AMERIVISION COMMUNICATIONS INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

2001
FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NO. 0-27683

AMERIVISION COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)

OKLAHOMA 73-1378798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

5900 MOSTELLER DRIVE, SUITE 1600 73112
OKLAHOMA CITY, OKLAHOMA (Zip Code)
(Address of principal executive offices)

(405) 600-3500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.10 PAR VALUE
(TITLE OF CLASS)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]

At December 31, 2001, there were 840,352 shares of Common Stock of the
Company.

DOCUMENTS INCORPORATED BY REFERENCE
NONE
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TABLE OF CONTENTS

PART I

Item 1. Business.................................................... 1
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Securities Holders....... 10
PART II
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters......................................... 10
Item 6. Selected Financial Data..................................... 11
Item 7. Amerivision Communications, Inc. Management's Discussion and
Analysis of Financial Condition and Results of Operations... 13
Item 7A. Quantitative and Qualitative Disclosure about Market Risk... 20
Item 8. Financial Statements and Supplementary Data................. 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 20
PART III
Item 10. Directors and Executive officers of the Registrant.......... 20
Item 11. Executive Compensation...................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 25
Item 13. Certain Relationships and Related Transactions.............. 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 26

ITEM 1. BUSINESS

GENERAL

Amerivision Communications, Inc. (the "Company", "Amerivision" or
"Lifeline") is a provider of long distance telephone and other
telecommunications services, primarily to residential users. The Company
acquires customers through affinity-based marketing. Under this type of
marketing program, the Company obtains membership lists from non-profit
organizations that support strong family values. The Company promotes its
services under its LIFELINE(R) service mark the non-profit organizations'
members. The non-profit organizations receive a percentage (currently a minimum
of 10%) of eligible collected revenues generated from their members ("Partner
Sharing"). In some cases the organizations will directly contact their members
to sell the Company's services. In addition the non-profit organizations may
receive a sign up fee for each new customer obtained by that organization. The
Company has experienced substantial success marketing its services to this
family values affinity prospect base largely because its customers, in addition
to receiving essential telecommunications services, are able to indirectly
contribute to causes they strongly support. The Company makes payments to
thousands of non-profit organizations and as of December 31, 2001 had over
400,000 subscribers for its telecommunication services in all 50 states.

The Company utilizes several carriers for its switchless long distance
traffic. Effective February 1, 1999 the Company began operating
telecommunication switching assets located in Oklahoma City and Chicago and
purchased these switches in April 2000 under terms of an asset purchase
agreement with an affiliate. This purchase has allowed the Company to originate
and terminate a portion of its long distance calls.

In addition to long distance and related telecommunication services (e.g.,
calling cards, prepaid cards and toll free service), the Company offers its
customers Internet access, paging and a credit card program under the LifeLine
service mark. These programs are discussed below.

The Company was incorporated in 1991 as an Oklahoma corporation and
maintains its principal executive offices at 5900 Mosteller Drive, Suite 1600,
Oklahoma City, Oklahoma 73112. The Company's telephone number is (405) 600-3500.

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PART I

MAJOR DEVELOPMENTS

Several important developments have occurred with respect to the Company
and its business which include:

Election of New Directors and CEO. In July 2001, the Company's
shareholders elected six new individuals to its board of directors and reelected
one of the three then incumbent board members. The incumbent member subsequently
resigned from the board and was replaced by action of the remaining members.
These new directors bring a wide range of skills and experiences with emphasis
on the mission of the Company. In July 2001, the new board elected one of its
member to serve as the Company's acting Chief Executive Officer and directed
that he take steps to restructure the Company and enhance its internal
management. The Company's new directors and officers are identified in Item
10 -- Directors and Officers

Credit Facility. In February 1999, the Company entered into a line of
credit facility (the "LOC") with a financial institution. In December 2001, the
LOC was amended to provided the Company with up to $28.5 million in financing,
currently limited to approximately $25.8 million due to financial results and
loan formula restrictions. The outstanding balance at December 31, 2001 was
approximately $18.6 million leaving $7.2 million available for future working
capital needs. In connection with the LOC, certain creditors agreed to
subordinate collection rights to those of the LOC lender.

New Supply Agreement with Carriers. In 2001, the Company entered into
supply agreements with several carriers for long distance services. The Company
lowered its transmission service costs as a result of these new agreements and
resolved certain billing disputes and claims between the parties. See Item 1 --
Business -- Suppliers.

Consolidating Locations. In 2001, the Company closed its Dallas location.
This enabled the Company to reduce significant costs and consolidate certain
activities. In 2002, the Company will close its Virginia location and continue
consolidation of redundant expenses.

BUSINESS STRATEGY

The Company's overall strategy is to profitably grow its telecommunications
and other services by further developing the family values affinity marketing
program. Elements of the Company's strategy include:

- Building the Company's Brand: Although the Company is a significant
affinity-based marketing company, the Company believes that it is still
relatively unknown in the national marketplace. The Company believes with
focused efforts in existing territories it can grow its revenues through
more brand recognition.

- Expanding Its Marketing Efforts and Portfolio of Telecommunications
Related Services: Substantially all of the Company's revenues are
currently derived from the provision of long distance telephone service.
The Company believes that it can grow its revenues by increasing the
marketing of its existing services to the membership of organizations
currently endorsing LifeLine services, offering additional bundled
telecommunications services, such as local services, internet access and
wireless services, and adding new participating organizations.

- Providing Cost Competitive Services: The Company continually works to
position its services in a manner which is cost-competitive with similar
services provided by major telecommunications services providers. To
achieve competitive margins on its telecommunications services, the
Company intends to continually review and refine its operations to
achieve operating and cost effectiveness.

- Building a Business-Oriented Product Offering: Historically, the vast
majority of the Company's customers have been residential. The Company
believes that it can expand its customer profile to include small and
medium size businesses and member organizations. The Company is
increasing its marketing efforts to small and medium size businesses by
approaching organizations currently endorsing LifeLine Communications.

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- Providing High Quality Customer Service: The Company has significantly
expanded and improved its customer service with continuous improvements
at its customer service center, which operates 24 hours a day, seven days
a week.

- Marketing Non-Telecommunications Products and Services: In light of the
Company's success in marketing telecommunications services to
family-values affinity groups, the Company believes that there is an
opportunity to market non-telecommunication services to its customer
base. For example, the Company provides a credit card product and is
evaluating additional product opportunities.

INDUSTRY OVERVIEW

LONG DISTANCE

Long distance companies can be categorized in different ways. One
distinction is between facilities-based companies and non-facilities-based
companies, or resellers. Facilities-based companies own transmission facilities,
such as fiber optic cable or digital microwave equipment. Profitability for
facilities-based carriers is dependent not only upon their ability to generate
revenues but also upon their ability to manage complex networking and
transmission costs. Non-facilities-based companies, such as the Company,
contract with facilities-based carriers to provide transmission of their
customers' long distance traffic. Pricing in such contracts is typically either
on a fixed rate lease basis or a call volume basis. Profitability for
non-facilities based carriers is based primarily on their ability to generate
and retain sufficient revenue volume to negotiate attractive pricing with one or
more facilities-based carriers.

A second distinction among long distance companies is that of switch-based
versus switchless carriers. Switched carriers have one or more switches,
computers that direct telecommunications traffic in accordance with programmed
instructions. All of the facilities-based carriers are switched carriers, as are
many non-facilities-based companies. Switchless carriers depend on one or more
facilities-based carriers to provide both transmission capacity and switch
facilities. In addition, switchless resellers enjoy the benefit of offering
their service on a nationwide basis, assuming that their underlying carrier has
a nationwide network. The Company operates and owns switches in two markets,
Oklahoma City and Chicago, but will continue to contract with facilities-based
carriers to provide most of its switching services.

Competition in the long distance industry is based primarily upon pricing,
customer service, network quality and value-added services. The success of a
non-facilities-based carrier such as the Company depends almost entirely upon
the amount of traffic that it can commit to the underlying carriers; the larger
the commitment, the lower the cost of service. Subject to contract restrictions
and customer brand loyalty, resellers like the Company may competitively bid
their traffic among other national long distance carriers to gain improvement in
the cost of service. The non-facilities-based carrier devotes its resources
entirely to marketing, operations and customer service, deferring many of the
costs of network maintenance and management to the underlying carriers.

The relationship between resellers and the major underlying carriers is
predicated primarily upon the pricing strategies of the first-tier companies,
which has resulted historically in higher rates for individuals and small
business customers. Individuals and small business customers do not generate
enough volume to receive reduced rates. The higher rates result from the higher
cost of credit, collection, billing and customer service per revenue dollar
associated with small billing level of long distance customers. By committing to
large volumes of traffic, the reseller is guaranteeing traffic to the underlying
carrier. The underlying carrier is also relieved of the administrative burden of
qualifying and servicing large numbers of relatively small accounts. The
successful reseller efficiently markets the long distance product, processes
orders, verifies credit and provides customer service to these large numbers of
small accounts.

INTERNET ACCESS SERVICES

Internet access and related value-added services ("Internet services")
represent a segment of the telecommunications marketplace. Declining prices in
the personal computer market, continuing improve-

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ments in Internet connectivity, advancements in Internet navigation technology,
and the proliferation of services, applications, information and other content
on the Internet have attracted a growing number of users.

PRODUCTS AND SERVICES

Currently, the Company's revenues are substantially all from long distance
sales, however, as discussed below, other products are entering the sales cycle.

TELECOMMUNICATIONS SERVICES

Long Distance. As of December 31, 2001, the Company provides long distance
service to over 400,000 subscribers, most of whom are residential. In addition,
the Company offers calling cards, prepaid phone cards, and toll-free service.
For these services, the Company offers pricing which is competitive (including
discounted rates for higher volume) with the larger long distance companies. The
Company is continuing to enhance its long distance rates and anticipates
introducing new rate plans in 2002.

The Company's long distance rates are currently:

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(1) Includes discounted intrastate, intra LATA, international, calling card and
toll free rates.

(2) $1.00 additional per month charge if not paid by credit card.

(3) Minimum monthly billing.

Wireless. The Company resells the paging services of the largest provider
of paging service in the United States. Local, regional and national paging
service is offered on an alpha and numeric basis. The Company is also exploring
offering wireless telephone service by reselling the services of a national or
regional wireless provider.

Internet Access. The Company offers Internet access services nationwide on
a dial-up basis. The Company's Internet access service includes an optional
filter so that its subscribers will not, subject to certain limitations inherent
to the filtering technology, be able to access "offensive" materials on the
Internet. The Company anticipates expanding its online capabilities, including
on-line interactive Internet customer service, sales and e-billing.

NON-TELECOMMUNICATIONS SERVICES

In light of the Company's success in marketing telecommunications services
to family-values affinity groups, the Company believes that there is an
opportunity to market non-telecommunication services to its customer base. The
Company has entered into an agreement to issue a branded credit card through a
larger credit card issuer. The Company believes that the pricing and terms
offered to its participating organizations are competitive with major credit
card providers.

MARKETING AND SALES

The Company primarily markets its telecommunications services utilizing its
family values affinity programs. To obtain new customers, the Company uses sales
executives, telemarketing and various promotional efforts including direct mail,
radio, conventional advertising and the Internet.

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Some of the Company's sales executives expend the majority of their efforts
obtaining and maintaining relationships with non-profit organizations which will
endorse LifeLine services. Others seek to expand the number of members of
existing non-profit organizations who endorse LifeLine services as well as sell
additional services.

Once membership lists of non-profit organizations have been obtained, the
Company generally contacts members and solicits their telecommunications
services through direct mail and telemarketing. The Company works with the
organizations in its direct mail efforts, often placing advertising in
newsletters or inserting brochures about the Company in the organizations'
mailings. The Company also uses its telemarketing resources to contact members
of participating organizations. The Company operates a call center in Tahlequah,
Oklahoma. As of December 31, 2001, the call center had an aggregate of over 300
full and part time employees who operate over 200 call stations. The Company
advertises its services through radio programs, which target viewers and
listeners who support the family-values affinity concept, including Christian
radio and television networks. The Company participates in conferences and
conventions sponsored by organizations endorsing LifeLine services. Prior to
those events, the Company will either advertise in materials being sent or send
materials to persons attending the event in order to increase awareness of the
telecommunications services the Company offers. At the actual events, the
Company will set up booths or make presentations regarding its
telecommunications services and have personnel on site to explain the services
and assist in enrolling customers.

The Company has also recently begun capitalizing upon the marketing
opportunities created through the Internet. On some websites of participating
organizations, the Company's services are promoted or a link to the Company's
website is provided. The Company is investigating other ways to expand the
marketing to current and potential customers through the Internet.

Through improved customer service, increased focus on brand awareness,
competitive rate plans and bundled services the Company is striving to improve
its retention rate.

SUPPLIERS

In 2001, the Company executed several new contracts with its long distance
carriers. These contracts resulted in pricing reductions from the prior billing
rates charged to the Company and in the Company's release of prior liability to
the carriers in connection with the settlement of various billing disputes and
claims. The Company also has entered into a contract with a carrier that
transports the Company's call records through the Oklahoma City and Chicago
switches. To obtain favorable forward pricing from the carriers, the Company has
committed to purchase certain minimum volumes of a variety of long distance
services during the term of the contract. The Company believes that all
liabilities have been properly recorded in its financial statements.

COMPETITION

OVERVIEW

The telecommunications services industry is highly competitive, rapidly
evolving and subject to constant technological change. There are numerous
companies offering the services the Company offers, and the Company expects
competition to increase in the future. The Company believes that existing
competitors are likely to continue to expand their service offerings and/or
lower their prices to appeal to existing or potential customers of the Company.
The Company expects that new competitors are likely to enter the communications
market, and some of these new competitors may market communications services
similar to the Company's services. Some of these new competitors may have
financial, personnel and other resources, including brand name recognition,
substantially greater than those of the Company. In particular, the regional
Bell operating companies ("RBOCs") will be strong competitors as they are
allowed to provide long distance services in their in-region markets. It is
expected that the rate of RBOC entry into the long distance market will increase
during 2002. In addition, cable companies intend to use these facilities to
offer local telephony, long distance, Internet, and other services to customers
in competition with incumbent local exchange carriers and other competitive
local exchange carriers ("CLECs").
5

Customer attrition is a problem inherent in the long distance industry. Its
occurrence is primarily due to competitive pricing, enhanced customer service,
and additional service offerings. The Company intends to continually review
competitive pricing. It intends to provide customer service that is superior to
competition. The Company also intends to offer new bundled services in the near
future. The Company believes that through these efforts and the enhancement of
its family based affinity marketing efforts it will be able to improve its
customer attrition.

In addition, the regulatory environment in which the Company operates is
undergoing significant change. As this regulatory environment evolves, changes
may occur which could create greater or unique competitive advantages for all or
some of the Company's current or potential competitors, or could make it easier
for additional parties to provide services similar to those offered by the
Company.

LONG DISTANCE

The Company provides long distance services by reselling the facilities of
other carriers in the United States. The long distance industry is intensely
competitive and significantly influenced by the marketing and pricing decisions
of the larger industry participants such as AT&T, Sprint and WorldCom. Moreover,
the industry has undergone and will continue to undergo significant
consolidation that has created and will continue to create numerous other
entities with substantial resources to compete for long distance business. In
addition, as a result of the Telecommunications Act of 1996 ("Telecommunications
Act"), RBOCs are beginning to enter the long distance market. These larger
competitors have significantly greater name recognition and financial,
technical, network and marketing resources. They may also offer a broader
portfolio of services and have longer standing relationships with customers
targeted by the Company. Many of the Company's competitors enjoy economies of
scale that can result in a lower cost structure for transmission and related
termination costs, and which could cause significant pricing pressures on the
Company. In addition, long distance carriers such as the Company are
experiencing the effects of lowering rates for wireless long distance services,
resulting in increased use of wireless services for calls previously made
through conventional telephone networks.

The Company competes in the long distance market through a family values
affinity marketing approach. This approach intends to enhance customer loyalty
through allowing the customer to designate a non-profit organization to receive
a percentage of certain collected revenues on behalf of that customer ("Partner
Sharing"). However the Company realizes it still must compete on price, customer
service and the ability to provide a variety of communications products and
services. Customers frequently change long distance providers in response to the
offering of lower rates or promotional incentives by competitors. Prices for
long distance calls have declined substantially in recent years. In response,
the Company has substantially cut its rates, which has reduced revenues and
margins. The Company is intending to take necessary actions to maintain and
improve its position with the existing customer base while making strong efforts
to add new customers. The Company intends to introduce new bundled services in
the near future.

INTERNET TELEPHONY

Internet Telephony is the transmission of voice long distance services over
Internet protocols rather than traditional long distance networks. The expansion
of these services has pressured traditional telecommunications companies,
including the Company, to effect rate reductions and to accept the resulting
reductions in revenue and margins. Because of its Internet services
capabilities, the Company intends to continue its research with respect to
Internet Telephony so as to be better able to determine whether it should offer
this alternative service as part of a new bundled package service.

INTERNET SERVICE PROVIDER

The Company provides Internet access on a nationwide basis. The Company's
competitors in this market include ISPs, other telecommunications companies,
cable companies, online service providers and Internet software providers. Many
of these competitors have greater financial, technological and marketing
resources than those available to the Company. Internet services are currently
deemed enhanced services by the FCC

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and therefore are not subject to federal and state common carrier regulations,
including long distance interstate and intra-state access fees. The Company
intends to enhance its existing Internet services as part of the new bundled
package service offering.

TECHNOLOGICAL ADVANCES

In the future, the Company may be subject to intense competition due to the
development of new technologies resulting in an increased supply of transmission
capacity. The telecommunications industry is experiencing a period of rapid and
significant technological evolution marked by the introduction of new product
and service offerings and increasing satellite transmission capacity for
services similar to those to be provided by the Company. The introduction of new
products or emergence of new technologies has caused capacity to greatly exceed
the demand, reducing the pricing of certain services to be provided by the
Company. The Company intends to continue its investment in new and improved
technology. The Company understands that to stay competitive in the delivery of
telecommunications services to customers it will need to make continuing use of
technological advancements as they become commercially feasible.

REGULATION

The terms and conditions under which the Company provides
telecommunications products and services are subject to government regulation.
Federal laws and Federal Communications Commission ("FCC") regulations apply to
interstate telecommunications, while particular state regulatory authorities
have jurisdiction over telecommunications that originate and terminate within
the same state.

DOMESTIC FEDERAL REGULATION

The Company is classified by the FCC as a non-dominant carrier, and
therefore is subject to significantly reduced federal regulation. The FCC
generally does not exercise direct oversight over cost justification and the
level of charges for services of non-dominant carriers, such as the Company,
although it has the statutory power to do so. Non-dominant carriers are required
by statute to offer interstate services under rates, terms, and conditions that
are just, reasonable, and not unduly discriminatory. Long distance carriers were
required to withdraw current tariffs for domestic business services by January
31, 2001 and for domestic mass-market services by July 31, 2001. In March 2000,
the FCC mandated the detariffing of international services, effective as of July
2001. The FCC has the jurisdiction to act upon complaints filed by third parties
or brought on the FCC's own motion against any common carrier, including
non-dominant carriers, for failure to comply with its statutory obligations.
Additionally, the Telecommunications Act grants explicit authority to the FCC to
"forbear" from regulating any telecommunications services provider in response
to a petition and if the agency determines that the public interest will be
served by such inaction.

The FCC imposes only minimal reporting requirements on non-dominant
carriers, although the Company is subject to certain reporting, accounting, and
record keeping obligations. A number of these requirements are imposed, at least
in part, on all carriers, and others are imposed on carriers whose annual
operating revenue exceed $100 million.

Resale carriers, like all other interstate carriers, are also subject to a
variety of miscellaneous regulations that, for instance, govern the
documentation and verifications necessary to change a subscriber's long distance
carrier, limit the use of "800" numbers for pay-per-call services, require
disclosure of certain information if operator assisted services are provided,
and govern interlocking directors and management. Other types of FCC regulation
may impose costs on the Company, such as regulatory fees, universal service
contribution obligations, North American Numbering Plan Administration fees,
Telecommunications Relay Services obligations, number portability obligations,
Communications Assistance for Law Enforcement Act obligations, the Universal
Service Fund surcharge and the Primary Interexchange Carrier Charge.

The Telecommunications Act authorizes the RBOCs to provide inter-Local
Access and Transport Area ("LATA") services within their regions only upon
specific FCC approval. To obtain such approval, an RBOC must demonstrate on a
state-by-state basis that is has satisfied a checklist of interconnection and
other requirements. The Telecommunications Act also provides for certain
safeguards against anticompetitive
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conduct by the RBOCs in the provision of inter-LATA service including a
requirement for a separate subsidiary and certain joint marketing limitations.

The Telecommunications Act prohibits carriers from changing a subscriber's
carrier of telephone exchange or toll services except in conformance with the
FCC's verification rules. In addition to other penalties imposed by the
Telecommunications Act and the FCC's rules, a carrier that violates the FCC's
verification rules and collects charges from the subscriber is liable to the
carrier previously authorized by the subscriber for the amount collected. The
FCC has adopted rules implementing these provisions.

STATE REGULATION

The Company is subject to varying levels of regulation in virtually all
states. The vast majority of the states require the Company to apply for
certification, which entails proof of technical, managerial and financial
ability to provide intrastate telecommunications services, or at least to
register or to be found exempt from regulation, before commencing intrastate
service. A majority of states also require the Company to file and maintain
detailed tariffs listing its rates for intrastate service. Many states also
impose various reporting requirements and/or require prior approval or notice
for various actions including (i) transfers of control of certified carriers;
(ii) corporate reorganizations; (iii) acquisitions of telecommunications
operations; (iv) assignments of carrier assets, including subscriber bases and
(v) carrier securities offerings. Certificates of authority can generally be
conditioned, modified, canceled, terminated, or revoked by state regulatory
authorities for failure to comply with state law and/or the rules, regulations,
and policies of the state regulatory authorities. Fines and other penalties,
including the return of all monies received for intrastate traffic from
residents of a state, may be imposed for such violations. In addition, several
states have verification rules different from the FCC's regarding changing a
subscriber's authorized carrier.

Currently, the Company can provide originating interstate and intrastate
service to customers in all 50 states and the District of Columbia. Of the
states in which the Company provides originating service, some state Public
Utilities Commissions ("PUCs") actively assert regulatory oversight over the
services offered by the Company.

Additionally, the rules for each state vary in regard to the authorization
of long distance versus local service. As a result of the Telecommunications
Act, local competition is now allowed in all states. Generally speaking, as the
rules have been modified, the states have either ordered that all certified long
distance carriers now have the authority to provide local services, or
directives have been given for companies to apply for local authority or revise
existing tariffs to comply with state regulations. In those states, which issued
directives for companies to apply for local authority or revise tariffs, the
Company has complied with such orders.

The Company is also subject to various registration requirements in
connection with the marketing and administration of its credit card business and
with the operation of its call center.

The Company continuously monitors regulatory developments in all states in
which it does business in order to ensure regulatory compliance. The Company
believes that it is in compliance in all material respects with the requirements
of federal and state regulatory authorities and maintains contact regularly with
the various regulatory authorities in each jurisdiction.

PROPRIETARY RIGHTS

The Company has obtained a federally registered service mark for the name
LIFELINE for long distance telecommunications services. With the exception of
the LIFELINE(R) service mark, the Company does not own or use in its operations
any other material intellectual property.

INFORMATION SYSTEMS

To accommodate customer growth and new product offerings, the Company is
upgrading its information technology systems by pursuing a Windows NT
environment with underlying client/server architecture. When fully operational,
this platform will include a data warehouse with front-end tools to address
financial,

8

operational, and sales and marketing research and reporting. The additional
costs of the Information Systems improvements are anticipated to be
approximately $200,000. The Company currently anticipates funding the
Information Systems improvements from operational cash flows or LOC draws, and
completing such undertaking during the third quarter. The Company believes these
improvements will provide employees and customers with adequate Information
Systems.

EMPLOYEES

As of December 31, 2001, the Company had approximately 300 full time
employees and 90 part time and temporary employees. None of the Company's
employees is party to any collective bargaining agreement and the Company has
never experienced a work stoppage. The Company considers its relations with its
employees to be good.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Annual Report on Form 10-K are not
based on historical facts, but are forward-looking and based upon numerous
assumptions made as of the date of this Form 10-K that could later prove to be
inaccurate. When used in this Form 10-K, the words "anticipate", "believe",
"estimate", "expect", "will", "could", "may" and similar expressions, as they
relate to management or the Company, are intended to identify forward-looking
statements. Such statements reflect the current views of management with respect
to future events and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should the underlying assumptions prove incorrect, actual results may vary
materially from those described herein.

ITEM 2. PROPERTIES

The Company's Oklahoma City headquarters, housing its senior executives and
certain of its operations, is located in approximately 37,000 square feet of
commercial office space which is leased from an affiliated company. The Company
also operates a call center (approximately 33,000 square feet) in Tahlequah,
Oklahoma. The Company believes these facilities are adequate for the Company's
intended activities for the foreseeable future. A separate existing Company
office in Virginia has been determined to be unnecessary and will be closed
prior to May 2002.

ITEM 3. LEGAL PROCEEDINGS

INVESTIGATION BY THE SECURITIES AND EXCHANGE COMMISSION

In late 1995, the Company commenced an internal investigation to determine
whether it might have committed securities law violations in connection with the
offer and sale of its restricted securities, and separately whether it should
have previously registered its common stock with the Securities and Exchange Act
of 1934. In July 1996, the Company voluntarily reported its preliminary findings
to the Commission, which then instituted its own investigation.

In July 1998, the Commission issued a cease-and-desist order stating that
(a) the Company, the two former directors/officers, and an affiliated company
had violated Sections 5(a) and 5(c) of the Securities Act of 1933, as amended
("Securities Act"), and Section 12(g) of the Securities Exchange Act of 1934, as
amended ("Exchange Act"), and Rule 12g-1 promulgated under the Exchange Act
("Rule 12g-1"); (b) the Company had violated Section 12(g) of the Exchange Act
and Rule 12g-1; and (c) the two former directors/officers had caused the
violation of Section 12(g) of the Exchange Act and Rule 12g-1. The Commission
ordered the Company, two directors/officers and the affiliated company to cease
and desist from committing or causing any violations and any future violations
of Sections 5(a) and 5(c) of the Securities Act and the Company and the two
directors/officers to cease and desist from committing or causing any violations
or future violations of Section 12(g) of the Exchange Act and Rule 12g-1.

9

LIABILITIES FOR BREACH OF SECURITIES LAW

Substantially all of the Company's sales of Common Stock and certain notes,
other than sales to officers and directors of the Company, failed to comply with
Sections 5(a) and (c) of the Securities Act, registration requirements of
certain states' securities laws and, possibly, Section 10 (b) of the Exchange
Act and Rule 10 b-5 promulgated under the Exchange Act. Such sales may have also
violated similar anti-fraud provisions under state securities laws. The Company
and two former directors/officers, after voluntarily presenting these facts to
the Commission in August 1996, consented in July 1998 to the entry of a cease
and desist order from the Commission concerning violations of the federal
securities laws.

The federal securities laws provide legal causes of action against the
Company by persons buying its securities, including action to rescind the sales,
provided that such actions are initiated prior to the expiration of applicable
statutes of limitations. Since all of the Company's securities sales were made
in or prior to 1996, it appears that the statutes of limitations relating to
such actions have expired.

The Company sold its securities to investors in over forty states. The
statutes of those states typically provide that if such sales violate the
applicable law, a purchaser may obtain a rescission of his purchase, receiving
from the issuer the purchase price paid plus an interest factor, less any
amounts paid to such security holder during the period of his ownership. While
the statutes of limitations for many of these rights appear to have expired,
some may have not. To that extent the Company may have a contingent liability,
the potential amount of which it is unable to estimate with any accuracy, but
which, in any event, should not exceed approximately $1.3 million at December
31, 2001.

Additionally, the Company may have theoretical liability under state
securities laws arising out of the 1996 offer and sale by an affiliate of the
Company of shares of its common voting stock. Because, however, that entity sold
its principal operating assets to the Company in April 2000, in connection
therewith offered its shareholders the right to dissent from such sale and to be
paid the fair value of their shares, and thereafter effected a shareholder
approved corporate liquidation which valued the affiliate's distributable assets
at a figure which exceeded the cost basis of the acquired shares, it appears
unlikely that any current shareholder of the affiliate currently has an
actionable claim against the Company.

If, however, purchasers of securities of either the Company or the
affiliated company are successful in asserting any of the above-described
claims, such activity could have a material adverse effect on the Company's
financial condition.

OTHER PENDING ACTIONS

In March 2001, a Company shareholder filed in an Oklahoma state court a
derivative action on behalf of the Company, alleging breaches of fiduciary duty
against certain then current and past Company directors. Such action was
subsequently assumed by the Company and dismissals were entered with respect to
all defendants other than one past director, Carl Thompson. In February 2002,
the court dismissed the action and the Company did not appeal.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

There is no established public trading market for the shares of Common
Stock. At December 31, 2001, there were 840,352 outstanding shares of Common
Stock owned by approximately 1,200 holders of record.

The Company has not declared any distributions or other cash dividends on
its shares of Common Stock since December 31, 1997. The Company is restricted by
requirements of the Credit Facility to the amount of

10

distributions made to shareholders, among others. The Company anticipates future
distributions, however all will be made in compliance with the requirements of
the Credit Facility.

RECENT SALES OF UNREGISTERED SECURITIES

In February 2001, the Company issued eight promissory notes to individuals
totaling $1.61 million. Such issuance was effected in order to replace a single
then existing note. Concurrently, a payment of $390,000 was made to the note
holders resulting in the $1.61 million outstanding balance for the new notes.
The terms and conditions of the replacement notes are similar to those of the
existing note and all mature February 2002.

ITEM 6. SELECTED FINANCIAL DATA

SELECTED HISTORICAL FINANCIAL AND OPERATING DATA (IN THOUSANDS)

The historical financial data for the years ended December 31, 1997, 1998,
1999, 2000, and 2001 are derived from the audited consolidated financial
statements of the Company. This information is not necessarily indicative of the
company's future performance. The data presented below should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto included elsewhere herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

- ---------------

(1) Dividends were declared through December 31, 1997. See "Dividend Policy."

(2) EBITDA (earnings before interest, taxes, depreciation and amortization)
consists of net sales less cost of telecommunication services and selling,
general and administrative expenses. EBITDA is provided because it is a
measure commonly used by investors to analyze and compare companies on the
basis of operating performance. EBITDA is presented to enhance an
understanding of the Company's operating results and is not intended to
represent cash flows or results of operations in accordance with generally
accepted accounting principles ("GAAP") for the periods indicated. EBITDA is
not a measurement under GAAP and is not necessarily comparable with
similarly titled measures for other companies.

12

ITEM 7. AMERIVISION COMMUNICATIONS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company provides domestic long distance and other telecommunications
services, primarily to residential users. Since its formation in 1991, the
Company's annual long distance telephone volume has grown from approximately
$1.0 million in net sales in 1991 to approximately $80.8 million in net sales in
2001. Substantially all of this growth is attributable to the increase in the
Company's subscriber base. The Company's subscriber base has increased from
approximately 30,000 subscribers at the beginning of 1994 to approximately
400,000 subscribers at December 31, 2001. The Company does not, however, expect
its revenues or subscriber base to continue to grow at this accelerated rate in
the future.

From its inception through December 31, 1998, the Company had incurred
cumulative net operating losses totaling approximately $12.1 million. During the
years ended December 31, 1999, 2000 and 2001, the Company generated net income
of $2.2 million, $0.8 million, and $3.4 million, respectively. The improvements
of net income from operating activities were primarily achieved as a result of
reductions in operating expenses. The Company reduced its accumulated
stockholders' deficiency from approximately $25.8 million at December 31, 1997
to approximately $16.9 million at December 31, 2001. In addition to the net
operating losses, the accumulated deficit has been attributed to the Company's
declaration and payment of quarterly capital distributions to its stockholders
during the period between 1994 and 1997, totaling approximately $15.8 million,
and by redemptions totaling approximately $4.7 million. The Company's current
liabilities exceeded its current assets by approximately $22.3 million, $22.7
million, and $19.6 million at December 31, 1999, 2000 and 2001, respectively.

The Company bills its customers under several different methods. Some
customers receive their long distance bills directly from the Company. The
Company also has billing and collection agreements with several of the RBOCs.
Customers who are billed through the RBOCs receive their long distance phone
bill with their local phone bill from the RBOC. The Company also utilizes one
third party billing and collection service for customer billings through other
LECs or RBOCs with whom the Company does not have a separate billing and
collection agreement.

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

Interest expense includes the cost of financing the Company's accounts
receivable and asset purchases, including loans from its primary financial
institution under an LOC.

The Company has recognized a net deferred tax assets, primarily due to net
operating loss carryforwards.

In 1996, the FCC adopted regulations implementing the Telecommunications
Act enacted that year. To support universal service, carriers are required to
contribute certain percentages of their annual gross receipts to fund the High
Cost Fund, the Schools and Libraries Fund, and the Low Income Fund. The FCC has
allowed carriers to offset these charges by passing them through to their
customers. In addition, the FCC adopted a Primary Interexchange Carrier Charge
("PICC") to allow LECs to recover through non-usage-sensitive charges certain
costs associated with long distance carriers having access to LEC networks. The
FCC has also allowed the long distance carriers to offset these amounts by
passing these charges on to their customers. In May 2000, the FCC adopted an
order, which consolidates PICC charges with certain other subscriber charges and
initially decreases the charges effective July 1, 2000 and then annually
increases such charges. As a result the Company reduced its PICC charges and the
impact is an annualized revenue loss of approximately $6.0 million with a
similar reduction in PICC costs.

13

RESULTS OF OPERATIONS

STATEMENTS OF OPERATIONS DATA FOR THE YEARS ENDED
DECEMBER 31, 1999, 2000 AND 2001:

The following table sets forth for the years indicated the percentage of
net sales represented by certain items in the Company's statements of
operations:

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Net Sales: Net sales decreased 19.3% to $80.7 million in 2001 compared to
$100.0 million in 2000. This decrease was the result of fewer billable minutes
being used by a smaller customer base and a reduction in minutes billed under
certain rate plans, which are billed at a higher per minute rate. Total billable
minutes were approximately 535 million minutes in 2001 compared to 557 million
minutes in 2000. PICC and USF fees billed to customers totaled $5.7 million in
2001, compared to $9.1 million in 2000. This decrease results from an FCC order,
which consolidates PICC charges with certain other subscriber charges and
initially decreases the charges effective July 1, 2000 and then annually
increases such charges. The Company estimates an annual reduction in PICC sales
but a similar reduction in PICC expenses on an annual basis due to this change.

The Company believes it is more cost effective to bill its residential
customers who have smaller than average phone bills through the LECs as opposed
to billing them directly. As a result, a greater percentage of customers who are
billed directly by the Company are the commercial customers or residential
customers who generate larger than average monthly phone bills. Approximately
60% of revenue from long distance usage were billed through the LECs or other
billing and collection services in 2001. Customers receiving their bills
directly from the Company were approximately 40% and 30% in 2001 and 2000,
respectively.

Cost of Telecommunication Services: The Company's cost of sales are
variable costs based on amounts paid by the Company to its providers for its
customers' long distance usage, as well as the amounts paid to providers for
customer service and support. For the year ended December 31, 2001 the overall
cost of telecommunication service was 42.6% of net sales compared to 44.0% in
2000. During the years ended

14

December 31, 2001 and 2000, the cost of sales and relative percentage of costs
to net sales to each of its providers was as follows:

Selling, General and Administrative Expenses: The significant components
of selling, general and administrative expenses include the following:

Selling, General and Administrative Expenses: The significant components
of selling, general and administrative expenses include the following:

Billing Fees and Charges: Billing fees and charges include the contractual
billing fees and bad debts charged by LECs and other third party billing
companies. It also includes bad debt charge-offs from the Company's direct bill
customers. The efforts to collect the direct bill customer accounts are
completed by internal personnel. During the year ended December 31, 2000, the
Company paid approximately $300,000 for initial set up charges on a new billing
and collection agreement with a RBOC.

Advertising and Marketing Expense: Advertising expense decreased in 2000
to $3.8 million, compared to $4.6 million in 1999, a decrease of 17.4%.

Payments to Non-Profit Organizations: During 2000, payments to non-profit
organizations decreased by approximately 11.1% to $7.9 million, compared to $8.8
million in 1999. The majority of the decrease is due to an overall decrease in
revenues. During 2000 and 1999, the Company paid approximately 35,000 non-profit
organizations, of which approximately 42.0% and 40.0%, respectively, of total
payments were paid to ten organizations.

Payroll Expenses: From 1999 to 2000, payroll expenses increased by over $3
million due to adding new senior management and the addition of a new location
in Dallas, Texas.

Other General and Administrative Expense: Other general and administrative
expenses decreased by approximately 19.7% during 2000 as compared to 1999
primarily due to a decrease in outside agent commissions and costs related to
internet services.

Depreciation and Amortization: Depreciation and amortization expense
increased 34.0% to $3.9 million in 2000 compared to $2.9 million in 1999. This
increase is attributable to an increase in the carrying value of the Company's
property and equipment primarily due to recording the purchase of switch and
internet equipment and the equipment additions for the new call center.

Interest Expense and Other Finance Charges: Interest expense and other
finance charges decreased to $5.2 million in 2000 compared to $5.6 million in
1999. This decrease is attributable to an increase in
17

borrowings related to the Company's LOC due to repayment of a significant amount
of high interest loans in 1999.

Income Tax Expense (Benefit): During the years 2000 and 1999, the Company
recorded a deferred income tax expense of approximately $455,000 and $1.9
million, respectively. The income tax benefits recognized in the financial
statements consist primarily of the deferred tax effects of the temporary
differences between the financial and tax bases of assets and liabilities, and
net operating loss carryforwards. The Company believes that it will realize the
tax benefits of net operating loss carryforwards within the period allowed under
federal tax laws (15 years).

Cumulative Effect of Changes in Accounting Principle: Through June 30,
2000, the Company accounted for stock options granted to its non-employee
directors in accordance with SFAS No. 123. Effective July 1, 2000, the Company
adopted the provisions of FASB Interpretation No. 44, which permits companies to
apply the provisions of APB No. 25 to its non-employee directors. The Company
has reported the cumulative effects of this change in accounting principle,
which totaled $57,000, net of tax effect in its statement of operations for the
year ended December 31, 2000.

Net Income: During the years ended December 31, 2000 and 1999 the Company
reported net income of $807,000 and $2.2 million, respectively.

FINANCIAL CONDITION AND LIQUIDITY

Overall the Company's financial condition and liquidity improved during the
year ended December 31, 2001. The major factor underlying of this improvement
was the reduction in its negative working capital position by approximately $3.1
million (see below). Specifically, the Company reduced its credit facility by
over $2.0 million and accounts payable and accrued expenses by over $3.5
million.

Net cash provided by operations for the years ended December 31, 2001 and
2000 was $5.9 million and $6.7 million, respectively. The variations in cash
flow from operations are primarily attributable to the timing of collections on
accounts receivable and the timing of payment of accounts payable.

Because of its historically unfavorable financial condition, the Company's
financing costs have historically exceeded market rates. Most of the note
payable obligations have borne interest rates between 18% and 24%. Interest
costs and late fees on vendor payables and tax obligations also generally have
had an effective rate of 18% or higher.

This combination of high financing costs, capital distributions (as
discussed previously), and the short-term nature of most of the Company's
indebtedness have contributed to the Company's lack of profitability and
negative working capital, which totaled approximately $19.6 million at December
31, 2001, an improvement of approximately $3.1 million from December 31, 2000.

During 1998, the Company was approved for a LOC with a financial
institution. In 2001, the Company and the financial institution modified the LOC
to provide availability of $28.5 million. Current availability is limited to
approximately $25.8 million due to financial results and loan formula
restrictions of which approximately $18.6 million was outstanding as of December
31, 2001. The remaining balance of $7.2 million is available to the Company for
working capital, capital improvements, debt reduction and required reserves. The
Credit Facility is secured by a blanket lien on all of the Company's assets,
including accounts receivable and the Company's customer base. The terms of the
Credit Facility are for three years from initial funding, with an interest rate
of prime plus 3.5%. Although the Credit Facility has a three-year term, it is
classified as a current liability in the Company's financial statements because
the agreement contains certain subjective acceleration clauses and requires that
all cash receipts be deposited to a lockbox, the proceeds of which are used
daily to repay the debt.

The Company expects to incur future capital expenditures of approximately
$250,000 related to upgrades to the Company's management information systems and
various aspects of reorganization.

18

OPERATING ACTIVITIES

Significant sources of cash in operating activities for the years ended
December 31, 2001 include decreases in accounts receivable of $3.5 million. The
Company also generated cash from operations by recording net income of $3.4
million; $790,000 from recording a deferred income tax expense; $1.7 million in
certain non-cash expenses, principally depreciation, amortization and loss from
disposal of a long lived asset. Significant uses of cash in operating activities
include reductions in accounts payable of $3.6 million.

Significant sources of cash in operating activities for the year ended
December 31, 2000 include decreases in accounts receivable of $2.4 million. The
Company also generated cash from operations by recording net income of $807,000;
$500,000 from recording a deferred income tax expense; $4.4 million in certain
non-cash expenses, principally depreciation and amortization. Significant uses
of cash in operating activities include reductions in accounts payable of $1.6
million.

Significant uses of cash in operating activities for the year ended
December 31, 1999 include decreases in accounts payable of $9.4 million.
Accounts receivable increased by $533,000 and prepaid expenses increased by
$709,000. The Company also generated cash from operations by recording net
income of $2.2 million; $2.0 million from recording a deferred income tax
expense; $3.0 million in certain non-cash expenses, principally depreciation and
amortization and $344,000 from recording the issuance of stock warrants, options
and awards.

INVESTING ACTIVITIES

The Company's investing activities for the years ended December 31, 2001,
2000 and 1999 consisted primarily of property and equipment purchases of
$510,000, $2.6 million and $3.3 million, respectively.

FINANCING ACTIVITIES

During the years ended December 31, 2001 and 2000, financing activities
used $4.8 million and $3.7 million, respectively, in cash. The most significant
use of cash was the repayments of notes and leases payable, including the
Company's Credit Facility. The repayment of loans to related parties totaled
$908,000 and $1.1 million, respectively, for the years ended December 2001 and
2000.

During the year ended December 31, 1999, financing activities provided $4.8
million in cash. The most significant source of cash was an increase of $12.9
million in borrowings under the Company's Credit Facility. Other financing
activities included borrowings from related parties totaling $262,000 and
repayments to related parties totaling $1.3 million, for net use of cash
totaling $1.0 million, and other borrowings totaling $2.6 million and repayments
totaling $9.2 million, for net use of cash totaling $6.6 million.

RECENT ACCOUNTING PRONOUNCEMENTS

In 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44, "An Interpretation of APB Opinion No. 25 -- Accounting
for Stock Issued to Employees. Interpretation No. 44 permits companies to
account for stock options granted to non-employee directors in accordance with
APB Opinion No. 25.

The Company adopted Interpretation No. 44 effective July 1, 2000, and
recognized the cumulative effects of this accounting change in its December 31,
2000 financial statements.

During 2001, the FASB issued the following Statements of Financial
Accounting Standards (SFAS) that have not yet been adopted by the Company,
because the required implementation date is not until 2002:

SFAS No. 142 Goodwill and Other Intangible Assets
SFAS No. 143 Accounting for Asset Retirement Obligations
SFAS No. 144 Accounting for Impairment or Disposal of Long-Lived Assets

The Company does not believe that adoption of these accounting standards
will have a significant effect on the financial position or results of
operations of the Company.

19

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is not exposed to market risk from changes in marketable
securities, as the Company has no such instruments.

The Company is exposed to future earnings or cash flow fluctuations from
changes in interest rates on borrowings under the Credit Facility since amounts
borrowed under the Credit Facility accrue interest at a fluctuating rate equal
to the prime lending rate ("Prime") plus 3.5%. The outstanding balance of the
Company's borrowings under the Credit Facility at December 31, 2001 was $18.6
million. Market risk is estimated as the potential increase in interest rate for
borrowings under the Company's Credit Facility resulting from an increase in
Prime. Based on borrowings under the Credit Facility at December 31, 2001, a
hypothetical increase of 1.00% in Prime increases the Company's cost of
borrowings by approximately $200,000 annually. To date, the Company has not
entered into any derivative financial instruments to manage interest rate risk
and is currently not evaluating the future use of any such financial
instruments.

The Company's operations are all originated within the United States and it
therefore conducts all business transactions in U.S. dollars.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data are set forth following the
signature page hereof beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information concerning the directors
and executive officers of the Company:

Kenneth Kolek has been a Company shareholder since 1993. He was elected to
the board of directors, elected Chairman and of the Board and appointed CEO in
July 2001. Mr. Kolek has successfully assisted many companies with turnaround
consulting for over 25 years and is the owner and principal employee of a
financial and business consulting company based in Cedar Rapids, Iowa. He has
also been employed as a chief financial officer and controller for several
companies following a career in public accounting.

Danny Bannister was elected to the board of directors in July 2001. Mr.
Bannister brings several years of technical telecommunications industry
experience to the board. He is currently the President of Natel LLC (a customer
of Amerivision). Mr. Bannister has performed consulting services for several
major telecommunications companies and has founded, operated and sold several
businesses in the telecommunications industry.

20

Arch Bonnema was elected to the board of directors in July 2001. Mr.
Bonnema has founded and operated several companies in his professional career.
Most recently he has served as a principal of Joshua Financial and Bonnema
Company. Mr. Bonnema has received several awards for his business
accomplishments including, among others, Wall Street Journal and National
Republican Congressional Committee Businessman of the Year 2000.

David Clark was elected to the board of directors in July 2001. Mr. Clark
is currently serving as the vice president of North American Missions Board
(NAMB). NAMB is responsible for production and distribution of all radio and
television programs for one of the largest non-profit organizations in North
America. Prior to assuming his present position Mr. Clark founded, owned, and
operated KMC Media, a media strategy, production and placement company. Mr.
Clark serves on the governing bodies of a number of non-profit ministries.

Belarmino Gonzalez was elected to the board of directors in October 2001.
Mr. Gonzalez has purchased or founded and operated several radio and television
stations. He is currently serving as the president of corporations that own
several stations. Mr. Gonzalez has been actively involved in the establishment
and promotion of Christian based radio stations and broadcast programs
including, among others, the first 24-hour all Christian youth television
station. Mr. Gonzalez is a member of the governing boards of several non-profit
organizations within the broadcasting industry.

Art Richardson was elected to the board of directors in July 2001. Mr.
Richardson is currently the Area President of Legalink Corporation. Mr.
Richardson has founded and operated several companies in the legal reporting
industry. He currently serves as a member of the Board of Directors for Hebron
Communications and MemberSource Credit Union. He is a member and serves on the
board of directors of several legal industry associations and other non-profit
organizations, including National Court Reporters Association.

Loren Unruh was elected to the board of directors in July 2001. Mr. Unruh's
entire career, spanning more than 30 years, has been spent in the hospitality
industry, and he currently owns and operates several hotels and restaurants. Mr.
Unruh also served on the Best Western Board of Directors. He served as the
National Chairman of the Board and a member of the International Board of
Directors of Best Western.

Al Jones was elected secretary of the Company in January 2002. He has over
20 years experience in sales and sales management and 12 years experience as an
educator. Mr. Jones has received many awards from his achievements including,
among others Teacher of the Year and National Salesman of the Year. Mr. Jones
brings a personal and customer driven approach to the Company.

Loni Woodley was elected treasurer of the Company in January 2002, after
joining the Company in that same month as the Company's chief financial officer.
For the past five years, Mr. Woodley has been engaged to assist troubled
companies in effecting turnarounds. Prior thereto he was employed by a national
public accounting firm during which period he provided financial accounting
services to several companies including, among others, publicly owned companies
in the telecommunications industry.

BOARD OF DIRECTORS MATTERS

Each director is elected to serve a term of one year, normally to expire at
the annual meeting of Company shareholders or at such time as his or her
successor is elected and qualified for office. The board of directors has
established a three person combination Compensation/Nominating Committee to
review executive compensation and to propose to the board the names of
individuals who might constitute board designated nominees for service as
directors. The current additional standing committees of the Board of Directors
include (1) a three person Audit Committee which is responsible for (a)
reviewing the scope of, and the fees for, the annual audit of the Company, (b)
reviewing with the independent auditors the Company's accounting practices and
policies, (c) reviewing with the independent auditors their final report, (d)
reviewing with internal and independent auditors overall accounting and
financial controls and (e) being available to the independent auditors for
consultation purposes; (2) a five person Sales and Marketing Committee which is
responsible to review sales incentive plans for inside and outside sales agents,
new products to be offered to customers, and non-profit organization
relationship; (3) a two person Legal Committee which is responsible to determine
that the Company is utilizing the appropriate legal counsel for specific issues
(e.g. SEC,
21

employment, statutory, contractual, etc.), and to review all legal proceedings
in which the Company is an actual or potential participant; and (4) a four
person Technology Committee which is responsible for analyzing the
implementation process of new product offerings and the impact of technological
advances on the Company and its industry position, as well as for assisting
management with the negotiation of new carrier contracts.

Each officer serves at the discretion of the Board of Directors, subject to
the terms of certain employment agreements described below.

ITEM 11. EXECUTIVE COMPENSATION

The following table summarizes the compensation paid the Company's chief
executive officer and each vice presidents of the Company for services rendered
in 2000 and 2001 (collectively, the "Named Executive Officers"). See Item 13
below for a description of transactions involving a former president and
currently an independent consultant, and certain of the Company's directors.

SUMMARY COMPENSATION TABLE

22

The following table sets forth the information regarding the options
granted to the Named Executive Officers of the Company in 2000 and 1999. There
are no additional options granted.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

During 2001, all options granted to Philip G. Evans and Kerry A. Smith were
forfeited.

CONSULTING AGREEMENT WITH CEO

During July 2001, the Board of Directors appointed Kenneth Kolek as the CEO
of the Company and agreed that the Company would pay Mr. Kolek's consulting
company $150 per hour for his time spent on Company business. The agreement may
be terminated by either party on 30 days notice.

EMPLOYMENTS AGREEMENT WITH RELATED PARTIES

As of May 26, 2000 (the "Commencement Date"), the Company entered into an
amended and restated employment agreement with Stephen Halliday, then the
Company's president and chief executive officer and a member of its board of
directors (the "CEO Agreement"). That agreement carried an effective initial
term of five years, measured from October 1998, and was subject to automatic one
year extensions unless either party notified the other of an intention to
terminate at the end of the then existing term. Under its principal provision
Mr. Halliday was to receive an annual salary of $450,000 which was increased to
$600,000 on October 1, 1999, as well as rights to receive and options to acquire
shares of the Company's Common Stock. Pursuant thereto, as of July 1, 2000, the
Company issued Mr. Halliday 4,549 shares of Common Stock of which 50% were then
deemed to be vested and an additional 25% were to be vested on each of the two
succeeding anniversary dates of the issuance. Further, Mr. Halliday was entitled
to receive a cash bonus equal to whatever additional income tax resulted from
the vesting of such shares and the payment of such bonus, as well as two
separate options to acquire (a) 27,296 shares of Common Stock at an exercise
price of $28.86/share, and (b) 2% of the Common Stock deemed outstanding, on a
fully diluted basis, as of May 26, 2003, at an exercise price of $36.075.

As a direct consequence of the shareholder action taken in July 2001, Mr.
Halliday's status with the Company was modified and he chose to effect a good
reason termination of the CEO Agreement. That action has led to the conduct of
negotiations which remain ongoing as of the date of filing of this report. The
Company is confident, however, that agreement with Mr. Halliday will shortly be
reached under terms which

23

will result in a cancellation of the CEO Agreement, an acknowledgment by the
Company that it will pay Mr. Halliday monthly payments of $37,500, extending
through December 2006, and the execution of an independent contractor agreement
under which Mr. Halliday will provide the Company with a variety of substantive
consulting services and will have certain of his expenses incurred, directly or
indirectly, in the performance of such activities reimbursed by the Company.

Effective as of January 1, 2001 (the "Effective Date"), the Company entered
into a one-year employment agreement (the "V.P. Agreement") with Kerry A. Smith,
its then Vice President of the Company. Pursuant to the V.P. Agreement, the
Company was required to pay an annual base salary of $240,000 and a bonus of
$35,000. The Company retained the right to terminate the V.P. Agreement during
its term in exchange for a severance payment equal to four (4) months of base
salary plus guaranteed bonus. The V.P. Agreement was terminated and all
severance benefits were negotiated and agreed to in July 2001.

Effective August 1, 2000, the Company entered into a two-year employment
agreement (the "G.C. Agreement") with Philip G. Evans, its then Vice President &
General Counsel. Pursuant to the G.C. Agreement, the Company was required to pay
an annual base salary of $170,000 in year one, and $190,000 in year two and the
V.P. was eligible to receive a bonus of up to $30,000 annually. The G.C.
Agreement was terminated and all severance benefits were negotiated agreed to
effective April 2001.

Effective as of May 24, 1999, the Company entered into an employment
agreement (the "C.B. Agreement") with its then Chairman of the Board, Tracy
Freeny. The initial term of the C.B. Agreement was for five years, with
automatic one-year extensions, and under its terms Mr. Freeny was entitled to
receive an annual salary of $300,000.

Effective as of August 31, 2001, the Company and Mr. Freeny entered into a
Settlement Agreement under which (a) the C.B. Agreement was terminated, (b) each
party waived all claims which it had asserted or might otherwise be able to
assert against the other, expressly including Mr. Freeny's claim to
approximately $3.2 million of distributions that had previously been declared to
be payable to him, (c) Mr. Freeny resigned as a Company director, was awarded
1,000 share of Common Stock for his prior board service, and was appointed as an
advisor to the Company's Board of Directors, (d) the Company agreed to pay him
approximately $176,000 of earned but unpaid salary and to reimburse him for
$45,000 of legal fees that he had incurred in defending himself against the
shareholder derivative action that had been filed 2001 (see Item 3. Legal
Proceedings), and in conducting other negotiations with the Company, and (e) the
Company agreed to engage his services as an independent consultant to the
Company. Under a separate Consulting Agreement, entered into as of that same
date and effective for a term ending May 2004, Mr. Freeny agreed, as an
independent contractor, to provide the Company with sales and marketing services
and to engage in no competitive activities in exchange for a monthly
remuneration of $25,000 and the reimbursement of certain expenses to be incurred
by him in the performance of such services.

Mr. Freeny and his wife also entered into a Voting Trust Agreement, dated
September 1, 2001, with the Company and three identified trustees, including
David Clark, a Company director, under which, for the same period as the
pendency of the Consulting Agreement (or until their earlier sale), 119,157.89
shares of the Company's Common Stock owned by the Freenys jointly or
individually, representing 14.14% of the Common Stock then outstanding, were
deposited with the trustees, who were granted the right to vote the same, in the
manner as determined by majority decision, upon all matters calling for
shareholder action, but reserving to the Freenys the right to direct a vote with
respect to certain corporate actions requiring stockholder action such as a
merger under which the Company would not be the surviving entity, a sale of
substantially all of its assets, or an amendment to the Company's Certificate of
Incorporation.

STOCK AGREEMENTS

Two former directors (Jay A. Selanlow and John B. Damoose) of the Company
are parties to separate amended and restated stock agreements with the Company,
each having an effective date of May 26, 2000 (the "Stock Agreements").
Thereunder, each former director was granted the right to receive stock bonuses,
as well as options to acquire share of Common Stock. As of July 1, 2000, the
Company issued 4,549 shares of Common Stock to each former director of which 50%
were then deemed to be vested and an additional 25%
24

were to be vested on each of the two succeeding anniversary dates of the
issuance. Further, the directors were entitled to receive a cash bonus equal to
whatever additional income tax resulted from the vesting of such shares and the
payment of such bonus. In July 2001, the directors were not reelected to the
board and therefore the rights to the stock bonus for 2002 was terminated.

TERMINATION AGREEMENT WITH A FORMER DIRECTOR

In April 1998, a former director and Senior Vice President (Carl Thompson)
of the Company resigned. In connection with such resignation, the Company
entered into an agreement pursuant to which the former director was to receive
(a) $40,000 a month until all accrued and unpaid distributions ($995,952 as of
the date of the agreement) had been paid, (b) and an additional $20,000 each
month for the remainder of his life so long as he did not take any action
significantly detrimental to or, during the period ending April 1999, in
competition with the Company. The Company paid the former director the last of
his accrued and unpaid distributions in March 2000. In September 2001, the
Company suspended payments under the Agreement, asserting that the former
director had breached the contract. As a result, the Company believes that it no
longer has an obligation pursuant to this contract, and accordingly, the Company
has removed this liability from its financial statements at December 31, 2001,
and has recognized an extraordinary gain of approximately $2.1 million.

STOCK INCENTIVE PLAN

In 1999, the Board of Directors approved a Stock Incentive Plan (the
"Plan") and reserved for future issuance thereunder 40,000 shares of Common
Stock ("Shares"). The Plan permits the granting of stock options and stock
appreciation rights to employees, directors and consultants, and includes
additional features (such as restricted shares and stock appreciation rights)
that enhance the company's abilities in hiring, retaining and motivating key
individuals. The Plan provides that it shall be administered by the compensation
committee of the Board of Directors. The Plan may be amended without shareholder
approval, except as specified in the Plan.

The Board of Directors approved option grants to purchase up to 24,500
Shares effective July 1, 2000, of which options to purchase 6,000 Shares were
granted to former officers and 18,500 were granted to non-officer employees.

Subsequent to December 31, 2001 the Board of Directors elected to freeze
this Plan and pursue new incentive packages for employees, directors, and
consultants.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information concerning the
beneficial ownership of shares of the Company's common stock, $0.10 par value
("Common Stock"), as of December 31, 2001, by (a) each person known by the
Company to own beneficially more than 5% of the outstanding Common Stock, (b)
each director of the Company, (c) each named executive officer (as defined in
Item 6 below) and (d) all executive

25

officers and directors as a group. The Company believes that each of such
stockholders has the sole voting and dispositive power over the shares held by
such stockholder except as otherwise indicated.

EXECUTIVE OFFICERS AND DIRECTORS:

- ---------------

* Less than 1%

(1) Includes 153,243 shares held jointly by Mr. Freeny and his wife and 2,200
shares held by Mr. Freeny's minor son.

(2) Includes 35,653 shares held by Christian Advocates Serving Evangelism
(CASE). Mr. Sekulow is the President and a Director of CASE.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

All known relationships and related transactions have been disclosed in
previous sections of this report. See Item 3 Legal Proceedings -- Other Pending
Actions; Item 11 -- Executive Compensation, and Notes B (Related Party
Transactions) and F (Notes Payable and Long-Term Debt -- Related Parties) to the
Notes to the Consolidated Financial Statements in Item 8.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)1. Financial Statements

See Item 8 of this Form 10-K

2. Financial Statement Schedules

Financial statement schedules have been omitted on the basis of their being
inapplicable or not required or because the information called for thereby has
been otherwise included in this Form 10-K

26

3. Exhibits

The exhibits listed in the Exhibit Index which follows the Company's
Consolidated Financial Statements are filed as part of, or incorporated by
reference into this Form 10-K.

(b) Reports on Form 8-K

Not applicable

28

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, who is duly authorized, in Oklahoma City,
State of Oklahoma on this 16th day of April 2002.

AMERIVISION COMMUNICATIONS, INC.

By: /s/ KENNETH R. KOLEK
------------------------------------
Kenneth R. Kolek
President, Chief Executive Officer
and Chairman of the Board of Directors
(Principal Executive Officer)

By: /s/ LONI WOODLEY
------------------------------------
Loni Woodley
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

29

AMERIVISION COMMUNICATIONS, INC.

AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000 AND 2001, AND FOR THE YEARS ENDED DECEMBER 31, 1999,
2000 AND 2001

Independent Auditors' Report................................ F-1
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Operations....................... F-3
Consolidated Statements of Stockholders' Deficiency......... F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-6

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
AmeriVision Communications, Inc.
Oklahoma City, Oklahoma

We have audited the accompanying consolidated balance sheets of AmeriVision
Communications, Inc. as of December 31, 2000 and 2001, and the related
consolidated statements of operations, stockholders' deficiency, and cash flows
for each of the three years in the period ended December 31, 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 audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AmeriVision
Communications, Inc. at December 31, 2000 and 2001, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

/s/ Cole & Reed P.C.

Oklahoma City, Oklahoma
April 9, 2002

F-1

AMERIVISION COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial
statements.

F-2

AMERIVISION COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated financial
statements.

F-3

AMERIVISION COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY

The accompanying notes are an integral part of these consolidated financial
statements.

F-4

AMERIVISION COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated financial
statements.

F-5

AMERIVISION COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Description of Business: AmeriVision Communications, Inc.
(the "Company") was incorporated in Oklahoma on March 15, 1991. The Company
provides long distance telecommunications services to subscribers throughout the
United States, and completes subscriber calls to all directly dialable locations
worldwide. The Company is a predominantly switchless long distance reseller, and
obtains its switching and long haul transmission from several different
carriers. The Company also provides services through owned switches.

Principles of Consolidation: The Company owns 100% of the common stock of
AmeriTel Communications, Inc. and AmeriVision Network, Inc. Neither of these
companies has any operations nor any assets or liabilities.

Accounting Estimates: The preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United States
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 consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.

Cash Equivalents: The Company defines cash equivalents as highly liquid,
short-term investments with an original maturity of three months or less.
Investments pledged as collateral for loans are not considered cash equivalents.

Accounts Receivable: The Company bills its customers either directly,
through billing agreements with Local Exchange Carriers ("LEC"), or through
unrelated billing and collection companies, collectively referred to as the
Billing Agents, which bill the customer through LECs with which the Company does
not have a LEC billing agreement. At December 31, 2000 and 2001, approximately
75% and 60%, respectively, of the Company's total accounts receivable were from
LECs or Billing Agents.

Property and Equipment: Property and equipment is stated at cost, net of
accumulated depreciation. Depreciation is provided using straight-line and
accelerated methods over the estimated useful lives of the assets. Estimated
lives range from three to seven years. Maintenance and repairs are charged to
expense as incurred.

Advertising Costs: Advertising and marketing costs are expensed as
incurred, and totaled approximately $4,640, $3,772, and $1,293 during the years
ended December 31, 1999, 2000 and 2001, respectively.

Revenue Recognition: The Company recognizes telecommunications revenues
when the Company's customers make long distance telephone calls from their
business or residential telephones or by using the Company's telephone calling
cards. Revenues are also recognized on monthly fees for certain rate plans.
Income from prepaid telephone calling cards is recognized as the telephone
service is utilized. Income from internet service is recognized in the month
that the service is provided.

Payments to Non-profit Organizations: The Company enlists the support of
non-profit organizations to promote the Company's services in return the Company
pays approximately 10% of a customer's eligible long distance collected revenues
to a non-profit organization. This payment is included in selling, general and
administrative expenses.

Concentrations of Credit Risk: Financial instruments that potentially
subject the Company to concentrations of credit risk include accounts receivable
from customers and accounts payable to its carrier. The Company's customer base
is distributed throughout the United States, and the Company does not require
any collateral from its customers. Although significant portions of the
Company's revenues are billed through the Billing Agents and LECs, the ultimate
collectibility of these accounts is dependent upon the status of the

F-6

AMERIVISION COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

individual customer. There are no significant concentrations of revenues or
accounts receivable among individual customers.

The Company maintains deposits at financial institutions that at times
exceed federally insured limits. Management does not believe there is any
significant risk of loss associated with this concentration of credit.

Redeemable and Nonredeemable Common Stock: Redeemable common stock is
carried at its redemption value. As the redemption options expire, as more fully
discussed in Note H, the principal amounts invested by the individual
stockholders are reclassified as nonredeemable common stock. Nonredeemable
common stock consists of stock issued to certain officers upon formation of the
Company, and to other stockholders with whom the Company had not executed a
redemption agreement. Nonredeemable common stock also includes the principal
amounts invested by stockholders whose redemption options have expired. As
discussed in Notes H and I, certain of the Company's nonredeemable common stock
is characterized as Common Stock Subject to Rescission in the Company's
consolidated balance sheets.

Income Taxes: Income tax expense is based on pretax financial accounting
income. The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. This method also requires the
recognition of future tax benefits such as net operating loss carryforwards, to
the extent that realization of such benefits is more likely than not. The
Company provides a valuation allowance for deferred tax assets for which it does
not consider realization of such assets to be more likely than not.

Earnings Per Share: The Company presents basic and diluted earnings per
share. Basic earnings per share is computed by dividing earnings available to
nonredeemable common stockholders by the weighted average number of
nonredeemable shares outstanding during the year. Diluted earnings per share
reflect per share amounts that would have resulted if dilutive potential
nonredeemable common stock had been converted to nonredeemable common stock.
Potential nonredeemable common stock includes redeemable common stock, stock
warrants, stock options and convertible notes payable.

Retirement Plan: In September 2000, the Company established a 401-k
retirement plan for its employees. All employees meeting certain age and service
requirements are eligible to participate in the plan. The Company may make
discretionary profit-sharing contributions to the plan. No such contributions
were made in 2000 or in 2001.

Fair Values of Financial Instruments: The carrying values of cash and cash
equivalents, short and long-term debt and redeemable common stock were used by
the Company as their approximate estimate of fair value.

Stock-Based Compensation: The Company accounts for stock-based
compensation plans in accordance with Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees", and its various
interpretations. Under APB 25, the Company recognizes compensation expense equal
to the difference between the fair value of the common stock at the date of the
grant and the exercise price of the option. Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation",
prescribes the recognition of compensation expense based on the fair value of
options on the grant date, but allows companies to apply APB 25 if certain pro
forma disclosures are made assuming hypothetical fair value method application.
See Note K for pro forma disclosures required by SFAS No. 123 plus additional
information on the Company's stock-based compensation plans.

Through June 30, 2000, the Company accounted for stock options granted to
its non-employee directors in accordance with SFAS No. 123. Effective July 1,
2000, the Company adopted the provisions of FASB Interpretation No. 44, which
permits companies to apply the provisions of APB No. 25 to its non-employee

F-7

AMERIVISION COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

directors. The Company has reported the cumulative effects of this change in
accounting principle in its statement of operations for the year ended December
31, 2000.

Accounting Standards Issued Not Yet Adopted: During the year ended
December 31, 2001, the Financial Accounting Standards Board (FASB) issued the
following Statements of Financial Accounting Standards (SFAS) that have not yet
been adopted by the Company, because the required implementation date is not
until 2002:

SFAS No. 142 Goodwill and Other Intangible Assets
SFAS No. 143 Accounting for Asset Retirement Obligations
SFAS No. 144 Accounting for Impairment or Disposal of Long-Lived Assets

The Company does not believe that adoption of these accounting standards
will have a significant effect on the financial position or results of
operations of the Company.

Reclassifications: Certain amounts in the prior year financial statements
have been reclassified to conform to the presentation used in the current year.

NOTE B -- RELATED PARTY TRANSACTIONS

During the year ended December 31, 2001, the Company entered into a
Settlement Agreement with the former Chairman of the Board of Directors. The
Settlement Agreement dismissed with prejudice to re-filing the Company's
litigated and unlitigated claims against the former Chairman. The Company did
agree to pay deferred compensation totaling $176 and attorney fees up to $45.
However, the Settlement Agreement required the former Chairman to release and
cancel all claims for declared but unpaid distributions (totaling $3,201),
resign as an employee and a member of the Board of Directors, release all claims
related to his existing employment agreement, and placed restrictions on voting
privileges of his Common Stock. The Company also entered into a Consulting
Agreement with former Chairman to provide sales and marketing assistance. The
Consulting Agreement requires the Company to make monthly payments of $25 plus
reimburse certain business expenses. The Consulting Agreement expires May 24,
2004.

In 1998, the Company entered into a Termination Agreement with a former
director/Senior Vice President. The Termination Agreement required the Company
to pay accrued distributions, totaling $935 at the time of his resignation, in
the amount of $40 per month. All such accrued distributions were paid in full
during the year ended December 31, 2000. The Termination Agreement further
obligated the Company to pay the former Senior Vice President $20 per month for
the remainder of his life. In exchange the former Senior Vice President agreed
to (1) not compete with the Company for one year from the date of the agreement,
(2) take no actions significantly detrimental to the Company (other than
competition), and (3) waive any claims against the Company as of the date of the
agreement. The Company recorded a liability and an asset for $2,184. The amount
was based on the present value of the obligation over the expected life of the
former Senior Vice President at the date of the agreement. The asset was
amortized over the term of the covenant not to compete.

In September 2001, the Company suspended payments under the Termination
Agreement, asserting that the former Senior Vice President had breached the
contract. As a result, the Company believes that it no longer has an obligation
pursuant to this contract, and accordingly, the Company has removed this
liability from its financial statements at December 31, 2001, and has recognized
an extraordinary gain of $2,146.

F-8

AMERIVISION COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Effective February 1, 1999, the Company and an Affiliate entered into an
asset purchase agreement (the "APA"). Under the terms of the APA, the Company
agreed to:

(1) pay the Affiliate for all expenses the Affiliate incurred prior to
January 31, 1999, related to the switch network, and convert the balance
owed to Affiliate for telecommunications services previously provided,
totaling approximately $2,300, to a note payable,

(2) reimburse the Affiliate for its costs and expenses incurred on the
Company's behalf in connection with the development of an internet service
product, totaling approximately $584, and acquire the rights to the assets
and assume all of the related lease obligations incurred by the Affiliate
in connection with the internet service product, totaling approximately
$1,200, and

(3) purchase all of the switch assets at their net book value, assume
all of the related switch lease obligations totaling approximately $1,300,
and issue a note payable to the Affiliate for the net amount of $567.

In connection with the APA, the Company issued a promissory note payable to
the Affiliate totaling approximately $2,300 for item (1) discussed above. This
note payable has been subordinated to the Company's credit facility described in
Note D. Effective April 1, 2000, the APA was closed, and the Company issued
notes payable for the internet and switch assets, which were also subordinated
to the Company's credit facility.

The $2,300 note payable matured on August 1, 2000; however, due to
limitations on the Company's ability to repay the note under the subordination,
the Company is now in default on this note payable. As a result of the default,
the interest rate on the note was increased to 18%.

Pursuant to a lease license agreement between the Company and the
Affiliate, the Company assumed operations of the switch and internet assets
effective February 1, 1999. Under the terms of the lease license agreement, the
Company and the Affiliate agreed the Affiliate would transfer to the Company
custody and control of the switch and internet assets, and the Company shall
hold and operate such assets as if the Company owned the assets. The terms of
the lease license agreement also provided that the Company will assume all of
the rights and obligations associated with owning and operating the switch and
internet assets. The lease license agreement also provides that the Company will
pay the Affiliate a monthly fee equal to the amount of interest that is payable
on the switch and internet assets. Accordingly, the Company has recorded the
assets and the related lease and note payable obligations in its financial
statements effective February 1, 1999, and the statement of operations from
February 1999 forward reflect the costs of operating those switches and internet
assets.

The Company also leases office space from the Affiliate mentioned above.
The total lease expense and related commitments are included in the
non-cancelable operating lease disclosures in Note I below. The total amount
paid to the Affiliate related to the lease of this office space for the years
ended December 31, 1999, 2000, and 2001 was $583, $585, and $528, respectively.

In December 1999, the Company entered into a Termination Agreement with a
former director. In connection with this Termination Agreement, the Company
agreed to pay the former employee $1,359 over four (4) years, in exchange for
the employee agreeing not to compete with the Company over that term. The
Company accrued the present value of this obligation and is amortizing the
covenant not to compete over the term of the Termination Agreement.

The Company does have existing agreements with non-profit organizations
that are affiliated with two former members of the Board of Directors. The
agreements require the payment of specific amounts in exchange for the promotion
of the Company's products and services. The total amounts paid to these
organizations for the years ended December 31, 1999, 2000, and 2001 were $3,190,
$2,615, and $990, respectively.

F-9

AMERIVISION COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During the year ended December 31, 2001, the Company paid its current Board
of Directors for their services on a monthly basis. The total expense related to
the fees due to the Board of Directors for the year ended December 31, 2001 was
$114.

During the year ended December 31, 2001, the Company entered into a
consulting agreement with a member of the Board of Directors. The agreement is
for managerial supervision and organizational development consulting. The total
consulting fee related to this agreement for the year ended December 31, 2001
was $117.

The Company is currently negotiating a Consulting Agreement with the former
CEO of the Company which would replace the former CEO's employment agreement.
The Company believes the terms of the Consulting Agreement will require the
Company to pay the former CEO $37.5 per month, plus certain business related
expenses through December 2006.

NOTE C -- PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

The total cost of all assets held under capital lease obligations was
$4,130 at both December 31, 2000 and 2001. Accumulated depreciation of leased
equipment was approximately $3,078 and $3,469 at December 31, 2000 and 2001,
respectively. Depreciation expense on property and equipment, including
depreciation on assets held under capital leases, was approximately $1,890,
$2,661, and $1,802 during the years ended December 31, 1999, 2000, and 2001,
respectively.

In October 1999, the Company began a project to develop a new billing
system. The Company utilized a third-party contractor to develop the software.
In November 2000, the Company terminated the contract with the contractor and
began action with the contractor in attempts to have them voluntarily rescind
all amounts that the Company paid to the contractor, totaling approximately
$1,000. During 2001, the Company determined that recovery of the payments was
not probable. During the year ended December 31, 2000 and 2001 the Company
expensed $575 and $1,052, respectively. Also during 2001 the Company placed
identifiable assets of approximately $435 into production and began depreciating
these assets.

NOTE D -- LINE OF CREDIT ARRANGEMENT

The Company has a line of credit facility (the "Credit Facility") with a
financial institution. Borrowing availability is based upon collections
multiples and earnings ratios, subject to the maximum line of credit. The
maximum amount of the Credit Facility is $28,500. The outstanding balance at
December 31, 2000 and 2001 was $20,661 and $18,573, respectively.

The Credit Facility matures on January 30, 2003, and carries an interest
rate of prime plus 3.5%, with a contractual floor of 9.0%. The stated interest
rate at December 31, 2001 was 9.0%. The weighted average

F-10

AMERIVISION COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

effective interest rates in 2000 and 2001, which include amortization of loan
origination costs, were 15.4% and 11.8% respectively. The Credit Facility is
secured by substantially all of the Company's assets, including accounts
receivable and the Company's customer base.

In connection with closing the Credit Facility, several of the Company's
creditors agreed to subordinate the Company's obligations to them in favor of
the financial institution. Repayment of these obligations is limited as
specified in the loan and security agreement. The total outstanding debt owed to
subordinated creditors as of December 31, 2001, was approximately $5,132.

The Credit Facility contains various financial and other covenants with
which the Company must comply, including a minimum net worth requirement,
restrictions on asset acquisitions, restrictions on the payment of dividends,
and restrictions on principal and interest payments to subordinated creditors.
At December 31, 2001, the Company is in compliance with, or has obtained a
waiver for all of its financial covenants.

NOTE E -- SHORT-TERM NOTES PAYABLE TO INDIVIDUALS

Convertible Notes Payable: In 1995, the Company issued promissory notes
payable to approximately seventy-five (75) individuals, substantially all of
which are convertible to common stock at the Company's option. These notes
generally have no specified maturity date and accrue interest at 10%, which is
paid quarterly. The individual notes contain varying terms with regard to the
conversion agreements. At December 31, 2000 and 2001, the balance of the notes
was $399 and $324, respectively.

Other Notes Payable: The Company has other notes payable due to
individuals with various due dates. The notes accrue interest at 11% and are
subordinated to the financial institution. At December 31, 2000 and 2001, the
balance of the notes was $177 and 137, respectively.

F-11

AMERIVISION COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE F -- NOTES PAYABLE AND LONG-TERM DEBT

RELATED PARTIES

Notes payable and long-term debt to related parties consist of the
following:

- ---------------

(1) In April 1999, the note payable was restructured. The new note provided for
additional advances of approximately $260, bringing the total outstanding
balance to $850, and monthly interest only payments at 10% for five years,
with the unpaid principal due at maturity in April 2004. The lender has the
option to convert the note to common stock at a per share price equal to the
lower of (1) the fair market value of the common stock on January 1, 1998,
as determined by an appraisal, or (2) the lowest publicly traded price of
the common stock three months following the establishment of a public
trading market for the common stock. The terms of the agreement also provide
for the Company to issue the affiliate warrants to purchase 3,400 shares of
Company common stock at a strike price of $0.01 per share. In connection
with

F-12

AMERIVISION COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the warrants, the Company valued the warrants using a minimum value of
$41.50 dollars per share. The value was based upon an appraised value of the
Company's common stock as of June 30, 1999. The Company does not believe
that the appraised value of its common stock as of June 30, 1999 differed
significantly from what the results of an appraisal in April 1999 would have
been. Accordingly, the Company recorded paid-in-capital and a corresponding
charge to interest and other financing charges of $141 for the stock
warrants. As a result of the stated interest rate in the note and the costs
associated with the warrants, the effective interest rate of this agreement
is 15.7%. In March 2001, the affiliate exercised the warrants, and the
Company issued 3,400 shares of Common Stock to the affiliate.

(2) The note payable to the former Company director was also restructured in
April 1999. The balance was paid down to $100, and the new payment terms
provide for monthly interest only payments at 10%, with the unpaid principal
due in April 2001. The note may be extended for an additional three years at
the option of the lender. In April 2001, the Company repaid $50 to this
former director, but was restricted under the terms of the Credit Facility
from making any additional payments. This note also contains conversion
options similar to the ones described above. The terms of the agreement also
provide for the Company to issue the director warrants to purchase 400
shares of Company common stock at a strike price of $0.01 per share. In
connection with the warrants, the Company valued the warrants using a
minimum value of $41.50 dollars per share, based upon the same appraisal
described above. Accordingly, the Company recorded paid-in-capital and a
corresponding charge to interest and other financing charges of $17 for the
stock warrants. As a result of the stated interest rate in the note and the
costs associated with the warrants, the effective interest rate of this
agreement is 15.9%. In March 2001, the former director exercised the
warrants, and the Company issued 400 shares of Common Stock to the former
director.

OTHER NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:

Notes payable, long-term debt and capital lease obligations to others
consists of the following:

F-13

AMERIVISION COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Future maturities of notes payable and long-term debt as of December 31,
2001, are as follows:

NOTE G -- INCOME TAXES

Income tax expense from continuing operations consists of the following:

At December 31, 2001, the Company has net operating loss carryforwards
totaling approximately $3,400 that may be used to offset future taxable income.
These net operating loss carryforwards expire in the years 2009 through 2014.

Income tax expense from continuing operations for the years ended December
31, 1999, 2000, and 2001, differs from the expected rate of 34% for the
following reasons:

F-14

AMERIVISION COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:

At December 31, 2000, the Company had provided a valuation allowance of
$865, for the tax effects of the accrued termination obligation to the former
Senior Vice President. This valuation allowance was removed when the Company
removed the related obligation, as discussed in Note B.

The Company believes that the improvements in its operating results in
1999, 2000 and 2001, as discussed in Note J, provide sufficient positive
evidence to indicate that it is more likely than not that it will realize the
net deferred tax benefit of $2,310 recorded in the financial statements. The
Company's actual operating results in 1999, 2000, 2001, and projections for
future taxable income provide for full utilization of the deferred tax asset,
net of the valuation allowance, over the periods in which the temporary
differences are anticipated to reverse.

The Company's ability to generate the expected amounts of taxable income
from future operations is dependent upon a number of factors, including
competitive pressures on sales and margins in the telecommunications industry,
management's ability to contain expenses, the Company's ability to acquire and
retain new customers, and other factors which are beyond management's ability to
control. There can be no assurance that the Company will meet its expectations
for future taxable income in the carryforward period. However, management has
considered the above factors in reaching the conclusion that it is more likely
than not that future taxable income will be sufficient to realize the net
deferred tax assets at December 31, 2001. The amount of deferred tax assets
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.

NOTE H -- REDEEMABLE AND NONREDEEMABLE COMMON STOCK

From time to time, the Company entered into various agreements with certain
of its shareholders pursuant to which the Company agreed, upon request of one or
more of such shareholders, to redeem the shares of Common Stock owned by such
shareholder. While the Company's Certificate of Incorporation authorizes the
Company to issue a single class of Common Stock, the Company has, for financial
accounting purposes, segregated its Common Stock into two distinct groups,
redeemable and nonredeemable. Of the 840,352 shares of Common Stock outstanding
at December 31, 2001, 15,537 shares are characterized as redeemable common stock
and 824,815 shares are characterized as nonredeemable common stock.

The Company has entered into four variations of the redemption agreements,
which it classifies as Type A, Type B, Type C and Type D. Generally, each
redemption agreement provides that the shares of Common Stock shall be
repurchased for an amount that gives the shareholder a specified rate of return
based on the

F-15

AMERIVISION COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

length of time the shareholder owned such shares. All of the Type A and Type B
agreements have now expired pursuant to their terms.

Type C agreements were issued primarily between July 1992 and September
1992 and have terms identical to the Type A agreements except that Type C
agreements have no expiration. The Company has agreed at its option to redeem
the shares of Common Stock owned for more than two years for the last highest
price that the shares of Common Stock have been sold to an investor. Type D
Agreements have no expiration and were issued from May 1995 until the Company
discontinued issuing redemption agreements altogether in February 1996. Type D
agreements provide that shareholders owning their shares of Common Stock less
than one year receive a 10% annual return; between one year and 18 months
receive a 15% annual return; between 18 months and three years receive an 18%
annual return; and over three years an amount based on a formula specified in
the agreement.

During the years ended December 31, 1999, 2000 and 2001, substantially all
of the outstanding Type D redeemable common stock had been outstanding for over
three years. Accordingly, the redemption price was based upon the formula
specified in the Type D redemption agreements for stock held over three years.
Application of the formula to the carrying amount of Type D redeemable common
stock resulted in a net reduction of the redemption price of approximately $102,
$42, and $-0-, respectively, during the years ended December 31, 1999, 2000, and
2001.

At December 31, 2000 and 2001, the carrying amount of redeemable common
stock is as follows:

The carrying amounts of redeemable common stock applicable to the various
types of redemption agreements were as follows at December 31, 2000 and 2001:

A summary of activity of redeemable common stock during each of the years
ended December 31, 1999, 2000, and 2001 is as follows:

As discussed in Note I, certain of the Company's nonredeemable common stock
may be subject to rescission by the stockholders because of the Company's
failure to comply with state securities laws. Rescission rights for individual
stockholders vary, based upon the laws of the states in which stockholders
reside. Common stock that is subject to rescission is recorded separately from
stockholders' deficiency in the

F-16

AMERIVISION COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company's balance sheet. As the statute of limitations expire in the respective
states, such amounts are reclassified to stockholders' deficiency. A summary of
the common stock subject to rescission and reclassifications to stockholders'
deficiency is as follows:

Balance at January 1, 1999.................................. $2,468
Amount reclassified to stockholders' deficiency............. (972)
------
Balance at December 31, 1999.............................. 1,496
Amount reclassified to stockholders' deficiency............. (63)
------
Balance at December 31, 2000.............................. 1,433
Amount reclassified to stockholders' deficiency............. (129)
------
Balance at December 31, 2001.............................. $1,304
======

As discussed in Note N to the financial statements, the amounts reported
above have been restated from the amounts reported in the Company's prior period
financial statements.

NOTE I -- COMMITMENTS AND CONTINGENCIES

VIOLATIONS OF FEDERAL AND STATE SECURITIES LAWS

In 1995, the Company determined that it may not have registered its
securities with the Securities and Exchange Commission (the "Commission") when
it was obligated to do so under Federal securities laws, consequently, it may
have engaged in the sale or delivery of unregistered securities in violation of
the Federal securities laws. On July 30, 1998, the Commission issued a
cease-and-desist order which stated that (a) the Company, the two founders and
an affiliate had violated Sections 5(a) and 5(c) of the Securities Act; (b) the
Company had violated Section 12(g) of the Exchange Act and Rule 12g-1; and (c)
the two founders had caused the violation of Section 12(g) of the Exchange Act
and Rule 12g-1. The Commission ordered the Company, the two founders, and an
affiliate to cease and desist from committing or causing any violations and any
future violations of Sections 5(a) and 5(c) of the Securities Act and Section
12(g) of the Exchange Act and Rule 12g-1. The Commission did not order any
monetary penalties, fines, sanctions, or disgorgement against the Company, the
two founders, an affiliate or anyone else associated with the Company or any of
the other parties.

The Federal securities laws provide legal causes of action against the
Company by persons buying the securities from the Company, including action to
rescind the sales. With respect to the sales described above, the statutes of
limitations relating to such actions appear to have expired for sales made by
the Company more than three years ago. The Company made substantially all of the
stock sales more than three years ago. However, with respect to such sales,
other causes of actions may exist under federal law, including causes of action
for which the statute of limitations may not have expired.

Each of the states in which the Company has effected sales of common stock
has its own securities laws, which likely have equal applicability to the
Company's activities discussed above. The Company sold stock to persons in over
40 states, and those states typically provide that a purchaser of securities in
a transaction that fails to comply with the state's securities laws may rescind
the purchase, receiving from the issuing company the purchase price paid plus an
interest factor, measured from the date of sales of such securities, less any
amounts paid to such security holder. The statutes of limitations applicable to
such violations appear to have expired in most states. In some states, however,
such statutes do not begin running until a purchaser discovers or should have
discovered the violation. Depending on individual circumstances, therefore,
certain investors may still have the right to bring actions against the Company
under state securities laws. Also, depending on the law of the state and
individual circumstances, other remedies may be actionable for breach of state
securities laws.

F-17

AMERIVISION COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has completed an evaluation of the statutes of limitations for
each of the states in which the Company sold stock to a stockholder. The Company
believes that it may have maximum liability at December 31, 2001 of up to $1,304
which could be asserted by stockholders whose rights of rescission may not have
expired under applicable state securities laws. As discussed in Note H, the
Company has recorded this potential liability as Common Stock Subject to
Rescission in the balance sheet.

In addition, the Company may be liable for rescission under state
securities laws to the purchasers of the affiliate's common stock because of the
relationships of the two companies. The Company cannot predict how many of the
affiliate's stockholders will attempt to assert a right of rescission, but
because it believes it has adequate defenses to any such assertion no liability
has been accrued at December 31, 2001.

COMMITMENTS WITH PROVIDERS AND OTHERS

The Company does have several telecommunications contracts with various
providers of switchless services. The contracts require minimum purchase
commitments. The Company has met all minimum purchase commitments or has no
obligation that is not recorded related to these contracts at December 31, 2001.

NON-CANCELABLE OPERATING LEASES

The Company leases office space, copiers and other equipment under
agreements that are accounted for as operating leases. These lease agreements
expire in varying years through 2008. Total lease expense was approximately
$692, $1,066, and $821 in 1999, 2000 and 2001, respectively.

Future commitments under non-cancelable operating leases are as follows:

OTHER MATTERS, INCLUDING EVENTS SUBSEQUENT TO DECEMBER 31, 2001

In March 2001, a shareholder of the Company filed a shareholder derivative
action on behalf of the Company in the District Court of Oklahoma, charging the
management and the Company's then current and certain former directors with
breaches of their fiduciary duties. The Company assumed responsibility for
prosecution of the suit and has obtained dismissals of all claims against
management and all other defendants except for one former director. In February
2002, the court dismissed the action against the former director and the Company
did not appeal.

In February 2001, the State of Florida made an assessment totaling
approximately $1,728, which includes penalties and interest of approximately
$847, for underpayment of various Florida taxes, including gross receipts taxes
and sales and use taxes, covering the periods from September 1993 through August
1998. The Company agreed with $14 of the assessment and subsequently paid that
amount. The Company disagrees with the remaining assessment of $1,714, asserting
that the payment of taxes that were allegedly underpaid was the responsibility
of the Company's third-party billing and collection companies. The State of
Florida has

F-18

AMERIVISION COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

requested an extension to December 31, 2002 to complete the audit. The Company
believes that it will ultimately prevail in its protest of the assessment, and
has not recorded a liability as of December 31, 2001.

On May 17, 2001, the Company filed a complaint against a competing entity
in Case No. CIV-01-768-C, in the United States District Court for the Western
District of Oklahoma. The Company seeks injunctive relief and monetary damages
for defendant's alleged false and defamatory statements to customers and
potential customers of the Company that constitutes false advertising under
Section 43(a) of the Lanham Act, 15 U.S.C. sec. 1125(a), as well as a violation
of the Oklahoma Deceptive Trade Practices Act, interference with advantageous
(business) relations, contract and prospective economic advantage, business
disparagement, and defamation under Oklahoma state law. The Company has also
alleged that defendant has misappropriated certain trade secrets of the Company.

On August 20, 2001, the defendant filed Counterclaims against the Company
alleging false advertising in violation of Section 43(a) of the Lanham Act, 15
U.S.C. sec. 1125(a), and violations of the Oklahoma Deceptive Trade Practices
Act, tortious interference with advantageous (business) relations, contract, and
prospective economic advantage, business disparagement, and defamation, slander
and libel under Oklahoma state law. Subsequent to year-end, the parties filed a
settlement agreement with the court resulting in the dismissal of all their
pending claims.

NOTE J -- FINANCIAL CONDITION AND RESULTS OF OPERATIONS

At December 31, 2001, the Company had an accumulated stockholders'
deficiency of $16,980, and negative working capital of $19,635. The accumulated
stockholders' deficiency is the result of cumulative net losses from inception
through December 31, 1998 in excess of $12,000, and the declaration and payment
of distributions to stockholders from 1994 through 1997 in excess of $15,800.
Declining billable minutes, lower rates, and elimination of certain other fees,
have reduced the Company's net sales from $114,661 in 1999, to $100,077 in 2000,
and $80,764 in 2001.

Management's plans are to continue to enact cost-cutting measures begun in
prior years that will enable the Company to continue to sustain profitable
operations. As a result of cost reductions, the Company realized net income from
continuing operations of $2,224, $750 and $1,232 in 1999, 2000 and 2001,
respectively. Management also plans to continue to develop and market new
products and to strengthen its relationship with its key non-profit
organizations. The Company also believes that it has sufficient borrowing
availability under its Credit Facility to continue to meet its obligations for
the next year.

NOTE K -- STOCK-BASED COMPENSATION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)

STOCK OPTION PLANS

Board of Directors Stock Option Plan

The Company has entered into various stock option and stock bonus plans
with officers, non-employee directors, key employees, and certain consultants
and independent contractors. The plans authorize the issuance of options to
purchase up to an aggregate of 115,487 shares of Common Stock, with vesting
periods of four years and maximum option terms of five years. For the employee
directors, the Company recognized expense of $8 in 2000 and 2001 based upon the
difference between the fair value of the common stock as of the grant date and
the exercise price of the stock options. Stock option expense recognized under
the fair value method prescribed by SFAS No. 123 for non-employee directors
totaled $38 and $36 for 1999 and through June 30, 2000, respectively. On July 1,
2000, the Company adopted the APB Opinion No. 25 intrinsic value method of
accounting for stock options. The $102 of expense recognized under SFAS No. 123
was recorded as a cumulative effect of an accounting change, net of applicable
income taxes of $45. Based on the exercise price of the options and the fair
value of the stock at the date of the directors' change in status, no
compensation

F-19

AMERIVISION COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

expense was required to be recognized in 2001. Subsequent to December 31, 2001
the Board of Directors elected to freeze this plan, therefore, not allowing any
further grants.

Employee Stock Incentive Plan

In December 1999, the Company's Board of Directors approved the 1999 Stock
Incentive Plan (the "Plan"), which authorized 40,000 shares of the Company's
common stock to be reserved for issuance to employees, directors, consultants
and other individuals. The Company has granted options totaling 24,500 shares to
certain Company employees under this plan. Subsequent to December 31, 2001 the
Board of Directors elected to freeze this plan, therefore, not allowing any
further grants.

The following table summarizes the Company's stock option transactions from
January 1, 1999 through December 31, 2001:

Following is a recap of the outstanding stock options at December 31, 2001:

Pursuant to SFAS No. 123, the Company is required to disclose the pro forma
net earnings and earnings per share effects of the stock options, as if the
stock options had been accounted for under the provisions of SFAS No. 123. Had
compensation costs been determined in accordance with SFAS No. 123, the
Company's

F-20

AMERIVISION COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

net income and net income per share amounts for the years ended December 31,
1999, 2000, and 2001 would have been reduced to the pro forma amounts indicated
below:

The Company has obtained an independent appraisal of its common stock for
each date that it granted stock options and bonuses to employees and
non-employee directors. Employee stock options granted during the year ended
December 31, 2000 have an exercise price of $25.20 per share, which equals the
fair value of the Company's common stock as of the grant date. The weighted
average estimated fair value of these options is $11.37 per share. Stock options
granted in January 1999 have an exercise price of $28.86 per share, which
exceeds the fair value of the Company's common stock as of the grant date. The
weighted average estimated fair value of the options granted in January 1999 was
$1.98 per share. The stock options granted in July 1999 have an exercise price
of $28.86 per share, which is lower than the fair value of the Company's common
stock as of the grant date. The weighted average estimated fair value of these
options was $19.46 per share.

Effective in July 2001, the directors who were granted options in 1998 and
1999 ceased to be directors of the Company. The exercise price of their
remaining unvested options continues to be $28.86, and the fair value of these
options is considered to be $0.00.

Because the Company's stock is not publicly traded, the fair value of the
Company stock options was estimated on the date of the grant using the minimum
valuation method, as prescribed by SFAS No. 123. Under the minimum value method,
expected stock price volatility is set at a level that approximates 0%. The
estimated weighted-average fair value of options granted during 1999 and 2000
was calculated using a Black-Scholes option-pricing model with the following
weighted-average assumptions:

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. The Company's stock options have characteristics
significantly different from those of traded options, and changes in the
subjective input assumptions can materially affect the fair value estimate.

STOCK BONUSES

The Company granted stock bonuses totaling 22,746 shares to former employee
and non-employee directors with vesting periods of up to four years.
Compensation expense is recognized on a straight-line basis over the vesting
period. In addition, the agreements provide for the Company to pay a cash bonus
equal to the amount of income taxes for which the recipients will be liable as a
result of the vesting of the stock bonus, and

F-21

AMERIVISION COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

an additional cash bonus equal to the amount of income taxes for which the
recipient will be liable as a result of the first cash bonus. During the years
ended December 31, 1999, 2000 and 2001, the Company recognized compensation
expense of $147, $192, and $42, respectively, pursuant to the stock bonus.
Additional compensation expense of $80, $109, and $31, respectively, was
recognized for the related tax bonus arrangements. Included in the compensation
expense for the year ended December 31, 2000 is $136 in stock compensation and
$76 for the related tax bonus attributable to a former officer, who became 100%
vested in his stock bonus upon his resignation in January 2000. Effective in
July 2001, the unvested portion of the stock bonus for two former non-employee
directors was forfeited when they were not re-elected to the Board of Directors.

NOTE L -- EARNINGS PER SHARE (PER SHARE AMOUNTS NOT IN THOUSANDS)

The computation of basic and diluted earnings per share is as follows:

The average shares listed below (in thousands) were not included in the
computation of diluted earnings per share because to do so would have been
antidilutive for the periods presented:

F-22

AMERIVISION COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE M -- QUARTERLY FINANCIAL DATA (UNAUDITED)

As discussed in Note C, in the fourth quarter of 2000, the Company expensed
costs of approximately $575 that had previously been capitalized in connection
with software development costs. In the fourth quarter of 2001, the Company
expensed costs of approximately $1,052 in connection with the final write-off of
the software development costs. As discussed in Note B, the Company recognized
an extraordinary gain of $2,146 in the fourth quarter of 2001.

NOTE N -- PRIOR PERIOD ADJUSTMENTS

Subsequent to December 31, 2001, the Company determined that it had
incorrectly computed the amount of common stock subject to rescission by
stockholders at December 31, 2000 and prior periods. Specifically, the Company
did not apply correct state statutes when it previously reported the amount of
common stock subject to rescission. The effects of this error were to increase
the stockholders' deficiency (1) from ($27,644) to ($28,427) at January 1, 1999,
(2) from ($23,758) to ($24,785) at December 31, 1999, and (3) from ($22,636) to
($23,738) at December 31, 2000. The restatement did not have any affect on the
previously reported results of operations or cash flows for the years ended
December 31, 1999 and 2000.

F-23

EXHIBIT INDEX