U.S. SECURTIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(B)
OR 12(G) OF THE SECURITIES ACT OF 1934
AMERICAN NORTEL COMMUNICATIONS, INC.
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(NAME OF ISSUER)
WYOMING 87-1507851
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(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
7201 E CAMELBACK ROAD, SUITE 320, SCOTTSDALE, AZ 85251
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
480-945-1266
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(ISSUER'S TELEPHONE NO.)
SECURITIES TO BE REGISTERED UNDER SECTION 12(B) OF THE ACT:
NONE
SECURITIES TO BE REGISTERED UNDER SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
American Nortel Communications, Inc. ("ANC" or "Company") is a reseller of
1-Plus and 1-800 long-distance telecommunications services. ANC resells it to
customers and buys and leases long distance telephone time from other long
distance carriers. The Company's volume of sales grew substantially in the
fiscal year ended June 30, 1998 ("Fiscal 1998") and ANC became profitable during
fiscal 1998. The volume of sales has continued to increase at a substantial
rate during the first three quarters of its fiscal year ended June 30, 1999
("Fiscal 1999").
ANC resells long distance telephone services to both small business and
residential customers. As a reseller it purchases or leases long distance time
from other carriers and resells that time to others. To a large extent, ANC's
profitability is dependent upon the spread between its cost per minute and the
amount it charges its customers. In addition to the cost of long distance time
it purchases ANC's major expenses are telemarketing and other sales and
marketing expenses. ANC out-sources its marketing efforts to telemarketers and
it pays those telemarketers a contracted amount for each new customer obtained.
The Company does not direct-bill its customers, but rather utilizes the Local
Exchange Carriers (LEC) which provide local area telephone service to the
Company long-distance customers, for billing and collections. LECs receive a
fee based upon a certain percentage of amounts collected. Management believes
that the practice of billing through LECs has substantial advantages since it
increases the likelihood and promptness of collections.
ANC's method of operations has certain advantages and disadvantages. It
substantially reduces its out-of-pocket expenses of such things as capital,
equipment costs, rent and salaries. But it also makes ANC dependent upon the
performance of others whom it does not control, and upon its ability to contract
for such services at a reasonable price as compared to the price ANC can charge
its customers. With regard to its cost of obtaining long distance time, there
is presently a surplus of lines and capacity held by carriers who sell long
distance usage time to ANC on a bulk basis, and ANC believes that such surplus
will continue in the foreseeable future.
Competition
The long distance telephone industry is intensely competitive. There are many
large and small competitors in the industry, many of which share the same target
market as ANC. Many of the Company's competitors have much larger resources,
and are more established and have a larger customer base than ANC. There are
also a large number of resellers in the market competing for the same customers
that the Company seeks. Many of the resellers operate in a manner similar to
ANC. Competition among resellers and other providers of long distance services
generally are conducted on the basis of price. Prices have been decreasing over
the last several years, sometimes dramatically, for a variety of communication
services. Customers have become more sophisticated and price conscious. They
are likely to switch services when new competitor communication packages become
available, and switching from one service provider to another typically has few,
if any, cost implications for a customer. ANC constantly obtains new customers
to replace its customer account attrition. Other sources of competition may be
developing because of new offerings by telecommunication providers, such as
cable television industry, internet telephony, and voice and data communication
companies.
Regulatory Background
The Company and its industry are subject to regulations by the U.S. Federal
Communications Commission (the "FCC").
The existing domestic long distance telecommunications industry was principally
shaped by a 1984 court decree (the "Decree") that required the divestiture by
AT& T of its 22 bell operating companies ("BOCs"), organized the BOCs under
seven regional Bell operating companies ("RBOCs") and divided the country into
some 200 Local Access Transport Areas or "LATAs." The incumbent local exchange
carriers ("ILECS"), which include the seven RBOCS as well as Independent local
exchange carriers, were given the right to provide local telephone service,
local access service to long distance carriers and intra-LATA long distance
service (long distance service within LATAS), but the RBOCs were prohibited from
providing inter-LATA service (service between LATAs). The right to provide
inter-LATA service was given to AT&T and the other interexchange carriers
("IXC"). Conversely, IXCs were prohibited from providing local telephone
service.
The Telecommunications Act (enacted on February 8, 1996) significantly
altered the telecommunications industry. The RBOCs are now permitted to provide
long distance service originating (or in the case of "800" service, terminating)
outside the local services areas or offered in conjunction with other ancillary
services, including wireless services. Following application to the FCC, and
upon a finding by the FCC that the RBOC faces facilities-based competition and
has satisfied a congressionally-mandated "competitive checklist" of
interconnection and access obligations, an RBOC will be permitted to provide
long distance service within its local service area, although in so doing it
will be subject to a variety of structural and nonstructural safeguards intended
to minimize abuse of its market power in these local service areas. Having
opened the interexchange market to RBOC entry, the Telecommunications Act also
removes all legal barriers to competitive entry by interexchange and other
carriers into the local telecommunications market and directs RBOCs to allow
competing telecommunications service providers, such as the Company, to
interconnect their facilities with the local exchange network, to acquire
network components on an unbundled basis and to resell local telecommunications
services. Moreover, the Telecommunications Act prevents IXCs that serve greater
than five percent of pre-subscribed access lines in the U.S., (which includes
the nation's three largest long distance providers) from jointly marketing their
local and long distance services until the RBOCs have been permitted to enter
the long distance market or for three years, whichever is sooner. This
provision of the Act is intended to give all other long distance providers a
competitive advantage over the larger long distance providers in the newly
opened local telecommunications market. As a result of the Telecommunications
Act, long distance carriers will allow significant new competition in the long
distance telecommunications market, but will also be afforded significant new
business opportunities in the local telecommunications market.
Legislative, judicial and, technology factors have helped to create the
foundation for smaller long distance providers, such as the Company, to emerge
as alternative long distance service. The FCC has required all IXCs to allow
the resale of their services. In recent years, national and regional network
providers have substantially upgraded the quality and capacity of their domestic
long distance networks, resulting in significant excess transmission capacity
for voice and data communications. The Company believes that, as a result of
digital fiber optic technology and installation of fiber optic transmission
networks, excess capacity has been, and will continue to be, an important factor
in long distance telecommunications. The Company believes that resellers and
the smaller long distance service providers represent a source of traffic such
to carriers with excess capacity. Thus, resellers have become an integral part
of the long distance telecommunications industry.
Industry Evolution
Resellers represent a paradox in the telecommunications marketplace. They
are simultaneously a source of revenues to the major long distance providers and
yet resellers represent a risk to the product quality, reputation and pricing of
the major providers. Not only do long distance service resellers receive legal
protection to compete with the network based major carriers, but also the
resellers' sale of network based carrier, excess capacity represents a source of
additional traffic for such carriers. The Company believes that the three major
carriers and most regional carriers have a substantial excess telecommunication
transmission capacity and that the constant technological and facility upgrading
will continue, with resultant excess capacity in the carriers' network for the
foreseeable future.
Resellers exist primarily due to their ability to offer substantially
discounted long distance toll rates, and increasingly, discounted calling card
rates and other discounted services, to their prime target markets, which are
small and medium sized businesses. The main target market for most resellers is
not as profitable as other markets for wholesale or major carriers to serve and
the major carriers have focused on the larger businesses, generally those who
are currently paying less than $25,000 a month in long distance charges.
Traditionally, many resellers originated as customer base groups or
aggregators of customers, and their operations generally are marked by
relatively low overhead and low capital investment in property, plant &
equipment. Resellers often offer services that larger carriers are not prepared
to offer, such as customized location billing, non-telecom billing services,
international call-back, customized calling cards, multiple carrier service at
single locations with single invoices, and split dedicated service. Although
new entrants face some regulatory barriers, the costs of overcoming these are
low. With low entry barriers, a significant portion of the telecommunications
market is still open to significant competition on a price and service basis.
To date, resellers have been able to quickly build sizable customer bases on
marketing and telemarketing strengths. In many cases, rapid growth has strained
some reseller's ability to manage their growing revenues and their general
business enterprise. Therefore, their ability to attract capital to finance
receivables, improve facilities and equipment, and develop management and
systems infrastructure, will be the difference between resellers that survive as
independent companies and those that are acquired or fail.
The Company believes that the major carriers and some of the regional carriers
will continue to derive a portion of their revenues from their wholesalers and
resale market sales, since resellers can currently serve their target market at
a price that the major or regional carrier cannot or will not provide. The
Company believes that opportunities for future growth of its business exists in
high gross profit product/service area segments, including prepaid calling
cards, international services, cellular and wireless services, video and data
transmission, web-sight and internet-access, 800 number service, voice mail and
electronic mail. As a result, the Company expects that the number of call
minutes billed by resellers will continue to rise at an annual rate that,
measured on a percentage basis, is substantially greater than the number of call
minutes billed by the major carriers. Within the resale market as a whole,
switchless resellers, such as the Company, appear to have experienced in recent
periods a higher percentage growth than have facilities-based carriers in all
the segments previously mentioned. However, more switchless resellers will
become facilities-based as they acquire small companies and as their traffic
increase in geographic zones, which will increase their ability to purchase or
lease a switch. More traffic flowing in a given area would enhance a reseller's
ability to make a switch economically viable and more profitable for that
geographic zone. Should this trend continue, there would be substantially fewer
resellers that are switchless in the next five to ten years.
Service and Products
The Company offers a basic 1 plus and 800 long distance services. ANC
success as a provider of these basic services depends significantly on the
volume discounts it has been able to negotiate with its underlying carriers.
The Company charges its customers on the basis of minutes or partial
minutes of usage at rates which vary with the distance, duration, time of day of
the call, and type of call. Rate charges for a call are not affected by the
particular transmission facilities selected for the call transmission, but are
affected by the type of call a user may select. All billing is done through the
local exchange carrier ("LEC"). The Company offers a flat-rate long distance
calling service throughout the United States; these providers' rates usually are
the same per minute rate regardless of the call's origin or destination.
Billing occurs in six-second increments.
Marketing Strategy
The Company intends to increase market share in each market it serves
through the acquisition of strategic competitive firms providing value-added
services to the core businesses of the Company. The Company is not presently a
party to any acquisition agreement, nor has the Company completed any such
acquisition. Marketing tactics will be employed to not only conserve resources,
but to increase credibility and visibility in the targeted marketplace.
Strategic planning to be used includes editorial coverage in industry specific
media along with general interest publications.
The Company plans to promote value-added services or product areas that
will be the focus of the Company's marketing strategy. By providing customized
systems and value-added services, the Company can also provide many of the
regular long distance products that are tied into the system without excessively
discounting the price of the long distance. However, a discount for the long
distance will generally be used to promote the sale of long distance services
along with the value-added products and services. To a large extent, ANC's
profits are dependent upon the spread between its cost per minute and the amount
it charges its customers. Telemarketing is a recurring expense and is its sales
and marketing expense. ANC out-sources its marketing efforts to telemarketers
and it pays those telemarketers a certain amount for each new customer obtained.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this report are forward looking statements that
involve risks and uncertainties. Among the factors that could cause actual
results to differ materially from those described in such forward looking
statements are the following: the Company's ability to manage rapid growth;
litigation; changes in regulations; competition in the long distance
telecommunications market; the Company's ongoing relationship with its long
distance carriers; dependence upon key personnel; subscriber attrition; the
adoption of new, or changes in, accounting policies, practices, and estimates
and the application of such policies, practices, and estimates; federal and
state governmental regulation of the long distance telecommunications industry;
the Company's ability to develop its own long distance network; the Company's
ability to maintain, operate, and upgrade its information systems; and the
Company's success in offering additional communications products and services.
In the quarter ended March 31, 1999, the Company provided long distance
service as a reseller, principally to individuals and small businesses. The
Company has been able to target markets that have high volume calls and
international calls. International calling represented 47% of the Company's
revenues during the quarter ended March 31, 1999. The Company has experienced an
increase in competition domestically in market pricing, and is currently seeking
joint ventures and investment acquisition opportunities to curtail the effects
of cost competition in the domestic resale market.
On April 23, 1999, the Company invested and purchased for the achievement of
investment and acquisition goals 1,000,000 shares of Dauphin Technology, Inc.
(DNTK). The acquisition price was $635,000. Dauphin Technology is a
manufacturer of laptop computers and components.
Results of Operations
Quarter Ended March 31, 1999 Compared to Quarter Ended March 31, 1998.
Revenues for the quarter ended March 31, 1999 increased to $4,622,597 from
$1,467,227 during quarter ended March 31, 1998. The increase in revenue is from
the continued growth of the basic 1 Plus and 800 long distance service, and an
increase in international long distance calling. The Company has purchased new
accounts and has increased the Company's customer base through the use of
outside telemarketers, which in turn, has significantly increased revenues. The
Company has also increased its market share in large call volume areas and has
concentrated on international calling which has higher profit margin, and which
is not being directly affected by the intense competition in the U.S. domestic
long distance market.
Selling expenses for the quarter ended March 31, 1999 increased to $371,672
from $32,656 during quarter ended March 31, 1998. The increase was principally
the result of expended telemarketing, which is the Company's primary means of
attracting new customers. The Company has increased its telemarketing campaign
to build its customer base.
General and administrative expenses for quarter ended March 31, 1999
increased to $262,892 from $223,345 during quarter ended March 31, 1998. The
increase was principally due to the Company's commencement of a cash salary for
the CEO, who previously was paid stock for services. The Company also increased
its customer service base to provide a bi-lingual assistance to non-English
speaking customers. The Local Exchange Carrier (LEC) has been continually
increasing the cost of wholesale traffic and the Company anticipates that this
trend will continue.
Interest expense for the quarter ended March 31, 1999 decreased to $13,500
from $32,996 during quarter ended March 31, 1998. The decrease in interest
expense was a result of lower debt outstanding.
Net earnings for the quarter ended March 31, 1999 was $802,208, for $.06
per diluted shares, compared to $172,535, for $.02 per diluted shares for
quarter ended March 31, 1998.
LIQUIDITY
The Company has funded its working capital requirements primarily from cash
provided by operating activities. Cash provided by operating activities for the
quarter ended March 31, 1999 by $33,266. The principle source of revenue is
generated from the sales of long distance service to the Company's customers.
Capital Resources
Cash flows used by investing activities was $22,078 for the quarter ended
March 31, 1999. The Company continues to purchase additional computer equipment
to upgrade and replace incompatible equipment to adhere to internal requirements
for the Year 2000.
Cash flows used for financing activities was $378,164 in the quarter ended
March 31, 1999. This cash outflow was attributable to payment of $160,157 under
loans to the control group. In addition, the Company has begun to pay down
notes payable to unrelated third party on terms negotiated with note holders.
During the quarter the Company paid $218,006 under note terms. The total
amounts of notes negotiated are approximately $405,000. The notes paid
represent pre-bankruptcy obligations from 1993, and were re-negotiated with pay
off, default, and maturity provisions.
Year 2000
The Company and its service provider utilize software, which truncates
the year to a two-digit field. Accordingly, when the date passes the year 2000,
errors may occur in the calculation and processing of data significant to the
revenue recognition of the Company. The Company's management and Integretel
(IGT) service providers have taken steps to modify and upgrade equipment and
software programs to be prepared for the Year 2000 conversions.
The Year 2000 issue also affects the Company's internal systems
including the Company's information technology (IT) and non -IT systems.
Currently the Company has purchased information systems internally to comply
with the requirements for the Year 2000. Management currently believes that all
material systems are compliant for the year 2000 and the cost to address the
issues is not material. The Company's service provider IGT is complaint with
Year 2000 readiness and has assured the Company that their information systems
are Year 2000 complaint in all material effects.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 128, "Earning Per Share"
specifies the computation, presentation and disclosure requirements for earnings
per share for entities with publicly held common stock. This statement requires
the presentation of basic earnings per share and diluted earnings per share.
Statement of Financial Accounting Standards No.129, "Disclosure of
Information about Capital Structure" is intended to consolidate existing
disclosure requirements into one publication to make them easier to apply. This
new standard continues the requirement to disclose certain information about an
entity's capital structure, as contained in other authoritative literature. The
adoption of this standard requires no change in the financial statement
disclosure requirements of the Company.
ACCOUNTING STANDARDS NOT YET ADOPTED
Statement of Financial Accounting Standards No 130, "Reporting on
Comprehensive Income" establishes standards for reporting and display of
comprehensive income (all changes in equity during a period except those
resulting from investments by and distributions to owners) and its components in
financial statements. This new standard, which will be effective for the
Company for quarter ended June 30, 1998, is not currently anticipated to have
significant impact on the Company's financial statements based on the current
financial structure and operations of the Company.
Statement of Financial Accounting Standards No.131, "Disclosure about
Segments of the Enterprise and Related Information" establishes standards for
reporting information about operating segments in annual financial statements,
selected information about operating segments in interim financial reports and
disclosures about products and services, geographic area and major customers.
This pronouncement will be required to be implemented in the year ended June 30,
1999 and may result in presenting more detailed information in the notes to the
Company's financial statements.
ITEM 3. DESCRIPTION OF PROPERTY
The Company's offices are located in Scottsdale, Arizona. The Company
leases 1700 square feet of office space on a month to month basis for
approximately $25,000 annually. The Company is presently reviewing available
office space in the Phoenix, Arizona metropolitan area, and expects to lease new
office space in the near future. The Company has approximately ten full-time
equivalent employees as of March 31, 1999.
ITEM 4. SECURITY OWNERSHIP OF OWNERS AND MANAGEMENT
The following table sets forth information concerning ownership of ANC's
voting securities by (i) all persons known by ANC to own 5% or more of ANC's
voting securities, (ii) the sole Director and two officers of ANC, and (iii) the
two officers and the sole Director as a group, as of March 31, 1999.
<TABLE>
<CAPTION>
TOTAL
NUMBER OF
NUMBER OF VOTING % OF
COMMON SECURITIES VOTING
NAME SHARES OWNED OWNED SECURITIES
- ------------------------------ ------------------ ---------- -----------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS:
- ------------------------------
William P. Williams, Jr. 9,906,951(1)(2)(3) 9,906,951 65.40%
- ------------------------------ ------------------ ---------- -----------
Eva Williams 9,906,951(1)(2)(3) 9,906,951 65.40%
- ------------------------------ ------------------ ---------- -----------
Directors and Officers as 9,906,951(1)(2)(3) 9,906,951 65.40%
a Group (2 persons)
- ------------------------------
5% SHAREHOLDERS:
- ------------------------------
Wilcom, Inc. 8,756,951 8,756,951 57.78%
- ------------------------------ ------------------ ---------- -----------
Shelton Financial, Inc. 400,000 400,000 2.64%
Eva Williams 750,000 750,000 4.95%
<FN>
(1) Includes 8,756,951 Common Shares owned by Wilcom, Inc., a Texas corporation
that is wholly owned by Eva Williams, wife of William P. Williams, Jr., the sole
director, CEO and president of ANC. By reason of Ms. Williams' ownership of
Wilcom, Inc. the shares are included as beneficially owned by her and are also
included as beneficially owned by Mr. Williams. See "Certain Relationships and
Related Transactions."
(2) Includes 400,000 shares of voting common stock owned by Shelton Financial,
Inc., a Texas corporation that is wholly owned by Mr. Williams, Jr.
(3) Includes 750,000 outstanding voting common shares owned by Eva Williams,
wife of Mr. Williams, Jr. By reason of Ms. Williams' ownership of the voting
common shares they are included as beneficially owned by her and are also
included as beneficially owned by Mr. Williams.
</TABLE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Executive Officers
Mr. Williams is the sole Director and sole Executive Officer of the Company
certain information representing Mr. Williams, and his wife, Eva Williams, who
is the only other officer of the Company, is set forth below:
<TABLE>
<CAPTION>
Name Age Position
- ------------------- --- ---------------------------------------------------------
<S> <C> <C>
W. P. Williams, Jr. 45 Chairman of the Board, Chief Executive Officer, President
- ------------------- --- ---------------------------------------------------------
Eva Williams 44 Secretary
- ------------------- --- ---------------------------------------------------------
</TABLE>
The Directors of the Company hold office until successors are duly elected
and qualified. The background and principal occupations of the sole director
and each officer of the Company are as follows:
William P. Williams, Jr. has been the Chairman, Chief Executive Officer,
and President of the Company since June of 1995. He oversees all operational
functions of the Company. He has twenty years of diversified, senior level
business experience. Mr. Williams came to the Company having served 12 years as
President and Chairman of the Board of Shelton Financial, Inc. He has a B.A.
Degree in Business and MBA from Baylor University. See "Certain Relationships
and Related Transactions" and "Executive Compensation."
Eva Williams, the Secretary of ANC, is the spouse of William P. Williams
Jr., ANC's President, CEO and sole director. Eva Williams is the sole
shareholder of Wilcom, Inc., the majority shareholder of ANC. See "Executive
Compensation", and "Certain Relationships and Related Transactions".
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT :
The Company is aware that all filings required of section 16(a) of the
Exchange Act of Directors, Officers or holders of 10% of the Company's shares
have not been timely and the Company has instituted procedures to ensure
compliance in the future.
ITEM 6. EXECUTIVE COMPENSATION
General. Mr. William P. Williams, Jr., serves as the Company's sole
Director and Chief Executive Officer pursuant to a Management Services and
Consulting Agreement between the Company and Wilcom, Inc., the Company's
principal stockholder. Through December 31, 1998, the Company issued Common
Shares to Wilcom in lieu of cash management fees. On January 1, 1999, the Board
of Directors and Mr. Williams entered into an employment agreement pursuant to
which Mr. Williams is paid an annual salary of $500,000 serving as Chief
Executive Officer.
The following table sets forth information concerning the compensation for
the fiscal year ended March 31, 1999, of ANC's President and Chief Executive
Officer, and the only other officer of ANC ("Named Officers"):
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------- ------------------------
Options Other
Name and Principal Position Year Salary Commissions (Shares) Compensation
- --------------------------- ---- -------- ----------- -------- --------------
<S> <C> <C> <C> <C> <C>
William P. Williams, Jr. $125,000
President and CEO 1999 - - $ 90,000(4)
- --------------------------- ---- ----------- -------- --------------
William P. Williams, Jr. 1998 - - - $ 340,000(1)
President and CEO
- ---------------------------
Eva Williams 1998 - - - $ 37,750(3)
Secretary
- ---------------------------
<FN>
(1) Represents the issuance of 1,000,000 shares of ANC restricted common stock valued
at $.34 per share to Wilcom, Inc. pursuant to a Management Services and Consulting
Agreement, under which Wilcom provided the executive management and consulting
services of its president, Williams P. Williams, Jr., to ANC as Director, CEO and
president of the Company for the fiscal year ending June 30, 1998.
(2) Represents issuance of 500,000 shares of ANC restricted common stock valued at
$.15 per share to Wilcom, Inc. pursuant to the Management Services and Consulting
Agreement for the fiscal year ended June 30, 1997.
(3) Represents the issuance of 250,000 shares of ANC restricted common stock valued at
$.15 per share (60% of market) to Ms. Williams as compensation for her services as
Secretary of the Company for the fiscal years ended June 30, 1998, 1997, 1996.
(4) Represents shares issued on July 9, 1998 as compensation to Wilcom, Inc. for
providing the management and consulting services of Mr. Williams for the
fiscal
year ending June 30, 1999.
</TABLE>
ANC does not have a pension plan, retirement plan, profit sharing plan or
similar existing benefits for its directors, officers, or employees.
See "Certain Relationships and Related Transactions" for details regarding
stock and warrants issued in prior periods.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
William P. Williams, Jr., ANC's President, CEO and sole director, is the
spouse of Eva Williams, ANC's Secretary. Mr. Williams in his capacity as the
Company's sole director, authorized all of the transactions set forth below on
behalf of ANC, except the transactions that occurred on June 27, 1995, which
were authorized by the prior directors of the Company. Mr. Williams is also
president of Shelton Financial, Inc., a corporation wholly owned by him, and
president of Wilcom, Inc., a corporation wholly owned by his spouse. Wilcom
owns more than 10% of ANC's issued and outstanding voting shares.
On June 27, 1995 the board of directors of the Company agreed to turn over
management and control of the Company to Wilcom, Inc. for the purpose of
reorganizing the Company and reestablishing the Company's business operations.
In connection therewith, the directors resigned and William P. Williams, Jr. was
elected as a member of the board of directors and was elected president of the
Company. The former directors assigned their interest in an Amended Managers
Agreement and an Earn-out Preferred Share Agreement between NorTel CCI, Inc.,
themselves and the Company to Wilcom, Inc., thereby transferring 3,300,000
shares of the Company's Preferred A Series One Preferred Stock, each share with
one vote on all matters submitted to the shareholders, to Wilcom, Inc. and
assuring Wilcom, Inc. voting control of the Company. NorTel CCI was controlled
by the former directors. Further, NorTel CCI, Inc. assigned approximately
500,000 shares of common stock of the Company owned by it to Wilcom, Inc. On
that same date, Wilcom, Inc. and the Company rescinded those agreements by
mutual consent and canceled the 3,300,000 shares of Preferred A Series One
Preferred Stock. Simultaneously ANC re-established, re-designated and re-issued
3,300,000 shares of Preferred A Series One Preferred Shares ("New Preferred") to
Wilcom, Inc., each New Preferred entitled to one vote and convertible into one
share of common stock at any time after the bid price for the Company's common
stock has averaged more than $1.00 for thirty consecutive trading days on the
NASDAQ OTC Bulletin Board.
On July 1, 1995 ANC entered into a Management Services and Consulting
Agreement with Wilcom, Inc. who engaged William P. Williams, Jr. to render
services to ANC as Director, Chief Executive Officer and President for twelve
months. The terms of the agreement provided for payment of 2,000,000 shares of
ANC common stock and options to purchase another 2,000,000 shares at 100.25% of
the closing bid price on July 1, 1995 (1/16th), exercisable through June 30,
1998. The shares and options delivered under the agreement were to be free
trading shares registered under Form S-8.
On July 16, 1995 the Board approved the issuance of 2,000,000 shares
to Wilcom, Inc. as compensation for 1996. On May 13, 1996 the Board approved
the issuance of 500,000 shares to Wilcom, Inc. as compensation for 1997. Since
restricted stock was issued, the transaction price was recorded at $.15 per
share (60% of the $.25 market price) giving effect to the trading restrictions
on marketability.
On May 15, 1996 the Board approved the issuance of 750,000 shares to
Eva Williams as compensation for 1996. Since restricted stock was issued, the
transaction price was recorded at $.15 per share (60% of the $.25 market price)
giving effect to the trading restrictions on marketability. The Board
subsequently determined that the stock would be issued as compensation for the
three-year period 1996 - 1998 as compensation for her services as an officer of
the Company.
On July 10, 1997 the Board approved the issuance of 1,000,000 shares
at $.34 per share to Wilcom, Inc. for management services rendered during fiscal
1998. Additionally, 3,300,000 shares were issued to Wilcom, Inc. in exchange for
the 3,300,000 shares of new Preferred that were issued in June 1995.
On July 9, 1998 the Board approved the issuance of 1,000,000 shares at
$.09 per share to Wilcom, Inc. for management services rendered during fiscal
1999.
ITEM 8. DESCRIPTION OF SECURITIES
The Company has 50,000,000 shares authorized as class A voting common
stock ("Common Shares"), of which shares were outstanding at June 30, 1999. The
Company is also authorized to issue shares of preferred stock with such rights,
preferences as the Board of Directors in its sole discretion may approve from
time to time. At June 30, 1999, no shares of preferred stock were outstanding.
PART II
ITEM 1. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
ANC's common stock is traded in the over-the-counter market, and quoted in
the National Association of Securities Dealers Inter-Dealer Quotation System
("Electronic Bulletin Board") under the symbol "ARTM".
The following table sets forth for the periods indicated the high and low
bid quotations for the Company's Common Stock. These quotations are believed
to represent inter-dealer quotations, without adjustment for retail mark-up,
markdown or commission and may not represent actual transactions.
At March 31, 1999, there were 15,153,785 shares of common stock of the Company
outstanding.
<TABLE>
<CAPTION>
HIGH BID LOW BID
<S> <C> <C>
FISCAL 1999
Quarter Ended March 31, 1999 1.25 .62
Quarter Ended December 31,1998 .16 .04
FISCAL 1998
Quarter Ended June 31, 1998 .59 .25
Quarter Ended March 31, 1998 .77 .48
Quarter Ended December 31, 1997 .94 .54
Quarter Ended September 30, 1997 .87 .37
FISCAL 1997
Quarter Ended June 30, 1997 1.37 .37
Quarter Ended March 31, 1997 1.12 .12
Quarter Ended December 31, 1996 1.31 .37
Quarter Ended September 30, 1996 2.37 .68
</TABLE>
The Company has never paid dividends on any of its shares. As a result of
the large accumulated deficit, no payment of dividends may be paid until profits
are earned. The terms of debt instruments do and will limit the payment of
dividends on Common Stock. The Transfer Agent and Registrar for the Company is
American Stock Transfer.
ITEM 2. LEGAL PROCEEDINGS
ANC has been named as defendant in the following:
CLIC International Corporation vs. W.P. & Eva Williams, d.b.a. ANC - The suit,
claiming damages in an amount less than $30,000, is related to a barter trade of
phone cards for light bulbs for the Fall Creek Inn, was filed during fiscal
1997. The suit is pending. The suit is discussed in Footnote 11 to the
Company's financial statements included at Item 7 of this report ("the Financial
Statements").
KPMG Peat Marwick vs. Certified Surety Group, Ltd. and ANC - The suit, claiming
damages in the amount of $30,000 is for services rendered by KPMG related to its
audit of the June 30, 1993 ANC financial statements. The suite is discussed in
Footnote 11 to the Financial Statements.
Kendel Corp. vs. ANC - The suit is discussed in Footnote 2 to the Financial
Statements, under the caption "Fall Creek Inn". The lessor repossessed the
property on January 31, 1997 and filed suit for breach of contract and recovery
of damages. A default judgment was initially entered, granting Plaintiff rent,
possession and damages in excess of $3,000,000. A motion to set the default
judgment aside was successful and there has been no appeal. The Court ordered
that possession be permanently transferred to the Plaintiff leaving the
Plaintiff in possession and full ownership, with ANC no longer having an
interest in the property. The case is still pending on the issue of damages.
Neither party has conducted discovery on the damage issue to date.
Lantern Bay, Inc. and Richmond Heights vs. ANC - The suit is discussed in
Footnote 2 to the Financial Statements, under the caption "Palace View". The
Lantern Bay portion of this suite was settled in Fiscal 1998 for $15,000 paid by
ANC.
Records Retrieval vs. ANC - The suit is in Note 11 of the Financial Statements.
The suit was settled in Fiscal 1998 for approximately $42,000 paid by ANC.
Hartzog Conger Cason vs. ANC - The suit is discussed in Note 9 of the Financial
Statements. Between 1991 and 1992, ANC issued promissory notes in an aggregate
amount of $675,000. ANC is delinquent on paying the principal and interest
amounts due under the note terms. The note holders have filed suit against ANC
and the surety company. Certain of the note holders have received judgment and
others are pending. On April 7, 1998 a judgment was entered against ANC in
favor of Herman Meinders and Marguerite Colton. The respective amounts of the
judgments are $144,529 and $33,876, including interest at 9% per annum. The
claim of Express Services is pending with no current trial setting. However, it
is anticipated that judgment will be entered in favor of Express Services, Inc.
for all amounts claimed due and owing. A claim on the Eason note has not yet
been asserted but ANC anticipates that at some point suit will be filed and
judgment will be established for all amounts (approximately $400,000) claimed
due.
In 1996, ANC was advised that the Securities Division of the Arizona
Corporation Commission had begun an investigation of ANC. The Securities
Division will neither confirm nor deny that an investigation is proceeding, and
the Securities Division advised ANC that any investigation, which would be in
the preliminary stages, would be kept confidential and not necessarily be any
indicator of wrongdoing. ANC has had no further contact from the Division since
November 3, 1997.
In addition to the foregoing, ANC is a party to legal proceedings and
other various claims and law suits in the normal course of its business which,
in the opinion of the Companies management, are not individually or collectively
material to its business.
LONG DISTANCE SERVICE AGREEMENTS
On December 9, 1996 ANC entered into a Billing Services Agreement (One
Plus (1+)) with Integretel Incorporated ("IGT") whereby IGT would provide ANC
telephone company billing and collection and associated services to the
telecommunications industry. The agreement term is for two years, automatically
renewable in two-year increments unless appropriate notice to terminate is given
by either party. The agreement automatically renewed on December 9, 1998, as
neither party had given notice of terminations prior to that renewal date. Under
the agreement, IGT bills, collects and remits the proceeds to ANC net of
reserves for bad debts, billing adjustments, telephone company fees and IGT
fees. If either the Company's transaction volume decreases by 25% from the
preceding month, less than 75% of the traffic is billable to major telephone
companies, IGT may at its own discretion increase the reserves and holdbacks
under this agreement. IGT is the only provider of this service to the Company.
On December 19, 1996 ANC entered into a Master Agreement for Purchase and
Sale of Accounts with IGT whereby IGT purchases accounts from ANC for a purchase
price consisting of an advance component and a deferred component. The advance
component, which is calculated by multiplying the estimated purchase price by
the advance component percentage, is payable within ten days of receipt of the
transaction batch pertaining to the purchased accounts. The deferred component
is the differential of the amount actually collected by IGT and the advance
component and is payable when the amount is determined. Except for the right of
IGT to refuse to accept or reject acceptance of accounts and except for the
right of IGT to charge back amounts to ANC under certain circumstances, the sale
of accounts is without recourse and IGT assumes the full credit risk. Certain
charge backs and fees are recourse obligations of ANC. IGT maintains both
Non-recourse and Recourse accounts comprising the Combined account for ANC. The
maximum purchase obligation of IGT to ANC was set at $700,000 when the agreement
was entered into in December 1996. This amount was subsequently increased to
$3,000,000 as of March 31, 1998.
On January 9, 1997 ANC entered into a Carrier Transport Switched Services
Agreement with LDC. In accordance with the agreement, ANC granted a security
interest in certain assets of ANC which include all right, title, and interest
in the customer lists, accounts receivable, customer and account contracts, and
all rights relating to such contracts serviced by the agreement and all present
and future accounts receivable attributable to such customer accounts including
the proceeds of any sale, transfer or encumbrance thereof and all awards or
payments related thereto. The security interest granted was documented in a
Security Agreement between ANC and LDC on January 9, 1997.
On April 24, 1997 ANC entered into a Reseller Agreement with Total Network
Services, a division of Cable and Wireless. The agreement, which runs for an
initial duration of 24 months, provides for minimum monthly payments for service
of $10,000, $30,000 and $40,000 in the 2nd, 3rd and 4th months respectively
after service initiation and $50,000 thereafter through the term of the
agreement. Through June 30, 1998, the Company's actual utilization has exceeded
the minimums. Total Network Services is currently the only provider of this
service to the Company.
Effective August 1, 1997 ANC entered into an agreement with Telesolutions
("TSN") to provide data processing services related to compiling call detail
from carriers and submission of LEC billing data to Integretel. The agreement
is for one year or until either party terminates with 120 days notice.
On November 18, 1997 ANC entered into a service agreement with Accutel,
Inc. whereby Accutel would acquire and provide LEC customers to ANC, which meet
certain criteria as specified in the agreement. ANC would pay Career
Communications for such verified customers a fee for 1,000 ANI's on an as needed
basis.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
On June 7, 1996 Crouch, Bierwolf & Chisholm ("Crouch Bierwolf"), Certified
Public Accountants, of Salt Lake City, Utah, were engaged to conduct an audit of
the financial statements of ANC for the fiscal years ended June 30, 1995 and
1994 (which accompanied its Form 10-KSB Annual Reports for the fiscal years
ended June 30, 1994 and June 30, 1995, filed with the Securities and Exchange
Commission on or about November 18, 1996). During the two most recent fiscal
years and any interim periods preceding this engagement, ANC had not consulted
Crouch Bierwolf regarding the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on ANC's financial statements or any other
financial presentation whatsoever, or any disagreement or reportable event with
any former accountant.
After completing the 1995 and 1994 audits, Crouch Bierwolf initiated the
audit of the financial statements of ANC for the fiscal year ended June 30,
1996. On or about May 1, 1997 the audit was discontinued because of discussions
and disagreements between ANC and Crouch Bierwolf with respect to the complexity
of the audit resulting from certain barter transactions in which ANC had traded
prepaid long distance time for various properties, the valuations of the
properties acquired in those transactions, and difficulties Crouch Bierwolf had
in staffing for audit field-work out of state. The decision to terminate the
relationship was made by the Chief Executive Officer and President, who
constitutes the sole member of the ANC Board of Directors. ANC has no audit
committee. On May 1, 1997 Crouch Bierwolf sent a letter to ANC confirming that
the client-auditor relationship had ceased. Subsequently, ANC approached Crouch
Bierwolf about continuing the audit and informed Crouch Bierwolf that ANC
accepted the method of valuation proposed by Crouch Bierwolf. However, ANC was
informed that Crouch Bierwolf was unwilling to undertake further audit work
because of the difficulties of staffing for audit fieldwork out of state.
Other than the disagreements disclosed above, there were no disagreements
between ANC and Crouch Bierwolf, whether resolved or not resolved, on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which, if not resolved, would have caused them to
make reference to the subject matter of the disagreement in connection with
their respective reports.
Other than expressing substantial doubt about the ability of ANC to
continue as a going concern, the reports of Crouch Bierwolf do not contain any
adverse opinion or disclaimer of opinion, and are not qualified or modified as
to uncertainty, audit scope or accounting principles.
On July 31, 1997 Semple & Cooper, LLP ("Semple & Cooper"), Certified Public
Accountants, of Phoenix, Arizona, were engaged to conduct an audit of the
financial statements of ANC for the fiscal year ended June 30, 1996. Semple &
Cooper initiated an audit of the financial statements of ANC for the fiscal year
ended June 30, 1996 and continued until January 22, 1998 when ANC and Cooper &
Semple terminated the client-auditor relationship by mutual agreement. During
the two most recent fiscal years and any interim periods preceding this
engagement, ANC had not consulted Semple & Cooper regarding the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on ANC's financial
statements or any other financial presentation whatsoever, or any disagreement
or reportable event with any former accountant.
On February 9, 1998 Semple & Cooper sent a letter to ANC confirming their
resignation effective January 22, 1998. The reason for the termination was the
complexity of the audit resulting from certain barter transactions in which ANC
had engaged and difficulties Semple & Cooper had in staffing for the audit.
There were no disagreements between ANC and Semple & Cooper, whether
resolved or not resolved, on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which, if not
resolved, would have caused them to make reference to the subject matter of the
disagreement in connection with their respective reports.
On March 2, 1998 LaVoie, Charvoz & May, P.C. ("LaVoie"), Certified Public
Accountants, of Tucson, Arizona, were engaged to conduct an audit of the
financial statements of ANC for the fiscal years ended June 30, 1998, 1997 and
1996. During ANC two most recent fiscal years and any interim periods preceding
this engagement, ANC had not consulted LaVoie regarding the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on ANC's financial
statements or any other financial presentation whatsoever, or any disagreement
or reportable event with any former accountant.
All decisions to engage and/or terminate the relationships between ANC and
Crouch Bierwolf, Semple & Cooper, and LaVoie were made by the Chief Executive
Officer and President who constitutes the sole member of the Board of Directors.
ANC has no audit committee.
ANC failed to timely report these changes with the SEC on Form 8-K. These
changes in accountants were reported on Forms 10-KSBs dated June 30, 1997, and
June 30, 1998 respectively.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Since July 1, 1997, the Company has issued a total of 5,300,000 Common
Shares to Wilcom, Inc. in transactions which are exempt from the registration
requirements of the Securities Act of 1933 pursuant to Section 4(2) of that Act.
Wilcom, Inc., is wholly -owned by Eva Williams, the Company's secretary. Ms.
Williams is the wife of William P. Williams, the Company's sole director and
Chief Executive Officer.
Of the 5,300,000 Common Shares issued since July 1, 1997, 3,300,000 were
issued in October 1997 upon the conversion of 3,300,000 shares of the Company's
preferred stock. The remaining 2,000,000 Common Shares were issued pursuant to
Management Services and Consulting Agreement between Wilcom and the Company,
under which Wilcom provides to the Company Mr. William's services and the
Company's sole director and CEO. 1,000,000 Common Shares were issued pursuant
to the Management Services and Consulting Agreement on July 30, 1998, and
1,000,000 Common Shares were issued on July 9, 1998, in respect of services to
be rendered during the fiscal year ending June 30, 1999.
ITEM 5. INDEMNIDICATION OF DIRECTORS AND OFFICERS
Section 16-10a-901 et seq. of the Utah Business Corporation Act authorizes
indemnification of directors, officers, employees, fiduciaries and agents of the
Company; allows the advancement of expenses of costs of defending against
litigation; and permits companies incorporated in Utah to purchase insurance on
behalf of directors, officers, employees, fiduciaries, and agents against
liabilities whether or not in the circumstances such companies would have the
power to indemnify against such liabilities under the provisions of the statue.
The Company's articles of incorporation provide for indemnification by the
Company of its directors to the fullest extent permitted by the Utah Act, the
Company does not currently carry directors and officers insurance covering its
officers and directors.
Insofar as indemnification by the Company for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the Company pursuant to the foregoing, the Company has been advised
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed by the Securities Act and
is therefore unenforceable.
FINANCIAL STATEMENTS.
3RD QUARTER FISCAL ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
AMERICAN NORTEL COMMUNICATIONS, INC.
COMPARATIVE BALANCE SHEET
AS OF MARCH 31, 1999 AND 1998
UNAUDITED
ASSETS
1999 1998
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 287,832.55 134,114.30
Prepaid Expenses 726,935.25 125,253.88
Intangible Debt Issue 16,200.00 28,400.00
Cable and Wirless - 68,638.13
Accounts Receivable 2,377,714.73 427,681.82
---------------- ---------------
TOTAL CURRENT ASSETS $ 3,408,682.53 784,088.13
PROPERTY AND EQUIPMENT:
Telecommunications Property 1,650.00 1,650.00
Equipment 98,675.18 58,448.50
LESS: Accumulated Depreciation (19,119.13) (16,939.00)
---------------- ---------------
TOTAL PROPERTY AND EQUIPMENT 81,206.05 43,159.50
OTHER ASSETS:
Investment Through Barter - 47,977.94
Other Assets 6,666.94 80,448.00
Due to Related Party 437,114.76 158,669.69
---------------- ---------------
TOTAL OTHER ASSETS 443,781.70 287,095.63
-------------- --------------
TOTAL ASSETS $ 3,933,670.28 1,114,343.26
============== ==============
LIABILITIES
CURRENT LIABILITIES:
Trade Accounts Payable 1,104,380.46 439,488.83
Trade Accounts Payable - Other 410,327.00 439,327.00
Payroll Taxes Payable 55,179.32 19,878.52
Notes Payable 620,000.00 708,191.90
Accrued Interest Payable 291,801.50 369,489.00
---------------- ---------------
TOTAL CURRENT LIABILITIES 2,481,688.28 1,976,375.25
LONG-TERM LIABILITIES:
Converted Debentures 18,750.00 93,750.00
Unearned Phone Card Revenue - 4,429.30
---------------
TOTAL LONG-TERM LIABILITIES 18,750.00 98,179.30
-------------- --------------
TOTAL LIABILITIES 2,500,438.28 2,074,554.55
STOCKHOLDERS' EQUITY
Common Stock 21,920,002.00 21,919,002.00
Treasury Stock (117,000.00) (270,000.00)
Retained Earnings(Loss) (20,369,770.00) (22,609,213.29)
---------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 1,433,232.00 (960,211.29)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,933,670.28 1,114,343.26
============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICAN NORTEL COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD ENDED MARCH 31, 1999 AND DECEMBER 31, 1998
UNAUDITED
3RD QTR 2ND QTR
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 802,208.23 $ 655,616.96
Adjustments to reconcile net income to net cash provided by operating
activities.
Depreciation and amortization 3,000.00 2,001.00
(Increase) decrease in:
Trade accounts receivable (503,897.91) (1,086,196.60)
Prepaid expenses 30,940.38 (432,851.22)
Increase (decrease) in:
Trade accounts payable (273,765.75) 865,479.02
Interest payable (67,187.50) 13,500.00
Payroll taxes payable 41,968.71 6,834.26
------------- ---------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 33,266.16 24,383.42
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (22,078.40) (9,973.17)
------------- ---------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (22,078.40) (9,973.17)
CASH FLOWS FROM FINANCING ACTIVITIES
Gain on maturing note NOTE 3 (81,000.00) -
Disposition of debt obligations (112,006.50) -
Payment on notes payable (25,000.00) (45,000.00)
Loans from control group (160,157.43) (43,949.99)
------------- ---------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (378,163.93) (88,949.99)
------------- ---------------
NET INCREASE (DECREASE) IN CASH (366,976.17) (74,539.74)
CASH AT BEGINNING OF PERIOD 654,808.72 729,348.46
------------- ---------------
CASH AT END OF PERIOD $ 287,832.55 $ 654,808.72
============= ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICAN NORTEL COMMUNICATIONS, INC.
COMPUTATION OF EARNINGS PER SHARE
UNAUDITED
1999 1998
3RD QUARTER 3RD QUARTER
<S> <C> <C>
BASIC EARNINGS PER SHARE: NOTE 2
Common shares outstanding, beginning of period 15,153,785 14,237,016
Effects of weighting shares:
Weighted common shares issued (1,082,627) (3,202,769)
------------- -----------
Weighted average number of common shares 14,071,158 11,034,247
============= ===========
outstanding
Net Income $ 802,208.23 172,534.60
============= ===========
Earnings Per Share $ 0.06 0.02
============= ===========
DILUTED EARNINGS PER SHARE: NOTE 2
Common shares outstanding, beginning of period 15,153,785 14,237,016
Effects of weighting shares:
Weighted common shares issued (1,082,627) (3,202,769)
------------- -----------
10% Convertible Debentures 5,844 314,613
------------- -----------
Weighted average number of common shares and
common equivalent shares outstanding 14,077,002 11,348,860
============= ===========
Net Income $ 802,208.23 172,534.60
============= ===========
Earnings Per Share $ 0.06 0.02
============= ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICAN NORTEL COMMUNICATIONS, INC.
COMPARATIVE STATEMENT OF INCOME AND EXPENSE
FOR THE PERIOD ENDING MARCH 31, 1999 AND 1998
UNAUDITED
1999 1998
3RD QUARTER YEAR TO DATE 3RD QUARTER YEAR TO DATE
<S> <C> <C> <C> <C>
INCOME
Airtime Income $4,622,597.17 11,880,424.06 $1,467,227.38 3,023,336.73
COST OF SALES 3,361,703.14 8,542,558.21 985,196.57 1,982,799.52
GROSS PROFIT 1,260,894.03 3,337,865.85 482,030.81 1,040,537.21
SELLING EXPENSES 371,671.59 694,164.01 32,655.67 86,441.98
GENERAL & ADMINISTRATIVE 262,892.19 671,311.54 223,345.75 478,517.07
-------------- -------------- -------------- -------------
TOTAL EXPENSES 634,563.78 1,365,475.55 256,001.42 564,959.05
EARNINGS (LOSS) FROM OPERATIONS 626,330.25 1,972,390.30 226,029.39 475,578.16
OTHER INCOME (EXPENSE)
Other Income 98,006.50 179,225.32 (830.00) (1,260.11)
Gain on Maturing Note NOTE 3 81,000.00
Amortization Expense - - (19,668.80) (35,245.90)
Interest Expense (13,500.00) (40,500.00) (32,995.99) (87,664.14)
Interest Income 10,371.48 13,277.87 - -
-------------- -------------- -------------- -------------
TOTAL OTHER INCOME 175,877.98 152,003.19 (53,494.79) (124,170.15)
NET INCOME (LOSS) $ 802,208.23 2,124,393.49 $ 172,534.60 351,408.01
============== ============== ============== =============
COMMON VOTING SHARES 15,153,785 14,237,016
</TABLE>
<PAGE>
NOTE 1:
- --------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to form 10-QSB. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations, and
cash flows for all periods presented have been made. The results of operations
for the three-month period ending March 31, 1999 are not necessarily indicative
of the operating results that may be expected for the entire year ending June
30, 1999. These financial statements should be read in conjunction with the
Company's June 30, 1998 financial statements and accompanying notes thereto.
NOTE 2:
- --------
Earnings per common share and common equivalent share are computed by
dividing net income by the weighted average number of shares of common stock and
common stock equivalents outstanding during the period. The 10% convertible
debentures are considered to be common stock equivalents. Consequently, the
number of shares issuable, assuming full conversion of these debentures as of
the beginning of the fiscal year is added to the number of common shares. A
fully diluted earnings per share is computed assuming conversion of all
debentures.
NOTE 3:
- --------
It is probable that a gain contingency will result, and the amount of gain
can be reasonably estimated. Management has elected to remove a maturing note
payable to EF Waters Trust and any accrued interest payable.
NOTE 4:
- --------
Management is reevaluating the valuation of the net operating loss
carryforwards generated in prior periods. Management is also in the process of
calculating the deferred tax assets and considering the recording of the
deferred tax assets generated from the net operating loss carryforwards.
FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 1998
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
American Nortel Communications, Inc.
Scottsdale, Arizona
We have audited the accompanying balance sheets of American Nortel
Communications, Inc., (the "Company"), as of June 30, 1998 and 1997 and the
related statements of operations, cash flows and stockholders' deficiency for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Nortel Communications,
Inc. as of June 30, 1998 and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
Significant material contingencies exist as of June 30, 1998 and are more fully
described in Note 11. Significant contingencies result from the issuance of
common stock to the Company's management and other third parties, default on
debt obligations, and the Company's delinquency in its public filings.
Commencing in fiscal 1996, the Company entered into numerous material barter
transactions, described in Note 2, to acquire assets in exchange for
long-distance telephone services. Additional transactions were entered into in
fiscal 1997. During fiscal 1997, Company management rescinded these
transactions. The effects of these transactions are identified on the balance
sheet and on the statement of operations as gains and losses from discontinued
operations.
/s/ LaVoie, Clark, Charvoz & May, P.C.
Tucson, Arizona
December 10, 1998
<PAGE>
<TABLE>
<CAPTION>
AMERICAN NORTEL COMMUNICATIONS, INC.
BALANCE SHEETS
As of June 30,
--------------------------------
<S> <C> <C>
ASSETS 1998 1997
- ------------------------------------------------------------ --------------- ---------------
Current Assets:
Cash $ 147,524 $ 32,922
Trade accounts receivable - Note 3 551,194 54,961
Prepaid expenses - Note 4 95,913 136,761
--------------- ---------------
Total Current Assets 794,631 224,644
Property and Equipment, net - Note 5 37,328 22,768
Other Assets:
Advances to control group, net - Note 12 163,020 14,370
Investments acquired through barter, net - Note 6 6,667 6,667
Intangible assets 16,200 28,400
--------------- ---------------
TOTAL ASSETS $ 1,017,846 $ 296,849
=============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
- ------------------------------------------------------------
Liabilities:
Current Liabilities:
Accounts payable $ 253,077 $ 190,745
Disputed claims - Note 7 439,327 439,327
Accrued payroll taxes 9,863 44,578
Accrued interest - Note 9 382,989 328,989
Notes payable - Note 9 695,000 850,000
--------------- ---------------
Total Current Liabilities 1,780,256 1,853,639
Unearned Phone Card Revenues 39,929
Convertible Debentures - Note 10 93,750 217,500
--------------- ---------------
TOTAL LIABILITIES 1,874,006 2,111,068
Commitments and Contingencies - Note 11
Stockholders' Deficiency - Note 13:
Preferred Stock, 3,300,000 shares issued and outstanding
during 1997 and 0 shares outstanding during 1998 198,000
Common Stock, no par value; 50,000,000 shares authorized;
13,911,874 and 9,830,476 shares issued and 13,845,016 and
9,371,618 shares outstanding for 1998 and 1997, respectively 21,755,002 21,218,402
Accumulated Deficit (22,494,162) (22,960,621)
Treasury Stock ( 117,000) ( 270,000)
--------------- ---------------
TOTAL STOCKHOLDERS' DEFICIENCY ( 856,160) ( 1,814,219)
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 1,017,846 $ 296,849
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
AMERICAN NORTEL COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
Years Ended June 30,
---------------------------
1998 1997
----------- --------------
<S> <C> <C>
REVENUES:
- ---------------------------------------------------
Long-distance telecommunications $ 4,646,222 $ 728,127
Cost of long-distance services 2,285,216 689,660
----------- --------------
Gross Profit 2,361,006 38,467
EXPENSES:
- ---------------------------------------------------
Selling 207,716 236,510
General and administrative 1,574,193 340,917
Interest 107,522 112,611
Other 5,116
----------- --------------
1,894,547 690,038
----------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 466,459 ( 651,571)
Discontinued Operations:
Operating loss from discontinued operations ( 300,990)
Gain from canceled phone cards 1,371,283
Loss on abandoned assets ( 1,237,898)
--------------
Income (Loss) Before Income Tax Benefits 466,459 ( 819,176)
Income Tax Benefits - Note 14
NET INCOME (LOSS) $ 466,459 $ ( 819,176)
=========== ==============
BASIC EARNINGS (LOSS) PER SHARE:
From Continuing Operations $ 0.04 $ (0.07)
=========== ==============
Net Earnings (Loss) Per Share $ 0.04 $ (0.09)
=========== ==============
Weighted Average Shares Outstanding 11,026,781 8,903,364
=========== ==============
DILUTED EARNINGS (LOSS) PER SHARE:
From Continuing Operations $ 0.04 $ (0.07)
=========== ==============
Net Earnings (Loss) Per Share $ 0.04 $ (0.09)
=========== ==============
Weighted Average Shares Outstanding 12,440,294 8,903,364
=========== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
AMERICAN NORTEL COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
Preferred Stock Common Stock
------------------------ -------------------------- Accumulated Treasury
Shares Amount Shares Amount Deficit Stock
------------ ---------- ------------ ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at July 1, 1996 3,300,000 $ 198,000 8,769,500 $20,840,832 $(22,141,445)
Shares issued for cash 272,000 244,301
Shares redeemed $(300,000)
Shares tendered for stock sold (30,000) 30,000
Shares issued for assets 68,000 41,000
Shares issued to investment advisors 25,000
Shares issued for interest expense 58,546 57,069
Shares issued for convertible debentures, net 178,572 65,200
Shares previously issued to related party,
tendered for shares sold by ANC for $25,000,
proceeds distributed to related party
Net loss (819,176)
------------ ---------- ------------ ------------ ------------- ----------
Balances at June 30, 1997 3,300,000 $ 198,000 9,371,618 $21,218,402 $(22,960,621) $(270,000)
Shares issued for convertible debentures, net 436,152 123,750
Shares issued for services 60,000 1,200
Shares issued for management fees 1,000,000 340,000
Shares issued for interest expense 11,246 9,850
Shares issued for assets 58,000 29,000
Amortization of debt issue costs (12,200)
Preferred stock converted to common (3,300,000) (198,000) 3,300,000 198,000
Treasury stock canceled (392,000) (153,000) 153,000
Net income 466,459
------------ ---------- ------------ ------------ ------------- ----------
Balances at June 30, 1998 $ $13,845,016 $21,755,002 $(22,494,162) $(117,000)
============ ========== ============ ============ ============= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
AMERICAN NORTEL COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
Years Ended June 30,
------------------------------
1998 1997
------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS
- ---------------------------------------------------------------
Net income (loss) $ 466,459 $ ( 819,176)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 96,294 8,000
Expenses paid with common stock 349,850 70,069
Loss on sale of assets 5,875
Other gain from bartered phone cards ( 219,638)
Changes in assets and liabilities:
Trade accounts receivable (496,233) ( 54,961)
Unearned phone cards ( 39,929)
Prepaid expenses ( 17,943) 41,239
Accounts payable 62,332 ( 29,566)
Disputed claims 439,327
Accrued payroll taxes (34,715) 18,543
Accrued interest 54,000 80,250
------------- ---------------
Net Cash Provided By (Used For) Operating Activities 445,990 ( 465,913)
------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ---------------------------------------------------------------
Purchase of property and equipment ( 27,738)
Purchase of intangible asset (38,200)
------------- ---------------
Net Cash Used For Investing Activities ( 27,738) ( 38,200)
------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ---------------------------------------------------------------
Proceeds from issuance of notes payable 175,000
Proceeds from issuance of convertible debentures 292,500
Payments on notes payable (155,000)
Loans from control group 48,500 68,200
Repayments to control group ( 197,150) ( 59,319)
Common stock issued for cash 244,301
Treasury stock purchases ( 300,000)
------------- ---------------
Net Cash Provided By (Used For) Financing Activities (303,650) 420,682
------------- ---------------
CASH AND CASH EQUIVALENTS
- ---------------------------------------------------------------
Increase (decrease) in cash 114,602 ( 83,431)
Cash at beginning of year 32,922 116,353
------------- ---------------
Cash at end of year $ 147,524 $ 32,922
============= ===============
Cash paid during the year for interest $ 19,800 $
============= ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
AMERICAN NORTEL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998 AND 1997
1. NATURE OF OPERATIONS, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND USE
OF ESTIMATES
NATURE OF OPERATIONS
The Company has existed in various forms since 1979 and has evolved from a
mining exploration and development business to a telecommunications business.
The Company has been known as American Nortel Communications, Inc. ("ANC") since
1992 and became a Wyoming corporation in 1993. ANC currently operates only in
the telecommunications business, providing long distance telephone service as a
reseller in combination with additional related services in the United States
and a number of foreign countries.
Prior to September 14, 1994, ANC conducted almost all of its telecommunications
business through NorTel Communications, Inc. ("NorTel-US"), a wholly owned
subsidiary in Salt Lake City, Utah. All subsidiaries, including NorTel-US, were
not active and were sold for nominal consideration or were dissolved.
On September 14, 1994, ANC and NorTel-US filed petitions under Chapter 11 of the
U.S. Bankruptcy Code, under case numbers 948-24604 and 948-24605 respectively in
the U.S. Bankruptcy Court, District of Utah, Central Division. ANC's bankruptcy
proceeding was subsequently converted to a Chapter 7 proceeding and was
thereafter dismissed on February 7, 1996. NorTel-US was sold June 27, 1996 for
nominal consideration to an affiliate of former directors, leaving ANC as the
sole surviving entity.
ANC's common stock was approved for listing on the Boston Stock Exchange
effective June 22, 1994. However, it was delisted on January 20, 1996 for
failure to meet maintenance requirements. The common stock had previously been
listed for trading on the Vancouver Stock Exchange from September 18, 1980 until
August 14, 1994. ANC's common stock is also traded in the over-the-counter
market and is quoted under the NASDAQ symbol "ARTM".
The Company was dormant when ANC's current President, Chief Executive Office,
and Board Chairman, William P. Williams, Jr. achieved control of the Company on
June 27, 1995. On that day, the former officers and directors resigned and
assigned their rights under certain agreements to Mr. Williams.
Subsequently, the Company has utilized various methods, including the infusion
of capital, barter trading, and the establishment of ANC as a "LEC" billed long
distance carrier to reestablish the financial viability of the Company. The
Company attempted to use prepaid phone cards to barter for goods and services,
not requiring the expenditure of cash. However, ANC encountered numerous
difficulties with this strategy, which is largely responsible for the delays in
filing the required financial statements with the Securities and Exchange
Commission ("SEC").
THE ANAHEIM SPLASH
For a brief period of time in fiscal 1996, ANC owned the Anaheim Splash, a
franchise of the Continental Indoor Soccer League (this league is no longer
operating). The agreements and commitments entered into are further disclosed
under the caption "Commitments and Contingencies" later in these notes.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by the Company and the methods of applying
those policies, which materially affect the determination of its financial
position, results of operations, or cash flows are summarized below.
Cash and Cash Equivalents - The Company considers all highly liquid investments,
- -------------------------
having a maturity of three months or less when purchased to be cash equivalents.
Revenue Recognition - Phone Card Revenue - Generally accepted accounting
- ---------------------------------------------
principles ("GAAP") require the deferral of revenue to match the future cost of
providing service. Accordingly, deferred revenue from the prepaid phone cards
which were bartered and sold and expiring within 18 to 24 months of issuance, is
recognized as revenue when the units of time on the cards are used.
During the 1998 and 1997 fiscal years, management committed ANC to provide
approximately 0 and 4,661,000 units of time, respectively. Committed units
related primarily to barter trades. Committed units related to cash sales were
nominal.
ANC issued approximately 0 and 8,897,000 units of time during 1998 and 1997,
respectively. As units were issued, the liability for committed units was
reduced and recorded as unearned revenues. Issued units could not be used until
the Company activated the card PIN numbers. Cards were issued related to the
barter transactions for which the PIN numbers were never activated.
As the issued and activated units were utilized, unearned revenues were reduced
and recorded as earned revenues. Approximately 0 and 1,260,000 activated units
were utilized during fiscal 1998 and 1997, respectively, resulting in generated
revenues of $0 and $171,000 in 1998 and 1997, respectively. During 1997, the
service was suspended and the related barter transactions rescinded by ANC
management. As a good faith gesture, ANC agreed to provide limited service
through another vendor until June 30, 1998. As of June 30, 1998 the program
expired and was terminated with the service provider.
All remaining units in excess of those utilized in fiscal 1998, were recorded as
gain at the end of fiscal 1997, since these revenues did not relate to service
provided and originated from barter transactions which were rescinded during
that year.
Revenue Recognition - Long-Distance Service - Revenue is recorded when service
- ---------------------------------------------
is rendered, which is measured when a long-distance call is completed and is
recorded net of an allowance for certain revenues which the Company estimates
will be refunded, rebated, uncollectable or unbillable.
Cost Recognition - Phone Card Units - Costs are incurred and recognized as the
- -------------------------------------
units are utilized by the purchaser. Costs related to providing the recognized
service revenues amounted to approximately $0 and $222,000, respectively, in
1998 and 1997. Production costs of unissued cards are not considered
significant enough to record as a prepaid expense.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Marketing Costs - Direct response marketing costs, primarily incurred through
- ----------------
contracted telephone solicitation of prospective accounts are deferred and
amortized over the average life of the new accounts generated in subsequent
periods, which is normally six months.
Income Taxes - The provision for income taxes includes deferred income taxes
- -------------
resulting from temporary differences in the recognition of certain income and
expense items for financial reporting purposes in different periods than for tax
purposes. The Company calculates its income tax provision and deferred income
taxes under SFAS 109.
The Company uses the flow-through method of accounting for investment tax
credits.
Fair Value Of Financial Instruments - The carrying amounts for cash, accounts
- --------------------------------------
receivable, advances to control group, accounts payable and accrued liabilities
approximate their fair value due to the short maturity of these instruments.
The fair value of notes payable and convertible debentures are determined based
on the Company's estimated current rates to enter into similar financial
instruments. The Company has determined that the recorded amounts approximate
fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ significantly from those estimated. Material
estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the collectibility of receivables,
impairment of long -lived assets, estimated liabilities for litigation
settlements and disputed claims, and the valuation allowance for deferred tax
assets.
BARTER TRADES
In December 1995, ANC began trading long distance phone time for other assets.
The Company has recorded the trades at the lower of the wholesale price of $.15
per unit value or estimated net realizable value of the property received in the
following exchanges.
FISCAL 1997 BARTER TRANSACTIONS
2. NON-MONETARY TRANSACTIONS
Barter Trade for Real Estate - Grand Cayman Lots
- --------------------------------------------------------
On May 3, 1996 Caribbean Realty Management, Ltd. agreed to accept 1,800,000
units of domestic long distance phone time for eight undeveloped lots on the
Grand Cayman Island, valued at $270,000 at $.15 per minute. The units were to
be ordered within 24 months of the agreement date and expire 18 months after the
date the units were issued. Since no consideration had been given by ANC until
fiscal 1997 it was recorded as a fiscal 1997 transaction.
ANC issued 1,170,000 minutes of domestic long distance credits during fiscal
1997 prior to discovery that the owner did not have satisfactory title to the
property. As of the date the project was terminated, 630,000 minutes of
committed long distance phone time had not been tendered. ANC sustained a loss
on abandonment of $270,000 during 1997.
Barter Trade for Real Estate - Lantern Bay, Missouri Condominiums
- --------------------------------------------------------------------------
On June 18, 1996 Eddie Hunter agreed to accept 133,332 units of domestic long
distance phone time for three condominiums in Lantern Bay, Missouri, valued at
$215,000 at $.15 per minute plus assumed debt. The financing was to be in the
form of a two-year lease/purchase agreement equivalent to the debt service on
the underlying debt of approximately $195,000. Since no consideration had been
given by ANC until fiscal 1997 it was recorded as a fiscal 1997 transaction.
ANC issued 133,332 minutes during fiscal 1997 prior to return of the property.
During fiscal 1997, ANC returned the property. ANC issued 30,000 additional
minutes for settlement of damages asserted by the owner. ANC sustained a loss
on abandonment of $20,000 during 1997.
Barter Trade for Real Estate - Palace View Condos, Missouri Condominiums
- --------------------------------------------------------------------------------
On June 26, 1996 Lantern Bay Condos, Inc. agreed to accept 440,000 units of
domestic long distance phone time for three condominiums in Palace View Condos,
Missouri, valued at $472,664 at $.15 per minute plus debt assumed. The
financing was to be in the form of a two-year lease/purchase agreement, monthly
payments equivalent to the debt service on the underlying debt of $406,664.
Since ANC did not tender consideration until fiscal 1997 it was recorded as a
fiscal 1997 transaction.
On June 28, 1996 ANC took possession of the property. ANC issued 440,000
minutes during fiscal 1997 prior to abandonment of the property. During fiscal
1997, the owner repossessed the property and filed suit for breach of contract
and recovery of damages. The suit was dismissed without prejudice and ANC
management subsequently settled the claim for $15,000. ANC sustained a loss on
abandonment of $66,000 during 1997.
Barter Trade for Real Estate - Palace View Condos, Missouri Condominiums
- --------------------------------------------------------------------------------
On June 26, 1996 Richmond Heights, Inc. agreed to accept 440,000 units of
domestic long distance phone time for three condominiums in Palace View Condos,
Missouri, valued at $430,893 at $.15 per minute plus assumed debt. The
financing was to be in the form of a two-year lease/purchase agreement, monthly
payments equivalent to the debt service on the underlying debt of $364,893.
Since ANC did not tender consideration until fiscal 1997 it was recorded as a
fiscal 1997 transaction.
On June 28, 1996 ANC took possession of the property. ANC issued 440,000
minutes during fiscal 1997 prior to abandonment of the property. During fiscal
1997, the owner repossessed the property and filed suit for breach of contract
and recovery of damages. The suit was dismissed without prejudice but has not
been refiled or settled. ANC sustained a loss on abandonment of $66,000 during
1997.
Barter Trade for Real Estate - Kentucky lots
- ---------------------------------------------------
On June 14, 1996 Barter Systems, Inc. agreed to accept approximately 158,000
units of domestic long distance phone time for 17 undeveloped lots in Kentucky,
valued at $23,700 at $.15 per minute. The title transfer was to take place when
the units were delivered. Since ANC did not tender consideration until fiscal
1997 it was recorded as a fiscal 1997 transaction
ANC issued approximately 100,000 minutes during fiscal 1997 prior to return of
the property. As of the date the property was returned, 58,000 minutes of long
distance phone time remained unissued under the agreement. ANC sustained a loss
on abandonment of approximately $24,000 during 1997.
Barter Trade for Real Estate - Kingman, Arizona Lots
- ------------------------------------------------------------
On June 26, 1996 the Equitas Group, Inc. agreed to accept 80,000 units of
domestic long distance phone time for 18 five acre parcels of undeveloped land
near Kingman, Arizona, valued at $12,000 at $.15 per minute. All units were to
be ordered within 18 months of the agreement. Warranty title to the lots was to
be conveyed upon delivery of the units. Since ANC did not tender consideration
until fiscal 1997 it was recorded as a fiscal 1997 transaction
ANC issued 80,000 minutes during fiscal 1997 prior to abandonment of the
property. ANC sustained a loss on abandonment of $12,000 during 1997.
Barter Trade for Art
- -----------------------
On March 15, 1997 Original Masterworks, Inc. agreed to accept 12,222,000 minutes
of prepaid domestic long-distance service for 110 pieces of museum quality art.
No minutes were issued and no art received under the agreement and ANC
management terminated the transaction. According to ANC management, the deal
was abandoned when the appraisal did not support the claimed value of the art.
Barter Trade for Real Estate - Ehrenburg, Arizona Land
- --------------------------------------------------------------
On June 28, 1996 the Curtis Family Trust agreed to accept 1,250,000 units of
domestic long distance phone time and 40,000 shares of ANC common stock for 20
acres of undeveloped land near Ehrenburg, Arizona, valued at $307,500 at $.15
per minute. The stock was to be freely tradeable by October 31, 1996 and ANC
was to furnish additional shares (to bring the aggregate share value up to
$120,000) if the price was less than $3 per share. Since ANC did not tender
consideration until fiscal 1997 it was recorded as a fiscal 1997 transaction
ANC issued 1,250,000 minutes during fiscal 1997 prior to abandonment of the
property. On September 25, 1996 ANC issued 40,000 restricted shares to the Zion
Company (Curtis Family Trust). It also issued 28,000 additional shares in May
1997 in accordance with the agreement provisions. ANC sustained a loss on
abandonment of $188,500 during 1997, net of $40,000 realized on sale of acreage.
FISCAL 1996 BARTER TRANSACTIONS SETTLED IN FISCAL 1997
2. NON-MONETARY TRANSACTIONS
Barter Trade for Real Estate - The Fall Creek Inn
- ----------------------------------------------------------
On March 30, 1996 the Kendel Corp agreed to accept 8,888,889 minutes of long
distance phone time for rights to the Fall Creek Inn in Branson, Missouri. ANC
also signed a five-year lease commencing April 15, 1996 and expiring March 14,
2001. The lease required ANC to pay the underlying loan payments to the
Mercantile Bank, which then were $20,069 per month. ANC also agreed to pay the
real and personal property taxes, maintenance and improvements, utilities and
insurance. Provided ANC was not in default on any rental payments, and, kept
and performed all other covenants and obligations required ANC could exercise
its option to purchase the property for the remaining principal and interest
balance due on the loan.
On March 30, 1996 ANC took operating possession of the Inn. ANC issued
1,590,000 minutes of domestic long distance credits as of June 30, 1996 and an
additional 4,066,000 minutes during fiscal 1997. ANC also advanced cash for
operations and lease payments totaling $54,000 through June 30, 1996 and an
additional $178,000 during fiscal 1997. During 1997, the lessor repossessed the
property and this activity ceased. As of the date of the repossession,
2,477,000 minutes of long distance phone times were remained unissued under the
agreement, with an additional 756,000 minutes unissued, which had been assigned
by the lessor to a third party. It is management's contention that the return
of the property to the owner effectively rescinded the obligation to supply the
minutes as agreed upon.
The lessor repossessed the property on January 31, 1997 and filed suit for
breach of contract and recovery of damages. A default judgment was initially
entered, granting Plaintiff rent, possession and damages in excess of
$3,000,000. A motion to set the default judgment aside was successful and there
has been no appeal. The Court ordered that possession be permanently
transferred to the Plaintiff leaving the Plaintiff in possession and full
ownership, with ANC no longer having an interest in the property. The case is
still pending on the issue of damages. See Note 7 for disputed claims resulting
from this litigation.
The leasehold, recorded at $1,200,000, was reduced by amortization of $121,000
and $61,000 for 1997 and 1996, respectively, prior to abandonment of the
property. A valuation reserve of has also been recorded to reduce the value to
zero, which is the amount of the remaining balance of unissued time bartered on
the transaction as of June 30, 1997.
Barter Trade for Real Estate - Pointe Royale, Missouri Patio Home
- ----------------------------------------------------------------------------
On April 10, 1996 Len D. Clayton agreed to accept 1,166,667 units of domestic
long distance phone time for a patio home in Pointe Royale, Missouri, valued at
$275,000 by ANC management. ANC also agreed to assume a loan of approximately
$130,000 secured by the property. Title was to be transferred upon delivery of
long distance units. Since ANC took possession, but not ownership, ANC was
never legally named a creditor on the loan. The net investment of $145,000 has
accordingly been recorded as a deposit on a realty transaction, which was
subsequently forfeited.
On April 10, 1996, when ANC took possession of the property, it issued 391,000
minutes of domestic long distance credits. During fiscal 1997 ANC issued another
770,000 minutes.
During fiscal 1997, ANC returned the property to the owner.
A valuation reserve has been recorded to adjust the value to zero, which is the
amount of the remaining balance of unissued time bartered on the transaction as
of June 30, 1997.
Barter Trade for Boat
- ------------------------
On April 22, 1996 CL Carr agreed to accept 88,889 units of domestic long
distance phone time for a 1963 35 foot Cris Craft boat for a recorded value of
$13,333 at $.15 per minute. A valuation reserve of $13,333 has been established
as of June 30, 1997 to adjust the carrying value to the amount subsequently
realized upon return of the asset.
Minutes issued are included in the Pointe Royale minutes disclosed above.
Barter Trade for Equipment
- -----------------------------
On May 8, 1996 George La Goe agreed to accept 52,222 units of domestic long
distance phone time and $2,000 cash for a tractor and other equipment. ANC
issued 52,222 minutes of domestic long distance credits (including 22,222 issued
to Barter Business Network) as of June 30, 1996 prior to abandonment of the
property in fiscal 1997. An additional valuation reserve of $9,833 was recorded
during 1997 to reflect the amount realized on subsequent abandonment.
Barter Trade for Real Estate - Ridgedale, Missouri lots
- ---------------------------------------------------------------
On June 5, 1996 Heritage West, Inc. agreed to accept 116,000 units of domestic
long distance phone time for six undeveloped lots in Ridgedale, Missouri, valued
at $17,400 at $.15 per minute. The units were to be ordered within 24 months of
the agreement date and expire 18 months after the issue date. The deed was not
assigned to ANC until July 1, 1996 and there is no evidence it was legally
recorded. The minutes tendered in fiscal 1996 were recorded as a deposit on a
realty transaction.
ANC issued 16,000 minutes of domestic long distance credits as of June 30, 1996
and an additional 63,000 minutes during fiscal 1997 prior to return of the
property. As of the date the property was returned, 37,000 minutes of long
distance phone time were still due the owner under the agreement, which have
subsequently been issued. A valuation reserve was recorded to adjust the value
to zero, which is the amount of the remaining balance of committed but unissued
time bartered on the transaction as of June 30, 1997.
STOCK TRANSACTIONS
The Company has entered into numerous transactions where it traded its stock for
assets or services. These transactions are disclosed under the caption "Common
Stock Issued".
3. TRADE ACCOUNTS RECEIVABLE
The Company entered into a customer billing service and master agreement for
purchase and sale of accounts with Integretel. See Note 11 COMMITMENTS AND
CONTINGENCIES, Long Distance Service Agreements. Under these agreements,
Integretel has advanced $1,188,134 and $112,147 at June 30, 1998 and 1997,
respectively, for purchase of accounts without recourse. These advances have
been netted against trade accounts receivable. Trade accounts receivables at
June 30, 1998 have been reduced by an allowance for doubtful accounts of
$32,000.
4. PREPAID EXPENSES
At June 30, 1998 prepaid expense consists mainly of unamortized deferred direct
marketing costs.
At June 30, 1997 prepaid expenses consisted of prepaid compensation of $37,500
to the wife of the President, $71,261 of unamortized deferred direct marketing
costs, and unamortized prepaid interest of $28,000.
5. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at June 30 consists of:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Telecommunications equipment $ 1,650 $ 1,650
Other equipment and furniture 47,795 30,057
------- -------
49,445 31,707
Less accumulated depreciation 12,117 8,939
------- -------
$37,328 $22,768
======= =======
</TABLE>
Depreciation is calculated using the straight-line method over five to seven
years estimated useful lives.
6. BARTER ACCOUNTS AND INVESTMENTS
Barter Accounts
- ----------------
Barter accounts consist of phone cards placed with five barter groups, net of a
valuation reserve of approximately $0 and $48,000 at June 30, 1998 and 1997,
respectively, to reflect the subsequent loss on abandonment of these deposited
amounts.
Investments Acquired Through Barter
- --------------------------------------
Investments acquired through barter consists of assets, discussed in Note 2,
acquired in transactions which were not rescinded, but were later abandoned.
The assets, all tangible personal property, are stated net of a valuation
reserve of approximately $23,283 and $335,000 at June 30, 1998 and 1997,
respectively
Investments Acquired Through Barter, Rescinded
- --------------------------------------------------
Investments acquired through barter consist of the Fall Creek Inn leasehold and
other deposits on realty transactions, discussed in Note 2, which were
subsequently rescinded by ANC in fiscal 1997. These assets are stated net of
accumulated amortization of $183,000 and a valuation reserve of $1,885,309 at
June 30, 1997.
7. DISPUTED CLAIMS
The liabilities to the following vendors are being disputed by ANC as of June
30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Thomas & Quinlan $ 93,461 $ 93,461
E.A.I. Marketing 14,000 14,000
On Target Marketing, Inc. 30,282 30,282
Records Retrieval, Inc. 48,138 48,138
CLIC International - Fall Creek Inn 23,000 23,000
Kendel Corporatin - Fall Creek Inn 40,088 40,088
Richmond Heights 15,000 15,000
Electric Lightwave 175,358 175,358
-------- --------
Total disputed claims $439,327 $439,327
======== ========
</TABLE>
8. BARTER TRADE COMMITMENTS
Barter trade commitments consist of the value of the committed but unissued
long-distance units traded for various assets, discussed more fully in Note 2.
During fiscal 1997 the remaining commitment, totaling $687,000, was offset
against the rescinded barter assets in determining the net loss on abandonment.
9. NOTES PAYABLE
Convertible Notes Payable
- ---------------------------
9% convertible secured notes due December 31, 1996 with interest payable
quarterly, convertible into common stock of ANC at $4.00 per share, with
warrants (which expired December 31, 1995) to purchase up to 78,125 common
shares at $4.00 per share, originally secured by guarantee bond (10% per annum)
purchased from a surety company:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Herman Meinders $100,000 $100,000
Express Services, Inc.,
formerly BancOklahoma Trust Company 450,000 450,000
Southwest Securities, Inc.(Gerald Eason) 50,000 50,000
Marguerite Colton 25,000 25,000
</TABLE>
9% convertible secured notes due December 31, 1998 with quarterly interest
payments, escalating to 18.2% in years 2 through 6, convertible into 6,000
shares of common stock of ANC at $5.00 per share, with warrants (which expired
September 7, 1997) to purchase 6,000 common shares at $5.00 per share,
originally secured by guarantee bond (10% per annum) purchased from a surety
company:
<TABLE>
<CAPTION>
<S> <C> <C>
Earle F. Waters, Trust 25,000 25,000
EF Waters & Eleanor M Waters, Trust 25,000 25,000
-------- --------
Total convertible notes 675,000 675,000
Other notes payable described below 20,000 175,000
-------- --------
$695,000 $850,000
======== ========
</TABLE>
On December 20, 1996 ANC entered into an agreement with Don Wittler, whereby Mr.
Wittler would loan $20,000 to ANC. The loan would be made under terms of a
one-year note with interest at 5% per month, payable monthly. Mr. Wittler
received 5,000 shares of ANC common stock for entering into the agreement. The
loan was repaid in its entirety in fiscal 1998.
On December 27, 1996 ANC entered into an agreement with John Lee, whereby Mr.
Lee would loan $10,000 to ANC. The loan would be made under terms of a one-year
note with interest at 5% per month, payable monthly. Mr. Lee received 1,000
shares of ANC common stock for entering into the agreement. The loan was repaid
in its entirety in fiscal 1998.
During January 1997, ANC entered into a verbal agreement with a related party,
whereby the party loaned $20,000 to ANC. The loan is for five years with a
balloon payment including interest at 10%.
On February 10, 1997 ANC entered into an agreement with Glenn Crotts, where Mr.
Crotts would advance up to $200,000 to ANC for the sole and only purpose of
purchasing long distance customer accounts. The advances would be made under
terms of a one-year, multiple advance note with interest at 10% per annum,
payable monthly. The first advance of $50,000 on February 10, 1997 was to
purchase accounts from Nortel, Inc. under terms of a contract dated January 29,
1997. The agreement provides that collections on billings for the accounts
purchased would be collected by Integretel with the cash flow applied to
interest and principal. Mr. Crotts received 30,000 shares of ANC common stock
for entering into the agreement. Additionally, Wilcom pledged 500,000 shares of
its ANC stock as security for the loan. The maximum amount advanced under the
agreement was $100,000, which was repaid in its entirety in fiscal 1998.
On March 3, 1997 ANC entered into an agreement with H.R. Colvin, whereby Mr.
Colvin would advance up to $100,000 to ANC. The advances would be made under
terms of a one-year, multiple advance note with interest at 12% per annum,
payable monthly. Mr. Colvin received 20,000 shares of ANC common stock for
entering into the agreement. The maximum amount advanced under the agreement
was $25,000, which was repaid in its entirety in fiscal 1998.
Accrued but unpaid interest on the above notes totaled $382,989 and $328,989 as
of June 30, 1998 and 1997, respectively.
Settlement of Notes and Interest on Convertible Notes Payable
- ---------------------------------------------------------------------
ANC is delinquent on paying the principal and interest amounts due under certain
promissory note terms. The note holders have filed suit against ANC and the
surety company. On April 7, 1998 a judgment was entered against ANC in favor of
Herman Meinders and Marguerite Colton. The respective amounts of the judgments
are $144,529 and $33,876 including interest at 9% per annum.
A judgment in favor of Express Services, Inc. for all amounts claimed due and
owing was granted in September 1998. A claim on the Eason note has not yet been
asserted but ANC counsel anticipates that at some point suit will be filed and
judgment will be established for all amounts claimed due.
The Court determined that interest is payable at the 9% rate specified in the
agreement without penalty. ANC is attempting to negotiate the retirement of the
other notes.
10. CONVERTIBLE DEBENTURES
In March 1997, the Company marketed $230,000 principal amount convertible
redeemable debentures due March 1, 2000. Interest was 10% per annum on the face
payable monthly in advance and was payable in cash or in stock at the Company's
discretion. The debentures were convertible at any time commencing after 45
days into shares of the Company's common stock at a price equal to the lower of
70% of the closing bid price of the stock immediately preceding closing or 70%
of the closing bid price of the stock immediately preceding the date the Company
received the conversion notice from the debenture holder.
The Company successfully placed the $230,000 debenture with Canadian Advantage
LP, Thomson Kernaghan & Co, Ltd, the general partner. The debenture, dated
April 8, 1997, resulted in the receipt of $201,500 net funds. The debenture did
not provide for issuance at a discount. The difference between the face amount
and the net funds received was for a 12% ($28,500) finders fee paid to Select
Capital. In accordance with the conversion provisions and the provisions of
Regulation S of the Securities Act of 1933, the general partner requested
conversion of $75,000 to common stock on May 30, 1997 at $.42 per share, $80,000
on July 7, 1997 at $.28125 per share and $75,000 on August 7, 1997 at $.2429.
The Company honored the May 30 and July 7 conversions issuing a total of 483,341
shares which included 9,838 shares for interest totaling $3,047. The August 7
conversion had not yet been honored by the Company at June 30, 1998, leaving a
remaining debenture balance of $75,000 plus accrued interest. The conversion
was honored on August 19, 1998 issuing of total of 308,769 shares totaling
$75,000 plus accrued interest.
Under this offering, a Netherlands entity, De Affiliatie B.V., subscribed to
debentures totaling $62,500, for which the Company received net proceeds
totaling $44,000 on May 29, 1997. The proceeds received less than the 80% were
for a finders fee of 12% ($6,000) paid to Select Capital. In accordance with
the conversion provisions and the provisions of Regulation S of the Securities
Act of 1933, the investor requested conversion of $31,250 to common stock on
July 17, 1997 at $.30 per share which was subsequently honored during fiscal
1998 by the Company resulting in the issuance of 104,167 shares of common stock.
The remaining unconverted debenture balance is $31,250 plus accrued interest.
Also under this offering, a Swiss entity, EBC Zurich AG, subscribed to
debentures totaling $12,500 for which the Company received net proceeds totaling
$8,800 on April 28, 1997. The proceeds received less than the 80% were for a
finders fee of 12% ($1,200) paid to Select Capital. In accordance with the
conversion provisions and the provisions of Regulation S of the Securities Act
of 1933, the investor requested conversion of $12,500 to common stock on June
23, 1997 at $.325 per share which was subsequently honored during fiscal 1998 by
the Company resulting in the issuance of 29,762 shares of common stock. There is
a disputed balance of 5,952 shares, which the investor claims is due based on a
disputed differential in the conversion price per share.
The Company entered into an agreement with Select Capital to market the
debentures. The agreement was mutually canceled by Select Capital and the
Company for failure of the Company to provide current filings required by the
1934 Act and failure of Select to obtain sufficient sales of the debentures.
Select was to receive common stock and warrants to purchase common stock in
addition to a fee and expenses based on a percentage of funds received as a
result of their efforts.
11. COMMITMENTS AND CONTINGENCIES
LITIGATION
ANC is named as defendant in the following suits:
CLIC International Corporation vs. W.P. & Eva Williams, d.b.a. ANC - The suit,
claiming damages in an amount less than $30,000 is related to a barter trade of
phone cards for light bulbs for the Fall Creek Inn, was filed during fiscal 1997
and is recorded as a disputed claim. The suit is pending but accrued as of June
30, 1998 and 1997.
KPMG Peat Marwick vs. Certified Surety Group, Ltd. and ANC - The suit, claiming
damages in the amount of $30,000 is for services rendered by KPMG related to its
audit of the June 30, 1993 ANC financial statements. The amount, which is being
disputed by ANC management, has been accrued as of June 30, 1998 and 1997.
Kendel Corp. vs. ANC - The suit is discussed in detail in Note 2, "Fall Creek
Inn". The suit is pending.
Lantern Bay, Inc. and Richmond Heights vs. ANC - The suit is discussed in detail
in Note 2, "Palace View". The Lantern Bay portion was settled in fiscal 1998
for $15,000 and properly accrued as of June 30, 1997.
Records Retrieval vs. ANC - The suit is discussed in detail below, "Long
Distance Service Agreements." The suit was settled in fiscal 1998 for
approximately $42,000 but is still outstanding and has been accrued as of June
30, 1998 and 1997.
Hartzog Conger Cason vs. ANC - The suit is discussed in detail in Note 9,
"Settlement of Notes and Interest". Certain of the note holders have received
judgment and others are pending.
LONG DISTANCE SERVICE AGREEMENTS
In March 1996, ANC entered into an Agreement with Vancouver Telephone Company
("VTC") whereby ANC provided long-distance services to VTC through its carrier,
ELI. Through June 30, 1996 VTC had paid approximately $6,000 to ANC under the
agreement and an additional $14,000 through November 1996. The fiscal 1996
revenue was greater than 10% of the revenues of ANC.
In an attempt to generate new accounts ANC contracted with the following firms:
On October and November 1996, ANC entered into marketing agreements with Thomas
& Quinlan ("T&Q"), E.A.I. Marketing ("EAI"), and On Target Marketing ("OTM"),
d.b.a. Jones Boys, where these telemarketers agreed to provide ANC with
telemarketing services.
On January 16, 1997 ANC entered into a Service Agreement with Records Retrieval,
Inc ("RRI") to provide verification services for new accounts acquired by ANC's
telemarketers at the greater of $2.25 each or 65% of the projected daily
minimum. The agreement was for one year, automatically renewable from year to
year unless proper notification is given by ANC to terminate the agreement.
LONG DISTANCE SERVICE AGREEMENTS
The above vendors accumulated unpaid charges to ANC under these agreements. The
amounts are disclosed above under the caption "disputed claims". ANC disputes
these unpaid charges on the basis that the accounts generated under this
telemarketing campaign resulted in an unacceptably high reject rate. However, on
September 30, 1997, Records Retrieval obtained a judgment of $41,498 against ANC
on their portion of the obligation. The judgment bears interest at 10% per
annum and is payable in monthly installments of $3,648. Settlements with other
vendors in this dispute have not yet been reached.
In approximately December 1996, ANC entered into a Sub-Reseller Agreement with
LDC Telecommunications, Inc where LDC would provide telecommunications services
to ANC.
On December 9, 1996 ANC entered into a Billing Services Agreement (One Plus
(1+)) with Integretel Incorporated ("IGT") whereby IGT would provide ANC
telephone company billing and collection and associated services to the
telecommunications industry. The agreement term is for two years, automatically
renewable in two-year increments unless appropriate notice to terminate is given
by either party. Under the agreement, IGT bills, collects and remits the
proceeds to ANC net of reserves for bad debts, billing adjustments, telephone
company fees and IGT fees. If either the transaction volume decreases by 25%
from the preceding month, or, less than 75% of the traffic is billable to major
telephone companies, IGT may at its own discretion increase the reserves and
holdbacks. Integretel is the only provider of this service to the Company.
On December 19, 1996 ANC entered into a Master Agreement for Purchase and Sale
of Accounts with IGT whereby IGT purchases accounts from ANC for a purchase
price consisting of an advance component and a deferred component. The advance
component which is calculated by multiplying the estimated purchase price by the
advance component percentage is payable within ten days of receipt of the
transaction batch pertaining to the purchased accounts. The deferred component
is the differential of the amount actually collected by IGT and the advance
component and is payable when the amount is determined. Except for the right of
IGT to refuse to accept or reject acceptance of accounts and except for the
right of IGT to charge back amounts to ANC under certain circumstances, the sale
of accounts is without recourse and IGT assumes the full credit risk. Certain
charge backs and fees are recourse obligations of ANC. IGT maintains both
Non-recourse and Recourse accounts comprising the Combined account for ANC. The
maximum purchase obligation of IGT to ANC was set at $700,000 when the agreement
was drafted. This was subsequently increased to $3,000,000 as of March 31,
1998.
On January 8, 1997 ANC entered into an agreement with the Furst Group, Inc., LDC
and IGT whereby IGT would assign net proceeds from services provided by LDC on
behalf of ANC customers to Furst. Under the agreement, 78% of the net proceeds
were remitted to Furst and 22% to ANC. The agreement was terminated by ANC in
July 1997. During the duration of the agreement ANC assigned a total of
approximately $256,000 of its net proceeds to Furst. Furst has provided no
accounting to ANC of these proceeds to determine if there are any amounts that
are due ANC which would result from proceeds being withheld in excess of the
cost of services provided by LDC and Furst.
On January 9, 1997 ANC entered into a Carrier Transport Switched Services
Agreement with LDC. In accordance with the agreement, ANC granted a security
interest in certain assets of ANC which include all right, title, and interest
in the customer lists, accounts receivable, customer and account contracts, and
all rights relating to such contracts serviced by the agreement and all present
and future accounts receivable attributable to such customer accounts including
the proceeds of any sale, transfer or incumbrance thereof and all awards or
payments related thereto. The security interest granted was documented in a
Security Agreement between ANC and LDC on January 9, 1997.
On February 4, 1997 ANC entered into a Contract of Sale with Nortel, Inc.
whereby Nortel sold to ANC 125,000 unprovisioned ANI's for $575,000. $50,000
was payable on February 15, 1997, $150,000 upon verification of long distance
carrier receiving a total of 50,000 ANI's, and $375,000 upon verification of
long distance carrier receiving a total of 75,000 ANI's. An addendum signed on
the same day provides for payment of the first $50,000 to be made to Career
Communications Corp. Nortel, Inc. signed a release and assignment to Career
Communications Corp. related to the 125,000 unprovisioned ANI's. ANC management
subsequently terminated this agreement as first ANI's were below ANC standards.
On April 24, 1997 ANC entered into a Reseller Agreement with Total Network
Services, a division of Cable and Wireless. The agreement, which runs for an
initial duration of 24 months, provides for minimum monthly payments for service
of $10,000, $30,000 and $40,000 in the 2nd, 3rd and 4th months respectively
after service initiation and $50,000 thereafter through the term of the
agreement. Through June 30, 1998 and 1997 the actual utilization has exceeded
the minimums. Total Network Services is currently the only provider of this
service to the Company.
On June 24, 1997 ANC entered into a Contract of Sale with Global Telecom
International, Inc. to purchase the GTI traffic base. ANC tendered 58,000
shares of common stock in January 1998 to consummate this transaction. On
September 11, 1997 the agreement was amended from a price of $.34 per share to
$.50 per share.
Effective August 1, 1997 ANC entered into an agreement with Telesolutions
("TSN") to provide data processing services related to compiling call detail
from carriers and submission of LEC billing data to Integretel. The agreement
is for one year or until either party terminates with 120 days notice.
On November 18, 1997 ANC entered into a service agreement with Accutel, Inc.
whereby Accutel would acquire and provide LEC customers to ANC, which meet
certain criteria as specified in the agreement. ANC would pay Career
Communications for such verified customers a fee for 1,000 ANI's on an as needed
basis.
LEASES
The Company has entered into lease obligations for office space for its
corporate headquarters in Scottsdale, Arizona and its support center in Salt
Lake City, Utah. The Scottsdale agreement, dated April 1, 1997 expired on March
31, 1998 and was extended for six months and now is on a month-to-month basis.
The Utah agreement dated January 1996 expired on March 31, 1997. Under terms of
the agreements ANC pays monthly rents totaled approximately $2,000. The Company
paid rents of $25,000 and $24,000 during the 1998 and 1997 fiscal years,
respectively.
As discussed above under the caption "Barter transactions", the Company entered
into agreements to lease a hotel and other rental properties. The leases, which
were for periods from two to five years, contained provisions to apply the lease
payments to the purchase of the properties. These transactions were
subsequently terminated by the Company resulting in forfeiture of its property
interests. These terminations resulted in litigation with the lessors, which
are further discussed under the caption "Barter Trades". Under these leases,
rents totaling $161,000 in 1997 were paid prior to the forfeitures. Also,
$15,000 was paid subsequent to 1997 for settlement of a default claim.
THE ANAHEIM SPLASH
As previously disclosed, ANC owned the Anaheim Splash for a brief period of time
in fiscal 1996. ANC management entered into certain agreements in connection
with this ownership. On February 16, 1996, ANC management entered into an
agreement to acquire the franchise from the Continental Indoor Soccer League
(the "CISL") which required, among other things, the placement of $400,000 worth
of ANC common stock as a security deposit and $10,000 as an advance payment
against the player compensation assessment. ANC tendered 400,000 shares of ANC
common stock as payment for the security deposit. However, since the market
price of the stock was less than the deposit agreement, the CISL has requested,
through counsel, that additional shares be surrendered to them. Under terms of
the agreement, there is a deferred league operating assessment of approximately
$88,000 and additional player compensation assessments of $150,000. On March 1,
1996, ANC also entered into a ten-year lease agreement with the Arrowhead Pond.
The lease terms include liquidated damages of $25,000 in the event of
termination.
In approximately April of 1996, ANC assigned its rights under these agreements
to Mr. Gary Sparks. ANC has no written agreement to substantiate this
assignment. CISL counsel verbally confirmed that Mr. Sparks had indeed stepped
into ANC's position and operated the team for approximately one year. CISL
counsel also commented that Mr. Sparks did not assume any obligations that ANC
may have incurred in connection with its ownership or termination of the above
agreements. He also indicated that the CISL may move to liquidate the stock in
settlement of any outstanding obligations. Presently, the CISL has made no
attempt to liquidate the stock and ANC has requested its stock transfer agent to
place a "stop transfer" notation in its stock register.
An analysis of the current market price of ANC stock indicates that a
liquidation of the stock would most likely yield proceeds sufficient to satisfy
the minimum commitments as specified in the agreements. In the event such
proceeds are insufficient, the CISL could make additional assessment to ANC.
Accordingly, ANC has fully reserved these deposits to reflect the anticipated
loss on abandonment.
Although no litigation has resulted from termination of these agreements, CISL
counsel could provide no assurance that such claim may be made in the future if
the liquidated proceeds are insufficient.
ACTIONS OF THE BOARD
Significant blocks of stock have been issued to officers and their affiliates as
disclosed under the caption "Common Stock Issued". It is not possible to
determine the effect, if any, of bringing current the required 1934 Act filings
and the financial statements and disclosures contained therein, may have on the
actions of current or former shareholders of the Company affected by these
transactions.
EFFECTS OF DELINQUENT FILINGS ON MARKET ACTIVITY
The Company is delinquent in its filings under the 1934 Act. The last filing
was the March 31, 1998 Form 10-QSB. Significant trading of ANC stock has
occurred by both related and unrelated parties during the period subsequent to
its filing. It is not possible to determine the effect, if any, of bringing
current the required 1934 Act filings and the financial statements and
disclosures contained therein, may have on the actions of current or former
shareholders of the Company affected by these revisions.
EFFECTS OF PRESS RELEASES ON MARKET ACTIVITY
In an attempt to mitigate the effects of not providing current 1934 Act filings,
ANC management has periodically announced certain information, which it
believed, would be beneficial to shareholders. As a result of these press
releases, market activity may have occurred, including the buying and selling of
ANC stock by both related and unrelated parties. Certain information contained
in press releases, based on information available to management at the time,
contained information, which has been substantially revised through the audit
process. Subsequent releases, containing the corrected information, have not
yet been released to the public. It is not possible to determine the effect, if
any, of bringing the required 1934 Act filings and the financial statements and
disclosures contained therein, may have on the actions of current or former
shareholders of the Company who made investment decisions based on those
releases.
EFFECTS OF DELINQUENT FILINGS ON RULE 144 AND REG S STOCK ISSUANCES
As discussed more thoroughly under "Capital Transactions", representation
letters have been provided which contain assertions that the Company satisfied
the current public information conditions contained in the 1933 Securities Act.
The Company has been delinquent in its public filings but has attempted to keep
the public informed through press releases while it makes a concerted effort to
become current in its filings. Company Counsel is determining the factual
issues of this matter and is currently unable to determine the materiality of
violations, if any, or their impact on the financial statements of the Company.
INVESTIGATIONS
During 1997, the Company was advised that the Securities Division of the Arizona
Corporation Commission had begun an investigation of the Company. The Division
personnel will neither confirm nor deny that an investigation is proceeding.
Such investigations, in the preliminary stages, are kept confidential and are
not necessarily indicators of wrongdoing.
RISK OF COMPETITION AND REGULATION
The Company is operating in an extremely competitive market in which their
customer base is subject to turnover resulting from solicitation by carriers
offering lower rates. Additionally, carriers with higher volumes may be able to
negotiate lower rates for the cost of their service provided which, in turn, can
be passed on through a lower rate structure. Additionally, industry competitors
may have a greater capital base to sustain them through periods of reduced
prices.
RISK OF YEAR 2000 PROBLEMS
The Company and its service provider utilize software, which truncates the year
to a two-digit field. Accordingly, when the date passes the year 2000, errors
may occur in the calculation and processing of data significant to the revenue
recognition of the Company. ANC management and the service provider are taking
steps to modify these programs before any such problems are encountered. In the
event they are not successful in their efforts, the revenue stream of the
Company may suffer significant adverse effects.
Risk from Phone-card Cancellations
- -------------------------------------
As previously discussed, ANC management decided to not activate service on
certain phone cards from barter trades. Additionally, they decided to suspend
service on phone cards, which had been activated. As a result of a billing
dispute with the carrier, service was suspended for approximately 6 months while
ANC worked to establish service with another carrier. To mitigate the adverse
reaction to cancellation of the cards, ANC management authorized service to all
properly validated cardholders through June 30, 1998 at which time the service
was finally terminated. Management believes that the validated claims of all
cardholders have been satisfied by the above action and asserts that no
additional claims have been made.
12. RELATED PARTY TRANSACTIONS
On May 13, 1996 the Board approved the issuance of 500,000 shares to Wilcom,
Inc. as compensation for 1997. Since restricted stock was issued, the
transaction price was recorded at $.15 per share (60% of the $.25 market price)
giving effect to the trading restrictions on marketability.
On May 15, 1996 the Board approved the issuance of 750,000 shares to Eva
Williams as compensation for 1996. Since restricted stock was issued, the
transaction price was recorded at $.15 per share (60% of the $.25 market price)
giving effect to the trading restrictions on marketability. The Board
subsequently determined that the stock would be issued as compensation for the
three-year period 1996 - 1998 as compensation for her services as officer. This
resulted in prepaid compensation of $37,500 as of June 30, 1997.
On July 10, 1997 the Board approved the issuance of 1,000,000 shares at $.34 per
share to Wilcom, Inc. for management services. These shares were issued on
October 29, 1997. On October 29, 1997 the Company issued 3,300,000 shares to
Wilcom, Inc. in exchange for the 3,300,000 shares of convertible preferred
shares issued in June 1995, as discussed above.
On August 13, 1998 the Board approved the issuance of 1,000,000 shares at $.09
per share to Wilcom, Inc. for management services rendered during fiscal 1999.
Flow of Funds to and from Williams/Wilcom/Shelton
- -------------------------------------------------------
Eva Williams, the Secretary of the Company, is the sole shareholder of Wilcom,
Inc., the majority shareholder of ANC. William P. Williams, the Company's
President and CEO, is the spouse of Eva and the sole shareholder of Shelton
Financial, Inc., also a shareholder of ANC. Williams, Wilcom and Shelton have
all advanced funds to and received funds from ANC. They have also paid
obligations on behalf of ANC. It is not practicable to segregate the flow of
funds between these three entities and ANC and accordingly they are reported in
the aggregate. The advances to and from this related group and ANC are reported
in the cash flows statement.
13. CAPITAL TRANSACTIONS
PREFERRED STOCK
As discussed above, the previously authorized, issued and outstanding Preferred
A Series One Preferred Stock issued to former officers and directors was
canceled, reestablished, redesignated and reissued to Wilcom, Inc. as Preferred
A Series One Convertible, Preferred Stock. The stock has the relative rights,
preferences and limitations as follows:
Dividends - The holders are entitled to dividends declared by the Board and are
entitled to participate with the holders of Common Stock in any dividend
distributions on a prorated basis.
Preferences on Liquidation - The holders are entitled to receive the residual
assets on a prorata basis with the holders of the Common Stock.
Voting Rights - The holders are entitled to one vote for each share of Preferred
Stock.
Conversion Rights - Each share is convertible at any time after the bid price
for the Common Stock has averaged more than $1.00 for thirty consecutive trading
days into one share of Common Stock.
Other Rights - The holders must approve certain expenditures, certain other
preferred issuances, certain asset dispositions and mergers.
COMMON STOCK ISSUED
PROVISIONS OF RULE 144
Rule 144 of the Securities Act of 1933 allows for limited trading of a company's
stock without registration provided that the Company and the shareholder comply
with certain provisions. This is referred to as Rule 144 stock. The Rule
requires that the shares bear a legend notifying the holder of the restriction,
that the stock be held for at least two years if issued to an unrelated party
and at least three years if issued to a related party. After the three-year
period the related party could dispose of limited quantities of the stock
restricted by the reported shares outstanding or the average trading volume of
the shares. To remove the restrictive legend, the issuer is required to satisfy
certain current public information conditions of Rule 144 (c).
The Rule was amended in 1997 to shorten the required holding periods from three
to two and two to one years respectively and now "piggybacks" the calculation
period from the date of first issuance by the Company.
RULE 144 RESTRICTED SHARES FOR CASH
During the year ended June 30, 1997 ANC sold restricted shares for cash:
<TABLE>
<CAPTION>
Shares Range Proceeds
- ---------- ------- -----------
<S> <C> <C> <C>
FY97 272,000 $.25 - 1.00 $244,301
</TABLE>
THE FOLLOWING MATERIAL "NON-MONETARY" TRANSACTIONS INVOLVED RULE 144 RESTRICTED
ANC STOCK:
<TABLE>
<CAPTION>
Date Description Shares Each Total
- ------------------ ---------------------------------- --------- ----- --------
<S> <C> <C> <C> <C>
September 25, 1996 Zion Company, payment on
Ehrenberg property 40,000 $ .50 $ 20,000
February 5, 1997 John Lee, loan fee 1,000 1.00 1,000
February 5, 1997 Don Whittler, loan fee 5,000 1.00 5,000
March 4, 1997 Glenn Crotts, loan fee 30,000 1.00 30,000
May 8, 1997 H.R. Colvin, loan fee 20,000 1.00 20,000
May 13, 1997 MRG Enterprises, consulting fee 25,000 .75 18,750
May 13, 1997 Zion Company, additional payment
on Ehrenberg property 28,000 .75 21,000
August 6, 1997 Stephen Roberts, legal fees
per 1997 agreement 60,000 .02 1,200
October 29, 1997 Wilcom, Inc. Preferred stock
Conversion (1996 agreement) 3,300,000 .06 198,000
Wilcom, Inc., 1998 mgmt fees 1,000,000 .34 340,000
November 20, 1997 Don Whittler, interest on loan 11,246 .70 7,872
January 21, 1998 Global Telecom, for purchase
of long distance accounts 58,000 .50 29,000
August 26, 1998 Wilcom, Inc. 1999 management fees 1,000,000 .09 90,000
</TABLE>
In addition to the above, Wilcom also exchanged some of it's shares for payment
of ANC obligations:
<TABLE>
<CAPTION>
Date Description Shares Each Total
- -------------- -------------------------------- ------- ----- -------
<S> <C> <C> <C> <C>
July 16, 1996 Stock issued
for investor services 200,000 $ .30 $60,000
July 16, 1996 Stock issued
for investor services 300,000 .30 90,000
August 7, 1996 Stock issued to Herman Meinders
for interest on note 10,000 .50 5,000
</TABLE>
COMMON STOCK WARRANTS
On November 7, 1996 the Company entered into an agreement with J.R. Younker &
Associates of Nova Scotia to expose the Company to key investment managers and
dealers throughout the world. The agreement entitles Younker and other named
parties to receive non-restrictive warrants for a total of 50,000 shares of ANC
common stock at the average trading price for the last 20 days ($1.05). The
warrants expire on November 7, 2001. Younker also received a commission on
funds invested in the Company as a result of his efforts.
On December 19, 1996 the Company issued additional warrants under the above
agreement with Younker at a price of $1.05 per share, expiring on January 19,
2001.
The Company also entered into an agreement with an individual to solicit
investors. The agreement entitled the individual to purchase shares and receive
a commission on funds invested in the Company as a result of his efforts.
TREASURY STOCK REPURCHASES
On August 21, 1996 ANC repurchased 66,858 shares of restricted ANC stock from
Wilcom, Inc., the majority shareholder of ANC, for $117,000, or $1.75 per share
which was the market price of free trading stock at that date.
On February 28, 1997 ANC purchased 60,000 shares of restricted ANC stock from
Sherry L Jabour for $32,100 or $.535 per share. ANC was required to repurchase
the shares as part of a settlement, constituting return of her original $30,000
investment plus 7% interest for one year. These shares were subsequently sold
on April 25, 1997 for $30,000 without being transferred into ANC's name. Wilcom
combined 40,000 shares of its restricted ANC stock as part of a 100,000 share
transfer of restricted shares to other shareholders. $50,000 was deposited to
ANC as payment for those shares by the respective shareholders and then paid to
Wilcom.
On April 21, 1997 ANC purchased 292,000 shares of restricted ANC stock from John
Busby for $128,000, or $.44 per share. Mr. Busby previously purchased the stock
from Wilcom in August and September, 1997 for $146,000 or $.50 per share.
On April 21, 1997 ANC purchased 100,000 shares of restricted ANC stock from Jeff
Holmes for $25,000, or $.25 per share. Mr. Holmes previously purchased the
shares from ANC in June, 1997 for $25,000.
The above shares purchased from Busby and Holmes (392,000) were canceled on June
22, 1998 and reissued to ANC on July 15, 1998 in error and the Company is in the
process of correcting this error.
PROVISIONS OF REGULATION S
Regulation S of the Securities Act of 1933 allows issuance of unregistered
shares to foreign investors. Prior to amendment of the regulations in 1997 the
investor was required to hold the shares for at least 40 days before selling the
shares on the US market. The shares were issued with restrictive legend. To
remove the restrictive legend after the 40-day period, the issuer is required to
satisfy certain current public information conditions.
During 1997 the regulation was amended, extending the holding period to conform
to that required by Rule 144 and requiring the issuers to report the issuance of
such shares.
REG S RESTRICTED SHARES ISSUED FOR CONVERTIBLE DEBENTURES:
During the fiscal years ended June 30, 1998 and 1997 ANC issued restricted
shares for convertible debentures and accrued interest:
<TABLE>
<CAPTION>
Shares Range Total
------- ---------- --------
<S> <C> <C> <C>
1997 181,118 $ .42 $ 76,069
1998 436,152 .27 - .35 125,278
</TABLE>
CONVERSIONS OF UNRESTRICTED STOCK
During the years ended June 30, 1997 and 1998 various owners of ANC common stock
submitted Forms 144 with respect to the conversion of at least 100,000 and
2,327,000 restricted shares of common stock, respectively. The Forms were
accompanied by representation letters stating, among other things, that the
Company satisfied the current public information conditions contained in Rule
144(c). ANC has been delinquent in its 1934 Act filings since the March 31,
1996 Form 10-QSB but has provided other contemporaneous information to the
market through its press releases.
Factual issues relating to these matters have been referred by the Company to
Counsel representing the Company at the time of these transactions for review
and determination. At this time it has not been determined if any, or how many,
or when, such restricted shares may have been sold in reliance upon Rule 144, or
if such sales were made exclusively in reliance upon Rule 144. Until those
facts are determined Counsel is unable to determine if any violations of the
1933 Securities Act were committed by the Company or the consequences of such
violations to any sellers or the Company. Counsel is unable to assess the
materiality of any possible violations or the financial impact of possible
violations on the financial statements of the Company. As soon as a reasonable
assessment of facts is made, should violations be indicated, the Company intends
to make appropriate and necessary action to resolve these issues.
SALES OF WILCOM UNRESTRICTED SHARES
Wilcom, Inc., the majority shareholder, was issued restricted shares as
discussed above under related party transactions. Wilcom has converted and sold
100,000 and 1,030,000 shares in fiscal 1997 and 1998, respectively, to freely
trading shares which it believes to be within the holding period and other
trading limitations required by Rule 144. These amounts are included in the
disclosure in the preceding paragraph.
14. PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES
There is no current or deferred tax expense or benefit for income taxes for the
years ended June 30, 1998 and 1997. The Company utilized net operating loss
carryforwards in 1998 and realized a net operating loss in 1997.
The deferred tax consequences of temporary differences in reporting items for
financial statement and income tax purposes are recognized, if appropriate.
Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors, including the Company's ability to generate taxable
income within the net operating loss period. The Company has considered these
factors in reaching its conclusion as to the valuation allowance for financial
reporting purposes.
At June 30, 1998 the Company has unused net operating losses of approximately
$10,900,000 expiring from 2009 through 2012. No deferred tax asset has been
recorded as the Company has provided a valuation allowance in the full amount of
the benefit until such time as deferred tax liabilities are realized or future
earnings are considered likely.
15. NON-CASH TRANSACTIONS ELIMINATED FROM CASH FLOWS BARTER TRANSACTIONS
ELIMINATED AT JUNE 30:
<TABLE>
<CAPTION>
1998 1997
---------- ---------------
<S> <C> <C>
Barter accounts $ (15,500)
Valuation account 15,500
Investments - bartered 36,706
Valuation account (36,706)
Investments - bartered, rescinded (478,684)
Valuation account 1,572,084
Amortization 122,000
Accounts payable - barter (1,093,400)
Unearned phone card revenue (341,638)
---------- ---------------
Barter transaction total $ $ (219,638)
========== ===============
STOCK TRANSACTIONS ELIMINATED:
1998 1997
---------- ---------------
Amortization of debt issue costs $ 12,200
Prepaid interest $ 28,000
Shares issued for assets 29,000
Accrued interest paid with stock 5,000
Interest paid with Wilcom stock 5,000
Common stock issued 133,269
Treasury stock purchased 30,000
Expenses paid with stock 351,050 70,069
Stock issued for convertible debentures, net 123,750 65,200
Conversion of preferred stock 198,000
Treasury stock canceled 153,000
</TABLE>
16. OTHER GAINS AND LOSSES
LOSS ON DISCONTINUED OPERATIONS
As previously discussed, during fiscal 1997, ANC abandoned its investments in
bartered assets, primarily real estate, including an operating motel and other
leased condominium units. Fiscal 1997 operations related to property management
consist of the following components:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Revenues $ 272,000
Expenses:
Operating leases 161,000
Leasehold amortization 122,000
Other operating expenses 270,000
----------
Total expenses 553,000
----------
Loss on discontinued property management operations $(281,000)
==========
</TABLE>
Also included are expenses related to the discontinued barter activity of
approximately $20,000 in 1997.
LOSS ON ABANDONMENTS
During fiscal 1997, ANC recorded additional losses on assets abandoned. The
losses, discussed more specifically in Note 2, consist of losses on tangible
personal property of approximately $78,000 and losses on real estate of
approximately $1,160,000.
17. EARNINGS PER SHARE
Earnings per share area calculated in accordance with the Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per Share". The following is a
reconciliation of the numerator and denominator of the basic and diluted per
share computations for the year ended June 30:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Basic:
Net income (loss) before discontinued operations
applicable to common stockholders $ 466,459 $ (651,571)
=========== ===========
Weighted shares 11,026,781 8,903,364
=========== ===========
Basic earnings (loss) per share before discontinued operations $ .04 $ (.07)
=========== ===========
Diluted:
Net income (loss) before discontinued operations
applicable to common stockholders $ 466,459 $ (651,571)
=========== ===========
Weighted shares 11,026,781 8,903,364
Common stock issuable upon conversion of:
Convertible preferred stock 1,098,900
10% Convertible debentures 314,613
-----------
Dilute shares outstanding 12,440,294 8,903,364
=========== ===========
Dilute earnings (loss) per share before discontinued operations $ .04 $ (.07)
=========== ===========
</TABLE>
Warrants to purchase shares at $1.05 per share were outstanding during fiscal
1998 but were not included in the computation of diluted earnings per share
because the warrant price was greater than the average market price of the
common shares. Also, common shares issuable upon conversion of the convertible
notes payable that were outstanding during fiscal 1998 were also not included
because the interest per common share obtainable on conversion exceeded basic
earnings per share. Both the warrants and convertible notes payable are
outstanding at June 30, 1998.
<PAGE>
