company has provided a valuation allowance of $650 and $865, respectively, for the tax effects of the accrued termination obligation to the former Company founder , because the Company cannot assess that it is more likely than not that it will realize these benefits. The change in the total valuation allowance for the year ended December 31, 1999, is due to the excess of expenses recorded in the financial statements for the accrued termination obligation and the deferred stock compensation over the amounts that were currently deductible for income tax purposes. The Company's ability to generate the expected amounts of taxable income from future operations is dependent upon a number of factors, including competitive pressures on sales and margins in the telecommunications industry, management's ability to contain expenses, the Company's ability to acquire and retain new customers, and other factors which are beyond management's ability to control. There can be no assurance that the Company will meet its expectations for future taxable income in the carryforward period. However, management has considered the above factors in reaching the conclusion that it is more likely than not that future taxable income will be sufficient to realize the net deferred tax assets at December 31, 1999. The amount of deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. NOTE H--REDEEMABLE AND NONREDEEMABLE COMMON STOCK From time to time, the Company entered into various agreements with certain of its shareholders pursuant to which the Company agreed, upon request of one or more of such shareholders, to redeem the shares of Common Stock owned by such shareholder. While the Company's Certificate of Incorporation authorizes the Company to issue a single class of Common Stock, the Company has, for financial accounting purposes, segregated its Common Stock into two distinct groups, redeemable and nonredeemable. Of the 838,927 shares of Common Stock outstanding at December 31, 1999, 15,537 shares are characterized as redeemable common stock and 823,390 shares are characterized as nonredeemable common stock. F-28 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE H--REDEEMABLE AND NONREDEEMABLE COMMON STOCK--Continued The Company has entered into four variations of the redemption agreements, which it classifies as Type A, Type B, Type C and Type D. Generally, each redemption agreement provides that the shares of Common Stock shall be repurchased for an amount that gives the shareholder a specified rate of return based on the length of time the shareholder owned such shares. Type A agreements were issued primarily between October 1992 and December 1992 and Type B agreements were issued primarily between January 1993 and May 1995. Each of the Type A and Type B agreements expired two years after issuance. All of the Type A and Type B agreements have now expired pursuant to their terms. Type C agreements were issued primarily between July 1992 and September 1992 and have terms identical to the Type A agreements except that Type C agreements have no expiration. The Company has agreed at its option to redeem the shares of Common Stock owned for more than two years for the last highest price that the shares of Common Stock have been sold to an investor. Type D Agreements have no expiration and were issued from May 1995 until the Company discontinued issuing redemption agreements altogether in February 1996. Type D agreements provide that shareholders owning their shares of Common Stock less than one year receive a 10% annual return; between one year and 18 months receive a 15% annual return; between 18 months and three years receive an 18% annual return; and over three years an amount based on a formula specified in the agreement. During the years ended December 31, 1998 and 1999, substantially all of the outstanding Type D redeemable common stock had been outstanding for over three years. Accordingly, the redemption price was based upon the formula specified in the Type D redemption agreements for stock held over three years. Application of the formula to the carrying amount of Type D redeemable common stock resulted in a net reduction of the redemption price of approximately $179 and $102, respectively, during the years ended December 31, 1998 and 1999. At December 31, 1998 and 1999, the carrying amount of redeemable common stock is as follows:
1998 1999 --------------- ---------------- Principal amount invested by stockholders $ 1,506 $ 1,492 Accumulated accretion of agreed upon redemption price, net of periodic returns of capital paid to the stockholders 249 147 --------------- ---------------- $ 1,755 $ 1,639 =============== ================
The carrying amounts of redeemable common stock applicable to the various types of redemption agreements were as follows at December 31, 1998 and 1999:
1998 1999 --------------- ---------------- Type C redemption agreements $ 237 $ 237 Type D redemption agreements 1,518 1,402 --------------- --------------- $ 1,755 $ 1,639 =============== ================
F-29 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE H--REDEEMABLE AND NONREDEEMABLE COMMON STOCK--Continued A summary of activity of redeemable common stock during each of the years ended December 31, 1997, 1998 and 1999 is as follows:
Year Ended December 31 1997 1998 1999 ---------- ---------- ---------- Balance at beginning of period $ 3,853 $ 3,035 $ 1,755 Redemptions of redeemable common stock (53) (1,082) (14) Expiration and cancellation of redemption options (687) (19) -- Change in redemption value of redeemable common stock 470 (179) (102) Distributions to redeemable stockholders (548) -- -- ---------- ---------- ---------- Balance at end of period $ 3,035 $ 1,755 $ 1,639 ========== ========== ==========
As discussed in Note I, certain of the Company's nonredeemable common stock may be subject to rescission by the shareholder because of the Company's failure to register its securities. Rescission rights for individual stockholders vary, based upon the states in which the stockholder resides. Common stock that is subject to rescission is recorded separately from stockholders deficiency in the Company's balance sheet. As the statute of limitations expire in the respective states, such amounts are reclassified to stockholders' deficiency. A summary of the common stock subject to rescission and reclassifications to stockholders' deficiency is as follows: Balance at January 1, 1997 $ 6,107 Amount reclassified to stockholders' deficiency (2,892) ---------- Balance at December 31, 1997 3,215 Amount reclassified to stockholders' deficiency (1,530) ---------- Balance at December 31, 1998 1,685 Amount reclassified to stockholders' deficiency (1,216) ---------- Balance at December 31, 1999 $ 469 ==========
F-30 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE I--COMMITMENTS AND CONTINGENCIES Violations of Federal and State Securities Laws In 1995, the Company determined that it may not have registered its securities with the Securities and Exchange Commission (the "Commission") when it was obligated to do so under Federal securities laws and that, consequently, it may have engaged in the sale or delivery of unregistered securities in violation of the Federal securities laws. In July 1996, the Company voluntarily reported this information to the Commission, which then instituted an investigation into whether the Company and its two principal founders had violated any of the Federal securities laws. The Company and its two founders cooperated with the Commission during this investigation. In September 1997, the Commission's staff attorney who was conducting the investigation informed the Company that the staff intended to recommend to the Commission that it institute cease-and-desist proceedings against the Company, based upon the staff's belief that the Company had violated Sections 5(a) and 5(c) of the Securities Act of 1933, as amended ("Securities Act"), and Section 12(g) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and Rule 12g-1 promulgated under the Exchange Act. Also in September 1997, the Commission's staff attorney informed the two founders and Hebron that the staff intended to recommend that the Commission institute cease-and-desist proceedings against them. On July 15, 1998, the Company, the two founders and Hebron executed an offer of settlement in which they consented to the entry of a cease-and-desist order contingent upon the Commission accepting the Commission's staff's recommendation. The offers provided that the Company and the two founders would cease and desist from committing or causing any violations or future violations of Sections 5(a) and 5(c) of the Securities Act and Section 12(g) of the Exchange Act and Rule 12g-1. Additionally, in the offers, Hebron consented to the entry of a cease-and-desist order which provided that it would cease-and-desist from committing or causing any violations or future violations of Sections 5(a) and 5(c) of the Securities Act. On July 23, 1998, the Commission approved the Commission's staff attorney's recommendation and accepted the offers of settlement. On July 30, 1998, the Commission issued a cease-and-desist order which stated that (a) the Company, the two founders and Hebron had violated Sections 5(a) and 5(c) of the Securities Act; (b) the Company had violated Section 12(g) of the Exchange Act and Rule 12g-1; and (c) the two founders had caused the violation of Section 12(g) of the Exchange Act and Rule 12g-1. The Commission ordered the Company, the two founders , and Hebron to cease and desist from committing or causing any violations and any future violations of Sections 5(a) and 5(c) of the Securities Act and Section 12(g) of the Exchange Act and Rule 12g-1. The Commission did not order any monetary penalties, fines, sanctions, or disgorgement against the Company, the two founders , Hebron or anyone else associated with the Company or any of the other parties. F-31 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE I--COMMITMENTS AND CONTINGENCIES--Continued Violations of Federal and State Securities Laws, Continued The Federal securities laws provide legal causes of action against the Company by persons buying the securities from the Company, including action to rescind the sales. With respect to the sales described above, the statutes of limitations relating to such actions appear to have expired for sales made by the Company more than three years ago. The Company made substantially all of the stock sales more than three years ago. However, with respect to such sales, other causes of actions may exist under federal law, including causes of action for which the statute of limitations may not have expired. Each of the states in which the Company has effected sales of common stock has its own securities laws, which likely have equal applicability to the Company's activities discussed above. The Company sold stock to persons in over forty states, and those states typically provide that a purchaser of securities in a transaction that fails to comply with the state's securities laws can rescind the purchase, receiving from the issuing company the purchase price paid plus an interest factor, frequently 10% per annum from the date of sales of such securities, less any amounts paid to such security holder. The statutes of limitations for these rights typically do not begin running until a purchaser discovers the violation of the law, and therefore in most instances, and depending on individual circumstances, the statute of limitations do not appear to limit those rights for most purchasers of securities from the Company. Also, depending on the law of the state and individual circumstances, monetary damages and other remedies may be granted for breach of state securities laws. The Company and its attorneys have completed an evaluation of the statutes of limitations for each of the states in which the Company sold stock to a stockholder. The Company believes that it may have a liability at December 31, 1999 of $469 to stockholders whose rights of rescission have not expired under applicable state securities laws. As discussed in Note H, the Company has recorded this potential liability as Common Stock Subject to Rescission in the balance sheet. In addition, the Company may be liable for rescission under state securities laws to the purchasers of the Hebron common stock because of the relationships of the two companies. The Company cannot predict how many of the Hebron stockholders will exercise their right of rescission, and no liability has been accrued at December 31, 1999. F-32 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE I--COMMITMENTS AND CONTINGENCIES--Continued Other Securities Matters In December 1994, the Washington Department of Financial Institutions - Securities Division ("WDS") notified the Company that it was aware that the Company may have offered unregistered securities to residents of the State of Washington and instructed the Company to cease and desist such offers and to provide information with respect to any sales of such securities. In April 1997, the WDS told the Company that it was trying to close its file on the Company and served a subpoena on the Company that sought various documents relating to the Company's shareholders in Washington State. The Company voluntarily produced documents in response to the subpoena in May 1997. The WDS has not corresponded with the Company since May 1997. In February 1996, the Oklahoma Department of Securities ("ODS") made an inquiry to the Company with regard to the basis upon which the Company had offered and sold securities and effected issuances of short-term notes under the APLP without registration under the Oklahoma Securities Act. The Company responded to such inquiry in February 1996 advising the ODS that neither the Company nor its Oklahoma counsel believed that the short-term notes issued under the APLP constituted securities, and claiming that the common stock was exempt from registration under Section 401(b)(9)(B) of the Oklahoma Securities Act. The Company has not received a response from ODS and consequently has not had any further contact with the ODS since its response. Commitments with Providers and Others In April 1999, the Company entered into a telecommunications contract with WorldCom, its primary provider of switchless telecommunications services. The term of the contract is for three years, with early termination provided for based on meeting specified purchase commitments during the term of the contract. In connection with the contract, WorldCom agreed to subordinate its interests in the Company's customer base, as well as its accounts payable and other rights and obligations, to the financial institution providing the Company's Credit Facility. WorldCom has a second security lien on all of the assets in which the financial institution has a first security lien. The agreement provided for reduced rates and credits for disputed payables. The Company recognized these credits as a reduction of expenses during the year ended December 31, 1999. The Company is required to maintain minimum purchase commitments under the terms of its contract with WorldCom. During the year ended December 31, 1999, the Company met the minimum purchase commitments, and expects to be able to continue to meet these requirements. At December 31, 1999, the remaining purchase commitment over the remainder of the contract was approximately $51,600. In connection with the Asset Purchase Agreement with Hebron, as described in Note B, the Company also assumed responsibility for the telecommunications contract between Hebron and Broadwing (Formerly IXC Communications, Inc.), the underlying carrier that transports the Company's call records through the Oklahoma City and Chicago switches. This contract is effective through September 2003, and also requires the Company to maintain minimum monthly purchase commitments of $550. The Company met the minimum purchase commitments during 1999. F-33 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE I--COMMITMENTS AND CONTINGENCIES--Continued At December 31, 1999, the Company has commitments to purchase equipment and system software totaling approximately $4,000. Long-Term Agreements with Salespersons In 1997, the Company entered into long-term agreements with certain salespersons. The agreements were effective for twenty-five (25) years, and provide for a 3% commission of the net domestic phone billings, as defined in the agreement, to be paid to the salespersons, plus additional commissions through recruitment efforts, death and termination benefits, and other benefits as described in the agreements. The termination benefits defined in the original agreement provide for the salespersons to receive 75% of the commissions earned under the contract for current subscribers assigned to the salesperson at the termination date, plus 50% of the commissions earned for all additional subscribers who enroll under the salespersons' existing non-profit organizations, for a period of 25 years. In exchange for the extended contract terms and death and termination benefits, the Company received non-competition agreements, as defined in the agreements, with each of the salespersons. In 1999, the Company renegotiated or terminated the agreements with these salespersons, by either (1) replacing the original agreements with full-time or part-time employment contracts, or independent contractor agreements ranging from three to five years; (2) entering into covenant agreements with the salespersons, or (3) continuing to pay the salespersons under the termination provisions of the original contract. Deferred Compensation Contracts In 1997, and as amended in 1998, the Company entered into non-qualified deferred compensation agreements with certain salespersons. The deferred compensation plan, which is not funded, allowed these salespersons to defer portions of their current compensation. The Company agreed to pay the salespersons an amount equal to their deferred compensation plus an effective rate of return, ranging from 45% to 55%. In 1999, the Company repaid in full all but one of these obligations. The liability for the deferred compensation contracts is included in accounts payable and accrued expenses, and totaled approximately $385 and $43 at December 31, 1998 and 1999, respectively. F-34 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE I--COMMITMENTS AND CONTINGENCIES--Continued Non-Cancelable Operating Leases The Company leases office space, copiers and other equipment under agreements that are accounted for as operating leases. These lease agreements expire in varying years through 2004. Total lease expense was approximately $229, $472, and $692 in 1997, 1998 and 1999, respectively. Future commitments under non-cancelable operating leases are as follows: Year Ended December 31 2000 $ 614 2001 420 2002 431 2003 111 2004 105 ------------- $ 1,681 =============
Other Matters From time to time, the Company may be party to litigation, claims and assessments arising in the normal course of business. In the opinion of management, the outcomes of such proceedings will not be material to the Company's financial position, results of operations or cash flows. NOTE J--FINANCIAL CONDITION AND RESULTS OF OPERATIONS From its inception through December 31, 1998, the Company had incurred cumulative net operating losses totaling approximately $12,000. In 1999, the Company implemented a series of cost reduction measures that enabled the Company to realize net income of $2,224. Despite the profitability, however, the Company's total net sales declined by 7.7% from 1998 to 1999, and the net sales from long distance revenues, exclusive of the pass-through charges that began in 1998, declined from $113,000 and $114,000 in 1997 and 1998, respectively, to $102,000 in 1999. In addition, the accumulated stockholders' deficiency was ($23,758) at December 31, 1999. These factors, among others, indicate that the Company will be unable to continue as a going concern for a reasonable period of time. F-35 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE J--FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued Beginning in 1998 and continuing into 1999 and 2000, the Company has taken several steps which management believes will enable the Company to continue to realize profitability, as well as improve the Company's overall financial position and liquidity. These steps include: o Despite recurring net losses, the Company previously had a policy of declaring returns of capital. From 1994 through 1997, the Company declared cumulative returns of capital to nonredeemable stockholders totaling approximately $15,700. Through December 31, 1999, approximately $12,400 had been paid, and $3,300 was payable at December 31, 1999. The amounts payable at December 31, 1999 were to the Chairman and the former Senior Vice President. When declared, the returns of capital were recorded as a reduction of retained earnings (deficit). In addition, accretions of the redemption value of the redeemable common stock, as described in Note H, were also recorded as a charge to retained earnings (deficit). Through December 31, 1999, the cumulative charge to retained earnings (deficit) as a result of accretions to the redeemable common stock was approximately $3,400. The Company reduced this liability through payment of the distributions to redeemable stockholders as well. Cumulative payments of distributions to redeemable stockholders totaled approximately $3,300. The deficit in retained earnings larger by approximately $19,100 as a result of the distributions to nonredeemable stockholders and accretions of the redemption value of redeemable stock to the redeemable stockholders. The Company discontinued the policy of declaring distributions to its stockholders at the end of 1997. Future dividends or distributions to owners are restricted under the Company's revolving line of credit agreement, as described in Note D to the financial statements. The Company believes that retaining earnings will enable the Company to sustain profitability. o As discussed in Note D, the Company has obtained funding from a financial institution for a $30,000 line of credit. The proceeds of this line of credit have enabled the Company to become and remain current on its operating liabilities, and to repay existing loans and notes that carried higher interest rates. The proceeds have also provided the Company with the necessary capital to upgrade its core computer systems. The Company has been notified by the financial institution that it has been approved for an increase in the line of credit to $35,000. o In April 1999, the Company entered into a new telecommunications contract with WorldCom, as discussed in Note I to the financial statements. The new agreement provides the Company with reduced rates on its switchless long distance services. The Company has passed some of the savings from reduced rates to its customers, in order to compete with industry-wide rate reductions, and has retained the benefit of some of the savings. The agreement provides for further periodic reviews of the rates, and in December 1999, the Company received an additional rate reduction from WorldCom. F-36 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE J--FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued o Effective February 1, 1999, the Company acquired the rights and responsibilities of the switched services operations that were previously provided by Hebron, as discussed in Note B to the financial statements. The Company realized significant savings in 1999 from operation of the switches as compared to purchasing the switched services from Hebron, and the Company expects these savings to continue in the future. o Beginning in January 1999, the Company began operating its telemarketing department internally, rather than outsourcing those services to VisionQuest. Internally operating the telemarketing department resulted in significant cost savings in 1999, and the Company expects these savings to continue in the future. In the fourth quarter of 1999, the Company began acquiring new telemarketing equipment, and opened a new telemarketing facility in Tahlequah, Oklahoma in January 2000. In an effort to increase its revenues and customer base, the Company plans to increase its telemarketing efforts in 2000. Management believes that the above factors will enable the Company to continue to realize profitable operations and reduce its deficits, improve its liquidity ratios, and continue to meet its obligations on an ongoing basis. NOTE K--STOCK-BASED COMPENSATION (dollars in thousands, except per share amounts) Description of Company Stock Compensation Plans The Company has entered into various stock option and stock bonus plans with certain officers and non-employee directors. For stock-based compensation awards granted to employees, the Company follows the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees. For stock-based compensation awards granted to non-employee directors, the Company follows the provisions of SFAS No. 123, Accounting for Stock-Based Compensation. F-37 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE K--STOCK-BASED COMPENSATION--Continued Stock Option Plans Board of Directors Stock Option Plan Effective October 1, 1998 and January 1, 1999, the Company's Board of Directors granted two employee directors and two non-employee directors options to purchase Company stock. Three of the options granted entitle the individuals to purchase 3% of the fully diluted outstanding common stock as of the grant date. The other option originally entitled the non-employee director to purchase 0.5% of the fully diluted common stock; this option was amended in May 1999 to 1% of the fully diluted common stock. For the employee directors, the fair value of the common stock, as determined by an independent appraiser, as of the grant date was less than the exercise price; accordingly, the Company did not recognize any compensation expense for the employee directors. Stock option expense recognized under the fair value method prescribed by SFAS No. 123 for non-employee directors totaled $28, and $38, for 1998 and 1999, respectively. For the additional options granted to one non-employee director effective July 1, 1999, as discussed above, the Company recognized expense of $8, based upon the difference between the fair value of the common stock as of the grant date ($41.50 per share) and the exercise price of the stock options ($28.86). Effective with the May 1999 amendments to the employment agreements with the employee directors and the stock agreements with the non-employee directors, the stock options are exercisable at 25% on July 1, 1999, and 25% each July 1 thereafter until fully vested. Each exercise right shall continue in force for a period of five years following its commencement, irrespective of the individual's subsequent employment status with the Company. The following table summarizes the Company's stock option transactions from January 1, 1998 through December 31, 1999:
Weighted Weighted Average Shares Average Shares Exercise Subject to Exercise Subject to Price Exercisable Price Options Per Share Options Per Share ------------ ------------ ------------ ------------ Outstanding, December 31, 1997 -- n/a -- n/a Granted 59,142 $ 28.86 5,914 $ 28.86 Exercised -- -- -- -- Canceled/forfeited -- -- -- -- ------------ ------------ ------------ ------------ Outstanding, December 31, 1998 59,142 28.86 5,914 28.86 Granted 31,845 28.86 16,833 28.86 Exercised -- -- -- -- Canceled/forfeited -- -- -- -- ------------ ------------ ------------ ------------ Outstanding, December 31, 1999 90,987 28.86 22,747 28.86
F-38 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE K--STOCK-BASED COMPENSATION--Continued Following is a recap of the outstanding stock options at December 31, 1999:
Options Outstanding ------------------------------ Options Exercisable -------------------------- Average Weighted Weighted Remaining Average Average Range of Contractual Exercise Exercise Exercise Prices Shares Life (Years) Price Shares Price --------------- ------------- ------------ ----------- ----------- ----------- 28.86 90,987 5.0 28.86 45,494 28.86
Pursuant to SFAS No. 123, the Company is required to disclose the pro forma net earnings and earnings per share effects of the stock options, as if the stock options had been accounted for under the provisions of SFAS No. 123. SFAS No. 123 prescribes that the compensation cost be recorded equal to the fair value of the options as of the grant date, and that compensation costs be recognized ratably over the vesting period of the options. Had compensation costs been determined in accordance with SFAS No. 123, the Company's net income (loss) and net income (loss) per share amounts for the years ended December 31, 1998 and 1999 would have been reduced (increased) to the pro forma amounts indicated below:
1998 1999 ------------- ------------- Net income (loss) As reported $ (3,655) $ 2,224 Pro Forma (3,671) 2,198 Basic earnings (loss) per share As reported $ (4.32) $ 2.83 Pro forma (4.34) 2.80 Diluted earnings (loss) per share As reported $ (4.43) $ 2.35 Pro forma (4.45) 2.32
F-39 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE K--STOCK-BASED COMPENSATION--Continued The Company has obtained an independent appraisal of its common stock for each date that it granted stock options and bonuses to employees and non-employee directors. Stock options granted in January 1999 and October 1998 have an exercise price of $28.86 per share, which exceeds the fair value of the Company's common stock as of the grant date. The weighted average estimated fair value of the options granted in January 1999 and October 1998 were $2.83 per share and $3.94 per share, respectively. The stock options granted in July 1999 have an exercise price of $28.86 per share, which is lower than the fair value of the Company's common stock as of the grant date. The weighted average estimated fair value of these options was $20.05 per share. Because the Company's stock is not publicly traded, the fair value of the Company stock options was estimated on the date of the grant using the minimum valuation method, as prescribed by SFAS No. 123. Under the minimum value method, expected stock price volatility is set at a level that approximates 0%. The estimated weighted-average fair value of options granted during 1998 and 1999 was calculated using a Black-Scholes option-pricing model with the following weighted average assumptions:
1998 1999 ---------- ---------- Expected stock price volatility 0.0001% 0.0001% Risk free rate 4.27% 4.55% Expected dividend yield 0.0% 0.0% Expected life (years) 8.3 years 7.1 years
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. The Company's stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. Stock Bonuses The stock bonuses were granted as of October 1, 1998 and January 1, 1999 and provided for the employee and non-employee directors to collectively receive 2.5% of the fully diluted common stock as of the grant dates. The number of shares granted in 1998 and 1999 was 13,647 and 9,099, respectively. Compensation expense is recognized on a straight-line basis over the vesting period. In addition, the agreements provide for the Company to pay a cash bonus equal to the amount of income taxes for which the recipients will be liable as a result of the vesting of the stock bonus, and an additional cash bonus equal to the amount of income taxes for which the recipient will be liable as a result of the first cash bonus. During the years ended December 31, 1998 and 1999, the Company recognized compensation expense of $83 and $147, respectively, pursuant to the stock bonus. Additional compensation expense of $45 and $80, respectively, was recognized for the related tax bonus arrangements. F-40 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE L--EARNINGS (LOSS) PER SHARE (per share amounts not in thousands) The computation of basic and diluted earnings (loss) per share is as follows:
1997 1998 1999 ------------ ------------ ------------ Net income (loss) $ (341) $ (3,655) $ 2,224 Decrease (increase) in redemption value of redeemable common stock (470) 179 102 ------------ ------------ ------------ Net income (loss) available to nonredeemable common stockholders $ (811) $ (3,476) $ 2,326 ============ ============ ============ Average shares of nonredeemable common stock outstanding 799 804 823 ============ ============ ============ Basic Earnings (Loss) Per Share $ (1.01) $ (4.32) $ 2.83 ============ ============ ============ Net income (loss) available to nonredeemable common stockholders $ (811) $ (3,476) $ 2,326 Decrease in redemption value of redeemable common stock -- (179) (102) ------------ ------------ ------------ Net income (loss) available to nonredeemable common stockholders and assumed conversions $ (811) $ (3,655) $ 2,224 ============ ============ ============ Average shares of nonredeemable common stock outstanding 799 804 823 Employee stock options -- -- 106 Stock warrants -- -- 3 Conversion of redeemable common stock -- 21 16 ------------ ------------ ------------ Average shares of common stock outstanding and assumed conversions 799 825 948 ============ ============ ============ Diluted Earnings (Loss) Per Share $ (1.01) $ (4.43) $ 2.35 ============ ============ ============
The average shares listed below (in thousands) were not included in the computation of diluted earnings (loss) per share because to do so would have been antidilutive for the periods presented:
1997 1998 1999 --------------- --------------- ---------------- Conversion of convertible notes 3 3 3 Conversion of redeemable stock 23 - - Employee stock options - 18 -
F-41 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE M--QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended ------------------------------------------------------------------ March 31, June 30, September 30, December 31, 1998 1998 1998 1998 ------------ ------------ ------------- ------------ (in thousands except per share data restated) Net sales $ 30,842 $ 31,810 $ 31,494 $ 30,086 Net loss (520) (999) (699) (1,437) Basic earnings (loss) per share (0.79) (1.28) (0.58) (1.66) Diluted earnings (loss) per share (0.79) (1.28) (0.85) (1.72)
Three Months Ended ---------------------------------------------------------------- March 31, June 30, September 30, December 31, 1999 1999 1999 1999 ------------ ------------ ------------- ------------ (in thousands except per share data) Net sales $ 29,040 $ 28,141 $ 29,371 $ 28,109 Net income (loss) 193 2,339 524 (832) Basic earnings (loss) per share 0.23 2.86 0.67 (0.94) Diluted earnings (loss) per share 0.21 2.47 0.55 (0.94)
In the second quarter of 1999, the Company received significant credits in connection with its new telecommunications service agreement with WorldCom. The Company also recovered $182 of the loss on the advances made to an unrelated long-distance reseller, as described below. In the fourth quarter of 1998, the Company provided pre-tax losses of $215 in connection with the impairment of its former corporate headquarters and $552 for a loss on a receivable from an unrelated long-distance reseller. For the first and second quarters of 1998, the fourth quarter of 1999, and the second quarter of 2000, diluted earnings (loss) per share is the same as basic earnings (loss) per share, because potentially dilutive securities were antidilutive. F-42 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (dollars in thousands) AMERIVISION COMMUNICATIONS, INC. NOTE N--SUBSEQUENT EVENTS In May 2000, the Company and the lender entered into an amendment to the Credit Facility, which increased the maximum availability under the line of credit to $35,000, subject to the collections and earnings multiples contained in the original agreement, and as amended. In December 1999, the Company's Board of Directors approved the 1999 Stock Incentive Plan (the "Plan"), which authorized 40,000 shares of the Company's common stock to be reserved for issuance to employees, directors, consultants and other individuals. The Plan enables the Company to reward participants with (i) incentive stock options and/or non-qualified stock options to purchase shares of Company common stock, (ii) stock appreciation rights with respect to shares of Company common stock, (iii) shares of Company common stock, (iv) performance share awards which are designated as a specified number of shares of company common stock and earned based on performance, and (v) performance unit awards which are designated as having a certain value per unit and earned based on performance. On July 1, 2000, options to purchase 24,500 shares of Company common stock granted to certain officers and employees of the Company. Effective September 1, 2000, the Company adopted the 401k AmeriVision Retirement Plan (the "401k"). The 401k Plan provides for all employees meeting certain eligibility requirements to participate in the 401k Plan. The Company may make discretionary profit-sharing contributions to the 401k Plan. In November 2000, the Company notified the third-party contractor responsible for development of the Company's billing system that the Company intended to terminate the contract between the Company and the contractor. The Company cannot determine what the ultimate outcome of this matter will be. NOTE O -- PRIOR PERIOD ADJUSTMENTS Subsequent to the issuance of the Company's 1999 Financial Statements, the Company's management and Board of Directors determined that the original employment and stock agreements entered into with certain of its officers and directors had not been considered. These agreements had effective dates ranging from October 1998 to January 1999. In May 1999, the Company entered into new agreements with each of the officers and directors, all of which superceded their prior agreements. However, except in the case of one non-employee director, the only changes to the stock options and stock bonuses were to change the vesting period of the awards. For one non-employee director, the stock option was increased from 4,550 shares to 9,099 shares. Thus, the Company believes that the stock options and stock bonuses are more properly accounted for in accordance with the terms of the original agreements, with subsequent modifications to the awards and vesting periods accounted for in the period that the changes occurred. In addition, the Company has also restated its financial statements to reclassify common stock subject to rescission by the stockholder separately from stockholders' deficiency, as discussed in Notes H and I to the financial statements. The following table summarizes the effects of the restatements described above to the prior period financial statements:
As Previously Reported As Restated ------------------------------------------------ ------------------------------------------------ Basic Diluted Basic Diluted Earnings Earnings Earnings Earnings Stockholders' Net Income (Loss) (Loss) Stockholders' Net Income (Loss) (Loss) Deficiency (Loss) Per Share Per Share Deficiency (Loss) Per Share Per Share ------------- ---------- ---------- --------- ------------- ---------- --------- --------- As of January 1, 1997 $(16,827) $ N/A $ N/A $ N/A $(22,934) $ N/A $ N/A $ N/A ======== ======= ====== ====== ======== ======= ====== ====== As of and for the year ended December 31, 1997 $(22,612) $ (341) $(1.01) $(1.01) $(25,827) $ (341) $(1.01) $(1.01) ======== ======= ====== ====== ======== ======= ====== ====== As of and for the year ended December 31, 1998 $(25,971) $(3,557) $(4.22) $(4.33) $(27,644) $(3,655) $(4.32) $(4.43) ======== ======= ====== ====== ======== ======= ====== ====== As of and for the year ended December 31, 1999 $(23,229) $ 1,913 $ 2.50 $ 2.14 $(23,758) $ 2,224 $ 2.83 $ 2.35 ======== ======= ====== ====== ======== ======= ====== ======
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