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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-KSB
( X ) Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934.
For the Year Ended December 31, 1999
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from __________ to __________.
Commission File Number: 333-72097
AMERICAN COMMUNICATIONS ENTERPRISES, INC.
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(Exact name of Registrant as specified in its Charter)
NEVADA 74-2897368
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(State of or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
7103 Pine Bluffs Trail, Austin, TX 78729
Address of Principle Executive Offices:
(512) 249-2344
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Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by 7 Section 13 or 15(d) of the Securities Exchange act of 1934
during the preceding 12 months (or for such other shorter period that the
registrant was required to file such reports), and (20 has been subject to such
filing requirements for the past 90 days. _X Yes _ _No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by referencing Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. _____
The issuer's revenues for the most recent fiscal year were $390,399.
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 31, 2000 was $14,120,415. Shares of common stock
held by each officer and director and by each person who owns more that 5% of
the outstanding common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of March 31, 2000.
18,030,888 Common Shares
Documents Incorporated By Reference - NONE
Transitional small business disclosure format. ___ Yes _X_No
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ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
ITEM PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
PART I
1. Business.................................................... 3
2. Properties.................................................. 14
3. Legal Proceedings........................................... 15
4. Submission of Matters to a Vote of Security Holders......... 15
PART II
5. Market for the Company's Common Equity and Related
Stockholder Matters....................................... 16
6. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
6A. Quantitative and Qualitative Disclosure about Market Risk... 18
7. Financial Statements and Supplementary Data................. 19
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 33
PART III
9. Directors and Executive Officers of the Company.............. 33
10. Executive Compensation...................................... 34
11. Security Ownership of Certain Beneficial Owners............. 34
12. Certain Relationships and Related Transactions.............. 35
PART IV
13. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 36
Signatures...................................................... 36
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PART I
ITEM 1. BUSINESS
General
American Communications Enterprises, Inc. (ACE), was incorporated in
Nevada in 1998 and is based in Austin, Texas. We commenced our initial public
offering effective August 24, 1999 and our common stock is listed on the NASDAQ
Bulletin Board (OTCBB) under the symbol "ACEN".
In connection with our initial public offering we registered 11,000,000
shares of common stock at $0.05 per share. We are selling the shares ourselves
and have not used an underwriter or paid any commissions. We are selling our
shares using our best efforts and there is no minimum amount of shares we must
sell, accordingly, none of the funds raised from the sale of our stock will go
into escrow, trust or other similar arrangement. We expect to end our offering
no later than June 30, 2000.
ACE acquires, consolidates and operates non-rated market radio stations
in Texas. In the near future, we intend to enter other geographic regions of the
United States. We hope to develop related "state-of-the-industry" Internet
services to network our planned regional clusters of radio stations in such
markets. We believe that this cross-marketing strategy will allow us to offer
greater advertising capabilities to potential advertisers, and therefore avail
itself of possibly greater revenue opportunities than available to radio
stations on a "stand alone" basis or other consolidators who do not follow such
strategy.
We identified KXYL AM and FM, Brownwood, Texas and KSTA AM and FM,
Coleman, Texas as ideal acquisitions within our desired market size. As a part
of our due diligence examination, as to whether or not we should pursue the
acquisition of these stations, we entered into a Time Brokerage Agreement with
the aforementioned radio stations, commencing June 1, 1999, whereby we manage
the operations of these stations for a period of up to twelve months. Under this
cancelable agreement, we collect all revenues from operations and are
responsible for the payment of all expenses including certain monthly debt
obligations, which approximate $10,000 per month.
Management
Dain Schult - President and Chief Executive Officer: Mr. Schult serves as
Chairman, President and Chief Executive Officer of ACE. Mr. Schult is a
broadcast veteran of over 32 years in the radio industry. Prior to the formation
of ACE, Mr. Schult was President of Radioactivity, Inc., a full-service radio
broadcast consulting firm serving over 150 radio stations in various parts of
the country. Mr. Schult participated in the turnaround of several stations,
created a unique turn-key management service for new station owners, conducted
station appraisals and market analysis projects for sellers and buyers, and
developed specific music formats for on-air use by client stations.
Concurrently, Mr. Schult was Chief Operating Officer for Sunbelt Radio Group,
Inc., a radio station group created to acquire and operate radio stations in
Texas. Previously, Mr. Schult had held various program manager, operating
manager, and on-air personality positions at several radio stations in the
Southeast and Southwest, including serving as President and Chief Executive
Officer for Equicom, Inc.
Robert E. Ringle - Executive VP/Internet Operations and Director of Sales: Mr.
Ringle has extensive experience in Internet operations and has held the position
of Director of Sales for a regional radio broadcasting network of over 30
stations which included creation of sales training programs, image enhancement
and the centralized billing system. He has owned and operated a Detroit-based
full-service advertising agency.
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Hap Hedges - Executive VP/Chief Operating Officer: As Executive Vice President
and Chief Operating Officer for the Company, Mr. Hedges brings with him over 30
years of experience in the radio broadcasting industry. Prior to the formation
of the Company, Mr. Hedges was Senior Vice-President/Regional Manager for
Equicom, Inc., garnering some of the highest sales goal achievements in the
entire group. Additionally he served as an associate consultant with
Radioactivity, Inc., and founded Hedges and Associates, a sales and marketing
company formed to represent Western and Southwestern clothing and accessories
manufacturers to various department stores and western-wear boutiques throughout
East and Central Texas. Previously, Mr. Hedges held various general manager,
sales and promotion manager, account executive, and news reporter/copy writer
positions at several stations in Texas.
Acquisition
On November 19, 1999, ACE entered into an agreement with Watts
Communications, Inc. to acquire all of the assets of the KXYL AM and FM,
Brownwood, Texas and KSTA AM and FM, Coleman, Texas for $1,625,000 subject to
the terms and conditions set forth in the Asset Purchase Agreement and subject
to prior approval of the FCC. The application to the FCC for license transfer
approval was accepted on December 2, 1999. We have final FCC approval and
anticipate closing on this acquisition by April 21, 2000.
The following table summarizes certain information relating to all radio
stations operated by ACE:
Market and Station Target Demographic
Call Letters Format Group Frequency
Brownwood, TX
KXYL-AM Country/Tejano 25-54 1240
KXYL-FM Country 18-64 104.1
Coleman, TX
KSTA -AM Classic Country 35-64 1000
KSTA-FM Oldies/AC 25-54 107.1
Acquisition Strategy
We will pursue a regionally focused acquisition strategy. We propose to
initially purchase small-sized radio stations in non-rated, non-major
metropolitan areas in Texas and then expand to surrounding states.
Our management believes that many of the non-major metropolitan areas
currently offer many attractively priced acquisition candidates compared to the
larger cities.
Besides our regional focus, our growth strategy is planned to be founded
upon the achievement of synergies and economies of scale, including but not
limited to, the generation of incremental sales through network marketing for
greater national and regional advertising, the reduction of overhead expenses
and the realization of operational cost savings.
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We hope to eventually acquire up to approximately 400 non-rated radio
stations nationwide. We intend operate additional radio stations beginning by
July, 2000. We plan to pursue a regionally focused acquisition strategy
beginning in a geographic area ranging from Wyoming to the west, Texas,
Mississippi and Georgia to the east. We then intend to add clusters of stations
across the country when and wherever possible. The total number of stations
acquired will be a function of availability, our financing capability and
marketing feasibility.
To this end, we have tendered Letters of Intent for 25 stations
located in Texas, Wyoming, Arizona, New Mexico, Oklahoma, Mississippi and
Georgia and currently have executed Letters of Intent for 4 stations located in
Texas, Wyoming and South Dakota.
Operating Strategy
With the successful integration of the operations of the Brownwood and
Coleman stations, we are able to offer regional advertisers the ability to
access a population base of approximately 300,000 people in Central/West Texas.
As we acquire more stations, advertisers will be able to purchase the entire ACE
group as a network with one media buy which will also include advertising
capabilities on the Internet. Under current market conditions, an advertiser
would not be able to roll out a campaign targeting non-major Texas areas without
entering into a number of separate media purchases which is both time consuming
and non-cost effective due to having to contact each station separately instead
of as a group .
Based on our management's prior experience in operating radio stations in
consolidated groups, we believe that these stations can be linked together for
efficient operation in a reasonable time frame. We intend to centralize
functions such as programming, accounting and national and regional sales to
significantly reduce operating expenses and enhance profits.
Our Internet component is planned to include a variety of entertainment,
gaming, and e-commerce sites along with local and national weather and news in a
unique configuration that we believe will successfully compete in this growing
segment of the Internet. By combining the small to medium market broadcast radio
stations with the Internet, we believe we can eventually create a network
presence across the country and internationally. The strategy is a hybrid of a
small-to-medium-market radio station consolidation and an Internet approach that
is cross-market oriented.
As an augmentation to this Internet strategy, on July 31, 1999, we entered
into a license agreement with Tamark Communications to obtain (4) four exclusive
IP Gateways. The Gateways are essentially switching devices that are a
combination of the Internet and global telephone networks to provide high speed
telecommunications routing. In return for the issuance of 4,300,000 shares of
our common stock and a 1% royalty on gross sales generated from the Gateways, we
have obtained the marketing and distribution rights for the Gateways for
specific territories. We believe that we may be able to use the Gateways in our
Internet activities and we also hope to be able to generate licensing revenue
for us through the licensing of the Gateways. However, because we have only
recently entered into this licensing agreement and have generated no revenues as
a result thereof, we are not able to predict whether we will have any decreased
costs or increased revenues through this arrangement.
On January 17, 2000, ACE executed an agreement with Sino Marketing to
develop opportunities for programming and entertainment content in both
broadcast and Internet formats for sale and distribution in Mainland China. Sino
Marketing's partner, CITIC Beijing Guoan Advertising, provides unique media
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venues in Internet and broadcast. We are planning to reach both English and
non-English speaking residents of China who are interested in American music
formats, entertainment and products. Sino Marketing and their partner are ready
to launch a portal to China for e-commerce. The web site will provide a broad
spectrum of product services including entertainment. This capability will be
extremely valuable in facilitating the sale and distribution of our programming
and products. Since our business plan includes the ability to provide our
services and products via satellite and the Internet, we are perfectly
positioned to do business in countries around the world.
Based upon the prior personal, professional experiences of our management
as well as the success of other regional consolidators, we believe our ability
to market our entire network will result in a consolidated advertising approach
with a distinctly higher component of national and regional advertising versus
local direct retail advertising. This is favorable because national and regional
advertising often command premiums over local ad rates by as much as 50%, and
100% in smaller cities.
Arbitron, the national radio ratings service provides every-other-year
ratings for markets such as Brownwood and Coleman. While ACE awaits the next
ratings results from Arbitron, using internal research systems provided by
Radioactivity, Inc., indications are that KXYL FM's listenership has grown 25%
since June, 1999 and KSTA FM's listenership has grown at least 35% since June,
1999. We are optimistic that the next Arbitron ratings will reflect the
improvements we have made in programming at all of the stations ACE owns in
Brownwood and Coleman, Texas. Additionally, ACE has consistently billed more
advertising revenue per month than the corresponding month a year ago before the
Time Brokerage Agreement took effect.
We plan to utilize a blend of WAN (Wide Area Network) music programming
coupled with centralized satellite voice programming from a centrally located
control location. Additionally, all of our stations are planned to operate with
centralized accounting, billing, marketing and promotions systems, an in-house
sales group that will be utilized for group advertising for the radio stations
as well as for Internet advertising, and specialized in-house sales training
programs for all of our salespeople. Due to such planned centralization of
services, we believe that each station's general manager will have more time to
focus on sales instead of administration responsibilities. We expect that we
will also eventually utilize "super regional managers" each of who will serve
on-site as general manager in one market but also oversee the operation of other
stations within their designated region.
Overview of the Radio Business
Radio station revenues are primarily derived from the sale of advertising
spots or programs to national, regional, and local advertisers. Advertising
rates charged by a station are predicated on its performance in the ratings
based on estimates of the number of persons listening to a station as well as
the number of homes in a station's service area.
The only national radio audience measuring service, Arbitron, serves the
entire country and provides even the smallest markets with annual ratings
service. Ultimately, the success of a radio station (or group of stations)
depends on its ability to develop popular programming and promotions, thus
generating higher rates and allowing the station to charge more for airing
commercials.
Industry Consolidation
The radio broadcast industry is currently subject to consolidation
activity which is having a major impact on the competitive landscape. In
general, and as further discussed below, such consolidation activity has been
triggered by the Telecommunications Act of 1996. Up until the mid-1980s, there
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was no public market for radio stocks. Local ownership limits by the FCC of one
AM and one FM station per market and a total limit of 14 total stations
prevented radio groups from amassing greater size to attract outside capital.
Because of these strict limits, radio station ownership was highly fragmented
and characterized by "mom and pop" operations in even the largest markets. By
1984, however, FCC ownership rules had begun to be relaxed, with major
relaxation of such rules occurring in 1992 and 1994.
The passage of the 1996 Telecommunications Act (the "Telecom Act")
eliminated the national limits on the number of radio stations that one entity
could own and eased local ownership rules so as to allow 1 operating entity to
control up to 8 stations in most medium and major markets. Much of the
consolidation activity to date has been centered on major markets, resulting in
increased competition and higher valuations in such markets.
Mid-sized markets (generally defined to mean US markets ranked #50 to #265
based on population) have recently begun to see upward price pressure, with
15.0x to 20.0x EBITDA (Earnings before Income Taxes, Depreciation and
Amortization) multiples not uncommon (vs. 8.0x to 10.0x EBITDA multiples as
recently as 1997). The consolidation activity of large market operators such as
Chancellor/Capstar Communications (Hicks, Muse), Sunburst (Bain Capital), and
Cumulus (Wisconsin State Teachers Retirement/ Quaestus Capital) all of whom have
consolidated stations across the US, have begun the process in some of the same
markets that we are exploring for acquisitions thus tending to indicate that
consolidation has begun in the smaller markets. We believe that we will only
encounter these larger mid-market consolidators at the upper end of our target
markets in rated medium sized markets but not in the smaller, non-regularly
rated markets. Few groups have ventured beyond focusing on the top 250 markets,
which has kept acquisition multiples in our targeted markets low, but that could
change should other consolidators follow our small market strategy.
Competition
Competition within the radio broadcasting industry has historically been
and will continue to be very intense. Overall, the principal factor affecting
competition in this industry is the number of audience members reached with one
advertising medium. With the advent of deregulation, competition has increased
since the key to success is no longer how many listeners can an independent firm
reach in one market, but rather, how many listeners can a consolidator reach in
multiple markets. Competition with newspapers and television for advertising
dollars is also high. However, radio's audience has held up well over time. In
the past five years listenership has actually increased as reported by the Radio
Advertising Bureau despite the onslaught of Internet use. Internet radio usage
continues to grow, too. In addition, with the bulk of radio listening taking
place outside of the home and on the road, where competition with other mediums
is limited, and the audience somewhat "captive" (unable to access television,
newspapers, or the Internet), radio appears to be well positioned for continued
growth.
Regulation
INTRODUCTION
The ownership, operation and sale of radio stations are subject to the
jurisdiction of the FCC, which acts under authority granted by the
Communications Act of 1934, as amended (the "Communications Act"). Among other
things, the FCC assigns frequency bands for broadcasting; determines the
particular frequencies, locations and power of stations; issues, renews, revokes
and modifies station licenses; determines whether to approve changes in
ownership or control of station licenses; regulates equipment used by stations;
imposes regulations and takes other action to prevent harmful interference
between stations; adopts and implements regulations and policies that directly
or indirectly affect the ownership, management, programming, operation and
employment practices of stations; and has the power to impose penalties for
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violations of its rules or the Communications Act. In February 1996, Congress
enacted the Telecommunications Act of 1996 (the "Telecom Act") to amend the
Communications Act. The Telecom Act, among other measures, directed the FCC,
which has since conformed its rules, to (a) eliminate the national radio
ownership limits; (b) liberalize the local radio ownership limits as specified
in the Telecom Act; (c) issue broadcast licenses for periods of up to eight
years; and (d) eliminate the opportunity for the filing of competing
applications against broadcast license renewal applications.
LICENSE GRANTS AND RENEWALS
The Communications Act provides that a broadcast license may be granted to an
applicant if the grant would serve the public interest, convenience and
necessity, subject to certain limitations referred to below. In making licensing
determinations, the FCC considers the legal, technical, financial and other
qualifications of the applicant, including compliance with the Communications
Act's limitations on alien ownership, compliance with various rules limiting
common ownership of broadcast, cable and newspaper properties, and the
"character" of the licensee and those persons holding "attributable" interests
in the licensee. Broadcast licenses are granted for specific periods of time
and, upon application, are renewable for additional terms. The Telecom Act
amended the Communications Act to provide that broadcast licenses be granted,
and thereafter renewed, for a term not to exceed eight years, if the FCC finds
that the public interest, convenience, and necessity would be served. Generally,
the FCC renews broadcast licenses without a hearing. The Telecom Act amended the
Communications Act to require the FCC to grant an application for renewal of a
broadcast license if: (1) the station has served the public interest,
convenience and necessity; (2) there have been no serious violations by the
licensee of the Communications Act or the rules and regulations of the FCC; and
(3) there have been no other violations by the licensee of the Communications
Act or the rules and regulations of the FCC which, taken together, would
constitute a pattern of abuse. Competing applications against broadcast license
renewal applications are therefore not entertained. The Telecom Act provided
that if the FCC, after notice and an opportunity for a hearing, decides that the
requirements for renewal have not been met and that no mitigating factors
warrant lesser sanctions, it may deny a renewal application. Only thereafter may
the FCC accept applications by third parties to operate on the frequency of the
former licensee. The Communications Act continues to authorize the filing of
petitions to deny against broadcast license renewal applications during
particular periods of time following the filing of renewal applications.
Petitions to deny can be used by interested parties, including members of the
public, to raise issues concerning the qualifications of the renewal applicant.
The Brownwood and Coleman Stations' broadcast licenses were renewed by Watts
Communications, Inc. on August 17, 1997 and will expire on August 17, 2004. We
do not anticipate any material difficulty in obtaining license renewals in the
future.
The following table sets forth selected license information concerning each of
the stations operated by ACE:
<TABLE>
<CAPTION>
Market and Station Expiration Date
Call Letters Frequency of License Class Power
- ------------------------ --------- --------------- ----- -----
<S> <C> <C> <C> <C>
Brownwood, TX
KXYL-AM 1240 2004 4 1,000 watts
KXYL-FM 104.1 2004 C-1 73,000 watts
Coleman, TX
KSTA -AM 1000 2004 4 1,000 watts
KSTA-FM 107.1 2004 C-3 25,000 watts
</TABLE>
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The action of the FCC or its staff granting a renewal application may be
reconsidered during specified time periods by the FCC or its staff on their own
motion or by request of the petitioner, and the petitioner may also appeal
within a certain period actions by the FCC to the U.S. Court of Appeals. If the
FCC does not, on its own motion, or upon a request by an interested party for
reconsideration or review, review a staff grant or its own action within the
applicable time periods, and if no further reconsideration, review or appeals
are sought within the applicable time periods, an action by the FCC or its staff
becomes a "Final Order." We have no current renewals.
LICENSE ASSIGNMENTS AND TRANSFERS OF CONTROL
The Communications Act prohibits the assignment of a FCC license or the transfer
of control of a corporation holding such a license without the prior approval of
the FCC. Applications to the FCC for such assignments or transfers are subject
to petitions to deny by interested parties and must satisfy requirements similar
to those for renewal and new station applicants. Many transactions involving
radio stations provide, as a waivable pre-condition to closing, that the FCC
consent to the transaction has become a "Final Order."
In 1998, the FCC implemented the practice of requesting public comment on
concentration issues of proposed radio acquisitions where the buyer would
control 50% or more of radio advertising revenues, or the buyer and another
broadcaster would control together 70% or more of radio advertising revenues, as
determined by industry publications. In certain instances, in response to such
an FCC request, third parties have filed petitions to deny the acquisition
application and the Antitrust Division of the United States Department of
Justice (the "Antitrust Division") has filed comments noting competitive
concerns, sometimes suggesting that the FCC initiate a hearing to determine if
the acquisition would serve the public interest. The filing of such petitions
and comments have resulted in delays in the FCC's consideration of such
acquisition applications, and could result in the FCC's denying its consent to
the transaction. Moreover, even when no petitions or comments have been filed,
applicants have experienced delays in the FCC's action on acquisition
applications when the Antitrust Division has the matter under investigation.
Such delays have the potential of allowing the other contracting party to
terminate the acquisition if the contract closing deadline has been passed due
to regulatory delays.
OWNERSHIP RULES
Rules of the FCC limit the number and location of broadcast stations in which
one licensee (or any party with a control position or attributable ownership
interest therein) may have an attributable interest. The FCC, pursuant to the
Telecom Act, eliminated the previously existing "national radio ownership rule."
Consequently, there now is no limit imposed by the FCC to the number of radio
stations one party may own nationally.
The "local radio ownership rule" limits the number of stations in a radio market
in which any one individual or entity may have a control position or
attributable ownership interest. Pursuant to the Telecom Act, the FCC revised
its rules to set the local radio ownership limits as follows: (a) in markets
with 45 or more commercial radio stations, a party may own up to eight
commercial radio stations, no more than five of which are in the same service
(AM or FM); (b) in markets with 30-44 commercial radio stations, a party may own
up to seven commercial radio stations, no more than four of which are in the
same service; (c) in markets with 15-29 commercial radio stations, a party may
own up to six commercial radio stations, no more than four of which are in the
same service; and (d) in markets with 14 or fewer commercial radio stations, a
party may own up to five commercial radio stations, no more than three of which
are in the same service, provided that no party may own more than 50% of the
commercial stations in the market. FCC cross-ownership rules also prohibit one
party from having attributable interests in a radio station as well as in a
local television station or daily newspaper, although such limits are waived by
the FCC under certain circumstances. In addition, the FCC has a "cross interest"
policy that may prohibit a party with an attributable interest in one station in
a market from also holding either a "meaningful" non-attributable equity
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interest (e.g., non-voting stock, voting stock, limited partnership interests)
or key management position in another station in the same market, or which may
prohibit local stations from combining to build or acquire another local
station. The FCC is presently evaluating its radio/television, radio/newspaper
and cross-interest rules and policies as well as policies governing attributable
ownership interests. We cannot predict whether the FCC will adopt any changes in
these policies or, if so, what the new policies will be or how they might affect
the Company.
ATTRIBUTION RULES
All holders of attributable interests must comply with, or obtain waivers of,
the FCC's multiple and cross-ownership rules. Under the current FCC rules, an
individual or other entity owning or having voting control of 5% or more of a
corporation's voting stock is considered to have an attributable interest in the
corporation and its stations, except that banks holding such stock in their
trust accounts, investment companies, and certain other passive interests are
not considered to have an attributable interest unless they own or have voting
control over 10% or more of such stock. The FCC is currently evaluating whether
to raise the foregoing benchmarks to 10% and 20%, respectively. An officer or
director of a corporation or any general partner of a partnership also is deemed
to hold an attributable interest in the media license. At present, when a single
shareholder holds a majority of the voting stock of a corporate licensee, the
FCC considers other shareholders, unless they are also officers or directors,
exempt from attribution. The FCC has asked for comments as to whether it should
continue the single majority shareholder exemption. Holders of non-voting stock
generally will not be attributed an interest in the issuing entity, and holders
of debt and instruments such as warrants, convertible debentures, options, or
other non-voting interests with rights of conversion to voting interests
generally will not be attributed such an interest unless and until such
conversion is effected. The FCC is currently considering whether it should
expand its attribution rules to reach certain of these interests in certain. We
cannot predict whether the FCC will adopt these or any other proposals to change
its attribution policies.
Under current FCC rules, any stockholder of the Company with 5% or more of the
outstanding votes (except for qualified institutional investors, for which the
10% benchmark is applicable), will be considered to hold attributable interests
in the Company. Such holders of attributable interests must comply with or
obtain waivers of the FCC's multiple and cross-ownership rules. At present, none
of the attributable stockholders, officers and directors of the Company have any
other media interests besides those of the Company that implicate the FCC's
multiple ownership limits. In the event that the Company learns of a new
attributable stockholder and if such stockholder holds interests that exceed the
FCC limits on media ownership, under the Company's Amended and Restated
Certificate of Incorporation dated December 19, 1997 and filed with the
Secretary of State of the State of Delaware on December 22, 1997 (the "Amended
and Restated Certificate of Incorporation") the Board of Directors of the
Company has the corporate power to redeem stock of the Company's stockholders to
the extent necessary to be in compliance with FCC and Communications Act
requirements, including limits on media ownership by attributable parties. The
FCC will consider a radio station providing programming and sales on another
local radio station pursuant to a LMA (as defined herein) to have an
attributable ownership interest in the other station for purposes of the FCC's
radio multiple ownership rules. In particular, a radio station is not permitted
to enter into a LMA giving it the right to program more than 15% of the
broadcast time, on a weekly basis, of another local radio station which it could
not own under the FCC's local radio ownership rules.
ALIEN OWNERSHIP LIMITS
Under the Communications Act, broadcast licenses may not be granted, transferred
or assigned to any corporation of which more than one-fifth of the capital stock
is owned of record or voted by non-U.S. citizens or foreign governments or their
representatives or by foreign corporations ("Aliens"). Where the corporation
owning the license is controlled by another corporation, the parent corporation
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cannot have more than one-fourth of the capital stock owned of record or voted
by Aliens, unless the FCC finds it in the public interest to allow otherwise.
The FCC has issued interpretations of existing law under which the Alien
ownership restrictions in slightly modified form apply to other forms of
business organizations, including general and limited partnerships. The FCC also
prohibits a licensee from continuing to control broadcast licenses if the
licensee otherwise falls under Alien influence or control in a manner determined
by the FCC to be in violation of the Communications Act or contrary to the
public interest. We believe that Aliens control or vote less than one-fifth of
the Company's capital stock. In the event that the Company learns that Aliens
own, control or vote stock in the Company in excess of the limits set in the
Communications Act and the FCC's rules, under the Amended and Restated
Certificate of Incorporation, the Board of Directors of the Company has the
corporate power to redeem stock of the Company's stockholders to the extent
necessary to be in compliance with FCC and Communications Act requirements on
alien ownership.
PROGRAMMING AND OPERATIONAL REQUIREMENTS
While the FCC has relaxed or eliminated many of its regulatory requirements
related to programming and content, radio stations are still required to
broadcast programming responsive to the problems, needs and interests of the
stations' service areas, must maintain local studios and public inspection files
and must comply with various rules promulgated under the Communications Act that
regulate political broadcasts and advertisements, sponsorship identifications,
indecent programming and other matters. Failure to observe these or other FCC
rules can result in the imposition of monetary forfeitures, in the grant of a
"short" (less than full term) license term or, where there have been serious or
a pattern of violations, license revocation. The FCC also traditionally enforced
its EEO rules vigorously, by requiring stations to implement minority and female
outreach plans and by prohibiting employment discrimination. In 1998, the U.S.
Court of Appeals for the D.C. Circuit struck down the FCC's outreach
requirements as unconstitutional and remanded to the FCC the question of whether
it has the jurisdiction to enforce its anti-discrimination rule. The FCC
conducted a rulemaking proceeding to formulate new EEO outreach rules in a
manner consistent with the court's ruling. The FCC has tentatively determined
that its anti-discrimination rule is enforceable. While the Company intends to
operate in smaller, non-rated markets where percentages of minority residences
are small-to-non-existent, ACE will endeavor, nevertheless, to maintain whatever
regulations are actually enforceable by the FCC regarding EEO hiring procedures.
The Company will continue to use every means reasonably possible to notify
communities served by our signals of employment openings at our stations.
Further, the Company knows of no reason why the FCC would have any reason to
either restrict ACE from being granted license renewals in the future or
purchasing additional stations.
TECHNICAL AND INTERFERENCE RULES
FCC rules specify technical and interference requirements and parameters that
govern the signal strength and coverage area of radio stations, and which,
unless waived, must be complied with in order to obtain FCC consent to modify a
station's service area or other technical operations. The FCC allots specific FM
radio frequencies and class designations to particular communities of license.
The FM class designations, which vary by geographic location, include (in order
of increasing potential coverage area) Class A, B1, C3, B, C2, C1 and C. (The C
Class designations are generally not allocated to communities in the more
11
<PAGE>
densely-populated regions of the United States, such as the Northeast and
California.) Each FM class has minimum and maximum power specifications and must
not cause interference to the protected service areas of other radio stations,
domestic or international, operating on the same or adjacent frequencies. Under
FCC rules, a radio station must transmit a minimum predicted signal strength to
its allocated community of license, and therefore must locate its transmitting
antenna at a site providing such coverage while also being within a specified
power and height range for that station's class designation, and at specified
minimum distances from the transmitting sites of nearby radio stations operating
on the same or adjacent frequencies. The Company must also comply with certain
technical, reporting, and notification requirements imposed by the FAA with
respect to the installation, location, lighting, and painting of the transmitter
antennas used by the Company's radio stations. The combination of these
requirements sets limits on the ability of a particular radio station to
relocate in certain directions and to increase signal coverage. Stations may
petition the FCC to change a particular station's community of license and/or
class, which changes are granted by the FCC when its service priorities are met
and conflicting re-allotment proposals, if any, are resolved. As to minimum
distance separation requirements designed to afford interference protection to
other FM stations, the FCC rarely waives such specifications. However, the FCC
permits radio stations in certain circumstances to relocate to a site not
meeting the minimum distance separation rule when the station demonstrates that
the service contours of neighboring radio stations will be protected from
interference.
Moreover, the FCC has proposed rules or is considering proposing new rules with
regard to several other technical issues that could affect the operations of the
Company's radio stations. In June 1998, the FCC proposed new rules that, among
other changes, would enable FM radio stations to agree to accept certain types
of interference resulting from technical changes to be made by other FM radio
stations in exchange for monetary or other consideration. Such interference
agreements could offer new opportunities for the Company to reach more
listeners, but may pose an increased possibility of interference. Also, the FCC
is considering whether to propose rules that would authorize certain lower-power
AM radio stations to use FM translators to broadcast the AM radio station's
nighttime programming. Such rules, if adopted, could result in improved
nighttime broadcast quality for certain AM radio stations that may compete with
the Company's radio stations. Finally, in January 1999, the FCC proposed new
rules that would enable certain parties to obtain licenses to build and operate
new low-power FM radio stations, known as "micro-radio" that would not be
subject to certain of the Commission's spacing requirements and other rules, and
may or may not be restricted to non-commercial operations. If the proposed rules
are adopted, though that is in question considering that Congress is considering
taking up the issue, such new micro-radio stations may compete with the
Company's radio stations for listeners and revenues. Also, such micro-radio
stations may create additional risks of interference to the Company's radio
stations and may limit, in certain areas, the ability of the Company to
construct new full-power radio stations or modify its current stations. We
cannot predict what effect, if any, the FCC's actions with regard to any of
these matters may have on the Company's radio stations. Several industry trade
groups however, including the National Association of Broadcasters, are pursuing
various legal avenues to either prevent the proposed rules from being
implemented entirely or at least gain additional modification of the frequency
spacing requirements to better protect existing FM radio frequencies.
FCC POWER INCREASE
In most instances, changes to the technical specifications of radio stations,
such as increases in the power (effective radiated power, or "ERP") and
subsequent increased coverage area, may be made only after application to the
FCC, and grant by the FCC of a construction permit for the modification of the
station. KXYL FM has the ability to have its current operating power of 74,000
watts increased to 100,000 watts without any additional approval from the FCC.
Additionally, as a part of the Asset Purchase Agreement, ACE has agreed to
change the frequencies of its two FM stations (KXYL FM, Brownwood and KSTA FM,
Coleman, Texas) to different dial positions to assist another broadcaster
looking to move a station frequency elsewhere in the state. ACE will receive the
funds for these frequency changes, including all necessary pieces of equipment,
new signage, advertising costs, etc., from this other broadcasting group. The
Company hopes to effect the increase in power for KXYL FM at the same time this
frequency change is effected.
12
<PAGE>
AGREEMENTS WITH OTHER BROADCASTERS
Over the past several years a significant number of broadcast licensees,
including the Company, have entered into cooperative agreements with other
stations in their markets. One typical example is a local marketing agreement
("LMA") between two separately or co-owned stations, whereby the licensee of one
station programs substantial portions or all of the broadcast day on the other
licensee's station, subject to ultimate editorial and other controls being
exercised by the latter licensee, and sells advertising time during such program
segments for its own account. The FCC has held that LMAs do not per se
constitute a transfer of control and are not contrary to the Communications Act
provided that the licensee of the station maintains ultimate responsibility for
and control over operations of its broadcast station. Typically licensees enter
into the LMA in anticipation of the sale of the station, with the proposed
acquirer providing programming for the station while the parties are awaiting
the necessary regulatory approvals to the transaction.
The FCC's rules also prohibit a radio licensee from simulcasting more than 25%
of its programming on other radio stations in the same broadcast service (i.e.,
AM-AM or FM-FM), whether it owns both stations or operates one or both through a
LMA, where such stations serve substantially the same geographic area as defined
by the stations' principal community contours. Our stations are not subject to
this limitation.
PROPOSED REGULATORY CHANGES
The FCC has not yet formally implemented certain of the changes to its rules
necessitated by the Telecom Act. Moreover, the Congress and the FCC have under
consideration, and may in the future consider and adopt new laws, regulations
and policies regarding a wide variety of matters that could, directly or
indirectly, (i) affect the operation, programming, technical requirements,
ownership and profitability of the Company and its radio broadcast stations,
(ii) result in the loss of audience share and advertising revenues of the
Company's radio broadcast stations, (iii) affect the ability of the Company to
acquire additional radio broadcast stations or finance such acquisitions, (iv)
affect cooperative agreements and/or financing arrangements with other radio
broadcast licensees, (v) affect the Company's competitive position in
relationship to other advertising media in its markets, or (vi) affect the
Company's ability to exploit its unique technical capabilities and innovative
approach to acquiring and using radio broadcast stations. Such matters include,
for example, changes to the license, authorization and renewal process;
proposals to revise the FCC's EEO rules and other matters relating to minority
and female involvement in broadcasting; proposals to alter the benchmarks or
thresholds for attributing ownership interest in broadcast media; proposals to
change rules or policies relating to political broadcasting; changes to
technical and frequency allocation matters, including those relative to DAB,
micro-radio, AM broadcast on FM translator stations and FM interference
acceptance; proposals to restrict or prohibit, the advertising of beer, wine and
other alcoholic beverages on radio; changes in the FCC's cross-interest,
multiple ownership, alien ownership and cross-ownership policies; and proposals
to limit the tax deductibility of advertising expenses by advertisers. Currently
the FCC has voted to revise EEO regulations that have been struck down in
Federal Appeals Court to set new guidelines for hiring practices. Additionally
the FCC has approved the introduction of a new class of extremely low-powered FM
stations. Already a number of trade organizations and broadcast groups have
moved through various legal avenues to stop the implementation of both these new
hiring guidelines and low-power FM stations. ACE does not anticipate problems
with either issue should they be considered legal and binding by a court of
competent jurisdiction. With our small, non-rated market strategy, neither item
is really an issue for us from an operating standpoint. In any event, ACE will
follow any and all existing FCC rules and regulations.
Although we believe the foregoing discussion is sufficient to provide the reader
with a general understanding of all material aspects of FCC regulations that
affect ACE, it does not purport to be a complete summary of all provisions of
the Communications Act or FCC rules and policies. Reference is made to the
Communications Act, FCC rules, and the public notices and rulings of the FCC for
further information.
13
<PAGE>
Employment
Assembling talented and aggressive operating management is critical to
success in our industry. We endeavor to create positive work environments in
order to attract and retain talented personnel. In addition we will provide
incentives to key employees by creating financial rewards, including making
equity available to certain key employees based on performance.
We believe that our relations with our employees are good.
We have entered into a three-year employment agreement with Mr. Dain L.
Schult, our Chief Executive Officer, President and Chairman, dated October 29,
1998. This employment agreement generally provides for an annual salary of
$126,000, a monthly automobile allowance of $500, reimbursement of business
related expenses and bonuses as may determined in management's sole discretion.
We have also entered into a three-year employment agreement with Mr.
Robert E. Ringle, our Vice President of Internet Operations, Director of Sales,
Treasurer and Director dated October 29, 1998. This employment agreement
generally provides for an annual salary of $115,000, a monthly automobile
allowance of $500, reimbursement for business related expenses and bonuses as
may be determined in management's sole discretion.
Forward-Looking Statements
Any matters discussed or incorporated by reference in this Form 10-K that
are not historical facts are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Any expressions
that indicate future events and trends are forward-looking statements and are
subject to risks and uncertainties that could cause actual results to differ
materially from historical results, results American Communications Enterprises
anticipates or results expressed or implied by such forward-looking statements.
Our future performance and financial results could differ materially from those
reflected in this report due to general financial, economic, regulatory and
political conditions or additional factors unknown to us at this time as well as
specific risks and uncertainties such as those set forth in documents filed by
us with the SEC.
ITEM 2. PROPERTIES
The types of properties required to support each of our radio stations include
offices, studios, transmitter sites and antenna sites. A station's studios are
generally housed with its offices in business districts of the station's
community of license or largest nearby community. The transmitter sites and
antenna sites are generally located so as to provide maximum market coverage.
At December 31, 1999, ACE leased 1500 square feet of office space in Brownwood,
Texas. We do not anticipate any difficulties in renewing any facility leases or
in leasing alternative or additional space, if required. ACE, upon closing, will
own substantially all of its other equipment, consisting principally of
transmitting antennae, towers, transmitters, studio equipment and general office
equipment. In additional ACE will also own the studio building and transmitter
site for KSTA AM and FM in Coleman, Texas and the KXYL AM studio and transmitter
site in Brownwood, Texas. No single property is material to our operations. We
believe that our properties are generally in good condition and suitable for our
operations; however, we continually look for opportunities to upgrade our
properties and intend to upgrade studios, office space and transmission
facilities in certain markets.
14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
ACE is involved in litigation from time to time in the ordinary course of its
business. In management's opinion, the outcome of all pending legal proceedings,
individually and in the aggregate, will not have a material adverse effect on
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of the year
ended December 31, 1999.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORAMATION
The common stock is traded on the NASDAQ Bulletin Board (OTCBB) under the symbol
"ACEN". The following table sets forth the high and low closing sale prices for
the common stock for the periods indicated, as reported by the NASDAQ Bulletin
Board
High Low
Year ended December 31, 1999
Fourth Quarter (from November 11) $9.00 $0.31
HOLDERS
As of March 1, 2000 there were 195 stockholders of record of the common stock.
DIVIIDENDS
ACE has never declared or paid cash dividends on its common stock. We intend to
retain all future earnings to finance future growth and, therefore, do not
anticipate paying any cash dividends in the foreseeable future.
CHANGES IN SECURITIES
None
RECENT SALES OF UNREGISTERED SECURITIES
None
ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with other financial data
appearing elsewhere in this report. Certain information included herein contains
statements that constitute "forward-looking statements" containing certain risks
and uncertainties. Readers are referred to the cautionary statement, which
addresses forward-looking statements made by us.
We are considered to be in the development stage as defined in Financial
Accounting Standards Board Statement No. 7, and we intend to provide branded,
interactive information and programming as well as merchandise to music
enthusiasts worldwide. We have identified KXYL AM and FM, Brownwood, Texas and
KSTA AM and FM, Coleman, Texas (the "Stations") as ideal acquisitions within our
desired market size. As a part of our due diligence, we have entered into a Time
Brokerage Agreement, effective June 1, 1999, with the aforementioned radio
stations, whereby we will manage the operations of the Stations for a period up
to twelve months. Under this cancelable agreement, we will collect all revenues
generated and are responsible for payment of all operating expenses, including
certain monthly debt obligations, which approximate $10,000 per month.
RESULTS OF OPERATIONS
For the year ended December 31, 1999 we generated revenues of approximately
$390,400 through the Time Brokerage Agreement with the Stations. Revenues
primarily consisted of commercial or program time sold. We generated no revenues
for the period October 29, 1998 (date of incorporation) through December 31,
1998, as we hadn't yet commenced operations.
16
<PAGE>
We incurred a net loss of approximately $405,715 for the year-ended December 31,
1999 as compared with a net loss of $70,830 for the period October 29, 1998
through December 31, 1998. Our operating expenses consist primarily of broadcast
operations, sales and marketing and general and administrative expenses. General
and administrative expenses of $504,748 principally include payroll and related
taxes; professional fees for consulting, business development, legal and
accounting; office supplies expense; travel expense and organizational costs.
Broadcast operating expenses of $203,249 consisted primarily of those expenses
incurred in connection with the management of the Stations. Sales and marketing
expenses of $89,781 were incurred in connection with the development of
advertising revenues.
The results of operations for the period ended December 31, 1999 are not
necessarily indicative of the results for any future period. We expect to expand
operations upon obtaining capital and financing for our planned principle
operations.
LIQUIDITY AND CAPITAL RESOURCES
Our operating requirements have exceeded our cash flow from operations as we
continue to build our business. Operating activities during the year ended
December 31, 1999 used cash of $177,251. Operating activities were funded
through proceeds from the sale of common stock of $175,000 and proceeds from the
issuance of debt of $50,000. At December 31, 1999 we had cash and cash
equivalents of $43,613.
During April 1999, we began offering subscriptions for the sale of up to
11,000,000 shares of our common stock at $0.05 per share. As of December 31,
1999, cash proceeds of $175,000 were received through the sale of 1,466,667
shares in connection with this offering. An additional 5,950,753 shares of
common stock, valued at $344,355, were issued in exchange for services,
satisfaction of debt and a license agreement. We need the proceeds of this
offering to expand our operations and finance our future working capital
requirements. Based upon our current plans and assumptions relating to our
business plan, we anticipate that we may need to seek additional financing to
fund our proposed acquisition strategy.
CAUTIONARY STATEMENT
This Form 10-QSB, press releases and certain information provided periodically
in writing or orally by our officers or agents contain statements which
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act, as amended and Section 21E of the Securities Exchange Act of
1934. The words expect, anticipate, believe, goal, plan, intend, estimate and
similar expressions and variations thereof if used are intended to specifically
identify forward-looking statements. Those statements appear in a number of
places in this Form 10-QSB and in other places, particularly, Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
include statements regarding our intent, belief or current expectations of the
Company, its directors or its officers with respect to, among other things: (i)
our liquidity and capital resources; (ii) our financing opportunities and plans
17
<PAGE>
and (iii) our future performance and operating results. Investors and
prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors. The factors that
might cause such differences include, among others, the following: (i) any
material inability of us to successfully identify, consummate and integrate the
acquisition of radio stations at reasonable and anticipated costs; (ii) any
material inability of us to successfully internally develop our products; (iii)
any adverse effect or limitations caused by Governmental regulations; (iv) any
adverse effect on our continued positive cash flow and abilities to obtain
acceptable financing in connection with our growth plans; (v) any increased
competition in business; (vi) any inability of us to successfully conduct its
business in new markets; and (vii) other risks including those identified in our
filings with the Securities and Exchange Commission. We undertake no obligation
to publicly update or revise the forward looking statements made in this Form
10-QSB to reflect events or circumstances after the date of this Form 10-QSB or
to reflect the occurrence of unanticipated events.
ITEM 6A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not have any derivative financial instruments as of December 31, 1999.
However, we are exposed to interest rate risk. We employ established policies
and procedures to manage our exposure to changes in the market risk of our
marketable securities, which are classified as available-for-sale as of December
31, 1999. Our Senior Discount Notes, Convertible Notes and other long-term debt
have fixed interest rates and the fair value of these instruments is affected by
changes in market interest rates. We believe that the market risk arising from
holdings of our financial instruments is not material.
18
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN COMMUNICATIONS ENTERPRISES, INC.
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT 20
FINANCIAL STATEMENTS
Balance Sheet 22
Statements of Operations 23
Statements of Stockholders' Equity 24
Statements of Cash Flow 25
Notes to Financial Statements 26-32
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
American Communications Enterprises, Inc.
We have audited the accompanying balance sheet of American Communications
Enterprises, Inc. (the Company), a development stage company, as of December 31,
1999, and the related statements of operations, stockholders' equity and cash
flows for the year then ended and from inception on October 29, 1998 through
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1999, and the results of its operations and its cash flows for the year ended
December 31, 1999 and from inception on October 29, 1998 through December 31,
1999, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 7 to the
financial statements, the Company has incurred significant operating losses and
has a working capital deficiency, which raise substantial doubt about its
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
SPROUSE & WINN, L.L.P.
Austin, Texas
April 11, 2000
20
<PAGE>
FINANCIAL STATEMENTS
21
<PAGE>
AMERICAN COMMUNICATIONS ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1999
ASSETS
CURRENT ASSETS
Cash $43,613
Accounts receivable, net of allowance for doubtful 70,226
accounts of $25,000 -------
Total Current Assets 113,839
Fixed assets, at cost, net of accumulated depreciation of $150 3,986
Licenses, at cost, net of accumulated amortization of $18,000 197,000
-------
$314,825
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $24,147
Accrued expenses 247,769
-------
Total Current Liabilities 271,916
-------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock; authorized 30,000,000 nopar common
shares; 17,917,420 shares issued and
outstanding, respectively 519,455
Deficit accumulated during the development stage (476,546)
--------
Total Stockholders' Equity 42,909
--------
$314,825
========
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
22
<PAGE>
AMERICAN COMMUNICATIONS ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
From Inception
For the Year On October 29,
December 1998 Through
31,1999 December 31,1999
--------- ----------------
REVENUE
Revenues $ 390,399 $ 390,399
Cost of goods sold 203,249 203,249
--------- ----------
Gross Profit 187,150 187,150
--------- ----------
EXPENSES
General and administrative 504,748 575,578
Sales and marketing 89,781 89,781
--------- ----------
Total Expenses 594,529 665,359
--------- ----------
Other Income (Expense) 1,663 1,663
--------- ----------
Net loss before provision for income (405,716) (476,546)
taxes
Provision for income taxes -0- -0-
--------- ----------
NET LOSS $(405,716) $(476,546)
========= ==========
Weighted Average Loss Per Share
o Basic and Diluted $ (.03)
========
Weighted Average Shares Outstanding
o Basic and Diluted 12,176,770
==========
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
23
<PAGE>
AMERICAN COMMUNICATION ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FROM INCEPTION ON OCTOBER 29, 1998 THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock During the
-------------------- Development
Shares Amount Stage
------ ------ -------------
<S> <C> <C> <C>
Balance, October 29, 1998 - Inception -0- $ -0- $ -0-
Issuance of common stock for cash 10,500,000 100 -0-
Net Loss for the period from October 29,
1998 (inception) to December 31, 1998 (70,830)
----------- -------- --------
-0- -0-
Balance, December 31, 1998 10,500,000 100 (70,830)
Issuance of common stock for cash 1,466,667 175,000 -0-
Issuance of common stock for debt (1) 1,333,333 50,000 -0-
Issuance of common stock for license 4,300,000 215,000 -0-
agreement (2)
Issuance of common stock for services (3) 317,420 79,355 -0-
Net loss for the year ended December 31, 1999 (405,716)
----------- -------- --------
-0- -0-
Balance, December 31, 1999 17,917,420 $519,455 $(476,546)
========== ======== ==========
</TABLE>
(1) Valued at estimated fair value of the Company's stock at the time the debt
was exchanged of $.0375/share.
(2) Valued at estimated fair value of the Company's stock at the time the
license agreement was signed, $.05/share.
(3) Valued at the estimated fair value of the Company's stock at the time the
services were rendered, $.25/share.
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
24
<PAGE>
AMERICAN COMMUNICATIONS ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
From Inception On
For the Year October 29, 1998
Ended December Through
31,1999 December 31, 1999
-------------- -----------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $(405,716) $(476,546)
Bad debt expense 25,500 25,500
Depreciation and amortization 18,150 18,150
(Increase) decrease in receivables (95,726) (95,726)
Increase (decrease) in payables and 201,186 265,776
accrued expenses
Stock issued for services 79,355 79,355
---------- ----------
Net Cash Used by Operating Activities (177,251) (183,491)
---------- ----------
Cash Flows From Investing Activities
Purchase of fixed assets (4,136) (4,136)
---------- ----------
Net Cash Used by Investing Activities (4,136) (4,136)
---------- ----------
Cash Flows From Financing Activities
Advances from stockholder -0- 6,140
Issuance of common stock 175,000 175,100
Issuance of debt 50,000 50,000
---------- ----------
Net Cash Provided by Financing 225,000 231,240
---------- ----------
Activities
Net (Decrease) Increase In Cash 43,613 43,613
Cash at Beginning of Period -0- -0-
---------- ----------
Cash at End of Period $ 43,613 $43,613
========== ==========
Supplemental cash flow information:
Cash Paid For:
Interest $ -0-
=======
Income Taxes $ -0-
=======
Non-Cash Transactions:
Stock issued for debt $ 50,000
========
Stock issued for services $ 79,355
========
Stock issued for license $215,000
========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
25
<PAGE>
AMERICAN COMMUNICATIONS ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Organization
American Communications Enterprises, Inc. (the "Company") was
incorporated under the laws of the state of Nevada on October
29, 1998. The Company is considered to be in the development
stage, as defined in Financial Accounting Standards Board
Statement No. 7. The Company intends to purchase and operate
radio stations throughout the United States. The planned
principal operations of the Company have not commenced,
therefore accounting policies and procedures have not yet been
established.
Method of Accounting
The Company recognizes revenue and expenses according to the
accrual method of accounting. Expenses are recognized when
incurred and revenue is recognized when earned. Earnings
(loss) per share are computed based on the weighted average
method. The fiscal year of the Company ends December 31 of
each year.
The Company, per FASB Statement No. 7, is properly accounted
for and reported as a development stage enterprise.
Substantially all of the Company's efforts since its formation
have been devoted to establishing its new business. No
significant revenue has been earned as of the balance sheet
date. Operations have been devoted to raising capital, and
acquisition of properties.
Nonmonetary Transactions
Nonmonetary transactions are transactions for which no cash
was exchanged and for which shares of common stock were
exchanged for assets. These transactions are recorded at fair
market value.
COMPREHENSIVE INCOME
The Company has no components of other comprehensive income.
Accordingly, net income equals comprehensive income for all
periods.
26
<PAGE>
AMERICAN COMMUNICATIONS ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
(Continued)
FOR THE YEAR ENDED DECEMBER 31, 1999
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure About Fair Value of Financial
Instruments", requires disclosure about the fair value of all
financial assets and liabilities for which it is practical to
estimate. Cash, accounts receivable, accounts payable, and
accrued expenses are carried at amounts that reasonably
approximate their fair values.
Accounts Receivable
The Company provides for uncollectible accounts receivable
using the allowance method of accounting for bad debts. Under
this method of accounting a provision for uncollectible
accounts is charged to earnings. The allowance account is
increased or decreased based on past collection history and
management's evaluation of accounts receivable. All amounts
considered uncollectible are charged against the allowance
account and recoveries of previously charged off accounts are
added to the allowance.
Accounts receivable are shown net of the allowance for
doubtful accounts. This amount was determined to be $25,500 at
December 31, 1999.
Fixed Assets
The Company has adopted SFAS No.121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", which requires a review of any potential for
the impairment of value of any long-lived assets. It is the
policy of the Company to annually review the future economic
benefit of all long-lived assets and to charge off to
operations any potential impairment of value of long-lived
assets when applicable.
Machinery and equipment is depreciated on the straight-line
method over the estimated useful lives of three years.
Depreciation expense is $150 for the year ended December 31,
1999.
27
<PAGE>
AMERICAN COMMUNICATIONS ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
(Continued)
FOR THE YEAR ENDED DECEMBER 31, 1999
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and
revenues and expenses during the reporting period. In these
financial statements, assets, liabilities and earnings involve
extensive reliance on management's estimates. Actual results
could differ from those estimates.
LICENSES
Licenses are being amortized over 60 months.
NOTE 2: INCOME TAXES
The Company has adopted SFAS No. 109 "Accounting for Income Taxes"
which requires an asset and liability approach for financial
accounting and reporting for income tax purposes. This statement
recognizes (a) the amount of taxes payable or refundable for the
current year and (b) deferred tax liabilities and assets for future
tax consequences of events that have been recognized in the
financial statements or tax returns.
Deferred income taxes result from temporary differences in the
recognition of accounting transactions for tax and financial
reporting purposes. There were no temporary differences at December
31, 1999, and accordingly, no deferred tax liabilities have been
recognized.
28
<PAGE>
AMERICAN COMMUNICATIONS ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
(Continued)
FOR THE YEAR ENDED DECEMBER 31, 1999
NOTE 2: INCOME TAXES (Continued)
The Company has an estimated net operating loss carryforward of
approximately $390,000 at December 31, 1999. No effect has been
shown in the financial statements for the net operating loss
carryforward as the likelihood of future tax benefit from such net
operating loss carryforwards is not presently determinable.
Accordingly, the potential tax benefits of the net operating loss
carryforward, based upon a 20% estimated tax rate, of $78,000 at
December 31, 1999 have been offset by valuation reserves of the same
amount.
The net operating losses begin to expire in the year 2018.
NOTE 3: RELATED PARTY TRANSACTIONS
Included in accrued expenses is approximately $245,000 in accrued
wages and related payroll taxes due to the President and
Vice-President of the Company under employment agreements.
NOTE 4: TIME BROKERAGE AGREEMENT
The Company entered into a Time Brokerage Agreement (the Agreement)
with Watts Communications Inc. on June 1, 1999. The Agreement is for
12 months unless terminated earlier. The Agreement gives the Company
an irrevocable option to purchase substantially all of the assets of
Watts Communications Inc. (the Seller), subject to Federal
Communications Commission approval, and grants to the Company the
radio air time for four radio stations for the period of the
Agreement. In exchange for the purchase option and the air time, the
Company will pay the Seller various monthly fees of approximately
$10,000 per month.
Under the Agreement, the Company will operate the four radio
stations and have the right to receive payment for any commercial or
program time sold during the term of the Agreement.
The sale of commercial and program time are included in revenues and
the monthly fees payable under the Agreement are included in Cost of
Revenues in these financial statements.
29
<PAGE>
AMERICAN COMMUNICATIONS ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
(Continued)
FOR THE YEAR ENDED DECEMBER 31, 1999
NOTE 5: PROPOSED ACQUISITION
The Company has agreed to purchase substantially all of the assets
of Watts Communication, Inc. (the Seller). The Company currently has
a Time Brokerage Agreement with the Seller, under which the Company
has operated the Sellers' radio stations since June 1, 1999. This
agreement expires on May 31, 2000, (see Note 4 for further details
of the Time Brokerage Agreement).
The Company has agreed to purchase substantially all of the Sellers'
assets for approximately $1,625,000. The proposed terms of the
purchase are for the Company to pay $150,000 in cash at closing,
issue $262,500 worth of Company stock (number of shares to be
determined based upon the ask price at date of closing), and to sign
a note payable of $1,212,500 with the following terms: 9.5% simple
interest, interest only for the first six months, thereafter,
monthly payments of $12,667 for 6.5 years with the remaining
balance, of approximately $890,790 due at the end of the seventh
year. In exchange for the above, the Company will receive
substantially all of the assets of the Seller, which generally
include the following:
o Studio building and land for 4 radio stations
o Production equipment
o Remote equipment
o Control room equipment
o Office furniture and equipment
The purchase is contingent upon Federal Communication Commission
approval.
NOTE 6: SUBSEQUENT EVENTS
In January of 2000, the Company entered into a capital lease for
computer and studio equipment. The lease is for 36 months with a
monthly lease payment of $1,065. The Company can purchase the
equipment for $1 at the end of the lease. Estimated value of the
leased equipment at the time the lease was executed was $50,000.
In January 2000, the Company executed a letter of intent to acquire
substantially all of the assets of a Texas corporation (the Seller),
which include two radio stations in Texas. The letter of intent
calls for the acquisition of substantially all of the assets of the
Seller, including the two radio stations, for approximately $750,000
made up of cash, notes, Company stock and/or other consideration.
30
<PAGE>
AMERICAN COMMUNICATIONS ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
(Continued)
FOR THE YEAR ENDED DECEMBER 31, 1999
NOTE 6: SUBSEQUENT EVENTS (Continued)
This acquisition is contingent upon Federal Communications
Commission approval.
In April 2000, the Company executed a letter of intent to acquire
substantially all of the assets of a Nevada corporation (the
Seller), which includes two radio stations. The letter of intent
calls for the acquisition of substantially all of the assets of the
Seller, including the two radio stations, for approximately
$3,000,000 made up of cash, notes, Company stock and/or other
consideration. This acquisition is contingent upon Federal
Communications Commission approval.
NOTE 7: GOING CONCERN
The accompanying financial statements have been prepared on a going
concern basis, which comtemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company has a working capital deficiency of $158,077, an accumulated
deficit of $476,546 as of December 31, 1999, and a net loss for the
year then ended of $405,716. Accordingly its ability to continue as
a going concern is dependent on obtaining capital and financing for
its planned principal operations. The Company plans to secure
financing for its acquisition strategy through the sale of its
common stock and issuance of debt. However, there is no assurance
that they will be successful in their efforts to raise capital or
secure other financing. These factors among others may indicate that
the Company will be unable to continue as a going concern for a
reasonable period of time.
NOTE 8: LICENSE AGREEMENT
On July 31, 1999, the Company entered into a license agreement with
Tamark Communications to obtain (4) four exclusive IP Gateways. The
Gateways are a combination of the internet and the global telephone
networks to provide high speed telecommunications routing. In
consideration of 4,300,000 shares of its common stock (with a fair
market value of $215,000) and 1% royalty on gross sales generated
from the Gateways, the Company has obtained the marketing and
distribution rights for the Gateways for specific territories.
31
<PAGE>
AMERICAN COMMUNICATIONS ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
(Continued)
FOR THE YEAR ENDED DECEMBER 31, 1999
NOTE 9: COMMITMENTS
In 1998 the Company has entered into employment agreements with two
key employees. These agreements generally provide for annual
aggregate salaries of $214,000 for a period of three years.
32
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective March 24, 2000, we elected to change our independent accountant, as
filed on Form 8-K on March 31, 2000, from Kingery, Crouse & Hohl, P.A to Sprouse
& Winn L.L.P. There have been no disagreements with our accountants on
accounting or financial disclosure issues.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding the Executive
Officers and Directors of the Company as of February 29, 2000:
EXECUTIVE OFFICERS
Name Age Positions
Dain L. Schult 46 Chief Executive Officer, President, Chairman
of the Board
Robert E. Ringle 56 Vice President of Internet Operations,
Director of Sales, Treasurer and Director
Harry H. Hedges 55 Executive Vice President and Chief Operating
Officer
Dain L. Schult. Mr. Schult serves as Chairman, President and Chief Executive
Officer of ACE. Mr. Schult is a broadcast veteran of over 32 years in the radio
industry. Prior to the formation of ACE, Mr. Schult was president of
Radioactivity, Inc., a full-service radio broadcast consulting firm serving over
150 radio stations in various parts of the country. Mr. Schult participated in
the turnaround of several stations, created a unique turn-key management service
for new station owners, conducted station appraisals and market analysis
projects for sellers and buyers, and developed specific music formats for on-air
use by client stations. Concurrently, Mr. Schult was Chief Operating Officer for
Sunbelt Radio Group, Inc., a radio station group created to acquire and operate
radio stations in Texas. Previously, Mr. Schult had held various program
manager, operating manager, and on-air personality positions at several radio
stations in the Southeast and Southwest, including serving as President and
Chief Executive Officer for Equicom, Inc.
Robert E Ringle Mr. Ringle has extensive experience in Internet operations and
has held the position of Director of Sales for a regional radio broadcasting
network of over 30 stations which included creation of sales training programs,
image enhancement and the centralized billing system. He has owned and operated
a Detroit-based full-service advertising agency.
Harry H. Hedges As Executive Vice President and Chief Operating Officer for the
Company, Mr. Hedges brings with him over 30 years of experience in the radio
broadcasting industry. Prior to the formation of the Company, Mr. Hedges was
Senior Vice-President/Regional Manager for Equicom, Inc., garnering some of the
highest sales goal achievements in the entire group. Additionally he served as
an associate consultant with Radioactivity, Inc., and founded Hedges and
Associates, a sales and marketing company formed to represent Western and
Southwestern clothing and accessories manufacturers to various department stores
and western-wear boutiques throughout East and Central Texas. Previously, Mr.
Hedges held various general manager, sales and promotion manager, account
executive, and news reporter/copy writer positions at several stations in Texas.
33
<PAGE>
BOARD OF DIRECTORS
Name Age
Dain L. Schult 46 Chief Executive Officer, President, Chairman
of the Board
Robert E. Ringle 56 Vice President of Internet Operations,
Director of Sales, Treasurer and Director
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the compensation
received for services rendered to us during the years ended December 31, 1999
and 1998, respectively by the Chief Executive Officer and the Vice President of
Internet Operations. No other executive officers received aggregate compensation
during our last fiscal year which exceeded, or would exceed on an annualized
basis, $100,000. Other annual compensation consists of health insurance premiums
paid for by us on behalf of the named officers, and in some cases, the spouse
and dependents of the named officers.
Executive Compensation and Other Information
Summary of Cash and Certain Other Compensation. The following table provides
certain summary information concerning compensation paid or accrued by the
Company to or on behalf of our most highly compensated executive officer
(determined as of the end of the last fiscal year) (hereafter referred to as the
"named executive officers") for the fiscal years ended December 31, 1999 and
1998:
SUMMARY COMPENSATION TABLE
Annual Compensation
Name and All Other
Principal Position Year Salary Bonus Annual
Compensation
- -------------------------- ------- ---------- ---------- --------------
Dain L. Schult
Chief Executive
Officer and President 1999 $ 156,250 $ - $ -
1998 $ - $ - $ -
Robert E. Ringle
Vice President of
Internet Operations and
Director of Sales 1999 $ 143,750 $ - $ -
1998 $ - $ - $ -
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of December 31, 1999:
Beneficial Ownership of Common Stock
-----------------------------------------
Shares Owned Percentage of Class
------------ -------------------
Dain L. Schult 6,300,000 35.2%
Robert E. Ringle 4,200,000 23.4%
----------- -----
All directors and
officers as a
group (2 persons) 10,500,000 58.6%
========== =====
34
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our President, who is also a shareholder, previously advanced $6,140 to us. This
advance was unsecured, non-interest bearing and due on demand. As of December
31, 1999, the entire advanced amount has been repaid.
35
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
We filed the following Form 8-K's during th fourth quarter of 1999:
Dated 10/08/1999
Dated 12/17/1999
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Austin,
Texas.
Date: April 14, 2000 American Communications Enterprises, Inc.
By:_____________________________________
Dain L. Schult, President, Chief Executive
Officer, Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed by the following persons on behalf of the registrant and the capacities
indicated.
__/s/Dain L. Schult___President, Chief Executive Officer, Chairman of the Board
Dain L. Schult of Directors
_/s/Robert L. Ringle__Vice President of Internet Operations, Director of Sales,
Robert E. Ringle Treasurer, Director
36
<PAGE>
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 43,613
<SECURITIES> 0
<RECEIVABLES> 95,726
<ALLOWANCES> 25,500
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<PP&E> 4,136
<DEPRECIATION> 150
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<COMMON> 519,455
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<CGS> 203,249
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