10-Q 1 d92420e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended September 30, 2001. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ___________ to ___________. Commission file number 0-27683 AMERIVISION COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) OKLAHOMA 73-1378798 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 5900 MOSTELLER DRIVE, SUITE 1800 73112 OKLAHOMA CITY, OKLAHOMA (Zip Code) (Address of principal executive offices) (405) 600-3800 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Outstanding shares of the registrant's common stock, par value $0.10 per share, at November 14, 2001: 842,727 AMERIVISION COMMUNICATIONS, INC. INDEX

PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - ~~June~~September 30, 2001 (unaudited) and December 31, 2000...................................................................~~....~~1 Condensed Consolidated Statements of Operations (unaudited) - Three months and ~~six~~nine months ended ~~June~~September 30, 2001 and 2000.............................................2 Condensed Consolidated Statements of Stockholders' Deficiency for the year ended December 31, 2000 and ~~six~~nine months ended ~~June~~September 30, 2001 (unaudited)...............~~.....................................................~~3 Condensed Consolidated Statements of Cash Flows (unaudited) - ~~Six~~Nine months ended ~~June~~September 30, 2001 and 2000............................................................4 Notes to Condensed Consolidated Financial Statements (unaudited)....................................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................................6............7 PART II. OTHER INFORMATION Item 1. Legal Proceedings..................................................................................13 Item 2. Changes in Securities and Use of Proceeds..........................................................13 Item 3. Submission of Matters to a Vote of Security Holders................................................13 Item 6. Exhibits and reports on Form 8-K...................................................................14 Signatures......................................................................................................15 Index to Exhibits...............................................................................................16

i PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERIVISION COMMUNICATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) (Information at September 30, 2001 is unaudited)

~~ASSETS~~ DECEMBER 31, ~~JUNE~~SEPTEMBER 30, 2000 2001 -------------- -------------- ASSETS CURRENT ASSETS: Cash ........................................................................... $ 1,104 $ 21,~~106~~410 Accounts receivable, net of allowance for uncollectible accounts of $861 and $840 at December 31, 2000 and ~~June~~September 30, 2001 ........................~~...............~~ 14,341 12,~~990~~310 Prepaid expenses and other current assets ...................................... 660 ~~640~~625 -------------- -------------- Total current assets ................................................. 16,105 1514,~~736~~345 Property and equipment, net ......................................................... 5,360 4,~~522~~143 Net deferred income tax benefits .................................................... 3,100 32,~~129~~915 Covenants not to compete, net ....................................................... 1,980 1,~~505~~268 Other assets ........................................................................ 595 ~~491~~447 -------------- -------------- Total assets ......................................................... $ 27,140 $ 2523,~~383~~118 ============== ============== LIABILITIES AND STOCKHOLDERS' DEFICIENCY CURRENT LIABILITIES: Revolving line of credit ....................................................... $ 20,661 $ 2119,~~438~~641 Accounts payable and accrued expenses .......................................... 12,398 11,~~709~~344 Current portion of other notes payable and capital lease obligations ........... 1,935 2,~~826~~470 Loans and notes payable to related parties, current portion .................... 3,446 32,~~154~~871 Short-term notes payable to individuals ........................................ 399 ~~349~~336 -------------- -------------- Total current liabilities ............................................ 38,839 3936,~~476~~662 -------------- -------------- Long-term debt to related parties, net of current portion ........................... 3,517 3,~~243~~360 -------------- -------------- Accrued distributions to related party .............................................. 3,201 ~~3,201~~-- -------------- -------------- Long-term debt, net of current portion .............................................. 2,291 ~~172~~270 -------------- -------------- Redeemable common stock, carried at redemption value ................................ 1,597 1,597 -------------- -------------- Common stock subject to rescission .................................................. 331 331 -------------- -------------- Commitments and Contingencies STOCKHOLDERS' DEFICIENCY: Common stock, $0.10 par value, 1,000,000 shares authorized; shares issued and outstanding at ~~June~~September 30, 2001 and December 31, 2000 of 842,727 and 838,927, respectively, net of 15,537 redeemable shares ..........~~...~~ 82 82 Additional paid-in capital ..................................................... 10,309 10,~~317~~321 Unearned compensation .......................................................... (125) (8362) Retained earnings (accumulated deficit) ........................................ (32,902) (3229,~~953~~443) -------------- -------------- Total stockholders' deficiency ........................................... (22,636) (2219,~~637~~102) -------------- -------------- Total liabilities and stockholders' deficiency ........................... $ 27,140 $ 2523,~~383~~118 ============== ==============

The accompanying notes are an integral part of these financial statements. 1 AMERIVISION COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)

THREE MONTHS ENDED ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~JUNE~~SEPTEMBER 30, ---------------------------- ---------------------------- 2000 2001 2000 2001 ------------ ------------ ------------ ------------ REVENUES: Net sales .................................................... $ 2524,~~551~~223 $ 2019,~~337~~973 $ 5176,~~913~~136 $ 4262,~~042~~015 ------------ ------------ ------------ ------------ OPERATING EXPENSES: Cost of telecommunication services ........................... 119,~~801~~912 98,~~909~~434 2333,~~753~~665 1927,~~016~~450 Selling, general and administrative expenses ................. 1211,~~148~~146 9,~~490~~349 2335,~~892~~035 1928,~~567~~916 Depreciation and amortization ................................ ~~978~~872 ~~534~~725 2,~~028~~901 12,~~428~~153 ------------ ------------ ------------ ------------ Total operating expenses ........................................ 2421,~~927~~930 1918,~~933~~508 4971,~~673~~601 4058,~~011~~519 ------------ ------------ ------------ ------------ Income from operations .......................................... ~~624~~2,293 ~~404~~1,465 24,~~240~~535 23,~~031~~496 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense ............................................. (1,~~040~~122) (~~830~~740) (23,~~194~~315) (12,~~831~~571) Interest expense to related parties .......................... (~~282~~162) (~~189~~220) (~~435~~597) (~~316~~536) Other income (expense) ....................................... 54(2) 1518 9290 3654 ------------ ------------ ------------ ------------ Total other income (expense) .................................... (1,~~268~~286) (~~1,004~~942) (23,~~537~~822) (23,~~111~~053) ------------ ------------ ------------ ------------ Income ~~(loss)~~ before income tax expense ......................... ~~(644)~~1,007 ~~(600)~~523 ~~(297)~~713 ~~(80)~~443 Income tax expense ~~(benefit)~~ .................................... ~~(321)~~480 ~~(228)~~215 ~~(148)~~332 ~~(29)~~185 ------------ ------------ ------------ ------------ Income before cumulative effect of accounting change ..... 527 308 381 258 Cumulative effect of accounting change, net of tax effect ....... 55 -- 55 -- ------------ ------------ ------------ ------------ Net income ~~(loss)~~ ............................................... $ ~~(323)~~582 $ ~~(372)~~308 $ ~~(149)~~436 $ ~~(51)~~258 ============ ============ ============ ============ EARNINGS ~~(LOSS)~~ PER SHARE: Basic: ~~earnings~~Before ~~(loss)~~cumulative ~~per~~effect ~~share~~of accounting change ............. $ .64 $ .37 $ .51 $ .31 Cumulative effect of accounting change .................... .07 -- .07 -- ------------ ------------ ------------ ------------ Net Income ......................................... $ (.~~39)~~71 $ (.~~06)~~37 $ (.~~13)~~58 $ (.~~45)~~31 ============ ============ ============ ============ Diluted: ~~earnings~~Before ~~(loss)~~cumulative ~~per~~effect ~~share~~of accounting change ............. $ .53 $ .32 $ (.~~39)~~40 $ (.26 Cumulative effect of accounting change .................... .07 -- .06) -- ------------ ------------ ------------ ------------ Net Income ................................................ $ (.~~18)~~60 $ (.~~45)~~32 $ .46 $ .26 ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic ........................................................ 823,390 827,190 823,390 ~~825~~826,~~923~~346 ============ ============ ============ ============ Diluted ...................................................... ~~823~~975,~~390~~771 ~~827~~975,~~190~~771 ~~823~~959,~~390~~356 ~~825~~975,~~923~~771 ============ ============ ============ ============

The accompanying notes are an integral part of these financial statements. 2 AMERIVISION COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (In thousands)

STOCKHOLDERS' DEFICIENCY -------------------------------------------------------------------------~~---------------------------------------------------~~ ADDITIONAL RETAINED COMMON PAID-IN UNEARNED EARNING STOCK CAPITAL COMPENSATION (DEFICIT) TOTAL ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1999 (restated) ............... $ 82 $ 10,228 $ (317) $ (33,751) $ (23,758) Expiration of potential rescission claims on ~~Nonredeemable~~nonredeemable common stock .................... -- 138 -- -- 138 Decrease in redemption value of redeemable common stock .................................. -- -- -- 42 42 Vesting of restricted stock awards and stock options ....................................... -- (57) 192 -- 135 Net income ......................................... -- -- -- 807 807 ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2000 .......................... 82 10,309 (125) (32,902) (22,636) ~~Balance at December 31, 2000~~ Vesting of restricted stock awards and stock options (unaudited) ........................... -- 812 4263 -- 5075 Cancellation of distributions payable to related party (unaudited)...................... -- -- -- 3,201 3,201 Net income (unaudited) ............................. -- -- -- ~~(51)~~258 ~~(51)~~258 ------------ ------------ ------------ ------------ ------------ Balance at ~~June~~September 30, 2001 (unaudited) ............. $ 82 $ 10,~~317~~321 $ (8362) $ (3229,~~953~~443) $ (2219,~~637~~102) ============ ============ ============ ============ ============

The accompanying notes are an integral part of these financial statements. 3 AMERIVISION COMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)

~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ---------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: 2000 2001 ------------ ------------ ~~CASH FLOWS FROM OPERATING ACTIVITIES:~~ Net income ~~(loss)~~ .................................................................................. $ ~~(149)~~436 $ ~~(51)~~258 Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation of property and equipment ..................................................~~........~~ 1,~~283~~918 ~~953~~1,441 Amortization of covenants not to compete ................................................~~........~~ ~~745~~983 ~~475~~712 Gain on sale of long-lived assets .......................................................~~........~~ 2729 --45 Amortization of unearned compensation related to stock option and awards ................~~........~~ ~~204~~166 5075 Deferred income tax expense (benefit) ................................................... 377 185 Cumulative effect of accounting change .................................................. (~~148~~55) ~~(29)~~-- Change in assets and liabilities - (Increase) decrease in operating assets: Accounts receivable ..........................................................~~........~~ 12,~~048~~445 12,~~351~~031 Prepaid expenses and other assets ............................................~~........~~ (~~551~~292) ~~124~~183 Increase (decrease) in operating liabilities: Accounts payable and accrued expenses ........................................~~........~~ (~~942~~1,693) (~~688~~1,058) Interest payable .............................................................~~........~~ 108 ~~(1)~~4 ------------ ------------ Net cash provided by operating activities ......................................~~........~~ 14,~~527~~322 23,~~184~~876 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment .........................................................~~........~~ (12,~~838~~375) (~~115~~269) Investment in television pilot .............................................................~~........~~ (~~470~~285) -- Proceeds from sale of long-lived assets ....................................................~~........~~ 20 -- ------------ ------------ Net cash used in investing activities ..........................................~~........~~ (2,~~288~~640) (~~115~~269) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of loans and other obligations to related parties ...............................~~........~~ (~~635~~829) (~~566~~732) Net increase (decrease) in borrowings under line of credit arrangements ....................~~...................~~ 3453 (1,~~115~~020) ~~777~~ Proceeds from notes payable ................................................................~~........~~ 44 50 Repayment of notes payable and capital lease obligations ...................................~~........~~ (1,~~448~~756) (1,~~278~~536) Repayment of short-term notes payable to individuals .......................................~~........~~ (21) (5063) ------------ ------------ Net cash provided by (used in) financing activities .............................~~........~~ 1(2,~~055~~109) (13,~~067~~301) ------------ ------------ Net change in cash and cash equivalents .......................................................~~........~~ ~~294~~(427) ~~1,002~~306 Cash and cash equivalents at beginning of period ..............................................~~........~~ 991 1,104 ------------ ------------ Cash and cash equivalents at end of period ....................................................~~........~~ $ ~~1,285~~564 $ 21,~~106~~410 ============ ============ Cash paid during the period for interest ......................................................~~........~~ $ 23,~~532~~849 $ 2,~~044~~955 ============ ============ Cash paid during the period for income taxes ..................................................~~........~~ $ -- $ -- ============ ============ Supplemental non-cash activity: Exchange of short-term loans for long-term loans ........................................... $ 177 $ -- ============ ============ Cancellation of distributions payable ...................................................... $ ~~177~~-- $ --3,201 ============ ============

The accompanying notes are an integral part of these financial statements. 4 AMERIVISION COMMUNICATIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements for AmeriVision Communications, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. In the opinion of the Company's management, the condensed consolidated financial statements reflect all adjustments, of a normal and recurring nature, that are necessary to present fairly the Company's financial position as of September 30, 2001, and the results of its operations and cash flows for the nine months ended September 30, 2000 and 2001. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. It is recommended that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and notes as of and for the year ended December 31, 2000. The interim results are not necessarily indicative of the results for a full year. Certain amounts in the condensed balance sheets as of September 30, 2001, have been reclassified to conform with the classifications used as of December 31, 2000. NOTE B - EARNINGS PER SHARE (share and per share amounts not in thousands) The computation of basic and diluted earnings per share for the nine months ended September 30, 2000 and 2001, is as follows:

~~Three~~September ~~months Six months ended ended June~~ 30, ----------------~~----------------~~ ~~BASIC~~Basic ~~EARNINGS~~Earnings ~~(LOSS)~~Per ~~PER~~Share ~~SHARE~~ 2000 2001 ~~2000 2001~~ ---- ---- ---- ---- Net income ~~(loss) ..........................................................~~ $~~(323)~~ ~~$(372)~~436 $~~(148)~~ $258 ~~(51)~~ Decrease in redemption value of redeemable common stock ~~.................... -- --~~ 42 -- ----- -~~----~~ ----- -~~----~~ Net income available to nonredeemable common stockholders ~~..................~~ $~~(323)~~ ~~$(372)~~478 $~~(106)~~ $258 ~~(51)~~ ===== =~~====~~ ===== =~~====~~ Average shares of nonredeemable common stock outstanding ~~...................~~ 823 ~~826~~827 ~~823 826~~ ===== =~~====~~ ===== =~~====~~ Basic earnings ~~(loss)~~ per share ~~.......................................~~ $~~(.39)~~ $(0.~~45)~~58 $~~(.13)~~ $(0.~~06)~~31 ===== =~~====~~ ===== =~~====~~ ~~DILUTED~~Diluted ~~EARNINGS~~Earnings ~~(LOSS)~~Per ~~PER~~Share ~~SHARE~~ Net income available to nonredeemable common stockholders ~~..................~~ $~~(323)~~ ~~$(372)~~478 $~~(106)~~ $258 ~~(51)~~ Change in redemption value of redeemable common stock ~~...................... -- --~~ (42) -- ----- -~~----~~ ----- -~~----~~ Net income available to nonredeemable common stockholders and assumed conversions ~~...............................................~~ $~~(323)~~ ~~$(372)~~436 $~~(148)~~ $329 ~~(51)~~ ===== =~~====~~ ===== =~~====~~ Average shares of nonredeemable common stock outstanding ~~...................~~ 823 ~~826~~827 ~~823~~Stock ~~826~~options and warrants 120 133 Conversion of redeemable common stock ~~......................................~~16 ~~-- --~~ 16 -- ----- ----- -~~----~~ ~~-----~~ Average shares of common stock outstanding and assumed conversions ~~.........~~959 ~~823~~976 ~~826 839 826~~ ===== =~~====~~ ===== =~~====~~ Diluted earnings ~~(loss)~~ per share ~~.....................................~~ $~~(.39)~~ $(0.~~45)~~46 $~~(.18)~~ $(0.~~06)~~26 ===== =~~====~~ ===== =~~====~~

The conversion of convertible notes was not assumed in the computation of diluted earnings per share for the nine months ended September 30, 2000 and 2001, because to do so would have been antidilutive for the periods. Effective February 27, 2001, two Company directors exercised their stock warrants. Accordingly, the Company issued 3,800 shares of its common stock to the two directors. The issuance price was $0.01 per share. 5 NOTE C - AGREEMENT WITH FORMER CHAIRMAN OF THE BOARD OF DIRECTORS The Company entered into a Settlement Agreement ("Agreement") with Tracy Freeny effective August 31, 2001, whereby the Company will dismiss with prejudice to re-filing its litigated claims against Mr. Freeny and has released all unlitigated claims. In exchange, all accrued, but unpaid distributions (totaling $3,201) that had been declared in favor of Mr. Freeny have been cancelled and extinguished, as has his pre-existing employment agreement with the Company. Under the Agreement Mr. Freeny has resigned from employment with the Company and from service as an elected member of the Company's Board of Directors, but will serve as an advisor to the Board of Directors. He will also receive gross compensation of $176,356, due under his pre-existing employment agreement for the period between February 23 and August 31, but withheld as a result of then unresolved disputes, and will be reimbursed for attorney fees incurred in defending himself against the Company's litigated claims and other disputed but unlitigated claims of wrongdoing made against him by the Company, up to a maximum amount of $45,000. He will also receive 1,000 shares of common stock from the Company for his service as a member of the Board of Directors between the date of his election and August 31, 2001, and has entered into a Voting Trust Agreement under which 119,157.89 shares of the Company's common stock (approximately 14.14% of the Company's outstanding shares) are to be voted by a three person group of trustees for a period likely to expire as of May 24, 2004. The Company also entered into a Consulting Agreement ("Agreement") with Mr. Freeny for the period between September 1, 2001 and May 24, 2004. Thereunder, Mr. Freeny will continue to serve the Company in the development of its sales and marketing strategies and in the maintenance of customer relations, for which he will be paid a monthly remuneration of $25,000 and will be reimbursed for certain approved business expenses. NOTE D - COMMITMENTS AND CONTINGENCIES In November 2000, the Company notified the third-party contractor responsible for development of the Company's billing system that the Company intended to terminate the contract between the Company and the contractor. The Company continued to negotiate resolution of the matter with the contractor, but in July 2001, the Company determined that it would be unable to reach a viable solution with the contractor. Accordingly, in July 2001, the Company, through its legal counsel, notified the contractor that the Company intends to pursue all appropriate remedies available to it pursuant to the contract, including arbitration under legal proceedings. However, the Company requested that the contractor voluntarily agree to rescind all amounts that the Company paid to the contractor, totaling approximately $1.0 million. The Company asked that the contractor respond to the letter by August 2, 2001, however the contractor asked for and the Company granted an extension of several weeks for that response. The amounts paid to the contractor, including direct expenses, of approximately $1.0 million are currently recorded as an asset in the Company's financial statements. There is a reasonable possibility, however, that the Company will not be able to recover all, or any, of those amounts from the contractor. This matter is still in the stages of development, and until the Company obtains additional information, including sending a reply to the response from the contractor as to its initial letter, the Company cannot reasonably estimate the amount of losses, if any, that the Company may ultimately recognize as a result of this matter. The financial statements at September 30, 2001 and for the nine-month period ended September 30, 2001 do not contain any adjustments that might result from the outcome of this matter. The Company was not in compliance with certain financial covenants under the Credit Facility for the period ended September 30, 2001. The Company has received from the lender a waiver for the noncompliance, which waiver is effective to March 31, 2002. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SELECTED HISTORICAL FINANCIAL AND OPERATING DATA The historical financial data presented in the following table for and at the end of the nine-month periods ended September 30, 2000 and 2001 are derived from the unaudited consolidated financial statements of the Company. In the opinion of management of the Company, such unaudited consolidated condensed financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial data for such periods. The results for the nine months ended September 30, 2001 are not necessarily indicative of the results to be achieved for the full year. The data presented below should be read in conjunction with the Company's consolidated financial statements and the notes thereto included elsewhere herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

~~Six~~Nine Months Ended ~~June~~September 30, ------------------------ 2000 2001 ---------- ---------- BALANCE SHEET DATA: Working capital (deficit) .......~~..............~~ $ (2524,~~663~~240) $ (2322,~~740~~317) Total long-term debt ............~~..............~~ $ 1110,~~349~~378 $ 85,~~544~~558 Total stockholder's deficit .....~~..............~~ $ (23,~~661~~031) $ (2219,~~637~~031) OTHER FINANCIAL DATA: EBITDA (1) ......................~~..............~~ $ 47,~~566~~738 $ 35,~~459~~649

---------- (1) EBITDA (earnings before interest, taxes, depreciation and amortization) consists of net sales less cost of telecommunication services and selling, general and administrative expenses. EBITDA is provided because it is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is presented to enhance an understanding of the Company's operating results and is not intended to represent cash flows or results of operations in accordance with generally accepted accounting principles ("GAAP") for the periods indicated. EBITDA is not a measurement under GAAP and is not necessarily comparable with similarly titled measures for other companies. GENERAL The Company provides domestic long distance and other telecommunications services, primarily to residential users. Since its formation in 1991, the Company's annual long distance telephone volume has grown from approximately $1.0 million in net sales in 1991 to approximately $100.0 million in net sales in 2000. Substantially all of this growth is attributable to the increase in the Company's subscriber base. The Company's subscriber base has increased from approximately 30,000 subscribers at the beginning of 1994 to approximately 400,000 subscribers at September 30, 2001. The Company does not, however, expect its revenues or subscriber base to continue to grow at this rate in the future and has in fact experienced a decline in the subscriber base recently. The net sales for the nine months ended September 30, 2000 totaled $76.1 million compared to $62.0 million for the nine months ended September 30, 2001. From its inception through December 31, 1998, the Company had incurred cumulative net operating losses totaling approximately $12.1 million. During the year ended December 31, 1999, the Company generated net income of $2.2 million, which was achieved from reductions in operating expenses. The Company's accumulated stockholders' deficiency increased from approximately $25.8 million at December 31, 1997 to approximately $27.6 million at December 31, 1998 due to the net loss of $3.7 million. The net income of $2.2 million during 1999 contributed to the decrease in accumulated stockholders' deficiency to approximately $23.8 million at December 31, 1999. The net income of $808,000 generated during the year ended December 31, 2000 also contributed to the decrease in accumulated stockholders' deficiency to approximately $22.6 million at December 31, 2000. The net income generated during the nine months ended September 30, 2001 also contributed to the accumulated stockholders' deficiency of approximately $19.0 million at September 30, 2001. In addition to the net operating losses, the accumulated deficit has been attributed to the Company's declaration of quarterly distributions to its stockholders during 1994 through 1997 totaling approximately $19.0 million and redemptions totaling approximately $4.7 million. Furthermore, the Company's current liabilities exceeded its current assets by approximately $22.3 million, $22.7 million, and $22.3 million at December 31, 1999, 2000 and at September 30, 2001, respectively. These factors among others may indicate that the Company may be unable to continue as a going 7 concern for a reasonable period of time. See "Note J to the Consolidated Financial Statements in the Company's FORM 10-K." The growth in the Company's long distance revenues and customer base is attributable to the Company's marketing efforts. The Company entered into agreements or made strategic alliances with various non-profit organizations. From the first quarter of 1993 through the middle of 1996, the Company relied substantially on the telemarketing efforts of VisionQuest, a related entity, in which the Company owned an equity interest, to solicit and acquire new long distance customers. The non-profit organizations would provide the Company and VisionQuest with its membership rosters, and VisionQuest would direct its telemarketing services to those individuals. The Company began, in the middle of 1996, to increase its own marketing related efforts through direct mail, radio advertising, including sponsorship of various radio programs for the organizations whose members subscribe to the Company's long distance services. These marketing efforts as well as telemarketing, conferences and internet-based sales strategies are currently being utilized by the Company to solicit and acquire new long distance customers. The Company bills its customers under several different methods. Some customers receive their long distance bills directly from the Company. The Company also has billing and collection agreements with several of the RBOCs. Customers who are billed through the RBOCs receive their long distance phone bill with their local phone bill from the RBOC. The Company also utilizes one third party billing and collection service for customer billings through other LECs or RBOCs with whom the Company does not have a separate billing and collection agreement. Effective February 1, 1999, the Company began operating the switching assets and related personnel of Hebron, which includes telecommunications switches in Oklahoma City and Chicago. The Company purchased the switches in April 2000 under terms of an asset purchase agreement with Hebron. This allows the Company to originate and terminate certain long distance calls. WorldCom carries the majority of the Company's long distance traffic. The Company pays its carriers based on the type of calls, time of certain calls, duration of calls, the terminating phone numbers, and the terms of the Company's contract in effect at the time of the calls. In addition to long distance service, the Company also offers its customers other telecommunication services such as paging, Internet access services, calling cards, prepaid phone cards and toll-free service, as well as credit cards. The Company pays a royalty of approximately 10.0% of certain of the customer's collected revenues to a non-profit organization selected by the customer. Selling, general and administrative expenses include billing fees charged by LECs and other third party billing and collection companies, bad debts, commissions to salespersons, advertising and telemarketing expenses, customer service and support, and other general overhead expenses. Interest expense includes the cost of financing the Company's accounts receivable and asset purchases, including loans from Hebron and Coast Business Credit ("Coast"). The Company has recognized a net deferred tax for the tax effects of temporary differences and net operating loss carryforwards, to the extent that the Company has determined that it is more likely than not that it will realize those tax benefits. PICC Fees. In 1996, the Federal Communications Commission ("FCC") adopted regulations implementing the Telecommunications Act enacted that year. To support universal service, carriers are required to contribute certain percentages of their annual gross receipts to fund the High Cost Fund, the Schools and Libraries Fund, and the Low Income Fund. The FCC has allowed carriers to offset these charges by passing them through to their customers. In addition, the FCC adopted a Primary Interexchange Carrier Charge ("PICC") to allow LECs to recover through non-usage-sensitive charges certain costs associated with long distance carriers having access to LEC networks. The FCC has also allowed the long distance carriers to offset these amounts by passing these charges on to their customers. 8 RESULTS OF OPERATIONS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 The following table sets forth for the three-month and nine-month periods indicated the percentage of net sales represented by certain items in the Company's statements of operations:

THREE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ------------------------------- ------------------------------- 2000 2001 2000 2001 ------------ ------------ ------------ ------------ Net sales ........................................~~......~~ 100.0% 100.0% 100.0% 100.0% ------------ ------------ ------------ ------------ Operating expenses: Cost of telecommunication service ...........~~......~~ 4640.29% 4842.72% 4544.82% 4544.23% Selling, general & administrative expense ...~~......~~ 4746.50% 46.78% 46.0% 46.56% Depreciation and amortization expense .......~~......~~ 3.86% 23.6% 3.98% 3.5% ------------ ------------ ------------ ------------ Total operating expenses ...............~~......~~ 9790.5% 9892.06% 9594.70% 9594.24% ------------ ------------ ------------ ------------ Income from operations ...........................~~......~~ 29.5% 27.04% 46.30% 45.86% Interest expense .................................~~......~~ (5.23)% (54.08)% (5.1)% (5.10)% Other income .....................................~~......~~ 0.20% 0.10% 0.21% 0.1% ------------ ------------ ------------ ------------ Income (loss) before income tax ..................~~......~~ (24.5)2% (2.9)6% (01.6)0% (0.2)7% Income tax (benefit) expense .....................~~......~~ ~~(1.~~2).0% (1.1)% (0.3)5% (0.1)3% ------------ ------------ ------------ ------------ Net income (loss) ................................~~......~~ (12.3)2% (1.8)5% (0.3)5% (0.1)4% ------------ ------------ ------------ ------------

Net Sales: Net sales decreased 17.5% to $20.0 million for the current quarter from $24.2 million for the year earlier quarter. Net sales decreased 18.5% to $62.0 million for the nine months ended September 30, 2001 from $76.1 million for the nine months ended September 30, 2000. This decrease was the result of a decrease in total minutes of traffic and a reduction in minutes under certain rate plans, which are billed at a higher per minute rate. In addition, revenues decreased for the three and nine months ended September 30, 2001 compared to the year earlier periods due to an FCC order, which consolidates PICC charges with certain other subscriber charges and initially decreased the charges effective July 1, 2000 and then annually increases such charges. Total billable minutes were approximately 131 million minutes for the current quarter compared to 141 million minutes for the year earlier quarter, a decrease of 6.7% and approximately 398 million minutes for the nine months ended September 30, 2001 compared to 415 million minutes for the nine months ended September 30, 2000, a decrease of 4.0%. Cost Of Telecommunication Services: The Company's cost of sales are variable costs based on amounts paid by the Company to its providers for its customers' long distance usage, as well as the amounts paid to providers for customer service and support. For the three and nine months ended September 30, 2001, the Company's overall cost per minute decreased as compared to the three and nine months ended September 30, 2000. This decrease resulted from rate reductions received by the Company from its switchless carrier. During the three and nine months ended September 30, 2001 and 2000, the amounts and relative percentage of net sales to each of its providers was as follows:

THREE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ---------------------------------------------- ---------------------------------------------- 2000 2001 2000 2001 --------------------- --------------------- --------------------- --------------------- Amount % of Amount % of Amount % of Amount % of (000's) Net ~~Sale~~Sales (000's) Net ~~Sale~~Sales (000's) Net ~~Sale~~Sales (000's) Net Sales --------- --------- --------- --------- --------- --------- --------- --------- World Com ~~.................................~~ $ 56,~~973~~272 2325.49% $ 5,~~820~~861 2829.53% $12 18,~~152~~424 2324.42% $12 18,~~183~~044 29.01% Switched ~~..................................~~ 2,~~776~~493 10.93% 1,~~984~~760 98.8% 58,~~638~~131 10.97% 35,~~911~~671 9.31% PICC/USF Fee ~~.............................. 3~~1,~~052~~147 114.97% ~~2,105~~813 ~~10.~~4.1% 57,~~963~~110 119.53% 23,~~922~~735 6.91% --------- --------- --------- --------- --------- --------- --------- --------- Total ~~................................~~ $11 9,~~801~~912 4640.29% $ 98,~~909~~434 4842.72% $23 33,~~753~~665 4544.82% $19 27,~~016~~450 4544.23%

WorldCom: The Company's overall percentage usage of WorldCom during the three and nine months ended September 30, 2001 as compared to the year earlier periods increased as a result of the Company having fewer minutes on the switches. For the three and nine months ended September 30, 2001, total minutes of usage from WorldCom were approximately 101 million minutes and 304 million minutes compared to approximately 102 million minutes and 302 million minutes for the same periods in 2000. 9 Switched Operations: Effective February 1, 1999 the Company began operating the switching assets and related personnel of Hebron, which includes telecommunications switches in Oklahoma City and Chicago. The total minutes of usage for switched operations for the three and nine months ended September 30, 2001 were 30 million minutes and 94 million minutes and for the three and nine months ended September 30, 2000 were 39 million minutes and 113 million minutes. PICC/USF Fees: These expenses decreased for the three and nine months ended September 30, 2001 compared to the year earlier period due to an FCC order, which consolidates PICC charges with certain other subscriber charges and initially decreases the charges effective July 1, 2000 and then annually increases such charges. Selling, General and Administrative Expenses: The significant components of selling, general and administrative expenses include the following:

THREE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ----------------------------------------------- ---------------------------------------------- 2000 2001 2000 2001 ---------------------- --------------------- --------------------- --------------------- Amount % of Amount % of Amount % of Amount % of (000's) Net ~~Sale~~Sales (000's) Net ~~Sale~~Sales (000's) Net ~~Sale~~Sales (000's) Net Sales --------- --------- --------- --------- --------- --------- --------- --------- Billing fees/charges ~~.......................~~ $ 2,~~312~~133 98.08% $ 2,~~470~~499 12.15% $ 46,~~576~~709 8.8% $ 47,~~767~~266 11.37% Advertising ~~................................~~699 ~~1,102 4~~2.39% ~~124~~81 .64% 12,~~839~~538 3.53% ~~283~~364 27.7% Other general/admin ~~........................~~ 6,~~718~~237 2625.37% 5,~~597~~510 27.56% 1319,~~539~~773 26.10% 1117,~~643~~153 27.7% Royalties to NPO's ~~.........................~~ 2,~~016~~077 78.96% 1,~~299~~259 6.43% 36,~~938~~015 7.69% 24,~~874~~133 6.87% --------- --------- --------- --------- --------- --------- --------- --------- Total ~~.................................~~ $12 11,~~148~~146 4746.50% $ 9,~~490~~349 46.68% $23 35,~~892~~035 46.0% $19 28,~~567~~916 46.57%

Billing Fees and Charges: Billing fees and charges include the contractual billing fees and bad debts charged by LEC's and other third party billing companies. During the nine months ended September 30, 2000, the Company paid approximately $300,000 for initial set up charges on a new billing and collection agreement with a RBOC. These expenses also include bad debts related to customers who are billed directly by the Company. Advertising Expense: Advertising expenses decreased 88.5% to $81,000 for the current quarter compared to $699,000 for the year earlier quarter and decreased 85.4% to $364,000 for the nine months ended September 30, 2001 compared to $2.5 million for the nine months ended September 30, 2000 due to the Company curtailing certain advertising expenses. The Company utilizes direct mail, radio and other forms of advertising to acquire new customers. Other General and Administrative Expense: Other general and administrative expenses decreased by approximately 18.8% for the current quarter as compared to the year earlier quarter and decreased 16.6% for the nine months ended September 30, 2001 as compared to the same period in 2000 due to a decrease in personnel and due to reductions in commissions, internet costs, stock compensation expense and other professional fees. Royalties to Non-Profit Organizations: During the current quarter royalties to non-profit organizations decreased by approximately 39.4% to $1.3 million compared to $2.0 million for the year earlier quarter and for the nine months ended September 30, 2001, royalties to non-profit organizations decreased by approximately 31.3% to $4.1 million compared to $6.0 million for the same period in 2000. The majority of the decrease is due to lower net sales during the periods in 2001 as compared to 2000. As of September 30, 2001, the Company was affiliated with approximately 35,000 organizations for its royalty program, compared to approximately the same number of organizations as of September 30, 2000. For the three and nine months ended September 30, 2001 and 2000, approximately 41.7% and 42.3%, and 40.4% and 40.9%, respectively, of total royalties were paid to the top ten organizations. Depreciation and Amortization: Depreciation and amortization expense decreased 16.9% to $725,000 for the current quarter compared to $872,000 for the year earlier quarter and decreased 24.1% to $2.2 million for the nine months ended September 30, 2001 compared to $2.9 million for the same period in 2000. This decrease is attributable to a reduction in the amortization of covenants not to compete and to the termination of certain equipment leases, which equipment was purchased at the lease termination and is now being depreciated over a longer period of time. Interest Expense and Other Finance Charges: Interest expense decreased 23.0% to $1.0 million for the current quarter as compared to $1.3 million for the year earlier quarter and decreased 20.5% to $3.1 million for the nine 10 months ended September 30, 2001 as compared to $3.9 million for the same period in 2000. This decrease is attributable to a reduction in the average interest rate being charged on the Company's credit facility. Other Income (Expense): During the current quarter, other income increased to $18,000 as compared to an expense of $2,000 for the year earlier quarter. For the nine months ended September 30, 2001, interest income and rental income decreased to $54,000 as compared to $90,000 for the same period in 2000. Income Tax Expense (Benefit): For the three and nine months ended September 30, 2001 the Company recorded a deferred income tax expense of approximately $215,000 and $185,000 and a deferred income tax expense of $480,000 and $332,000 for the three and nine months ended September 30, 2000. The income tax benefits recognized in the financial statements consist primarily of the deferred tax effects of the temporary differences between the financial and tax bases of assets and liabilities, and net operating loss carryforwards. The Company believes that it will realize the tax benefits of net operating loss carryforwards within the period allowed under Federal tax laws (15 years). Cumulative Effect of Change in Accounting Principle: Effective July 1, 2000, the Company changed its method of accounting for stock options granted to non-employee directors, as permitted by generally accepted accounting principles. The cumulative effect of this accounting change, net of taxes, was $55,000 for the three and nine-month periods ended September 30, 2000. Net Income: During the three and nine months ended September 30, 2001, the Company reported net income of $308,000 and $258,000 compared to a net income of $582,000 and $436,000 for the three and nine months ended September 30, 2000. FINANCIAL CONDITION AND LIQUIDITY Net cash provided by operations was $3.9 million for the nine months ended September 30, 2001 as compared to net cash provided by operations of $4.3 million for the same period in 2000. The variations in cash flow from operations are primarily attributable to the timing of collections on accounts receivable and the timing of payment of accounts payable. Of the $35.0 million in availability, currently limited to approximately $26.8 million due to financial results and loan formula restrictions, approximately $19.6 million was outstanding as of September 30, 2001 under the Credit Facility. The remaining balance of $7.2 million is available to the Company for working capital, capital improvements, debt reduction and required reserves. The Company was not in compliance with certain financial covenants under the Credit Facility for the period ended September 30, 2001. The Company has received from the lender a waiver for the noncompliance, which waiver is effective to March 31, 2002. The Company may have to request a waiver for future periods and the lender may or may not provide such waiver. In conjunction with the waiver received, the lender and the Company have agreed to limit the maximum availability to $28.5 million effective December 19, 2001, which is a reduction from the previous maximum availability of $35.0 million. Additionally, the Company will maintain a minimum amount of $500,000 under the maximum availability for reserves related to carrier billings. The Company and the lender have also added a debt service coverage ratio to the existing Company covenants, which requires the Company to maintain a coverage ratio of 1.10 to 1.0 for the first quarter of year 2002 and of 1.25 to 1.0 for subsequent quarterly periods. The ratio is expressed as a fraction whose numerator is the difference between EBITDA and the sum of unfinanced capital expenditures and income tax payments made, and whose denominator is the sum of all principal and interest payments, subject to certain adjustments, made by the Company on outstanding debt. All other covenants between the Company and the lender remain unchanged. The Company estimates cash flow from operations and, to the extent required, borrowings under the Credit Facility would be sufficient to fund its remaining obligations and to meet its other anticipated capital requirements for 2001. In the event the Company's estimates of capital requirements are too low, and the Company does not have sufficient availability under the Credit Facility or is unable to obtain alternate sources of financing, the Company may be required to curtail its capital improvement and telemarketing. See "Note J--Financial Condition and Results of Operations in the Company's FORM 10-K." Operating Activities Significant uses of cash in operating activities for the nine months ended September 30, 2001 include decreases in accounts payable of $1.1 million. Accounts receivable decreased by $2.0 million and prepaid expenses decreased by $183,000. The Company recorded net income of $258,000; a deferred income tax expense of $185,000; $2.2 million in certain non-cash expenses, principally depreciation and amortization and $75,000 from recording amortization of unearned compensation on stock options and awards. Significant uses of cash in operating activities for the nine months ended September 30, 2000 include decreases in accounts payable of $1.7 million. Accounts receivable decreased by $2.4 million and prepaid expenses increased by $292,000. The Company also generated cash from operations by recording net income of $436,000; $377,000 11 from recording a deferred income tax expense; $2.9 million in certain non-cash expenses, principally depreciation and amortization and $166,000 from recording stock compensation expense. Investing Activities The Company's investing activities for the nine months ended September 30, 2001 consisted primarily of property and equipment purchases of $269,000. The Company's investing activities for the nine months ended September 30, 2000 consisted primarily of property and equipment purchases of $2.4 million and an investment in a television pilot of $285,000. Financing Activities During the nine months ended September 30, 2001, financing activities used $3.3 million in cash. The most significant use of cash was the repayment of notes and leases payable totaling $1.6 million; the repayments to related parties totaling $732,000 and a decrease of $1.0 million under the Company's Credit Facility. The most significant source of cash was proceeds from notes payable of $50,000. During the nine months ended September 30, 2000, financing activities used $2.1 million in cash. The most significant source of cash was an increase of $453,000 in borrowings under the Company's Credit Facility. Other financing activities included repayments to related parties totaling $829,000 and other repayments totaling $1.8 million. INFLATION AND CHANGING PRICES Telecommunications revenues do not necessarily track the changes in general inflation, as they tend to respond to the level of activity on the part of the telecommunications industry in combination with the number of competing companies. Capital and operating costs are influenced to a larger extent by specific price changes in the telecommunications industry and to a lesser extent by changes in general inflation. FORWARD LOOKING INFORMATION This Report contains forward-looking statements and information that are based on the beliefs of the Company's management as well as assumptions made by and information currently available to management. All statements other than statements of historical fact included in this Report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements identified by the words "anticipate," "believe," "intend," "estimate" and "expect" and similar expressions. Such statements reflect the Company's current views with respect to future events, based on what it believes are reasonable assumptions; however, such statements are subject to certain risks, uncertainties and assumptions, including but not limited to the risk factors set forth in the Company's Statements on FORM 10-K, copies of which may be obtained from the Securities and Exchange Commission or from the Internet site maintained by the Commission at http://www.sec.gov. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those in the forward-looking statements. The Company disclaims any intention or obligation to update or review any forward-looking statements or information, whether as a result of new information, future events or otherwise. 12 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On or about March 9, 2001, Mr. Jerry Parry, a shareholder of the Company, filed a shareholder derivative action on behalf of the Company in the District Court of Oklahoma County, Oklahoma against Messrs. Tracy Freeny, Jay Sekulow, John Telling and Carl Thompson. The Company was named as a nominal defendant in the suit. After taking a deposition of Mr. Sekulow and reviewing other relevant information provided by the Company, Mr. Parry moved the court to dismiss Mr. Sekulow as a defendant and the court entered an order dismissing Mr. Sekulow on March 27, 2001. Subject to court approval, which the Company has received, the Company and Mr. Parry agreed to convert Mr. Parry's shareholder derivative suit on behalf of the Company into a suit, controlled by the Company. The suit raises, among others, issues that have already been the subject of examination by the Investigative Committee. The Company paid approximately $85,000 for legal fees incurred by the attorney for Mr. Parry in pursuing the derivative lawsuit and for the Company to acquire control of such legal action. The Company felt that it was more appropriate to pursue and control the lawsuit (which was filed on behalf of the Company) than for a shareholder to do so. In addition, the Company paid approximately $20,000 for legal fees in connection with the dismissal of Mr. Sekulow. As of August 31, 2001, after resolving its dispute with Mr. Freeny and determining it was not in the Company's best interests to proceed against Mr. Telling at this time, the Company filed its Amended Petition solely against Carl Thompson. Mr. Thompson moved to dismiss the Amended Petition. On November 9, 2001, the Court granted Thompson's motion but granted the Company leave to file another Petition. The Company intends to file another Petition against Carl Thompson in the near future. The Company has incurred and will continue to incur legal fees and expenses in connection with this matter as the Company is continuing legal action in this matter against Carl Thompson. On May 17, 2001, the Company filed a complaint against PromiseVision Technology, Inc. in Case No. CIV-01-768-C, in the United States District Court for the Western District of Oklahoma. The Company seeks injunctive relief and monetary damages for defendant's alleged false and defamatory statements to customers and potential customers of the Company that constitutes false advertising under Section 43(a) of the Lanham Act, 15 U.S.C. Section 1125(a), as well as a violation of the Oklahoma Deceptive Trade Practices Act, interference with advantageous (business) relations, contract and prospective economic advantage, business disparagement, and defamation under Oklahoma state law. The Company has also alleged that defendant has misappropriated certain trade secrets of the Company. On August 20, 2001, defendant filed Counterclaims against the Company alleging false advertising in violation of Section 43(a) of the Lanham Act, 15 U.S.C. Section 1125(a), and violations of the Oklahoma Deceptive Trade Practices Act, tortious interference with advantageous (business) relations, contract, and prospective economic advantage, business disparagement, and defamation, slander and liable under Oklahoma state law. Discovery has just begun and trial is scheduled for April 2002. On or about July 24, 2001, a terminated employee of the Company filed a lawsuit claiming breach of contract. The Company has incurred and will continue to incur legal fees and expenses in connection with this matter. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10.28 -- Settlement Agreement, effective as of August 31, 2001, by and between the Company and Tracy Freeny 10.29 -- Consulting Agreement, effective as of September 1, 2001, by and between the Company and Tracy Freeny 10.30 -- Voting Trust Agreement, effective as of September 1, 2001, among the Company, Tracy Freeny and Sharon Freeny and David Clark, Russell Beaty and David Thompson 10.31 -- Confidentiality Agreement, effective as of August 31, 2001, by and between Tracy Freeny and the Company 10.32 -- Promissory Note dated September 1, 2001, payable by the Company to Tracy Freeny (b) REPORTS ON FORM 8-K Not applicable. 14 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERIVISION COMMUNICATIONS, INC. DATE: December 28, 2001 /s/ Ken Kolek ------------- Ken Kolek, Chairman of the Board /s/ David E. Grose ------------------ David E. Grose, Vice President and Chief Financial Officer (Principal Financial Officer) 15 INDEX TO EXHIBITS 10.28 -- Settlement Agreement, effective as of August 31, 2001, by and between the Company and Tracy Freeny 10.29 -- Consulting Agreement, effective as of September 1, 2001, by and between the Company and Tracy Freeny 10.30 -- Voting Trust Agreement, effective as of September 1, 2001, among the Company, Tracy Freeny and Sharon Freeny and David Clark, Russell Beaty and David Thompson 10.31 -- Confidentiality Agreement, effective as of August 31, 2001, by and between Tracy Freeny and the Company 10.32 -- Promissory Note dated September 1, 2001, payable by the Company to Tracy Freeny 16

Nominee For Against Authority Withheld ------------------------------------------------------- -------------- -------------- ------------------ David Clark 601,170 -- 1,027 Arch Bonnema 589,256 -- 27 Ken Kolek 489,616 -- -- Tracy Freeny 407,813 -- -- Arthur Richardson 380,121 -- 27 Danny Bannister 325,940 -- -- Loren Unruh 309,986 -- -- B. Gonzalez 285,990 -- -- Steve Halliday 278,123 -- 1,965 John Damoose 277,897 -- 1,005 Jay Sekulow 273,205 -- 990 John Telling 154,504 -- 5,395 Jack Parsons 44,937 -- -- David Gandy 22,248 -- -- Item 2 - 168,933 464,866 5,321 Item 3 - 158,552 471,190 9,479 Item 4 - 299,891 322,406 11,198 Item floor proposal 1 400,632 138,535 933 Item floor proposal 2 403,359 136,545 933

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