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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1998
REGISTRATION NO. 000-23105
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
PRE-EFFECTIVE
AMENDMENT NO. 3
TO
FORM 10-SB
GENERAL FORM FOR
REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
-----------------
AMERICAN INDEPENDENT NETWORK, INC.
(Exact name of small business issuer in its charter)
------------------
DELAWARE 752504551
(State or Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6125 AIRPORT FREEWAY, SUITE 200
HALTOM CITY, TX 76117
(817) 222-1234
(Address and telephone number of principal executive offices)
-----------------
DR. DONALD W. SHELTON
CHIEF EXECUTIVE OFFICER
AMERICAN INDEPENDENT NETWORK, INC.
6125 AIRPORT FREEWAY, SUITE 200
HALTOM CITY, TX 76117
TELEPHONE (817) 222-1234
FACSIMILE (817) 222-9809
(Name, address and telephone number of agent for service of process)
------------------
Copies to:
ROBERT E. GYEMANT, Esq.
PAMELA HICKS, Esq.
KNAPP, PETERSEN & CLARKE
A Professional Corporation
500 N. Brand Blvd., 20th Floor
Glendale, California 91203
Telephone (818) 547-5000
Facsimile (818) 547-5329
Securities to be issued under Section 12(g) of the Act: COMMON STOCK
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
The Company was incorporated in the State of Delaware on December 11, 1992 under
the name Strictly Business, Inc. On September 16, 1993, pursuant to an amendment
to the Certificate of Incorporation, the Company changed its name to American
Independent Network, Inc. (the "Company" herein). The Company's principal
offices are located at 6125 Airport Freeway, Suite 200, Haltom City, Texas
76117.
From inception through March 1994, the Company engaged in no substantive
business operations, but was actively seeking and pursuing potential business
opportunities. In September 1993, the Company was acquired by Donald Shelton and
Randy Moseley in a stock exchange transaction. Commencing in March 1994, the
Company began providing programming, media production, and syndication services
to television stations.
The Company's initial business strategy focused on entering into agreements with
television and cable stations broadcasting in smaller communities and by 1997,
the Company had affiliate agreements ("Affiliate Agreements") with over 150
broadcast television and cable stations ("Affiliate Stations").
Broadcast Television
Broadcast television stations, which are licensed and regulated by the Federal
Communications Commission ("FCC"), transmit audio and video signals over the
air-waves within a designated signal area on a designated frequency. There are
three (3) basic types of broadcast television stations operating in the United
States today: (1) full-power network affiliates (ABC; NBC; CBS; FOX; WB Network;
and Paramount) ("Network Affiliate"); (2) full-power independent stations, such
as UHF channels ("Full Power Stations"); and (3) low power independent stations
("LPTV"). A Network Affiliate receives its programs from its network provider
and is generally only permitted to air programs of that particular network, with
the exception of FOX, WB Network, and Paramount affiliates who must obtain
additional programming. Network Affiliates may air programs from other sources,
such as local programming, only a few hours per week and may not broadcast
programs of any of the other major networks. Independent Stations include both
full-power and low-power stations which are not affiliated with one of the major
networks and thus, do not have access to network programming. Instead, they must
seek their own programming sources, such as that provided by the Company.
Cable Television
Cable television was first developed in the 1940's primarily to serve rural
communities unable to receive broadcast television signals. Cable television is
defined by the FCC as a cable system
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facility consisting of closed transmission paths and associated signal
generation, reception, and control equipment that is designed to provide cable
service, including video programming, to multiple subscribers within a
designated community. To receive cable transmission, a viewer is required to
feed an outside, dedicated wire or cable directly into their home. By 1995,
there were more than 11,200 cable systems serving over 60 million subscribers in
over 32,000 communities in the United States. Cable system operators range from
large multiple system operators that own many systems, to small independent
systems that serve as few as several thousand households. Each system operates
under a franchise from the local government in the community in which it is
located. Cable television is regulated by local municipalities, as well as the
FCC. In addition to basic, premium and pay-per view programs provided on cable
television, many municipal governments require local cable operators to
originate their own programming, called "Community Access" television or "Local
Origination."
Company Affiliates
The Company originally broadcast its programs in analog signal and, in 1996, had
Affiliate Agreements with over 150 Affiliate Stations. In late 1996, the Company
converted from analog transmission to digital in early compliance with the FCC
mandate that all broadcast stations convert to digital transmission by the year
2006. The Company was the first network to convert to digital with
multi-channels. As a result of the conversion from analog to digital, the
Company's broadcast signal is now transmitted to its Affiliate Stations in
digital format, however, most television stations do not have the capability to
broadcast a digital signal, thus they are required to decode the Company's
digital signal back to analog so that they can broadcast to their viewers
through their analog transmitter. To enable the Affiliate Stations to decompress
the digital signal, the Company was required to furnish each Affiliate Station
with digital decoding equipment. Due to the costs of providing the decoding
equipment, the Company was not able to furnish the necessary equipment to all of
its then existing Affiliate Stations. Accordingly, the Company initially entered
into Affiliate Agreements with thirty-three (33) independent Full Power and LPTV
stations and Local Origination cable television systems to provide programming
services via digital transmission. The Company has since added additional
Affiliate Stations and, to date, has agreements with forty-four (44) Affiliate
Stations. The Company plans to expand its current affiliate base by
concentrating its marketing efforts on the 30 largest broadcast territories in
terms of viewing households and by reassociating with prior Affiliate Stations.
Ten of the Company's current Affiliate Stations are located within the 30
largest designated market areas ("DMA"). The Company is currently evaluating
applications from stations desirous of becoming Affiliate Stations and will
enter into Affiliate Agreements with these stations when it is able to provide
the stations with the necessary decoding equipment.
The following table identifies the Company's current Affiliate Stations, the
Affiliate Station's DMA location and ranking, the location of the Affiliate
Station, the Affiliate Station's title, and the approximate number of households
in such DMA:
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<TABLE>
<CAPTION>
RANK DESIGNATED MARKET AREA DMA LOCATION STATION NAME NO. OF
(DMA) HOUSEHOLDS
--------------------------- ------------ ------------ ----------
<S> <C> <C> <C>
2 Los Angeles Temecula, CA KFMG-TV 67 100,000
4 Philadelphia Winslow Township, NJ WPSJ-TV 8 1,505,000
7 Washington, D.C. Arlington, VA WTMV-TV 14 1,750,000
10 Atlanta LaGrange, GA WGBN-TV 33 100,000
13 Cleveland Cleveland, OH WAX-TV 35 1,260,000
WAOH-TV 29
15 Tampa Sebring, FL WOCX-TV 5 85,000
17 Phoenix Prescott, AZ KUSK-TV 7 1,000,000
17 Phoenix Phoenix, AZ KTVP-TV 56 200,000
20 Sacramento Sacramento, CA KBTV-TV 25 500,000
22 Orlando/Dayton Orlando, FL WNTO-TV 26 1,117,093
Beach/Melbourne
27 Hartford Hartford, CT WHTX-TV 10 120,000
34 Columbus Columbus, OH WLWG-TV 62 505,000
36 Salt Lake City Logan, UT KUTN-TV 12 45,000
38 San Antonio San Antonio, TX KSAA-TV 19 160,000
40 Buffalo West Valley, NY WNGS-TV 67 250,000
40 Buffalo Olean, NY W25AK-TV 17,000
42 Memphis Memphis, TN WBII-TV 20 302,845
43 Oklahoma City Edmond, OK K07TX-TV 40,000
43 Oklahoma City Norman, OK KTOU-TV 22 170,000
43 Oklahoma City Stillwater, OK K19DF-TV 50,000
44 West Palm Beach West Palm Beach, FL WINQ-TV 19 420,000
44 WPB/Ft. Pierce Vero Beach, FL WWCI-TV 10 87,000
58 Tulsa Grove, OK KELF-TV 43 20,000
60 Knoxville Heiskell, TN WFEM-TV 12 39,000
60 Knoxville Oneida, TN Cable Channel 4 3,700
61 Mobile, AL/Pensacola, FL Pensacola, FL WBOP-TV 12 35,000
65 Wichita/Hutchinson Kiowa, KS KDE-TV 36 6,500
66 Toledo Bellevue, OH WBF-TV 21 6,500
71 Lexington East Bernstadt, KY WOBZ-TV 9 125,000
72 Des Moines Marshalltown, IA KDAO-TV 39 35,000
</TABLE>
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<TABLE>
<S> <C> <C> <C>
76 Paducah Union City, TN WOBT-TV 9 5,000
77 Texarkana/Shreveport Hope, AR KTSS-TV 55 25,000
81 Huntsville/Decatur/Florence Florence, AL WBCF-TV 3 30,000
97 Evansville Mt. Carmel, IL WCJ-TV 12 30,000
100 Savannah Ailey, GA W46CA-TV 50,000
103 Ft. Wayne Auburn, IN W07CL-TV 237,090
115 San Luis Obispo San Luis Obispo, CA KSLO-TV 20 180,000
118 Reno Hawthorne, NV KWI-TV 13 9,000
125 Columbus, GA Columbus, GA WCGT-TV 16 86,000
128 Corpus Christi Corpus Christi, TX K07UD-TV 49,000
131 Chico/Redding Redding, CA K04NV-TV 70,000
155 Bangor, ME Banger, ME WBGR-TV 33 50,000
205 Juneau, AK Sitka, AK KSCT-TV 5 2,900
TOTAL STATIONS = 44 TOTAL DMAS COVERED = 35 TOTAL HHS = 10,878,628 (APPROX.)
</TABLE>
In December 1997, the Company entered into an agreement with Dominion Sky
Angels, a satellite direct television digital system, to add the Company as a
separate channel. The channel began broadcasting in February 1998 and can be
seen on the Dominion DBS Television System by persons owning a Dish(TM) NetWork
satellite receiver, as well as in over 1,500 hotel rooms at the Imperial Palace
Hotel and Casino in Las Vegas, Nevada. In addition, Internet users with AudioNet
can view the Company's programs on their computers while it is being aired on
the network. The Company's web site is located at www.aini.com
(see "The Business").
In December 1997, the Company and Media Fund, Inc. ("MFI") entered into an
agreement pursuant to which MFI will receive 1,875,000 shares of the Company's
Common Stock, assets with a book value of $2,818,933 and 20% of the commercial
time slots on the Company's channels for a period of four (4) years commencing
in December 1998 in exchange for the payment of $5,000,000 to be paid in
installments and up to 12 hours per day of network quality programming for the
life of the contract. The agreement is renewable for five (5) years (See
"Exhibit 6.33"). MFI is in the business of helping growing businesses gain
access to media and professional advertising and marketing services by
purchasing the appropriate type and amount of media to bring its client
companies' products and services to its target markets.
The Company has a wholly-owned subsidiary, Eureka Media & Trading, Inc., which
was formed in the State of Nevada on September 6, 1995. To date, the subsidiary
corporation has not conducted operations. The Company is in the process of
changing the name to "Senior Channel, Inc."
THE BUSINESS
PRINCIPAL SERVICES
The Company provides family-oriented television to a network of television
stations and cable systems nationwide ("Affiliates" or "Affiliate Stations").
The Company also provides media production and syndication services, as well as
satellite uplink services on behalf of certain cable channels. The Affiliate
Stations serviced by the Company are primarily "independent" stations, meaning
that they have no affiliation with the major network organizations (NBC; ABC;
CBS; FOX;
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WB Network; and Paramount). A station which is affiliated with one of the major
networks is provided programming by the managing network organization, whereas
independent stations must either produce their own programs at a significant
expense, or purchase such programming from an outside source, such as the
Company. The programs provided by the Company cover a wide array of topics and
interests, and include cartoons, sports, sitcoms, movies, news and weather,
comedy, science, health shows, documentaries, and public interest programs. The
Company also offers original programs such as The Junior National Achievers
Awards, National Golden Gloves, The Better Life Show, Television Factory Direct,
Under Sea Adventures, Travel Escapades, celebrity golf tournaments, professional
boxing, fishing expeditions and interactive programming. The Company maintains a
library of over 2,000 licensed and wholly owned programs, including nostalgic
and vintage genre films, as well as newly produced movies.
Program Inventory
The Company amasses its program inventory by various methods, including
licensing the rights from program owners and syndicators, purchasing the rights,
or by producing its own programming.
The vast majority of the Company's programs are procured via license agreements
with program owners and syndicators (collectively referred to herein as "Program
Owners"). The "National Association of Programers and Television Executives"
("NAPTE") is an annual industry convention where broadcasters, such as the
Company, are able to view program offerings, meet with Program Owners, and
negotiate licensing terms. The Company's officers have attended several NAPTE
conventions and have been successful in negotiating licensing rights to many of
its family oriented programs. In addition to contacts generated through the
NAPTE convention, the Company has, on occasion, been contacted at its offices by
Program Owners seeking to license their programs to the Company. Due to the
immense array and amount of programming material available, and the large
numbers of Program Owners, the Company has numerous contacts and a variety of
products from which to choose and is not dependent upon any one party for its
programming selections.
The form of agreement utilized by the Company to secure licensing rights with
program owners and syndicators contains barter terms pursuant to which the
Company obtains broadcasting rights to certain identified programming and in
exchange, the Company gives the Program Owner advertising time during the
broadcast of such programs. In a thirty (30) minute program there are normally
eight (8) minutes of commercial time, which time is allocated as follows: three
(3) minutes to the Program Owner; two (2) minutes to the Affiliate Station; and
three (3) minutes to the Company. The Program Owner can then sell the
advertising time to outside parties, thereby earning income on the licensing of
their program to the Company. The contract is generally for a term of fifty-two
(52) weeks and is cancelable by either party upon two (2) weeks written notice.
The Company has the right to refuse any program without prior notice if the
content, subject matter, or production quality does not meet the Company's
standards.
The Company entered into a License Agreement with All News Channel ("ANC"),
commencing as of January 1, 1998 and ending on December 31, 1998, pursuant to
which the Company has the right to broadcast ANC's national, international,
weather and sports news coverage during specified time slots Monday through
Sunday for a licensing fee of $542 per month. Each news segment is 30 minutes in
length, including commercial time of approximately 7 minutes. Of the available
commercial time, ANC reserves 3 minutes and the Company is allotted 4 minutes
for its own use. The Company is also permitted to preempt certain segments of
the ANC broadcast with its own news material. Currently, the Company airs ANC
approximately 25 times per week. In the event the
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Company fails to pay the licensing fee or any part thereof during the term of
the agreement, ANC may terminate the agreement upon thirty days advance written
notice to the Company.
The Company has purchased the rights to select public-domain movies. These
purchase arrangements are generally done pursuant to oral contract and involve a
one-time payment by the Company. The Company has sole discretion in determining
when and how often to run its wholly owned programs. The Company owns
approximately 2000 shows and movies outright, however the majority of the
Company's current broadcast list continues to be licensed programs.
The Company has the facilities to produce its own programming, but due to the
wide availability and low cost of finished programing and the high cost
associated with producing its own programming, the Company no longer produces
its own programs. However, the Company does lease its production facilities and
certain equipment to third-parties for their production needs.
In 1996, the Company made the conversion from analog to digital transmission of
its programs in early compliance with the Federal Communications Commission
mandate that all broadcast stations convert to digital transmission by the year
2006. Digital technologies enable the cable system to compress multiple digital
channels into the bandwidth currently required for a single analog channel,
thereby permitting a cable system to significantly expand its current channel
capacity with a much lower capital investment than would be required to install
fiber optic cables or to make other major infrastructure upgrades. As a result
of the conversion to digital transmission, the Company was able to expand its
single channel to a total of five (5) channels.
The Company utilizes one of its five channels for broadcast of its own programs.
On April 3, 1997, the Company leased a channel to Lionshead Entertainment, Inc.
to broadcast as the "Senior Channel" with 24 hour programming designed for the
senior citizen market. The agreement was for a term of three years and required
LEI to pay the Company $98,000 per month. LEI failed to pay the accrued amounts
due and was in arrears to the Company and in breach of its contract. In December
1997, the Company and LEI agreed to a Settlement, Compromise and Assignment
pursuant to which LEI assigned to the Company all of its rights, title and
interest in any intellectual property rights relating to the Senior Channel,
including, but not limited to, its rights in the "Senior Channel" name. The
Settlement Agreement and Assignment were executed on February 28, 1998 and are
effective as of December 1998. In exchange for the foregoing, the Company
released LEI from its contract and deemed all amounts owed by LEI to the Company
paid in full.
The Senior Channel was founded to address the interests and needs of the growing
senior population. The Company intends to operate the channel as a wholly owned
subsidiary and is in the process of changing the name of its subsidiary, Eureka
Media & Trading, Inc. to "Senior Channel, Inc." The Company plans to broadcast
on the Senior Channel 24 hours per day and will include applicable programming
currently in the Company's library, as well as new programs geared specifically
for the senior market. The Company is seeking to include Gospel Music, Big Band
Hour, The Low Fat Gourmet, Senior Travel Show, The Washington Spy, Whatever
Happened To ?, and Senior Lifestyles in its Senior Channel programming schedule.
In addition, Dominion Shy Angels has expressed interest in including the Senior
Channel on its direct satellite system.
The Company is negotiating with parties to lease its additional three channels
on the digital compression system uplinking to the satellite. Broadcast Magazine
estimated that there are over 65 new cable channels who have announced that they
are ready to commence broadcasting and are seeking channel space. Accordingly,
the Company believes that it will be able to enter into a lease agreement for
the remaining channels.
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The Company has a website located at www.aini.com. The Company's website
provides information regarding the Company and about future programming. In
addition, the Company's website has live video and audio feeds of the Company's
programs which are only accessible to computers with adequate memory via
AudioNet.
MARKETING STRATEGY; PRINCIPAL MARKETS AND CUSTOMERS
The Company essentially has two products to distribute to generate revenues: (1)
sale of its programming; and (2) sale of the commercial advertising time within
the programming.
(1) Programming:
Marketing Strategy: The Company markets its programming to broadcast and cable
television stations on the strength of its quality family oriented programming
and its attractive barter system pursuant to which the Affiliate Station retains
4 minutes per hour of advertising time. Under this barter system, an Affiliate
Station is not required to spend money to receive programming ("no-cost
programming"). The Nielsen Designated Market Area Television Households
publishes an annual Television Market Rankings which lists the identity of
stations, its market, ranking and estimated number of households. The Company
contacts many of these stations through direct mailings and other
advertisements. In addition, the Company is introduced to potential Affiliate
Stations at industry conventions and through other Affiliates' recommendations.
Stations also hear about the Company at industry conventions and from other
stations, programmers, equipment manufacturers and suppliers, and then contact
the Company to inquire about becoming an Affiliate Station. As the Company
expands into the top 30 markets, it will make personal visits and telephone
calls to the independent stations that it has targeted as good candidates for
affiliation with the Company.
Customers: The Company's potential customers for its programming includes all
television and cable stations. The Company originally broadcast in analog signal
and had Affiliate Agreements with over 150 television and cable stations. In
connection with its conversion to digital transmission and the associated costs
of furnishing its Affiliate Stations with digital decoding equipment, the
Company was not able to furnish the equipment to all of its then existing
Affiliate Stations. The Company has entered into agreements with 44 Affiliate
Stations (for a complete list of the Company's Affiliate Stations, please refer
to Page 4) and is currently evaluating applications from additional stations
desirous of affiliating with the Company. The Company plans to concentrate on
adding stations located in the top 30 DMAs.
A station which has been added as an affiliate of the Company is required to
broadcast a minimum of 12 hours of the Company's broadcast within a 24 hour
period. In general, the terms of the Affiliate Agreement between the Company and
each Affiliate Station provides that the Affiliate Station will receive 24 hours
of television programming, during which the Affiliate Station may use
approximately four (4) minutes per hour for local commercials or other
announcements. The Affiliate Agreement also provides that the Affiliate must
broadcast the Company's programs in their entirety, submit a weekly affidavit of
its broadcast logs showing the number of hours per day that the Company's
programming was broadcast on the Affiliate Station, maintain all necessary
permits and licenses, and may not preempt or disrupt the Company's national
advertisements. Either party may cancel the agreement at any time with thirty
(30) days written notice.
Upon request, the Company also provides its Affiliate Stations with promotional
packages, as well as press releases and recorded audio announcements.
Promotional packages may include: (i) customized station IDs; (ii) Company
Network ID's with a common theme designed to show the distinctiveness of the
Affiliate Station by its association with the Company's network; (iii) 30 second
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generic promotions for each element of Company program content; (iv) 10 second
and 30 second program-specific promotions for the different programs provided by
the Company, including movies and shorts; (v) opening and closing "bumpers" for
all programs (a bumper is a short introduction or closing which provides a
smooth transition from program segments to commercials and vice-versa); (vi)
animated promotions; and (vii) 30 second and 60 second radio commercials
promoting the station's affiliation with the Company.
In exchange for providing the Affiliate Stations with programming and commercial
time, the Company retains the remainder of the advertising time which it sells
to advertising firms and independent advertisers and uses to barter with
third-parties to acquire additional programming. A critical factor in attracting
advertisers is the Affiliate Stations's market since each viewer comprising such
market represents a potential customer for the advertiser's product. Therefore,
the Company's access to the Affiliates' markets is integral to selling the
advertising time.
(2) Advertising:
Marketing Strategy and Customers
The Company markets its advertising time to (i) to Program Owners; (ii)
Affiliate Stations; and (iii) advertising agencies and independent advertisers.
Program Owners: In exchange for licensing rights to select programming, the
Company gives the Program Owner advertising time during the broadcast of such
programming. The Program Owner is then able to sell the advertising to outside
parties. The Company generally contracts with Program Owners at the NAPTE
convention and accordingly, is not required to actively market this segment of
its advertising time.
Affiliate Stations: The Company provides programming and advertising time to its
Affiliate Stations in exchange for retaining advertising time and access to the
Affiliate Stations' markets. In a traditional broadcasting contract, an
affiliate station would retain all available advertising time, which it would
then sell to outside advertisers, and the network would receive a fee from the
affiliate station. However, the Company believes that by selling retained
commercial time to outside advertisers, it is able to generate higher revenues
than it would otherwise receive in fees from its Affiliate Stations. The Company
markets both its family oriented programming and advertising time to Affiliate
Stations. Advertising time is generally a component of the programming contract
with Affiliate Stations, accordingly, the Company does not separately market the
advertising time to Affiliate Stations.
Advertisers: Approximately 25% of the Company's revenues come from sales of
commercial time to advertising agencies and independent advertisers. The
monetary value of this time is based upon the estimated size of the viewing
audience; the larger the audience, the more the Company is able to charge for
the advertising time. To measure the size of a viewing audience, networks and
stations generally subscribe to nationally recognized rating services, such as
Nielsen. Initially, the Company's Affiliate Stations were located in the smaller
market areas of the country. However, the Company's goal is to enter into
Affiliate Agreements with stations located in the top 30 designated market
areas ("DMA") in order to obtain Nielsen ratings to allow the Company to
charge higher rates for their advertising time.
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Presently, the Company has Affiliate Stations in 9 of the top 25 DMAs and 19 of
the top 50 DMAs. Sales of the Company's advertising time to advertising agencies
and to independent advertisers is generally by referrals or by advertisers
contacting the Company. In some instances, the Company has solicited advertising
agencies.
In addition to sales of its programming and advertising time, the Company also
generates revenues through (i) sales of programming time slots to companies
desiring to air their own programs; (ii) leasing of its digital satellite
channels; (iii) direct response marketing of products advertised on the network;
and (iv) leasing of its production facilities.
COMPETITION
The broadcast industry is highly competitive and, as a result of the wide range
of programming available in both the broadcast and cable formats, the Company
competes with a large number of competitors, many of whom may offer similar
programs. The Company competes for available air time, channel capacity,
advertiser revenue, revenue from license fees, number of viewing households, and
programming material. The Company believes its strongest competitive advantages
are (i) the quality of its family oriented programming; (ii) its advertising
rates; (iii) the markets in which its programming is broadcast; and (iv) its
no-cost programming.
Quality Family Oriented Programming: The Company's programming philosophy is
centered on family viewing and it believes that there is strong public support
(as evidenced by Congress' hearings on appropriate programming and the recent
mandate to add the content ratings symbols on the television screens as the
programs are aired) for rated "G" programming which is appropriate for viewing
by the entire family. As major networks are permitting more violence, sexual
content, and offensive language within their programming, the Company believes
that there is a strong and growing contingent of families who will demand
programs that are more aligned with their family values. The Company intends to
position itself as the "family network" to fill this niche. Although the Company
does not believe that its family oriented programming will put it in direct
competition with the larger and more established networks, it does believe that
its programming, in combination with other factors, will establish the Company
as a premiere network.
Advertising Rates: The Company also competes with other networks on the basis of
its advertising rates. The Company's barter system allows it to keep its rates
low, thereby making advertising with the Company a viable alternative for many
companies whose revenues do not permit them to pay the exorbitant fees required
to advertise on the major networks. In addition, as other networks increase the
cost of producing shows, such as the recently announced $13,000,000 per episode
of E.R. on NBC, they must increase the fees charged to advertisers in order to
recoup their expenses. Since the Company does not produce its own shows and has
relatively low overhead, it is able to maintain very competitive advertising
rates.
Markets: The leading networks, based upon total number of affiliated stations,
are ABC, CBS, NBC, and FOX. Each of these competitors are more established than
the Company, have significantly greater name recognition and viewer loyalty, as
well as greater industry, financial, distribution and
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marketing, programming, personnel and other resources than the Company.
Moreover, the television market has seen a continual increase in the number of
networks, including the addition of Warner Brothers Network (WB) and United
Paramount Network (UPN) in 1994. As the number of networks increase, the Company
will face greater competition for available syndicated programs, viewers, and
for affiliates who wish to carry their broadcasts. The Company also believes
that other forms of quasi-networks, including QVC and the Home Shopping Network
and so called "superstations" such as WTBS and WGN, will also be a significant
source of competition. At present, the Company is approximately the tenth
largest network based upon the total aggregate households covered by the
Company's Affiliate Stations. The Company currently broadcasts in 10 of the top
30 DMAs and broadcasts in an aggregate of approximately 10,878,628 households.
The Company intends to increase its household viewership by entering into
additional markets in the top 30 DMAs.
No-Cost Programming: In a typical broadcasting arrangement, the network charges
the affiliate station a fee to broadcast its programs and the affiliate retains
most, if not all, of the advertising time. The fees charged by the networks
generally represent a large portion of the affiliate's expenses and may be
prohibitive to many of the smaller affiliate stations. The Company is able to
compete with the high fees charged by other networks with its no-cost barter
arrangement which enables affiliate stations to broadcast quality programs
without the usual associated costs. Under the Company's barter system, the
Company provides programming and advertising time to its Affiliate Stations and,
in exchange, the Company retains advertising time and gains access to the
Affiliate Stations' viewing market. The Company earns revenues on its
programming by selling the retained advertising time to outside advertisers.
In addition to the foregoing, the Company believes that the recent introduction
of direct satellite services ("DSS") will directly compete with cable systems
and increase the pressure for additional channels and services. DSS systems
offer their subscribers more than twice as many channels as most cable systems,
with better audio and video quality. The price of satellite dishes are
competitive with premium cable fees and industry analysts expect the
approximately 4.5 million DSS subscribers to increase to 19 million by the year
2000. In December 1997, the Company entered into an agreement with Dominion Sky
Angels to add the Company as one of its 16 channels. The channel is delivered
through EchoStar via the small 12-inch dish.
RELIANCE ON CUSTOMERS
The Company currently provides programming services to forty-four (44) Affiliate
Stations. The Company is not dependant upon any one station for its revenues,
however, the loss of several stations could adversely effect the Company's
results of operations.
The Company also sells advertising time slots on its programming to various
advertisers. The revenues generated by sale of the advertising slots represents
approximately 25% of the Company's income, however, taken as a whole, no one
company provides a large portion of such income.
11
<PAGE> 12
Accordingly, the Company is not dependent upon one or a few major advertisers,
however, the loss of a significant number of advertisers could adversely effect
the Company's results of operations.
The Company is negotiating to lease its additional channels on the digital
compression system uplinking to the satellite. Broadcast Magazine has estimated
that there are over 65 new cable channels who have announced they are ready to
commence broadcasting and are seeking channel space. Accordingly, the Company
believes that it will be able to enter into lease agreements for the remaining
channels.
ENVIRONMENTAL COMPLIANCE
The Company's business is not subject to any federal, state or local
environmental laws.
PATENTS, TRADEMARKS AND SERVICE MARKS
The Company does not currently hold patents, copyright marks or service marks on
any of its products, however, the Company may apply for such intellectual
property right protections if future conditions indicate that this would be in
the Company's best interests.
On July 18, 1997, the Company was granted a Radio Station Authorization by the
FCC. The Radio Station Authorization, which authorizes the Company to build and
operate a domestic fixed transmit/receive C-band earth station (uplink system)
on the Company's premises, expires July 18, 2007.
The Company has entered into license agreements with several syndicators and
program owners for the use of their programming. Under the agreements, which are
generally non-exclusive, the Company is granted the right to exhibit, distribute
and transmit by means of broadcast or cablecast, a particular program. In
consideration thereof, the Company provides advertising time during such program
to the syndicator. The amount of advertising time, the length, and other terms
of the license agreement vary, depending upon the type of program being
licensed.
The Company has also entered into Affiliate Agreements with each of its
Affiliate Stations pursuant to which the Company provides programming and other
amenities in exchange for advertising time during such programming. The Company
either utilizes such advertising time or sells it to third parties. The terms of
the Affiliate Agreements vary depending upon the type of programming being
provided by the Company, the length of the agreement, as well as other
variables. The Company currently has 44 Affiliate Stations with whom it has
entered into comparable Affiliate Agreements.
12
<PAGE> 13
GOVERNMENT REGULATIONS
Broadcasting of the Company's programming, both by the Company and its
Affiliates, is subject to the rules and regulations of various federal, state
and local agencies. The Company believes that it currently complies with
applicable laws and regulations governing cable and television broadcasts,
however, in the event that such laws are subsequently modified, there can be no
assurance that the Company will be able to continue to comply with such laws.
Failure to comply could have serious negative implications for the Company.
EMPLOYEES
The Company has nine (9) full time employees and two (2) part-time
employees. The Company's employees are not represented by any collective
bargaining organization, and the Company has never experienced a work stoppage.
The Company believes that its relations with its employees are satisfactory.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Management's discussion and analysis is designed to provide a better
understanding of the Company's financial condition, results of operations,
liquidity, and capital resources. The discussion should be read in conjunction
with, and is qualified in its entirety by, the audited financial statements of
the Company and the Notes thereto included elsewhere herein for the Company's
fiscal years ended December 31, 1996 and 1997, and the unaudited financial
statements of the Company and the Notes thereto included elsewhere herein for
the Company's fiscal quarters ended March 31, 1997 and 1998.
The Company was founded on December 11, 1992 and provides programming, media
production and syndication services to television and cable stations, as well as
satellite uplink services to certain cable channels. The Company has a
wholly-owned subsidiary, Eureka Media & Trading, Inc., formed in the State of
Nevada on September 6, 1995, which has not commenced operations. The Company is
in the process of changing the name of its subsidiary to "Senior Channel, Inc."
The Company originally broadcast its programs via analog transmission and, in
1996, had Affiliate Agreements with over 150 Affiliate Stations. However, in
late 1996, the Company converted from analog to digital transmission and in
connection with the conversion, was required to provide digital decoding
equipment to each of its Affiliate Stations. Due to the cost of providing the
decoding equipment, the Company was not able to furnish the equipment to all of
its then existing Affiliate Stations. Accordingly, upon conversion, the Company
initially entered into Affiliate Agreements with 33 Affiliate Stations. The
Company has since entered into Affiliate Agreements to provide family-oriented
television to a network of forty-four (44) television stations and cable systems
nationwide. The stations serviced by the Company are primarily "independent"
stations, meaning that they have no affiliation with the major network
organizations (NBC; ABC; CBS; FOX; WB Network; and Paramount). The Company
maintains a library of over 2,000 programs covering a wide array of topics and
interests, and includes cartoons, sports, sitcoms, movies, news and weather,
comedy, science and health shows, documentaries, and public interest programs.
The Company also offers original programs, celebrity golf tournaments,
professional boxing, fishing expeditions and interactive programming.
13
<PAGE> 14
RESULTS OF OPERATIONS
Revenues
Revenues are primarily derived from the Company's programming services, sales of
advertising and programming time, and leasing of digital satellite channels.
Revenues for 1997 were $1,243,145 compared to $642,399 for 1996, an increase
of $600,746 or 94%. The increase in revenues resulted from leasing out of
digital channels and a decrease in uplinking and programming expenses.
For the three months ended March 31, 1998, revenues were $53,463 and for the
comparable three month period in 1997, revenues were $137,735. The decrease in
1998 revenues was due to decrease in digital channel lease revenues by $80,000.
Cost of Operations
Costs of operations were $957,715 for the 1997 fiscal year and $987,715 for the
1996 fiscal year, a 3% decrease. The decrease in 1997 was due to a decrease in
uplinking and programming expenses. The decrease in uplinking expenses resulted
from the replacement of a rented mobile uplink with its own permanent uplink as
part of the digital system. Programming expenses, which include costs for
program development, editing, videotapes and other miscellaneous expenses,
decreased by approximately $70,000 (85%) for fiscal year ended 1997 as compared
to the 1996 fiscal year. Programming costs decreased as the Company acquired
more of its programming through barter. Net rental expenses, which include
office space, office equipment, and company vehicles increased by 9% in 1997 due
to the increase in office space rental from $4,800 per month to $5,400 per month
from June through December.
For the three months ended March 31, 1998 and March 31, 1997, cost of operations
were $115,273 and $220,537, respectively. The $105,264 decrease in cost of
operations for the three months ended March 31, 1998 is due primarily to the
$97,500 decrease in the cost of satellite expense and $7,211 decrease in the
cost of programming.
General and Administrative
General and administrative expenses for the fiscal year ended December 31, 1997
were $439,232, a decrease of $43,626 or 9% less than administrative expenses of
$482,858 for fiscal year 1996. The general and administrative expenses represent
35% and 75% of revenues for fiscal years 1997 and 1996, respectively. For the
three months ended March 31, 1998 general and administrative expenses were
$126,125 and for the three months ended March 31, 1997, general and
administrative expenses were $115,468. The $10,657 increase in general and
administrative expenses for the three months ended March 31, 1998 is due to
general increases in administrative expenses. The Company's general and
administrative expenses consist of operating costs for the Company's
headquarters, the salaries of corporate officers and office staff, travel,
accounting, legal and other professional expenses, and advertising and
promotional costs.
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<PAGE> 15
Interest expense for the fiscal year 1997 was $381,654 and for fiscal year 1996
was $204,757, an increase of $176,897 or 86%. This increase was due to interest
paid on the outstanding balance on various bridge loans and a nine percent (9%)
interest factor payment on Series B Preferred Stock.
During the period November 1997 through March 1998, at the election of the
noteholders, the Company converted an aggregate approximate amount of $203,750
in outstanding debt and accrued interest into Common Stock of the Company. As a
result of the conversions, the Company expects interest payments for 1998 to be
correspondingly reduced.
Operating Results
The Company had an operating loss of $2,640,982 for fiscal year ended December
31, 1997. The loss for 1997 is primarily attributed to a provision for doubtful
accounts in the amount of $1,584,594, a non-recurring expense in the amount of
$380,260 resulting from the conversion of Bride Loans to Common Stock, and a
reserve in the amount of $125,138 for trade credits.
For fiscal year 1996, the Company had an operating loss of $1,443,646. The
operating loss for 1996 was largely due to an increase in programming and rental
expenses, issue costs and interest on bridge loans, and interest factor payments
to Series B Preferred stock holders.
For the three months ended March 31, 1998, the Company's operating losses were
$218, 955 and for the comparable period in 1997, the Company's operating losses
were $222,172. The loss before income taxes and extraordinary for the three
months ended March 31, 1998 was $303,921 as compared to a loss before income
taxes for the three months ended March 31, 1997 of $334,915. Net loss for the
three months ended March 31, 1998 was $321,307 as compared to a net loss for the
three months ended March 31, 1997 of $268,915. The loss before income taxes and
extraordinary item in 1998 is $3,490 more than the 1997 loss for the similar
period and is due primarily to decreases in the satellite expenses of $97,500
and amortization of debt issue cost of $40,000 being less than the amortization
of The Senior Channel of $34,484 and the decrease in revenues caused by the
decrease in digital satellite lease revenues.
Earning/Loss Per Share of Common Stock
The net earnings per common share are based upon the weighted average of
outstanding common stock and convertible preferred stock. The outstanding
warrants that accompany the preferred stock are not dilutive, therefore, they
are not included in the weighted average. In 1997, the net loss per of common
stock was $0.18. The loss is reflective of the provision for doubtful accounts
and the costs of converting Bride Loans to Common Stock.
For fiscal 1996, net loss per share of common stock was $0.12. The loss for
fiscal year 1996 is reflective of the increased debt and other expenses of the
Company resulting from acquisition of a digital compression system and satellite
equipment.
For the three months ended March 31, 1998 and March 31, 1997, net loss per share
was $.02 and $.03, respectively.
15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through a combination of the issuance of
equity securities to private investors, issuance of private debt, loans from
affiliates, and cash flow from operations. The Company has cumulative losses of
$4,135,723 from inception through December 31, 1997.
In December 1997, the Company entered into an agreement with Media Fund, Inc.
("MFI") pursuant to which MFI will receive 1,875,000 shares of the Company's
Common Stock, assets with a book value of $2,818,933 and 20% of the commercial
time slots on the Company's channels for a period of four (4) years in exchange
for up to 12 hours of network quality programming and $5,000,000 to be paid to
the Company in installments as follows:
May 30,
1998 - $50,000; June 30, 1998 - $750,000; September 30, 1998 - $300,000;
December 30, 1998 - $300,000; March 30, 1999 - $300,000; June 30, 1999 -
$300,000; and December 31, 2002 - $3,000,000.
Current liabilities for fiscal year 1997 were $2,653,286, which exceed current
assets of $767,018 by $1,886,268. For fiscal year ended 1996, current
liabilities exceeded current assets by $2,040,747. The increase in current
assets in 1997 as compared to 1996 was primarily the result of the addition of
the note receivable. The current liabilities for 1997 increased by $511,727 as
compared to 1996 due primarily to increases in notes payable of $600,000 and
equipment lease payments of $36,000, and decreases in accounts payable of
$106,932 and customer deposits of $20,000.
The Company has been able to generate funds from private placements to finance
operations, however, in the event the Company requires additional capital
investments, there can be no assurance that a sufficient amount of the Company's
securities can be sold to fund the continuing operating needs of the Company.
Financing activities during 1997 and 1996 consisted of Bridge Loans in the
cumulative amount of $2,057,750 and sales of Preferred Stock in the cumulative
amount of $1,837,551. Of the combined amount of $3,895,301, approximately
$1,933,499 was used for operating expenses, $1,402,802 was paid in issue costs,
and $559,000 for debt repayment.
Of the $1,402,802 in issuance costs in connection with the Company's bridge
loans and preferred stock offerings in the aggregate amount of $2,057,750, the
Company incurred costs to placement agents and selling commissions to
broker-dealers in the approximate amount of $413,423, finder's fees in the
amount of $389,920, legal fees of $376,620, $190,358 in consulting and public
relations fees, $20,468 in printing and travel expenditures, $8,000 in state
filing fees, and $4,013 in miscellaneous costs and fees.
Management believes that anticipated cash flows from operations will be
sufficient to meet the Company's expected cash needs and to finance future
operations, however, in the event that future revenues are not sufficient, the
Company will conduct private and/or public offerings of its equity stock to
raise the necessary capital.
IMPACT OF INFLATION
Management does not believe that general inflation has had or will have a
material effect on operations.
ITEM 3. DESCRIPTION OF PROPERTY
The Company entered into a lease agreement ("Lease Agreement") on June 1, 1995
for its principal offices located at 6125 Airport Freeway, Haltom City, Texas
76117. The premises measure approximately 13,900 square feet and are used for
the Company's general office and administrative purposes, as well as for their
programming services, warehouse needs and full-service production studio. The
Company subleases part of the office space to other companies engaged in the
television and media business.
The initial term of the Lease Agreement was for a period of twenty-four (24)
months commencing on June 1, 1995 and terminating on May 31, 1997. The Company
renewed the lease for an additional twelve (12) months, up to and including May
31, 1998 and is in the process of negotiating an extension of the lease for
another term. The Company believes that the premises are acceptable for their
current operating needs.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of June 18, 1998 by (i) each person who is known
by the Company to beneficially own more than five percent of the Company's
Common Stock; (ii) by each of the Company's directors; and (iii) by all
executive officers and directors as a group. Except as otherwise indicated, the
persons named in the table have sole voting and investment power with respect to
all shares beneficially owned, subject to community property laws where
applicable. As of June 18, 1998, there were approximately 18,354,587 shares
of the Company's Common Stock outstanding on a fully diluted basis.
16
<PAGE> 17
<TABLE>
<CAPTION>
Number Percent
Name and Address of Beneficial Owner Of Shares of Class
- ------------------------------------ --------- ---------
<S> <C> <C>
Dr. Donald W. Shelton 4,360,000 23.75%
6125 Airport Freeway, Suite 200
Haltom City, Texas 76117
Randy J. Moseley 4,360,000 23.75%
6125 Airport Freeway, Suite 200
Haltom City, Texas 76117
Media Fund, Inc.(1) 1,875,000 10.22%
2510 South Germantown Road
Germantown, TN 38138
Charles Coburn 1,450,000 7.90%
10008 Walleye
Knoxville, Tennessee 37822
Jim Hock/Pacific Acquisition Group, Inc.(2) 1,481,433 8.07%
21800 Burbank Blvd., 3rd Floor
Woodland Hills, California 91367
Officers and Directors as a Group(3) 8,720,000 47.50%
6125 Airport Freeway, Suite 200
Haltom City, Texas 76117
</TABLE>
- ------------
(1) One hundred percent (100%) of the issued and outstanding shares of
Media Fund, Inc. are held by Sam Cooper.
(2) Jim Hock owns 300,000 shares of the Company's Common Stock and
Pacific Acquisition Group, Inc. ("PAG") owns 1,181,433 shares of
the Company's Common Stock. Mr. Hock is the President of PAG
and owns one hundred percent (100%) of the issued and outstanding
shares of Common Stock of PAG, therefore he is the beneficial owner
of the Company's Common Stock held by PAG.
(3) The "Officer and Director" group is comprised of two (2) persons.
- ------------
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The control of the Company rests in its shareholders who elect a Board of
Directors to oversee the business of the Company. The Board of Directors elect
officers who are charged with carrying out the directions of the Board and
running the day-to-day business affairs of the Company. The following table sets
forth certain information regarding directors and executive officers of the
Company:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C>
Dr. Donald W. Shelton 54 Chairman of the Board of Directors, Chief Executive
Officer, and Director
Randy J. Moseley 50 President, Chief Financial Officer, Secretary, and
Director
</TABLE>
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<PAGE> 18
MANAGEMENT RESUMES
The Company's executives have significant experience in the television industry
and related businesses. Following are brief resumes of the key personnel for the
Company.
DR. DONALD W. SHELTON - Chairman, Chief Executive Officer and Director.
Dr. Shelton is a co-founder of the Company and has served as its Chairman, Chief
Executive Officer and as a Director since its inception in 1993. Dr. Shelton
holds a doctorate in English Literature from Louisiana Baptist University. He
has also attended Oklahoma University, Kansas University and the Philanthropy
Tax Institute. Dr. Shelton has nine years experience in television station
construction, management and production. He has produced various entertainment
programs, infomercials and commercials. In addition, since 1992, Dr. Shelton has
been part owner and operator of television stations in San Antonio, Phoenix,
Oklahoma City, Bryan/College Station, and Beaumont. Before entering the
broadcasting industry, Dr. Shelton was the Regional Representative of the
Secretary for the U.S. Department of Transportation and Vice Chairman of the
Southwest Regional Council. He also has served as the director of sales and
marketing for a major oil company and national pharmaceutical firm, and has
owned his own real estate school and development corporation.
RANDY MOSELEY - President, Chief Financial Officer, Secretary and Director. Mr.
Moseley is a co-founder of the Company and has served as its President, Chief
Financial Officer, Secretary and as a Director since its inception in 1993. Mr.
Moseley received his Bachelor of Business Administration degree, majoring in
accounting, from Southern Methodist University in Dallas, Texas. Mr. Moseley is
a certified public accountant and worked for a national public accounting firm
for the six years following his graduation from college. Mr. Moseley has over
twenty-five years of fiscal management experience in such industries as
insurance, mortgage and real estate, hospital services and agriculture, as well
as the television broadcasting and media industries. Mr. Moseley has been part
owner and operator of six television stations.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the annual and other compensation of the
Company's Chief Executive Officer and each of the other executive officers whose
total salary and bonus exceeded $100,000 for the Company's fiscal years ended
December 31, 1995, 1996, and 1997. No other executive officers of the Company
had total salary and bonus which exceeded $100,000 for the reported period.
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<PAGE> 19
SUMMARY COMPENSATION TABLE
Annual Compensation
<TABLE>
<CAPTION>
Name Other
Principal Position Year Salary Compensation(3)(4) Stock Options(5)
- ------------------ ---- ------ ------------------ ----------------
<S> <C> <C> <C> <C>
Dr. Donald W. Shelton 1997 $100,000(1) $ 2,132 $0
Chief Executive 1996 $100,000(1) $ 5,805 $0
Officer 1995 $ 25,000(2) $ 10,711 $0
Randy Moseley 1997 $100,000(1) $ 0 $0
Chief Financial 1996 $100,000(1) $ 5,805 $0
Officer 1995 $ 25,000(2) $ 10,711 $0
</TABLE>
- --------------------
1. Pursuant to their respective employment agreements, Dr. Shelton and Mr.
Moseley are each entitled to an annual salary of $100,000, however, in 1997, Dr.
Shelton and Mr. Moseley each deferred $80,000 and in 1996, each deferred $72,220
of their salaries, which amounts have not been accrued. Dr. Shelton and Mr.
Moseley plan to continue to defer portions of their salary until such time as
the Company has sufficient earnings to pay their salaries in full.
2. The employment agreements with Dr. Shelton and Mr. Moseley were effective on
October 2, 1995, accordingly, their salaries for fiscal year ended 1995 were
calculated on a pro rata basis of $8,333 per month, for total salary in 1995 of
$24,999 each.
3. The amounts shown are the aggregate lease payments for the automobiles
provided to Dr. Shelton and Mr. Moseley. Payments in 1997 for Dr. Shelton
equalled $956.
4. In August 1997, the Company purchased a life insurance policy for Dr. Shelton
in the amount of $500,000. The quarterly premium is $588 and payments in 1997
totalled $1,176.
5. On October 2, 1995, in connection with their employment agreements, Dr.
Shelton and Mr. Moseley were each granted the option to purchase 1,000,000
shares of the Company's Common Stock at $0.10 per share. Dr. Shelton and Mr.
Moseley exercised their options in September 1996.
- --------------------
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Dr. Shelton to serve as
its Chairman and Chief Executive Officer for a period of five (5) years,
commencing October 2, 1995. Pursuant to the employment agreement, Dr. Shelton is
entitled to an annual salary of one hundred thousand dollars ($100,000), with
increases, if any, to be determined by the Board of Directors. As additional
19
<PAGE> 20
compensation, Dr. Shelton was provided with a leased automobile and was granted
an option to purchase 1,000,000 shares of the Company's common stock at $0.10
per share, which Dr. Shelton exercised in full on September 30, 1996.
The Company entered into an employment agreement with Mr. Moseley effective
October 2, 1995 whereby Mr. Moseley was engaged as President and Chief Financial
Officer of the Company for a period of five (5) years. Mr. Moseley is entitled
to an annual base salary equal to one hundred thousand dollars ($100,000), with
increases, if any, to be determined by the Board of Directors. As additional
compensation, Mr. Moseley was provided with a leased automobile and was granted
an option to purchase 1,000,000 shares of the Company's common stock at $0.10
per share, which Mr.
Moseley exercised in full on September 30, 1996.
COMPENSATION OF DIRECTORS
All non-officer directors are entitled to receive an attendance fee for each
meeting of the Board of Directors at which they attend. Currently, the Company
does not have any non-officer directors. All other directors are entitled to
reimbursement for out-of -pocket expenses related to and arising out of Board of
Directors' meetings. For the fiscal years ended 1995, 1996, and 1997, there were
no such expenses reported.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Shelton and Mr. Moseley have joint ownership interests in six (6) television
stations which have contracted with the Company to broadcast as Affiliates of
the Company. The stations include (the aggregate respective ownership of Dr.
Shelton and Mr. Moseley is shown in parenthesis following the station name): (i)
T.V. 7 (75%); (ii) TV 50, Inc. (50%); (iii) Cleveland Broadcasting Co. (49%);
(iv) ATN Network, Inc. (35%); (v) San Antonio Broadcasting Corp. (52%); and (vi)
Beaumont Broadcasting Corp. (100%). The terms of the Affiliate Agreements with
the foregoing television stations are the same as those with other non-related
Affiliates.
The Company has outstanding loans with various Affiliates of the Company,
including:
In 1995, the Company borrowed $104,500 from Lyn Broadcasting Corporation ("LBC")
at an interest rate of 10%. Dr. Shelton and Mr. Moseley own 100% of LBC. In
September 1996, Dr. Shelton and Mr. Moseley exercised options to purchase
2,000,000 shares of the Company's Common Stock at $0.10 per share, for a
combined purchase price of $200,000. Of this amount, $100,000 was paid directly
to LBC in partial payment of the outstanding debt (the remaining $100,000 was
applied to debt owed to ATN, as further described hereinbelow). In 1997, the
balance of $4,500 was converted to shares of the Company's Common Stock.
20
<PAGE> 21
In 1995, the Company borrowed $52,531 from Shelly Media Marketing ("SMM") at an
interest rate of 10%. Dr. Shelton and Mr. Moseley own 100% of SMM. To date, the
Company has paid approximately $1,400 of this obligation. Pursuant to a
Promissory Note Extension Agreement, the maturity date for the remaining balance
of $51,100 has been extended to September 31, 1998.
In 1994, the Company borrowed $141,152 from ATN Network Inc. ("ATN") at an
interest rate of 10%. Dr. Shelton and Mr. Moseley own an aggregate of 35% of
ATN. In September 1996, Dr. Shelton and Mr. Moseley exercised options to
purchase 2,000,000 shares of the Company's Common Stock at $0.10 per share, for
a combined purchase price of $200,000. Of this amount, $100,000 was paid
directly to ATN in partial payment of the outstanding debt. Pursuant to a
Promissory Note Extension Agreement, the maturity date for the remaining balance
has been extended to September 30, 1998. In December 1997, the Company borrowed
an additional $243,090 pursuant to a written Promissory Note. The principal
bears interest at an annual rate of 10%. The principal and all accrued and
unpaid interest is due in full on September 30, 1998. At December 31, 1997 there
remained a balance of approximately $284,242.
The Company borrowed a combined total of $10,257 in 1995 from San Antonio
Broadcasting Corp. ("SABC") and TV Channel 22, Inc. ("Channel 22"), at 10%
interest to be repaid upon demand. Dr. Shelton and Mr. Moseley own 52% and 75%
of SABC and Channel 22, respectively. To date, payment has not been demanded.
In 1994, the Company borrowed $38,274 from Cleveland Broadcasting Co. ("CBC") at
an interest rate of 10%. Dr. Shelton and Mr. Moseley own an aggregate of 49% of
CBC. At December 31, 1997, the Company had a remaining balance of $26,089.
Pursuant to a Promissory Note Extension Agreement, the maturity date has been
extended to September 30, 1998.
The Company believes that the terms of the foregoing loans are comparable to
terms that the Company could have received from nonaffiliate lenders in an
arms-length transaction. In the event the Board of Directors deems it to be in
the Company's best interests to borrow additional monies to fund operating and
other expenses, the Company will seek to enter into agreements on terms
favorable to the Company, which may be with related or non-related parties. Any
agreements entered into by the Company concerning loans with related or
non-related parties will be required to be authorized by a favorable vote of the
Board of Directors.
ITEM 8. DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, $0.01 par value and 10,000,000 shares of Preferred Stock, $0.01
par value. Pursuant to Certificates of Designation filed with the Delaware
Secretary of State, the Company designated the rights, preferences, privileges
and restrictions for the establishment of 1,000,000 shares of Convertible
Redeemable Series A Preferred Stock, and 1,000,000 shares of 9% Convertible
Redeemable Series B Preferred Stock.
21
<PAGE> 22
The summary description of the Company's Common Stock, which is covered by this
Registration Statement, is qualified in its entirety by reference to the
Company's Articles of Incorporation, as amended. The summary description of the
Company's Series A and Series B Preferred Stock is qualified in its entirety by
reference to the respective Certificates of Determination.
COMMON STOCK
The Company is authorized to issue 20,000,000 shares of Common Stock, $0.01 par
value and, as of June 18, 1998, there were approximately 18,354,587 shares
outstanding, on a fully-diluted basis, and approximately 325 holders of record.
Holders of Common Stock are entitled to one vote per share held of record on all
matters requiring a vote of shareholders, including the election of directors.
There is no right to cumulative voting in the election of directors,
accordingly, holders of more than fifty percent (50%) of the Common Stock, if
any, who vote for elections of directors can elect one hundred percent (100%)of
the Company's directors if they so choose. Subject to the prior rights of
holders of Preferred Stock and any contractual restrictions against the payment
of dividends, the holders of Common Stock are entitled to receive dividends on a
pro-rata basis when, if and as declared by the Board of Directors out of funds
legally available therefore. Upon liquidation or dissolution, each outstanding
share of Common Stock will be entitled to share equally in the assets of the
Company legally available for distribution to shareholders after the payment of
all debts, liabilities, and other obligations, including the preferences of any
outstanding shares of Preferred Stock. Shares of Common Stock are not
redeemable, have no conversion rights and carry no preemptive or other rights to
subscribe to or purchase additional shares in the event of a subsequent
offering. All outstanding shares of Common Stock are duly authorized and validly
issued, fully paid and non-assessable and free of preemptive rights.
PREFERRED STOCK
Pursuant to the Company's Certificate of Incorporation, as amended, the Company
is authorized to issue 10,000,000 shares of Preferred Stock in one or more
series and is further authorized to (i) determine the number of shares
constituting any such series; and (ii) determine the rights, preferences,
privileges, and restrictions granted to or imposed upon any such series.
CONVERTIBLE REDEEMABLE SERIES A PREFERRED STOCK
The Company filed a Certificate of Determination with the Delaware Secretary of
State designating 1,000,000 shares of Convertible Redeemable Series A Preferred
Stock ("Series A Stock"). The Series A Stock is senior to all warrants and
options to purchase Common Stock of the Company ("Junior Stock") with respect to
dividend rights, rights on redemption, conversion rights, and rights on
liquidation, winding up and dissolution of the Company.
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Holders of outstanding Series A Stock are entitled to receive, in preference to
the holders of any Junior Stock in any fiscal year, when and as declared by the
Board of Directors, dividends in such amounts and payable at such times as the
Board of Directors may determine, out of any assets at the time legally
available therefor. Dividend rights are not cumulative, do not accrue, and do
not bear or accrue interest. The Board of Directors shall not declare and pay,
at any time, dividends (in cash or other property) on its Common Stock without a
prior or concurrent declaration and payment of dividends on Series A Stock,
which dividend on Series A Stock shall be equal on a per-share basis to such
dividend declared or to be declared on the Common Stock.
In the event of a voluntary or involuntary liquidation, dissolution or winding
up of the Company, the holders of Series A Stock shall be entitled to receive,
out of the assets of the Company, whether those assets are capital or surplus of
any nature, an amount equal to $10.00 per share of Series A Stock, plus all
unpaid dividends on the date of that distribution, before any payment shall be
made or any assets distributed to the holders of Junior Stock, and the remaining
assets shall be distributed ratably to the holders of Junior Stock.
Holders of Series A Stock are not entitled to vote, except as otherwise may be
provided by law.
At the option of the Board of Directors, the Company may, after July 24, 1999,
redeem all or any part of Series A Stock by converting each outstanding share of
Series A Stock into two shares of Common Stock.
At any time following the earlier of (i) the completion of any merger or other
business combination by the Company wherein a controlling interest in the
Company is acquired by another entity; or (ii) July 24, 1999, each holder of
Series A Stock may convert any or all of such Series A Stock into fully paid and
non-assessable Common Stock of the Company, at the rate of two shares of Common
Stock for each share of Series A Stock, subject to certain adjustment
provisions.
9% CONVERTIBLE REDEEMABLE SERIES B PREFERRED STOCK
The Company filed a Certificate of Determination with the Delaware Secretary of
State designating 1,000,000 shares of 9% Convertible Redeemable Series B
Preferred Stock ("Series B Stock"). The Series B Stock shall, with respect to
dividend rights, rights on redemption, rights on conversion and rights on
liquidation, winding up and dissolution, rank senior to all warrants and options
to purchase Common Stock established by the Board of Directors or the
Stockholders (all of such equity securities of the Corporation to which the
Series B Stock ranks senior are collectively referred to herein as "Junior
Stock").
Holders of outstanding Series B Stock are entitled to receive, in preference to
the holders of any Junior Stock in any fiscal year, when and as declared by the
Board of Directors, dividends at the annual rate of $0.585 per share of Series B
Stock, payable in cash quarterly, on the 30th day of March, June, September and
December. Dividends are accruable from the date of issuance and are cumulative.
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In the event of a voluntary or involuntary liquidation, dissolution or
winding-up of the Company, the holders of Series B Stock shall be entitled to
receive, out of the assets of the Company, whether those assets are capital or
surplus of any nature, an amount equal to $10 per share of Series B Stock, plus
all accrued and unpaid dividends on the date of that distribution, before any
payment shall be made or any assets distributed to the holders of Junior Stock,
and the remaining assets shall be distributed ratably to the holders of Junior
Stock.
Holders of Series B Stock are not entitled to vote, except as otherwise may be
provided by law.
At the option of the Board of Directors, the Company may, after July 24, 1999,
redeem all or any part of Series B Stock by converting each outstanding share of
Series B Stock into two shares of Common Stock ("Redemption Shares").
At any time following the earlier of (i) the completion of any merger or other
business combination by the Company wherein a controlling interest in the
Company is acquired by another entity; or (ii) July 24, 1999, each holder of
SerIes B Stock may convert any or all of such Series B Stock into fully paid and
non-assessable Common Stock of the Corporation, at the rate of two shares of
Common Stock for each share of Series B Stock, subject to certain adjustment
provisions.
The Company does not have any current arrangements or understandings to issue
any of its Series A or Series B stock, or to designate additional series of
preferred stock.
STOCK OPTION PLAN
In 1995, the Company implemented its 1995 Stock Option Plan (the "Plan") to
provide employees, officers, directors, consultants and independent contractors
of the Company or any of its subsidiaries incentives to achieve high levels of
performance on behalf of the Company. The Options issued under the Plan may be
Incentive Stock Options under Internal Revenue Code Sections 421 and 422, or
Nonqualified Stock Options. Only officers, employees, and directors who are
also employees are eligible to receive grants of Incentive Stock Options.
Officers, employees, and directors (whether or not they are also employees) of
the Company, as well as consultants and independent contractors of the Company
are entitled to receive grants of Nonqualified Stock Options. Unless previously
terminated by the Company, the Plan terminates on October 1, 2005.
There are 5,000,000 shares of Common Stock reserved under the Plan. The
exercise price per share of Common Stock under a Nonqualified Stock Option may
not be less than 85% of the Fair Market Value of the Common Stock on the date
of grant. The exercise price per share under an Incentive Stock Option may not
be less than the Fair Market Value of the Common Stock on the date on grant. To
date, no Options have been granted under the Plan.
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PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
The Company is a private company and, at the time of filing this Registration
Statement, there is no established trading market for the Company's Common
Stock.
As of June 18, 1998 the Company had approximately 325 shareholders of record for
its Common Stock and approximately 18,354,587 shares of Common Stock issued and
outstanding. As of the date of this Registration Statement, approximately
286,625 shares of the Company's Common Stock may be issuable upon exercise of
outstanding Warrants. In addition, the Company has outstanding 286,625 shares of
Series B Stock which are eligible for conversion into a cumulative total of
573,250 shares of Common Stock. Approximately 5,308,454 shares of the Company's
Common Stock are eligible for resale pursuant to Rule 144 under the Securities
Act of 1933, as amended (the "Act").
Although holders of the Company's Common Stock are entitled to receive
dividends, there can be no assurance that the Company will have sufficient funds
to pay such dividends, or even if such funds are available, that the Company
will be permitted to make such dividend payments under the provisions of the
Delaware General Corporate Law or other applicable laws. Delaware law prohibits
the Company from paying dividends or making other distributions if the Company
would be unable to pay its debts as they become due in the usual course of
business or if the Company's assets would be less than its liabilities after
giving effect to such dividend or distribution. Further, the policy of the Board
of Directors has been and continues to be to retain earnings in order to fund
operations and continue the development and expansion of the Company. To date,
the Company has not declared or paid any dividends with respect to its Common
Stock. Future cash dividends on the Common Stock, if any, will be determined by
the Company's Board of Directors and will be based upon the Company's earnings,
capital requirements, financial conditions and other factors deemed relevant by
the Board of Directors.
None of the Company's current agreements contain restrictions on the payment of
dividends, however, future financing arrangements may contain such restrictions.
ITEM 2. LEGAL PROCEEDINGS
The Company is not currently involved in any material legal proceeding and is
not aware of any material legal proceeding threatened against it.
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ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company engaged Jack F. Burke, Jr., Certified Public Accountant, as its
principal independent accountant. The Company has never had any disagreements
with its principal independent accountant on any matter related to the Company's
accounting principles or practices, financial disclosure, or auditing scope or
procedure, or any other matter.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
During fiscal years 1994 and 1995, SMM, CBC, and ATN loaned the Company a
cumulative of $332,000. The loans are evidenced by promissory notes, all of
which mature on September 30, 1998. As partial consideration for extending the
loans to the Company, the Company issued the foregoing entities an aggregate of
592,000 shares of Common Stock. The Company did not engage in a public offering
in connection with the foregoing loans and issuances of Common Stock. Dr.
Shelton and Mr. Moseley, officers and directors of the Company, hold an
aggregate of 100%, 49% and 35% of SMM, CBC, and ATN respectively, accordingly,
such investors have complete access to the Company's corporate and financial
records. The principals of SMM, CBC and ATN have extensive experience in the
broadcast industry and are knowledgeable about the associated financial and
business matters and risks of investments in such businesses, therefore, SMM,
CBC, and ATN qualify as sophisticated investors. The foregoing transactions were
effected in reliance upon the exemptions from registration provided by Section
4(2) of the Act and Regulation D promulgated thereunder. There were no
underwriting discounts or commissions in connection with these transactions.
On January 2, 1995, the Company issued 70,000 and 60,000 shares of Common Stock
to Jerry Powell and Judy Bryant, respectively, for no consideration. Mr. Powell
and Ms. Bryant are partners of Dr. Shelton and Mr. Moseley in "Channel 56"
television station in Tucson, Arizona. Prior to investing in the Company,
investors were provided with all available financial information on the Company
and opportunities to ask questions of and receive answers from the Company
regarding the Company, its business, and the Common Stock. As executive officers
of the Channel 56 television stations, Mr. Powell and Ms. Bryant have extensive
experience in the broadcast industry and are knowledgeable about the associated
financial and business matters and risks of investments in such businesses,
therefore, Mr. Powell and Ms. Bryant qualify as sophisticated investors. The
offer and issuance of the foregoing shares did not involve a public offering,
accordingly, such shares were issued by the Company in reliance upon the
exemption provided by Section 4(2) under the Act. There were no underwriting
discounts or commissions in connection with these transactions.
On February 2, 1995, the Company issued 10,000 shares of Common Stock each to
John George and Connie Ross for assisting the Company in negotiating the
broadcast of its channel in over 1,500 rooms at the Imperial Palace Hotel and
Casino, located in Las Vegas, Nevada. Prior to investing in the Company,
investors were provided with all available financial information on the Company
and opportunities to ask questions of and receive answers from the Company
regarding the Company, its business, and the Common Stock. Mr. George has an
extensive background in the media advertising and promotional business and Ms.
Ross formerly owned and operated a securities brokerage firm and is currently
the Advertising and Promotional Vice-President of a large hotel in Las Vegas,
Nevada. Mr. George and Ms. Ross each possess the requisite knowledge and
experience in financial and business matters to evaluate the merits and risks of
an investment in the Company, accordingly, they qualify as sophisticated
investors. The offer and issuance of the foregoing shares did not involve a
public offering, accordingly, such shares were issued by the Company in
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reliance upon the exemption provided by Section 4(2) under the Act. There were
no underwriting discounts or commissions in connection with these transactions.
During the period of July 1995 through March 1996, the Company undertook a
private offering of Units at an offering price of $6.50 per Unit for total gross
proceeds of $589,928.50. Each Unit consisted of one (1) share of Convertible
Redeemable Series A Preferred Stock, which was convertible into two (2) shares
of Common Stock, and one (1) Warrant to purchase one (1) share of the Company's
Common Stock. There were a total of 90,758 Units sold to ( # ) investors, ( # )
of whom were accredited and ( # ) of whom were non-accredited investors, as
those terms are defined under the Securities Act. Prior to investing in the
Company, potential investors were provided with a Confidential Private Placement
Memorandum which contained the Company's most recent audited financial
statements, current information regarding the Company, estimated use of offering
proceeds, and risks associated with an investment in the Company, as well as
other relevant information. Potential investors were also given the opportunity
to ask questions of the Company regarding the Company, the Units, and the
offering. The offer and issuance of the foregoing Units did not involve a public
offering, accordingly, such Units were issued by the Company in reliance upon
the exemption provided by Section 4(2) under the Act. The offering was not
underwritten, and there were no underwriting discounts or commissions.
During March 1996, 100% of the issued and outstanding Series A Preferred Shares
were converted into the Company's Common Stock. The Common Stock was issued
pursuant to an exemption from registration under Section 3(a)(9) of the Act. The
Warrants expired by their terms and were not converted into Common Stock. All
shares of Common Stock issued upon conversion of the Series A Preferred shares
were issued with the appropriate restrictive legend.
During the period from December 1995 through April 1996, the Company sold 15%
Guaranteed Promissory Notes with a face value of $1,000 ("Bridge A Notes") for
an aggregate of $548,750 in gross offering proceeds. The offer and sale of such
Units did not involve a public offering. There were 50 investors, 32 of whom
were accredited and 18 of whom were non-accredited investors, as those terms are
defined under the Securities Act. Prior to investing in the Company, potential
investors were provided with a Confidential Private Placement Memorandum which
contained the Company's most recent audited financial statements, current
information regarding the Company, estimated use of offering proceeds, and risks
associated with an investment in the Company, as well as other relevant
information. Potential investors were also given the opportunity to ask
questions of the Company regarding the Company, the notes, and the offering. The
sales were made in reliance upon exemptions from registration pursuant to
Section 4(2) and Regulation D promulgated under the Act. The offering was not
underwritten, and there were no underwriting discounts or commissions.
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Commencing in October 1997 through January 1998, an aggregate of $71,756 in
Bridge A Notes were converted into 22,078 shares of the Company's Common Stock.
The Common Stock was issued pursuant to an exemption from registration under
Section 3(a)(9) of the Act. All shares of Common Stock issued upon conversion of
the Bridge A Notes were issued with the appropriate restrictive legend.
The Company commenced a private offering of 15% Guaranteed Promissory Notes with
a face value of $1,000 ("Bridge B Notes") in March 1996. From March 1996 through
June 1996, the Company sold 574 notes for an aggregate of $574,000 in offering
proceeds. The offer and sale of the notes did not involve a public offering.
There were a total of 52 investors, 49 of whom were accredited and 3 of whom
were non-accredited investors, as those terms are defined under the Securities
Act. Prior to investing in the Company, potential investors were provided with a
Confidential Private Placement Memorandum which contained the Company's most
recent audited financial statements, current information regarding the Company,
estimated use of offering proceeds, and risks associated with an investment in
the Company, as well as other relevant information. Potential investors were
also given the opportunity to ask questions of the Company regarding the
Company, the notes, and the offering. The sales were made in reliance upon
exemptions from registration pursuant to Section 4(2), Section 4(6), and
Regulation D under the Act. The offering was not underwritten, consequently,
there were no underwriting discounts or commissions.
During the period November 1997 through January 1998, an aggregate value of
$25,000 in Bridge B Notes were converted into 7,691 shares of the Company's
Common Stock. The Common Stock was issued pursuant to an exemption from
registration under Section 3(a)(9) of the Act. All shares of Common Stock issued
upon conversion of the Bridge B notes were issued with the appropriate
restrictive legend.
In 1995, in connection with certain employment agreements for key positions
within the Company, 2,000,000 options were granted to two executive officers of
the Company to purchase 2,000,000 shares of the Company's Common Stock at $0.10
per share. Upon exercise of the options in 1996, the Company received aggregate
proceeds in the amount of $200,000. The offer and sale of the options and the
shares underlying the options did not involve a public offering. The investors
were executive officers and directors of the Company accordingly, they are
accredited investors, as that term is defined under the Securities Act. The
options and shares of Common Stock were issued in reliance upon Section 4(2) and
Regulation D promulgated under the Act.
During the period of July 1996 through May 1997, the Company conducted a private
offering of Units at an offering price of $6.50 per Unit. Each Unit was
comprised of one share of Series B Preferred share and one Investor Warrant. The
Series B Preferred Shares are convertible into two (2) shares of Common Stock
and the Investor Warrants are exercisable into one share of Common Stock upon
the occurrence of certain events. Prior to investing in the Company, potential
investors were provided with a Confidential Private Placement Memorandum which
contained the Company's most recent audited financial statements, current
information regarding the Company, estimated use of offering proceeds, and risks
associated with an investment in the Company, as well as other relevant
information. Potential investors were also given the opportunity to ask
questions of the
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Company regarding the Company, the Units, and the offering. The offer and sale
of the Units did not involve a public offering. There were a total of 286,625
Units sold for a total of $1,863,059 in gross offering proceeds. There were 105
investors, 100 of whom were accredited and 5 of whom were non-accredited, as
those terms are defined under the Securities Act. The Units were sold in
reliance upon the exemptions from registration pursuant to Section 4(2) and
Regulation D under the Act. The offering was not underwritten, consequently
there were no underwriting discounts or commissions.
During the period October 1997 through December 1997, September 1997 through
March 1998, 229,273 shares of the issued and outstanding Series B Preferred
Stock converted were converted into 458,546 shares of the Company's Common
Stock. The Common Stock was issued pursuant to an exemption from registration
under Section 3(a)(9) of the Act. All shares of Common Stock issued upon
conversion of the Series B Preferred shares were issued with the appropriate
restrictive legend. To date, none of the Investor Warrants have been converted
into Common Stock of the Company.
On July 19, 1996, the Company issued 50,000 shares of its Common Stock to Harvey
Huffstetler for pre-incorporation services, including certain administrative
tasks and financial planning services provided to the Company. Mr. Huffstetler
was provided with all financial information regarding the Company, including
audited financial statements as well as the opportunity to ask questions of and
receive answers from the Company regarding its business, the financial
statements and the Common Stock. Mr. Huffstetler has extensive experience in
business management and in insurance, accordingly, Mr. Huffstetler has the
requisite knowledge and experience in financial and business matters to evaluate
the merits and risks of an investment in the Company and qualifies as a
sophisticated investor. The issuance of the shares to Mr. Huffstetler did not
involve a public offering. The shares were issued in reliance upon the exemption
provided by Section 4(2) of the Act. There were no underwriting discounts or
commissions in connection with this transaction.
On July 19, 1996, the Company issued 50,000 shares of Common Stock to Keith
Lowery in consideration for consulting services relating to various engineering
matters and counsel regarding compliance with the rules and regulations of the
FCC. Mr. Lowery was provided with all financial information regarding the
Company, including audited financial statements as well as the opportunity to
ask questions of and receive answers from the Company regarding its business,
the financial statements and the Common Stock. Mr. Lowery has a Juris Doctor
degree from the University of Houston, has worked with the FCC, and provides
compliance assistance with the rules and regulations of the FCC, accordingly,
Mr. Lowery has the requisite knowledge and experience in financial and business
matters to evaluate the merits and risks of an investment in the Company and
qualifies as a sophisticated investor. The issuance of the shares did not
involve a public offering. The shares were issued in reliance upon the exemption
provided by Section 4(2) of the Act. There were no underwriting discounts or
commissions in connection with this transaction.
On November 8, 1996, the Company sold 400,000 shares of Common Stock to Winco
Corporation for $200,000. The equity owners of Winco each individually
represented to the Company that they are accredited investors, as that term is
defined under the Act. The offer and sale of the foregoing shares did not
involve a public offering. The offer and issuance of the shares were effected in
reliance upon the exemptions from registration provided by Section 4(2) of the
Act and Regulation D promulgated thereunder. There were no underwriting
discounts or commissions in connection with this transaction.
During March 1997, the Company sold 15% Guaranteed Promissory Notes with a face
value of $10,000 each ("Bridge C Notes") for an aggregate of $125,000 in gross
offering proceeds. The offer and sale of such notes did not involve a public
offering and were sold only to accredited investors, as that term is defined
under the Act. Prior to investing in the Company, potential
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investors were provided with a Confidential Private Placement Memorandum which
contained the Company's most recent audited financial statements, current
information regarding the Company, estimated use of offering proceeds, and risks
associated with an investment in the Company, as well as other relevant
information. Potential investors were also given the opportunity to ask
questions of the Company regarding the Company, the notes, and the offering. The
notes were sold in reliance upon Section 4(2) and Regulation D promulgated under
the Act. The offering was not underwritten, therefore, there were no
underwriting discounts or commissions.
During the period November 1997 through March 1998, 100% of the Bridge C Notes
in the aggregate value of $125,000 were converted into 38,463 shares of the
Company's Common Stock. The Common Stock was issued pursuant to an exemption
from registration under Section 3(a)(9) of the Act. All shares of Common Stock
issued upon conversion of the Bridge C Notes were issued with the appropriate
restrictive legend.
On May 12, 1997, Frank J. Lyons ("Lyons"), an individual, loaned $100,000 to the
Company. The loan is evidenced by a promissory note of even date therewith, the
terms of which provide for an interest payment of $10,000 on the maturity date,
August 12, 1997. The Company is currently negotiating a conversion of Mr. Lyon's
note and interests into shares of the Company's Common Stock. As partial
consideration for extending the loan to the Company, the Company issued Lyons
20,000 shares of Common Stock. Mr. Lyons represented to the Company that he is
an accredited investor, as that term is defined under the Act. The issuance of
the foregoing shares did not involve a public offering. The foregoing loan and
issuance of Common Stock were effected in reliance upon the exemptions from
registration provided by Section 4(2) of the Act and Regulation D promulgated
thereunder. There were no underwriting discounts or commissions in connection
with this transaction.
On May 12, 1997, Gary Lamberg ("Lamberg"), an individual, loaned $50,000 to the
Company. The loan, which was evidenced by a promissory note of even date
therewith, has been satisfied in full by the Company. As partial consideration
for extending the loan to the Company, the Company issued Lamberg 10,000 shares
of Common Stock. Mr. Lamberg represented to the Company that he is an accredited
investor. The issuance of the foregoing shares to Mr. Lamberg did not involve a
public offering. The foregoing loan and issuance of Common Stock were effected
in reliance upon the exemptions from registration provided by Section 4(2) of
the Act and Regulation D promulgated thereunder. There were no underwriting
discounts or commissions in connection with this transaction.
On July 1, 1997, Super Six, Inc. ("Super Six") loaned $30,000 to the Company.
The loan is evidenced by a promissory note of even date therewith, the terms of
which provide for the accrual of simple interest at the rate of twelve percent
(12%) per annum. All outstanding principal and accrued interest was due and
payable on December 31, 1997, however, the Company is currently negotiating an
extension of the foregoing promissory note. As partial consideration for
extending the loan to the Company, the Company issued Super Six 60,000 shares of
Common Stock. The equity owners of Super Six each individually represented to
the Company that they are accredited investors, as that term is defined under
the Act. The
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offer and sale of the foregoing shares did not involve a public offering. The
foregoing loan and issuance of Common Stock were effected in reliance upon the
exemptions from registration provided by Section 4(2) of the Act and Regulation
D promulgated thereunder. There were no underwriting discounts or commissions in
connection with these transactions.
On August 1, 1997, James Thornbo ("Thornbo"), an individual, loaned $25,000 to
the Company. The loan, which was evidenced by a promissory note of even date
therewith, has been satisfied by the Company in full. As partial consideration
for extending the loan to the Company, the Company issued Thornbo 9,079 shares
of Common Stock. Mr. Thornbo represented to the Company that he is an accredited
investor, as that term is defined under the Act. The issuance of the foregoing
shares did not involve a public offering. The foregoing loan and issuance of
Common Stock were effected in reliance upon the exemptions from registration
provided by Section 4(2) of the Act and Regulation D promulgated thereunder.
There were no underwriting discounts or commissions in connection with these
transactions.
On August 1, 1997, Raji Shah ("Shah"), an individual, loaned $38,000 to the
Company. The loan was evidenced by a promissory note, the terms of which
provided for the accrual of simple interest at the rate of nine percent (9%) per
annum, pro-rated to the maturity date. The Company satisfied its debt to Shah in
full. As partial consideration for extending the loan to the Company, the
Company issued 12,500 shares to Mr. Shah. Mr. Shah represented to the Company
that he is an accredited investor, as that term is defined under the Act. The
issuance of the foregoing shares did not involve a public offering. The
foregoing loan was effected in reliance upon the exemptions from registration
provided by Section 4(2) of the Act and Regulation D promulgated thereunder.
There were no underwriting discounts or commissions in connection with these
transactions.
On August 4, 1997, Logistics Services International, Inc. ("Logistics") loaned
$50,000 to the Company. The loan is evidenced by a promissory note of even date
therewith, the terms of which provide for the accrual of simple interest at the
rate of twelve percent (12%) per annum. All outstanding principal and accrued
interest was due and payable to Logistics on December 31, 1997. The Company is
currently negotiating an extension of the foregoing promissory note. As partial
consideration for extending the loan to the Company, the Company issued
Logistics 4,285 shares of Common Stock. There is one equity owner of Logistics,
who has represented to the Company that he is an accredited investor, as that
term is defined under the Act. The issuance of the foregoing shares did not
involve a public offering. The foregoing loan and issuance of Common Stock were
effected in reliance upon the exemptions from registration provided by Section
4(2) of the Act and Regulation D promulgated thereunder. The offering was not
underwritten, and there were no underwriting discounts or commissions.
On August 28, 1997, Midas Fund Ltd. ("Midas") loaned $100,000 to the Company.
The loan was evidenced by a promissory note of even date therewith and matured
on February 28, 1998. The Company was required to pay a $5,000 interest payment
on November 28, 1997 and on February 28, 1998. The Company was unable to pay the
amounts as due and is currently negotiating an
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extension of the foregoing promissory note. As partial consideration for
extending the loan to the Company, the Company issued Midas 20,000 shares of
Common Stock. The equity owners of Midas each individually represented to the
Company that they are accredited investors, as that term is defined under the
Act. The issuance of the foregoing shares did not involve a public offering. The
foregoing loan and issuance of Common Stock were effected in reliance upon the
exemptions from registration provided by Section 4(2) of the Act and Regulation
D promulgated thereunder. There were no underwriting discounts or commissions in
connection with these transactions.
During November and December 1997, the Company offered and sold 20 Units
("Units") to two accredited investors for a total gross proceeds of $100,000.
Each Unit consisted of (i) a promissory note in the principal amount of $5,000,
bearing interest at the rate of 20% per annum, payable at maturity, and
maturing six (6) months from the date of issuance, and (ii) 1,000 shares of
Common Stock. The offer and sale of the Units did not involve a public
offering. The Units were sold in reliance upon the exemptions from registration
pursuant to Section 4(2) and Rule 506 of Regulation D promulgated under the
Act. The offering was not underwritten, consequently there were no underwriting
discounts or commissions.
In December 1997, the Company and Media Fund, Inc. ("MFI") entered into an
agreement pursuant to which MFI received 1,875,000 shares of the Company's
Common Stock, as well as other assets of the Company, in exchange for payment
of $5,000,000 to be paid in installments over a one year period. The equity
owners of MFI have each individually represented to the Company that they are
accredited investors, as that term is defined under the Act. The issuance of
the foregoing shares did not involve a public offering. The foregoing loan and
issuance of Common Stock were effected in reliance upon the exemptions from
registration provided by Section 4(2) of the Act and Regulation D promulgated
thereunder. There were no underwriting discounts or commissions in connection
with these transactions.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is permitted to indemnify its directors and officers in accordance
with and as limited by its Bylaws and Delaware and Federal law.
The above provisions in the Certificate of Incorporation and Bylaws and the
written indemnity agreements may have the effect of reducing the likelihood of
derivative litigation against directors and may discourage or deter stockholders
or management from bringing a lawsuit against directors for breach of their
fiduciary duty, even though such an action, if successful, might otherwise have
benefitted the Company and its stockholders. However, the Company believes the
foregoing provisions are necessary to attract and retain qualified persons as
directors and officers.
At present there is no pending litigation or proceeding involving a director or
officer of the Company in which indemnification is required or permitted, and
the Company is not aware of any threatened litigation or proceeding that may
result in a claim for such indemnification.
For liabilities against directors and officers arising under the federal
securities laws, the Securities and Exchange Commission has stated that, in its
opinion, indemnification of directors and officers for such liabilities is
against public policy and is therefore unenforceable.
GENERAL - YEAR 2000 ISSUES
The Company has conducted a comprehensive review of its computer systems to
identify any business functions that could be affected by the "Year 2000" issue.
As the millennium ("Year 2000") approaches, businesses may experience problems
as the result of computer programs being written using two digits rather than
four to define the applicable year. The Company has conducted a comprehensive
review of its computer systems to identify those areas that could be affected by
the "Year 2000" issue. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. If not corrected, this could result in extensive miscalculations or a
major system failure.
The Company relies on industry standard software. Certain manufacturers have
already provided the Company with upgraded software to address the "Year 2000"
issue and the Company believes
32
<PAGE> 33
that its remaining software manufacturers will modify their programs
accordingly. In the event the remaining manufacturers do not upgrade their
software packages, the Company will replace such software with programs that
address the "Year 2000" issue. The Company believes that by modifying existing
software and converting to new software, the "Year 2000" issue will not pose
significant operational problems and is not anticipated to require additional
expenditures that would materially impact its financial position or results of
operations in any given year.
33
<PAGE> 34
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this Pre-Effective Amendment No. 3 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICAN INDEPENDENT NETWORK, INC.
Date: June 19, 1998 /s/ Donald W. Shelton
--------------------------------------
Dr. Donald W. Shelton, Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this
Pre-Effective Amendment No. 3 to the Registration Statement has been signed by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Donald W. Shelton Chairman of the Board of June 19, 1998
- ------------------------ Directors, Chief Executive
Dr. Donald W. Shelton Officer, and Director
/s/ Randy Moseley President, Chief Financial June 19, 1998
- ------------------------ Officer, Secretary, and
Randy Moseley Director
</TABLE>
34
<PAGE> 35
PART F/S
The following financial statements are filed as part of this
Registration Statement:
<TABLE>
Financial Statements: Page
----
<S> <C>
Report of Independent Certified Public Accountants F-1
Comparative Balance Sheets at December 31, 1997
and December 31, 1996 F-2
Comparative Analysis of Stockholders' Equity for
the Twelve Months ended December 31, 1997 and 1996 F-4
Comparative Statement of Operations for the
Twelve Months ended December 31, 1997 and 1996 F-5
Comparative Statement of Cash Flows for the
Twelve Months ended December 31, 1997 and 1996 F-6
Notes to Financial Statements F-7
</TABLE>
35
<PAGE> 36
JACK F. BURKE, JR.
CERTIFIED PUBLIC ACCOUNTANT
P.O. BOX 15728
HATTIESBURG, MS 39404
REPORT OF INDEPENDENT AUDITOR
The Board of Directors
American Independent Network, Inc.
Haltom City, Texas 76117
I have audited the accompanying balance sheets of American Independent Network,
Inc., as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of American Independent Network
management. My responsibility is to express an opinion on these financial
statements based on my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I 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 statements
presentation. I believe that my audits provide a reasonable basis for my
opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of American Independent Network, Inc.
at December 31, 1997 and 1996 and the results of its operations and its cash
flows for the years ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 16 to the
financial statements, the company has suffered recurring net operating losses
and has a current ratio deficit which raises substantial doubts about its
ability to continue as a going concern. Management's plans in regard to the
matters are also described in Note 16. The financial statements do not include
any adjustments that might result from the outcome of the uncertainty.
Sincerely,
/s/ JACK BURKE, JR.
---------------------------------
Jack Burke, Jr.
March 20, 1998
F-1
<PAGE> 37
AMERICAN INDEPENDENT NETWORK, INC.
COMPARATIVE BALANCE SHEET
DECEMBER 31,
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 34,768 $ 59,846
Accounts Receivable 2,250 10,730
Trade Credits Receivable 30,000 30,000
Note Receivable Net (Doubtful Accounts $700,000) 700,000 0
Prepaid Expenses 0 236
---------- ----------
TOTAL CURRENT ASSETS 767,018 100,812
---------- ----------
PLANT, PROPERTY AND EQUIPMENT
Leasehold Improvements 22,851 22,851
Less Amortization (8,028) (3,458)
Equipment and Furnishings 125,096 88,144
Digital Compression Equipment 831,391 605,000
Accumulated Depreciation (103,954) (49,242)
---------- ----------
TOTAL PLANT, PROPERTY AND EQUIPMENT 867,356 663,295
---------- ----------
OTHER ASSETS
Trade Credits Receivable Net (Allowance $125,138) 261,990 432,128
Other Investments 893,658 2,463,933
Note Receivable Net (Doubtful Accounts 884,595) 884,595 0
---------- ----------
TOTAL OTHER ASSETS 2,040,243 2,896,061
---------- ----------
TOTAL ASSETS $3,674,617 $3,660,168
---------- ----------
</TABLE>
The Accompanying "Notes to Financial Statements"
Are An Integral Part of These Financial Statements
F-2
<PAGE> 38
AMERICAN INDEPENDENT NETWORK, INC.
COMPARATIVE BALANCE SHEET
DECEMBER 31,
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1997 1996
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable $ 177,404 $ 284,336
Notes Payable 2,133,930 1,533,867
Accrued Interest - Notes 119,530 142,962
Advances from Affiliates 9,602 5,042
Customer Deposits 0 20,000
Interest Due Preferred Shareholders 37,440 15,972
Equipment Lease Payments 175,380 139,380
----------- -----------
TOTAL CURRENT LIABILITIES 2,653,286 2,141,559
----------- -----------
LONG TERM DEBT
Deferred Income Tax 661,824 0
Equipment Lease Payments 216,407 251,617
----------- -----------
TOTAL LONG TERM DEBT 878,231 251,617
----------- -----------
TOTAL LIABILITIES 3,531,517 2,393,176
----------- -----------
STOCKHOLDER'S EQUITY
Preferred Stock - 1,000,000 shares $1 Par
Authorized - 1996 107,546 shares issued,
1997 53,427 shares issued 53,427 107,546
Common Stock - 20,000,000 shares $.01 Par
Authorized, 1996 14,045,268 shares issued,
1997 18,232,715 shares issued 182,325 140,453
Additional Paid-In Capital 4,511,821 2,513,734
Retained Earnings (Deficit) (4,135,723) (1,494,741)
Note Receivable (468,750) 0
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 143,100 1,266,992
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 3,674,617 $ 3,660,168
----------- -----------
</TABLE>
The Accompanying "Notes to Financial Statements"
Are An Integral Part of These Financial Statements
F-3
<PAGE> 39
AMERICAN INDEPENDENT NETWORK, INC.
COMPARATIVE ANALYSIS OF STOCKHOLDERS' EQUITY
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in Note Retained
Shares Amount Shares Amount Capital Receivable Earnings
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 47,841 $47,841 10,000,000 $100,000 $1,664,341 $ 0 $ (51,095)
Preferred A Shares Issued 42,918 42,918 229,546
Issued Cost of Preferred A (82,793)
Conversion of Preferred A
Shares to Common (90,759) (90,759) 181,518 1,815 88,944
Preferred B Shares Issued 107,546 107,546 591,504
Issued Cost of Preferred B (225,808)
Common Issued to Bridge
Loan Investors 212,183 2,122
Issuance of Common Stock
for Contributed Capital 1,451,567 14,516
Issuance of Common Stock for
Exercise of Stock Options 2,000,000 20,000 180,000
Sale of Common Stock 200,000 2,000 98,000
Net Loss for the Year Ended
December 31, 1996 0 0 0 0 0 0 (1,443,646)
------- ------- ---------- -------- ---------- --------- -----------
Balance, December 31, 1996 107,546 107,546 14,045,268 140,453 2,513,734 0 (1,494,741)
Preferred B Shares Issued 175,154 175,154 963,347
Issued Cost of Preferred B (547,999)
Preferred Stock Conversions (229,273) (229,273) 458,546 4,585 224,688
Common Issued to Bridge
Loan Investments 1,521,039 15,210 380,260
Conversion of Bridge Loans 132,862 1,327 429,791
Sale of Common Stock 200,000 2,000 98,000
Sale of Common Stock for
a Note Receivable 1,875,000 18,750 450,000 (468,750)
Net Loss for the Year Ended
December 31, 1997 0 0 0 0 0 0 (2,640,982)
------- ------- ---------- -------- ---------- --------- -----------
Balance, December 31, 1997 53,427 $53,427 18,232,715 $182,325 $4,511,821 $(468,750) $(4,135,723)
------- ------- ---------- -------- ---------- --------- -----------
</TABLE>
The Accompanying "Notes to Financial Statements"
Are An Integral Parts of These Financial Statements
F-4
<PAGE> 40
AMERICAN INDEPENDENT NETWORK, INC.
COMPARATIVE STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
REVENUES
INCOME FROM NETWORK OPERATIONS $ 1,243,145 $ 642,399
----------- -----------
COST AND EXPENSES
Satellite Rental 581,861 598,590
Uplinking of Programming 0 115,802
Programming Expenses 12,162 81,849
Production Expenses 111,558 110,802
Depreciation 54,692 14,096
Amortization Leasehold 4,590 4,590
Rental Expenses (Net) 67,714 61,986
Provision for Doubtful Accounts 1,584,595 0
Administration Expenses 439,232 482,858
Reserve for Trade Credits 125,138 0
----------- -----------
Total Costs and Expenses 2,981,542 1,470,573
----------- -----------
NET INCOME (LOSS) FROM OPERATIONS (1,738,397) (828,174)
----------- -----------
OTHER INCOME - GAIN ON SALE OF ASSETS 785,257 0
----------- -----------
OTHER EXPENSES
Interest Expense (Net) 381,654 204,757
Debt Issue Cost 250,135 385,000
Loss on Sale of Assets 13,969 14,238
----------- -----------
TOTAL OTHER EXPENSES 645,758 603,995
----------- -----------
GAIN (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (1,598,898) (1,432,169)
INCOME TAX BENEFIT (EXPENSE) (661,824) (11,477)
----------- -----------
NET GAIN (LOSS) BEFORE EXTRAORDINARY ITEM (2,260,722) (1,443,646)
EXTRAORDINARY ITEM
Cost of conversion of Bridge Loans
to Common Stock 380,260 0
----------- -----------
NET GAIN (LOSS) $(2,640,982) $(1,443,646)
----------- -----------
EARNINGS PER SHARE OF COMMON STOCKS $(0.18) $(0.12)
WEIGHTED AVERAGE SHARES 14,834,322 11,628,104
</TABLE>
The Accompanying "Notes to Financial Statements"
Are An Integral Part of These Financial Statements
F-5
<PAGE> 41
AMERICAN INDEPENDENT NETWORK, INC.
COMPARATIVE STATEMENT OF CASH FLOW
FOR THE TWELVE MONTHS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash Flows Provided (Used)
by Operating Activities
Net Gain (Loss) $(2,640,982) $(1,443,646)
Adjustment to Reconcile Net Income to Net
Cash from Operating Activities
Amortization of Leasehold 4,570 4,590
Depreciation 54,712 14,096
Provision for Doubtful Accounts 1,584,595 0
Gain on Sale of Assets with Note Receivable (785,257) 0
Reserve for trade Credits 125,138 0
Non Cash Operating Expenses 3,991 0
Accounts Receivable 8,480 12,346
Non cash revenues (120,000) 0
Cost of Loan Conversion to Common Stock 380,260 0
Trade Credits Receivable 45,000 31,000
Deferred tax expense 661,824 11,477
Investment in Stocks 0 52,000
Prepaid Assets 0 (237)
Accounts Payable (106,932) 4,605
Accrued Interest (1,964) 115,637
Advances from Affiliates 4,561 (5,215)
Conversion of interest payable to common stock 165,612 0
Customer Deposits (20,000) 20,000
Investment in Senior Channel (689,680) 0
----------- -----------
TOTAL CASH USED BY OPERATING ACTIVITIES (1,326,072) (1,183,347)
----------- -----------
Cash Flows from Investing Activities
Investment in Equipment (99,915) (214,003)
Investment in Film Library (7,523) (1,000)
Investment in Common Stock 0 (200,000)
----------- -----------
TOTAL CASH USED BY INVESTING ACTIVITIES (107,438) (415,003)
----------- -----------
Cash Flows Provided by Financing Activities
Notes Payable Increase 819,580 627,066
Long Term Lease Decrease (101,650) 0
Preferred Stock Increase 175,154 150,464
Common Stock Increase 2,000 36,516
Additional Paid-In Capital Increase 513,348 760,449
----------- -----------
TOTAL CASH PROVIDED BY FINANCING ACTIVITY 1,408,432 1,574,495
----------- -----------
Net Cash Increase (Decrease) (25,078) (23,855)
Cash Beginning of Year 59,846 83,701
----------- -----------
Cash End of Year $ 34,768 $ 59,846
----------- -----------
</TABLE>
The Accompanying "Notes to Financial Statements"
Are an Integral Part of These Financial Statements
F-6
<PAGE> 42
AMERICAN INDEPENDENT NETWORK, INC.
NOTES TO COMPARATIVE FINANCIAL STATEMENTS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents: Consist of cash balances. Cash equivalents consisted
of highly liquid investments with an original maturity date of ninety days or
less. The Company does not have any cash equivalents.
Trade Credits Receivable: The Company owns trade credits in the amount of
$417,128 at December 31, 1997 and $462,128 at December 31, 1996. As defined by
the International Reciprocal Trade Association, a trade dollar is a unit of
account that denotes the right to receive (receivable) or the obligation to pay
(a payable), one US dollar worth of goods and services within a barter system
or network. While all of the trade credits may be used by The Company at any
time, The Company has shown a pattern of using $25,000 to $30,000 worth of the
credits in each of the past two years. Therefore the company's trade credits
are being classified as current $30,000 and other assets of $387,128 at
December 31, 1997. The Trade Credits were obtained in 1994 in exchange for an
Investment in Common Stock and was valued at the fair value of the asset
investment in common stock. The Company uses the credits primarily for travel
expense. The Company, also exchanged Trade Credits for computer equipment and
Fine Art. Management does not consider impairment under FAS 121 is appropriate
as management intends to fully utilize the credits and the credits do not have
an expiration date. Due to the slow rate of usage the Company has established a
valuation account of $125,138. The trade group, the Company is a member of,
currently has over twenty four hundred participants. The Company can use these
trade credits without any infusion of cash except sales or excise taxes.
Accounts Receivable: Allowance for doubtful accounts. The Company has accounts
receivable at December 31, 1997 of $2,250 owed by regular customers. Management
deems this amount to be fully collectable. No allowances for doubtful accounts
is necessary. At December 31, 1996 the accounts receivable total was $10,730.
Plant, Property and Equipment: is recorded at cost.
Depreciation and Amortization: The cost of plant, property and equipment is
depreciated over the estimated useful life of the assets ranging from equipment
at 5 years to leasehold improvements at 20 years. Depreciation is on a straight
line basis. Depreciation and for amortization 1997 was $59,282 and for 1996 was
$18,869.
Income Taxes: The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109. "Accounting for Income Taxes" (SFAS
109). SFAS 109 is an asset and liability approach that requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences
of events that have been recognized in the company's financial statements or
tax returns. In estimating future tax consequences, SFAS 109 general considers
all expected future events other than enactment's of changes in the tax law or
rates. Income tax accounting information is disclosed in Note 3 to the
comparative financial statements.
Use of Estimates: The preparation of financial statements in conformity with
general accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from these estimates.
F-7
<PAGE> 43
OTHER INVESTMENTS - CONSIST OF THE FOLLOWING
<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
Prepaid Media $1,426,933
Investments in Stocks (See Note 12 "Investment in Common Stock") $196,455 200,000
Film Library (See Note 13 "Film Library") 7,523 1,000
Investment Senior Channel (See Note 11 "Senior Channel") 689,680
Trade Due Bills 0 836,000
-------- ----------
Total $893,658 $2,463,933
-------- ----------
</TABLE>
NOTE 2 NOTES PAYABLE
Notes Payable at December 31, 1997 - Consist of the Following Notes:
<TABLE>
<CAPTION>
ACCRUED
CREDITOR DUE DATE INTEREST PRINCIPAL INTEREST
-------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Shelley Media Marketing(1) 9/30/98 10% $51,100 $0
Cleveland Broadcasting Co.(1) 9/30/98 10% 26,089 0
ATN Network, Inc.(1) 9/10/98 10% 284,241 0
Pacific Acquisition Group 12/31/98 11% 250,500 0
Bridge Loan 10/30/97 15% 1,522,000 119,530
---------- --------
Total $2,133,930 $119,530
---------- --------
</TABLE>
(1) Affiliated Companies
Notes Payable at December 31, 1996 - Consist of the Following Notes:
<TABLE>
<CAPTION>
ACCRUED
CREDITOR DUE DATE INTEREST PRINCIPAL INTEREST
-------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Lyn Broadcasting Corporation(1) 8/31/97 10% $4,500 $17,047
Shelley Media Marketing(1) 9/30/97 10% 51,100 10,398
Cleveland Broadcasting Co.(1) 9/30/97 10% 38,274 7,654
ATN Network, Inc. 9/30/97 10% 25,366 21,739
Advances from Affiliates(1) Demand 10% 5,042 1,545
Pacific Acquisition Group 12/31/97 11% 485,500 42,476
Bridge Loan 8/30/97 15% 1,122,750 42,103
Less Cost of Bridge
Loan Acquisition (193,623) 0
---------- --------
TOTAL 1,538,909 142,962
Less Amount Classified as
Advances from Affiliates 5,042 0
---------- --------
TOTAL $1,533,867 $142,962
---------- --------
</TABLE>
(1) Affiliated Companies
F-8
<PAGE> 44
The Company has engaged in transactions with certain other enterprises that are
affiliated companies. These companies are controlled by the management and
principal stockholders of American Independent Network. The controlled
companies transactions are as follows:
<TABLE>
<CAPTION>
1997 1996
FUNDS FUNDS
---------------------- -----------------------
BORROWED REPAID BORROWED REPAID
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Cleveland Broadcasting 12,185
San Antonio Broadcasting 2,200 20,556 19,521
TV Channel 22 12,310 5,500 6,250
Lynn Broadcasting 4,500(1) 100,000(2)
ATN Network 579,250 320,376(2) 115,786(2)
Shelley Media 350
</TABLE>
- -------------
(1) Repaid with common stock issued at $3.25 per share
(2) Repaid $100,000 with common stock at $0.10 per share
NOTE 3 INCOME TAXES
DEFERRED INCOME TAX LIABILITY CONSIST OF THE FOLLOWING COMPONENTS
<TABLE>
<CAPTION>
1997 1996
---------- -------
<S> <C> <C>
Provision for Income Taxes
Current 0 0
Deferred Liability (1,137,548) 0
Deferred tax asset 475,724 (11,477)
---------- -------
Total Provision for Income Taxes (661,824) (11,477)
---------- -------
</TABLE>
The tax effects of temporary differences which give rise to deferred income by
assets and liabilities consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
Deferred income tax assets
Valuation allowance 475,724 0
Net operating loss 207,477 207,477
Deferred income tax liabilities
Installment sale method on Notes Payable (1,137,548) 0
Valuation allowance (207,477) (207,477)
---------- --------
Net deferred tax asset liability (661,824) 0
---------- --------
Extraordinary Item - Bridge loan conversion cost $(380,260)
consist the fair market value of common stock issued and has
no income tax attributes
</TABLE>
F-9
<PAGE> 45
RECONCILIATION OF STATUTORY U.S. TAX RATE WITH EFFECTIVE TAX RATE.
<TABLE>
<CAPTION>
<S> <C> <C>
Statutory U.S. tax rate on pretax loss 0% 0%
Average tax rate on temporary differences 41 0
Average tax rate on change in valuation allowance 0 1
-- -
Effective tax rate 41 1
-- -
NOTE 4 SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid
Interest $127,861 $91,724
Income Taxes 0 0
</TABLE>
NOTE 5 DISBURSEMENTS FROM BRIDGE LOAN PROCEEDS AND PREFERRED STOCK SALES
Financing activities during 1997 and 1996 consisted of bridge loans of
$2,057,750 and preferred stock sales of $1,837,551. The disbursements from the
financing escrow's were $1,933,499 to the operating account, $1,402,802 for
issue costs and $559,000 for debt repayment.
NOTE 6 DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument where it is practicable to estimate that
value.
NOTES RECEIVABLE: The carrying amount approximates fair value because
each is valued at estimated discounted future cash flows.
LONG TERM INVESTMENTS: The fair value of these investments is estimated
based on quoted market prices for those and similar investments.
NOTES PAYABLE: The carrying value approximates fair value because of
the short maturity date of these investments.
F-10
<PAGE> 46
The estimated fair value of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Trade Credits $291,990 $41,713 $462,128 $46,213
Notes Receivable $1,584,595 $1,584,595 0 0
Long Term Investments $196,455 $390,910 $1,037,000 $1,037,000
Accounts Payable $177,404 $177,404 $284,336 $284,336
Equipment Lease Payments $391,787 $354,219 $390,997 $347,316
Notes Payable $2,133,930 $2,133,930 $1,533,867 $1,533,867
</TABLE>
NOTE 7 LEASE OBLIGATIONS AND LONG TERM DEBT DISCLOSURE
The Company is obligated on three leases. The leases are as follows:
BUILDINGS: The Company utilizes the space as both corporate offices and
studios. The lease is $5,400 per month and expires May 31, 1998.
EQUIPMENT: The Company has entered a master equipment lease (digital
compression equipment) for a period of thirty-six months ending December 1,
1999. The lease has a fair market value purchase option at the end of the
lease. The total lease obligation is $390,996 and the lease has been treated as
a capital lease. In May 1997, the Company entered into a lease for additional
digital compression equipment for a period of 9 months with payments of $4,302
per month. The lease period is from June 1, 1997 to May 1, 2000. The lease has
been capitalized.
SATELLITE: The Company leased satellite transponder space under an initial
operating lease. The lease is for three years ending July 31, 1999 with a total
lease obligation of $2,250,000. The Company modified its lease reducing its
satellite band width from 24 Mhz which reduces its future lease cost from
$1,187,500 to $619,848 under the lease modification. The Company pays the new
balance at the rate of $30,000 per month the period January 1, 1998 through
July 1, 1999 when the lease terminates.
DETAILS OF LEASE OBLIGATIONS ARE AS FOLLOWS:
<TABLE>
<CAPTION>
CAPITALIZED CAPITALIZED OPERATING
EQUIPMENT EQUIPMENT TRANSPONDER
----------- ----------- -----------
LEASE #1 LEASE #2 LEASE #3
-------- -------- --------
<S> <C> <C> <C>
1998 $139,380 $51,624 $360,000
1999 $139,380 $51,624 $210,000
2000 $24,237 $21,510
</TABLE>
F-11
<PAGE> 47
NOTE 8 SALE OF ASSETS
AIN entered into an agreement with Media Fund, Inc. Dated December
10, 1997. This agreement materially affects the financial statements and AIN
daily operations.
Media Fund, Inc., under the provisions of the above agreement, gave
to AIN a promissory note in the amount of $5,000,000. The agreement has certain
restrictions as to the use of funds received from Media Fund, Inc. (see below).
AIN exchanged the following assets of the company for the $5,000,000
promissory note:
<TABLE>
<S> <C>
NOTE RECEIVABLE (PRESENT VALUE) $3,637,940
Common stock 1,875,000 shares @ $2.25 468,750
----------
3,169,190
----------
BOOK VALUE OF ASSETS SOLD
Prepaid television inventory 1,426,933
Other long term assets (trade due bills) 837,000
Accounts Receivable (Inet Inc.) 120,000
----------
Total Asset Book Value 2,383,933
----------
GAIN ON SALE $ 785,257
----------
Media Fund, Inc. payment schedule on promissory note:
Due within 12 months
May 30, 1998 50,000
June 30, 1998 750,000
September 30, 1998 300,000
December 30, 1998 300,000
----------
1,400,000
----------
Due beyond 12 months
March 30, 1999 300,000
June 30, 1999 300,000
December 31, 2002 3,000,000
----------
3,600,000
----------
</TABLE>
MEMO: An allowance for Doubtful Accounts in the amount of $1,584,595 has been
established due to incomplete financial information on Media Fund, Inc.
The note is uncollateralized.
RESTRICTIONS ON CASH RECEIVED:
Eighty (80%) percent of first $2,000,000 or $1,600,000 must be used to
purchase IRD (Digital to Analog Decoders) equipment, and towards its goal
of total households reached of seventy million (70,000,000) plus
nationally.
F-12
<PAGE> 48
ADDITIONAL CONDITIONS OF THE ABOVE AGREEMENT:
1. Media Fund, Inc. receives twenty (20%) percent of all spots
of AIN, HTN, and Senior Network for a period of four years beginning December
10, 1998 with three (3) renewal options of five (5) years each.
2. Media Fund, Inc. was issued 1,875,000 shares in AIN, HTN
(Hispanic Television Network) and Senior Network.
3. Media Fund, Inc. will provide up to twelve (12) hours of
Network quality programming per day which AIN agrees to air. The commercial
slots due Media Fund, Inc. per the agreement will be used by Media Fund, Inc.
for Media Fund clients.
NOTE 10 PREFERRED STOCK
Preferred stockholders' may convert one share of preferred stock into two
shares of common. Preferred stockholders' also receive nine percent interest
per annum in lieu of dividends. Summary of preferred stock transactions are as
follows:
<TABLE>
<S> <C>
Number of Preferred B Shares sold in 1996
per Comparative Analysis of Stockholders' Equity 107,546
Number of Preferred B Shares sold in 1997
per Comparative Analysis of Stockholder's Equity 175,154
--------
Total Number of Preferred B Shares Sold 282,700
Number of Preferred B Shares converted to Common Stock at
December 31, 1997 at the rate of two Common for each
Preferred B, which would equal 458,546 shares of Common (229,273)
--------
Number of Preferred B Shares outstanding at December 31, 1998 53,427
--------
</TABLE>
NOTE 11 SENIOR CHANNEL
In 1997 the Company acquired the Copyright to the Senior Channel in exchange
for programming services in the amount of $689,680 that was billed at standard
programming rates. The Senior Channel has twenty four hour programming per day.
The Company's cash plan projections indicate the cost will be recovered in four
to five years.
NOTE 12 INVESTMENT IN COMMON STOCK
The Company owns 368,100 shares of Quick Tent, Inc. (NASD Small Cap QTNT). The
Company sold Quick Tent, Inc. stock in November, 1997 at $1,085 per share. The
quoted market value at December 31, 1997 was $1,062 per share. The cost basis
in the financial statements is $0.523 per share for a capitalized amount of
$196,455. This investment is included in Other Investments.
F-13
<PAGE> 49
NOTE 13 FILM LIBRARY
The Film Library consists of approximately 2,000 films and television produced
tapes at a cost of $7,523.
NOTE 14 BRIDGE LOAN
Bridge Loan holders have the option of converting their loans to Common Stock at
$3.25 per share. Loans in the amount of $161,006 were converted into 49,540
Common Shares. To equate the difference between market price of $0.25 and
conversion price of $3.25 an additional 1,521,039 were issued. This gave rise
to an extraordinary item - of Loan Conversion to Common Stock in the amount of
$380,260. The market value of $0.25 per share was derived from the sale of
200,000 shares at $0.50 per share discounted for the much larger number of
shares involved and the restrictions on the stock.
NOTE 15 RECONCILIATION OF CHANGES IN NOTES PAYABLE TO CASH FLOW GENERATED BY
INCREASE IN NOTES PAYABLE
<TABLE>
<S> <C>
Notes payable 1997 2,133,930
Notes payable 1996 1,533,867
----------
Net Change 600,063
Notes paid by Conversion to Common Stock 265,506
Non cash digital equipment note (45,989)
----------
Cash flow generated by notes payable $ 819,580
----------
</TABLE>
NOTE 16 GOING CONCERN
As shown in the accompanying financial statements the company has had recurring
net operating losses resulting in cash flow problems. All of the company's debt
is short term resulting in a substantial current ratio deficit (current
liabilities and long term liabilities due within twelve months are greater than
current assets and assets available for use within twelve months). These
circumstances raise substantial doubt as to the company's ability to continue
as a going concern. Such conditions may prevent the company from meeting its
liabilities within a timely manner.
Management fully believes it will lease a minimum of two satellite access
channels. This in conjunction with the collection of short term notes
receivable and normal operating revenues will provide the company sufficient
cash flow to continue as a going concern and to reach its penetration of
household (viewer) goals for the year.
The financial statements do not include any adjustments that might be necessary
if the company is unable to continue as a going concern.
F-14
<PAGE> 50
AMERICAN INDEPENDENT NETWORK, INC.
Comparative Balance Sheet (Unaudited)
March 31,
ASSETS
<TABLE>
<CAPTION>
1998 1977
----------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 94,368 $ 164,172
Accounts receivable 2,250 14,730
Trade credits receivable 30,000 30,000
Note receivable, net of
doubtful account of $700,000 700,000 0
Prepaid expenses 0 112,736
----------- ----------
TOTAL CURRENT ASSETS 826,618 321,638
----------- ----------
PLANT, PROPERTY AND EQUIPMENT
Leasehold improvements 22,851 22,851
Equipment and furnishings 128,842 91,999
Digital compression equipment 834,769 627,001
----------- ----------
986,462 741,851
Accumulated depreciation (126,802) ( 59,700)
----------- ----------
TOTAL PLANT, PROPERTY AND EQUIPMENT 859,660 682,151
----------- ----------
OTHER ASSETS
Deferred tax benefits 207,477 273,477
Trade credits receivable, net of
allowance of $125,138 261,990 432,128
Other investments 897,588 2,801,433
Note Receivable, net of
doubtful account of $884,595 884,595 0
----------- ----------
TOTAL OTHER ASSETS 2,251,650 3,507,038
----------- ----------
TOTAL ASSETS $ 3,937,928 $4,510,827
=========== ==========
</TABLE>
THE ACCOMPANYING "NOTES TO FINANCIAL STATEMENTS" ARE
AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-15
<PAGE> 51
AMERICAN INDEPENDENT NETWORK, INC.
Comparative Balance Sheet (Unaudited)
March 31,
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 154,997 $ 236,726
Notes payable 2,330,188 1,562,843
Accrued interest - notes 177,317 95,986
Advances from affiliates 28,402 3,542
Customer deposits 20,000
Interest due preferred shareholders 37,440 25,000
Equipment lease payments 175,380 139,380
---------- ----------
TOTAL CURRENT LIABILITIES 2,903,724 2,083,477
---------- ----------
LONG TERM DEBT
Deferred income tax 1,137,548
Equip lease payments 184,973 235,617
---------- ----------
TOTAL LONG TERM DEBT 1,322,521 235,617
---------- ----------
TOTAL LIABILITIES 4,226,245 2,319,094
---------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock - 1,000,000 shares $1 Par
Authorized - 1996 107,546 shares issued,
March 31, 1998 48,813 shares issued 48,813 217,795
Common Stock - 20,000,000 shares $.01 Par
Authorized, 1996 14,045,300 shares issued,
1998 18,354,587 shares issued less 1,875,000
to be issued when note paid;
16,479,587 outstanding 164,796 142,453
Additional Paid in Capital 4,223,351 2,937,664
Retained Earnings (4,725,277) (1,106,179)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY ( 288,317) 2,191,733
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $3,939,928 $4,510,827
========== ==========
</TABLE>
THE ACCOMPANYING "NOTES TO FINANCIAL STATEMENTS" ARE
AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-16
<PAGE> 52
AMERICAN INDEPENDENT NETWORK, INC.
Comparative Statement of Operations (Unaudited)
For the Three Months Ended March 31,
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
REVENUES
Income from network operations $ 53,463 $ 137,735
---------- ----------
COST AND EXPENSES:
Satellite rental 90,000 187,500
Programming expenses 844 8,055
Production expenses 24,429 24,982
Depreciation 14,820 7,000
Rental Expense (Net) 16,200 16,902
Administrative expenses 126,125 115,468
---------- ----------
TOTAL COST AND EXPENSES 272,418 359,907
---------- ----------
NET (LOSS) FROM OPERATIONS ( 218,955) (222,172)
---------- ----------
OTHER EXPENSES:
Interest expense (net) 84,966 72,743
Amortization of debt issue cost 0 40,000
---------- ----------
Total Other Expense 84,966 112,743
---------- ----------
(LOSS) BEFORE INCOME TAXES AND ( 303,921) (334,915)
EXTRAORDINARY ITEM
INCOME TAX BENEFIT (EXPENSE) 0 66,000
---------- ----------
NET (LOSS) BEFORE EXTRAORDINARY ITEM $( 303,921) $( 268,915)
EXTRAORDINARY ITEM
Cost of Conversion of Bridge Loans
To Common Stock 17,386 0
---------- ----------
NET GAIN (LOSS) $( 321,307) $( 268,915)
---------- ----------
EARNINGS PER SHARE OF COMMON STOCK $ (0.02) $ (0.03)
WEIGHTED AVERAGE SHARES 16,383,773 10,000,000
</TABLE>
THE ACCOMPANYING "NOTES TO FINANCIAL STATEMENTS" ARE
AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-17
<PAGE> 53
AMERICAN INDEPENDENT NETWORK, INC.
Comparative Analysis of Stockholders' Equity (Unaudited)
For The Three Months Ended March 31, 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------- -------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings
------- ------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1996 107,546 $107,546 14,045,268 $140,453 $2,513,734 $(837,264)
Preferred B Shares Issued 175,154 175,154 963,347
Issue cost of Preferred B (547,999)
Preferred Stock Conversions (229,273) (229,273) 458,546 4,585 224,688
Common Issued to Bridge
Loan Investors 1,521,039 15,210 380,260
Conversion of Bridge Loans 132,652 1,327 429,791
Sale of Common Stock 200,000 2,000 98,000
Sale of Common Stock to
Media Fund, Inc. 1,875,000 18,750 450,000
Less Stock Paid for by
Note Receivable (1,875,000) (18,750) (450,000)
Net Loss for the Year Ended
December 31, 1997 (3,566,706)
------- ------- ---------- -------- ---------- --------
BALANCE DECEMBER 31, 1997 53,427 $53,427 16,357,505 $163,575 $4,061,821 ($4,403,970)
Preferred Stock Conversions ( 4,614) (4,614) 9,230 93 4,522
Conversion of Bridge Loans 43,306 433 140,317
Common Issued to Bridge
Loan Investors 69,546 695 16,691
Net Loss for the Three
Months Ended March 31, 1998 ( 321,307)
------- ------- ---------- -------- ---------- --------
BALANCE MARCH 31, 1998 48,813 $48,813 16,479,587 $164,796 $4,223,351 ($4,725,277)
</TABLE>
THE ACCOMPANYING "NOTES TO FINANCIAL STATEMENTS" ARE
AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-18
<PAGE> 54
AMERICAN INDEPENDENT NETWORK, INC.
Comparative Statement of Cash Flow (Unaudited)
For The Three Months Ended March 31,
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS PROVIDED (USED)
BY OPERATING ACTIVITIES:
Net (Loss) $(321,307) $(268,915)
Adjustment to reconcile net income to net
cash from operating activities:
Extraordinary item 17,386 0
Depreciation 14,820 7,000
Accounts receivable 0 ( 4,000)
Deferred tax benefit 0 ( 66,000)
Accounts payable ( 22,407) ( 47,610)
Accrued interest 57,787 ( 37,948)
Advances from affiliates 18,800 ( 1,500)
-------- --------
TOTAL CASH USED BY OPERATING ACTIVITIES (234,921) (418,973)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment ( 7,124) ( 25,856)
Investment in film library ( 3,929) 0
-------- --------
TOTAL CASH FLOW FROM INVESTING ACTIVITIES ( 11,053) ( 25,856)
-------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Notes payable increase 196,258 28,976
Long term lease decrease ( 31,434) ( 16,000)
Preferred stock increase 0 110,249
Common stock increase 433 2,000
Additional paid-in capital increase 140,317 423,930
-------- --------
TOTAL CASH PROVIDED BY FINANCING ACTIVITIES 305,574 549,155
-------- --------
Net Cash Increase 59,600 104,326
Cash, beginning of Period 34,768 59,846
-------- --------
CASH AT END OF PERIOD $ 94,368 $164,172
-------- --------
</TABLE>
THE ACCOMPANYING "NOTES TO FINANCIAL STATEMENTS" ARE
AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-19
<PAGE> 55
AMERICAN INDEPENDENT NETWORK, INC.
Notes To Comparative Financial Statements (Unaudited)
March 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - Consist of cash balances. Cash and Cash equivalents
consist of highly liquid investments with an original maturity date of ninety
days or less. The company does not have any cash equivalents.
TRADE CREDITS RECEIVABLES - the company owns trade credits in the amount of
$417,128 at March 31, 1998 and $462,128 at March 31, 1997. As defined by the
International Reciprocal Trade Association, a trade dollar is a unit of account
that denotes the right to receive (receivable) or the obligation to pay (a
payable), one US dollar worth of goods and services within a barter system or
network. While all of the trade credits may be used by the company at any time,
the company has shown a pattern of using $25,000 to $30,000 worth of the credits
in each of the past two years. Therefore the company's trade credits are being
classified as current $30,000 and other assets of $387,128, at March 31, 1998.
ACCOUNTS RECEIVABLE - Allowance for doubtful accounts. The company has accounts
receivable at March 31, 1998 of $2,250 owed by regular customers. Management
deems this amount to be fully collectible. No allowances for doubtful accounts
is necessary. At March 31, 1997 the total was $14,730.
PLANT, PROPERTY AND EQUIPMENT is recorded at cost.
DEPRECIATION - the cost of plant, property and equipment is depreciated over the
estimated useful life of the assets ranging from equipment at 5 years to
leasehold improvements at 20 years. Book depreciation is on a straight line
basis while income tax depreciation is accelerated. For income tax information
see Note 3.
INCOME TAXES - The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 is an asset and liability approach that requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences
of events that have been recognized in the company's financial statements or tax
returns. In estimating future tax consequences, SFAS 109 generally considers all
expected future events other than enactments of changes in the tax law or rates.
Income tax accounting information is disclosed in Note 3 to the comparative
financial statements.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
F-20
<PAGE> 56
AMERICAN INDEPENDENT NETWORK, INC.
Notes To Comparative Financial Statements (Unaudited)
March 31, 1998 and 1997
OTHER INVESTMENTS - Consist of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Prepaid Telephone $ 337,500
Prepaid Media 1,426,933
Investment in stocks $196,455 200,000
Film Library 11,453 1,000
Investment in Senior Channel 689,680 0
Media trade due bills 0 836,000
--------- ----------
Total Other Investments $ 897,588 $2,801,433
--------- ----------
</TABLE>
NOTE 2 - NOTES PAYABLE
Notes Payable at March 31, 1998 consist of the following notes;
<TABLE>
<CAPTION>
Due Accrued
Creditor Date Interest Principal Interest
-------- -------- -------- ---------- --------
<S> <C> <C> <C> <C>
Shelley Media
Marketing(1) 9/30/98 10% 50,650 1,266
Cleveland
Broadcasting Co.(1) 9/30/98 10% 17,933 500
ATN Network, Inc.(1) 9/30/98 10% 599,914 11,051
Pacific Acquisition
Group, Inc. 12/31/98 11% 250,500 6,262
Bridge Loan 10/31/97 15% 1,411,191 155,443
---------- --------
Total $2,330,188 $174,522
---------- --------
</TABLE>
- ----------
(1) Affiliated Companies
Notes Payable at March 31, 1997 consist of the following notes;
<TABLE>
<CAPTION>
Due Accrued
Creditor Date Interest Principal Interest
-------- -------- -------- ---------- --------
<S> <C> <C> <C> <C>
Lyn Broadcasting
Corporation(1) 8/31/97 10% $ 4,500 $17,047
Shelley Media
Marketing(1) 9/30/97 10% 51,100 10,398
Cleveland
Broadcasting Co.(1) 9/30/97 10% 37,053 7,654
ATN Network, Inc.(1) 9/30/97 10% 22,338 21,739
Pacific
Acquisition Group 12/31/97 11% 435,500
Bridge Loan 10/31/97 15% 1,137,750 37,603
Less Cost of Bridge
Loan Acquisition (125,398)
---------- --------
Total $1,562,843 $94,441
</TABLE>
- ----------
(1) Affiliated Companies
F-21
<PAGE> 57
AMERICAN INDEPENDENT NETWORK, INC.
Notes To Comparative Financial Statements (Unaudited)
March 31, 1998 and 1997
NOTE 3 - INCOME TAXES
Deferred income tax liability consist of the following components:
<TABLE>
<CAPTION>
1998 1997
------------------------- --------------------
Book Tax Book Tax
<S> <C> <C> <C> <C>
Net (Loss) from operations (218,955) (218,955) (222,172) (222,172)
Other (expenses) ( 84,966) ( 84,966) (112,743) (112,743)
Extraordinary Item ( 17,386) ( 17,386)
----------- ----------- -------- --------
Income (loss) before income tax (321,307) (321,307) (334,915) (334,915)
----------- ----------- -------- --------
Tax benefit (expense) 0 0 66,000 66,000
Less tax benefit carryover 207,477 207,477 207,477 207,477
----------- ----------- -------- --------
Net deferred tax benefit
(liability) $(1,137,548) $(1,137,548) $273,477 $273,477
=========== =========== ======== ========
</TABLE>
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash used for:
Interest $ 17,520 $68,216
Taxes $ 0 $ 0
</TABLE>
NOTE 5 - DISBURSEMENTS FROM BRIDGE LOAN PROCEEDS
AND PREFERRED STOCK SALES
Financing activities during 1997 and 1996 consisted of bridge loans ($2,057,750)
and preferred stock sales ($1,837,551). The disbursements from the financing
escrows were $1,933,499 to the operating account, $1,402,802 for
issue costs and $559,000 for debt repayment.
NOTE 6 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for where it is practicable to estimate
that value:
Cash and Accounts Receivable - The carrying amount approximates fair value
because of the short maturity of those instruments.
Long Term Investments - The fair value of these investments are estimated based
on quoted market prices for those and similar investments.
The estimated Fair Values of the Company's Financial Instruments are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and Accounts Receivable $ 67,018 $ 67,018 $164,172 $164,172
Notes receivable current $1,400,000 $700,000
Long Term Investments $1,769,190 $884,595 $836,000 $836,000
</TABLE>
F-22
<PAGE> 58
AMERICAN INDEPENDENT NETWORK, INC.
Notes To Comparative Financial Statements (Unaudited)
March 31, 1998 and 1997
NOTE 7 - LEASE OBLIGATIONS AND LONG TERM DEBT DISCLOSURE
The Company is obligated on three leases. The leases are as follows:
Building - The Company utilizes the spaces as both corporate offices and
studios. The lease is $5,400 per month and expires May 31, 1998.
Equipment - The Company has entered a master equipment lease (digital
compression equipment) for a period of thirty-six months ending December 31,
1999. The lease has a fair market value purchase option at the end of the lease.
Total lease obligation is $390,996 and the lease has been treated as a capital
lease. In May 1997, the Company entered into a lease for additional digital
equipment for a period of 36 months with payments of $4,302 per month. The lease
period is from June 1, 1997 to May 1, 2000. The lease has been capitalized.
Satellite - The Company leased satellite transponder space under an initial
operating lease. The lease is for three years ending July 31, 1999 with a total
lease obligation of $2,250,000. The Company has modified its lease reducing its
satellite band width from 24 MHZ to 8 MHZ which reduces its future lease cost
from $1,187,500 to $619,848 under the lease modification. The Company pays the
new lease balance at the rate of $30,000 per month during the period January 1,
1998 through July 1, 1999 when the lease terminates.
Details of lease obligations are as follows:
<TABLE>
<CAPTION>
Capitalized Capitalized Operating
Equipment Equipment Transponder
Lease #1 Lease #2 Lease
----------- ----------- -----------
<S> <C> <C> <C>
1998 $139,380 $51,624 $360,000
1999 $139,380 $51,624 $210,000
2000 $ 24,237
2000 $ 24,237
</TABLE>
F-23
<PAGE> 59
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Title of Exhibit
- -------------- ----------------
<S> <C>
2.1 Articles of Incorporation of the Company, as amended(1)
2.2 Bylaws of the Company, as amended(1)
3.1 Form of Warrant Agreement(1)
6.1 Lease for Offices(1)
6.2 Employment Agreement with Dr. Donald W. Shelton(1)
6.3 Employment Agreement with Randy Moseley(1)
6.4 Stock Option Agreement with Dr. Donald W. Shelton(1)
6.5 Stock Option Agreement with Randy Moseley(1)
6.6 Form of License Agreement (Affiliate Agreement)(1)
6.7 GE Americom Lease Agreement(1)
6.8 Master Lease with Insight Investments(1)
6.9 Promissory Note Extension Agreement with Lyn
Broadcasting Corporation(1)
6.10 Promissory Note Extension Agreement with
Shelly Media Marketing(1)
6.11 Promissory Note Extension Agreement with Cleveland
Broadcasting Co.(1)
6.12 Promissory Note Extension Agreement with ATN
Network, Inc.(1)
6.13 Promissory Note with Super Six, Inc.(1)
6.14 Promissory Note with Jim Thornbo(1)
6.15 Promissory Note with Logistic Services International, Inc.(1)
6.16 Promissory Note with Rajendra Shah(1)
6.17 Promissory Note with Gary Lamberg(1)
6.18 Promissory Note with Frank Lyons(1)
6.19 Loan and Security Agreement with Midas Fund(1)
6.20 United State Federal Communications Commission Radio
Station Authorization(1)
6.21 Form of Programming Agreement(2)
6.22 Promissory Note with ATN Network, Inc.(2)
6.23 "All News Channel Agreement"(2)
6.24 Promissory Note Extension Agreement with Super Six, Inc.(2)
6.25 Promissory Note Extension with Logistics Services, Inc.(2)
6.26 Promissory Note Extension Agreement with Shelly Media Marketing Corporation(2)
6.27 Promissory Note Extension Agreement with Cleveland Broadcasting
Corporation(2)
6.28 Promissory Note Extension Agreement with ATN Network Inc.(2)
6.29 Form of Equipment Agreement(2)
6.30 Channel Use and Programming Agreement with Dominion Sky Angel(2)
6.31 Agreement of Settlement, Compromise and Assignment(2)
6.32 Assignment of Senior Channel(2)
6.33 Agreement with Media Fund, Inc.(2)
6.34 1995 Stock Option Plan(2)
10.1 Consent of Jack F. Burke, Jr., Certified Public Accountant
27.1 Financial Data Schedule for fiscal year ended December 31, 1997
27.2 Financial Data Schedule for fiscal year ended December 31, 1996
27.3 Financial Data Schedule for fiscal quarter ended March 31, 1998
27.4 Financial Data Schedule for fiscal quarter ended March 31, 1997
</TABLE>
- -------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form 10-SB (File No. 000-23105), filed with the Securities and Exchange
Commission on September 19, 1997.
(2) Previously filed as an exhibit to the Company's Pre-Effective Amendment
No. 2 to the Registration Statement on Form 10-SB (File No. 0-23105),
filed with the Securities and Exchange Commission on April 10, 1998.
<PAGE> 1
Consent of Inclusion
I, Jack Burke, Jr., hereby consent to the inclusion of the financial
statements of American Independent Network, Inc. (the "Company") for years ended
December 31, 1997 and December 31, 1996 in the Company's Pre-Effective Amendment
No. 3 to the Registration Statement on Form 10-SB to be filed with the
Securities and Exchange Commission.
Dated: June 18, 1998 /s/ Jack Burke, Jr.
--------------------------------------
Jack Burke, Jr., C.P.A.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 34,768
<SECURITIES> 0
<RECEIVABLES> 2,250
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 767,018
<PP&E> 867,356
<DEPRECIATION> 103,954
<TOTAL-ASSETS> 3,674,617
<CURRENT-LIABILITIES> 2,653,286
<BONDS> 0
182,325
53,427
<COMMON> 182,325
<OTHER-SE> (92,652)
<TOTAL-LIABILITY-AND-EQUITY> 3,674,617
<SALES> 1,243,145
<TOTAL-REVENUES> 1,243,145
<CGS> 0
<TOTAL-COSTS> 2,981,542
<OTHER-EXPENSES> 645,758
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 381,654
<INCOME-PRETAX> (1,598,898)
<INCOME-TAX> 661,824
<INCOME-CONTINUING> (2,260,722)
<DISCONTINUED> 0
<EXTRAORDINARY> 380,260
<CHANGES> 0
<NET-INCOME> (2,640,982)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
AUDITED FINANCIAL STTEMENTS FOR FISCAL YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFRENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 59,846
<SECURITIES> 0
<RECEIVABLES> 10,730
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 100,812
<PP&E> 663,295
<DEPRECIATION> 49,242
<TOTAL-ASSETS> 3,660,168
<CURRENT-LIABILITIES> 2,141,559
<BONDS> 0
0
107,546
<COMMON> 140,453
<OTHER-SE> 1,018,993
<TOTAL-LIABILITY-AND-EQUITY> 3,660,168
<SALES> 1,092,399
<TOTAL-REVENUES> 1,092,399
<CGS> 0
<TOTAL-COSTS> 1,470,573
<OTHER-EXPENSES> 603,995
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 204,757
<INCOME-PRETAX> (1,432,169)
<INCOME-TAX> (11,477)
<INCOME-CONTINUING> (1,443,646)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,443,646)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
UNAUDITED FINANCIAL STATEMENTS FOR THE FISCAL QUARTER ENDED MARCH 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 94,368
<SECURITIES> 0
<RECEIVABLES> 2,250
<ALLOWANCES> 700,000
<INVENTORY> 0
<CURRENT-ASSETS> 826,618
<PP&E> 986,462
<DEPRECIATION> 126,802
<TOTAL-ASSETS> 3,937,928
<CURRENT-LIABILITIES> 2,903,724
<BONDS> 0
0
48,813
<COMMON> 164,796
<OTHER-SE> (74,708)
<TOTAL-LIABILITY-AND-EQUITY> 3,939,928
<SALES> 53,463
<TOTAL-REVENUES> 53,463
<CGS> 0
<TOTAL-COSTS> 272,418
<OTHER-EXPENSES> 84,966
<LOSS-PROVISION> 700,000
<INTEREST-EXPENSE> 84,966
<INCOME-PRETAX> (303,921)
<INCOME-TAX> 0
<INCOME-CONTINUING> (321,307)
<DISCONTINUED> 0
<EXTRAORDINARY> 17,386
<CHANGES> 0
<NET-INCOME> (321,307)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
UNAUDITED FINANCIAL STATEMENTS FOR THE FISCAL QUARTER ENDED MARCH 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 164,172
<SECURITIES> 0
<RECEIVABLES> 14,730
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 321,638
<PP&E> 682,151
<DEPRECIATION> 59,700
<TOTAL-ASSETS> 4,510,827
<CURRENT-LIABILITIES> 2,083,477
<BONDS> 0
0
217,795
<COMMON> 142,453
<OTHER-SE> 1,831,485
<TOTAL-LIABILITY-AND-EQUITY> 4,510,827
<SALES> 0
<TOTAL-REVENUES> 137,735
<CGS> 0
<TOTAL-COSTS> 359,907
<OTHER-EXPENSES> 112,743
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72,743
<INCOME-PRETAX> (334,915)
<INCOME-TAX> 0
<INCOME-CONTINUING> (268,915)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (268,915)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
