UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF
1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM N/A TO N/A
COMMISSION FILE NUMBER: 1-13134
AMERICAN NORTEL COMMUNICATIONS, INC.
(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
WYOMING 87-0507851
STATE OF INCORPORATION IRS EMPLOYER IDENTIFICATION NUMBER
7201 EAST CAMELBACK ROAD, SUITE 320, SCOTTSDALE, AZ 85251
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
ISSUER'S TELEPHONE NUMBER: (480) 945-1266
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 .
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Registrant's revenues for its most recent fiscal year were $7,967,108.
The aggregate market value of the common stock held by non-affiliates
computed based on the closing price of such stock on August 31, 2001, was
approximately $2,291,017.
The number of shares outstanding of the registrant's classes of common
stock, as of August 31, 2001, was 15,273,785.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
American Nortel, Inc. ("ANC" or the "Company"), is a Wyoming corporation
formed in 1979. In September 1994, American Nortel and its subsidiary Nortel
Communications, Inc., filed petitions under Chapter 11 of the U.S. Bankruptcy
Code in the U.S. Bankruptcy Court, District of Utah, Central Division (Case
Numbers 948-24604 and 948-24605). The proceedings were later converted to
Chapter 7 liquidation proceedings, and dismissed on February 7, 1996. American
Nortel sold its Nortel Communications subsidiary in June 1996 for nominal
consideration to an affiliate of former directors. During the pendancy of the
bankruptcy proceedings in June 1995, a controlling stock interest in the company
was sold to Wilcom, Inc., which is currently the majority stockholder of the
Company. In February 1996, the bankruptcy proceedings were dismissed.
ANC is presently in the business of long distance telecommunications
services offerings and is a reseller of 1-Plus, 1-800 and 1-888 long-distance
telecommunications services. ANC resells long distance telephone time that it
purchases or leases from other long distance carriers.
ANC resells long distance telephone services to both business and
residential customers. As a reseller it purchases or leases long distance time
from other carriers and resells that time to its customers. ANC is charged for
the time it uses beyond certain minimum requirements and in turn charges its
customers a certain rate per minute. To a large extent, ANC's profits are
dependent upon the difference between its cost per minute of long distance time
purchased and the amount it charges its customers. The Company's results of
operations are directly affected by competition, which in recent years has
lowered the amount resellers such as the Company can charge customers.
ANC out-sources its sales and marketing to telemarketers and it pays these
telemarketers a certain amount for each new customer obtained. The Company does
not direct-bill its customers, but rather utilizes Local Exchange Carriers
("LEC's") which provide telephone services to the Company's long-distance
customers, and perform billing and collections for the Company.
The LEC's receive a fee based upon a certain percentage of amounts
collected for the Company. The Company's management believes that the practice
of billing through LEC's has a substantial advantage because it increases the
likelihood and promptness of the Company collecting on its customer accounts.
ANC's operating strategy has both advantages and disadvantages. Because
the Company purchases long-distance services from other carriers and uses third
parties for its sales and marketing, ANC has lower capital requirements since it
does not have the additional cost of traditional long distance companies to
provide infrastructure, and lower equipment costs, rent and salaries compared to
some of its competitors. On the other hand, ANC is dependent upon these long
distance carriers and third parties to provide essential services to ANC and to
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allow ANC to contract for these services at competitive rates. ANC's revenues
from the sale of long distance internationally have decreased. ANC has ceased
promoting and selling long distance services for international calling.
ANC had net sales of $7,967,108 for the fiscal year ended June 30, 2001,
compared to gross net sales of $22,923,118 for the fiscal year ended June 30,
2001.
COMPETITION
The long distance telephone industry is highly competitive, with numerous
providers sharing the same market as ANC. Many of ANC's competitors have
greater capital resources, are more established and have a larger customer base
than ANC. Competition among resellers and other providers of long-distance
services generally is conducted on the basis of price. Prices charged to users
of long distance services have decreased over the last several years. Extreme
competition in the market has resulted in consolidation in the industry.
However, the remaining resellers operate in a manner similar to ANC
Long distance telephone service customers have become more sophisticated
and price conscious. Customers are likely to switch services when new
communication packages offered by competitors become available, and switching
from one service provider to another has little or no cost implications to the
customers. Other sources of competition for long distance service providers are
developing due to new offerings by providers, such as cable television
providers, Internet service providers, and high-speed voice and data
communication providers. In addition, long distance service offered by the
LEC's will also tend to increase ANC's customer and revenue attrition.
Competitive conditions in the long distance telephone service industry in
recent years have resulted in larger companies taking control of the market.
Because of this competition, ANC is seeking other business operations to replace
its declining long distance telephone revenue.
REGULATORY BACKGROUND
The Company and the long distance telecommunications industry are subject
to regulations by the United States Federal Communications Commission (the
"FCC").
Today's domestic long distance telecommunications industry was shaped by a
1984 court decree that required AT&T's divestiture of its 22 Bell operating
companies. This decree organized those companies under seven regional Bell
operating companies and divided the country into Local Access Transport Areas,
or LATAs. The incumbent local exchange carriers, which include the seven
regional Bell operating companies as well as independent local exchange
carriers, were given the right to provide local telephone service, local access
service to long distance carriers and long distance service within Local Access
Transport Areas. However, the regional Bell operating companies were prohibited
from providing long distance service between Local Access Transport Areas.
Consequently, the right to provide long distance service was given to other
interexchange carriers.
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The 1996 Telecommunications Act significantly altered the long distance
telecommunications industry. The regional Bell operating carriers are now
permitted to provide long distance service originating (or in the case of "800
and 888" service, terminating) outside the local services areas or offered in
conjunction with other ancillary services, such as wireless services.
Following application to the FCC, and upon a finding by the FCC that the
regional Bell operating companies face facilities-based competition, and after
satisfying a congressionally-mandated "competitive checklist" of interconnection
and access obligations, a Bell operating carrier may now provide long distance
service within its local service area. Having opened the interexchange market
to the Bell operating companies, the 1996 Telecommunications Act also removes
all legal barriers to competitive entry by interexchange and other carriers into
the local telecommunications market and directs Bell operating companies 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. The result of these regulatory actions was to give resellers of long
distance services access to potential customers directly through the local area
exchange network.
Legislative, actions judicial and technology factors have helped to create
the foundation for smaller long distance providers, such as ANC, to emerge as
alternative long distance service providers. The FCC has required all
interexchange carriers 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. ANC 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. ANC believes that
resellers and other long distance service providers represent a source of such
traffic to carriers with excess capacity.
INDUSTRY EVOLUTION
Resellers represent a paradox in the telecommunications marketplace.
Resellers are a source of revenues to the major long distance providers, but
also 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 network-based major carriers, but also the resellers'
sale of network-based carrier excess capacity represents a source of additional
traffic for such carriers. ANC believes that the three major carriers and most
regional carriers have substantial excess telecommunication transmission
capacity, and that the constant technological and facility upgrading will
continue, resulting in excess capacity in the carriers' network for the
foreseeable future.
Many resellers originated as customer base groups or aggregators of
customers. Their operations generally are marked by relatively low overhead and
low capital investment in property, plant and equipment. Resellers often offer
value-added services that other 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
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locations with single invoices, and split dedicated service. Although new
entrants to the industry face some regulatory barriers, the costs of overcoming
these are relatively low. With low entry barriers, a significant portion of the
telecommunications market is still open to significant price and service
competition. 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 resellers' ability to manage their revenues and their
general business enterprise. Highly competitive conditions in the industry will
continue to create difficulties for resellers in attracting capital to finance
receivables, improve facilities and equipment, and to develop management and
systems infrastructure.
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. ANC believes that opportunities for the future
growth of its business exist in the high gross profit product/service area
segments, including prepaid calling cards, international services, wireless
services, voice and data transmission, web-site and internet service packaging,
800 and 888 number service, voice mail and electronic email. However, to
supplement its declining long distance telephone service revenue, ANC believes
that it must also seek other business opportunities.
SERVICE AND PRODUCTS
The Company offers basic 1 plus, 800 and 888 long distance services. 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 and type of
call. Rate charges for a call are not affected by the particular transmission
facilities selected for the call, but are affected by the type of call a user
may select. All of ANC's billings for its customers' use of ANC long distance
calling is done through a customer's LEC. ANC offers a flat-rate long distance
calling service throughout the United States. ANC bills for its services in
six-second increments.
BILLING SERVICE AGREEMENTS
ANC's 1 plus, 800 and 888 long distance customers utilize LEC billing
service integrators to bill customers. These integrators have been approved by
various LECs to provide billing, collection and related services through the
LECs. ANC has entered into a customer billing service agreement with
Integretel, Inc. ("IGT"). Under this agreement, the service providers bill and
collect long distance charges to the Company's customers through LEC billings.
These amounts, net of reserves for bad debts, billing adjustments, telephone
company fees and the integrator's fees, are remitted to the Company on a monthly
basis.
LONG DISTANCE SERVICE AGREEMENTS
On December 9, 1996, ANC entered into a Billing Services Agreement for 1
plus 800 and 888 service with Integrated Incorporated ("IGT") whereby IGT
provides ANC telephone company billing and collection and other associated
services to the telecommunications industry. The agreement term is for two
years, and is automatically renewable in two-year increments unless appropriate
notice to terminate is given by either party. The agreement automatically
renewed on December 9, 2000, as neither party gave notice of termination prior
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to the renewal date. Under this agreement, IGT bills, collects and remits the
long distance service proceeds to ANC, net of reserves for bad debts, billing
adjustments, telephone company fees and IGT fees.
On December 19, 1996, the Company entered into a Master Agreement for
Purchase and Sale of Accounts with IGT (the "Account Agreement"), which is in
substance a factoring agreement. The terms of the Account Agreement provide for
advances of the lesser of the maximum purchase obligation of $5,000,000 or a
percentage of the total receivables, based on historical uncollectible account
data. Interest is charged monthly at a rate equal to the prime rate plus six
percent, applied to the average daily balance during the preceding month. An
administrative fee equal to one tenth of one cent for each transaction record
submitted to IGT is also charged monthly. In addition, an annual facility fee
in an amount equal to one percent of the maximum purchase obligation of
$5,000,000 is due on the anniversary date of the agreement. The advances and
related fees are repaid by customer payments remitted directly to IGT. The
Account Agreement is secured by all of ANC's accounts receivable whether or not
specifically purchased by IGT. The balance of the Account Agreement at June 30,
2001, is in excess of customer payments received by IGT and exceeds the
allowance reserve maintained by IGT.
Effective August 1, 1997, ANC entered into an agreement with Telesolutions
("TSN") to provide data processing services related to compiling call data from
carriers and submission of LEC billing data to IGT. This agreement is
terminable by either party upon 120 days notice.
GROWTH STRATEGY
The Company has decided to change its 1 plus 800 and 888 long distance
strategy. ANC has determined that profit margins from the long distance service
offerings that it has achieved in the past have narrowed to an unacceptable
level. The long distance market as a whole has experienced a decrease in profit
margins due to the aggressive price competition that has characterized the
industry during the last several years. ANC has changed its business endeavors.
Although the Company has not abandoned its long distance service business, ANC
has decreased its marketing efforts in long distance service offerings and has
dedicated that portion of its operating budget to investments in other
companies, particularly in smaller early stage companies that are in need of
working capital. ANC is making these investments with the hope of acquiring
control of a profitable operating company that has the potential to generate
revenues to supplement the revenues ANC generates from its long-distance service
business. The Company will continue to serve its existing customers.
INVESTMENTS IN MARKETABLE SECURITIES
The companies in which ANC has made investments are generally small, under
capitalized corporations whose stock is traded in the over-the-counter markets.
The issuers may have limited operating histories and revenues. ANC intends to
continue to seek to acquire an operating company with substantial revenue to
supplement its declining long distance service revenues. ANC has invested in
businesses that operate in or are affiliated with the Internet or
telecommunications industry. These companies have limited operating histories
and revenue and ANC's investment in these companies may not achieve its goal of
obtaining a profitable operating company. ANC intends to continue to seek to
acquire an operating company with substantial revenue to supplement its
declining long distance service revenues, but ANC can provide no assurances that
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it will be successful in these efforts. However, the Company has not presently
identified the business in which it intends to invest its resources in an effort
to mitigate the effects of the declining profitability in the long distance
reseller business.
ANC's investments in marketable securities consisted of the following at
June 30, 2001:
Gross Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Equity securities $3,196,133 $1,107,370 $(782,033) $3,221,470
The above reflects values before income taxes. ANC has invested in common
stock and related warrants of several publicly traded companies. At June 30,
2001, ANC's investment in marketable securities consisted of investments in six
different companies. The investment in one such company's securities represents
approximately 56% and 40% of ANC's estimated aggregate fair value of all
investments in marketable securities as of June 30, 2001 and June 30, 2000,
respectively.
ANC has an arrangement with Medcom USA, Inc. that provide the Company with
a guarantee or a reverse stock split protection and ANC would maintain a value
of $1,000,000 should the stock price fall below a point that reduces the stock's
current value below a certain amount. At June 30, 2001, the value of the
Company's holdings in that company was approximately $600,000 determined on the
basis of the trading price of the stock at June 30, 2001. However, on the basis
of that agreement, ANC recorded a value of $1,000,000 for holdings in that
security considering that the entity is required to issue additional shares to
the Company to meet the $1,000,000 guarantee. This company has since complied
with the terms of the agreement and issued ANC the additional stock as required
by the agreement.
ANC sold its interest in American Educational Products, Inc. ("AMEP") in
April 2001. Proceeds from sales of equity securities of AMEP were $194,000 and
$2,232,888 and gross realized (losses) gains were ($16,468) and $1,670,979 for
the years ended June 30, 2001 and June 30, 2000, respectively.
ANC reclassified its investment in Morgan Cooper Inc., ("MCII") under the
equity method, at a cost of $1,727,027. Reclassification of ANC's investment
occurred due to ANC's investment of additional funds, which was made in order to
preserve ANC's original investment. This investment was previously classified
as an available for sale security. Subsequent to June 30, 2001, the market
value of all investment securities held by ANC at June 30, 2001 had decreased by
approximately $1,404,000. The Company determined that its investment in MCII
had been permanently impaired and wrote down the value of its investment from
$1,727,027 to $165,282 as of June 30, 2001. See the report form 8-K, filed
June 22, 2001 for Morgan Cooper, Inc. (MCII).
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Description of Companies
--------------------------
The following is a brief description of the public companies in which ANC has
made an investment:
Dauphin Technologies, Inc. ("DNTK"). DNTK designs manufactures and
markets mobile hand-held, pen based computers, as well as other electronic
devises for home and business use. DNTK primary product line is a handheld
computer developed with the multi-sector mobile user in mind. This product
incorporates an upgradeable processor, user upgradeable memory and hard disk,
various modules and mobile devices.
Sonoma Financial Corporation. ("SONM"). SONM incorporates financial
service companies that operate a chain of stores devoted to providing low
documentation, short-term consumer loans. SONM is one of the largest payday
advance operations in the Chicago area.
PTN Media, Inc. ("PTNM"). PTNM is an interactive media content provider
focusing on providing branded products through the use of the Internet with
content using a combination of new and traditional media. PTNM initial web-site
focus on fashion, beauty, style, fitness, and related subjects. PTNM currently
provides this content on its interactive web site www.fashionwindow.com.
MedCom USA, Inc. ("EMED"). EMED enables paperless electronic verifications
and transactions, a web health care portal, and online purchase of home medical
equipment through its operating units. In July 2001, as a result of common
stock issued to ANC, through the operation of a reverse stock split protection
agreement, assumed the management of EMED. EMED was in a financial crisis and
asked that Mr. Williams and ANC to provide direction and funding. The Corporate
offices of EMED are now located with the corporate offices of ANC and ANC's
interest in EMED is intended to be accounted for on an equity method accounting
for period ending June 30, 2002.
Cynet, Inc. ("CYNE"). CYNE is an Internet business applications solutions
provider integrating convergent messaging with Internet services. CYNE's
products and services include convergent messaging, which includes fax, data,
voice, email and wireless messaging, and Internet services, which includes
custom application development, e-commerce development, web content creation,
web hosting and internet access. ANC's interest in CYNE is approximately 3%.
Pursuant to a Funding Agreement between ANC and CYNE, in consideration of ANC's
$750,000 investment in CYNE, CYNE agreed to file a registration statement
covering ANC's shares in CYNE on or before September 1, 2000. CYNE has failed
to file the registration statement, and under the Funding Agreement CYNE has
issued to ANC 75,000 shares of CYNE common stock for every 30 days that expire
before the registration statement is effective. Under this Agreement, ANC held
or was entitled to be issued 450,000 shares of CYNE common stock, consisting of
5% of all CYNE's issued and outstanding common stock.
Morgan Cooper, Inc. ("MCII"). MCII was primarily involved in designing
contemporary style clothing. After making an additional investment in an effort
to protect its original investment, ANC assumed the management of MCII pursuant
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to a Settlement Agreement between ANC and Morgan Cooper and Zarina Cooper,
individually, dated March 4, 2001, under which the Company for $125,000
purchased 6,400,000 shares of MCII common stock from Morgan and Zarina Cooper
which is approximately 48% of all issued and outstanding shares of MCII. The
corporate offices of MCII are now located at the Corporate offices of ANC. MCII
is presented as a consolidated entity under the equity method of accounting
since ANC now owns greater than 20% of the outstanding common stock of the MCII.
MCII currently has no operations, and ANC may be unable to recover its
$1,727,027 investment in Morgan Cooper. The Securities and Exchange Commission
has notified ANC and Morgan Cooper that it is investigating MCII relative to
certain matters ANC's management believes occurred prior to the time ANC's chief
executive officer assumed management of MCII. See "Legal Proceedings," below.
MCII has been delinquent in filing its required periodic reports with the
Securities Exchange Commission (SEC). It has not filed its annual report on
form 10-KSB its 2000 fiscal year and has not filed reports on form 10-QSB for
the periods ending March 31, 2001 and September 30, 2001. MCII is seeking to the
correct the filing delinquencies. As a result of the failures to file the
report, investors in MCII stock have not had available to them financial and
other information, which would be necessary for informed investment decisions.
As a consequence of MCII's late filings of its reports, investors did not have
available to them full financial and other information concerning MCII and such
failures may result in claims against the MCII. Recently the SEC has written a
letter to MCII regarding its failure to file. It has also requested MCII to
provide documents in connection with an SEC investigation. MCII cannot at this
time say what, if any, actions the SEC may take against MCII. Any action taken
by the SEC could have an adverse impact on MCII. ANC believes that the SEC
investigation relates to matters that occurred at MCII before ANC's chief
executive officer assumed the position of chief executive officer of MCII.
ADDITIONAL INFORMATION
The Company files reports and other materials with the Securities and
Exchange Commission. These documents may be inspected and copied at the
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.,
20549. You can obtain information on the operation of the Public Reference Room
by calling the Commission at 1-800-SEC-0330. You can also get copies of
documents that the Company files with the Commission through the Commission's
Internet site at www.sec.gov.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's offices are located in Scottsdale, Arizona. The Company
leases 1700 square feet of office space for approximately $25,000 annually. The
Company entered into a three-year lease in May 2000. The Company had four
employees and approximately six full-time equivalent employees at July 31, 2001.
ITEM 3. LEGAL PROCEEDINGS
ANC is party to legal proceedings and other various claims and lawsuits in
the normal course of its business, which, in the opinion of management, are not
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individually or collectively material to its business or financial condition.
On September 25, 2001, ANC was notified by the Securities and Exchange
Commission ("SEC") that it was investigating certain matters at MCII. ANC and
its chief executive officer have agreed to cooperate with the SEC investigation.
ANC believes that the investigation relates to matters that occurred at MCII
before ANC's chief executive officer assumed the position of chief executive
officer of MCII. ANC is cooperating with the SEC in the conduct of its
investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company submitted no matters to a vote of its security holders during
the fiscal year ended June 30, 2001.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
ANC 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.OB".
The following table sets forth for the periods indicated, the high and low
bid quotations for ANC's Common Stock. These quotations represent inter-dealer
quotations, without adjustment for retail mark-up, markdown or commission and
may not represent actual transactions.
HIGH BID LOW BID
FISCAL 2001
------------
Quarter Ended June 30, 2001 $ .17 $ .07
Quarter Ended March 31, 2001 .25 .15
Quarter Ended December 31, 2000 .344 .145
Quarter Ended September 30, 2000 .594 .313
FISCAL 2000 HIGH BID LOW BID
------------
Quarter Ended June 30, 2000 $ 2.375 $ 0.750
Quarter Ended March 31, 2000 3.875 1.156
Quarter Ended December 31, 1999 1.300 0.600
Quarter Ended September 30, 1999 1.030 0.580
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At June 30, 2001, there were 15,237,643 shares of common stock of ANC
outstanding and there were approximately 754 record holders of common stock.
ANC has never paid dividends on any of its shares. ANC does not anticipate
paying dividends at any time in the foreseeable future and any profits will be
reinvested in ANC's business. The terms of debt instruments do and will limit
the payment of dividends on Common Stock. ANC's Transfer Agent and Registrar for
the common stock is American Stock Transfer located New York, NY.
SALES OF UNREGISTERED SECURITIES
For the year ended June 30, 2000, warrants were exercised for 40,000 shares
of common stock in the amount of $42,000. The shares were issued in reliance on
the exemption from registration provided by Section 4(2) of the Securities Act.
For the year ended June 30, 2000, the Company issued 300,000 shares of
common stock at $0.09 per share to an officer who is the spouse of the CEO and
majority shareholder as payment for services rendered in a previous year. The
shares were issued in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act.
The Company cancelled 60,000 shares of common stock previously issued and
valued at $1,200 during the year ended June 30, 2000. The shares were
originally issued for future legal services and those services were never
received. The shares were issued in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act.
ITEM 6. 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: ANC's ability to manage its growth; litigation;
changes in regulation; competition in the long distance telecommunications
market; ANC's ongoing contractual relationship with its long distance carriers
and other service providers; dependence upon key personnel; changes in rates of
customer attrition; the adoption of new, or changes in, accounting policies or
practices, and estimates and the application of such policies, practices, and
estimates; federal and state governmental regulation of the long distance
telecommunications industry; ANC's ability to develop its own long
distance network; the Company's ability to maintain, and operate its
information systems; and ANC's success in offering additional communications
products and services; and the services of ANC's investment in other
companies.
FISCAL 2001 OPERATIONS
------------------------
During the fiscal year ended June 30, 2001, the Company has purchased and
sold stock in the following companies:
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On October 26, 2000, the Company purchased 150,000 shares of PTN Media,
Inc. ("PTNM") common stock at $3.33 and on May 13, 2001, the Company purchased
300,000 shares of common stock of PTNM at $1.00 per share. PTNM is an
interactive media content provider focusing on providing branded content using a
combination of new and traditional media. PTNM initial web-site focus on
fashion, beauty, style, fitness, and related subjects. PTNM currently provides
this content on its interactive web site www.fashionwindow.com. The average of
the bid and asked price of the stock as of June 30, 2001, was $2.60 per share
according to over-the-counter market.
On December 26, 2000, ANC purchased 106,400 shares of MedCom USA, Inc.
("EMED") common stock at a $1.25 per share, and on June 30, 2001, ANC purchased
300,000 shares of EMED common stock at a $1.00 per share. EMED enables paperless
electronic verifications and transactions, a web health care portal, and online
purchase of home medical equipment through its operating units. The average of
the bid and asked price of the stock as of June 30, 2001, was $1.00 per share.
ANC has an agreement with EMED that provides that EMED will issue ANC additional
shares of common stock if the stock price of EMED stock falls below a price that
reduces the current value of the Company's investment below $1,000,000. At June
30, 2001, the value of ANC's investment in EMED was approximately $600,000,
determined on the basis of the trading price of the stock as of the same date.
The Company, on the basis of its agreement with EMED, recorded a value of
$1,000,000 for holdings in EMED considering that the entity is required to issue
additional shares to ANC to meet the $1,000,000 guarantee. EMED has since
issued ANC the additional shares of common stock required to meet EMED's
obligation.
Although ANC can provide no issuances, ANC's management believes that
EMED's business model and potential opportunities may provide the vehicle for
ANC to supplement or replace its declining revenue from long distance telephone
service.
On December 28, 2000, the Company purchased 175,000 shares of common stock
at $.14 per share and received 450,000 of penalty shares from Cynet, Inc.
("CYNE"). CYNE is an Internet business applications solutions provider
integrating convergent messaging with Internet services. CYNE's products and
services include convergent messaging, which includes fax, data, voice, email
and wireless messaging, and Internet services, which includes custom application
development, e-commerce development, web content creation, web hosting and
internet access. The average of the bid and asked price of the Stock as of June
30, 2001, was $.075 per share as quoted on the over-the-counter market. CYNE is
obligated to issue 75,000 additional shares of its common stock to the Company
for each month that it fails to file a registration statement with the
Securities and Exchange Commission covering the shares of its common stock that
have been issued to the Company.
On October 2, 2000, the Company purchased 400,000 shares of common stock of
Morgan Cooper, Inc. ("MCII") at $1.56 per share. MCII was primarily involved
in design contemporary style clothing. During the year ended June 30, 2001, the
Company acquired an interest of approximately 40% of this entity. Because of
the increased ownership, the Company reclassified its investment in MCII under
the equity method of accounting in accordance with Accounting Principles Board
Opinion No. 18.
-12-
Morgan and Zarina Cooper, the principal shareholders of MCII, reached a
settlement agreement with ANC whereby ANC acquired additional shares of common
stock and ANC's chief executive officer assumed the position of president of
MCII. MCII had ceased its existing operations prior to that time. The Company
intends to assist in recapitalizing MCII and is attempting to locate prospective
merger candidates for MCII.
The Company has invested approximately $1,727,000 in MCII. Because of the
uncertainties relative to the prospects of MCII and the significant decline in
the market value of its stock, the Company believes the carrying value was
impaired and recognized an impairment write-down of $1,561,767 for the year
ended June 30, 2001.
MCII has conducted no material operations subsequent to ANC's acquisition
of ANC's additional equity interest and, therefore, no recognition of the
Company's income or loss of equity in MCII for the year ended June 30, 2001.
ANC is attempting to determine how it will recover its investment in MCII.
RESULTS OF OPERATIONS
Fiscal Year End June 30, 2001, Compared to Fiscal Year End June 30, 2000.
Revenues for Fiscal 2001 decreased to $7,967,108 from $22,783,749 during
Fiscal 2000. The decrease in revenue is primarily the result of decreases in
revenues from the Company's basic 1 Plus 800, and 888 long distance service, and
a decrease in international long distance calling. The Company has also
experienced a decrease in its market share in large call volume areas. The
decrease in volume is a result of the decision of management to make changes in
the strategic direction of the Company as outlined above.
Selling expenses for Fiscal 2001 decreased to $150,529 from $872,525 during
Fiscal 2000. The decrease was primarily the result of a decrease in marketing
efforts. ANC has dedicated its marketing budget to an equity investment
strategy.
General and administrative expenses for Fiscal 2001 decreased to $1,572,543
from $1,622,225 during Fiscal 2000. The decrease was due to the Company's
decision to decrease its customer service staff.
Interest expense for Fiscal 2001 decreased to $191,665 from $619,719 for
Fiscal 2000. The decrease in interest expense was a result of margin interest
from First Research Investment for the holding and purchase of corporate stock
equities on margin. These loans had been paid in full at June 30, 2000. The
decrease is also a result of pay down of the Company's factoring facility,
thereby decreasing the interest expense from the cost of sale to be included in
the separately stated interest expense.
Proceeds from sales of equity securities were $194,000 and $2,232,888 and
gross realized (losses) gains were ($16,468) from the sale of AMEP, $1,670,979
from the sale of DNTK and SONM for the year ended June 30, 2001.
-13-
The Company reclassified, under the equity method, its investment in Morgan
Cooper, Inc. at a cost of $1,727,027 previously classified as an available for
sale security. Subsequent to June 30, 2001, the market value of investment
securities held at June 30, 2001, had decreased by approximately $1,404,000.
Net loss for Fiscal 2001 was ($1,176,227) or ($.08) per basic share,
compared to a net profit of $2,840,906, or $.18 per basic share for Fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its working capital requirements primarily from cash
provided by operating activities. The Company has been able to sustain its
operations from cash generated from operations and cash generated from
investments in corporate securities. Cash provided by operating activities
increased for Fiscal 2001 to $2,906,516 compared to $2,751,631 for Fiscal 2000.
The Company's source of revenue is generated from its sale of long distance
services to the Company's customers. Additional sources of revenue are
generated from the Company's investment in corporate securities. The increase
in operating activities is primarily due to market change in corporate
securities held by the Company and its income tax accounting.
Cash flows used for investing activities were $1,945,552 for Fiscal 2001
compared to $1,074,867 for Fiscal 2000. The Company continues to invest in
available-for-sale corporate securities.
Cash flows used for financing activities was $2,146,150 in Fiscal 2001,
compared to cash flows provided for financing activities of $989,613 for Fiscal
2000. The Company had cash outflow of $2,146,150 for the payment of debt, which
resulted from the paying down of a factoring arrangement that now has a balance
of $237,000.
As the Company makes investments is other entities, it may determine that
additional investments are necessary to fund these entities to assist in them
achieving profitability. The Company will make these investment decisions on a
case-by-case basis.
Other Considerations
There are numerous factors that affect our business and the results of its
operations. Sources of these factors include general economic and business
conditions, federal and state regulation of our business activities, the level
of demand for our services, the level and intensity of competition in the
telecommunications industry and the pricing pressures that may result, our
ability to develop new services based on new or evolving technology and the
market's acceptance of those new services, our ability to timely and effectively
manage periodic product transitions, the services, customer and geographic sales
mix of any particular period, and our ability to continue to improve our
infrastructure (including personnel and systems) to keep pace with the growth in
its overall business activities.
Factors that may affect our business is the regulations by Securities Exchange
Commissions related to the possibility that we could be treated as an investment
company. The Securities Exchange Commission regulation states that if our
available-for-sale investments fair market value exceeds our operating assets we
-14-
could be classified as an investment company. However, the Securities Exchange
Commissions has been requested by various companies to reconsidering this
regulation.
FACTORS, WHICH MAY AFFECT FUTURE OPERATING RESULTS
Set forth below and elsewhere in this Annual Report and in the other
documents ANC files with SEC, including the most recent Form 10-QSB, are risks
and uncertainties that could cause actual results to differ materially from the
results contemplated by the forward-looking statements contained in the Annual
Report.
CARRYING VALUE OF FINANCIAL INSTRUMENTS
The carrying values of financial instruments include cash and cash
equivalents, accounts receivable, accounts payable and notes payable,
approximate fair value because of the short maturity of these instruments. The
carrying value of long-term debt approximates its fair value, as estimated by
using discounted future cash flows based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements.
FLUCTUATIONS IN FAIR VALUES
ANC maintains investment portfolio holdings of various issuers, types, and
maturities. These securities are generally classified as available for sale,
and consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a separate component of accumulated other
comprehensive income, net of tax. Part of this portfolio includes equity
investments in several publicly traded companies, the values of which are
subject to market price volatility. These investments are inherently risky
because they are relatively small, unseasoned companies and the market for the
technologies or products they have under development are typically in the early
stages of development and may not materialize as anticipated. ANC could lose its
entire investment in these companies. Several of the companies in which ANC has
invested have experienced severe operating difficulties. Morgan Cooper, Inc.
("MCII") is presently conducting no operations and it is uncertain whether the
company will be able to return to operational status or to make a profit. The
management of MedCom has resigned and ANC's Chief Executive Officer has assumed
managerial responsibilities for MedCom. Medcom is presently increasing their
operations of the Med-card product and increasing sales with the new management
and the divesting of subsidiaries that were not operating efficiently.
NO INTENT TO BECOME AN INVESTMENT COMPANY
ANC intends to conduct its business so as to not become a regulated
investment company under the Investment Company Act of 1940 (the "1940 Act").
Accordingly, ANC does not expect to be subject to the provisions of the 1940
Act, including those that prohibit certain transactions among affiliated
parties. The 1940 Act exempts issuers primarily engaged, directly or indirectly,
through a wholly-owned subsidiary or subsidiaries, in a business other than that
of investing, reinvesting, owning or holding or trading in securities. The
United States Securities and Exchange Commission ("SEC") may also, upon
-15-
application by an issuer, find by order that the issuer is primarily engaged in
the business or businesses other than investing, reinvesting, owning or holding
or trading in securities.
The Company's investments in securities are currently 56% of its total
assets, exclusive of government securities and cash items (on an unconsolidated
basis). The Company intends to seek and develop other lines of business, which
would prevent us from becoming subject to the 1940 Act and will, if necessary,
make application to the SEC for an order of exemption. If for any reason the
Company was to become an investment company which is non-exempt from the 1940
Act (for example, due to a change in its assets or a change in the value of
particular assets), it would either have to restructure its assets so as not to
become subject to the 1940 Act or would have to change the way in which the
Company conducts its activities. Either of these changes could require the
Company to sell substantial portions of its assets at a time when it may not
wish to do so, and could incur significant losses as a result. Further, to avoid
becoming subject to the requirements of the 1940 Act, the Company may be
required to forego investments, which it would like to make, or otherwise act in
a manner other than which management believes would maximize its earnings. These
securities are held for investment purposes and the Company sold only its
investment in AEP, because of a cash buyout by a third party, for the quarter
ended June 30, 2001.
UNCERTAINTIES ASSOCIATED WITH SELLING ASSETS
An element of ANC's business plan may be to sell publicly or privately held
stock in companies in which ANC has invested. ANC's ability to engage in such
transactions, the timing of such transactions and the amount of proceeds from
such transactions, are dependent on market and other conditions largely beyond
ANC's control. Accordingly, there is no assurance that ANC will be able to
realize a profit from its investment in any of these companies. These companies
may experience thin trading volumes; there is no assurance that ANC could easily
dispose of all of its investments in any of these companies in a single
transaction and ANC could be required to discount its shares in order to effect
a sale. In certain instances, ANC would be required to register its shares with
the SEC in order to sell them or to effect sales pursuant to the exemption from
registration provided by Rule 144, which would limit the amount of shares ANC
could sell in any three month period to 1% of the total shares issued and
outstanding or the average volume of the company's stock over the past few
weeks. If ANC were unable to liquidate portions of its portfolio companies at a
profit, ANC's business, financial condition and results of operations could be
adversely affected.
The following table presents the hypothetical change in fair values of
public equity investments held by ANC that are sensitive to changes in the stock
market. These equity securities are held for purposes other than trading. The
modeling technique used measures the hypothetical change in fair values arising
from selected hypothetical changes in each stock's price. Stock price
fluctuations of plus or minus 15%, plus or minus 35%, and plus or minus 50% were
selected based on the probability of their occurrence.
This table estimates the fair values of the publicly traded corporate
equities at a 12-month time horizon: (in millions)
-16-
Valuation of security Fair value Valuation of security
Given X% decrease in each as of given X% increase in each
Stock price's June 30, 2001 stock's price
(50%) (35%) (15%) 15% 35% 50%
Corporate Equities $1.61 $2.09 $2.74 $3.221 $3.70 $4.35 $4.83
*Corporate Equities in comparison to ANC's shares outstanding.
$3,221,470/ 15,237,643 shares outstanding as of June 30, 2001.
$.21 corporate equities to ANC's shares outstanding
INVESTMENTS ACCOUNTED FOR UNDER THE EQUITY METHOD:
The Company has acquired additional holdings in certain investee companies that
increase its holdings to point where the Company now accounts for those
investments under the equity method of accounting. Under the equity method, the
Company will recognize its proportionate amount of the net income or loss of
those entities. The investments in companies for which the Company accounts for
under the equity method have not yet realized operating profits and there can be
no assurances that profitability will be achieved in these operations.
ANC EXPECTS GROSS MARGINS TO DECLINE OVER TIME
The Company expects that its gross margins will be adversely affected and
ANC has determined that profit margins from the long distance service offerings
that it has provided in the past have fluctuated and are narrowing. The long
distance market as a whole has experienced a decrease in profit margins due to
increased competition and competitive price offerings. A geographic mix, as
well as the mix of configurations within telecommunications offerings, may also
impact the gross margins. ANC is refocusing its business endeavors. ANC has
decreased its marketing efforts in long distance service business and has
dedicated that portion of its operating budget to the investment in other
companies, one or more of which ANC hopes to provide operating profits to
supplement and eventually replace its declining long distance service revenues.
While long distance margins are decreasing, ANC continues to look for profitable
telecommunications opportunities; however there are no assurances that ANC will
be successful in any of these efforts. Presently ANC has no acquisition targets
in progress.
ANC DEPENDENCE ON KEY PERSONNEL
ANC's performance is substantially dependent on the performance of its
executive officers and other key employees and its ability to attract, train,
retain and motivate high quality personnel, especially highly qualified
technical and managerial personnel. The loss of services of any of the
Company's executive officers or key employees could have a materially adverse
effect on its business, results of operations or financial condition.
Competition for talented personnel is intense, and there can be no assurance
that ANC will be able to continue to attract, train, retain or motivate other
highly qualified technical and managerial personnel in the future.
-17-
ITEM 7. FINANCIAL STATEMENTS
AMERICAN NORTEL COMMUNICATIONS, INC.
FINANCIAL STATEMENTS AS OF
JUNE 30, 2001
AND INDEPENDENT AUDITORS' REPORT
AMERICAN NORTEL COMMUNICATIONS, INC.
TABLE OF CONTENTS
--------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 19
FINANCIAL STATEMENTS
Balance Sheet at June 30, 2001 20
Statement of Operations for the year ended June 30, 2001 21
Statement of Comprehensive Income for the year ended
June 30, 2001 22
Statement of Stockholders' Equity for the year ended
June 30, 2001 23
Statement of Cash Flows for the year ended June 30, 2001 24-25
NOTES TO FINANCIAL STATEMENTS 26
-18-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
American Nortel Communications, Inc.
Scottsdale, Arizona:
We have audited the accompanying balance sheet of American Nortel
Communications, Inc. (the "Company"), as of June 30, 2001 and the related
statements of operations, comprehensive income, stockholders' equity and cash
flows for each of the two years in the period ended June 30, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Nortel Communications,
Inc. as of June 30, 2001 and the results of its operations and cash flows for
each of the two years in the period ended June 30, 2001 in conformity with
generally accepted accounting principles.
/s/ WEBER & COMPANY, P.C.
Scottsdale, Arizona
September 12, 2001
-19-
AMERICAN NORTEL COMMUNICATIONS, INC.
BALANCE SHEET
JUNE 30, 2001
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 219,816
Accounts receivable (net of $148,080 allowance) 2,153,652
Investments in marketable securities 3,221,470
Deferred income taxes 295,229
-------------
Total current assets 5,890,167
PROPERTY AND EQUIPMENT, net 23,592
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY 165,282
NOTES RECEIVABLE 32,982
OTHER ASSETS 6,667
-------------
TOTAL ASSETS $ 6,118,690
=============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 280,644
Accrued liabilities 210,729
Disputed claims 339,101
Accrued interest 48,438
Note payable 50,000
Factoring arrangement 237,806
Income taxes payable 396,431
-------------
Total current liabilities 1,563,149
-------------
STOCKHOLDERS' EQUITY:
Common stock, no par value, 50,000,000 shares authorized,
15,510,643 shares issued and 15,273,785 shares outstanding 21,980,202
Paid in capital 51,795
Accumulated deficit (16,731,884)
Treasury stock, 236,858 shares at cost (759,773)
Unrealized gain on investments held for sale 15,201
-------------
Total stockholders' equity 4,555,541
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,118,690
=============
The accompanying notes are an integral part of these consolidated financial
statements.
-20-
AMERICAN NORTEL COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
-----------------------------------------------------------------------------------------
2001 2000
NET SALES $7,967,108 $22,923,118
------------ ------------
COST OF SALES
Cost of sales 6,663,429 16,751,371
------------ ------------
Gross profit 1,303,679 6,171,747
------------ ------------
OPERATING EXPENSES
General and administrative expenses 1,572,543 1,622,225
Sales and marketing expenses 150,529 872,525
Depreciation and amortization 17,596 14,400
------------ ------------
Total operating expenses 1,740,668 2,509,150
------------ ------------
OPERATING (LOSS) INCOME (436,989) 3,662,597
------------ ------------
OTHER (INCOME) AND EXPENSES
Interest income (68,363) (88,675)
Interest expense and factoring charges 191,665 619,719
Other (income) expense (171,781) 2,910
Write-down for impairment of investments 1,561,767 -
Realized losses (gains) on sales of marketable securities 16,468 (1,670,979)
------------ ------------
Total other expenses 1,529,756 (1,137,025)
------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (1,966,745) 4,799,622
------------ ------------
INCOME TAX (BENEFIT) PROVISION (790,518) 1,958,716
------------ ------------
NET (LOSS) INCOME $(1,176,227) $ 2,840,906
============ ============
NET (LOSS) INCOME PER COMMON SHARE
Basic $ (0.08) $ 0.18
============ ============
Diluted $ (0.08) $ 0.18
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 15,273,785 15,412,114
============ ============
Diluted 15,273,785 15,673,875
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
-21-
AMERICAN NORTEL COMMUNICATIONS, INC.
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED JUNE 30,
-----------------------------------------------------------------------------------------
2001 2000
NET (LOSS) INCOME $(1,176,227) $2,840,906
OTHER COMPREHENSIVE INCOME
Unrealized (loss) gain from available-for-sale investments
(net of income taxes of ($1,954,861) and $1,964,996) (2,988,334) 2,947,494
------------ ----------
Total Other Comprehensive (Loss) Income (2,988,334) 2,947,494
------------ ----------
COMPREHENSIVE (LOSS) INCOME $(4,164,561) $5,788,400
============ ==========
The accompanying notes are an integral part of these consolidated financial
statements.
-22-
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------------- PAID-IN ACCUMULATED -------------------- UNREALIZED
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT GAINS TOTAL
----------- ------------ -------- ------------- -------- ---------- ------------ ------------
BALANCE JULY 1, 1999 15,163,785 $21,912,402 $ 50,595 $(18,396,563) 66,858 $(117,000) $ 56,041 $ 3,505,475
Stock issued for cash,
exercised warrants 40,000 42,000 42,000
Stock issued for
compensation previously
accrued 300,000 27,000 27,000
Stock received as payment
on note (170,000) 170,000 (642,773) (642,773)
Cancellation of shares
previously issued (60,000) (1,200) 1,200 -
Unrealized gain from
investments available-
for-sale 2,947,494 2,947,494
Net income 2,840,906 2,840,906
----------- ------------ -------- ------------- -------- ---------- ------------ ------------
BALANCE JUNE 30, 2000 15,273,785 21,980,202 51,795 (15,555,657) 236,858 (759,773) 3,003,535 8,720,102
Unrealized gain from
investments available-
for-sale (2,988,334) (2,988,334)
Net loss (1,176,227) (1,176,227)
----------- ------------ -------- ------------- -------- ---------- ------------ ------------
BALANCE JUNE 30, 2001 15,273,785 $21,980,202 $ 51,795 $(16,731,884) $236,858 $(759,773) $ 15,201 $ 4,555,541
=========== ============ ======== ============= ======== ========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
-23-
AMERICAN NORTEL COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
---------------------------------------------------------------------------
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(1,176,227) $ 2,840,906
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 17,593 14,400
Deferred income taxes (134,133) 988,769
Realized loss (gain) on sale of marketable securities 16,711 (1,670,979)
Impairment write-down on investments 1,561,737
Other non-cash expense (income) 27,527 (3,500)
Changes in assets and liabilities:
Accounts receivable 3,581,176 11,095
Prepaid expenses 143,129 270,513
Accounts payable (480,964) (719,529)
Accrued liabilities 61,071 85,209
Accrued interest (4,500) 12,938
Disputed claims (23,088) (48,138)
Income tax payable (683,516) 969,947
------------ ------------
Net cash provided by operating activities 2,906,516 2,751,631
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (2,155,344) (2,960,429)
Proceeds from sale of marketable securities 194,000 2,232,888
Advances on note receivable from officer - (408,383)
Repayments on note receivable from officer - 142,000
Advances on notes receivable (30,000) (80,509)
Payments received on notes receivable 50,000
Purchase of property and equipment (4,208) (434)
------------ ------------
Net cash used in investing activities (1,945,552) (1,074,867)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable - 500,000
Payments on notes payable - (1,110,500)
Proceeds from issuance of common stock - 42,000
Repayments to factor (2,146,150) (421,113)
------------ ------------
Net cash used in financing activities (2,146,150) (989,613)
------------ ------------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS (1,185,186) 687,151
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,405,002 717,851
------------ ------------
CASH AND EQUIVALENTS, END OF PERIOD $ 219,816 $ 1,405,002
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
-24-
AMERICAN NORTEL COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS, (CONTINUED)
FOR THE YEAR ENDED JUNE 30,
---------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 231,159 $ 606,781
============ ==========
Income taxes paid $ 30,000 $ - 0 -
============ ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized (loss) gain from investments available-for-sale $(4,943,195) $4,912,490
============ ==========
Cancellation of common stock previously issued $ - 0 - $ 1,200
============ ==========
Treasury stock acquired from officer in exchange
for note receivable $ - 0 - $ 642,773
============ ==========
The accompanying notes are an integral part of these consolidated financial
statements.
-25-
AMERICAN NORTEL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2001 AND 2000
------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
American Nortel Communications, Inc. (the "Company") operates in the
telecommunications business, providing long distance telephone service as a
reseller of 1-Plus and 1-800 long distance telecommunication services to
small business and residential customers in all areas of the United States.
The Company targets markets that have a high volume of calls and
international calls. The Company purchases or leases long distance time
from other carriers and resells that time to its customers. Local Exchange
Carriers ("LECs") that provide local area telephone service to the
Company's long distance customers are utilized for billing and collections.
The Company has reduced its marketing efforts within its product line. The
Company intends to continue operating its long distance telephone services,
it has also begun to develop another business segment. The Company has
begun to provide investment-banking services. This business line may entail
making additional investments, business acquisitions and providing
management services to investee businesses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents include all short-term highly liquid investments
--------------------------
that are readily convertible to known amounts of cash and have original
maturities of three months or less. At times cash deposits may exceed
government insured limits. At June 30, 2001, cash deposits exceeded those
insured limits by $82,754.
Investments in marketable securities consist of corporate equity securities
------------------------------------
which are stated at market value. The Company currently classifies all
investment securities as available-for -sale. Unrealized gains and losses
on such securities, net of the related income tax effect, are excluded from
earnings and reported as a separate component of stockholders' equity until
realized. Realized gains and losses are included in earnings and are
derived using the specific identification method for determining the cost
of securities sold.
Customer acquisition costs represent the direct response marketing costs
----------------------------
that are incurred through contracted telephone solicitation as the primary
method by which customers subscribe to the Company's services. The Company
capitalizes and amortizes the costs of direct-response advertising on a
straight-line basis over eight months. The amortization lives are based on
customer attrition rates. The unamortized balance is included in prepaid
expenses. As discussed above, the Company has reduced its marketing efforts
in this business segment. There were no unamortized customer acquisition
costs at June 30, 2001. The Company's expense for amortization of customer
acquisition costs was $143,000 for the year ended June 30, 2001. The
Company paid $565,000 for these marketing costs and amortization of the
capitalized costs was $144,000 for the year ended June 30, 2001.
The Company also incurs advertising costs that are not considered
direct-response advertising. These other advertising costs are expensed
when incurred. Advertising expense was $7,400 and $58,537 for the years
ended June 30, 2001 and 2000 respectively.
-26-
Property and equipment are recorded at cost and depreciated on a
------------------------
straight-line basis over the estimated useful lives of the assets ranging
from 3 to 5 years. Depreciation expense was $17,593 and $14,400 for the
years ended June 30, 2001 and 2000 respectively.
Revenue recognition - The Company's revenue is generated by long distance
--------------------
calls made by its customers. Revenue is billed and recognized monthly based
on the number of long distance minutes used. The Company utilizes outside
companies to transmit billing data which is forwarded to LECs that provide
local telephone service. Monthly long distance fees are included on the
telephone bills of the customers. The Company recognizes revenue based on
net billings accepted by the LECs. Net billings result from gross
submittals reduced by billing records rejected by the LEC's and adjusted
for resubmittals. Revenue is reported gross of fees charged by the billing
company and the LEC's. Total fees paid to the billing company and the LEC's
were $1,123,131 and $2,899,888 for the years ended June 30, 2001 and 2000
respectively.
Income taxes - The Company provides for income taxes based on the
-------------
provisions of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, which, among other things, requires that
recognition of deferred income taxes be measured by the provisions of
enacted tax laws in effect at the date of the financial statements.
Financial instruments - Financial instruments consist primarily of cash,
----------------------
accounts receivable, notes receivable and obligations under accounts
payable, accrued expenses, and note payable. The carrying amounts of cash,
accounts receivable, notes receivable, accounts payable, and accrued
expenses approximate fair value because of the short maturity of those
instruments. The Company derives the fair value of its investments in
marketable securities based on quoted market prices. The Company also has
contracts with certain investee companies that provide anti-dilution and
fair value depreciation protection for the Company as well as warrants to
acquire additional shares of such investee companies. The fair value of the
$50,000 note payable could not be estimated because the note is past due
and the Company has had difficulties locating the note holder to settle the
balance.
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 from
those estimates.
Net income per share is calculated using the weighted average number of
-----------------------
shares of common stock outstanding for the year. The Company has adopted
the provisions of SFAS No. 128 Earnings Per Share.
-27-
Stock-Based Compensation - Statements of Financial Accounting Standards No.
------------------------
123, Accounting for Stock-Based Compensation, ("SFAS 123") established
accounting and disclosure requirements using a fair-value based method of
accounting for stock-based employee compensation. In accordance with SFAS
123, the Company has elected to continue accounting for stock based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." The proforma effect of the fair value method is discussed in
Note 12.
Recently Issued Accounting Standards
------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
---------------------------------------------------------------------------
Accounting for Derivative Instruments and Hedging Activities, which is
---------------------------------------------------------------------------
effective for fiscal years beginning after June 15, 2000 (as amended). This
---------------------------------------------------------------------------
statement establishes accounting and reporting standards requiring that
---------------------------------------------------------------------------
derivative instruments be recorded on the balance sheet as either an asset
---------------------------------------------------------------------------
or liability measured at its fair value. The statement also requires that
---------------------------------------------------------------------------
changes in the derivative's fair value be recognized in earnings unless
---------------------------------------------------------------------------
specific hedge accounting criteria are met. The Company has not completed
-------------------------------------------
evaluating the impact of implementing SFAS No. 133. However, it is not
expected to have a significant impact on the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. SAB No. 101 summarizes the staff's views in applying generally
accepted accounting principles to revenue recognition in financial
statements. The Company believes it had previously applied the concepts of
SAB 101 and the adoption of SAB No. 101 did not have a material effect on
the Company's revenues or revenue recognition policy.
3. ACCOUNTS RECEIVABLE
The Company has entered into a customer billing service agreement with
Integretel, Inc. (IGT) on December 9, 1996 and was amended on July 28,
1997, whereby IGT provides billing and collection and related services. The
Company uses an outside company to compile billing information which is
provided directly to IGT for its monthly billings. Billings submitted are
"filtered", or processed by IGT and the LEC's to conform with their formats
for billings and to reject any records that may not have complete data. Net
accepted billings are recognized as revenue and accounts receivable.
Rejected records are then corrected and resubmitted. IGT and the LEC's
charge fees for their services which are netted against the gross accounts
receivable balance. IGT also applies holdbacks for the remittances of
potentially uncollectible accounts. The IGT holdback balance at June 30,
2001 was $867,000. Generally, IGT holdbacks significantly exceed actual
uncollectible account balances. The Company estimates uncollectible account
balances and provides an allowance for such estimates. The Company factors
its accounts receivable with recourse (Note 6).
-28-
4. INVESTMENTS IN MARKETABLE SECURITIES
Investments in marketable securities consisted of the following at June 30,
2001:
Gross Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Equity securities $3,196,133 $1,107,370 $(782,033) $3,521,470
The above reflects values before the effect of income taxes. The Company
has invested in common stock and related warrants of several publicly
traded companies. At June 30, 2001, the Company's investment in marketable
securities is made in five different companies. The investment in one such
company's securities represents approximately 56% and 40% of the estimated
aggregate fair value of all investments in marketable securities at June
30, 2001 and June 30, 2001, respectively.
The Company has an arrangement with one of the investee companies that
provides the Company with a guarantee of $1,000,000 in value should the
stock price fall below a point that reduces the current the value below
such amount. At June 30, 2001, the value of the Company's holdings in that
company was approximately $600,000 determined on the basis of the trading
price of the stock at June 30, 2001. However, on the basis of that
agreement, the Company recorded a value of $1,000,000 for holdings in that
security considering that the entity is required to issue additional shares
to the Company to meet the $1,000,000 guarantee.
Proceeds from sales of equity securities were $194,000 and $2,232,888 and
gross realized (losses) gains were ($16,468) and $1,670,979 for the years
ended June 30, 2001 and June 30, 2001, respectively. The Company
reclassified, under the equity method, its investment in an entity at a
cost of $1,727,027 previously classified as an available for sale security
(Note 12). Subsequent to June 30, 2001, the market value of investment
securities held at June 30, 2001 had decreased by approximately $1,404,000.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2001:
Office furniture $ 4,660
Computer equipment 81,657
Telecommunications equipment 1,650
-------------
Total 87,967
Less accumulated depreciation and amortization (64,375)
-------------
Property and equipment - net $ 23,592
=============
-29-
6. ADVANCES FROM FACTOR
On December 19, 1996, the Company entered into a Master Agreement for
Purchase and Sale of Accounts with IGT which in substance is a factoring
agreement. The terms of the agreement provide for advances at the lesser of
the maximum purchase obligation of $5,000,000 or at a percentage of the
total receivables that is based on historical uncollectible account data.
Interest is charged monthly at a rate equal to the prime rate plus six
percent applied to the average daily balance during the preceding month. An
administrative fee equal to one tenth of one cent for each transaction
record submitted to IGT is also charged monthly. In addition, an annual
facility fee in an amount equal to one percent of the maximum purchase
obligation is due on the anniversary date of the agreement. The advances
and related fees are repaid by customer payments remitted directly to the
factor. The agreement is secured by all accounts receivable whether or not
specifically purchased by the factor. The balance at June 30, 2001
represents funds advanced in excess of customer payments received by factor
and allowance reserve maintained by factor.
7. DISPUTED CLAIMS
The Company is in dispute with certain vendors regarding their performance
in accordance with service agreements. The Company concluded that the
performance of these vendors did not meet the requirements of the
agreements and is withholding payment for these services pending resolution
with these vendors. These liabilities were incurred over a period of
several years. The ultimate resolution of these liabilities could not be
determined at June 30, 2001.
8. NOTE PAYABLE
The Company had issued 9% convertible secured notes due December 31, 1998
with interest payable quarterly, escalating to 18.2% in years 2 through 6.
The notes are convertible into 6,000 shares of the Company's common stock
at $5.00 per share. The Company has attempted but has been unsuccessful in
locating the payee. The Company intends to maintain the liability on its
balance sheet until a claim is made and paid or the statute of limitations
is run. Effective in the fiscal year ended June 30, 2001, the Company
ceased accruing interest payable on this note.
9. INCOME TAXES
The Company recognizes deferred income taxes for the differences between
financial accounting and tax bases of assets and liabilities. Income taxes
for the years ended June 30, consisted of the following:
2001 2000
---- ----
Current tax provision (benefit) $ (656,385) $2,129,947
Deferred tax provision (benefit) (134,133) (171,231)
------------ -----------
Total income tax provision (benefit) $ (790,518) $1,958,716
============ ===========
There was a short-term deferred tax liability at June 30, 2001 of $130,135
related to the unrealized gain on marketable securities. There was a
current deferred tax asset of $305,364 at June 30, 2001. Those balances are
comprised of the following:
Allowance for doubtful accounts $ 59,232
Accrued compensation 246,132
------------
Total assets 305,364
-30-
Unrealized gains on investments (10,135)
------------
$ 295,229
============
The Company utilized the deferred tax asset of $1,160,000 from net
operating loss carryforwards of $3,408,000 in the year ended June30, 2000.
A reconciliation for the differences between the effective and statutory
income tax rates is as follows:
2001 2000
---- -----
Federal statutory rates $(670,053) (34)% $1,631,872 34%
State income taxes - net of federal benefit (128,098) (6.5)% 383,970 8%
Other 7,633 0.5 (57,126) (1) %
---------- ------ ----------- -----
Effective rate $(790,518) (40)% $1,958,716 41%
========== ====== =========== =====
10. LEASE
The Company leases its office space under an operating lease expiring in
April 2002. Rent expense was approximately $31,000 for the year ended June
30, 2001. Minimum annual lease payments for the year ended June 30, 2001
are approximately $22,000. The lease contains one 2-year renewal option.
11. NET (LOSS) INCOME PER SHARE
Net income per share is calculated using the weighted average number of
shares of common stock outstanding during the year. The Company has adopted
SFAS No. 128 Earnings Per Share. The following presents the computation of
basic and diluted earnings per share from continuing operations:
2001 2000
---- ----
Per Per
Income Shares Share Income Shares Share
------------ ---------- ------- ---------- ---------- ------
Net (Loss) Income $(1,176,227) $2,840,906
------------ ----------
BASIC EARNINGS PER SHARE:
Income available to Common
Shareholders $(1,176,227) 15,273,785 $(0.08) $2,840,906 15,412,114 $ 0.18
EFFECT OF DILUTIVE SECURITIES
- N/A 261,761 $ *
------------ ---------- ------- ---------- ---------- ------
DILUTED EARNINGS PER SHARE $(1,176,227) 15,273,785 $(0.08) $2,840,906 15,673,875 $ 0.18
============ ========== ======= ========== ========== ======
* - less than $0.01 per share
The computation for the loss per share for the year ended June 30,
2001excludes employee stock options exercisable into 1,268,534 shares of
the Company's common stock. These common stock equivalents are excluded
because inclusion would be anti-dilutive
-31-
The effect of dilutive securities for the year ended June 30, 2001,
includes stock options assumed exercised for which the market value exceeds
the exercise price, less shares which would have been purchased by the
Company with the related proceeds. The effect of dilutive securities in the
year ended June 30, 2001 is less than $0.01 per share.
12. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
During the year ended June 30, 2001, the Company acquired an interest of
approximately 40% of an entity that had been classified as an available for
sale security. Because of the increased ownership, the Company reclassified
its investment in this entity under the equity method of accounting in
accordance with Accounting Principles Board Opinion No. 18.
The investee, Morgan Cooper, Inc. reached an agreement with the Company
whereby the Company acquired an additional interest and the Company's
president would assume the same position with Morgan Cooper. Morgan Cooper,
Inc. had ceased its existing operations prior to that time. The Company
intends to assist in recapitalizing Morgan Cooper and is attempting to
locate prospective merger candidates for Morgan Cooper.
The Company had invested $1,727,000 in Morgan Cooper. Because of the
uncertainties relative to the prospects of Morgan Cooper and the
significant decline in the market value of its stock, the Company believed
the carrying value was impaired and recognized an impairment write-down of
$1,561,767 in the year ended June 30, 2001.
There were no material operations of Morgan Cooper subsequent to the
acquisition of the additional interest and therefore no recognition of the
Company's income or loss of equity investee for the year ended June 30,
2001.
13. STOCKHOLDERS' EQUITY
During the year ended June 30, 2001, warrants were exercised for 40,000
shares of common stock in the amount of $42,000.
In the year ended June 30, 2001, the Company issued 300,000 shares of
common stock at $0.09 per share to an officer who is the spouse of the CEO
and majority shareholder as payment for services rendered in a previous
year.
The Company cancelled 60,000 shares of common stock previously issued and
valued at $1,200 during the year ended June 30, 2001. The shares were
originally issued for future legal services and those services were never
received.
Stock Options and Warrants
The Company issues stock options from time to time to executives and key
employees. The Company has a qualified stock option plan for its key
employees, consultants and independent contractors. The Company has adopted
the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," and continues
to account for stock based compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". Accordingly, no compensation cost has been
recognized for the stock options granted. There were no options granted in
the year ended June 30, 2001 nor were any of the previously granted options
-32-
vested. Therefore, there is no pro forma effect for the year ended June 30,
2001. There were 1,268,534 options granted in the year ended June 30, 2001.
2000
----
Net income - as reported $ 2,840,906
Net income - pro forma $ 2,587,199
Income per share - as reported $ 0.18
Income per share - pro forma $ 0.17
Under the provisions of SFAS No. 123, the number of proportionately vested
options granted of 338,276 for the year ended June 30, 2001, were used to
determine net earnings and earnings per share under a pro forma basis.
There were 1,268,534 options granted in the year ended June 30, 2001.
During the year ended June 30, 200, the Company adopted a stock option plan
for key employees and outside directors. Options are to be granted at the
discretion of a non-employee committee of the board of directors. The plan
reserves 1,750,000 shares for the granting of options.
All of the options granted in the year ended June 30, 2001 were subject to
vesting provisions on the basis of annual increasing pre-tax income. The
vesting provisions were not met in the year ended June 30, 2001 and
therefore no additional vesting occurred in the year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for
year ended June 30, 2001:
Dividend yield None
Volatility 1.074
Risk free interest rate 6.00%
Expected asset life 5 years
A summary of activity for the Company's stock options and warrants is
presented below:
2001 2000
---- ----
Exercise Exercise
Options Price OPTIONS Price
--------- --------- ---------
Options outstanding at July 1, 1,268,543 $ 1.00 0
Granted 0 1,268,534 $ 1.00
Exercised 0 0
Terminated/Expired 0 0
--------- ---------
Options outstanding at June 30, 1,268,543 $ 1.00 1,268,534 $ 1.00
Options available for grant at June 30, 481,466 481,466
Price per share of options outstanding $ 1.00 $ 1.00
Options exercisable at June 30, 338,276 338,276
Weighted average remaining
contractual lives 9 years 10 years
-33-
Weighted average exercise price
of options granted N/A $ 1.00
Weighted Average fair value of
options granted during the year N/A $ 0.75
The Company has the following common stock warrants outstanding at June 30,
2001:
Warrants Price EXPIRATION
-------- ------
Warrants outstanding at July 1, 2000 10,000 $ 1.05 November 2001
Expired 0
Exercised 0
--------
Warrants outstanding at June 30, 2001 10,000 $ 1.05 November 2001
========
-34-
14. RELATED PARTY TRANSACTIONS
The Company purchased marketable securities from the Company's President
and Secretary in the year ended June 30, 2001. The Company advanced funds
of $235,000 to the President during the year under a note receivable and
recognized interest income on the note of approximately $12,000. The
Company and its president agreed to exchange 600,000 shares of marketable
securities held personally by the President as payment for the note
receivable. The value of the transaction was $0.48 per share, the trading
value of the securities at the time of the agreement.
The Company advanced funds during the year June 30, 2001 to two entities
for which the Company's President and Secretary are the sole shareholders.
One of these entities is the majority shareholder of the Company. The
Company reacquired 170,000 shares of its common stock in exchange for the
balance of the advances made and note receivable of approximately $642,000
or at $3.78 per share. The number of shares was determined on the basis of
the trading price of the Company's common stock at the date of transaction.
The shares are recorded as treasury stock at June 30, 2001. The note bore
interest at 8%.
The Company paid $10,000 and $30,000 in consulting fees to the spouse of
beneficial majority shareholder during the years ended June 30, 2001 and
2000 respectively.
During the year ended June 30, 2001, the Company sold certain investments
made by the Company represented by 428,571 shares of common stock of an
investee to the Company's President for $60,000 equaling the Company's cost
and market value at the date of the transaction.
15. CONCENTRATION OF CREDIT RISK
The Company maintains approximately 40% of its investments in marketable
securities with three brokerage firms. Accounts at each firm are insured up
to $500,000 by the Security Investor Protection Corporation (SIPC). At June
30, 2001 investment values exceeded the insured limit by $390,000.
Approximately 88% of the fair value of marketable securities is comprised
of securities of two entities.
All of the Company's accounts receivable balance is held and collectible
through a single entity that provides the billing and collection services
for the Company. The Company relies on reports from this billing company to
reconcile billing and collection records. The Company receives its cash
receipts from the billing company and relies on the amounts reported and
received from the billing company. The Company may dispute amounts received
and withheld by the billing company but such events may have a negative
effect on liquidity.
-35-
16. COMMITMENTS AND CONTINGENCIES
On June 1, 2000 the Company entered into a new three-year employment
agreement with its President and Chief Executive Officer. The agreement
provides for a base salary and certain benefits plus an annual bonus up to
$200,000. The bonus is to be paid in cash in increments of $10,000 for each
one percent increase in the pre-tax profits of the Company measured in
relation to the prior fiscal year's pre-tax profit beginning with the year
ended June 30, 2001. Pre-tax profit shall include unrealized gains and
losses but shall exclude any extraordinary items. If the increase in
pre-tax profits for any fiscal year exceeds twenty percent, the excess
dollar amount of pre-tax profits shall be carried forward to the following
year or years. In addition, the agreement provides for an annual retirement
benefit, in the form of a nonqualified Supplemental Executive Retirement
Plan ("SERP"), equal to three percent of the President's final average
compensation multiplied by his total years of service with the company.
This benefit shall commence at age 65 and shall be payable for 20 years.
The President also received options to acquire 1,268,534 shares of common
stock under the agreement. The agreement also contains termination
provisions and a one-year non-competition clause and may be extended for
additional one-year terms.
Compensation expense related the SERP was $293,000 and $261,000 during the
years ended June 30, 2001 and 2000 respectively. The amount funded for this
plan during the years ended June 30, 2001 and 2000 was $298,000 and
$268,000 respectively and there was no accrued benefit at June 30, 2001.
The Company is involved in several legal proceedings incident to the
ordinary course of business. Management believes that the probable
resolution of such contingencies will not materially affect the financial
position, results of operations or cash flows of the Company.
17. OTHER INCOME
During the year ended June 30, 2001, the Company settled approximately
$220,000 in billing disputes with its supplier of air time. These billings
were recognized as expenses in prior years.
18. SUBSEQUENT EVENTS
Subsequent to June 30, 2001, the Company acquired a substantial additional
interest of an entity for which the investment is classified as an
available for sale security at June 30, 2001. The Company's management also
took control of the investee's management. The Company intends to assist in
fund raising and the management of the investee's operations. Management
control is anticipated to be temporary. The Company invested in or advanced
to this investee an additional $300,000 during the period from July 1, 2001
through September 12, 2001
* * * * * *
-36-
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
The Company reports that it has retained as its certifying public accountants
the firm of King, Weber & Associates, P.C., which has changed its name to Weber
and Company, P.C. for the fiscal year ending engagements was June 30, 2000 and
2001.
All decisions to engage and/or terminate the relationships between ANC and its
certifying public accountants are made by the Chief Executive Officer and
President who constitutes the sole member of the Board of Directors. ANC has no
audit committee.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Executive Officers
Mr. William P. Williams is the sole Director and sole executive officer of the
Company. Information representing Mr. Williams, and Eva Williams, who is the
only other officer of the Company, is set forth below:
William P. Williams 48 years old Chairman of the Board, President, Chief
Executive Officer
Eva Williams 47 years old Secretary
William P. Williams and Eva Williams are husband and wife. 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. From 1983 to June of 1995, he was
President and Chairman of the Board of Shelton Financial, Inc. He has a B.A. in
Business and M.B.A. from Baylor University.
Eva Williams has served as the Company's Secretary since July 1995. Eva
Williams is the sole shareholder of Wilcom, Inc., the majority shareholder of
ANC.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT 9.A. DIRECTORS AND
EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS:
The Company is aware that all filings of Form 4 and 5 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 10. EXECUTIVE COMPENSATION
-37-
General. On June 1, 2000 the Company entered into a new three-year employment
agreement with its President and Chief Executive Officer (the "Employment
Agreement"). The Employment Agreement provides for a base salary and certain
benefits plus an annual bonus up to $200,000. The bonus is to be paid in cash
in increments of $10,000 for each one percent increase in the pre-tax profits of
the Company, measured in relation to the prior fiscal year's pre-tax profit
beginning with the year ended June 30, 2001. Pre-tax profit shall include
unrealized gains and losses but shall exclude any extraordinary items. If the
increase in pre-tax profits for any fiscal year exceeds twenty percent, the
excess dollar amount of pre-tax profits shall be carried forward to the
following year or years. In addition, the Employment Agreement provides for an
annual retirement benefit, in the form of a nonqualified Supplemental Executive
Retirement Plan ("SERP"), equal to three percent of the President's final annual
compensation multiplied by his total years of service with the company. This
benefit shall be paid when the President attains age 65 and shall be payable in
equal installments for 20 years. The President also received options to acquire
1,268,534 shares of the Company's common stock under the Employment Agreement
for the fiscal year ended June 30, 2001, and has been granted options to acquire
1,268,534 shares of the Company's common stock for the fiscal year ended June
30, 2000. The Employment Agreement also contains termination provisions and a
one-year non-competition clause and may be extended for additional one-year
terms.
The following table sets forth information concerning the compensation for the
fiscal year ended June 30, 2001, of ANC's President and Chief Executive Officer,
and the only other executive officer of ANC ("Named Executive Officers"):
Stock
Name & Principle Position Year Salary Compensation Options Bonus
William P. Williams Jr. 2001 $434,500 $ -0- 1,268,534(1) 200,000
President & CEO 2000 $434,500 $ -0- 1,268,534(1) 200,000
Eva Williams 2001 $ 30,000 $ -0- -0- -0-
Secretary 2000 $ 30,000 $ -0- -0- -0-
(1) Represents granted options of 1,268,534 at an option price of $1.00 per
share to William P. Williams as part of an employment agreement entered into on
June 1, 2000. The options vest based on the pre-tax profits and vest in
accordance to the employment agreement. The options expire June 7, 2010.
ANC has a stock option plan for key employee and executives. The effective date
of the stock option plan is July 8, 2000. The Company has reserved 1,750,000
shares of its common stock to fund the stock option plan.
See "Certain Relationships and Related Transactions" for details regarding
stock and warrants issued in prior periods.
ITEM 11. 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
-38-
securities, (ii) sole Director and the Executive Officer of ANC and the other
officers of ANC (who are husband and wife), and (iii) the group of two officers
and the sole Director set forth above as a group, as of as of June 30, 2001.
Name # of Common Total # of Voting % of Voting
Shares Owned Securities Owned Securities
--------------------------------------------------------------------------------
William P. Williams 8,016,173(1)(2)(3)(4)(5) 8,016,173 50.94%
And Eva Williams
(1) Includes 6,166,173 common shares owned by Wilcom, Inc. Wilcox, Inc. Is
wholly owned by Eva Williams, wife of William P. Williams, Jr. See "Certain
Relationships and Related Transactions."
(2) Includes 400,000 shares of voting common stock owned of record by Shelton
Financial, Inc. Shelton Financial, Inc. Is wholly owned by Mr. Williams.
(3) Includes 1,050,000 outstanding voting common shares owned by Eva Williams,
wife of Mr. Williams.
(4) The Company granted options of 1,268,534 at an option price of $1.00 per
share to William P. Williams as part of an employment agreement entered into on
June 1, 2000 and granted options of 1,268,534 at an option price of $1.00 per
share to Mr. Williams as a part of this employment agreement for fiscal year
ended June 30, 2001. The options vest based on the pre-tax profits and vest in
accordance to the employment agreement. The options expire June 7, 2010. The
stock options are not exercisable as of the filing of this 10-KSB for the fiscal
year ended June 30, 2001.
(5) Includes 400,000 outstanding voting common shares owned by William P.
Williams purchased from the Continental Soccer League in Anaheim California.
ITEM 12. 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. In his capacity as the Company's sole
director, authorized all of the transactions set forth below on behalf of ANC.
Wilcox, Inc. ("Wilcox") owns a majority of ANC's issued and outstanding voting
shares.
See "Executive Compensation and Security Ownership of Owners and Management,"
above, for details regarding stock option plans, stock options granted and
employment agreements for William P. Williams.
On July 9, 1998, the Company's Board of Directors approved the issuance of
1,000,000 shares, valued at $.09 per share, which was the average bid and ask
price as of July 9, 1998 to Wilcom for management services rendered under a
Management Services and Consulting Agreement during Fiscal 1999.
-39-
On January 9, 1999, the Company's Board of Directors approved the issuance of
300,000 shares, valued at $.09 per share, which was the average bid and ask
price as of January 9, 1999, to Eva Williams for management services rendered as
Secretary of ANC during Fiscal 1999.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as a part of this Annual Report:
(a) Exhibits
Exhibit No. Documents
3.1 Articles of Incorporation (Incorporated by reference for the Registrant's
annual report on Form 10-KSB for the Fiscal
Year ended June 30, 1995.)
3.2 By-Laws of the Company (Incorporated by reference for the Registrant's
annual report on Form 10-KSB for the Fiscal
Year ended June 30, 1995.)
10 Integrated Corporation (Incorporated by reference for the Registrant's
annual report on Form 10-KSB for the Fiscal
Year ended June 30, 1998.)
11.1 Earnings Per Share (Incorporated in the current filing from note 11
of the Notes to Financial Statements for June 30,
2001 included in Item 7 hereof.)
21 Subsidiaries: NONE
(b) Reports on Form 8-K none SIGNATURES
----------------------------------------------
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. In accordance with the Exchange Act
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
AMERICAN NORTEL COMMUNICATIONS INC.
By: /S/ W. P. Williams. Date: October 15, 2001
W. P. Williams
Sole Director and Chief Executive Officer
(Sole executive officer of the registrant)
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