** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q**

 
| **(Mark One)** |                                                                                                                                                                |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ý         | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                        |
|           |                                                                                                                                                                |
|           | **For the quarterly period ended March 31, 2003**                                                                                                              |
|           |                                                                                                                                                                |
| **Or**         |
|           |
| o              | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                 |
|           |                                                                                                                                                                |
|           | **For the transition period  from          to           ** |
|                |                                                                                                                                                                     |  |

 

**Commissionfile no. 0-27683**

 

**AmerivisionCommunications, Inc.**

(Exact name ofregistrant as specified in its charter)

 

| **Oklahoma**                                                          |   | **73-1378798**                       |
|-----------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization)       |   | (IRS Employer Identification Number) |
|                                                                  |   |                                 |
| **5900 Mosteller Drive, Suite 1800****Oklahoma  City, Oklahoma** |   | **73112**                            |
| (Address of principal executive offices)                              |   | (Zip Code)                           |
|                                                                  |   |                                 |
| **(405) 600-3500**                                               |
| (Registrant’s telephone number, including  area code)            |

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act) Yes o  No ý

 

At March 31, 2003, there were 848,906shares of our common stock outstanding.

 

 

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AMERIVISION COMMUNICATIONS, INC. INDEX

 
| **Part I.**  | **Financial Information**                                                                                                                                             |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.           | Financial Statements                                                                                                                                                  |
|              | Condensed Consolidated Balance  Sheets—December 31, 2002 and March 31, 2003 (unaudited)                                                                     |
|              | Condensed Consolidated Statements of  Operations (unaudited)— Three months ended March 31, 2002 and 2003                                                    |
|              | Condensed Consolidated Statements of  Stockholders’ Deficiency for the year ended December 31, 2002 and three  months ended March 31, 2003 (unaudited) |
|              | Condensed Consolidated Statements of Cash  Flows (unaudited)—Three months ended March 31, 2002 and 2003                                                     |
|              | Notes to Condensed Consolidated Financial  Statements (unaudited)                                                                                                     |
| Item 2.           | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                           |
| Item 3.           | Quantitative and Qualitative Disclosures  About Market Risk                                                                                                           |
| Item 4.           | Controls and Procedures                                                                                                                                               |
| **Part II.** | **Other Information**                                                                                                                                                 |
| Item 1.           | Legal Proceedings                                                                                                                                                     |
| Item 2.           | Changes in Securities and Use of Proceeds                                                                                                                             |
| Item 3.           | Default Upon Senior Securities                                                                                                                                        |
| Item 4.           | Submission of Matters to a Vote of Security  Holders                                                                                                                  |
| Item 5.           | Other Information                                                                                                                                                     |
| Item 6.           | Exhibits and reports on Form 8-K                                                                                                                                 |
| Signatures        |                                                                                                                                                                  |

 

2

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**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

AMERIVISIONCOMMUNICATIONS, INC. CONDENSEDCONSOLIDATED BALANCE SHEETS

(In thousands)

(Information at March 31, 2003is unaudited)

 
|                                                                                                                                                                                                      |   | **December  31,  2002** |       | **March 31,  2003** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|---------------------|------------|
|                                                                                                                                                                                                      |   |                    |       |                |       |
| **ASSETS**                                                                                                                                                                                                |   |                    | ** ** |                | ** ** |
| Current Assets:                                                                                                                                                                                           |   |                    |       |                |       |
| Cash                                                                                                                                                                                                      |   | $                       | 799        |                | $          | 1,595 |   |
| Accounts receivable, net of allowance for  uncollectible accounts of $1,542 and $936 at December 31, 2002 and March 31,  2003, respectively                                                               |   | 8,538                   |       | 6,984               |       |
| Prepaid expenses and other current assets                                                                                                                                                                 |   | 1,047                   |       | 1,068               |       |
| Total current assets                                                                                                                                                                                      |   | 10,384                  |       | 9,647               |       |
| Property and equipment, net                                                                                                                                                                               |   | 2,400                   |       | 1,964               |       |
| Net deferred income tax benefits                                                                                                                                                                          |   | 1,465                   |       | 1,412               |       |
| Covenants not to compete, net                                                                                                                                                                             |   | 2,319                   |       | 2,081               |       |
| Other assets                                                                                                                                                                                              |   | 623                     |       | 623                 |       |
| Total assets                                                                                                                                                                                              |   | $                       | 17,191     |                | $          | 15,727 |   |
|                                                                                                                                                                                                      |   |                    | ** ** |                | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIENCY**                                                                                                                                                         |   |                    | ** ** |                | ** ** |
| Current Liabilities:                                                                                                                                                                                      |   |                    |       |                |       |
| Revolving line of credit                                                                                                                                                                                  |   | $                       | 13,719     |                | $          | 13,165 |   |
| Accounts payable and accrued expenses                                                                                                                                                                     |   | 8,802                   |       | 7,990               |       |
| Current portion of other notes payable and  capital lease obligations                                                                                                                                     |   | 1,140                   |       | 1,262               |       |
| Loans and notes payable to related parties,  current portion                                                                                                                                              |   | 4,829                   |       | 4,742               |       |
| Short-term notes payable to individuals                                                                                                                                                                   |   | 279                     |       | 279                 |       |
| Total current liabilities                                                                                                                                                                                 |   | 28,769                  |       | 27,438              |       |
| Long-term debt to related parties, net of  current portion                                                                                                                                                |   | 859                     |       | 787                 |       |
| Long-term debt, net of current portion                                                                                                                                                                    |   | 259                     |       | 115                 |       |
| Redeemable common stock, carried at  redemption value                                                                                                                                                     |   | 1,200                   |       | 1,200               |       |
|                                                                                                                                                                                                      |   |                    |       |                |       |
| Commitments and Contingencies                                                                                                                                                                             |   |                    |       |                |       |
| Stockholders’ deficiency:                                                                                                                                                                            |   |                    |       |                |       |
| Common stock, $0.10 par value, 1,000,000  shares authorized; shares issued and outstanding at December 31, 2002 and  March 31, 2003 of 832,869 and 833,369 respectively, net of 15,537 redeemable  shares |   | 82                      |       | 82                  |       |
| Additional paid-in capital                                                                                                                                                                                |   | 11,000                  |       | 11,000              |       |
| Retained earnings (accumulated deficit)                                                                                                                                                                   |   | (24,978                 | )          | (24,895             | )          |
| Total stockholders’ deficiency                                                                                                                                                                       |   | (13,896                 | )          | (13,813             | )          |
| Total liabilities and stockholders’  deficiency                                                                                                                                                      |   | $                       | 17,191     |                | $          | 15,727 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

3

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AMERIVISIONCOMMUNICATIONS, INC. CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per shareamounts)

(Unaudited)

 
|                                          |   | **Three  months  ended  March 31,** |   |
|-----------------------------------------------|--------|-------------------------------------|--------|
|                                          |   | **2002**                            |   | **2003** |   |
|                                          |   |                                |   |   |   |
| Revenues:                                     |   |                                |   |   |   |
| Net sales                                     |   | $                                   | 16,375 |   | $ | 12,340 |   |
| Operating expenses:                           |   |                                |   |   |   |
| Cost of telecommunication services            |   | 6,541                               |   | 4,643 |   |
| Selling, general and administrative  expenses |   | 7,334                               |   | 6,238 |   |
| Depreciation and amortization                 |   | 536                                 |   | 681 |   |
| Total operating expenses                      |   | 14,411                              |   | 11,562 |   |
| Income from operations                        |   | 1,964                               |   | 778 |   |
| Other income (expense):                       |   |                                |   |   |   |
| Interest expense                              |   | (576                                | )      | (471 | ) |
| Interest expense to related parties           |   | (126                                | )      | (181 | ) |
| Other income                                  |   | 8                                   |   | 10 |   |
| Total other income (expense)                  |   | (694                                | )      | (642 | ) |
| Income before income tax expense              |   | 1,270                               |   | 136 |   |
| Income tax expense                            |   | 484                                 |   | 53 |   |
| Net income                                    |   | $                                   | 786    |   | $ | 83 |   |
|                                          |   |                                |   |   |   |
| Earnings per share:                           |   |                                |   |   |   |
| Basic earnings per share                      |   | $                                   | .95    |   | $ | .10 |   |
| Diluted earnings per share                    |   | $                                   | .82    |   | $ | .09 |   |
| Weighted average common shares outstanding:   |   |                                |   |   |   |
| Basic                                         |   | 824,815                             |   | 832,688 |   |
|                                          |   |                                |   |   |   |
| Diluted                                       |   | 950,317                             |   | 955,440 |   |
|                                          |   |                                |   |   |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

4

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AMERIVISION COMMUNICATIONS, INC.COMMUNICATIONS, INC. CONDENSEDCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY

(In thousands)

 
|                                                                     |   | **Stockholders’  deficiency** |   |
|--------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                     |   | **Common  Stock**                  |   | **Additional  Paid-in  Capital** |   | **Unearned  Compensation** |   | **Retained  Earning  (Deficit)** |   | **Total** |   |
|                                                                     |   |                               |   |   |   |   |   |   |   |   |   |
| Balance at December 31, 2001                                             |   | $                                  | 82     |   | $ | 9,275 |   | $ | (14 | ) | $ | (26,323 | ) | $ | (16,980 | ) |
| Expiration of potential rescission claims  on nonredeemable common stock |   | -0                                 | -      | 1,222 |   | -0 | - | -0 | - | 1,222 |   |
| Stock issued to board of directors for  services                         |   | -0                                 | -      | 84 |   | -0 | - | -0 | - | 84 |   |
| Vesting of restricted stock awards and  stock options                    |   | -0                                 | -      | 2 |   | 14 |   | -0 | - | 16 |   |
| Reduction of redemption value of redeemable  common stock                |   | -0                                 | -      | 397 |   | -0 | - | -0 | - | 397 |   |
| Issuance of common stock for payment of  note payable                    |   | -0                                 | -      | 20 |   | -0 | - | -0 | - | 20 |   |
| Net income                                                               |   | -0                                 | -      | -0 | -  | -0 | - | 1,345 |   | 1,345 |   |
| Balance at December 31, 2002                                             |   | $                                  | 82     |   | $ | 11,000 |   | $ | -0 | - | $ | (24,978 | ) | $ | (13,896 | ) |
| Net income (unaudited)                                                   |   | -0                                 | -      | -0 | -  | -0 | - | 83 |   | 83 |   |
| Balance at March 31, 2003 (unaudited)                                    |   | $                                  | 82     |   | $ | 11,000 |   | $ | -0 | - | $ | (24,895 | ) | $ | (13,813 | ) |

 

Theaccompanying notes are an integral part of these financial statements.

 

5

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AMERIVISIONCOMMUNICATIONS, INC. CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 
|                                                                                 |   | **Three  months ended  March 31,** |   |
|--------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                 |   | **2002**                           |   | **2003** |   |
|                                                                                 |   |                               |   |   |   |
| Cash flows from operating activities:                                                |   |                               |   |   |   |
| Net income                                                                           |   | $                                  | 786    |   | $ | 83 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:   |   |                               |   |   |   |
| Depreciation of property and equipment                                               |   | 410                                |   | 441 |   |
| Amortization of covenants not to compete                                             |   | 126                                |   | 238 |   |
| Amortization of unearned compensation  related to stock option and awards            |   | 25                                 |   | -0 | - |
| Deferred income tax benefit                                                          |   | 484                                |   | 53 |   |
| Change in assets and liabilities:                                                    |   |                               |   |   |   |
| Decrease (increase) in operating assets:                                             |   |                               |   |   |   |
| Accounts receivable                                                                  |   | 1,095                              |   | 1,554 |   |
| Prepaid expenses and other assets                                                    |   | (275                               | )      | (21 | ) |
| Increase (decrease) in operating  liabilities, accounts payable and accrued expenses |   | 173                                |   | (812 | ) |
| Net cash provided by operating activities                                            |   | 2,824                              |   | 1,536 |   |
| Cash flows from investing activities:                                                |   |                               |   |   |   |
| Purchase of property and equipment                                                   |   | (200                               | )      | (5 | ) |
| Cash flows from financing activities:                                                |   |                               |   |   |   |
| Repayments of loans and other obligations  to related parties                        |   | (58                                | )      | (159 | ) |
| Net decrease in borrowings under line of  credit arrangements                        |   | (2,230                             | )      | (554 | ) |
| Repayment of notes payable and capital  lease obligations                            |   | (189                               | )      | (22 | ) |
| Net cash used in financing activities                                                |   | (2,479                             | )      | (735 | ) |
| Net change in cash and cash equivalents                                              |   | 147                                |   | 796 |   |
| Cash and cash equivalents at beginning of  period                                    |   | 1,743                              |   | 799 |   |
| Cash and cash equivalents at end of period                                           |   | $                                  | 1,890  |   | $ | 1,595 |   |
|                                                                                 |   |                               |   |   |   |
| Cash paid during the period for interest                                             |   | $                                  | 716    |   | $ | 466 |   |
|                                                                                 |   |                               |   |   |   |
| Cash paid during the period for income taxes                                         |   | $                                  | -0     | - | $ | -0 | - |

 

Theaccompanying notes are an integral part of these financial statements.

 

6

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AMERIVISION COMMUNICATIONS, INC. NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(In thousands)

 (Unaudited)

 

**NOTEA—BASIS OF PRESENTATION**

 

The accompanying unaudited consolidated condensed financial statementsfor AmeriVision Communications, Inc. have been prepared in accordance withgenerally accepted accounting principles for interim financial information.Certain information and footnote disclosures normally included in financialstatements prepared in accordance with generally accepted accounting principleshave been omitted. In the opinion of our management, the condensed consolidatedfinancial statements reflect all adjustments, of a normal and recurring nature,that are necessary to present fairly our financial position as of March 31,2003 and the results of our operations and cash flows for the three monthsended March 31, 2002 and 2003.

 

The balance sheet at December 31, 2002 has been derived from theaudited financial statements at that date but does not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. It is recommended that these condensedconsolidated financial statements be read in conjunction with the consolidatedfinancial statements and notes as of and for the year ended December 31,2002. The interim results are not necessarily indicative of the results for afull year.

** **

**NOTEB—EARNINGS PER SHARE (share and dollars in thousands, per share amounts not inthousands)**

 

The computation of basic and diluted earnings per share for the threemonths ended March 31, 2002 and 2003, is as follows:

 

|                                                                               |   | **Three  months  ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                               |   | **2002**                            |   | **2003** |   |
|                                                                               |   |                                |   |   |   |
| **Basic Earnings Per Share**                                                       |   |                                |   |   |   |
| Net income available to nonredeemable  common stockholders                         |   | $                                   | 786    |   | $ | 83 |   |
|                                                                               |   |                                |   |   |   |
| Average shares of nonredeemable common  stock outstanding                          |   | 825                                 |   | 832 |   |
|                                                                               |   |                                |   |   |   |
| Basic earnings per share                                                           |   | $                                   | .95    |   | $ | .10 |   |
|                                                                               |   |                                |   |   |   |
| **Diluted Earnings Per Share**                                                     |   |                                |   |   |   |
| Net income available to nonredeemable  common stockholders and assumed conversions |   | $                                   | 786    |   | $ | 83 |   |
|                                                                               |   |                                |   |   |   |
| Average shares of nonredeemable common  stock outstanding                          |   | 825                                 |   | 832 |   |
| Stock options and awards                                                           |   | 109                                 |   | 107 |   |
| Conversion of redeemable common stock                                              |   | 16                                  |   | 16 |   |
|                                                                               |   |                                |   |   |   |
| Average shares of common stock outstanding  and assumed conversions                |   | 950                                 |   | 955 |   |
|                                                                               |   |                                |   |   |   |
| Diluted earnings per share                                                         |   | $                                   | .82    |   | $ | .09 |   |

 

7

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**NOTEC — LEGAL MATTERS**

 

In February 2001, the State of Florida made an assessment totalingapproximately $1,728 which includes penalties and interest of approximately$847 for underpayment of various Florida taxes, including gross receipts taxesand sales and use taxes, covering the periods from September 1993 throughAugust 1998. The Company agreed with $14 of the assessment andsubsequently paid that amount. The Company disagrees with the remainingassessment of $1,714 asserting that the payment of taxes that were allegedlyunderpaid was the responsibility of its third-party billing and collectioncompanies. On April 28, 2003 the Company received a Notice of Decision,however, the Company believes that it will ultimately prevail in its protest ofthe assessment, and have not recorded a liability as of March 31, 2003.

 

**NOTED — LINE OF CREDIT ARRANGEMENTS**

 

The Company has a line of credit facility (the “Credit Facility”) witha financial institution. Borrowing availability is based upon collectionsmultiples and earnings ratios, subject to the maximum line of credit. Themaximum amount of the Credit Facility is $15,000. The outstanding balance atDecember 31, 2002 and March 31, 2003 was $13,719 and $13,165,respectively.

 

The Credit Facility matured on January 30, 2003, and carries aninterest rate of prime plus 3.5%, with a contractual floor of 9.0%. The statedinterest rate at March 31, 2003 was 9.0%. The Credit Facility is secured by substantially all of the Company’sassets, including accounts receivable and the Company’s customer base.

 

In connection with closing the Credit Facility, several of theCompany’s creditors agreed to subordinate the Company’s obligations to them infavor of the financial institution. Repayment of these obligations is limitedas specified in the loan and security agreement. The total outstanding debtowed to subordinated creditors as of March 31, 2003, was approximately$4,700.

 

The Credit Facility contains various financial and other covenants withwhich the Company must comply, including a minimum net worth requirement,restrictions on asset acquisitions, restrictions on the payment of dividends,and restrictions on principal and interest payments to subordinated creditors.

 

On August 6, 2002, the Company was notified by its financialinstitution of its intention not to renew its Credit Facility following theoccurrence of its maturity date, January 30, 2003. DuringSeptember 2002, the Company was also notified of an event of default underthe Credit Facility. The event of default resulted from a decrease in theappraised value of the Company’s subscriber base larger than allowed by theCredit Facility. As of December 31, 2002, the Company was in violation ofits debt service coverage ratio. Subsequent to year-end, the Company didreceive a waiver of this violation with its financial institution. The Companyexecuted two amendments to the existing Credit Facility, whereby the financialinstitution would agree to forbear from taking any further actions against theCompany through May 2003. Pursuant to the amendments, the Company wasrequired to reduce the maximum borrowing under the Credit Facility to$14,100  at May 2003, pay certain fees, not make any payments tosubordinated note holders, and follow a determined plan for expenditures, amongother requirements.

 

On February 7, 2003, the California Division of FinancialInstitutions closed Southern Pacific Bank, the parent company of the financialinstitution, and the Federal Deposit Insurance Corporation was named receiver.  The credit facility was subsequently sold toLINC Credit L.L.C. on May 14, 2003. The Company entered into a forbearance agreement with LINC Crediteffective July 14, 2003.  Amongother things, and subject to earlier termination of the forbearance agreementfor certain breaches of the agreement, the forbearance agreement provides forthe credit facility to remain in place until September 30, 2003 at whichtime it may be renewed for two further months under certain conditions.  Upon termination of the forbearanceagreement, LINC Credit will have the right, but not the obligation, toaccelerate the repayment of the entire amount outstanding under the creditfacility.

 

The Company is currently considering available financing options. Asdiscussed further in Note E to the financial statements, if the Company isnot successful in obtaining alternative financing, there could be a materialadverse effect on the Company’s ability to continue as a going concern and tomeet its obligations as they come due.

 

8

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**NOTEE — FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

At March 31, 2003, the Company had an accumulated stockholders’deficiency of $13,813, and negative working capital of $17,791. Decliningbillable minutes, lower rates, and elimination of certain other fees, havereduced the Company’s net sales from $16,375 for the period ended March 31,2002, to $12,340 for the same period in 2003. In addition, as discussed inNote D, the Company has been notified by its primary lender of its intentto not renew the Credit Facility. As discussed below, the Company is searchingbut has yet to replace its Credit Facility. In addition, the Company is indefault to certain subordinated and non-subordinated debt holders with anoutstanding balance of approximately $5,600. These debt holders have the rightto demand payment of the outstanding balances, plus penalties and accruedinterest, subject to the terms of their agreements. Despite the fact that theCompany has realized net income in each of the last three years and the threemonth period ended March 31, 2003, the fact that the Company’s line of creditis not being renewed, the default of the subordinated and non-subordinatednotes payable, as well as the declining customer base and total revenues, raisesubstantial doubts about the Company’s ability to continue in existence as agoing concern.

 

Management plans to maintain the cost-cutting measures enacted inprevious years and continue to search for new ways to continue to controlexpenses, including negotiations of new carrier contracts and improvedcollection procedures. The Company has also implemented or is implementing aseries of initiatives and programs designed to help increase the customer baseand as a result, total revenues. The Company has begun a new agent program,known as the Lifeline Giving Network. The Company is finalizing agreements fornew services such as local service through a bundled package.

 

The Company believes that the combination of continued cost-cuttingmeasures, revenue enhancement programs, and successful negotiation of a newcredit facility must occur to enable the Company to continue in existence as agoing concern for a reasonable period of time. Should the Board of Directorsand management’s plans be unsuccessful, however, the Company may be unable tomeet its obligations as they come due or continue in existence as a goingconcern. The financial statements do not contain any adjustments that might benecessary should the Company be unable to continue in existence as a goingconcern.

 

**NOTE F — STOCK BASED COMPENSATION**

 

At March 31, 2003, the Company has several stock-basedcompensation plans. The Company accounts for those plans under the recognitionand measurement provisions of Accounting Principles Board Opinion No. 25(“APB 25”), “Accounting for Stock Issued to Employees”, and its variousinterpretations. No stock-based employee compensation cost is reflected in netincome, as all options granted under those plans had an exercise price equal toor greater than the market value of the underlying common stock on the date ofthe grant. The following table illustrates the effect on net income andearnings per share if the Company had applied the fair value recognitionprovisions of FASB Statement No. 123, “Accounting for Stock-BasedCompensation”, to stock-based employee compensation.

 

 
|                       |   | **Three  Months Ended March 31,** |   |
|----------------------------|--------|-----------------------------------|--------|
|                       |   | **2002**                          |   | **2003** |   |
|                       |   |                              |   |   |   |
| Net income                 |   |                              |   |   |   |
| As reported                |   | $                                 | 786    |   | $ | 83 |   |
| Pro Forma                  |   | 776                               |   | 73 |   |
| Basic earnings per share   |   |                              |   |   |   |
| As reported                |   | $                                 | .95    |   | $ | .10 |   |
| Pro forma                  |   | .92                               |   | .09 |   |
| Diluted earnings per share |   |                              |   |   |   |
| As reported                |   | $                                 | .82    |   | $ | .09 |   |
| Pro forma                  |   | .81                               |   | .08 |   |

 

Through June 30, 2000, the Company accounted for stock optionsgranted to its non-employee directors in accordance with SFAS No. 123.Effective July 1, 2000, the Company adopted the provisions of FASBInterpretation No. 44, which permits companies to apply the provisions ofAPB No. 25 to its non-employee directors. The Company has reported thecumulative effects of this change in accounting principle in its statement ofoperations for the year ended December 31, 2000.

 

9

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**Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**FINANCIALCONDITION**

 

The data presented below should be read in conjunction with ourcondensed consolidated financial statements and the notes thereto includedelsewhere herein.

 

|                             |   | **December  31,  2002** |    | **March 31,  2003** |   |
|----------------------------------|--------|-------------------------|---------|---------------------|--------|
|                             |   |                    |    |                |   |
| BALANCE SHEET DATA:              |   |                    |    |                |   |
| Working capital (deficit)        |   | $                       | (18,385 | )                   | $      | (17,791 | ) |
| Total long-term debt             |   | $                       | 2,318   |                | $      | 2,102 |   |
| Total stockholder’s deficit |   | $                       | (13,896 | )                   | $      | (13,813 | ) |

 

**GENERAL**

 

Since 1998, we have experienced a decline in annual net sales from$124.2 million in 1998 to $64.1 million in 2002. From March 2002to March 2003, subscribers with traffic have decreased by approximately23%. We have also had several changes in management in recent years. Tocounteract the decline in revenue and subscribers we have implemented severalsignificant cost cutting strategies, as well as strategies to increase oursubscriber base and net revenues. However, with continual declines in net saleswe may not be able to meet our cash requirements in the near future.

 

We are in default of our credit facility and our subordinated andcertain non-subordinated notes. We entered into a forbearance agreement withour lender effective July 14, 2003. Among other things, and subject toearlier termination of the forbearance agreement for certain breaches of theagreement, the forbearance agreement provides for the credit facility to remainin place until September 30, 2003 at which time it may be renewed for twofurther months under certain conditions. Upon termination of the forbearanceagreement, LINC Credit will have the right, but not the obligation, toaccelerate the repayment of the entire amount outstanding under the creditfacility. We continue to hold discussions with our lenders concerningrefinancing the debts and to explore other alternatives for financing ouroperations. To that end, we hired a Finance and Restructuring expert in July toassist us in this process.  We canprovide no assurance that we will be successful in refinancing our debt,consummating a reorganization, or otherwise becoming able to meet ourobligations as they become due or under accelerated repayment terms. Therefore,at March 31, 2003, substantially all of our long-term debt is classifiedas current. Unless these matters can be resolved, there exists substantialdoubt about our ability to continue as a going concern, as expressed in ourindependent auditors’ report included in our 2002 Annual Report on Form 10-K.

 

From our inception through December 31, 2002 we have incurredcumulative net operating losses totaling approximately $12.1 million.During the years ended December 31, 2001 and 2002, we generated net incomeof $3.4 million, and $1.3 million. The improvements of net incomefrom operating activities were primarily achieved as a result of reductions inoperating expenses. However, for the three month period ended March 31, 2003our net income was $83,000 compared to $786,000 for the same period in 2002. Wereduced our accumulated stockholders’ deficiency from approximately$25.8 million at December 31, 1997 to approximately$13.8 million at March 31, 2003. In addition to the net operatinglosses, the accumulated deficit was partially due to our declaration andpayment of quarterly capital distributions to our stockholders during theperiod between 1994 and 1997, totaling approximately $16.0 million, andour redemptions of common stock totaling approximately $4.7 million. Ourcurrent liabilities exceeded our current assets by approximately$18.4 million at December 31, 2002 and $17.8 million at March 31, 2003.

 

We bill our customers under several different methods. Some customersreceive their long distance bills directly from us. We also have billing andcollection agreements with several of the regional bell operating companies, orRBOCs. Customers who are billed through the RBOCs receive their long distancephone bill with their local phone bill from the RBOC. We have also used a thirdparty billing and collection service for customer billings through other localexchange carriers, or LECs, or RBOCs with whom we did not have a separatebilling and collection agreement. However, we have found this arrangement to benon-cost effective and have ceased that arrangement effectiveNovember 2002.

 

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Selling, general and administrative expenses include billing feescharged by LECs and other third party billing and collection companies, baddebts, commissions to salespersons, advertising and telemarketing expenses,customer service and support, and other general overhead expenses.

 

Interest expense includes the cost of financing our accounts receivableand asset purchases, including loans from our primary financial institutionunder our credit facility.

 

We have recognized a net deferred tax asset, primarily due to netoperating loss carryforwards and allowance for doubtful accounts.

 

In 1996, the FCC adopted regulations implementing theTelecommunications Act of 1996. To support universal service, carriers arerequired to contribute certain percentages of their annual gross receipts to fundthe High Cost Fund, the Schools and Libraries Fund, and the Low Income Fund,collectively known as the Universal Service Fund, or USF. The FCC has allowedcarriers to offset these charges by passing them through to their customers ata percentage rate greater than what is charged to the carrier. EffectiveApril 2003, the FCC has passed additional legislation that will no longerallow for additional mark up to the customers in regards to that pass throughliability. As a result, we will reduce our USF charges according to thequarterly rates set by the FCC. This change is expected to impact annual netsales and income from operations in 2003. In 2002, our net sales generated bythe USF fee were $4.0 million and the amount included in cost of telecommunicationservices was $2.2 million. For the three month period ended March 31,2003, our net sales generated by the USF fee were $819,000 and the amountincluded in cost of telecommunication services was $379,000.

 

**RESULTSOF OPERATIONS**

 

THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH31, 2003

 

The following table sets forth for the three-month periods indicatedthe percentage of net sales represented by certain items in our statements ofoperations:

 

|                                           |   | **Three  Months Ended March 31,** |   |
|------------------------------------------------|--------|-----------------------------------|--------|
|                                           |   | **2002**                          |   | **2003** |   |
|                                           |   |                              |   |   |   |
| Net sales                                      |   | 100.0                             | %      | 100.0 | % |
| Operating expenses:                            |   |                              |   |   |   |
| Cost of telecommunications service             |   | 39.9                              | %      | 37.6 | % |
| Selling, general & administrative  expense |   | 44.8                              | %      | 51.5 | % |
| Depreciation and amortization expense          |   | 3.3                               | %      | 4.6 | % |
| Total operating expenses                       |   | 88.0                              | %      | 93.7 | % |
| Income from operations                         |   | 12.0                              | %      | 6.3 | % |
| Interest expense and other                     |   | (4.2                              | )%     | (5.2 | )% |
| Income before income tax                       |   | 7.8                               | %      | 1.1 | % |
| Income tax expense                             |   | 3.0                               | %      | 0.4 | % |
| Net income                                     |   | 4.8                               | %      | 0.7 | % |

 

Net Sales: Net sales decreased 25% to $12.3 million for thecurrent quarter from $16.4 million for the same quarter the year earlier.This decrease was the result of fewer billable minutes being used by a smallercustomer base. Total billable minutes decreased approximately 30% for thecurrent quarter compared to the same quarter last year.

 

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Our new rate plans are geared towards direct bill as we continue tobuild our customer retention and brand awareness. Approximately 57.0% of ourcustomers received a bill directly from us in the three month period endedMarch 31, 2003 compared to the 46.0% for the same quarter the year earlier. Wehave also implemented additional procedures to increase the percentage ofdirect billed customers.

 

Cost of Telecommunication Services: Our cost of sales are variablecosts based on amounts paid to our providers for our customers’ long distanceusage, as well as the amounts paid to providers for customer service andsupport. For the three months ended March 31, 2003, the overall cost oftelecommunication service was 37.6% compared to 39.9% of net sales for the sameperiod in 2002.

 

During the years ended December 31, 2002 and 2001, the cost ofsales and relative percentage of costs to net sales was as follows:

 

|                                    |   | **Three  Months Ended March 31,** |   |
|-----------------------------------------|--------|----------------------------------------|--------|
|                                    |   | **2002**                               |   | **2003** |   |
|                                    |   | **Amount  (000’s)**               |   | **Percentage  of  Net Sales** |   | **Amount  (000’s)** |   | **Percentage  of  Net Sales** |   |
|                                    |   |                                   |   |   |   |   |   |   |   |
| Switchless and switched operation costs |   | $                                      | 5,428  |   | 33.1 | % | $ | 3,876 |   | 31.4 | % |
| PICC/USF fees                           |   | 825                                    |   | 5.0 | % | 439 |   | 3.6 | % |
| Other related costs                     |   | 288                                    |   | 1.8 | % | 328 |   | 2.6 | % |
| Totals                                  |   | $                                      | 6,541  |   | 39.9 | % | $ | 4,643 |   | 37.6 | % |

 

Overall switchless and switched operation costs decreased $1.6 millionin the three month period ended March 31, 2003 compared to the same period in2002, due to reduced carrier costs per minute and a reduction in total minutes.

 

Selling, General and Administrative Expenses: Selling, general andadministrative expenses decreased by approximately $1.1 million from the threemonths ended March 31, 2002 to the same period in 2003, while the percent ofnet sales increased by approximately 6.7%. This was primarily due to the fixed costs being divided over a reducednet sales amount. The significant components of selling, general and administrativeexpenses include the following:

 

|                                 |   | **Three  Months Ended March 31,** |   |
|--------------------------------------|--------|-----------------------------------|--------|
|                                 |   | **2002**                          |   | **2003** |   |
|                                 |   | **Amount  (000’s)**          |   | **% of  Net Sales** |   | **Amount  (000’s)** |   | **% of  Net Sales** |   |
|                                 |   |                              |   |   |   |   |   |   |   |
| Billing and collection expenses      |   | $                                 | 1,867  |   | 11.4 | % | $ | 1,866 |   | 15.1 | % |
| Advertising and marketing expense    |   | 424                               |   | 2.6 | % | 131 |   | 1.1 | % |
| Payments to non-profit organizations |   | 1,212                             |   | 7.4 | % | 853 |   | 6.9 | % |
| Payroll expense                      |   | 1,981                             |   | 12.1 | % | 1,735 |   | 14.1 | % |
| Other                                |   | 1,850                             |   | 11.3 | % | 1,767 |   | 14.3 | % |
| Total                                |   | $                                 | 7,334  |   | 44.8 | % | $ | 6,352 |   | 51.5 | % |

 

Billing and Collection Expenses: Billing and collection expensesinclude the contractual billing fees and bad debts charged by LECs and otherthird party billing companies. It also includes bad debt charge-offs from ourdirect bill customers. The efforts to collect the direct bill customer accountsare completed by internal personnel.

 

Advertising and Marketing Expense: Advertising expense decreased forthe three months ended March 31, 2003 to

 

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approximately $131,000, compared to approximately $424,000 in the sameperiod in 2002. The decrease was primarily due to more focused efforts onspecific marketing.

 

Payments to Non-Profit Organizations: Payments to non-profitorganizations decreased by approximately $360,000 from the three months endedMarch 31, 2002 to 2003, due primarily to an overall decrease in net sales.During the three months ended March 31, 2003, we made approximately 3,500partner sharing distributions to affinity partners on a monthly basis.Supporters of ten of these affinity partners accounted for approximately 40.0%of our gross revenue during the period. The termination of our relationshipwith any of these ten affinity partners may have a material adverse effect onour financial condition and results of operations. In the second quarter of2003, our management agreed to terms and signed an agreement with a significantnew Affinity Partner.

 

Payroll Expenses: Payroll expenses decreased by approximately $246,000for the three months ended March 31, 2003 compared to the same period in2002, due primarily to reorganization efforts and elimination of certainexpenses.

 

Other General and Administrative Expense: Other general andadministrative expenses decreased by approximately $83,000 during the threemonths ended March 31, 2003 compared to the same period in 2002. Theprimary reason for these decreases was due to increased controls on expenses.

 

Depreciation and Amortization: Depreciation and amortization expensetotaled approximately $567,000 for the three months ended March 31, 2003compared to approximately $536,000 in the same period in 2002.

 

Interest Expense and Other Finance Charges: Interest expense and otherfinance charges decreased to approximately $652,000 for the three months endedMarch 31, 2003 compared to $702,000 in the same period in 2002. Thisdecrease is attributable to a reduction in our credit facility balance due torepayments from operating cash flow.

 

Income Tax Expense: During the three months ended March 31, 2003 and2002 we recorded deferred income tax expense of approximately $53,000 and$484,000.  The income tax benefitsrecognized in the financial statements consists primarily of the deferred taxeffects of the temporary differences between the financial and tax basis ofassets and liabilities, and net operating loss carryforwards.

 

Net Income: During the three months ended March 31, 2003 and 2002we reported net income of $83,000 and $786,000.

 

**FINANCIALCONDITION AND LIQUIDITY**

 

Our working capital has improved by $594,000 from December 31, 2002 toMarch 31, 2003 while our cash increased by $796,000. During the same period, wereduced our credit facility by $554,000.

 

We have a credit facility with the borrowing availability based uponcollections multiples and earnings ratios, subject to the maximum line ofcredit. The maximum amount of the credit facility is $15.0 million. Theoutstanding balance at December 31, 2002 was $13.7 million and atMarch 31, 2003 was $13.2 million.

 

*Credit Facility and Loans:*  The credit facility matured onJanuary 30, 2003, and carried an interest rate of prime plus 3.5%, with acontractual floor of 9.0%. The stated interest rate at December 31, 2002and March 31, 2003 was 9.0%.

 

In connection with closing the credit facility, several of ourcreditors agreed to subordinate our obligations to them in favor of thefinancial institution. Repayment of these obligations is limited as specifiedin the loan and security agreement. The total outstanding debt owed tosubordinated creditors as of March 31, 2003 was approximately$4.7 million.

 

The credit facility contains various financial and other covenants withwhich we must comply, including a minimum net worth requirement, restrictionson asset acquisitions, restrictions on the payment of dividends, andrestrictions on principal and interest payments to subordinated creditors.

 

On August 6, 2002, our lender notified us that it would not renewour $28.5 million credit facility following its

 

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maturity on January 30, 2003. Since September 2002, we havebeen in default under our credit facility. We have executed two amendments toour credit facility, pursuant to which our lender has agreed to forbear fromtaking any action against us until the earlier of another event of default orMay 30, 2003. Pursuant to the amendments, we are required to reduce themaximum borrowing under the credit facility to $14.1 million atMay 30, 2003, as well as pay certain fees, not make any payments tosubordinated note holders, and follow a determined plan for expenditures, amongother requirements. Under the amendments, at December 31, 2002, we were inviolation of our debt service coverage ratio. We received a waiver of thisviolation from our lender. Our lender has a first secured interest insubstantially all of our assets. On February 7, 2003, the CaliforniaDivision of Financial Institutions closed Southern Pacific Bank, the parentcompany of our lender, and the Federal Deposit Insurance Corporation, or FDIC,was appointed as receiver of our lender. The FDIC sold our loan to LINC Credit,L.L.C. on May 14, 2003.  Wesubsequently entered into a forbearance agreement with LINC Credit effectiveJuly 14, 2003. Among other things, and subject to earlier termination ofthe forbearance agreement for certain breaches of the agreement, theforbearance agreement provides for the credit facility to remain in place untilSeptember 30, 2003 at which time it may be renewed for two further monthsunder certain conditions. Upon termination of the forbearance agreement, LINCCredit will have the right, but not the obligation, to accelerate the repaymentof the entire amount outstanding under the credit facility. We can give noassurance that we will successfully renegotiate the credit facility or that thecredit facility will be amended to include terms favorable to us or that LINCCredit will continue to forebear from taking action against us.

 

Similarly, we are in default under $5.6 million principal amountof our subordinated and non-subordinated notes. The non-subordinated lenderpresently has the right, but not the obligation, to accelerate the repayment ofthe entire $1.7 million principal balance and related penalties andinterest outstanding under this notes. The subordinated lenders also have theright to demand repayment of the entire $3.9 million principal balance andrelated penalties and interest outstanding under these notes, subject tonotification to and prior rights of the secured creditor.  Certain of our subordinated note holdershave expressed a desire to demand and accelerate the repayment of their notes.

 

 

### **CASH FLOWS**

### ** **

OperatingActivities

 

Significant uses of cash in operating activities during the threemonths ended March 31, 2003 include a decrease in accounts payable and accruedexpenses of $813,000 and an increase of prepaid expenses and other assets of$21,000. Significant sources of cash in operating activities for 2003 were adecrease in accounts receivable of $1.6 million. We also generated cash fromoperations by recording net income of $83,000, deferred income tax expense of$53,000, and certain non-cash expenses, principally depreciation andamortization, of $681,000.

 

Significant uses of cash in operating activities during the threemonths ended March 31, 2002 included an increase in prepaid expenses and otherassets of $275,000. A significant source of cash in operating activities duringthe three months ended March 31, 2002 includes a decrease in accountsreceivable of $1.1 million. We also generated cash from operations byrecording net income of $786,000, deferred income tax expense of $484,000, andcertain non-cash expenses, principally depreciation and amortization of$561,000.

 

###### **Investing Activities**

 

Our investing activities during the three months ended March 31, 2003and 2002 consisted of property and equipment purchases of $5,000 and $200,000.

 

Financing Activities

 

During the three months ended March 31, 2003 and 2002, financingactivities used $736,000 and $2.5 million in cash. The most significantuse of cash was the repayments of notes and leases payable, including ourcredit facility. The repayment of loans to related parties totaledapproximately $159,000 and $58,000 for the three months ended March 31,2003 and 2002.

 

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**OTHER MATTERS**

 

*Intangible Assets*

 

We amortize intangible assets representing covenants not to compete ona straight-line basis over their contractual periods ranging up to five years.At each balance sheet date, we assess whether there has been any permanentimpairment in the value of these intangible assets. The factors considered byus include if any breach in the agreements has occurred. The measurement ofpossible impairment is based on the ability to recover the balance ofintangibles from expected future operating cash flows on an undiscounted basis.We believe there has been no impairment in the carrying value of intangibleassets at March 31, 2003. However, the contractual period of a covenantnot to compete with a former CEO can be accelerated upon termination of theconsulting agreement with the former CEO. If the consulting agreement isterminated by the former CEO or by us, it would cause the remaining book valueof the non competition agreement, approximately $1.7 million, to beamortized as an expense over the succeeding six months.

 

#### *Inflation andChanging Prices*

 

Telecommunications revenues do not necessarily track the changes ingeneral inflation, as they tend to respond to the level of activity on the partof the telecommunications industry in combination with the number of competingcompanies. Capital and operating costs are influenced to a larger extent byspecific price changes in the telecommunications industry and to a lesserextent by changes in general inflation.

 

#### *Forward-LookingInformation*

 

This report contains forward-looking statements and information thatare based on the beliefs of our management as well as assumptions made by andinformation currently available to management. All statements other thanstatements of historical fact included in this Report constitute forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995, including but not limited to statements identified by the words“anticipate,” “believe,” “intend,” “estimate” and “expect” and similarexpressions. Such statements reflect our current views with respect to futureevents, based on what we believe are reasonable assumptions; however, suchstatements are subject to certain risks, uncertainties and assumptions. Shouldone or more of these risks or uncertainties materialize, or should underlyingassumptions prove incorrect, actual results may vary materially from those inthe forward-looking statements. We disclaim any intention or obligation toupdate or review any forward-looking statements or information, whether as aresult of new information, future events or otherwise.

 

**Item 3. Quantitativeand Qualitative Disclosure about Market Risk**

 

We are not exposed to market risk from the changes in marketablesecurities, as we have no such instruments.

 

Inflation generally affects us by increasing our cost of labor,equipment and new materials. We do not believe that inflation has had anymaterial effect on our results of operations during the three month periodsending March 31, 2002 and 2003.

 

We are exposed to future earnings or cash flow fluctuations fromchanges in interest rates on borrowings under our credit facility since amountsborrowed under the credit facility accrue interest at a fluctuating rate equalto the prime lending rate, or prime, plus 3.5%. Our stated interest rate atMarch 31, 2000 was 9.0%, which represents the floor rate of our creditfacility. At March 31, 2003 we had $13.2 million of outstanding debtbearing interest at floating rates. Market risk is estimated as the potentialincrease in interest rate for borrowing under our credit facility resultingfrom an increase in prime. Based on borrowings under our credit facility atMarch 31, 2003, a hypothetical increase of one percentage point in primewould increase our interest expense on an annual basis by approximately$132,000.

 

Our operations are all originated within the United States and wetherefore conduct all business transactions in U.S. dollars.

 

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**Item 4. Controls andProcedures**

 

Within the 90-day period prior to the filing of this report, anevaluation was performed under the supervision and with the participation ofour management, including the Chief Executive Officer (CEO) and the ChiefFinancial Officer (CFO), of the effectiveness of the design and operation ofour disclosure controls and procedures (as defined inRule 13a-14(c) under the Securities and Exchange Act of 1934). Basedon that evaluation, our management, including the CEO and CFO, concluded thatour disclosure controls and procedures were effective.

 

Except for the resignation of the our Chief Financial Officer in April2003, there have been no significant changes in our internal controls or inother factors that could significantly affect these controls subsequent to thedate of their evaluation.

 

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**PARTII. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

In February 2001, the State of Florida made an assessment totalingapproximately $1.7 million, which includes penalties and interest ofapproximately $847,000 for underpayment of various Florida taxes, includinggross receipts taxes and sales and use taxes, covering the periods fromSeptember 1993 through August 1998. We agreed with $14,000 of theassessment and subsequently paid that amount. We disagree with the remainingassessment of $1.7 million asserting that the payment of taxes that wereallegedly underpaid was the responsibility of our third-party billing andcollection companies. On April 28, 2003, we received a Notice of Decision,however, we believe that we will ultimately prevail in our protest of theassessment, and have not recorded a liability as of March 31, 2003.

 

 

**Item 2. Changes inSecurities and Use of Proceeds**

 

In February 2003, we issued 500 shares to an executive search firm inexchange for approximately $20,000 of services. The issuance was exempt fromregistration under the Securities Act of 1933 pursuant to Section 4(2)thereunder.

 

 

### **Item 3. Default upon SeniorSecurities**

 

We are in default of our credit facility, as more fully described in"Management's Discussion and Analysis of Financial Conditions and Resultsof Operations".  Our existingdefault in our credit facility has been temporily waived pursuant to theforbearance agreement with our primary lenders.

 

 

**Item 4. Submission ofMatters to a Vote of Security Holders**

 

Not applicable.

 

 

**Item 5. Other Information**

 

 

#### ***Merger with PowerNetGlobal Communications, Inc., or PNG***.    Our previously announced mergernegotiations with PowerNet Global Communications, Inc. were terminated Friday,April 25, 2003.

 

***Agreements withCarriers.*** In 2003, we lowered our transmission service costs and resolved certainbilling disputes and claims between our vendors and us. We are continuingnegotiations with existing and prospective carriers that would further reduceour cost of telecommunications service for 2003. 

** **

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**Item 6. Exhibits andreports on Form 8-K**

 

**(a)**                                  **Exhibits**

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                       |
|---------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                                                                                                  |
| 3.1                 |   | Certificate of Incorporation of the Registrant (which is incorporated  herein by reference to Exhibit 3.1 to Registrant’s Form 10 registration  statement, filed October15, 1999)                                                                                                                                                                |
| 3.2                 |   | Amended and Restated Bylaws of the Registrant (which is incorporated  herein by reference to Exhibit 3.2(ii) to Registrant’s Second Quarter Form  10-Q, filed August 19, 2002)                                                                                                                                                                   |
| 4.1                 |   | Form of certificate representing shares of the Registrant’s common  stock (which is incorporated herein by reference to Exhibit 4.1 to  Registrant’s Form 10 registration statement, filed October 15, 1999)                                                                                                                                |
| 4.2                 |   | Form of Type C Redemption Agreement (which is incorporated herein by  reference to Exhibit 4.4 to Registrant’s Form 10 registration statement,  filed October 15, 1999)                                                                                                                                                                          |
| 4.3                 |   | Form of Type D Redemption Agreement (which is incorporated herein by  reference to Exhibit 4.5 to Registrant’s Form 10 registration statement,  filed October 15, 1999)                                                                                                                                                                          |
| 4.4                 |   | Form of Convertible Note (which is incorporated herein by reference  to Exhibit 4.6 to Registrant’s Form 10 registration statement, filed October  15, 1999)                                                                                                                                                                                     |
| 4.5                 |   | Promissory Note dated April 20, 1999, payable by the Registrant to  John Damoose (which is incorporated herein by reference to Exhibit 4.8 to  Registrant’s Form 10 registration statement, filed October 15, 1999)                                                                                                                              |
| 4.7                 |   | Promissory Note dated April 20, 1999, payable by the Registrant to  C.A.S.E. (which is incorporated herein by reference to Exhibit 4. to  Registrant’s Form 10 registration statement, filed October 15, 1999)                                                                                                                                   |
| 4.8                 |   | Form of Subordinated Note dated February 1, 2001. (which is  incorporated herein by reference to Exhibit 4.8 to Registrant’s 2002 Form  10-K, filed April 15, 2003)                                                                                                                                                                              |
| 4.8.1               |   | List of Subordinated Notes dated February 1, 2001. (which is  incorporated herein by reference to Exhibit 4.8.1 to Registrant’s 2002 Form  10-K, filed April 15, 2003)                                                                                                                                                                           |
| 4.9                 |   | Promissory Note dated November 15, 2001, payable by the Registrant to  Larry J. Geringer(which is incorporated herein by reference to Exhibit 4.9 to  Registrant’s 2002 Form 10-K, filed April 15, 2003)                                                                                                                                         |
| 4.10                |   | Promissory Note dated November 15, 2001, payable by the Registrant to  Tineke C. Geringer. (which is incorporated herein by reference to Exhibit  4.10 to Registrant’s 2002 Form 10-K, filed April 15, 2003)                                                                                                                                     |
| 4.11                |   | Form of Subordinated Tranche ‘B’ and ‘C’ Note Payable dated  February 15, 2000. (which is incorporated herein by reference to Exhibit  4.11 to Registrant’s 2002 Form 10-K, filed April 15, 2003)                                                                                                                       |
| 4.11.1              |   | List of Subordinated Tranche ‘B’ and ‘C’ Note Payables dated  February 15, 2000. (which is incorporated herein by reference to Exhibit  4.11.1 to Registrant’s 2002 Form 10-K, filed April 15, 2003)                                                                                                                    |
| 9.1                 |   | Freeny Voting Trust Agreement, dated September 1, 2001, by and among  the Registrant, Tracy C. Freeny and Sharon Freeny, as beneficiaries, and  David Clark, Russell Beaty, and David Thompson, as trustees (which is  incorporated herein by reference to Exhibit 10.30 to Registrant’s 2001 Third  Quarter Form 10-Q, filed December 28, 2001) |
| 10.1                |   | Loan and Security Agreement dated as of February 4, 1999 between the  Registrant and Coast Business Credit (which is incorporated herein by  reference to Exhibit 10.18 to Registrant’s Form 10 registration statement,  filed October 15, 1999)                                                                                                 |
| 10.1.1              |   | Amendment Number One to Loan and Security Agreement dated as of  October 12, 1999 between the Registrant and Coast Business Credit (which is  incorporated herein by reference to Exhibit 10.18.1 to Registrant’s Form 10  registration statement, filed October 15, 1999)                                                                       |
| 10.1.2              |   | Amendment Number Two to Loan and Security Agreement dated as of May  10, 2000 between the Registrant and Coast Business Credit (which is  incorporated herein by reference to Exhibit 10.18.2 to Registrant’s Form 10  registration statement, filed July 10, 2000)                                                                              |

 

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| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                                                                             |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                                        |
| 10.1.3              |   | Amendment Number Three to Loan and Security Agreement dated as of  December 19, 2001 between the Registrant and Coast Business Credit (which is  incorporated herein by reference to Exhibit 10.1.3 to Registrant’s 2001 Form  10-K, filed, April 16, 2002)                            |
| 10.1.4              |   | Amendment Number Four to Loan and Security Agreement dated as of  March 22, 2002 between the Registrant and Coast Business Credit. (which is  incorporated herein by reference to Exhibit 10.1.4 to Registrant’s 2002 Form  10-K, filed April 15, 2003)                                |
| 10.1.5              |   | Amendment Number Five to Loan and Security Agreement dated as of  November 26, 2002 between the Registrant and Coast Business Credit. (which is  incorporated herein by reference to Exhibit 10.1.5 to Registrant’s 2002 Form  10-K, filed April 15, 2003)                             |
| 10.1.6              |   | Amendment Number Six to Loan and Security Agreement dated as of  January 31, 2003 between the Registrant and Coast Business Credit. (which is  incorporated herein by reference to Exhibit 10.1.6 to Registrant’s 2002 Form  10-K, filed April 15, 2003)                               |
| 10.1.7              |   | Waiver of Event of Default on Loan and Security Agreement dated as of  February 27, 2003 between the Registrant and Coast Business Credit. (which is  incorporated herein by reference to Exhibit 10.1.7 to Registrant’s 2002 Form  10-K, filed April 15, 2003)                        |
| 10.2                |   | Settlement Agreement, dated as of August 31, 2001, by and between the  Registrant and Tracy C. Freeny (which is incorporated herein by reference to  Exhibit 10.28 to Registrant’s 2001 Third Quarter Form 10-Q, filed December  28, 2001)                                             |
| 10.3**              |   | Consulting Agreement, dated as of September 1, 2001, by and between  the Registrant and Tracy C. Freeny (which is incorporated herein by reference  to Exhibit 10.29 to Registrant’s 2001 Third Quarter Form 10-Q, filed December  28, 2001)                                           |
| 10.4                |   | Confidentiality Agreement, effective as of August 31, 2001, by and  between the Registrant and Tracy C. Freeny (which is incorporated herein by  reference to Exhibit 10.31 to Registrant’s 2001 Third Quarter Form 10-Q,  filed December 28, 2001)                                    |
| 10.5                |   | Promissory Note dated September 1, 2001, payable by the Registrant to  Tracy C. Freeny (which is incorporated herein by reference to Exhibit 10.32  to Registrant’s 2001 Third Quarter Form 10-Q, filed December 28, 2001)                                                             |
| 10.6**              |   | Amended and Restated Employment Agreement, dated as of May 24, 2000  between the Registrant and Stephen D. Halliday (which is incorporated herein  by reference to Exhibit 10.3 to Registrant’s Form 10 registration statement,  filed July 10, 2000)                                  |
| 10.8                |   | Asset Purchase Agreement, dated as of April 30, 1999, among Hebron,  AmeriVision, Tracy Freeny, Carl Thompson and S. T. Patrick (which is  incorporated herein by reference to Exhibit 10.13 to Registrant’s Form 10  registration statement, filed October 15, 1999)                  |
| 10.9                |   | Lease/License Agreement, dated as of April 30, 1999 between Hebron  and AmeriVision (which is incorporated herein by reference to Exhibit 10.14  to Registrant’s Form 10 registration statement, filed October 15, 1999)                                                               |
| 10.10               |   | Form of Promissory Note payable by AmeriVision to Hebron (form to be  used with respect to Switch Note and Internet Note) (which is incorporated  herein by reference to Exhibit 10.15 to Registrant’s Form 10 registration  statement filed October 15 1999)                          |
| 10.11               |   | Promissory Note dated February 1, 1999, in the original principal  amount of $2,274,416 payable by AmeriVision to Hebron (which is incorporated  herein by reference to Exhibit 10.16 to Registrant’s Form 10 registration  statement, filed October 15, 1999)                         |
| 10.12               |   | Capital Stock Escrow and Disposition Agreement dated April 30, 1999  among Tracy C. Freeny, Hebron and Bush Ross Gardner Warren & Rudy, P.A.  (which is incorporated herein by reference to Exhibit 10.17 to Registrant’s  Form 10 registration statement, filed October 15, 1999) |
| 10.13**             |   | Letter Agreement dated as of December 31, 1999 between the Company  and John Telling (which is incorporated herein by reference to Exhibit 10.24  to Registrant’s Form 10 registration statement, filed July 10, 2000)                                                                 |

 

19

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| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                                                          |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                     |
| 10.14**             |   | Stock Incentive Plan (which is incorporated herein by reference to  Exhibit 10.27 to Registrant’s Form 10 registration statement, filed July 10,  2000)                                                                                                             |
| 10.15               |   | Acknowledgement and Agreement, dated as January 1, 2002 between the  Registrant and Stephen D. Halliday (which is incorporated herein by reference  to Exhibit 10.1 to Registrant’s 2002 Form 10-Q, filed August 19, 2002)                                          |
| 10.16               |   | Consulting and Settlement Agreement, dated as January 1, 2002 between  the Registrant and Stephen D. Halliday (which is incorporated herein by  reference to Exhibit 10.1 to Registrant’s 2002 Form 10-Q, filed August 19,  2002)                                   |
| 10.17               |   | Promissory Note, dated as July 10, 2002 between the Registrant and  Stephen D. Halliday (which is incorporated herein by reference to Exhibit  10.1 to Registrant’s 2002 Form 10-Q, filed August 19, 2002)                                                          |
| 10.18               |   | Confidentiality and Non-Competition Agreement, dated as June 26, 2002  between the Registrant and Stephen D. Halliday (which is incorporated herein  by reference to Exhibit 10.1 to Registrant’s 2002 Form 10-Q, filed August 19,  2002)                           |
| 10.21**             |   | Consulting Agreement dated October 1, 2002 between the Registrant and  Task Force 3, LLC (which is incorporated herein by reference to Exhibit 10.21  to Registrant’s 2002 Form 10-K, filed April 15, 2003)                                                         |
| 10.22**             |   | Employment Agreement dated January 31, 2002 between the Registrant  and Al Jones (which is incorporated herein by reference to Exhibit 10.22 to  Registrant’s 2002 Form 10-K, filed April 15, 2003)                                                                 |
| 10.23**             |   | Employment Agreement dated November 11, 2002 between the Registrant  and Robert Cook (which is incorporated herein by reference to Exhibit 10.23  to Registrant’s 2002 Form 10-K, filed April 15, 2003)                                                             |
| 10.24               |   | Telecommunications Services Agreement dated April 20, 1999 by and  between the Registrant and WorldCom Network Services, Inc. (which is  incorporated herein by reference to Exhibit 10.19 to Registrant’s Form 10  registration statement, filed October 15, 1999) |
| *10.24.1(+)         |   | Telecommunications Services Agreement Amendment 14 dated  January 16, 2003 by and between the  Registrant and WorldCom Network Services, Inc.                                                                                                                       |
| *10.24.2(+)         |   | Telecommunications Services Agreement Amendment 15 dated  November 26, 2002 by and between the  Registrant and WorldCom Network Services, Inc.                                                                                                                      |
| *10.24.3(+)         |   | Telecommunications Services Agreement Amendment 16 dated  January17, 2003 by and between the  Registrant and WorldCom Network Services, Inc.                                                                                                                        |
| 10.25               |   | Program Enrollment Terms dated April 20, 1999 by and between the  Registrant and WorldCom Network Services, Inc. (which is incorporated herein  by reference to Exhibit 10.20 to Registrant’s Form 10 registration statement,  filed October 15, 1999)              |
| 10.25.1(+)          |   | Amended and Restated Program Enrollment Terms dated November 11, 2001  by and between the Registrant and WorldCom Network Services, Inc. (which is  incorporated herein by reference to Exhibit 10.25.1 to Registrant’s 2002 Form  10-K, filed April 15, 2003)      |
| 10.26               |   | Security Agreement dated April 20,1999 by and between the Registrant  and WorldCom Network Services, Inc. (which is incorporated herein by  reference to Exhibit 10.20 to Registrant’s Form 10 registration statement,  filed October 15, 1999)                     |
| 10.27(+)            |   | Master Service Agreement dated October 18, 2002 by and between the  Registrant and Broadwing Communications Services, Inc. (which is incorporated  herein by reference to Exhibit 10.27 to Registrant’s 2002 Form 10-K, filed  April 15, 2003)                      |
| *10.28              |   | Lease agreement dated January 1, 2000, by and between the Registrant  and Hebron Communications Corporation.                                                                                                                                                             |
| *10.29              |   | Lease agreement dated November 18, 2002, by and between the  Registrant and Hebron Communications Corporation.                                                                                                                                                           |

 

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*                                         Filedherewith

 

**                                  Compensatorycontract

 

(+)                                 Confidentialtreatment requested

 

20

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**(b)**                                  **Reports onForm 8-K**

 

On March 11, 2003, we filed an 8-K announcing the FDIC being appointedreceiver of our lender and our negotiations of a merger with PowerNet GlobalCommunications, Inc.

 

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities and Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

 
|                | **AMERIVISION  COMMUNICATIONS, INC.** |
|---------------------|--------------------------------------------|
|                |                                       |
|                |                                       |
|                |                                       |
|                |                                       |
|                |                                       |
|                |                                       | /s/ Robert D. Cook |   |
| DATE: July 30, 2003 | By:                                        | Robert D. Cook, President and Chief Executive Officer |   |
|                |                                       |   |
|                |                                       | /s/ Randall W. Muth |   |
|                | By:                                        | Randall W. Muth, Chief Financial Officer |   |
|                |                                       |   |

 

21

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**CERTIFICATIONS**

 

I, Robert Cook, certify that:

 
| 1.  I have reviewed this  quarterly report on Form 10-Q of Amerivision Communications, Inc.;                                                                                                                                                                                                                                                                                                       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| 2.  Based on my knowledge,  this quarterly report does not contain any untrue statement of a material  fact or omit to state a material fact necessary to make the statements made,  in light of the circumstances under which such statements were made, not  misleading with respect to the period covered by this quarterly report;                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| 3.  Based on my knowledge, the  financial statements, and other financial information included in this  quarterly report, fairly present in all material respects the financial  condition, results of operations and cash flows of the registrant as of, and  for, the periods presented in this quarterly report;                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| 4.  The registrant’s other  certifying officers and I are responsible for establishing and maintaining disclosure  controls and procedures (as defined in Exchange Act Rules 13a-14 and  15d-14) for the registrant and we have:                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         | a) | designed such disclosure controls and procedures to ensure that  material information relating to the registrant, including its consolidated  subsidiaries, is made known to us by others within those entities,  particularly during the period in which this quarterly report is being  prepared; |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         | b) | evaluated the effectiveness of the registrant’s disclosure controls  and procedures as of a date within 90 days prior to the filing date of  this quarterly report (the “Evaluation Date”); and |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         | c) | presented in this quarterly report our conclusions about the  effectiveness of the disclosure controls and procedures based on our  evaluation as of the Evaluation Date; |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| 5.  The registrant’s other  certifying officers and I have disclosed, based on our most recent  evaluation, to the registrant’s auditors and the audit committee of  registrant’s board of directors (or persons performing the equivalent  function):                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         | a) | all significant deficiencies in the design or operation of internal  controls which could adversely affect the registrant’s ability to record,  process, summarize and report financial data and have identified for the  registrant’s auditors any material weaknesses in internal controls; and |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         | b) | any fraud, whether or not material, that involves management or other  employees who have a significant role in the registrant’s internal controls;  and |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| 6.  The registrant’s other  certifying officers and I have indicated in this quarterly report whether or  not there were significant changes in internal controls or in other factors  that could significantly affect internal controls subsequent to the date of  our most recent evaluation, including any corrective actions with regard to  significant deficiencies and material weaknesses. |
|                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |  |  |

 

Date: July 30, 2003

 
| /s/ Robert D. Cook                 |   |
|------------------------------------|--------|
| Robert D. Cook                     |
| President, Chief Executive Officer |

 

22

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**CERTIFICATIONS**

 

I, Randall W. Muth, certify that:

 
| 1.  I have reviewed this  quarterly report on Form 10-Q of Amerivision Communications, Inc.;                                                                                                                                                                                                                                                                                                       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| 2.  Based on my knowledge,  this quarterly report does not contain any untrue statement of a material  fact or omit to state a material fact necessary to make the statements made,  in light of the circumstances under which such statements were made, not  misleading with respect to the period covered by this quarterly report;                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| 3.  Based on my knowledge, the  financial statements, and other financial information included in this  quarterly report, fairly present in all material respects the financial  condition, results of operations and cash flows of the registrant as of, and  for, the periods presented in this quarterly report;                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| 4.  The registrant’s other  certifying officers and I are responsible for establishing and maintaining  disclosure controls and procedures (as defined in Exchange Act  Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         | a) | designed such disclosure controls and procedures to ensure that  material information relating to the registrant, including its consolidated  subsidiaries, is made known to us by others within those entities,  particularly during the period in which this quarterly report is being prepared; |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         | b) | evaluated the effectiveness of the registrant’s disclosure controls  and procedures as of a date within 90 days prior to the filing date of  this quarterly report (the “Evaluation Date”); and |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         | c) | presented in this quarterly report our conclusions about the  effectiveness of the disclosure controls and procedures based on our  evaluation as of the Evaluation Date; |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| 5.  The registrant’s other  certifying officers and I have disclosed, based on our most recent  evaluation, to the registrant’s auditors and the audit committee of  registrant’s board of directors (or persons performing the equivalent  function):                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         | a) | all significant deficiencies in the design or operation of internal  controls which could adversely affect the registrant’s ability to record,  process, summarize and report financial data and have identified for the  registrant’s auditors any material weaknesses in internal controls; and |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         | b) | any fraud, whether or not material, that involves management or other  employees who have a significant role in the registrant’s internal controls;  and |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| 6.  The registrant’s other  certifying officers and I have indicated in this quarterly report whether or  not there were significant changes in internal controls or in other factors  that could significantly affect internal controls subsequent to the date of  our most recent evaluation, including any corrective actions with regard to  significant deficiencies and material weaknesses. |
|                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |  |  |

 

Date: July 30, 2003

 
| /s/ Randall W. Muth     |   |
|-------------------------|--------|
| Randall W. Muth         |
| Chief Financial Officer |

 

23

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**CERTIFICATION PURSUANT TO**

**18 U.S.C. SECTION 1350**

**AS ADOPTED PURSUANT TO**

**SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002**

 

In connection with the Quarterly Report of Amerivision Communications, Inc.on Form 10-Q for the period ending March 31, 2003 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, RobertCook, President and Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002, that to my knowledge:

 
| 1.     | The Report fully complies with the requirements of section 13(a)  or 15(d) of the Securities Exchange Act of 1934; and                            |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                   |   |
| 2.     | The information contained in the Report fairly presents, in all  material respects, the financial condition and results of operations of the  Company. |

 
| /s/ Robert D. Cook                 |   |
|------------------------------------|--------|
| President, Chief Executive Officer |
| July 30, 2003                      |

 

24

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**CERTIFICATION PURSUANT TO**

**18 U.S.C. SECTION 1350**

**AS ADOPTED PURSUANT TO**

**SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002**

 

In connection with the Quarterly Report of AmerivisionCommunications, Inc. on Form 10-Q for the period ending March 31,2003 as filed with the Securities and Exchange Commission on the date hereof(the “Report”), I, Randall W. Muth, Chief Financial Officer, certify, pursuantto 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, that to my knowledge:

 
| 1.     | The Report fully complies with the requirements of section 13(a)  or 15(d) of the Securities Exchange Act of 1934; and                            |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                   |   |
| 2.     | The information contained in the Report fairly presents, in all  material respects, the financial condition and results of operations of the  Company. |

 
| /s/ Randall W. Muth     |   |
|-------------------------|--------|
| Chief Financial Officer |
| July 30, 2003           |

 

25

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