QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the period ending March 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Commission file number 0-18612
I.R.S. Employer Identification Number 84-1062555
TV COMMUNICATIONS NETWORK, INC.
(a Colorado Corporation)
10020 E. Girard Avenue, #300
Denver, Colorado 80231
Telephone: (303) 751-2900
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of The
Securities and Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date: 41,188,454 shares of the Company's Common Stock ($.0005
par value) were outstanding as of March 31, 1998.
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
Business Development
TV Communications Network, Inc. ("TVCN" or the "Company")
was organized as a Colorado corporation on July 7, 1987.
Its executive offices are at 10020 E. Girard Avenue,
Suite 300, Denver, Colorado 80231, its telephone
number is (303) 751-2900 and its fax number is (303) 751-1081.
The Company was formed to seek business opportunities that,
in the opinion of management, will provide profit to the
Company in any industry in general and the Wireless Cable TV
("WCTV") industry in particular. During its early years, TVCN
focused its attention on WCTV operations. After early success,
TVCN began to diversify. Now, the Company is a diversified
holding enterprise with operations in gas and oil; WCTV;
internet; mining and wireless communications.
Oil and Gas Operations
TVCN has an ambitious goal ... to become the Microsoft of
the gas and oil industry. With assets of only $11
million, it is hardly apparent that TVCN would become a
recognized force in the giant gas and oil industry. But,
as Microsoft perfected a process for the computer
industry dominated by the likes of IBM, TVCN is now ready
to offer a process for the gas and oil industry in
competition against the likes of Exxon and Shell.
How Did It All Begin
Qatar is the third largest gas producing country in the world
with the largest single natural gas field. In 1992 as TVCN
was constructing the world's first WCTV station (outside the USA)
in Qatar, it came to the realization that Qatar was not making
much profit on exporting its Liquefied-Natural-Gas ("LNG"). The
Qatari requested TVCN to explore for more efficient and profitable
applications and utilization of natural gas. It wasn't too long
before TVCN's management ran into a technology used by the Germans
in the 1920's and then by the South Africans in the 1950's. At
the heart of such technology was the Fisher-Tropsch ("F-T")
process that converted coal/gas into transportation fuels.
The initial F-T process was not efficient and was not commercially
viable, but a few companies claimed the introduction of certain
innovations and improvements to optimize the process efficiency.
World-wide reviews were conducted by TVCN of the improvements and
innovations claimed at that time. After extensive reviews and
evaluations, TVCN decided to develop its own F-T process in order
to overcome many of the deficiencies identified in then existing
technological processes or claimed innovations. Accordingly, TVCN
incorporated Reema International in 1993 as a wholly-owned subsidiary
for the development of its own Gas-To-Liquid ("GTL") process. A team
of industry experts was put together and headed by Glen Clark, who
is considered one of the top authorities in the GTL industry. As TVCN,
through Reema, began to develop its own technology, we began to
negotiate with several foreign countries for securing a gas supply
source for a GTL plant. Now, TVCN would like to construct as many
GTL plants as the world can demand, perhaps at least 50 GTL plants
throughout the world.
The Name is GTL
At the center of TVCN's ambitious plan is a
technological process known as Gas-To-Liquid. It is the
GTL conversion technology for transforming natural gas
into finished petroleum products such as diesel, jet
fuel, naphtha, etc. The new technological improvements
could transform trillions of cubic feet of stranded
natural gas in Alaska and other remote areas around the
world into valuable finished petroleum products. These
petroleum products could generate hundreds of millions of
dollars in profits, reduce the U.S. dependency on
imported petroleum products, and possibly prevent what
Senator Jesse Helms referred to as a potential "economic
calamity ... in America, if and when foreign producers shut
off our supply."
Memorandum of Understanding
After years of negotiations, Reema and the government of
Trinidad and Tobago signed a Memorandum of Understanding
("MOU") for the construction and operation of a GTL plant
in Trinidad. The proposed GTL conversion plant will be
employing Reema's propriety technological information.
Reema's GTL plant in Trinidad will be using natural gas
from Trinidad. Depending on date of construction
completion, the proposed GTL plant might be the world's
first commercial GTL plant to process natural gas into
about 10,000 barrels per day ("bpd") of high-quality
finished petroleum products such as sulfur-free diesel,
jet fuel, naphtha and others.
The initial capitalization of Reema's proposed GTL plant in
Trinidad is expected to be between $275 and $300 million,
for a production capacity of 10,000 bpd over a period of
at least 20 years. Reema is negotiating the details of a
definitive agreement with the government of Trinidad and
Tobago, and is discussing various financing options with
financial institutions and interested parties.
How Does GTL Work?
A typical GTL conversion plant consists of three major
units. The first section is a gasification or gas
reforming unit for converting natural gas into syngas (a
mixture of hydrogen and carbon monoxide). The second
step is the F-T process unit in which the syngas from the
first step is converted into 'soupy' waxy hydrocarbon
products. The last unit is for hydrocracking/hydro-
isomerization of the wax into the desired product mix
such as diesel, jet fuel, naphtha, etc.
Historical Background and Competition
The "heart" of a GTL conversion plant is the Fisher-
Tropsch process. The front end (gasification) and the
back end (hydrocracking) units of a GTL plant are
relatively standard commercial units that are
commercially available today and have been in use for
about 40 years. The F-T process itself is not new. It
was used by the Germans since the 1920's to convert coal
into syngas which was then fed into the F-T process for
conversion into transportation fuels. South Africa used
the F-T process in the 1950's. However, because of the
inefficiency of the early F-T processes, the old GTL
technology was not commercially viable. In 1992, Sasol of
South Africa began to experiment on a 2500 bpd GTL plant.
The initial focus was on the production of the high-value wax.
It is believed that Sasol is now working on the production
of transportation fuels, but no information is currently
available on such work.
It wasn't until 1993 that Shell built the first
commercial GTL plant in Malaysia. However, the Shell
plant reportedly focused on the production of high-value
products such as solvents, detergents, lubricants and
wax, instead of transportation fuels. The capital cost of the
Shell plant reportedly was in excess of $850 Million, and the
production capacity was 12,500 bpd. A recent fire destroyed part
of the plant and that the plant is not currently in operation.
The giant oil company Exxon announced recently that it
has completed the construction of a pilot GTL plant for
the production of 250 bpd of transportation fuels. As of
this date, other than the foregoing, neither Exxon nor
others have built any other commercial GTL plant anywhere
in the world.
The Critical Significance of the GTL Process
"Refiners will kill for it because it solves formidable
clean-air problems, crucial in the United States and
other environmentally sensitive countries. Use of no-
sulfur feedstocks will save refiners billions of dollars
in investments they would have to make to reduce sulfur
in motor fuels", reported National Petroleum News, June,
98 ("NPN"). "Crude oil refining could be replaced by
integrated gasification synfuel plants to produce fuels
of the highest quality. ... the consequences of a
breakthrough in this area are so significant that no
company in the energy business can afford not to follow
developments", continued NPN.
The critical significance of the GTL conversion process
stems from three facts. The first is related to the
location of the gas fields around the world. The second
is related to the premium quality of the finished
products as compared to that of those produced from crude
oil. The third is due to the impact of GTL products on
the U.S. trade deficit and national security.
A. Gas Locations
More than half of the estimated 5086 trillion cubic feet
of natural gas is stranded in remote areas. GTL "... could
make use of gas which would otherwise be wasted ...",
said the Norwegian state firm Statoil. This is obvious
because transporting natural gas through conventional
pipelines across continents and oceans is not
commercially viable. The alternative has been to liquefy
the natural gas through very expensive LNG plants and
transport it through specialized and expensive tankers to
specialized terminals under special handling to end
users. The entire LNG process is so expensive, costing
billions of dollars, that it leaves little profit for the
gas producing countries and makes the price of gas
expensive for end-users. In addition LNG plants have
been used only when the amount of gas liquefied and
exported is very large, and that the gas price to the
end-users at the importing countries is very high.
On the other hand, a typical GTL conversion plant can be
built at a cost of approximately $300 million, producing
10,000 bpd of finished petroleum products such as diesel,
jet fuel and naphtha which can be transported by
conventional means without special terminals or handling.
Further, the production capacity of a typical GTL plant
can be expanded through a series of modules. Thus, a
small plant can start production at the rate of 10,000
bpd, then modularly increase the production capacity to
20,000; 30,000; 40,000 etc. bpd. The capacity appears to be
almost endless with one limitation, which is the amount of
natural gas available for the process.
In a study conducted by Arthur D. Little ("ADL"), a
global consulting firm, it was said that "recent
technological improvements and operational experience
have finally made GTL an attractive alternative way to
commercializing remote natural gas, i.e., LNG and
pipeline gas." Tim Patridge, VP of ADL, predicted that
"GTL will revolutionize the gas industry the way the
first LNG plant did about 40 years ago". Patridge
expects "to see 1-2 million bpd GTL industry ... to the
tune of 25-50 billion dollars of investment ... And
that's just a fraction of the potential 11 million bpd of
GTL capacity that could be built based on known economic
gas reserves." GTL plants can be built near remote gas
fields around the world and transform such fields into
massive profit centers.
B. Premium Quality of GTL Produced Products
"Recent advances in converting natural gas into clean,
environmentally friendly oil products could trigger
revolutionary changes in the world energy industry,"
reported Reuters from London, 6-22-98.
In order to appreciate the high quality products produced
through the GTL process, one needs to understand that the
major cause of pollution in most major cities throughout
the world is the presence of sulfur and other impurities
in crude oil-derived products. Additionally, aromatics
are the major cause of engine wear and tear. Governments
are constantly limiting the contents of sulfur and other
impurities in crude oil-based products in order to curb
the rising levels of pollution. For example, the U.S.
Congress has adopted a resolution to reduce the standard
level of sulfur content in diesel from 0.35% to 0.20%.
Similar standards were adopted for aromatics content.
In the early 1990's, Congress attempted to reduce the
sulfur content to 0.05%. Oil giants lobbied against the
proposed legislation under the claim, among other things,
that it would cost upward of $50 billion to meet the
proposed standards. The proposed Federal legislation did
not pass in Congress. However, the State of California
adopted a state resolution to reduce the sulfur standard
to 0.05%, whenever available. It is not known at this
time if there is any refinery in the USA or the world
that has the production capability of meeting the
California standard of 0.05%. It is believed that most
foreign countries are still operating at the 0.35% high
level of impurities. In Great Britain alone, it was
reported that some 10,000 deaths occurred as a result of
diesel pollution.
In contrast, diesel and jet fuel processed and produced
by the GTL process will have zero sulfur, zero aromatics,
higher cetane, and a higher smoke point. The quality of
the finished products of the GTL process is expected to
be so premium that it can be used as a blend with the
products derived from crude oil in order to improve their
quality and meet ever-increasing stringent pollution
standard requirements.
C. Impact on U.S. Trade Deficit
Petroleum imports, accounting for the largest single item
of the U.S. trade deficit in 1997, could top 65% of total
consumption within the next five years, according to
IOGCC (a 29-state Commission on oil and gas). IOGCC
reported to Congress that the "U.S. may have to abandon
60-80% of discovered domestic oil resources by 2015 ...
Clearly the situation as it now stands is intolerable.
As Senator Jessie Helms said earlier this year: 'Economic
calamity will occur in America, if and when foreign
producers shut off our supply.'"
In the meantime, it is reported that there are trillions
of cubic feet of natural gas in Alaska that cannot be
transported economically and competitively to the 48
states. GTL plants can be built in Alaska that can
produce badly needed high-quality diesel, jet fuel,
naphtha, etc. This can generate huge profits, reduce the
U.S. trade deficit, reduce U.S. dependence on foreign oil
and reduce pollution.
Projected Growth Potential
There are only two commercial GTL plants in the world
today - the Shell plant of 12,500 bpd capacity, and the
2500 bpd plant of Sasol in South Africa. While Exxon has
a pilot GTL plant, Exxon, at the present, does not have
any commercial GTL plant. There is little information
about the South African plant. The capital cost of the
Shell plant reportedly ranged from $850 million to as
high as $2.0 billion. However, the Shell plant is
concentrating on the high-value finished products instead
of transportation fuel. Therefore, the Shell plant is
not really a typical GTL plant.
Based on Reema's proprietary design criteria and
specifications, the following parameters are projected
for a typical GTL plant:
Capital Cost: $300 million
Feedstock: natural gas
Production: 10,000 bpd
Life Span: Minimum 20 years
Total Gross Revenues: $2.32 billion
Avg. Yearly Revenues: $116 million
The current estimate of world reserves of natural gas is
5086 trillion cubic feet. More than one-half of known
natural gas is in stranded gas fields far away from world
markets. This is a sufficient feedstock for hundreds,
if not thousands of GTL plants around the world. The
dwindling crude oil reserves throughout the world underscores
the critical role that the GTL conversion process will play
in the coming years. Moreover, with the advent of the GTL
conversion process, exploration activities for natural gas may
intensify in the coming years.
According to Arthur D. Little, 11 million bpd could
potentially
be produced by GTL plants. Using the size of Reema's proposed
plant of 10,000 bpd, and an average operating revenues of $116
million per year, the market potential for GTL as projected by
ADL would be as follows:
Average
Number of Finished Petroleum Oper. Revenues
GTL Plants Products (1000 bpd) Per Year
1 10 $116.0 million
50 500 $ 5.8 billion
100 1,000 $ 11.6 billion
500 5,000 $ 58.0 billion
1,100 11,000 $127.6 billion
2,000 20,000 $232.0 billion
In order to evaluate the growth potential of GTL in the
U.S. market alone, the following should be taken into
account:
Trillions of cubic feet of natural gas is stranded in
Alaska. Giant oil and gas companies reportedly cannot even
place a book value on their gas reserves because of a current
lack of marketability.
- Oil consumption in the U.S. in 1996 was 18.3 million
bpd. It is projected to reach 21.3 by 2005.
- U.S. Petroleum imports could top 65% of total
consumption within five years.
- Petroleum imports account for the largest single item
of the U.S. trade deficit.
- The U.S. may have to abandon 60-80% of discovered
domestic oil resources by 2015.
Taking the foregoing into account, the U.S. market alone
could handle hundreds of GTL plants of the size proposed
by Reema, generating revenues in the tens of billions of
dollars per year.
Wireless Cable TV ("WCTV") Operations
The WCTV industry was created in 1983 when the FCC began
licensing WCTV stations to broadcast multiple TV channels per
station on microwave frequencies. The WCTV frequency spectrum is
now divided by the FCC into groups of frequencies such as MMDS
("Multichannel Multi-point Distribution Service"), ITFS
("Instructional Television Fixed Service"), OFS ("Operational
Fixed Service"), as well as the MDS band previously available.
MMDS, MDS and OFS frequencies are licensed to commercial entities
for commercial use, while ITFS frequencies are licensed to
educational institutions for educational, instructional and
cultural TV programs. However, educational institutions are allowed
to lease any excess capacity on their ITFS channels to commercial
entities for commercial use. A television station that employs MMDS,
MDS, OFS and/or leased ITFS microwave channels to broadcast cable TV
programming to subscribers for monthly fees, is referred to as a WCTV
station.
The FCC regulates the construction, operation, and reporting
requirements of WCTV stations, which transmit from 4 to 33 analog
TV channels of programming and have a range of 25 to 50 miles
from the transmitting station. With new digital equipment coming
to the marketplace, each 6 MHz channel will be able to deliver up
to six different TV programs. The costs involved in digital
transmissions is very prohibitive now, but as demand increases,
these costs should become more affordable. A WCTV station can
deliver a variety of signals, including subscription television,
data, and other related entertainment and communications
services. WCTV station subscribers capture the microwave signals
by means of a specially designed partial parabolic antenna. The
captured microwave signals are then converted to frequencies
recognizable by a standard television set.
Wireless Cable Stations
Salina, Kansas - TVCN is currently operating a WCTV in Salina,
Kansas. The Salina operation broadcasts on 19 channels to a base
of 525 subscribers and has two employees. Zenith scrambling
equipment was introduced into the Salina head-end equipment in
November and December, 1996, each subscriber's household received
a new descrambler (set-top converter), and the Company added ESPN,
Showtime and Flix to its programming package.
Mobile, Alabama - The Company's Mobile, Alabama license is
operated by Mobile Wireless TV. For the use of this license the
Company received two cash payments totaling $200,000. In
addition, the Company receives a transmission fee which is the
greater of $2,000 per month; $0.50 per subscriber per month; or
two percent of the gross monthly revenues of the station.
San Luis Obispo, California - Currently, the Company is broadcasting
on seven channels to 48 subscribers in the San Luis Obispo area.
Other Stations - The Company also owns a WCTV station in Hays,
Kansas. In cooperation with its affiliate MDA, the Company has
constructed four channel WCTV stations in Myrtle Beach, South
Carolina; Quincy, Illinois; Rome, Georgia; and Scottsbluff,
Nebraska. None of these stations have been leased. The Rome,
Georgia station was sold to BellSouth.
In addition, in an effort to expand its concentration of WCTV
stations in the West Virginia and Pennsylvania areas, the Company
has applied for five vacant channels in the Scranton/Wilkes-
Barre/Hazelton BTA. The Company purchased the F Group lease from
American Telecasting, Inc. for $195,705.
The FCC Spectrum Auction
From November 13, 1995 to March 28, 1996 the FCC conducted an
auction of a certain portion of the microwave spectrum used by
WCTV stations. In this auction the FCC divided the country into
Basic Trade Areas ("BTAs"), according to certain geographic WCTV
markets. The successful bidder on each BTA acquired the right to
obtain the licenses for all parts of the commercial WCTV spectrum
in the BTA which were not already under license. In order to qualify
to participate in the auction, each bidder was required to pay an
up-front payment to the FCC. The Company's up-front payment was
$300,000 with a small business bidding credit of $400,000.
The FCC conducted the auction as an electronic simultaneous
multiple round auction through a specially prepared automated
auction software program. The auction closed after 181 rounds.
Sixty-seven auction participants made successful bids on one or
more BTAs. CAl Wireless Systems, Inc. was the largest
participant in terms of dollar volume, purchasing 32 BTAs for
$48.8 million. Heartland Wireless Communications, Inc. purchased
the most BTAs, acquiring 93 BTAs for a total of $19.8 million.
The Company was the successful bidder on the following 12 BTAs:
Clarksburg-Elkins, Fairmount, Logan, Morgantown, Wheeling, West
Virginia; Steubenville, Ohio/Weirton, West Virginia; Dickinson
and Williston, North Dakota; Scranton/Wilkes Barre/Hazleton and
Stroudsburg, Pennsylvania; Scottsbluff, Nebraska; and Watertown,
New York. The Company's net bid was $1,276,000 (taking into
account the 15% small business credit TVCN received). This made
TVCN the tenth largest participant in terms of the number of BTAs
acquired, and the 22nd largest participant in terms of dollar
volume. The total amount outstanding on this obligation is
$1,020,445, which the Company is financing over ten years as
described in the notes to the company's financial statements.
The Company has not yet finalized its plans with respect to
development of WCTV stations in these BTAs, and there is no
assurance that the Company will have sufficient resources to
develop such stations.
Sale of WCTV Stations
Detroit, Michigan
In 1994 the Company sold its WCTV station in Detroit, Michigan to
Eastern Cable Networks of Michigan, Inc. ("ECNM"), a subsidiary
of Eastern Cable Network Corp. ("ECNC"). The consideration received
by TVCN was $11,000,000 payable as follows: (1) a deposit of $250,000;
(2) $2.25 million cash at closing; (3) $500,000 90 days after closing;
(4) up to $2.0 million payable as a function of ECNMs ability to
successfully expand its services; (5) $500,000 nine months after
closing; and (6) a $5.5 million promissory note secured by a lien
upon the entire station.
On August 30,1995, ECNM sold the Detroit station to a subsidiary
of Peoples Choice TV ("PCTV"). In September 1995 the Company
filed a lawsuit in the District of Columbia Superior Court
seeking damages and to set aside the transaction on the grounds
that it violated the agreement pursuant to which TVCN sold the
Detroit station to ECNM in 1994. On January 12,1996 the parties
settled the lawsuit effective December 31, 1995. Pursuant to the
settlement, the Company released ECNC from all liability and
consented to PCTVs assumption of the note secured by the Detroit
station (the Original Detroit Note). In return, ECNC and PCTV
paid the Company $614,120 in cash; PCTV assumed the Original
Detroit Note; and one of PCTVs wholly-owned subsidiaries executed
a second note (the Additional Detroit Note) in favor of the
Company in the amount of $2.15 million. As of March 31, 1998 the
total outstanding deferred purchase price of the Detroit station
was $3,061,186, consisting of the $717,686 principal balance of
the Original Detroit Note and the $2,343,500 principal balance of
the Additional Detroit Note.
Denver, Colorado
In December 1993 the Company sold its Denver, Colorado WCTV
station to American Telecasting, Inc. ("ATI"), of Colorado
Springs, Colorado. The gross purchase price was determined
pursuant to a contractual formula to be $6,073,500. After
adjustments, the net purchase price was $5,868,434, payable as
follows: (1) $250,000 at execution of the sales agreement; (2)
$1,500,000 at closing; (3) $250,000 30 days after closing; and
(4) the balance of $3,868,634 is payable at eight percent (8%)
interest in monthly interest only payments for the first year,
$50,000 per month plus interest for the second year, $125,000.00
per month plus interest for the third year, $83,333 per month
plus interest for the fourth year, and $64,036.50 per month plus
interest for the fifth year.
After the closing a dispute arose between the Company and ATI
concerning a number of post-closing contractual price
adjustments. On October 2, 1995 ATI and the Company settled this
dispute, and pursuant to the settlement agreement ATI paid the
Company $47,500, and the parties released one another from all
liabilities, except ATI is still liable to the Company for the
promissory note secured by the Denver station. The Company
purchased the 4 channel F-Group lease in Scranton, PA from ATI.
To pay for the purchase, the note was reduced by $195,705. As of
March 31, 1998 the outstanding principal amount of this note was
$380,623.
Rome, Georgia
In January, 1997, TVCN and MDA, an affiliated company, began to
negotiate the acquisition of MDA of Georgia, Inc. by TVCN in
exchange for stock of TVCN. On June 17, 1997, the two companies
completed the transaction. Pursuant to the acquisition
agreement, TVCN acquired all issued and outstanding stock of MDA
of Georgia, Inc. (a wholly owned subsidiary of MDA, Inc.). In
exchange, TVCN agreed to issue 17,953,321 shares of its common
stock. The only asset of MDA of Georgia was a four-channel MMDS
station in Rome, Georgia with a market value of about $2.0
million.
The number of shares issued to MDA was calculated as follows:
the highest bid prices of TVCN stock at the close on each of the
previous four Fridays were $0.14, $0.13, $0.15 and $0.15, as
reported by the National Quotation Bureau. The average of such
high bids is $0.1425 per share. Since the shares issued by TVCN
are restricted shares, and TVCN has historically discounted
restricted shares by 20%, the discounted average high bids of
$0.1425 was discounted by 20% to $0.114 per share. Accordingly,
in exchange for all the issued and outstanding shares of MDA
of Georgia, Inc. TVCN issued 17,953,321 shares to MDA.
Both TVCN and MDA are owned and/or controlled by more than 80% by
Mr. Omar Duwaik, who is the president and CEO of both companies.
This transaction is a non-arms length transaction and was
approved by the shareholders of both TVCN and MDA. TVCN
subsequently sold the Rome, Georgia WCTV station to BellSouth
Wireless, Inc. for $2,000,000 in cash. The FCC approved the
transfer to BellSouth on April 24, 1997.
Pager Business
In February, 1997, TVCN purchased the assets of a pager business
In Georgia for $100,000. The business sells pagers, cellular
phones, airtime for pagers, and accessories from locations in Calhoun
and Dalton, Georgia. This business currently has over 1,000 airtime
customers, who are charged $12.95 or more per month. The stores
have five employees. The Company believes this is a fast growing
business with great potential for aggressive competitors.
Mining Business
Mining and Energy International Corp./Liberty Hill Mine
On September 2, 1997 the company's subsidiary, Mining and Energy
International Corp. ("MEICO") entered into two agreements with
"Big Trees' Trust" and "Naylor 1996 Charitable Remainder Trust
under date of December 30, 1996," of Applegate, California
(collectively, "Big Trees Trust") concerning the Liberty Hill
Mine in Nevada County, California. Under the first agreement
MEICO agreed to lease ten unpatented mining claims, consisting of
about 200 acres of the Liberty Hill Mine, for thirty years.
Under the second agreement, MEICO acquired an option to lease 109
other unpatented mining claims, consisting of approximately 1,750
acres of the Liberty Hill Mine, for a nominal option price. Big
Trees Trust is controlled by Ray Naylor, who for many years was
an officer of the Company's Century 21 mining subsidiary.
Under the terms of the lease agreement, MEICO agreed to
lease the subject mining property for thirty years, with an
option to terminate the lease without penalty. MEICO agreed to
pay the out-of-pocket costs of operating the mine. In addition
to these out-of-pocket expenses MEICO agreed to pay Big Trees
Trust a nonrefundable advance against royalties of $40,000 per
month (or 15% of the ores mined and sold, whichever is greater).
As of March 31, 1998 MEICO had expended a total of $2,103,650 in
out-of-pocket expenses to bring the mine into operation. In
addition, to these expenses, MEICO has paid Big Trees Trust a
total of $955,000 in advance royalties. Capital expenditures on
the mine amounted to $433,399. Thus total expenditures of
all kinds through March 31, 1998 were $3,492,049. An additional
$33,800 was spent on Century 21 mining equipment used at the
Liberty Hill Mine.
Development of the Liberty Hill Project began in the winter
of 1996. MEICO contracted with Ray Naylor to be the operator of
the mine and to develop the project. Beginning in the summer of
1996, Ray Naylor assured MEICO that the mine was on the verge of
production. However, for one reason or another, including
inclement weather, inadequate water purification equipment,
unanticipated clay content of the ore, etc., Mr. Naylor never
actually brought the mine into operation. Therefore, in the fall
of 1997 MEICO began to suspect that Mr. Naylor was unable or
unwilling to bring the mine into production. On March 5, 1998
TVCN and MEICO sued, inter alia, Big Trees Trust and Ray Naylor
in a dispute over the lease and operation of the Liberty Hill
Mine. In its complaint MEICO alleges that it was fraudulently
induced to enter into the mining lease and that Ray Naylor
breached his contract to operate the mine on MEICO's behalf in a
good and miner-like fashion. MEICO and TVCN claim damages in
excess of $3.5 million. While no answer has been filed in the
case, Mr. Naylor has informed MEICO that he believes it is in
default under the lease and has served a notice of termination of
the lease on the Company. On May 20, 1998 the Court entered an
order on the parties' stipulated motion submitting the matter to
binding arbitration. The parties have agreed to the appointment
of Mr. Murray Richtel of the Judicial Arbiter Group, Inc. as the
arbitrator in this matter, and an arbitration hearing has been
set for September 10, 1998. The arbitration proceeding is in its
initial stages, and no discovery has been conducted. At this
preliminary stage it is not possible to predict with any
certainty the probable outcome of this matter. However, TVCN
intends to prosecute its claims vigorously.
Century 21/Mountain House Mine
The Company acquired a controlling interest in Century 21 Mining,
Inc. in December 1989. Century 21's principal asset is the
Mountain House Mine. The mine is not yet in operation. The
status of this mine has not changed since the last fiscal year.
For more information, see the company's previous annual reports,
which are incorporated by reference.
Reema International Corp.
Reema's day-to-day operations are managed by its Senior Vice
President, Glen Clark. Mr. Clark is the manager and driving force
behind the GTL project with some 44 years broad management
experience domestically and internationally. Previously, Mr. Clark
was with Ford Bacon & Davis Technologies in charge of the
Environmental Department. Prior to that, he was responsible for
managing a 300-person Engineering and Design Drafting Group at Gulf
Interstate Engineering, where they provided design and drafting
services to the pipeline (Liquid & Gas) and related process
industries. At M.K. Kellogg, Mr. Clark was responsible for world-
wide start-up to completion operations of an average of over 30
projects employing over 2,500 people around the world. The projects
included LNG (and regasification), ammonia, fertilizer, methanol,
cogeneration, carbon dioxide (recovery, purification and
reinjection), catalytic cracking and refinery operations and
maintenance. At Bechtel Petroleum (an $11 Billion company), Mr.
Clark was responsible for all synfuel project activities. The
projects included coal gasification, heavy oils, tar sands, oil
shale, biomas conversion and coal liquefication. At Allied Chemical
(a $13 Billion company), for over 27 years, Mr. Clark progressed
from an entry-level foreman to become the vice president with a wide
range of responsibilities that included managing the operations of
20 chemical plants. Mr. Clark has a B.S. in Ch.E. from Penn State
and an MBA from NYSU. He has completed graduate marketing and
management courses at Columbia University and an advanced management
program at Harvard University.
Internet Business Opportunities
On February 16, 1996 the Company incorporated its wholly-owned
subsidiary, Planet Internet Corp. ("Planet") as an Internet Service
Provider ("ISP"). Planet provides internet service to subscribers.
During the first year of testing and operation, Planet concentrated
its efforts on local individual accounts. Planet has now begun
concentrating on commercial accounts and expanding its services
nationwide.
Individual dial-up subscribers are charged an average of $19.95 per
month per subscriber with a certain discount for a pre-paid yearly
subscription. Planet offers a wide range of services to commercial
accounts for as little as $50.00 per month for dial-up subscribers
to as high as $350.00 per month per subscriber for accounts with
high speed digital modems and other internet services. As of
March 31, 1998, Planet had 836 subscribers.
As of March 31, 1998, Planet Internet has purchased internet
equipment worth $584,696, and has spent $1,008,068 for the
development of its internet services. On May 7, 1997, Planet has
placed a purchase order of $746,445 for additional internet
equipment.
Middle East Investment Authorization
At a special meeting of the Company's Board of Directors held on
December 13, 1995, Omar Duwaik was authorized to explore
investment opportunities in the Middle East. Mr. Duwaik was
authorized to enter into such agreements as were necessary and to
invest in a holding company on behalf of the Company if he deemed
such an investment to be in the best interests of the Company. To
date Mr. Duwaik has explored numerous investment opportunities.
However, none have met the criteria he has established for making
such an investment. Therefore, although Mr. Duwaik was authorized
to commit up to $3 million, no funds have been expended to date
pursuant to the Board's authorization. Pursuant to its general policy
of seeking shareholder approval of major investments, the Company
will seek shareholder approval of any investment made pursuant to
this authority.
Qatar WCTV Station
In 1992 the Company received a contract from the Qatari Government
Telecommunications Corporation ("Q-Tel") to build a WCTV station
in Doha, Qatar and train operations personnel. The Company built
the station in 1993, and a provisional acceptance certificate for
the station was issued on August 14, 1993. Through May 1996, TVCN
personnel assisted in the management and operation of the station
and trained Qatari personnel. TVCN has guaranteed the supply of all
compatible equipment and spare parts that may be needed for the
maintenance, and refurbishment of the equipment, and the
continuation of the WCTV operation without interruption over a
period of 10 years. The Qatar wireless cable system was awarded
Cable Operator of the Year honors at the CABSAT 95 (cable and
satellite exhibition).
Business of Issuer
TVCN has not constructed any commercial GTL plants as of this date.
Therefore, the gas and oil operations are not discussed in this
section. For the development of these operations, see "Business
Development" herein.
Principal Services and Markets
The Company owns MMDS licenses in Mobile, Alabama; San Luis
Obispo, California; Salina, Kansas; Hays, Kansas; and
Scranton/Wilkes-Barre, PA. The Company's MMDS license in
Mobile is leased to an independent WCTV operator. The Company
constructed stations in Myrtle Beach, South Carolina; Quincy, Illinois;
Rome, Georgia; Woodward, Oklahoma; and Scottsbluff, Nebraska
under authority from MDA. Currently, the only WCTV stations the
Company is operating are in the Salina, Kansas and San Luis Obispo,
California areas. The Company is leasing its Mobile, Alabama license
as well as the Woodward, Oklahoma license (under authority from
MDA). The company has had inquiries concerning the leasing of the
channels in Quincy, Illinois; Scottsbluff, Nebraska; Hays, Kansas;
and Myrtle Beach, South Carolina. The license in Rome, Georgia was
sold to BellSouth. See Rome, Georgia, Inc. on Page 12 for details.
The Company offers its services to private homes, apartments and
commercial properties including stores, bars, restaurants, office
buildings, and hotels/motels.
Distribution Methods
In any given market, the number of channels a WCTV station is able
to offer to its subscribers is limited by the number of WCTV
channels available to the operator (including any channels leased
from other licensees) and the terms of the leases under which leased
channels are used. In addition, the nature of the subscribers
receiving equipment and the availability of funds for the necessary
capital investment affects the quality of the station's services.
The so-called head-end equipment at a WCTV broadcast station
typically includes satellite receiving equipment, descramblers,
transmitters, encoders (scramblers), combiners, waveguides and omni-
directional or cardioid antenna located at the tower site in each
location. Television programming, received via satellite at each
broadcast facility, is retransmitted over microwave frequencies in a
scrambled mode over the WCTV channels owned or leased by the
WCTV operator. The signal is received by the subscribers' reception
equipment. The scrambled signal is then decoded at each television
outlet by an authorized set-top converter.
Subscriber reception equipment typically consists of a television
antenna designed to provide reception of VHF/UHF off-air
programming (provided as an option to consumers), a microwave
receive antenna (about 27" tall and 18" wide), a down-converter, a
set-top converter (descrambler and channel selector) and various
other component parts.
Competition
The Company competes for viewers with the television networks,
independent television stations and other video suppliers such as
cable television, satellite television program services, Direct
Broadcast Satellite ("DBS") and video cassettes.
The most common source of competition to a WCTV station is
traditional cable television. Most cable television systems are
able to offer a greater number of channels to their audiences than
most WCTV stations. In addition, most cable television systems
supply some programming that is not available on WCTV stations,
including a wide range of advertiser supported and subscription
supported video programming services. New compression technology is
presently being tested which could allow WCTV operators to offer
many more channels by compressing more than one TV channel of
programming onto each licensed channel. However, the same
technology is being developed for cable usage and DBS usage, so the
effect of the technology cannot be predicted with certainty at this
time. In addition, there is no certainty that deployment of such
technology for any of its present or future stations will be within
the Company's financial capacity.
Other sources of competition include low power television stations
and DBS transmissions to homes. Wireless and traditional cable
communication systems face substantial competition from alternative
methods of distributing and receiving television signals, and from
other sources of entertainment such as movie theaters and home video
rentals.
Finally, in most areas of the country, including areas served by the
Company, off-air programming can be received by viewers who use
their own antenna. The extent to which a WCTV operator competes
with off-air programming depends upon the quality and quantity of
the broadcast signals available by direct antenna reception compared
to the quality and diversity of the operators WCTV programming.
Advances in communications technology and changes in the
marketplace are constantly occurring. Thus, it is not possible to
predict the effect that ongoing or future developments might have on
the cable communications industry. The ability of the Company's
systems to compete with present, emerging and future distribution
media will depend to a great extent on obtaining attractive
programming. The continued availability of sufficient quality
programming may in turn be affected by the developments in
regulation or copyright law. In addition to management and
experience factors, which are material to the Company's competitive
position, other competitive factors include authorized broadcast power
allowance, number of leased channels, access to programming and the
strength of local competition. The Company competes with a great
number of other firms in all phases of its operations, many of which
have substantially greater resources than the Company.
Agreements with Program Suppliers
A WCTV operator can offer its subscribers a broad range of television
programming, including popular channels like ESPN, CNN, WTBS,
DISCOVERY, LIFETIME, CNBC, WGN, NICKELODEON, WWOR, A&E , USA, CMTV,
MTV, SCOLA, and SHOWTIME. As well as offering the local ABC, NBC,
CBS, FOX, Warner Brothers TV, United Paramount Network and FOX
affiliates, PBS stations, independent stations and local UHF channels.
The Company has agreements with World Satellite Network to provide
certain programming for its Salina and San Luis Obispo stations, and
directly with the programming sources ESPN, The Family Channel and
The Nashville Network.
Patents, Trademarks and Licenses
The Company owns MMDS licenses in Mobile, Alabama; San Luis
Obispo, California; Salina, Kansas; Hays, Kansas; and
Scranton/Wilkes-Barre, Pennsylvania. All licenses issued by the
FCC are subject to renewal. The Company has also constructed
stations in Myrtle Beach, South Carolina; Quincy, Illinois; Rome,
Georgia; Woodward, Oklahoma; and Scottsbluff, Nebraska under
authority from MDA, an affiliate which holds the MMDS licenses for
these stations. The Company subsequently sold the Rome, Georgia
station and license to BellSouth Wireless, Inc.
In addition, the Company successfully bid on twelve BTAs in the
recent FCC auction of a portion of the microwave spectrum (see FCC
Spectrum Auction herein). The Company received these 12 BTA licenses
in October of 1996 with grant dates of August 16, 1996 and
build-out dates of August 16, 2001. The company applied for the
transfer of the San Luis Obispo, California BTA license and received
FCC approval of the transaction on May 23, 1997.
The Company's wholly-owned subsidiary, Planet Internet
Corporation, registered the trade names fun.edu and TVCN.NET with
the Colorado Secretary of State (see Internet Business Opportunities
herein).
The Company holds no patents.
Governmental Regulation/FCC Licensing
The licenses of the Company are not subject to regulation by any
state or local government. However, the WCTV portion of the
Company's activities are subject to FCC regulations. The
Company's ability to continue providing WCTV programming is
dependent upon continued FCC qualification of the Company as the
licensee (or lessee) of the channels comprising such system. In
any given market the microwave broadcast spectrum is divided into
33 channels. These channels are further divided into groups as
follows:
Channel Group No. of Channels
A Group 4
B Group 4
C Group 4
D Group 4
E Group 4
F Group 4
G Group 4
H1, H2, and/or H3 3
Channel 1 1
Channel 2 (or 2A) 1
Total 33
Of the 33 channels in this part of the spectrum a commercial WCTV
operator can directly own the licenses for the eight MMDS
channels (groups E and F), the OFS channels (H1, H2 and/or H3)
and the MDS channels (1 and 2 or 2A). This allows a WCTV
operator to directly own up to thirteen (13) channels. In
addition, the FCC has authorized educational licensees of ITFS
channels (groups A, B, C, D and G) to lease their excess capacity
for commercial use, including subscription television service.
Broadcasting licenses for WCTV facilities are granted for a
maximum period of ten years and are renewable upon application.
Prior to the expiration of a license, the licensee must submit an
application for renewal of the license evidencing that the
licensee has been complying with the FCC's rules and regulations.
While there can be no assurance that renewal of a license will be
granted, historically, such licenses have been renewed if the
licensee has complied with the FCC's rules and regulations for
the operation of the facilities, as well as the rules relating to
the types and nature of transmission equipment.
From time to time legislation may be introduced in Congress
which, if enacted, might affect the Company's operations.
Proceedings, investigations, hearings and studies are
periodically conducted by Congressional committees and by the FCC
and other government agencies with respect to problems and
practices of, and conditions in the subscription TV industry.
On February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996 ("The Act"), the most sweeping
overhaul in the 60 year history of the Communications Act. The
Act does not completely replace the older law, but rather deletes
some parts, adds new ones and augments others. The Act's primary
purpose is to open the entire range of telecommunications
services to greater competition and cross service providers. The
Act is not completely self-executing, however, so the FCC must
enact regulations to implement the Act's provisions.
Two actions taken by the FCC as a result of The Act are
particularly important to the Company's ongoing business in the
wireless cable industry. First, the FCC has proposed a rule that
would preempt the local zoning regulation of MMDS antennas, thus
allowing the placement of antennas in areas in which they had
been prohibited. The rule would establish a rebuttable
presumption that state or local regulations are unreasonable if
they affect the installation, maintenance or use of MMDS
antennas. The FCC has also streamlined its ITFS application
process by delegating processing authority to the FCC staff. As
many WCTV systems rely on leasing excess ITFS channel capacity,
the new procedures should benefit the wireless cable industry by
making more such licenses available.
On March 14, 1997 over 100 industry participants submitted a
proposal to the FCC for a petition for rulemaking. The petition
suggests some sweeping changes, such as: 1) allowing an operator
to cellularize transmissions within its market; 2) allowing
neighboring operators to police their own borders to prevent
unwanted interference, with the FCC being called in only if such
cooperation fails; 3) allowing an operator the right to turn a
channel or parts of a channel around for two-way communications;
4) allowing an operator to put all required educational
programming on any channel within a system instead of on a
certain channel licensed to the educator; and 5) allow that if an
operator sets up some twenty transmission points within its market,
that the sum of the output power of all twenty transmitters does not
exceed the authorized power of the original license.
The information contained under this section does not purport to
be a complete summary of all the provisions of the Communications
Act and the rules and regulations of the FCC thereunder, or of
pending proposals for other regulation of MMDS stations and
related activities. For a complete statement of such provisions,
reference is made to The Communications Act, and to such rules,
regulations and pending proposals thereunder and are incorporated
herein by reference.
Employees
As of March 31, 1998, the Company had 33 employees.
Capital
Providing television programming requires substantial initial
capital outlays. While contracts with respect to providing such
services are intended to have terms sufficient to provide for the
recovery of the Company's investment, together with a favorable
return on its investment, the Company's continued expansion is
largely dependent on its ability to raise capital for the costs
of any of its new business endeavors.
Since inception, the Company has financed its capital and
operating cash requirements through loans and advances from the
Company's president, other shareholders, and the sale of common
and preferred stock. The Company is now considering different
debt financing options. There is no certainty that the Company
will be able to obtain all required financing.
Summary
The most dominant business about which financial information is
presented elsewhere in this report is the construction, sale,
lease and operation of WCTV stations. The principal service is
the providing of subscription TV programs to commercial and
private subscribers. As of this date, the method of distribution
is by over the air microwave signals. The leasing of MMDS and other
microwave TV channels is essential to this business. The practice
of the Company relating to working capital is to have an adequate
amount of inventory and in particular, the receiving equipment for
the installation of new subscribers. The Company's principal methods
of competition includes lower price, better service, and product
performance (better picture quality). Another advantage is the
ability of the microwave signal to reach subscribers in areas not
economically feasible for the cable TV operators. Increasingly,
satellite television program services are competing with the Company.
The negative factors include a lesser number of channels and
consequently a lesser number of programs. As disclosed above,
the Company is also involved in other business opportunities,
including mining, internet access, and gas conversion projects.
Item 2. DESCRIPTION OF PROPERTIES
The Company retains ownership of substantially all system
equipment necessary to provide its services to subscribers. Such
system equipment includes all reception and transmission
equipment located at the tower (i.e., the head-end equipment),
reception equipment located at each subscriber location (i.e.,
subscriber equipment) and related computers, diagnostic equipment
and service vehicles, and facilities. The Salina, Kansas system
equipment is valued at $540,581. The Company's WCTV facilities
are, in the opinion of management, suitable and adequate by
industry standards.
The Company owns its executive offices in Denver, Colorado. The
Company also owns a warehouse in Detroit, which is leased to PCTV
at the rate of $4,000 per month until March 1999, and vacant land
in Arapahoe and Jefferson Counties in Colorado, which is being
held for future development. Physical assets of the Company,
except for the mortgage on corporate headquarters, and a lease on
Internet equipment with Ascend Equipment Leasing Co., and are not
held subject to any major encumbrance.
Item 3. LEGAL PROCEEDINGS
(1) Mining and Energy International Corporation and TV
Communications Network, Inc. v. Big Trees Trust et al., Case No. 98
WM 537 in the United States District Court for the District of
Colorado. On March 5, 1998 TVCN and its wholly-owned subsidiary
MEICO sued, inter alia, Big Trees Trust and Ray Naylor in a dispute
over the lease and operation of the Liberty Hill Mine in Nevada
County, California. In its complaint MEICO alleges that it was
fraudulently induced to enter into the mining lease and that Ray
Naylor has breached his contract to operate the mine on MEICO's
behalf in a good and miner-like fashion. MEICO and TVCN claim
damages in excess of $3.5 million. While no answer has been filed
in the case, Mr. Naylor has informed MEICO that he believes it is in
default under the lease and has served a notice of termination of
the lease on the Company. On May 20, 1998 the Court entered an
order on the parties' stipulated motion submitting the matter to
binding arbitration. The parties have agreed to the appointment of
Mr. Murray Richtel of the Judicial Arbiter Group, Inc. as the
arbitrator in this matter, and an arbitration hearing has been set
for September 10, 1998. The arbitration proceeding is in its
initial stages, and no discovery has been conducted. At this
preliminary stage it is not possible to predict with any certainty
the probably outcome of this matter. However, TVCN intends to
prosecute its claims vigorously.
(2) The Company knows of no other material litigation
pending, threatened or contemplated, or unsatisfied judgment against
it, or any proceedings in which the Company is a party. The
Company knows of no material legal actions pending or threatened or
judgments entered against any officers or directors of the Company
in their capacity as such in connection with any matter involving
the Company or the business.
Settlement of Class Action
On April 2, 1994, two TVCN shareholders filed a class action suit
against TVCN in the United States District Court for the District of
Colorado under Case No. 94-D-837. MERTON FREDERICK, as
Trustee of the M&M Frederick, Inc. Profit Sharing Plan, f/k/a M&M
Frederick, Inc. Defined Benefit Pension Plan; and F.S. WORKMAN;
on Behalf of Themselves and All Others Similarly Situated, were the
Plaintiffs, and the Defendants were TV COMMUNICATIONS NETWORK, INC.;
TVCN OF MICHIGAN, INC.; TVCN OF WASHINGTON, D.C., INC.; INTERNATIONAL
INTEGRATED SYSTEMS; TVCN INTERNATIONAL, INC.; INTERNATIONAL EXPORTS,
INC.; OMAR DUWAIK; JACOB A. DUWAIK; KENNETH D. ROZNOY; SCOTT L.
JENSON; AND SCOTT L. JENSON, P.C.
The Company has always emphatically denied the plaintiffs'
allegations in this legal action and was vigorously defending the
case. However, because of the continued drain on the Company's
resources caused by nearly four years of protracted and expensive
litigation, on October 31, 1997 the Company agreed to settle the
case. Pursuant to the terms of the settlement agreement, the
Company agreed to pay the plaintiffs the sum of $1.5 million in full
settlement of all their claims of any nature whatsoever. On March 3,
1998 the Court approved the settlement and dismissed the class
action with prejudice.
Of the $1.5 million paid pursuant to the settlement agreement,
$705,268.82 was paid as fees and expense to the plaintiff class's
counsel. The remaining funds were ordered distributed to the
members of the class that had filed valid proofs of claim. In addition,
pursuant to the settlement agreement, those class members who had
purchased shares of TVCN stock during the class period and who still
retained the stock at the time of the settlement, were required to
relinquish those shares back to the Company in order to participate
in the settlement. Pursuant to this provision, the Company received
793,111 shares of stock from class members participating in the
settlement. The Company will cancel the shares of common stock
returned as a result of the settlement.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS
No matters were submitted for a vote of security holders of the
Company during the fourth quarter of the fiscal year ended March
31, 1998.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock has traded on the over the counter
market ("OTC") since January 11, 1988. As of March 31, 1998, there
were twelve stock brokerage firms making a market in the Company's
common stock. The high bid and low asked prices of the common
stock of the Company have been as follows:
High Bid Low Bid
Quarter Ending Per Share Per Share
3/31/92 4.88 3.88
3/31/93 .38 .25
3/31/94 .19 .14
3/31/95 .15 .13
3/31/96 .07 .02
6/30/96 .75 .06
9/30/96 .19 .13
12/31/96 .13 .06
3/31/97 .17 .08
6/30/97 .17 .07
9/30/97 .07 .05
12/31/97 .31 .03
3/31/98 .34 .15
The above quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commission and may not necessarily represent
actual transactions.
As of March 31, 1998, there were 2,040 record holders of the
Company's common stock. As of March 31, 1998 there were
41,188,454 shares of common stock outstanding.
The Company has not paid cash dividends on its common stock and
does not anticipate paying cash dividends for the foreseeable
future. The Company anticipates that all earnings, if any, will be
retained for development of the Company's business.
NASDAQ Listing
In 1989, the Company made an application to have its common stock
listed and quoted on the NASDAQ System. The application was denied.
One of the requirements for listing on NASDAQ is that the common
stock of the company requesting inclusion have a minimum bid price
of $3.00 per share. The current price of the stock does not meet
the requirements of NASDAQ. The Company intends to reapply for
listing when the listing requirements are met.
Conversion of Preferred Stock
Class C Preferred Stock - Class C Preferred Stock is non-cumulative.
Holders of Class C Preferred Stock are entitled to receive non-
cumulative dividends of up to six percent (6%) per annum from the
net profits of the Company, when and if declared by its Board of
Directors. The conversion rate is two shares of Class C Preferred
Stock for one share of Common Stock. A thirty day (30) notice was
given as required to holders in a call for redemption by the Company,
during which thirty day (30) period the holders of Class C Preferred
Stock are entitled to convert their Preferred Stock into Common
Stock. The Company had issued 400,000 Class C Preferred Shares to
MDA (a company related by virtue of having several mutual
stockholders, officers and directors, including Omar Duwaik), in
exchange for Transmission Equipment and MDA requested the
conversion of its Class C Preferred Stock. The
Company issued 200,000 Restricted Common Shares to MDA on May
29, 1997. Another 380,000 Class C Preferred Shares were issued to
AT&I (a company related by virtue of having mutual stockholders,
officers and directors, including Omar Duwaik), as partial payment
for the acquisition of the Company's Headquarters Building. The
headquarters building had a fair market value of $930,000 and the
Company assumed a $550,000 mortgage. AT&I requested the
conversion of its Class C Preferred Stock and the Company issued
190,000 Restricted Common Shares to AT&I on May 29, 1997.
Class D Preferred Stock - The Class D Preferred Stock is convertible
into common stock of TVCN at the rate of one Class D Preferred
Share for one Common Share of TVCN, provided that such
conversion is not made for a period of four (4) years from October
1991; and holders of Class D Preferred Stock shall be entitled to
receive non-cumulative and non-participating dividends from TVCN's
net profits at the rate of up to nine percent (9%), when and if
declared by TVCN.
In 1991, the Company made a successful bid on certain assets and
businesses of Microband together with MDA, an affiliated company
substantially owned and controlled by TVCN's president, in addition
to having some mutual officers and directors. When TVCN and MDA
became the successful bidders, it was partially due to the fact that
MDA had collateralized the bid with a number of licenses. The
Company issued 4,864,000 Class D Preferred Shares pursuant to the
asset acquisition from Microband. Consequently, when the
opportunity came to buy back the TVCN preferred stock from
Microband for $152,000, it was mutually agreed that MDA should
derive the benefit from the discount as consideration for its part in
making the winning bid. TVCN received the assets and businesses for
its part. The Class D Preferred Stock was recorded at the
repurchase price. MDA requested this preferred stock be converted
into common stock, and the company issued to MDA 4,864,000
Restricted Common Shares on May 29, 1997.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The total primary operating revenue for 1998 was $1.2 million
compared to $1.1 million in 1997. The increase is due to higher
revenues from operations. The net income for 1998 was a loss of
$571,000 compared to a loss of $959,000 last year. Expenses for
1998 were $6.3 million compared to $4.8 million in 1997. The
difference was primarily due to the shareholder lawsuit expenses
and settlement.
Salaries and wages were $1,659,000 in 1998 compared to $1,368,000
in 1997. Staffing has increased due to operations relating to the
Internet, and developing the Liberty Hill Mine.
SUMMARY INCOME STATEMENT
HIGHLIGHTING NET OPERATING INCOME
BEFORE INTEREST, DEPRECIATION & AMORTIZATION
1998 1997
Revenues $ 1,201,829 $ 1,146,144
Operating expenses $ 5,430,998 $ 4,108,282
$ (4,229,169) $(2,962, 138)
Interest, depreciation and
amortization before gain
on the sale of cable
operations and cumulative
effect of a change
in accounting method $ 857,093 $ 690,857
OPERATING LOSS $ (5,086,262) $(3,652,995)
This table shows the effect of operating expenses on net income,
interest expense and the non-cash items, depreciation and
amortization. This presentation is not an alternative to GAAP
operating income as an indicator of operating performance, but
will show net operating income before non-cash items and
interest.
As set forth in the attached audited financial statements, the
assets of the Company at the end of March, 1998 were $11,012,467.
Similarly, the Company's revenues for the foregoing fiscal years
of 1997 and 1998 were $1,146,144 and $1,201,829, respectively.
The operating revenue increased by $55,685 from 1997 to 1998, due
primarily to higher revenues from Operations. The revenues were
generated from channel lease fees, the subscriber fees from the
wireless operations, the subscriber fees from Internet operations,
and interest income from the notes receivable and investments. The
foregoing operating activities during fiscal years 1997 and 1998
resulted in losses of $3,652,995 and $5,086,262 respectively.
The increased loss resulted from the cost of the settlement of
the shareholders' lawsuit. The gain recognized on the sale of
operations for fiscal year 1997 and 1998 was $2,343,043 and
$2,257,409, respectively. The Company sold the Rome, Georgia
license for $2,000,000.
Liquidity and Capital Resources
The business of the Company requires substantial capital
investment on a continuing basis and the availability of a
sufficient credit line or access to capital financing is
essential to the company's continued expansion. The Company's
cash flows for the years ended March 31, 1998, and 1997, are
summarized as follows:
Cash Provided By (Used In) March 31, 1998 March 31, 1997
Operations $(1,315,000) $(2,599,654)
Investing activities $2,167,185 $ 1,911,102
Financing activities $(490,808) $(337,912)
Net increase (decrease) $361,377 $(1,026,464)
The sale of the Denver, Colorado; Washington, D.C.; and Detroit,
Michigan, systems for approximately $17.5 million, resulting gain
of $15.5 million and the sale of the Rome, Georgia system for
$2,000,000 are expected to adequately cover the Company's current
liabilities along with helping the Company develop other wireless
cable TV markets in the United States, and to explore other
business opportunities domestically and internationally.
Currently, the Company has $2,173,678 in long-term debt, which
is primarily for the purchase of the TVCN corporate headquarters
building in Denver, Colorado, the purchase of 12 BTAs from the FCC
(see FCC Spectrum Auction herein), and the acquisition of
the thirteenth BTA license from WTCI of Pennsylvania, and
for the purchase of the Ascend equipment for Planet Internet.
The Company's current assets and liabilities are $2,071,619 and
$1,892,782 respectively. The Company's cash position is such
that management anticipates no difficulty in its ability to meet
its current obligations.
Cash Investments
The president and a shareholder have advanced loans to the
Company totaling $904,304.
Income Tax Developments
Since its inception the Company has incurred operating losses
through March 31, 1998, which include certain accrued expenses
that are not deductible for tax purposes until paid. The Company
has net operating loss carry-forwards available to offset future
year taxable income. The following summarizes these losses.
Net Operating
Loss Carry-Forward Year of Expiration
As of March 31, 1998 $3,900,000 2013
Inflation
Inflation did not significantly impact the Company's operations
in the periods discussed above since many of the costs incurred
by the Company are fixed in nature.
Selected Financial Data
Year ended
March 31, 1998 1997 1996 1995 1994
Revenues $1,201,829 $1,146,144 $1,195,368 $1,592,475 $4,503,078
Net income
(loss) $(571,143) $(959,079) $ 512,387 $ 777,439 $2,256,961
Per Share: Net
income (loss) ($.02) ($.05) $.03 $.04 $.13
At year end:
Total assets $11,012,467 $12,419,656 $15,287,790 $14,168,587 $20,664,798
Plant and equip-
ment, net $3,579,109 $3,265,350 $2,543,499 $2,064,733 $1,226,090
Current assets $2,071,619 $7,136,684 $6,560,906 $8,785,659 $3,482,585
Total
liabilities $7,079,069 $7,700,974 $9,610,028 $9,003,212 $16,276,862
Long term
debt $2,173,678 $1,518,165 $1,510,240 $ 512,560 $ 662,728
The Company has not paid cash dividends on its common stock and
does not anticipate paying cash dividends in the foreseeable
future. The Company anticipates that all earnings, if any, will
be retained for the development of the Company's business.
Capitalization
The capitalization of the Company as of March 31, 1998 is as set
forth in the following table and as more detailed in the attached
audited financial statement:
Description March 31, 1998 March 31, 1997 March 31, 1996
Stockholders Equity (Deficit):
Common Stock $20,197 $9,016 $9,016
Preferred Stock $28,813 $960,813 $960,813
Additional Paid-
in Capital $7,281,889 $6,575,211 $6,575,211
Deficit accumulated $(3,397,501) $(2,826,358) $(1.867.279)
Total Stockholders
equity $3,933,398 $4,718,682 $ 5,677,761
Forward Looking Statements
Certain oral and written statements of management of the Company
included in the Form 10 KSB and elsewhere may contain forward
looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, which are intended to be covered by the safe harbor
created thereby. These statements include the plans and
objectives of management for future operations, and include but
are not limited to such words as "intent", "believe", "estimate",
"choice", "projection", "potential", "expect", "should", "might",
and other similar expressions. The forward looking statements
included herein and elsewhere are based on current expectations
that involve judgments which are difficult or impossible to
predict accurately and many of which are beyond the control of
the Company. In particular the assumptions assume the
collectability of the notes receivable from the sale of cable
operations, the ability to produce a salable product from the
conversion of natural gas to petroleum products, and the
profitable mining of ores from the Liberty Hill Mine, the ability
to develop the BTAs and markets in which to operate them,
satisfactory resolution of legal maters, and economic,
competitive and market conditions for the Company's business
operations. Although the Company believes that the assumptions
are accurate, there can be no assurance that the forward looking
statements will prove to be accurate. In light of the
significant uncertainties inherent in the forward looking
statements, the inclusion of such information should not be
regarded as a representation by the Company or any other person
that the objectives and plans of the company will ever be achieved.
Item 7. Financial Statements and Supplementary Data
The consolidated financial statements of the Company are filed
under this Item, and are included herein by reference.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
On May 29, 1998, the Company signed an engagement letter with the
auditing firm of Ehrhardt Keefe Steiner & Hottman, P.C. of 7979
East Tufts Avenue, Suite 400, Denver, CO 80237 ("EKS&H or
Auditor") (Telephone Number: (303) 740-9400, Fax Number: (303)
740-9009). EKS&H also audited the Company's financial records
for fiscal years 1997, 1996, 1995, 1994 and 1993. The Auditor
agreed to audit the Company's financial records for fiscal year
1998 and assist the Company in the preparation of the Company's
Annual Report on Form 10 KSB.
A representative(s) of the firm will be available at the annual
meeting to respond to any questions and make a statement.
The accountants report on the financial statements for the fiscal
years 1994, 1995, 1996 and 1997 contained no adverse opinions,
disclaimers of opinion, or qualifications as to uncertainty,
audit scope, or accounting principles.
PART III
Item 9. Directors and Executive Officers
The following sets forth the name, age, salary and business
experience for the last five years of the directors and executive
officers of TVCN as of March 31, 1998. Unless otherwise noted,
the positions described are positions with the Company or its
subsidiaries.
Name Age Position Period Served
Omar A. Duwaik 54 Chairman of the Board, 1987 to present
Chief Executive Officer
And President(1)
Armand DePizzol 66 President, Alert Systems 1989 to present
and CEO of National Direct
Connect Corp.; since 1986
Director (2)
Dennis J. Horner 51 Vice President Treasurer, 1994 to present
Director( 1)
(1) Mr. Omar Duwaik also serves in the same capacities in each
of the Company's wholly-owned subsidiaries: TVCN of Washington,
D.C., Inc. (1991 to Present); TVCN of Michigan, Inc. (1991 to
present); TVCN of Kansas, Inc. (1996); TVCN of California, Inc.
(1996); International Exports, Inc.(1992 to present); Integrated
Systems (1993 to present); Mining Energy International, Inc.
(1995 to present); Reema International Corp. (1993 to present);
and Planet Internet (1996).
Mr. Dennis Horner also serves in the same capacities in the
Company's wholly-owned subsidiaries.
(2) Armand DePizzol became a director of the Company in
September of 1989.
The Company is not aware of any filings on Forms 3 or 4.
All directors hold office until the next annual shareholders
meeting or until their successors have been elected and
qualified. Vacancies in the existing Board are filled by
majority vote of the remaining directors. Officers of the
Company are appointed by the Board of Directors. Omar Duwaik and
Dennis Horner are employed by the Company on a full-time basis.
Omar Duwaik should be considered a founder and parent of the
Company (as such terms are defined by the Securities Act of
1933).
Omar Duwaik, has been the President, CEO and Director of TVCN
since its inception in 1987. Mr. Duwaik has been involved in the
telecommunications, aerospace and electronic industries for the
past 20 years. In 1980, Mr. Duwaik joined MDA, Inc. in Denver as
its president. In 1983, MDA submitted 413 MMDS applications to
the FCC, of which 71 were granted to MDA, with no competition,
and through a lottery process, about forty more conditional
licenses were granted by the FCC. For MDA, Mr. Duwaik
constructed the first MMDS station in San Luis Obispo, California.
Under his direction, three more MMDS stations were constructed in
Kansas and Alabama. Mr. Duwaik received a B.S. Degree in
Electrical Engineering, a B.S. Degree in Computer Science and an
M.S. Degree in Electrical Engineering Communications from Oregon
State University in 1971. Mr. Duwaik owns 10,023,356 shares of
common stock of TVCN, and also owns the majority of MDA, an
affiliated company, which owns 23,845,892 shares of common stock.
Mr. Duwaik also owns a majority of American Technology and Infor-
mation, which owns 190,000 shares of common stock. Mr. Duwaik was
granted a bonus of 10,000,000 shares of common stock, which will be
issued after being approved by the shareholders. Mr. Duwaik is
employed on a full-time basis with the Company and is compensated
at the rate of $108,157 a year. See Item 11. Security Ownership
herein.
Dennis J. Horner, Vice President of Finance, Controller,
Director, and Treasurer. Mr. Horner joined the Company in
February, 1994. Mr. Horner received his Bachelor of Science
Degree in December, 1970, from Metropolitan State College. Mr.
Horner received his Master of Business Administration from the
University of Colorado in December, 1974. Mr. Horner continued
his education at the University of Colorado from September, 1977
to June, 1980 majoring in accounting. Mr. Horner became a
Certified Public Accountant in the State of Colorado in 1983.
Mr. Horner also studied at the Colorado School of Mines from
September, 1965, to June, 1968. Mr. Horner has twenty years
working experience. He has four years experience as assistant
controller and five years as controller for Ryan Murphy, Inc.,
BCS, Inc., and American Medco. Mr. Horner is employed on a full-
time basis with the Company and is compensated at the rate of
$50,791 per year.
Armand L. DePizzol, President of Alert Systems and CEO of
National Direct Connect Corp. Mr. DePizzol has been a director
since 1989. Mr. DePizzol holds an M. A. in Economics and a B.S.
in Business Administration. He was the president of American
Technology & Information, Inc. (AT&I) from 1984 to 1987 and was
in charge of all operations for that company. Prior to that, Mr.
DePizzol spent seven years overseas with the International
Department of City Bank of New York. During this period he
conducted extensive credit and operational examinations of some
thirty foreign bank branches. Mr. DePizzol was also employed by
the Federal Reserve Bank. He was the first bank examiner to
uncover a major defalcation in the international department of a
foreign bank branch located on the West Coast. He acted as a
consultant to the First of Denver Bank, currently First
Interstate Bank. Mr. DePizzol is also a financial advisor.
Recently, he directed the growth of a transportation company from
nine units to more than forty units within a six month period.
He has helped obtain financing for several turn-around companies
and he also holds various patents.
Item 10. Executive Compensation
The following table sets forth the cash remuneration paid or
accrued by the Company and its subsidiaries for services to the
Company in all capacities during the fiscal year ended March 31,
1997, to (i) each of the two most highly compensated officers of
the company, and (ii) all executive officers of the Company as a
group (includes compensation only for those periods of the fiscal
year ended March 31, 1998, for which each such individual was an
executive officer). Following are the salaries of individuals
who are officers receiving a salary from the Company:
Name of Individual Capacity in Which Served Cash Compensation
Omar A. Duwaik Chairman of the Board $108,157
of Directors, President
and Chief Executive Officer
Dennis J. Horner Vice President, Treasurer, $50,791
and Director
Barry K. Arrington Vice President, General Counsel $7l,784
Stock Option Plan
The Company has in effect an incentive Stock Option Plan and has
reserved a total of 2,000,000 shares of the Company's common
stock for issuance pursuant to the plan, designed as an incentive
for key employees, and for acquisitions of business
opportunities, and is to be administered by the compensation
committee of the Board of Directors, which selects optionees and
determines the number of shares subject to each option. The plan
provides that no option may be granted at an exercise price less
than the fair market value of the shares of the common stock of
the Company on the date of grant. Fair market value is
determined by calculation of an average of the highest and lowest
sale prices of the stock, as reported by a responsible reporting
service the committee may select. The committee is also
empowered to determine fair market value in such other manner as
is deemed equitable for purposes of the plan. The committee
expects to determine fair market value in accordance with
quotations of share prices maintained by the market makers in the
Company's shares, if any. Unless otherwise specified, the
options expire five years from date of grant and may not be
exercised during the initial one year period from date of grant.
Thereafter, options may be exercised in whole or in part,
depending on terms of the particular option. The Board of
Directors has not selected the compensation committee. As of
March 31, 1998, no options under this stock option plan were
issued. The total number of shares allocated to the plan is
2,000,000.
Compensation Pursuant to Plans
No compensation was paid to executive officers pursuant to any
plan during the fiscal year just ended, and the Company has no
agreement or understanding, express or implied, with any officer
or director concerning employment or cash compensation for
services.
Other Compensation
For the fiscal year ended March 31, 1998, executive officers
received reimbursement of out of pocket expenses incurred on
behalf of the Company.
On February 14, 1995, Mr. Omar Duwaik was granted a cash bonus of
$100,000 by the Board Directors. Because of cash flow constraints,
the bonus has not been paid. In lieu of cash, Mr. Duwaik has been
offered 10,000,000 shares of restricted Common Stock of TV Communications
Network, Inc. by the Board of Directors on March 25, 1998. The stock
will be issued after approval of the shareholders.
Compensation of Directors
None.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth certain information regarding the
beneficial ownership of common stock by each director and nominee
and by all directors and officers of the Company as a group and
of certain other beneficial owners of more than 5% of any class
of the Companies voting securities as of March 31, 1998. The
number of shares beneficially owned is deemed to include shares
of common Stock which directors or officers have a right to
acquire pursuant to the exercise of options within sixty days
(60) of March 31, 1998. Each such person has sole voting and
dispositive power with respect to such securities.
Name and Position with
TVCN, or Name and Address Amount of Beneficial
of Greater than 5% Holders * Ownership Percent of Class
0mar A. Duwaik **
Chairman of the Board of
Directors, President and
Chief Executive Officer 10,023,356 24.33%
Dennis Horner
Vice President, Treasurer
and Director 1,000 0.07%
All officers and directors
as a group (Three in number) 10,024,356 24.40%
Multichannel Distribution **
of America, Inc. (MDA) 23,845,892 57.89%
Total as a Group
(Four in Number) 33,869,248 82.22%
* All information refers to common stock.
** On May 29,1997 MDA became greater than a 5% Shareholder of
TVCN's Common Stock by converting its Preferred Stock to
Common. MDA is substantially-owned and controlled by Omar
Duwaik, its President. See Conversion of Preferred Stock.
Additionally, Mr. Duwaik owns/controls other stock of TVCN
that makes the total stock under his direct ownership/control
37,193,000 shares, or 90.3% of the class. This total will be
increased to 47,193,000 shares if and when the shareholders
approve the proposed bonus of 10,000,000 shares granted to
Mr. Duwaik by TVCN's Board of Directors.
Item 12. Certain Relationships and Related Transactions
The assignment from MDA to TVCN of four channel licenses in San
Luis Obispo, California; Mobile, Alabama; Salina, Kansas; and
Hays, Kansas was approved by the FCC, and the FCC has transferred
the licenses to TVCN.
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on
Form 8 K
The audited financial statements as of March 31, 1998, and
March 31, 1997, are attached hereto.
On Form 8-K dated March 13, 1998, for events on March 3, 1998, the
Company entered into, and the Court approved, a final settlement of
the shareholder's lawsuit. The Company agreed to pay $1,500,000 and
all claims were dismissed.
On Form 8-K dated April 6, 1998, for events on March 3, 1998, the
Registrant reported that their independent auditors, Erhardt Keefe
Steiner & Hottman, P.C. (EKS&H) would not perform the audit, based
on a lack of manpower.
On Form 8-K dated June 2, 1998, for events on May 29, 1998, the
Registrant and EKS&H arrived at a mutually acceptable audit schedule
and the Registrant re-engaged EKS&H as their certifying accountants.
The Company has filed the 10-KSB for the year ended March 31, 1998
without the Financial Statements and the Independent Auditors' Report
from the independent auditors, Ehrhardt Keefe Steiner & Hottman, P.C.
The auditors are withholding their statement pending the receipt of
several confirmations.
Management believes that the Financial Statements will present fairly,
in all material aspects, the financial position of the Company at
March 31, 1998.
The Company will file an amended 10-KSB when the Independent Auditors'
Report is received.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TV COMMUNICATIONS NETWORK, INC.
Date: July 15, 1998
/ss/Omar A. Duwaik
Omar A. Duwaik
PRESIDENT/CEO
/ss/Dennis J. Horner
Dennis J. Horner
VICE PRESIDENT/TREASURER
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TV COMMUNICATIONS NETWORK, INC.
Date: July 15, 1998
Omar A. Duwaik
PRESIDENT/CEO
Dennis J. Horner
VICE PRESIDENT/TREASURER
