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/A
[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.
<PAGE>
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/hydroisomerization 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.
<PAGE>
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 qualitythe 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.
<PAGE>
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.'"
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Finished Petroleum
Average Number of Products Oper. Revenues
Per Year (1000 bpd) Per Year
- ------------------- -------------------------- -----------------
<S> <C> <C>
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
</TABLE>
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
Channel Group No. of Channels
- ------------------ -------------------------
<S> <C>
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
</TABLE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Quarter High Bid Per Low Bid Per
Ending Share Share
- ----------- ----------------- -------------------
<S> <C> <C>
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
</TABLE>
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.
<PAGE>
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.
<PAGE>
SUMMARY INCOME STATEMENT
HIGHLIGHTING NET OPERATING INCOME
BEFORE INTEREST, DEPRECIATION & AMORTIZATION
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
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)
</TABLE>
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)
<TABLE>
<CAPTION>
March 31,
--------------------------------------
1998 1997
---------------- --------------
<S> <C> <C>
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)
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
Net Operating
Loss Carry- Year of
Forward Expiration
------------- -------------
<S> <C> <C>
As of March 31, 1998 $ 3,900,000 2013
</TABLE>
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.
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Year ended
March 31,
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
equipment, 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
</TABLE>
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:
<TABLE>
<CAPTION>
March 31,
-----------------------------------
Description 1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
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
</TABLE>
<PAGE>
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.
<PAGE>
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.
TABLE OF CONTENTS
-----------------
Page
----
Consolidated Financial Statements
Consolidated Balance Sheet F - 2
Consolidated Statements of Operations F - 3
Consolidated Statement of Changes in Stockholders'
Equity F - 4
Consolidated Statements of Cash Flows F - 5
Notes to Consolidated Financial Statements F - 7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
TV Communications Network, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheet of TV Communications
Network, Inc. as of March 31, 1998 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the two
years in the period ended March 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TV Communications
Network, Inc. at March 31, 1998 and the results of their operations and their
cash flows for each of the two years in the period ended March 31, 1998
in conformity with generally accepted accounting principles.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
June 10, 1998
Denver, Colorado
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets
Cash and cash equivalents $ 852,362
Investments 87,659
Accounts receivable, net of allowance
for doubtful accounts of $41,099 39,498
Inventory 107,028
Current portion of notes receivable (Note 8) 737,813
Deferred income taxes (Note 7) 151,188
Other current assets 96,071
--------
Total current assets 2,071,619
Property and equipment - net (Note 3) 3,579,109
Other assets
Notes receivable (Note 8) 2,343,500
License agreements - net of accumulated
amortization of $652,212 (Note 4) 1,598,800
Deferred income taxes (Note 7) 1,291,866
Other assets (Note 9) 127,573
---------
Total other assets 5,361,739
---------
Total assets $ 11,012,467
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 322,865
Accrued expenses 630,250
Current maturities of long-term debt (Note 4) 235,195
Deferred gain (Note 8) 657,992
Income taxes payable (Note 7) 21,850
Subscriber deposits 24,630
--------
Total current liabilities 1,892,782
Long-term liabilities
Long-term debt (Note 4) 1,938,483
Long-term deferred gain (Note 8) 2,343,500
Advances from stockholder (Note 4) 904,304
---------
Total liabilities 7,079,069
---------
Commitments and contingencies (Notes 4, 5 and 6)
Stockholders' equity (Note 6)
Class A preferred stock, $1 par value;
no shares outstanding -
Class B preferred stock, $1 par value;
28,813 shares issued and outstanding 28,813
Class C preferred stock, $1 par value;
no shares outstanding -
Class D preferred stock, $1 par value;
no shares outstanding -
Common stock, $.0005 par value; 100,000,000
shares authorized, 40,395,343
shares issued and outstanding 20,197
Additional paid-in capital 7,281,889
Accumulated deficit (3,397,501)
------------
Total stockholders' equity 3,933,398
-----------
Total liabilities and stockholders' equity $11,012,467
==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
March 31,
--------------------------
1998 1997
----------- ---------
<S> <C> <C>
Revenues (Note 11)
Lease income (Note 5) $ 693,857 $ 363,296
Interest income 493,521 519,340
Other revenue 14,451 263,508
----------- ---------
Total revenue 1,201,829 1,146,144
----------- ---------
Operating expenses
General and administrative 2,994,526 2,579,049
Litigation settlement expense (Note 5) 1,285,859 -
Mine development costs (Note 5) 1,150,613 1,529,233
Depreciation and amortization 618,422 461,583
Interest expense 238,671 229,274
----------- -----------
Total expenses 6,288,091 4,799,139
----------- -----------
Operating loss (5,086,262) (3,652,995)
Gain on sale of cable
operations (Note 8) 2,257,409 2,343,043
Gain on sale of licenses (Note 2) 2,000,000 -
----------- -----------
Loss income before income taxes (828,853) (1,309,952)
Income tax expense (benefit) (Note 7)
Current 21,573 85,556
Deferred (279,283) (436,429)
---------- ------------
Net loss $ (571,143) $ (959,079)
========== ==========
Loss per weighted average share
of common stock
Basic $ (.02) $ (0.05)
========== ==========
Diluted $ (.02) $ (0.05)
========== ==========
Weighted average common shares
outstanding
Basic 36,841,656 17,981,133
========== ==========
Diluted 36,841,656 17,981,133
========== ==========
</TABLE>
See notes to consolidated financial statements.
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------- ---------- --------- ---------
Shares Amount Shares Amount
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Balances at March 31, 1996 5,672,813 960,813 17,981,133 9,016
Net (loss) for the year
ended March 31, 1997 - - - -
--------- -------- ----------- ---------
Balances at March 31, 1997 5,672,813 960,813 17,981,133 9,016
Net loss for the year
ended March 31, 1998 - - - -
Preferred stock conversions
(Note 6) (5,644,000) (932,000) 5,254,000 2,627
Stock repurchases (Note 5) - - (793,111) (423)
Acquisition of business
(Note 2) - - 17,953,321 8,977
--------- -------- ---------- --------
Balances at March 30, 1998 28,813 $ 28,813 40,395,343 $20,197
========= ======== =========== ========
Table continued below.
Additional
Paid-in Accumulated
Capital (Deficit) Total
------------- ------------- -------------
Balances at March 31, 1996 $ 6,575,211 $(1,867,279) $5,677,761
Net (loss) for the year ended
March 31, 1997 - (959,079) (959,079)
----------- ----------- -------------
Balances at March 31, 1997 6,575,211 (2,826,358) 4,718,682
Net loss for the year ended
March 31, 1998 - (571,143) (571,143)
Preferred stock conversions
(Note 6) 929,373 - -
Stock repurchases (Note 5) (213,718) - (214,141)
Acquisition of business (Note 2) (8,977) - -
------------ ----------- ------------
Balances at March 30, 1998 $7,281,889 $(3,397,501) $3,933,398
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
March 31,
-------------------------------
1998 1997
------------ ----------------
<S> <C> <C>
Cash flows from operating activities
Net (loss) $ (571,143) $ (959,079)
------------- -----------
Adjustments to reconcile net (loss)
income to net cash used in operating
activities -
Gain on sale of cable operations (904,560) (1,963,043)
Loss on sale of fixed assets - 20,201
Depreciation and amortization 631,720 461,583
Deferred income taxes (279,283) (436,429)
Change in certain assets and liabilities -
Accounts receivable (11,771) 83,889
Inventory - 53,002
Prepaid expenses and other current assets (21,080) (27,136)
Other assets (19,677) 353,235
Accounts payable (7,111) (360,804)
Accrued expenses (92,026) 244,555
Income taxes payable (39,559) (70,313)
Subscriber deposits (510) 685
---------- ----------
(743,857) (1,640,575)
---------- ----------
Net cash flows used in operating
activities (1,315,000) (2,599,654)
----------- -----------
Cash flows from investing activities
Payments on notes receivable 1,051,292 2,334,703
Net investing activity 1,502,172 597,052
Property and equipment purchases (386,279) (897,667)
Purchase of broadcasting licenses - (122,986)
----------- -----------
Net cash flows provided
by investing activities 2,167,185 1,911,102
----------- -----------
Cash flows from financing activities
Repurchase of common stock (214,141) -
Proceeds from stockholder advances 167,993 110,477
Payments on stockholder advances (277,389) (459,679)
Proceeds from issuance of long-term debt - 44,888
Payments on long-term debt and capital leases (167,271) (33,598)
--------- --------
Net cash flows used by
financing activities (490,808) (337,912)
--------- --------
Net increase (decrease) in cash
and cash equivalents 361,377 (1,026,464)
Cash and cash equivalents - beginning
of year 490,985 1,517,449
-------- ----------
Cash and cash equivalents - end of year $ 852,362 $ 490,985
========== ==========
</TABLE>
See notes to consolidated financial statements.
Supplemental disclosure of cash flow information
Cash paid during the year for interest was $305,868 (1998) and $178,396
(1997).
Cash paid during the year for income taxes was $73,242 (1998) and $15,617
(1997).
Supplemental disclosure of noncash investing activities
During 1997, the Company acquired equipment valued at $62,500 under
capital lease agreements.
During 1997, the Company recorded $193,500 of interest receivable and
deferred the related gain.
During 1997, the Company recognized additional notes receivable on the
sale of wireless cable systems of $657,031 and deferred the gain.
During 1998, the Company issued 5,254,000 shares of common stock upon the
conversion of 780,000 shares of Series C preferred stock and 4,864,000 shares
of Series D preferred stock.
During 1998, the Company acquired $361,050 of fixed assets under capital
leases.
During 1998, the Company also acquired $362,168 of licenses through the
assumption of notes payable.
During 1998, the Company acquired licenses valued at $195,707 through the
reduction of notes receivable.
During 1998, the Company issued 17,953,321 shares of common stock valued
at $2,000,000 in the acquisition of a business (Note 2).
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------------------------------------------
Organization
- ------------
TV Communications Network, Inc. (the "Company") is engaged primarily in the
business of leasing Wireless Cable TV (WCTV) licenses. In addition, the
Company engages in research regarding the conversion of natural gas into
alternative fuels, mining for various minerals and metals, providing internet
access services, and retail sale of paging equipment and the related access
service through its various subsidiaries.
Principles of Consolidation
- -----------------------------
The Company's consolidated financial statements include the accounts of TV
Communications Network, Inc. (TVCN), its wholly-owned subsidiaries
International Integrated Systems, TVCN International, Inc., International
Exports, Inc., Mining and Energy International Corp., REEMA International
(Note 10), Planet Internet Corp., MDA of Georgia, Inc. and its majority-owned
stock position in Century 21 Mining, Inc. and Page TVCN, Inc. All material
intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
- ----------------------------
For purposes of cash flow reporting, cash equivalents include certificates of
deposit with initial maturities of less than three months.
Investments
- -----------
Investments primarily consist of mutual funds, equity securities and funds
invested in government bonds which are redeemable at the option of the
Company. Investments are reported at fair market value.
Investments currently owned by the Company are classified as available for
sale securities. Unrealized holding gains and losses, when they occur, are
reported as a separate component of stockholders' equity.
Minority Interest
- ------------------
Minority interest is reflected in consolidation and is the portion of Century
21 Mining, Inc. stock and Page TVCN, Inc. stock that is not owned by the
Company. The aggregate losses attributable to the minority interests are in
excess of the minority interests investments and accordingly, the Company is
recognizing 100% of the operating losses generated.
Revenue Recognition
- --------------------
The Company recognizes revenue when it has substantially completed all its
obligations and has earned the revenue.
Profits with respect to sale of the Company's Denver Cable operations are
being recorded on the installment sale method while profit with respect to the
Detroit and Washington D.C. sales are being recorded using the cost recovery
method (Note 8).
Basic Loss Per Share
- -----------------------
During the year ended March 31, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standard No. 128, "Earnings Per Share" (FAS
128). FAS 128 established new definitions for calculating and disclosing
basic and diluted earnings per share. Basic loss per share is based upon the
weighted average number of shares outstanding. All dilutive potential common
shares have an antidilutive effect on diluted net loss per share and therefore
have been excluded in determining net loss per share.
Depreciation and Amortization
- -------------------------------
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of primarily five
years. Buildings are being depreciated over a 31 year life using the
straight-line method. It is the policy of the Company to charge operations
for maintenance and repairs, and to capitalize expenditures for renewals and
betterments. Licenses are recorded at cost which may include related
equipment. Amortization is provided using the straight-line method over the
life of the licenses of 10 years.
Inventory
- ---------
Inventories are carried at the lower of cost, determined on the weighted
average method, or market. Inventory consists of installation materials which
are held for resale or expected to be used in the next year.
Advertising Costs
- ------------------
The Company expenses advertising and promotional costs as incurred.
Advertising expenses for the years ended March 31, 1998 and 1997 were
approximately $23,000 and $2,000, respectively.
Concentration of Credit Risk
- -------------------------------
Cash accounts potentially subject the Company to concentration of credit risk.
The Company places its cash with high credit quality financial institutions
and, by policy, limits the amount of credit exposure to any one financial
institution. At March 31, 1998, there was approximately $744,000 in excess of
the federally insured limit.
Use of Estimates
- ------------------
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications of Prior Year Amounts
- -------------------------------------------
Certain amounts from the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
Recently Issued Accounting Pronouncements
- --------------------------------------------
In June 1997, the FASB issued Statement of Financial Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), which establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS 130 requires that all items that are required to
be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. Currently, the
Company's only component which would comprise comprehensive income is its
results of operations.
Also, in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131), which supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise."
SFAS 131 establishes standards for the way that public companies report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of a company
about which separate financial information is available, that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. Management believes that SFAS 131
will not have a significant impact on the Company's disclosure of segment
information in the future.
SFAS 130 and 131 are effective for financial statements for periods beginning
after December 15, 1997 and require comparative information for earlier years
to be restated.
NOTE 2 - BUSINESS ACQUISITION
- ---------------------------------
The Company acquired all of the issued and outstanding stock of MDA of
Georgia, Inc (MDA Georgia) which is a newly created wholly owned subsidiary of
Multichannel Distribution of America, Inc. (MDA) which is majority owned by a
stockholder of the Company, Omar Duwaik. The Company issued 17,953,321 shares
of restricted common stock valued at $2,000,000 to consummate the transaction.
As a result of issuing the shares to MDA, Omar Duwaik beneficially owns
approximately 85% of the outstanding common voting stock of the Company
subsequent to the acquisition. Due to the common control relationship which
existed prior to the transaction, the acquisition of MDA Georgia resulted in
the assets and liabilities being recorded at historical cost in which the net
book values approximated zero. MDA Georgia's only asset consisted of certain
broadcast transmission license rights. Subsequent to its acquisition, the
Company sold these license rights to an unrelated party for $2,000,000 in
cash. The resulting gain has been included in the accompanying statement of
operations for the year ended March 31, 1998.
MDA Georgia had no significant assets, liabilities, equity, revenues or
expenses prior to its acquisition by the Company, and accordingly the effects
to the Company had the transaction taken place as of April 1, 1996 would not
be materially different from the historical results of operations or financial
position of the Company. The results of operations of MDA Georgia have been
included in the accompanying consolidated financial statements from the date
of acquisition forward.
<PAGE>
NOTE 3 - PROPERTY AND EQUIPMENT
- ------------------------------------
The following summarizes the property and equipment:
<TABLE>
<CAPTION>
<S> <C>
Land $ 1,207,926
Office building and improvements 942,867
Office furniture and equipment 1,011,458
Mining equipment 425,963
Transmission equipment 729,782
Transportation equipment 191,175
---------
4,509,171
Less accumulated depreciation (930,062)
---------
Total $ 3,579,109
=============
</TABLE>
NOTE 4 - LONG-TERM DEBT AND STOCKHOLDER ADVANCES
- -------------------------------------------------------
Long-Term Debt
- ---------------
<TABLE>
<CAPTION>
<S> <C>
Mortgage payable in connection with the
purchase of an office building and
related land, maturing July 2000.
Interest at 10%, with monthly principal and
interest payments of $6,526. Collateralized
by land and building with a net
book value of $896,208. $493,008
Note payable in connection with purchase
of a vehicle maturing in 1998. Interest at
9%, with monthly payments of $2,383.
Collateralized by the vehicle. 4,894
Notes payable in connection with the
purchase of several Basic Trade Areas
(BTA's) maturing 2006. Interest at 9.5%.
Debt service began with quarterly
interest payments totaling $24,236,
with principal and interest payments to
begin November 1998 totaling $45,886.
The notes are secured by the BTA
license rights 1,382,613
Capital lease in connection with the
purchase of mining equipment currently
due. Monthly payments of $5,000.
Collateralized by the equipment. 37,500
Capital lease in connection with
the purchase of communication equipment
maturing in 2001. Monthly payments
of $10,200. Collateralized by the
equipment. 255,663
------------
2,173,678
Less current maturities (235,195)
------------
Long-term debt $ 1,938,483
============
</TABLE>
The aggregate annual maturities of long-term debt at March 31, 1998 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Year Ending March 31,
------------------------
1999 $ 235,195
2000 261,897
2001 660,181
2002 153,479
2003 167,459
Thereafter 735,594
---------
2,213,805
Less amount representing
capital lease interest (40,127)
---------
$2,173,678
=========
</TABLE>
As of March 31, 1998, the cost and net book value of equipment under capital
lease was approximately $370,000 and $321,000, respectively.
Stockholder Advances
- ---------------------
Stockholder advances bear interest at 8%. Interest expense on stockholder
advances totaled $77,956 (1998) and $102,062 (1997).
NOTE 5 - COMMITMENTS AND CONTINGENCIES
- -------------------------------------------
Leases
- ------
The Company leases radio towers with leases expiring through 1998 and are
automatically renewed for one year periods unless terminated by either party
upon 90 days prior written notice. Total lease expense for the years ended
March 31, 1998 and 1997 was $64,888 and $65,819, respectively.
The Company is a lessor of multiple real properties. The lease of the
Michigan property commenced on March 16, 1994 and expires April 14, 1999. The
remaining operating leases are at the Denver location. Leases commenced in
the 1997 fiscal year and expire between 1998 and 2001.
Future minimum lease receipts are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 127,050
2000 55,165
2001 10,766
--------
$ 192,981
========
</TABLE>
Commitments
- -----------
The Company 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 operations in Qatar without
interruption over a period of ten years, ending in 2006. Costs incurred by
the Company to date have been insignificant and management believes any such
future costs will not have a material impact to the Company.
Liberty Hill Mine
- -------------------
During the year ended March 31, 1996, a wholly owned subsidiary of the Company
entered into a lease agreement with an unrelated Company where it has an
option to enter into a 30 year lease to explore and mine certain mining claims
held by this unrelated company during the term of the lease. The option
provides for the greater of $40,000 per month, or 15% of the monthly gold
production of the mine. The lease agreement requires a $500,000 non-refundable
advance royalty payment and a minimum monthly royalty payment of the greater
of $40,000, 15% of the monthly gold production of the mine unless the average
concentration of gold produced is greater than .03 ounces per short ton, when
the share of gold production is increased to 20% of production. In addition,
the Company would be required to pay $3.00 per ton for silica and barite sold
from the premises. During 1998 the Company negotiated a reduced royalty rate
of $15,000 per month as the mine is not currently in production.
In the fourth quarter ended March 31, 1998, the Company filed a lawsuit
against the operator of the mine alleging, among other things breach of
contract for failure to operate the mine in the best interests of the Company.
This litigation is currently scheduled for arbitration. As a result of the
lawsuit the operator has ceased all activities related to the mine and the
Company has suspended its royalty payments under the lease agreement.
Contingencies
- -------------
The Company was the defendant in a class action suit by a shareholder of TV
Communications Network, Inc. The case is in the United States District Court
wherein Merton Frederick, on behalf of himself and all others similarly
situated is the plaintiff and the defendants are TV Communications Network,
Inc., TVCN of Michigan, Inc., TVCN International, Inc., International Exports,
Inc., Omar Duwaik, Jacob A. Duwaik, Kenneth D. Roznoy, Scott L. Jenson, and
Scott L. Jenson, P.C. The class action suit alleged that had the financial
condition of the Company been fully and fairly disclosed to the plaintiff and
other shareholders, they would not have purchased TV Communications Network,
Inc. securities. The Company has denied all such acquisitions. During the
fourth quarter ended March 31, 1998, a final settlement agreement was approved
by the US District Court which provided that $1,500,000 which was placed in
escrow by the Company be distributed to the plaintiffs after deducting related
attorneys fees. All class members participating in the suit are required to
sign a proof of claim form thereby relinquishing their rights to all TVCN
stock owned and release the Company from all future claims, liabilities and
damages. The Company expensed approximately $1,286,000 of the escrowed funds
as litigation settlement expense with the remaining $214,000 being recorded
against equity, reflecting the market value of the stock relinquished to the
Company.
NOTE 6 - STOCKHOLDERS' EQUITY
- ---------------------------------
Class A Preferred Stock
- --------------------------
Class A Preferred Stock entitles the holder to convert the Preferred Stock at
the rate of one Class A Preferred Share for 4.167 shares of Common Stock of
the Company. Class A Preferred Stock is participating stock, and carries a
cumulative dividend of nine percent (9%) per annum, compounded quarterly, on
the issued and outstanding Class A Preferred Stock. Holders of the Class A
Preferred Stock are not entitled to convert their Class A Preferred Stock into
Common Stock in the event the Company calls such Preferred Stock to redemption
at $1.00 per share, plus any unpaid dividends, if any. No Class A Preferred
Shares have been issued to date.
Class B Preferred Stock
- --------------------------
Class B Preferred Stock is participating but non-cumulative stock. The
holders of Class B Preferred Stock are entitled to receive non-cumulative
dividends from the Company's net profits at the rate of up to nine percent
(9%) when and if declared by the Board of Directors. Holders of Class B
Preferred Stock are not entitled to receive dividends if profits are not
allocated for such distribution by the Board of Directors. Class B holders
are entitled to convert their Preferred Stock into Common Stock at the rate of
two shares of Class B Preferred Stock for one share of Common Stock, and are
given a thirty day (30) notice to convert, if such Preferred Stock is called
for redemption by the Company. Pursuant to the Century 21 Mining acquisition,
28,813 Class B Preferred Shares were issued.
Class C Preferred Stock
- --------------------------
Class C Preferred Stock is non-participating and 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. Similar to Class B
Preferred Stock, a thirty day (30) notice is given to holders of Class C
Preferred Stock upon a call for redemption by the Company, during which thirty
day (30) period the holders of Class B or Class C Preferred Stock are entitled
to convert their Preferred Stock into Common Stock. Other rights and
restrictions may apply on any class of Preferred Stock as agreed upon prior to
issuance. The Company issued 400,000 Class C Preferred Shares to MDA (a
company related by virtue of having several mutual stockholders, officers and
directors) in exchange for Transmission Equipment, and 380,000 Class C
Preferred Shares to AT&I (a company related by virtue of having several mutual
stockholders, officers and directors) 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 (Note
14). During the year ended March 31, 1998, the Company converted 400,000
shares of Class C Preferred Stock, previously issued to MDA (a related
company), into 200,000 shares of TV Communications Network, Inc. common stock;
and 380,000 shares of Class C Preferred Stock, previously issued to AT&I (a
related company), and into 190,000 shares of TV Communications Network, Inc.
common stock.
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. The Company
issued 4,864,000 Class D Preferred Shares pursuant to the asset acquisition
from Microband.
The Company bid on certain assets and businesses of Microband together with
MDA, a company related by virtue of having some mutual stockholders, 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. 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.
During the year ended March 31, 1998, 4,864,000 shares of Class D preferred
stock were converted into 4,864,000 shares of TV Communications Network, Inc.
common stock.
Incentive Stock Option Plan
- ------------------------------
Effective July 14, 1987, the Company adopted an Incentive Stock Option Plan
for Company executives and key employees. The Company has reserved 2,000,000
common shares for issuance pursuant to the plan. The plan provides that no
option may be granted at an exercise price less than the fair market value of
the common shares of the Company on the date of grant. To date, no options
have been granted pursuant to the plan. Under current terms, the plan will
terminate in 2007.
Subsidiary Stock
- -----------------
The Company is disputing the potential issuance of 5,000,000 shares (5%
interest) of its wholly owned subsidiary TVCN International, Inc. The dispute
arose as a result of a previous letter agreement. The Company believes
requirements of the letter were not met and therefore the 5,000,000 shares
have not been issued.
NOTE 7 - INCOME TAXES
- -------------------------
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statements and tax basis of assets and liabilities using the enacted tax rates
in effect for the year in which the differences are expected to reverse. The
measurement of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence are not expected to be
realized. Although realization is not assured, management believes it is more
likely than not that all of the deferred tax asset will be realized. The
amount of the deferred tax asset is considered realizable; however, could be
reduced in the near term if estimates of future taxable income are reduced.
As a result of the sale of operations in 1994, the Company was able to utilize
a significant portion of the net operating loss in 1996.
Deferred taxes are recorded based upon differences between the financial
statements and tax basis of assets and liabilities and available tax credit
carryforwards. Cumulative temporary differences and carryforwards which give
rise to the deferred tax assets for 1998 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Net operating loss $ 1,323,212
Recognition of gain on sale of stations 14,871
Alternative minimum tax credit 113,532
Shareholder interest and bonus 72,682
Depreciation (94,098)
Other 12,855
--------
$ 1,443,054
========
</TABLE>
The net current and long-term deferred tax assets and liabilities in the
accompanying balance sheet includes the following deferred tax assets and
liabilities.
<TABLE>
<CAPTION>
<S> <S>
March 31,
1998
---------
Current deferred tax asset $ 151,188
Current deferred tax liability -
-----------
Net current deferred tax asset $ 151,188
===========
Long-term deferred tax asset $ 1,385,964
Long-term deferred tax liability (94,098)
-----------
Net long-term deferred tax liability $ 1,291,866
===========
</TABLE>
The Company has incurred losses, which include certain accrued expenses that
are not deductible for tax purposes until paid, since its inception, July 7,
1987, and has loss carryforwards available to offset future taxable income.
The Company has net operating loss carryforwards totaling approximately
$3,900,000 which expire through 2013.
The following is a reconciliation of income taxes at the Federal Statutory
rate with income taxes recorded by the Company.
<TABLE>
<CAPTION>
Years Ended
March 31,
--------------------------
1998 1997
------------ ----------
<S> <C> <C>
Computed income taxes at statutory rate $ (281,810) $ (445,384)
State income taxes, net of Federal
income tax benefit (27,352) (51,088)
Section 453A interest 22,290 70,842
Non deductible items and net operating loss 29,162 74,757
---------- ----------
$ (257,710) $ (350,873)
========== ==========
</TABLE>
NOTE 8 - SALE OF DOMESTIC WIRELESS CABLE OPERATIONS
- -----------------------------------------------------------
During the year ending March 31, 1994, the Company sold three of its domestic
wireless cable operations for approximately $5,100,000 in cash and $12,268,000
in notes receivable, due in monthly installments from 1994 through 1998. The
sales resulted in a pretax gain of approximately $15,460,000, of which
approximately $11,475,000 was deferred at March 31, 1994. On December 31,
1995, the Company entered into an agreement to receive $500,000 cash and an
additional $2,150,000 note receivable for the Detroit WCTV System due in 2001.
On December 31, 1996, the Company revised this agreement, incorporating
$193,500 of unpaid interest into the note receivable balance due in 2001. The
Company continually assesses the collectibility of the notes receivable and
adjusts the estimated deferred gain accordingly. The estimated deferred gain
at March 31, 1998 is approximately $3,000,000.
Long-Term Receivables
- ----------------------
<TABLE>
<CAPTION>
<S> <C>
Note receivable from Peoples Choice TV of
Detroit, Inc. in connection with the
sale of the Detroit WCTV System maturing
through 2001. Interest ranging from
8% to 9%; secured by the assets
of the systems. $ 2,698,790
Note receivable (unsecured) from American
Telecasting, Inc. in connection with
the sale of TVCN's Denver cable operations
maturing in 1998. Interest at 8%. 380,623
Notes receivable - other. 1,900
-------
3,081,313
Less current portion (737,813)
----------
$ 2,343,500
==============
</TABLE>
The aggregate maturities of notes receivable at March 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year Ending March 31,
------------------------
1999 $ 737,813
2000 -
2001 2,343,500
-----------
$ 3,081,313
===========
</TABLE>
Due to the inherent uncertainties in the estimation process, the Company feels
that it is reasonably possible that the allowance for notes receivable may
necessitate future revisions.
NOTE 9 - OTHER ASSETS
- -------------------------
During the year ended March 31, 1997, the Company purchased approximately
$70,000 of reclamation bonds related to its mine development efforts (Note 4),
in addition to the $27,000 purchased in prior years. The bonds are held for
the purpose of offsetting the cost of restoration following completion of the
related mining efforts. Cost of the reclamation bonds will be amortized over
the necessary reclamation period.
NOTE 10 - REEMA INTERNATIONAL
- ---------------------------------
REEMA International (REEMA) was incorporated on October 27, 1993 with the
primary purpose of converting natural gas into usable petroleum products. On
April 1, 1995, the Company purchased 100% of the outstanding shares of REEMA.
Accordingly, during the year ended March 31, 1995, the Company considered all
expenses of REEMA advances. During the year ended March 31, 1996, the Company
consolidated the operations of REEMA consisting of a net loss of approximately
$351,000. In addition, the Company wrote off the advance to REEMA recorded on
the prior years books, amounting to an additional net loss of approximately
$312,000. Operations during March 31, 1997 generated an additional loss of
$202,621 and as of that date the Company has limited development efforts
pending arrangements to purchase cost efficient raw materials.
During 1998, REEMA and the government of Trinidad and Tobago signed a
Memorandum of Understanding (MOU) for the construction and operation of a
gas-to-liquid (GTL) plant in Trinidad. The GTL plant construction costs are
estimated at approximately $300 million, which REEMA is currently reviewing
various financing alternatives. There are no binding obligations for either
party under the MOU and both parties are in continued negotiations towards
reaching a definitive agreement. There can be no assurances that REEMA will
be successful in negotiating a definitive agreement or that the necessary
financing will be obtained to cover the costs of constructing the GTL plant.
NOTE 11 - BUSINESS SEGMENTS
- -------------------------------
Operating results and other financial data are presented for the principal
business segments of the Company for the years ended March 31, 1998 and 1997.
Total revenue by business segment includes wireless cable TV (WCTV) station
leases and WCTV international station construction contracts, as reported in
the Company's consolidated financial statements. Operating profit by business
segment is total revenue less cost of sales, where appropriate, and other
operating expenses. In computing operating profit by business segment, the
following items were considered in the Corporate and Other category: portions
of administrative expenses, interest expense, income taxes and any unusual
items. Identifiable assets by business segment are those assets used in
Company operations in each segment. Corporate assets are principally cash,
notes receivable, investments, intangible assets and deferred charges.
<TABLE>
<CAPTION>
WCTV WCTV Station Natural Gas
License Construction Fuel Mining and
Leases Contracts Conversion Exploration
---------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Lease income $ 204,342 $ - $ - $ -
Interest income - - - -
Other income - - - -
---------- ----------- ------------- -----------
Total revenue 204,342 - - -
Operating (loss) profit $ (67,529) $ (12,515) $ (311,915) $(1,234,816)
Identifiable assets $3,120,710 $ 52,377 $ 20,777 $ 378,729
Depreciation $ 2,058 $ 12,465 $ 11,867 $ 84,203
Capital expenditures $ 137,724 $ - $ - $ 33,253
March 31, 1997
Lease income $ 171,930 $ - $ - $ -
Interest income - - - -
Other income - 263,320 - -
--------- --------- ----------- -----------
Total revenue 171,930 263,320 - -
Operating profit (loss) $ (69,466) $ 188,588 $ (202,621) $(1,571,122)
Identifiable assets $1,673,727 $ 69,342 $ 77,644 $ 448,754
Depreciation $ 833 $ 14,020 $ 13,100 $ 41,890
Capital expenditures $ 326,488 $ - $ - $ 325,690
Table continued below.
Internet Access
Service Pager Corporate
Provider Rental and Other Consolidated
----------- --------- ------------- ---------------
<S> <C> <C> <C> <C>
March 31, 1998
Lease income $255,350 $ 87,951 $ 146,214 $693,857
Interest income - - 493,521 493,521
Other income - - 14,451 14,451
-------- --------- ---------- -----------
Total revenue 255,350 87,951 654,186 1,201,829
Operating (loss) profit $(508,084) $(155,083) $(2,796,320) $(5,086,262)
Identifiable assets $ 515,784 $ 63,848 $ 6,860,242 $11,012,467
Depreciation $ 85,112 $ 12,467 $ 423,548 $ 631,720
Capital expenditures $ 459,955 $ 650 $ 115,747 $ 747,329
March 31, 1997
Lease income $ 34,621 $ 20,500 $ 136,245 $ 363,296
Interest income - - 519,340 519,340
Other income - - 188 263,508
----------- ---------- ----------- -----------
Total revenue 34,621 20,500 655,773 1,146,144
Operating profit (loss) $(221,251) $ (30,514) $(1,746,579) $(3,652,995)
Identifiable assets $ 117,260 $ 69,294 $ 9,963,635 $12,419,656
Depreciation $ 9,482 $ - $ 382,258 $ 461,583
Capital expenditures $ 124,742 $ 62,334 $ 120,913 $ 960,167
</TABLE>
NOTE 12 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
- ------------------------------------------------------
In the fourth quarter for the year ended March 31, 1998, the Company made the
following adjustments to the financial statements:
The Company recorded approximately $905,000 of gain which was previously
deferred related to the sales of the Denver cable operations in 1994, as a
result of receiving payments during the year which are reported under the
installment method.
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
- ----------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value. Fair value estimates are made at a specific point in time for the
Company's financial instruments; they are subjective in nature and involve
uncertainties, matters of significant judgment and, therefore, cannot be
determined with precision. Fair value estimates do not reflect the total
value of the Company as a going concern.
Cash
- ----
The carrying value approximates fair value due to its liquid or short-term
nature.
Investments
- -----------
For those investments, which consist primarily of money market investments,
the carrying amount is a reasonable estimate of fair value.
Notes Receivables
- ------------------
Interest rates on notes receivable are consistent with the interest rates on
current purchases by the Company of contracts with similar maturities and
collateral. Notes receivable are continually assessed as to the
collectibility of the notes and adjusted to approximate the estimated
collectible amount, accordingly the fair value is net of the related deferred
gain on the notes receivable.
Long-Term Debt
- ---------------
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of existing debt.
<PAGE>
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.
<PAGE>
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Age Position Period Served
Omar A. Duwaik 54 Chairman of the Board,
Chief Executive Officer
and President (1) 1987 to present
Armand DePizzol 66 President, Alert Systems
and CEO of National Direct
Connect Corp., since
1986 Director (2) 1989 to present
Dennis J. Horner 51 Vice President Treasurer,
Director (1) 1994 to present
</TABLE>
(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).
<PAGE>
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 Information, 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.
<PAGE>
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:
<TABLE>
<CAPTION>
Cash
Name of Individual Capacity in Which Served Compensation
- ----------------------- ------------------------------- -------------
<S> <C> <C>
Omar A. Duwaik Chairman of the Board of
Directors, President and Chief
Executive Officer $108,157
Dennis J. Horner Vice President, Treasurer,
and Director $ 50,791
Barry K. Arrington Vice President, General Counsel $ 7l,784
</TABLE>
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.
<PAGE>
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.
<TABLE>
<CAPTION>
Amount of
Name and Position with TVCN, or Name Beneficial Percent of
and Address of Greater than 5% Holders Ownership Class
- -------------------------------------- ------------- --------------
<S> <C> <C>
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%
</TABLE>
* All information refers to common stock.
<PAGE>
** 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.
<PAGE>
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.
<PAGE>
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 17, 1998 /s/Omar A. Duwaik
Omar A. Duwaik
PRESIDENT/CEO
/s/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 17, 1998
Omar A. Duwaik
PRESIDENT/CEO
Dennis J. Horner
VICE PRESIDENT/TREASURER
Exhibit 21 Subsidiaries of the Registrant
Wholly Owned Subsidiaries:
International Integrated Systems
TVCN International, Inc.
International Exports, Inc.
Mining and Energy International Corp.
REEMA International
Planet Internet Corp.
MDA of Georgia, Inc.
Majority Owned Subsidiaries:
Century 21 Mining, Inc.
Page TVCN, Inc.
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