PRELIMINARY PROXY MATERIAL
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
The Annual Meeting of Stockholders of TV Communications Network, Inc. ("TVCN"
or the "Company") will be held at the TVCN Building, 10020 East Girard Avenue,
Suite 300, Denver, Colorado 80231, on Friday, November 19, 1999 at 10:00 a.m.
MST time for the following purposes:
(1) To elect the following three (3) Directors:
Omar A. Duwaik
Armand DePizzol
Kenneth D. Roznoy
(2) To ratify management's decision to sell the office building in Denver for
$1.2 million.
(3) To ratify management's decision to sell the warehouse building in Detroit
for $200,000.
(4) To ratify management's decision to sell Planet Internet Corp. to BeWell Net
for a gross sale price of $1, 746,515 payable in private common stock of BeWell
Net, a private company.
(5) To ratify the Management decision to retain the services of the auditing
firm of Ehrhardt Keefe Steiner & Hottman PC or any other auditing firm
management so chooses.
Proxy material will be mailed on or about November 5, 1999.
The date of record is October 29, 1999.
Stockholders of record at the close of business on October 29, 1999 will be
entitled to notice of and to vote at the meeting. The stock transfer books
of the Company will remain open.
By order of the Board of Directors,
Kenneth D. Roznoy, Secretary
October 12, 1999
Denver, Colorado
IMPORTANT
IT IS IMPORTANT THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL
MEETING. ACCORDINGLY, YOU ARE URGED TO COMPLETE, SIGN, DATE AND
PROMPTLY RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. IF YOU SO
CHOOSE, YOU MAY VOTE YOUR SHARES IN PERSON AT THE ANNUAL MEETING.
THIS REPORT DOES NOT PURPORT THAT THE SECURITIES AND EXCHANGE
COMMISSION ("SEC") HAS APPROVED OR DISAPPROVED ANY OF THIS REPORT OR
PASSED UPON ITS ACCURACY OR ADEQUACY.
PRELIMINARY PROXY MATERIAL
TV COMMUNICATIONS NETWORK, INC.
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
November 19, 1999
VOTING SECURITIES, PRINCIPAL HOLDERS AND PROXIES
This Proxy Statement is being furnished in connection with the solicitation
of proxies by the Board of Directors of TV Communications Network, Inc.
(The "Company" or "TVCN" or the "Registrant") for use at the Annual Meeting
of Shareholders to be held on Friday November 19, 1999. All valid proxies
received prior to the meeting will be voted. All proxies will be voted in
accordance with the instructions contained therein and, if no choice is
specified, will be voted for the election of each of the individuals
nominated by the Board of Directors and in favor of the other proposals
set forth in the Notice of Annual Meeting of Shareholders. A shareholder
who has given a proxy may revoke it at any time prior to such proxy being
voted at the meeting by filing with the Secretary of the Company an
instrument revoking it or a duly executed proxy bearing a later date, or by
attending the meeting and giving notice of such revocation. Attendance at
the meeting does not by itself constitute revocation of a proxy.
The Board of Directors has fixed October 29, 1999 as the record date for the
determination of stockholders entitled to vote at the Annual Meeting. Only
shareholders of record as of the close of business on October 29, 1999
(the "Record Date") will be entitled to notice of and to vote at the Annual
Meeting of Shareholders or any adjournment thereof. Shares may be voted at
the meeting in person or by proxy. At the Record Date, there were
outstanding and entitled to vote 50,835,954 shares of the Common Stock of
the Company. Each share is entitled to one vote. The election of directors
as well as the adoption of Proposals 2 through 5 requires the affirmative
vote of the holders of a majority of the shares present at the meeting in
person or represented by proxy and entitled to vote.
All costs of solicitation of proxies will be borne by the Company. In
addition to the use of the mails, arrangements also may be made with
brokerage firms and other custodians, nominees and fiduciaries who hold
the voting securities of record for the forwarding of solicitation material
to the beneficial owners thereof. The Company will reimburse such brokers,
custodians, nominees and fiduciaries for the reasonable out-of-pocket
expenses incurred by them in connection therewith. The costs of the
solicitation of proxies will approximately be between $15,000 and $20,000.
The amounts being spent include attorneys' fees, accountants' fees,
solicitors' time, printing costs, postage, and other incidental expenses.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the Record Date, the number of shares
of the Company's common stock owned beneficially, and controlled by
management and by each person known by the Company to have owned
beneficially more than five percent of such shares then outstanding:
Name and Address Amount and Nature of Percentage of Class
Of beneficial Owner Beneficial Ownership Benficially Owned
and/or controller and/or control and/or controlled
Omar Duwaik (1)
10020 E. Girard Ave. 47,150,348** 92.8%
Denver, CO 80231
Armand De Pizzol (1)
1115 Broadway, Ste. 109 None -0-
Denver, CO 80203
Kenneth D. Roznoy (2)
10020 E. Girard Ave. 175 *
Denver, CO 80231
Total as a Group
(three in number) 47,150,523 92.8%
* Negligible
(1) These persons being those making the solicitation of proxies by mail.
** Of these 47,150,348 shares, 23,845,892 shares are in the name of MDA, Inc.
an affiliate substantially owned and controlled by Mr. Duwaik, the Company's
president, and 950,233 shares beneficially owned by a brother of Mr. Duwaik.
PROPOSAL 1 - ELECTION OF DIRECTORS
The persons named in the enclosed proxy will vote to elect as directors the
persons identified below, as nominees, for a one-year term expiring in 2000
unless authority to vote for the election of directors is withheld by
marking the proxy to that effect.
In the event that any nominee for election should become unavailable, the
person acting under the proxy may vote for the election of a substitute.
Management has no reason to believe that any nominee will become unavailable.
In the event this proposal is not passed, then the Company will propose that
the three previous directors be re-elected. Other nominations may be made
by eligible shareholders. The three nominees with the most votes will be
elected directors.
The information about each director and his beneficial ownership of shares of
the Common Stock of the Company as of the Record Date is as follows:
<TABLE>
<S> <C> <C> <C>
Beneficial Ownership
and/or control
Nominees for Director Percent of
For Terms Principal Occupation No. of Outstanding
Expiring in 2000 During Past Five Years Shares Common Stock
Omar A. Duwaik Chairman of the Board
Director since 1987 Chief Executive Officer 47,150,348 92.8%
Age 55 and President
Kenneth D. Roznoy Vice President of Business 175 *
Age 51 Development,
Secretary and a director off and
on since 1990
Armand DePizzol Director 0 0%
Director
Age 67
</TABLE>
* Negligible
Omar A. Duwaik has been the President, CEO and Director of TVCN since its
inception on July 7, 1987. Mr. Duwaik has been involved in the
telecommunications, aerospace and electronic industries for the past 27
years. In 1980, Mr. Duwaik joined Multichannel Distribution of America,
Inc. ("MDA"), 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 U.S. MMDS station in San Luis Obispo, California in 1984. Under
his direction, three more MMDS stations were constructed in Kansas and
Alabama. By 1994, TVCN had ten of these wireless cable TV stations, of
which three were sold for about $17.5 million. Mr. Duwaik received a BS
Degree in electrical Engineering, a BS Degree in Computer Science and an
MS Degree in Electrical Engineering Communications from Oregon State
University in 1971. Mr. Duwaik owns or controls 47,150,348 shares of
Common Stock. Mr. Duwaik is employed on a full-time basis with the
Company and is compensated at the rate of $91,720 a year, of which $54,079
is being paid in cash, and the remaining balance is deferred until such
time as more funds become available to the Company.
Armand L. DePizzol - President of Alert Credit Bureau, Inc. and CEO of
National Direct Connect Corporation. Mr. DePizzol holds an MA in Economics
and a BS in Business Administration. He was President of American
Technology & Information, Inc. ("AT&I") from 1986 - 1987 and was in charge
of all operations for that company. This was during the period when AT&I
operated the very first wireless multichannel TV station in the country.
Prior to that, Mr. DePizzol spent seven years overseas with the
International Department of CitiBank of NewYork. 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 acted as a consultant to the First of Denver
Bank, which became First Interstate Bank. 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.
Kenneth D. Roznoy - Vice President, Secretary and Director. Mr. Roznoy
returned to the Company on a free-lance basis in September of 1996 and was
re-hired on a full-time basis on February 9, 1997 as Vice President of
Business Development. During his two-year sabbatical he worked as a
consultant for Elitch Garden in Denver and CHILDRENS CABLE NETWORK in
Denver and Burbank, California. Mr. Roznoy served as a Director of TVCN
from 1989 - October 1994. Prior to joining the Company in 1987, Mr. Roznoy
had been employed by American Technology and Information, Inc. ("AT&I") in
Denver, Colorado since January 1, 1987 as its Vice President and Public
Relations Director. From 1981 to 1987, Mr. Roznoy was working for KDR
Production providing entertainment related services for businesses and
non-profit organizations in Denver, Colorado. From 1978 to 1981, Mr. Roznoy
worked for Commonwealth Theaters in Denver, Colorado and Dallas, Texas as
Advertising Director. At Mulberry Square Productions, in Dallas, Texas
from 1975 to 1978, Mr. Roznoy helped promoted "Benji" into an international
movie star with films and TV shows grossing in excess of $100 million.
Mr. Roznoy is employed on a full-time basis with the Company and is
compensated at the rate of $32,500.00 a year.
Currently, the Company has no standing Audit, Nominating or Compensation
committees or committees that perform similar functions, other than the
Board of Directors. The Board held three meetings during the last fiscal
year, and no director attended less than 75% of the aggregate of those
meetings, either in person or telephonically.
The Board of Directors Recommends a Vote FOR All Nominees.
PROPOSAL 2 - TO RATIFY MANAGEMENT'S DECISION TO SELL THE OFFICE BUILDING IN
DENVER.
The Company has accepted an offer on the TVCN building in the amount of one
million two hundred thousand dollars ($1,200,000.00) from Asian Pacific
Cooperative Association d/b/a Asung Hyup Johapp. Since the Company sold the
major TV market operations in 1993 and 1994 it has pursued with diligence the
new Gas-to-Liquid Project(s). None of those operations would be located in
Denver, so management believes it is better to divest the building while the
realty market is strong. The Company will then lease its current office
space (approximately 3600 square feet) back for the next three years at the
rate of $3625/month. The building was acquired in 1990 from an affiliated
company substantially owned and controlled by TVCN's president Mr. Duwaik,
in a non-arms-length transaction. The original purchase price was $930,000
payable in the form of issuing 380,000 shares of TVCN's Class C preferred
stock, and the assumption of a loan of $550,000 carrying an annual interest
of 10%. In 1997, the 380,000 preferred shares were converted to 190,000
restricted shares of TVCN's common stock. No interest or dividends were ever
paid or distributed by TVCN on such preferred stock. The current book value
of the building is $896,208. The net selling price of $1.135 is expected
to generate a net gain of about $240,000.
The board of directors recommends a vote FOR this proposal.
PROPOSAL 3 - TO RATIFY MANAGEMENT'S DECISION TO SELL THE WAREHOUSE
BUILDING IN DETROIT
In connection with the acquisition of the Wireless Cable TV station in
Detroit ("WCTV") from the Microband Companies in 1990, the Company acquired
a warehouse building ("warehouse") for a purchase price of $220,000,
payable over two years. In connection with the sale of the Detroit WCTV
station in September 1993 to Eastern Cable Network Corp. ("ECNC"), which
subsequently sold the system to People's Choice TV ("PCTV"), the Company
entered into a lease agreement with the buyer(s) at the lease rate of
$4000/month. The lease expired in March of 1999. The warehouse has
been vacant since that time. Since then, the Company has been attempting to
find a customer to either lease or buy the warehouse. Recently, the company
has accepted an offer to buy the warehouse for $200,000. subject to
closing. The net selling price is expected to be about $180,000. The
current book value of the warehouse is about $158,000. If the sale is
successfully completed, the sale will result in a net gain of about
$22,000.
The board of directors recommends a vote FOR this proposal.
PROPOSAL 4 - TO RATIFY MANAGEMENT'S DECISION TO SELL PLANET INTERNET TO
BEWELL NET (A PRIVATE COMPANY) FOR $1.76 MILLION IN PRIVATE STOCK
On February 16, 1996 the Company incorporated its wholly-owned subsidiary,
Planet Internet Corp. ("Planet") as an Internet Service Provider ("ISP").
Planet Internet provided internet service to subscribers. By March 31, 1999,
Planet had 836 subscribers. On May 18, 1999, the Company signed an agreement
to sell Planet to BeWell Net Corp., another ISP for a gross sale price of
$1,746,515. The net sale price was $1,508,640 payable in private common
stock of BeWell Net at the rate of $5.00 per share. Accordingly, the
Company received 301,728 private shares of the common stock of BeWell Net.
As part of the sale, the Company has allocated 80,000 shares for distribution
to various employees as performance bonuses. None of the officers or
directors of the Company received any of said stock other than Kenneth Roznoy
who received 5,000 shares of said stock. BeWell Net is a private company and
has no public trading market for its stock. As of March 31, 1999, Planet had
a negative operating monthly cash flow of about $40,000.00, liabilities of
approximately $283,000 and assets of $282,000. In connection with the sale,
the entire assets will be transferred to BeWell Net, and about $230,000 of
the liabilities will be transferred to and assumed by BeWell Net, while about
$53,000.00 in liabilities will remain the responsibility of the Company.
The board of directors recommends a vote FOR this proposal.
PROPOSAL 5 - RETAINING THE INDEPENDENT AUDITING FIRM
On April 12, 1999 the Company signed an engagement letter with the auditing
firm of Ehrhardt Keefe Steiner & Hottman PC of 7979 East Tufts Avenue,
Suite 400, Denver, Colorado 80237 ("EKSH" or "Auditors"). The Board is
considering reselecting EKSH as TVCN's auditors for the fiscal year ending
March 31, 2000 and recommends that the shareholders ratify and approve this
consideration, but to give management the latitude to hire any other audit
firm should the need arise.
During the Company's last fiscal year and the interim periods there were no
disagreements with the accountants on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
In the event this proposal is not passed, the Company will fulfill its
present contractual obligations with the present firm and seek a new
independent auditing firm for the next fiscal year.
The Board of Directors Recommends a Vote FOR this Proposal.
COMPENSATION PLAN
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
(post 5 to 1 reverse split) 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.
OTHER COMPENSATION BENEFITS
The Company currently has no Directors or Executive Officers who receive
compensation in an amount over $60,000, except the Company's President,
Omar A. Duwaik, whose annual compensation is $91,720 of which $54,079 is
payable in cash, and the remaining balance is deferred until such time more
funds become available to the Company. The Company offers a health benefits
package to all employees, but currently has no retirement plan. The costs
for the health benefit package (medical insurance) are paid by the eligible
enrollees.
No option/Stock Appreciation Rights ("SAR") Grants were awarded during the
Last Fiscal Year. No Aggregated option SAR Exercises were awarded during
Last Fiscal Year. Therefore, Fiscal Year End Option/SAR Values and long-term
Incentive Plan Award Tables have been omitted.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANT
On April 12, 1999, the Company signed an engagement letter with the auditing
firm of Ehrhardt Keefe Steiner & Hottman PC ("EKSH" or "Auditors"). EKSH
also audited the Company's financial records for fiscal the years ended
March 31, 1993-1998 and restated the Company's financial records for 1992.
The Auditor did audit the Company's financial records for fiscal year 1999
and assisted the Company in the preparation of the Company's Annual Report
on Form 10-KSB and 10-KSB/A.
A representative(s) of EKSH may be available at the Annual
Meeting to respond to any questions and make a statement.
The principal accountants' report on the financial statements of
the fiscal year 1999 contained no adverse opinions, nor was qualified
as to uncertainty, audit scope, or accounting principles.
OTHER BUSINESS AT THE NEXT ANNUAL MEETING OF SHAREHOLDERS
Any shareholder of record of the Company who desires to submit a
proper proposal for inclusion in the Proxy materials relating to the
next Annual Meeting of Shareholders must do so in writing and
according to the Company's By Laws. Pursuant to the By Laws of the
Company, for any matter (other than proposals made by Management) to
be properly brought before the 2000 Annual Meeting of Shareholders by
a Shareholder, the other matter must be a proper subject for
stockholder action. The stockholder proposing to bring such other
matter must be entitled to vote at the 2000 Annual Meeting of
Shareholders and must deliver written notice describing such other
matter, which written notice must be received by the Secretary of the
Company, at the Company's principal office in Denver, Colorado on or
before March 31, 2000.
ANNUAL REPORT
The financial audit of the Company has been completed and is
incorporated herein by reference.
AVAILABILITY OF ANNUAL REPORT ON FORM 10-KSB\A
UPON WRITTEN REQUEST, THE COMPANY WILL PROVIDE, WITHOUT A CHARGE, A
COPY OF ITS ANNUAL REPORT ON FORM 10-KSB\A FOR THE FISCAL YEAR ENDED
MARCH 31, 1999, TO EACH SHAREHOLDER OF RECORD OR TO EACH SHAREHOLDER
WHO OWNED COMMON STOCK OF THE COMPANY LISTED IN THE NAME OF BANK OR
BROKER, AS NOMINEE, AT THE CLOSE OF BUSINESS ON OCTOBER 29 1999. ANY
REQUEST BY A SHAREHOLDER FOR THE COMPANY'S ANNUAL REPORT ON FORM
10-KSB\A SHOULD BE MAILED TO THE COMPANY'S SECRETARY, TV
COMMUNICATIONS NETWORK, INC., 10020 EAST GIRARD AVENUE, SUITE 300,
DENVER, CO 80231.
The above Notice of Annual Meeting of Shareholders and Proxy Statement
are sent by order of the Board of Directors.
___________________________ _
Kenneth D. Roznoy, Secretary
Denver, Colorado
October 12, 1999
PRELIMINARY PROXY MATERIAL
TV COMMUNICATIONS NETWORK, INC
Proxy Solicited on Behalf of the Board of Directors for its Annual Meeting
of Shareholders
The undersigned hereby appoint Omar A. Duwaik, Armand DePizzol, and Kenneth
D. Roznoy, or any of them, with the power of substitution, as proxies to
vote all shares of the Common Stock of the Company owned by the undersigned
at the Annual meeting of the Stockholders to be held at 10020 East Girard
Avenue, Suite 300, Denver, Colorado 80231, on November 19, 1999, or to any
adjournment thereof, on such business as may property come before the
meeting, including the following items as set forth in the Notice of Annual
Meeting of Stockholders and Proxy Statement:
(1) To elect the following three (3) Directors:
Omar A. Duwaik ??For ??Against ??Abstain
Armand DePizzol ??For ??Against ??Abstain
Kenneth D. Roznoy ??For ??Against ??Abstain
(2) To ratify management's decision to sell the office building in Denver
for $1.2 million.
??For ??Against ??Abstain
(3) To ratify management's decision to sell the warehouse building in Detroit
for $200,000.00.
??For ??Against ??Abstain
(4) To ratify management's decision to sell Planet Internet Corp. to BeWell
Net for a gross sale price of $1,746,515 payable in private common stock of
BeWell Net, a private company.
??For ??Against ??Abstain
(5) To ratify the Management decision to retain the services of the auditing
firm of Ehrhardt Keefe Steiner & Hottman PC or any other auditing firm
management so chooses.
??For ??Against ??Abstain
Please date, sign, and mail in the enclosed envelope.
This proxy, when properly executed, will be voted in the manner directed by the
undersigned stockholder. If no direction is made, this proxy will be voted for
proposals 1 through 5. It is revocable at any time before it is exercised.
Number of shares: ____________________ Date: __________________________________
Please Print
Signature: __________________________ Name and Title: _________________________
Please Print
Signature: __________________________ Name and Title: _________________________
Address:_______________________________________________________________________
Instructions: Where there is more than one owner, each should sign. When
signing as an attorney, administrator, executor, guardian, or trustee, please
add your title as such. If executed by a corporation, the proxy should be
signed by a duly authorized officer.
<PAGE>
PRELIMINARY PROXY MATERIAL
ANNUAL REPORT
For Fiscal Year ended 3-31-99
October 12, 1999
Dear Shareholders,
On behalf of TV Communications Network, Inc., ("TVCN" or "Company") and its
employees, I would like to take this opportunity to welcome you and report
TVCN's progress.
Last year was a remarkable year. Two major developments took place that are
expected to have major impact upon the Company and its potential growth. The
first one was in the Wireless Cable TV ("WCTV") industry, while the other one
is concerning the Company's gas-to-liquid ("GTL") proposed project in
Trinidad and Tobago in Latin America.
Until October, 1998, the WCTV stations have been limited to a one-way
transmission: broadcasting cable TV programming over the air to potential
subscribers. However, in October, 1998, the FCC changed its rules such that
it allowed the use of the WCTV channels for two-way communications. Using
the Concept of "cellular phone" or "cellular communications", the WCTV
frequencies can now be used for two way communications connecting customers
directly with long-distance telephone networks, circumventing local telephone
lines.
As a result, long-distance telecommunications companies such as Sprint and
MCI Worldcom began to acquire WCTV companies. During 1999, it has been
reported that Sprint and MCI have acquired most of the large WCTV companies
in the USA, paying a total of about 1.84 billion. This is translated to a
rate of about $54.0 per household.
Based upon the foregoing, the Company believes that this is an opportune time
to sell the Company's WCTV stations, licenses and rights and interest in its
BTA's. The Company has approximately 1.1 million households in its markets.
The Company has commenced discussions with Sprint, MCI and others about the
possibility of selling the Company's WCTV assets. It is impossible to
predict as to the outcome of such discussions, or the amount that may be
generated, if any, from the possible sale of such assets. Based on the
company's experience in selling WCTV stations, and current market conditions,
the company's WCTV assets may be worth as much as $55 million. However,
there is no assurance that the Company will succeed in selling any of its
WCTV assets.
While the Company is holding discussions with various different potential
buyers about the possibility of selling WCTV stations, the Company will
continue its attempt to obtain the necessary financing to acquire additional
WCTV stations, licenses, channels and BTAs. It is believed that any such
additional acquisition will help increase the value of the WCTV assets, and
strengthen our negotiating position.
As to the Company's proposed GTL plant in Trinidad, the Company has been
negotiating with the government of Trinidad since 1995. In 1997, the Company
signed a Memorandum of Understanding with the government to negotiate the
details of a definitive agreement for the construction of the world's first
commercial GTL plant in Trinidad. It was the hope then that the long-sought
definitive agreement would be signed with the gas producing country within
the following few months.
The Company has been negotiating similar proposals with several gas producing
countries around the world for many years. Similar to the negotiations with
those countries, the negotiations with the government of Trinidad went on and
on for many months. Finally, in June 1999, an agreement was signed detailing
the responsibilities of the Company and the government for the construction
and operation of the proposed GTL plant in Trinidad.
The Company intends to focus its future activities on the gas project. The
proposed GTL plant in Trinidad is expected to cost the Company about $300
million. The company is discussing with various financial institutions
obtaining the necessary financing for the plant. The Company is also
discussing with different entities the possibility of entering into a
partnership agreement for the purpose of financing and implementing the
proposed GTL plant. There is no assurance that the Company will succeed in
obtaining the necessary financing or enter into a partnership agreement
with any entity.
If the Company is successful in selling any of its WCTV assets, or in
obtaining the GTL project financing, of which there can be no assurance,
it is anticipated that the proceeds from said sale or financing will be
sufficient to fund the Company's activities and meet the Company's
obligations over the next several years.
In the meantime, the Company has sold its wholly-owned subsidiary, Planet
Internet, for a net selling price of about $1.5 million which was received in
the form of private shares of common stock of a privately held BeWell Net
Corp. Planet was operating at more than $40,000 per month negative cash
flow. Previously, the Company sold one of its residential lots for $630,000.
Additionally, the Company sold its executive office building in Denver for
$1.2 million, and its warehouse building in Detroit for $200,000, subject to
shareholders' ratification vote.
With the reduction in the Company's expenditures, and streamlining its
operations, the proceeds from the sale of its residential land, the Detroit
warehouse and office building should be sufficient to meet its current
obligations and fund the Company's activities. The Additional Detroit Note
receivable in the approximate amount of $2.4 million is due December 30, 2000.
In the Event that the Company is not successful in selling any of its WCTV
assets, or obtaining the necessary GTL financing, or that the proceeds from
the sale of other assets are not adequate to meet the Company's current
obligations or fund its activities, then in that event the Company will
consider selling its $2.4 million receivable note at a discount.
We feel optimistic that the Company is well on its way of achieving its long
term goals.
Omar Duwaik
President & CEO
This Report does not purport that the securities and exchange commission
("SEC") has approved or disapproved any of this Report or passed upon its
accuracy or adequacy.
This Report is a summary of information about the Company and its operations.
For more details, see the Company's report on Form 10-KSB/A for the fiscal
year ended March 31, 1999.
Forward Looking Statements
Certain oral and written statements of management of the Company included in
this Report and elsewhere 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, GTL Technology based on TVCN's GTL process,
anticipated capital and operating costs of GTL plants, signing a definitive
agreement, obtaining required financing for such plants, the continued
development of TVCN's GTL process and the projected economic use of GTL
plants. In addition, these statements include but are not limited to such
words as "intent", "believe", "estimate", "choice", "projection",
"potential", "expect", "should", "might", "could" 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. Actual results may differ substantially from these
statements. In particular the assumptions assume the collectability of the
note receivable from the sale of cable operations, the ability to sign a
definitive agreement, obtain required financing, construct and successfully
operate commercial GTL plants, and produce a salable product from the
proposed GTL plant, and the ability to successfully develop the BTAs and
markets, 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 can or will ever be achieved.
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. Since then, the Company has been a diversified holding enterprise
with operations in gas and oil refining; WCTV; Internet; mining; auto salvage
and wireless communications. However the company recently sold its Internet
operations, and is considering the sale of other operations in order to focus
on its gas and oil business.
Wireless Cable TV ("WCTV") Operations
The WCTV industry was created in 1983 when the Federal Communications
Commission ("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 excess ITFS
channel capacity to commercial entities for commercial use. A television
station that employs MMDS, MDS, OFS and/or ITFS 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 are expensive, 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
standard television sets.
The FCC Spectrum Auction
Until November, 1995, the FCC used to grant licenses in the WCTV frequency
spectrum to qualified applicants on a first-come first-served basis. From
November 13, 1995 to March 28, 1996 the FCC conducted an auction of the
frequency 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 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. The development is dependent on
the Company's ability to obtain substantial capital resources. There is no
assurance that the Company will obtain sufficient financing to develop such
stations. In the meantime, the Company will attempt to sell its rights and
interest in the BTAs, of which there can be no assurance of success.
Wireless Cable Stations
Salina, Kansas. TVCN is currently operating a wireless cable TV ("WCTV")
system in Salina. The system broadcasts on 19 channels to a base of 447
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.
The number of subscribers remain limited because of the limited number of TV
channels. With only 19 TV channels, the Company has been unable to compete
effectively against conventional cable TV operators. Through an agreement
with Heartland Communications, which agreement is awaiting FCC approval, the
Company hopes to increase the number of TV channels to as much as 33.
Mobile, Alabama. The Company's 4-TV channel station (E1, E2, E3, E4) in
Mobile, Alabama was leased to Mobile Wireless TV, Inc. ("Mobile Wireless")
pursuant to a lease agreement dated May 9, 1994. The lease was for an
initial period of five years at the greater of $2,000.00 per month, 0.50 per
month per subscriber or 2.0% of the gross monthly revenues of the station.
Mobile Wireless was hoping to lease many additional TV channels from other
licensees in order to offer a reasonable alternative to conventional cable TV
in Mobile. However, Mobile Wireless was able to lease/buy only seven more
channels in addition to the Company's four channels. With only 11 TV
channels, Mobile was unable to mount a viable commercial wireless cable TV
system that could compete adequately against cable TV systems. The revenues
of the station remained limited, and the maximum monthly transmission fees
received by the Company was $2,000.00 during the last five years. The lease
expired in May, 1999. Mobile Wireless expressed its interest to renew the
lease for five more years under the same terms and conditions. The Company
declined to enter into a long term lease because of its desire to sell its
rights and interest in the station. However, the Company agreed to lease the
station on a month-to-month basis at the rate of $1,200.00 per month. The
Company is considering the sale of its assets in this Mobile market.
San Luis Obispo, California. The Company owns a 4-TV channel station (E1,
E2, E3, E4) in San Luis Obispo, California ("SLO") which was leased to
Wireless Telecommunications, Inc. ("WTCI") in 1995. In January, 1996, WTCI
defaulted on its payments to the Company. The Company repossessed the
station in June 1996 and has been operating it since that time. As part of
the settlement with WTCI, TVCN agreed to purchase the Basic Trading Area
("BTA") of SLO from WTCI. In exchange, WTCI conveyed and transferred all of
its assets and interest in SLO BTA to TVCN. See "The FCC Spectrum Auction",
herein. The purchase price for the BTA was $452,168. Of this amount $90,000
was paid in cash, and $362,168 was paid in the form of the Company's
assumption of an obligation in that amount payable to the FCC over 10 years,
with interest only payments for the first two years and principal and
interest payments for the final eight years. The FCC approved the transfer
of the BTA on May 23, 1997. Since the Company needed more TV channels to be
competitive, the Company acquired from non-affiliated entities, the three H-
Group licenses (H1, H2, and H3) for $20,000.00. The FCC approved the
acquisition. Currently, the Company is broadcasting on seven channels (3 H-
Group and 4 E-Group channels) to 59 subscribers. As the new owner of the
BTA, the Company applied for the 4 F-Group channels (F1, F2, F3, and F4) and
for the two channels MDS1 and MDS2. The FCC approved the Company's
applications for the last six channels. The Company has not yet constructed
the transmission facilities for said six additional channels. The Company has
until August, 2001 to complete such construction. The construction of those
six channels would expand the station capacity to 13 channels, which is still
not commercially viable to compete against conventional cable TV systems.
The Company is negotiating with other licensees in SLO for the purpose of
leasing additional channels. In the meantime, the Company is considering
selling all of its assets in this SLO market.
Other stations. The Company owns 4-TV channel stations in each of Hays,
Kansas; Woodward, Oklahoma; and Quincy, Illinois. In cooperation with its
affiliate, Multichannel Distribution of America, Inc. (MDA) the Company has
constructed four-channel stations in Myrtle Beach, South Carolina; Rome,
Georgia; and Scottsbluff, Nebraska. MDA is owned and controlled by TVCN's
president. The Quincy station is involved in a three-way transaction. The
Company acquired the station from its affiliate MDA and entered into an
agreement with Heartland Communications to transfer and assign its rights and
interest in the Quincy station to Heartland in exchange for transferring
certain of Heartland's rights and interest in its BTA in Salina, Kansas to
the Company. The agreement with Heartland is awaiting a final approval from
the FCC (see the discussion under "Quincy, Illinois and Salina, Kansas"
herein). The Woodward station is being leased to Heartland for $500.00 per
month for a period of two years expiring April 2001. The Company's stations
in Myrtle Beach and Scottsbluff have not been placed in commercial
operations, nor are they the subject of any lease because no reasonable lease
has been offered. Because of the limited number of channels (4-channel each)
of these stations, the Company has no immediate plans to place such two
stations into commercial operations. The Company is considering the sale of
these and other stations.
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. In order to increase the
channel capacity of the stations, the Company purchased the F Group lease and
station equipment from American Telecasting, Inc. for $200,000. The lease is
for $750.00 per month for five years, renewable every five years thereafter
at the Company's option.
Purchase/Sale of WCTV Stations
In 1991, the Company, together with its affiliate MDA, Inc., made a
successful bid in the U.S. Bankruptcy Court in New York to purchase the WCTV
station in Washington, D.C., and the WCTV station in Detroit, Michigan. MDA
is substantially owned and controlled by TVCN's president. The two acquired
WCTV stations were owned by Microband Companies, Inc. which were under
bankruptcy proceedings. The purchase price for the two stations was
$6,264,000.00 of which the amount of $4,864,000 was paid in the form of
issuing to Microband 4,864,000 shares of TVCN's Class D, preferred stock, and
the remaining balance of $1,400,000 was paid in cash and a short term note.
A few months later, MDA purchased from Microband Companies the foregoing
4,864,000 preferred shares for a cash payment of $152,000. The acquisition
cost of the two WCTV stations in Detroit and Washington, D.C. was initially
recorded on the Company's books at the purchase price of $6,264,000.
However, in the Company's 10-KSB of March 31, 1994 the recorded purchase
price of said two WCTV stations was adjusted to $1,552,000 instead of the
original $6,264,000. Subsequently, the two stations were sold for a total of
$13.5 million payable in cash and notes that carried an annual interest of
8.0% as follows:
The WCTV station in Washington, D.C., was sold in 1993 to Eastern Cable
Network Corp. ("ECNC") for $2,500,000.00 payable as follows: (1) a non-
refundable deposit of $50,000.00; (2) payment upon closing of $550,000.00;
(3) payment of $600,000.00 six months after Closing; and (4) balance of $1.3
million dollars under a promissory note at eight percent (8%) interest
payable in sixteen (16) equal quarterly installments, commencing November 22,
1994, secured by a lien upon the entire System.
In 1994, the Company also sold the foregoing WCTV station in Detroit,
Michigan to Eastern Cable Networks of Michigan, Inc. ("ECNM"), a subsidiary
of 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
PCTV's assumption of the note secured by the Detroit station. In return,
ECNC and PCTV paid the Company $614,120 in cash; PCTV assumed the Original
Detroit Note; and one of PCTV's 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, 1999, all payments under the Washington
station sale, and the original Detroit Note have been received, and the
remaining balance in the amount of $2,448,957.50, as required under the
Additional Detroit Note is due to the Company by December 30, 2000. The
Latter Note carries an annual interest of 9%, payable semiannually until the
Note is fully paid. All interest payments under this Additional Detroit Note
have been timely received. Recently, Sprint Corp. acquired PCTV.
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. As of March 31, 1999 all payments under the ATI note were
received. Recently, ATI was also acquired by Sprint.
Quincy, Illinois and Salina, Kansas
TVCN has been negotiating with Heartland over the Salina, KS BTA license
(which Heartland had won in the auction back in March of 1996 for $217,000).
On August 4, 1998, Heartland gave TVCN an acceptable offer, i.e., the two
companies would partition the BTA off so that TVCN would receive 40.6% of the
BTA that covers the central part, and Heartland would keep the 59.4%.
According to the offer, the two companies would share payments to the FCC in
those percentages. As a condition, TVCN had to transfer a 4 channel TV
license in another market to Heartland. To meet this condition, TVCN offered
Heartland TVCN's E-Group license in Hays, Kansas. Heartland rejected TVCN's
offer, but was willing to accept the transfer of the E-Group license in
Quincy, Illinois. But, TVCN did not own the Quincy license/station. The 4-
channel Quincy station and license were owned by MDA - Illinois which is a
wholly-owned subsidiary of Multichannel Distribution of America ("MDA") Inc.
MDA is substantially owned and controlled by TVCN's president.
The Salina partition is important for the commercial viability of the Salina
WCTV system and to its growth potential. The Salina system has been limited
to 19 TV channels, hardly adequate to compete against conventional cable TV
systems. Since Heartland is the FCC auction winner for the Salina BTA,
Heartland has the exclusivity over the remaining 14 TV channels in Salina.
Dividing the frequency spectrum in Salina, with 14 channels under Heartland's
control, and 19 channels under TVCN's control, severely limits the ability of
either Heartland or TVCN to independently develop the Salina market to its
growth potential.
Prior to the foregoing partition agreement, TVCN and Heartland had long
negotiations. At one time, Heartland offered to purchase the Salina 19-TV
channel system from TVCN for $750,000. TVCN rejected the offer and instead
asked for a purchase price of $2.1 million, which was rejected by Heartland.
Finally, the foregoing partition offer was made by Heartland, provided that
the Quincy station and license were made part of the deal.
The foregoing partition is favorable to TVCN. First, it allows TVCN to
assume only 40.6% of the remaining payments to the FCC, or the balance amount
of $59,909.36 payable in quarterly payments of $2,693.81 to the FCC over the
next 8 years. Second, the 40.6% of the BTA covers the vast majority of the
population in the Salina market. Third, it enables TVCN to obtain the
remaining 14 TV channels in Salina, which should increase the commercial
value of the Salina system and increase the likelihood of its development to
its growth potential.
However, before the partition agreement with Heartland could be concluded,
TVCN had to buy the Quincy station and license from MDA. Since Mr. Duwaik
owns and controls the majority of both TVCN and MDA, any business between the
two entities would not be an arm-length transaction. Mr. Horner, a former
TVCN's board director, and Mr. Roznoy, a current director of TVCN's board,
cooperated in evaluating the Quincy transaction without Mr. Duwaik's
involvement. Since the Quincy license was applied for by MDA in 1983, among
other factors, the documents concerning the actual cost associated with the
issuance of the License and construction of the Quincy station/license were
not readily available.
Based on cost of comparable stations' construction and licensing, and market
values, the Quincy station and license were evaluated at $425,373 for which
TVCN offered to issue, and Mr. Duwaik agreed to receive restricted shares of
TVCN common stock. An evaluation of the common stock of TVCN had been
conducted by an independent appraiser (Houlihan Valuation Advisors of Denver,
Colorado). Based on such factors as similarly situated companies, book
value, thinly traded stock, pink-sheet listing limitation, TVCN's liability,
cash flow and liquidity, etc., the appraiser determined that the restricted
shares of TVCN common stock in such a transaction would be worth $0.05 per
share. Accordingly, TVCN issued 8,507,460 shares of its restricted common
stock to MDA (at the rate of $0.05/sh) for the acquisition of MDA's Quincy
station and license. Since Mr. Duwaik is already in control of both TVCN and
MDA, no change in control is affected.
The Quincy transaction was submitted to and approved by a vote of the
majority of shareholders of TVCN during the 1998 Annual Meeting of TVCN's
shareholders. The majority of the votes counted, excluding those of Mr.
Duwaik's, were also in favor of the transaction.
As a result, the partition agreement was submitted to the FCC in December
1998. It went on public notice on May 26, 1999. The Company is awaiting final
FCC approval, which is totally unpredictable, and can take between two months
and two years.
Rome, GA
On June 18, 1997, TVCN concluded the sale of its 4-channel E-Group station in
Rome, GA ("Rome Station") to Bell South for $2,000,000.00 in cash.
Previously, TVCN had acquired the Rome Station from MDA, Inc. through the
acquisition of all outstanding shares of its wholly owned subsidiary MDA of
Georgia. MDA, Inc. is owned and controlled by TVCN's president. In exchange
for the acquisition of the Rome Station, TVCN issued 17,953,321 restricted
shares of TVCN's common stock to MDA. The number of shares issued in the
transaction was derived by averaging the high bid price of TVCN's stock at
the close on each of the previous four Fridays, which were $0.14, $0.13,
$0.15 and $0.15, as reported by the National Quotation Bureau. The average
of those high bids was $0.1425 per share. Since the shares issued by TVCN
are restricted shares, and TVCN historically discounted restricted shares by
20%, the stock price used in the transaction was adjusted to $0.114 per
share. The $2.0 million was then divided by $0.114. The resulting number was
the 17,953,321 restricted shares. The transaction was approved by the
shareholders of TVCN during their annual meeting in 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 about 1,000 airtime customers, who are charged $12.95
or more per month. The stores have three employees. Since the Company is
attempting to focus on its gas project, the Company is considering the sale
of this pager business.
Auto Salvage and Parts Recycling Business
In November of 1998, TVCN entered into an agreement with JBA Wholesalers,
Inc. ("JBA") to acquire all of the issued and outstanding stock of JBA
Wholesalers, Inc. JBA owns an auto salvage and parts recycling business in
Calhoun, Georgia. The appraised market value of JBA at the time of the
transaction was $125,000. That was also the historical book value of JBA.
Omar Duwaik, the Company's president, had a 60 % private interest in JBA
prior to the transaction. The Board of Directors of the Company approved a
resolution for the Company to acquire the remaining 60% of the stock in JBA
to go along with the 40% which the Company already owned from an April 1998
transaction.
The Company issued 1,500,000 shares of restricted Common Stock to Omar Duwaik
based upon a share price of $.05 per share, which is the value per share
estimated by Houlihan Valuation Advisors in a report dated March 25, 1998.
The business maintains an inventory of used autos and parts to be sold to the
public in Calhoun, Georgia. The grounds and buildings are on a Lease Purchase
Agreement payment plan of $1,500 per month. The last payment is due in March
of 2006, at which time the property and buildings will be conveyed to JBA for
$1.
The business has 3 employees. Because of the Company's attempt to focus on
its gas project, the Company is considering the sale of JBA.
Mining Business
The Company invested in two mines, but neither was ever brought into
commercial operation. After considerable development losses, the Company has
decided not to make any further mining investment, and to discontinue the
mining operations. The Company has no current commercially viable mining
operations, and that the mining activities are considered "discontinued
operations." The Company filed a law suit against the previous owner of the
mines in an attempt to recover any of its losses.
Internet Business Opportunities
On February 16, 1996 the Company incorporated its wholly-owned subsidiary,
Planet Internet Corp. as an Internet Service Provider (ISP). Planet Internet
provided internet service to subscribers. By March 31, 1999, Planet had 836
subscribers. On May 18, 1999, the Company signed an agreement to sell Planet
to BeWell Net Corp., another ISP. The net sale price was $1,508,640 payable
in common stock of BeWell Net at the rate of $5.00 per share. Accordingly,
the Company received 301,728 shares of the common stock of BeWell Net. As
part of the sale, the Company has allocated 80,000 shares for distribution to
various employees as performance bonuses. None of the officers or directors
of the Company received any of said stock other than Kenneth Roznoy who
received 5,000 shares of said stock. BeWell Net is a private company and has
no public trading market for its stock. As of March 31, 1999, Planet had a
negative monthly cash flow of more than $40,000, liabilities of approximately
$283,000 and assets of $282,000. In connection with the sale, the entire
assets will be transferred to BeWell Net, and about $230,000 of the
liabilities will be transferred to and assumed by BeWell Net.
InterOmni Services - The InterOmni Wallet
TVCN had incorporated a wholly-owned subsidiary, InterOmni Services, Inc., in
order to develop the InterOmni Wallet, a digital profile that tracks and
records information about individuals. The Company attempted to sell
InterOmni, but the sale, did not go through. The Company has ceased any
further development in InterOmni, and considers it discontinued.
Reema International Corp.
In 1993, the Company incorporated a wholly-owned subsidiary under the name
Reema International Corporation ("Reema") for the purpose of evaluating and
developing a gas-to-liquid ("GTL") process. The GTL process converts natural
gas into finished products such as diesel, jet fuels and other specialty
products. Additionally, Reema began to negotiate with various gas producing
countries around the world the possibility of constructing and operating
commercial GTL plants at gas fields.
As of this date, Reema's activities have been limited to the research and
development of the GTL technology, and the negotiations with various
governments of gas producing countries. Reema has generated no revenues from
these activities, nor does it expect to generate any revenues any time soon,
and does not have any GTL plants under operation or construction. Reema is
simply negotiating with various entities the possibility of constructing its
first GTL plant, of which there can be no assurance of success.
As a wholly-owned subsidiary, Reema is under the control of the Company's
management. The company's president also is Reema's president. Glen Clark,
who manages Reema's day to day activities, is Vice President for Reema. Mr.
Clark is not involved in the decision-making process for the Company or
Reema. Prior to joining Reema in 1993 Mr. Clark had some 40 years broad-
management experience in chemical plants in such industries as LNG,
regasification, amonia, fertilizer, methanol, cogeneration, carbon dioxide,
catalytical cracking, refinery and other related process industries. Mr.
Clark has a BS degree in Chemical Engineering from Pennsylvania State, and an
MBA from NYSU.
Memorandum of Understanding
After years of negotiations, Reema and the government of Trinidad and Tobago
signed in December, 1997 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. On June 11, 1999, The National Gas Company of Trinidad and Tobago,
Ltd. (a government agency) and Reema International Corporation signed a "Term
Sheet For Supply of Natural Gas Agreement". The Agreement sets forth the
terms and conditions for a definitive agreement, and the obligations of both
parties that must be satisfied before the signing of a definitive agreement.
No assurance can be given that the definitive agreement will be executed. If
an when the proposed plant is constructed successfully, of which there can be
no assurance, the natural gas will be converted into approximately 10,000
barrels per day (bpd) of 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 discussing various
financing options with financial institutions and interested parties, of
which there can be no assurance of success.
GTL Plant
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. 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 2,500 bpd GTL plant. The
initial focus was on the production of the high-value wax. It is believed
that Sasol is now working on the production of transportation fuels, but no
information is currently available on such work.
It wasn't until 1993 that Shell built the first commercial GTL plant in
Malaysia. However, the Shell plant reportedly focused on the production of
high-value products such as solvents, detergents, lubricants and wax, instead
of transportation fuels. The capital cost of the Shell plant reportedly was
in excess of $850 Million, and the production capacity was 12,500 bpd. A
recent fire destroyed part of the plant, and 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.
GTL Competition
While the GTL technology is at its infancy, the competition in this new
emerging technology and industry is expected to be intense. The Company does
not expect the competition to adversely affect the implementation of the
first GTL project in Trinidad. But, in its attempt to negotiate similar
agreements with other gas producing countries around the world, the Company
will be competing against giant companies such as Exxon, Shell and others
which have vastly greater resources and capabilities. Even with the success
of constructing the first GTL plant in Trinidad, the Company will be facing
extremely tough competition for constructing additional GTL plants. There is
no assurance that the Company will be able to succeed in constructing any GTL
plant.
Premium Quality of GTL Produced Products
It is frequently reported 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. The recent announcement in California regarding
the danger of diesel produced from crude oil underscores the significance of
the GTL process. On August 27, 1998, UPI reported that "California has
become the first state to declare that soot emitted in diesel exhaust is a
cancer threat that requires new controls. "On August 28, 1999, the Rocky
Mountain News reported eleven members of the California Air Resources Board
("ARB") "voted unanimously to declare 40 chemicals found in (crude oil-
derived) diesel exhaust as toxic air pollutants."
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 an ever-increasing
stringent pollution standard requirements.
Employees
As of March 31, 1999, the Company had 19 employees. None of the Company's
employees are the subject of a collective bargaining agreement. The company
believes that relations with its employees are good.
Capital
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 as well as continued asset
sales. There is no certainty that the Company will be able to obtain all
required financing.
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
$566,579. The Company's WCTV facilities are, in the opinion of management,
suitable and adequate by industry standards. Except the office building
mortgage, and the internet equipment, all equipment and assets are not
subject to any lease or encumbrance. Subsequent to March 31, 1999, the
Company sold its subsidiary, Planet Internet, to BeWell Net, and assigned and
transferred the internet equipment lease and certain liabilities in the
approximate amount of $230,000 to BeWell Net.
The Company owns its executive offices in Denver, Colorado. The office
building has an outstanding mortgage with a balloon payment due in July of
2000. The mortgage balance at year-end was $481,783. In July of 1999, the
Company accepted an offer for sale of the building subject to closing. The
contracted sale price is $1,200,000.00. The net book value of the building
is $896,208.00. If the sale is successfully completed, of which there can be
no assurance, the net sale proceeds are expected to be about $1.135 million,
which will result in a gain of about $240,000.00. Under the terms of the
sale agreement, the Company will enter into a three year lease for the rental
of its' executive offices of approximately 3,600 square feet at the rate of
$3,625.00/month.
The Company also owns a warehouse in Detroit, MI not subject to any mortgage.
This warehouse was leased to PCTV at the rate of $4,000 per month until March
1999. In July 1999, the Company accepted an offer for sale of the warehouse
and associated land subject to closing. The net book value at year-end of
the building and land was $158,379. The net selling price is about $180,000,
which will result in a gain of about $22,000.00.
The Company owns undeveloped acreage on two lots in Cherry Hills Village,
Colorado not subject to any mortgages. The book value of these lots at year-
end was $633,113. Both lots have been listed for sale. On April 15, 1999,
one of the lots was sold for $630,000 (See Note 16 - to the Company's audited
consolidated financial statements).
The Company also owns undeveloped acreage in Jefferson County, Colorado not
subject to any mortgages. The acreage has also been listed for sale for $1.1
million.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock has traded on the over the counter market ("OTC")
since January 11, 1988. As of March 31, 1999, there were eleven 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:
Quarter High Bid Per Low Ask Per
Ending Share Share
3/31/98 .17 .19
6/30/98 .39 .41
9/30/98 .47 .56
12/31/98 .19 .24
3/31/99 .16 .19
The above quotations reflect inter-dealer prices, without retail mark-up,
markdown, or commission and may not necessarily represent actual
transactions.
As of March 31, 1999, there were 1,715 record holders of the Company's common
stock.
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.
Description of Securities
As of March 31, 1999 there were 50,835,954 shares of common stock
outstanding. No other classes of stock of the Company were issued and
outstanding as of March 31, 1999. All previous classes of preferred stock of
the Company had been converted to common stock as of March 31, 1999. For
more information see "Description of Securities" in the Company's 10-KSB/A of
March 31, 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The operating revenue for 1999 was $1,035,000 compared to $1,202,000 in 1998,
a decrease of $167,000. The decrease is due to lower interest income of
$218,000 in 1999. Other income was less by $13,000 in 1999. Lease income,
management fees, operations revenue and wireless revenue increased by $64,000
in 1999.
Total operating expenses were $3,913,000 in 1999 compared to $5,053,000 in
1998, a decrease of $1,141,000. The decrease is due to a substantial
reduction in litigation expenses, downsizing personnel, streamlining
operations and reduction in general and administrative expenses. For
example, litigation settlement expenses were $117,000 in 1999 compared to
$1,286,000 in 1998, a decrease of $1,169,000. General and administrative
expenses were $2,698,000 in 1999 compared to $2,995,000 in 1998, a decrease
of $297,000. Depreciation and amortization expenses were $812,000 in 1999
compared to $618,000, an increase of $194,000, due to the timing and useful
life assigned to the WCTV assets. Interest expense was $286,000 in 1999
compared to $154,000 in 1998, an increase of $132,000, due to an increase in
the BTAs' interest expense.
The loss from operations in 1999 was $2,878,000 compared to a loss of
$3,851,000 in 1998, a decrease of $973,000, due largely to reduced operating
expenses. Non-operating gains, primarily from the sale of cable operations
and licenses, in 1999 were $1,320,000 compared to $4,257,000 in 1998, a
decrease of $2,937,000. There were more sales of cable operations and
licenses posted in 1998 than 1999. The net loss for 1999 was $1,076,000
million compared to a loss of $571,000 in 1998. This is due to the fact that
there were more non-operating gains in 1998 than 1999.
The foregoing operating revenues do not include the revenues that are
generated from the activities of buying and selling WCTV stations. For
example, the buying/selling of WCTV station activities resulted in a gain of
$1,020,388 in fiscal year 1999 as compared to gains of $4,257,409;
$2,343,043; $3,589,919; $2,813,017 and $3,980,847 in fiscal years 1998, 1997,
1996, 1995 and 1994 respectively. Thus, the total revenues for fiscal year
1999 are $2,054,961 as compared to $5,459,238 a year earlier. Income tax
benefits generated were $554,227 and $1,234,816 in 1999 and 1998,
respectively.
The Company maintains accounting records for TVCN, and each of its
subsidiaries. Schedule F-23, which follows, reflects the results of
operations for the years 1999 and 1998. The salvage yard was consolidated
into the Company's operations in 1999. Expenses exceeded revenue by $110,000
and the operating loss was $80,000. Reema's natural gas fuel conversion
expenditures were less by $1,163,000 in 1999 than in 1998 due to streamline
operations and less travel expenses. Legal expenses were less in 1999 than
1998 and included legal settlement income of $300,000 in 1999. Mining and
exploration expenditures were $1,163,000 less in 1999 than 1998. The mining
activities have been shutdown and are now considered as discontinued
operations. Planet Internet's access service provider business, which was
sold after year-end, had increased revenue of $25,000 and increased expenses
of $93,000, resulting in an increase loss of $67,000 in 1999. Corporate and
other segment expenses decreased by $1,223,000 in 1999. Headcount reductions,
less travel expenditures and lower legal expenses were the primary reasons
for the reductions in 1999.
While revenues from the gas project are not expected to materialize for at
least three years, the Company intends to manage the proceeds from the sale
of assets such that the Company anticipates no difficulty in maintaining its
existence, meeting its obligations for years to come, and funding its
activities.
Liquidity and Capital Resources
The Company's primary source of liquidity has been from the sale of
appreciated assets. 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, 1999, and
1998, are summarized as follows:
Cash provided by March 31,
(used in) 1999 1998
Operations $(1,049,013) $ (1,315,000)
Investing
activities $ 639,921 $ 2,167,185
Financing
activities $ 18,887 $ (490,808)
Net increase
(decrease) $ (390,025) $ 361,377
Currently, the Company has $1,798,121 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 BTA license from WTCI of Pennsylvania.
The office building is under sale contract.
The Company's current assets and liabilities are $887,393 and $1,616,368
respectively. The Company's cash position is such that management
anticipates no difficulty in its ability to sell appreciated assets to
continue meeting its current obligations.
Cash Investments
The president and a shareholder have advanced loans to the Company totaling
$1,100,334.
Stockholder Advances
The president has been advancing loans to the Company since its inception.
The loans carry an annual interest of 8%. The advances are long-term loans,
and are expected to be paid back at such time when the Company has sufficient
funds to do so. As of March 31, 1999, the loans totaled $1,100,334.
Interest expense on shareholder's advances totaled $68,464 in 1999, and
$77,956 in 1998. Currently, the Company has no intentions of repaying such
loans within the next twelve months.
Selected Financial Data
1999 1998 1997 1996 1995
Year ended
March 31,
Revenues $ 1,034,573 $1,201,829 $ 1,146,144 $ 1,195,368 $ 4,503,078
Net income
(loss) $(1,075,848) $ (571,143) $ (959,079) $ 512,387 $ 777,439
Per share:
Net income
(loss) (.03) (.02) (.05) .03 .04
Total
assets $ 9,907,925 $11,012,467 $12,419,656 $15,287,790 $14,168,587
Plant and
equipment,
net $ 3,252,830 $ 3,579,109 $ 3,265,350 $ 2,543,499 $ 2,064,733
Current
assets $ 887,393 $ 2,071,619 $ 7,136,684 $ 6,560,906 $ 8,785,659
Total
liabilities $ 6,858,322 $ 7,079,069 $ 7,700,974 $ 9,610,028 $ 9,003,212
Long-term
Debt $ 1,798,121 $ 2,173,678 $ 1,518,165 $ 1,510,240 $ 512,560
Capitalization
The capitalization of the Company as of March 31, 1999 is as set forth in the
following table and as more detailed in the attached audited financial
statement:
Stockholders equity (deficit)
March 31
- -----------------------------------------------------------------------------
Description 1999 1998 1997 1996
Common stock $ 25,418 $ 20,197 $ 9,016 $ 9,016
Preferred stock $ 28,813 $ 28,813 $ 960,813 $ 960,813
Additional paid-in
capital $ 7,468,721 $ 7,281,889 $ 6,575,211 $ 6,575,211
Deficit accumulated $(4,473,349) $(3,397,501) $ (2,826,358) $(1,867,279)
Total stockholders
equity ----------------------------------------------------------
$ 3,049,603 $ 3,933,398 $ 4,718,682 $ 5,677,761
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth the name, salary and business experience for the
last five years of the directors and executive officers of TVCN as of March
31, 1999. Unless otherwise noted, the positions described are positions with
the Company or its subsidiaries.
Name Salary Position Period Served
Omar A. Duwaik(1) $ 91,720 Chairman of the 1987 to
Board, Chief present
Executive Officer
and President (1)
Armand DePizzol -0- Director 1989 to
present
Kenneth D. Roznoy $ 29,250 Vice President, 1998 to
Secretary present
Director (2)
(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 until sold in May, 1999).
(2) Mr. Kenneth Roznoy also serves in the same capacities in the Company's
wholly owned subsidiaries.
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. The Board of
Directors appoints officers of the Company. Omar Duwaik and Kenneth Roznoy
are employed by the Company on a full-time basis. Omar Duwaik should be
considered a founder and parent of the Company (as such terms are defined by
the Securities Act of 1933).
Omar Duwaik has been the President, CEO and Director of TVCN since its
inception in 1987. Mr. Duwaik has been involved in the telecommunications,
aerospace and electronic industries for the past 21 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, the FCC granted about forty more
conditional licenses. 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 BS
Degree in Electrical Engineering, a BS Degree in Computer Science and an MS
Degree in Electrical Engineering Communications from Oregon State University
in 1971. Mr. Duwaik owns and controls 23,354,223 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. In total, Mr. Duwaik owns and controls
47,150,348 or 92.8% of the Company's common stock. Mr. Duwaik is employed on
a full-time basis with the Company and is compensated at an annual salary of
$91,720 of which $54,079 are paid in cash and the remaining balance is
deferred until such time as the Company has more funds.
Kenneth D. Roznoy - Vice President, Assistant Secretary and Director. Mr.
Roznoy returned to the Company on a free-lance basis in September of 1996 and
was re-hired on a full-time basis on February 9, 1997 as Vice President of
Business Development. During his two-year sabbatical he worked as a
consultant for Elitch Garden in Denver and CHILDRENS CABLE NETWORK in
Denver and Burbank, California. Mr. Roznoy served as a Director from 1989 -
October 1994. Prior to joining the Company in 1989, Mr. Roznoy had been
employed by American Technology and Information, Inc. ("AT&I") in Denver,
Colorado since January 1, 1987 as its Vice President and Public Relations
Director. From 1981 to 1987, Mr. Roznoy was working for KDR Productions
providing entertainment-related services for businesses and non-profit
organizations in Denver, Colorado. From 1978 to 1981, Mr. Roznoy worked for
Commonwealth Theaters in Denver,. Colorado and Dallas, Texas as Advertising
Director. At Mulberry Square Productions, in Dallas, Texas from 1975 to
1978, Mr. Roznoy helped promote "Benji" into an international movie star with
films and TV shows grossing in excess of $100 million. Mr. Roznoy is
employed on a full-time basis with the Company and is compensated at the
temporarily reduced rate of $29,250 a 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.
The following are audited financial statements as of March 31, 1999. For
additional information, see the Company's 10-KSB/A for the fiscal year ended
March 31, 1999.
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 1999
<PAGE>
Table of Contents
Page
Independent Auditors' Report ......................................... F - 1
Consolidated Financial Statements
Consolidated Balance Sheet.......................... F - 2
Consolidated Statements of Operations .............. F - 3
Consolidated Statements 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 and Stockholders
TV Communications Network, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheet of TV
Communications Network, Inc. as of March 31, 1999 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, 1999.
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, 1999 and the results of their
operations and their cash flows for each of the two years in the period ended
March 31, 1999 in conformity with generally accepted accounting principles.
Ehrhardt Keefe Steiner & Hottman PC
June 4, 1999
Denver, Colorado
F-1
<PAGE>
Consolidated Balance Sheet
March 31, 1999
Assets
Current assets
Cash and cash equivalents $ 462,157
Investments 27,200
Accounts receivable, net of allowance for
doubtful accounts of $39,950 28,850
Inventory 165,261
Current portion of notes receivable (Note 10) 1,300
Deferred income taxes (Note 9) 121,838
Other current assets 80,787
---------
Total current assets 887,393
Property and equipment - net (Note 4) 2,983,809
Property and equipment, net - discontinued operations (Note 4) 269,021
Other assets
Notes receivable (Note 10) 2,343,500
License agreements - net of accumulated
amortization of $1,049,442 1,396,945
(Note 6)
Deferred income taxes (Note 9) 1,875,443
Other assets 109,632
Reclamation bonds - discontinued operations (Note 10) 42,182
---------
Total other assets 9,020,532
---------
Total assets $ 9,907,925
===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 469,800
Accounts payable - discontinued operations 23,899
Accrued expenses (Note 5) 692,861
Current maturities of long-term debt (Note 6) 367,928
Current maturities of long-term debt - discontinued operations 37,500
(Note 14)
Subscriber deposits 24,379
---------
Total current liabilities 1,616,367
Long-term liabilities
Long-term debt (Note 6) 1,798,121
Long-term deferred gain (Note 10) 2,343,500
Advances from stockholder (Note 6) 1,100,334
---------
Total liabilities 6,858,322
---------
Commitments and contingencies (Notes 6, 7 and 8)
Stockholders' equity (Note 8)
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, 50,835,954 shares issued and outstanding 25,418
Additional paid-in capital 7,468,721
Accumulated deficit (4,473,349)
---------
Total stockholders' equity 3,049,603
---------
Total liabilities and stockholders' equity $ 9,907,925
===========
F-2
<PAGE>
Consolidated Statements of Operations
Years Ended
March 31,
------------------------------
1999 1998
--------- --------
Revenues (Note 13)
Lease income (Note 7) $ 757,614 $ 693,857
Interest income 275,405 493,521
Other revenue 1,554 14,451
--------- ---------
Total revenue 1,034,573 1,201,829
--------- ---------
Operating expenses
General and administrative 2,697,525 2,994,526
Litigation settlement expense (Note 7) 117,052 1,285,859
Depreciation and amortization 812,435 618,422
Interest expense 285,598 154,468
--------- ---------
Total expenses 3,912,610 5,053,275
--------- ---------
Operating loss (2,878,037) (3,851,446)
Lawsuit settlement 300,000 -
Gain on sale of cable operations (Note 9) 1,020,388 2,257,409
Gain on sale of licenses (Note 3) - 2,000,000
--------- ---------
(Loss) income before income taxes (1,557,649) 405,963
Income tax expense (benefit) (Note 9)
Current - 21,573
Deferred (529,602) 140,554
--------- --------
Net (loss) income from continuing
operations (1,028,047) 243,836
Discontinued operations (Note 14)
Loss from discontinued operations net of income tax benefit of
$24,625 and $419,837 for 1999 and 1998,
respectively (47,801) (814,979)
-------- ---------
Net loss $ (1,075,848) $ (571,143)
============= ============
Income (loss) per weighted average share of common stock
Basic from continuing operations $ (.02) $ .01
Basic from discontinued operations (.01) (.03)
------- ------
Total basic $ (.03) $ (.02)
======= =======
Diluted from continuing operations $ (.02) $ .01
Diluted from discontinued operations (.01) (.03)
------- ------
Total diluted $ (.03) $ (.02)
======= =======
Weighted average common shares
outstanding
Basic 41,119,281 36,841,656
========== ==========
Diluted 41,119,281 36,841,656
========== ==========
F-3
<PAGE>
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended March 31, 1999 and 1998
Preferred Stock Common Stock
-------------------------- --------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
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
Net loss for the year
ended March 31, 1999 - - - -
Acquisition of business
(Note 2) - - 1,500,000 750
Acquisition of business
(Note 2) - - 8,507,460 4,254
Stock repurchase adjustment
(Note 5) - - 433,151 217
------------ ------------- ------------ -----------
Balance at March 31,
1999 28,813 $ 28,813 50,835,954 $ 25,418
============ ============= ============ ===========
Additional
Paid-In Accumulated
Capital (Deficit) Total
------------- -------------- ------------
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
Net loss for the year ended
March 31, 1999 - (1,075,848) (1,075,848)
Acquisition of business (Note 2) 74,250 - 75,000
Acquisition of business (Note 2) (4,253) - 1
Stock repurchase adjustment
(Note 5) 116,835 - 117,052
------------- -------------- --------------
Balance at March 31, 1999 $ 7,468,721 $ (4,473,349) $ 3,049,603
============= ============== ==============
F-4
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
Years Ended
March 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (1,075,848) $ (571,143)
-------------- -------------
Adjustments to reconcile net loss to net
cash used in operating activities -
Adjustment to repurchase of common stock 117,052 -
Gain on sale of cable operations (1,020,388) (904,560)
Depreciation and amortization 850,720 631,720
Deferred income taxes (554,227) (279,283)
Change in certain assets and liabilities -
Accounts receivable 10,648 (11,771)
Prepaid expenses and other current
assets 15,284 (21,080)
Other assets 34,006 (19,677)
Accounts payable 170,834 (7,111)
Accrued expenses 62,611 (92,026)
Income taxes payable (21,850) (39,559)
Subscriber deposits (251) (510)
-------------- -------------
(335,561) (743,857)
-------------- -------------
Net cash flows used in
operating activities (1,411,409) (1,315,000)
-------------- -------------
Cash flows from investing activities
Cash paid for business acquisitions net of cash
acquired (47,426) -
Payments on notes receivable 736,513 1,051,292
Proceeds from Wireless Cable license sale 362,396 -
Net investing activity 60,459 1,502,172
Property and equipment purchases (102,365) (386,279)
Purchase of broadcasting licenses (7,260) -
------------- ------------
Net cash flows provided by investing
activities 1,002,317 2,167,185
------------- ------------
Cash flows from financing activities
Repurchase of common stock - (214,141)
Proceeds from stockholder advances 151,379 167,993
Payments on stockholder advances (69,132) (277,389)
Payments on long-term debt and capital leases (63,360) (167,271)
------------- ------------
Net cash flows provided by (used in)
financing activities 18,887 (490,808)
------------- ------------
Net (decrease) increase in cash and cash
equivalents (390,205) 361,377
Cash and cash equivalents - beginning of year 852,362 490,985
------------- ------------
Cash and cash equivalents - end of year $ 462,157 $ 852,362
============= ============
</TABLE>
Continued on the following page.
<PAGE>
Consolidated Statements of Cash Flows - (continued)
Supplemental disclosure of cash flow information
Cash paid during the year for interest was $213,707 (1999) and $305,868
(1998).
Cash paid during the year for income taxes was $0 (1999) and $73,242
(1998).
Supplemental disclosure of noncash investing activities
During 1999, the Company issued 1,500,000 shares of common stock valued
at $75,000 in the acquisition of a business (Note 3).
During 1999, the Company also issued 8,507,460 shares of common stock
in the acquisition of a business (Note 3)
During 1999, the Company recorded an adjustment to the number of shares
cancelled in the prior year for the settlement of a lawsuit resulting in the
reinstatement of 433,151 shares of common stock and a charge of $117,052 to
operations for additional litigation settlement expense (Note 5).
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).
F-5
<PAGE>
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, operating a salvage yard, 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. (Note 16), JBA Wholesalers, Inc., MDA of
Georgia, Inc. MDA of Illinois, 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.
Note 1 - Summary of Significant Accounting Policies (continued)
Revenue Recognition
The Company recognizes revenue when it has substantially completed all its
obligations and has earned the revenue.
Leasing of Wireless Cable Licenses
The Company records revenue on the leasing of wireless cable licenses monthly
as access to use of the broadcast licenses is provided and no significant
continuing obligations under such license agreements exist.
Cable Television Services
Cable television service revenue is recorded on a monthly basis as services
are provided and no significant continuing obligations to the subscriber
exist.
Auto Salvage Yard
Revenue from auto salvage sales is recorded at the time of delivery to the
customer as no significant continuing obligations or right of return
obligation exists.
Internet Access Services
Internet access service revenue is recorded on a monthly basis as services
are provided and no significant continuing obligations to the subscriber
exist.
Paging Equipment Sales
Paging equipment sales revenue is recorded at the time of delivery to the
customer as no significant continuing obligations or right of return
obligation exists.
Sale of Cable Operations
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).
Note 1 - Summary of Significant Accounting Policies (continued)
Basic Loss Per Share
The Company follows 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. The Company has no dilutive potential common shares at
March 31, 1999 and 1998, respectively.
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, 1999 and 1998 were
approximately $43,623 and $23,000, respectively.
Research and Development Expenses
The Company expenses research and development costs as incurred.
The Company incurred approximately $ 423,000 and $ 300,000 in research and
development related expenses associated with its gas-to-liquids conversion
process for the years ended March 31, 1999 and 1998, respectively.
Note 1 - Summary of Significant Accounting Policies (continued)
Valuation of Long-Lived Assets
The Company assesses valuation of long-lived assets in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed
of. The Company periodically evaluates the carrying value of long-lived
assets to be held and used, including goodwill and other intangible assets,
when events and circumstances warrant such a review. The carrying value of a
long-lived asset is considered impaired when the anticipated undiscounted
cash flow from such asset is separately identifiable and is less than its
carrying value. In that event, a loss is recognized based on the amount by
which the carrying value exceeds the fair market value of the long-lived
asset. Fair market value is determined primarily using the anticipated cash
flows discounted at a rate commensurate with the risk involved.
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, 1999, there was approximately $269,623
in excess of the federally insured limit.
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.
Note 1 - Summary of Significant Accounting Policies (continued)
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.
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.
Recently Issued Accounting Pronouncements
In June of 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"(SFAS
No. 133). SFAS No. 133 addresses the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. SFAS No. 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. Initial application of SFAS No.
133 shall be as of the beginning of an entity's fiscal quarter, on that date,
hedging relationships shall be designated anew and documented under the
provisions of this statement. The adoption of SFAS No. 133 shall not be
retroactively applied. This statement currently has no impact on the
financial statements of the Company, as the Company does not hold any
derivative instruments or participate in any hedging activities.
Note 2 - Management's Plans for Continued Existence
As shown in the accompanying financial statements, the Company has incurred
net losses of $1,075,848 and $571,143 for the years ended March 31, 1999 and
1998, respectively and as of that date the Company's current liabilities
exceeded its current assets by $728,974. The Company also has negative cash
flows from operations in 1999 and 1998. Management's plans to maintain
sufficient future cash flows to meet its future financial obligations and to
continue funding research of its gas-to-liquids technology, include the sale
of the Company's internet operations and certain real property (Note 16). In
addition, management is also actively marketing other real property and
buildings, and reducing general and administrative costs by downsizing
personnel. Management is also looking into the sale of the Company's basic
trade area (BTA) license rights and is also looking into possible factoring
arrangements for the note receivable obtained in the sale of its domestic
wireless cable operations (Note 10). Based on a review of all possible
options available to the Company and the estimated related resulting cash
flows management believes that sufficient cash flow will be provided to meet
the Company's financial obligations through the fiscal year 2000.
Note 3 - Business Acquisitions
During fiscal 1998, 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.
In 1999, the Company acquired all the issued and outstanding shares of JBA
Wholesalers, Inc. majority owned by a stockholder of the Company, Omar
Duwaik. The Company paid $50,000 and issued 1,500,000 shares of common stock
valued at $75,000 for a total purchase price of $125,000. Due to the common
control relationship which existed prior to the transaction, the acquisition
of JBA Wholesalers, Inc. resulted in the assets and liabilities of being
recorded at historical cost.
Note 3 - Business Acquisitions (continued)
Also in 1999, the Company acquired all the issued and outstanding shares of
MDA of Illinois, Inc. which is a 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 8,507,460 shares of common
stock. Due to the common control relationship which existed prior to the
transaction, the acquisition of MDA Illinois resulted in the assets and
liabilities of being recorded at a nominal value of $1 as no records
pertaining to historical cost could be readily located. In the event
historical records become available in the future, the Company will adjust
the recorded values of the assets and liabilities to their historical
amounts.
The Company acquired the following assets and liabilities in connection with
its 1999 business acquisitions:
Inventories $ 58,233
Fixed assets 212,960
TV licenses 1
Other assets 58,247
Liabilities assumed (207,014)
-----------
$ 122,427
===========
The following consideration was issued to fund the 1999 acquisitions.
Cash paid, net of cash acquired $ 47,426
Issuance of common stock 75,001
-----------
$ 122,427
===========
The results of operations have been included from the dates of acquisition
forward. The historical results of operations of MDA of Illinois, Inc. and
JBA were insignificant in 1999 and 1998 prior to the acquisitions and
accordingly no pro forma results of operations have been presented as the
Company's pro forma results of operations would approximate the historical
results of operations presented in the accompanying consolidated financial
statements.
Note 4 - Property and Equipment
The following summarizes the property and equipment:
Continuing Discontinued
Operations Operations
Land $ 1,297,926 $ -
Office building and improvements 1,092,573 -
Office furniture and equipment 1,002,482 7,436
Mining equipment - 425,963
Gas to liquids testing equipment 58,595 -
Transmission equipment 735,346 -
Transportation equipment 141,850 -
------------ ------------
4,328,772 433,399
Less accumulated depreciation (1,344,963) (164,378)
------------ ------------
Total $ 2,983,809 $ 269,021
============ ============
Note 5 - Accrued Liabilities
Accrued liabilities consist of the following:
Payroll taxes payable $ 43,475
Bonus payable 100,000
Note receivable prepayments 86,959
Interest payable 82,837
Commission payable 369,143
Other 10,447
---------
$ 692,861
==========
Note 6 - Long-Term Debt and Stockholder Advances
Long-Term Debt
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.
$ 481,783
Note 6 - Long-Term Debt and Stockholder Advances (continued)
Long-Term Debt (continued)
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, non-
interest bearing, past due from April 1998 (Note 14). Monthly payments of
$5,000. Collateralized by the equipment with a net book value of
approximately $44,000.
37,500
Note payable in connection with the purchase of a building and related land,
maturing March 2006. Interest at 9% with monthly principal and interest
payments of $1,500. Collateralized by land and building.
93,231
Capital lease in connection with the purchase of communication equipment
maturing in August 2000. Interest at 12%, monthly payments of $10,200.
Collateralized by the equipment with a net book value of approximately
$240,000.
208,422
---------
2,203,549
Less current maturities (405,428)
---------
Long-term debt $1,798,121
===========
Note 6 - Long-Term Debt and Stockholder Advances (continued)
Long-Term Debt (continued)
The aggregate annual maturities of long-term debt at March 31, 1999 are as
follows:
Year Ending March 31,
-----------------------
2000 $ 429,840
2001 671,087
2002 165,462
2003 180,566
2004 151,253
Thereafter 631,511
--------------
2,229,719
Less amount representing capital
lease interest (26,170)
--------------
Present value of long-term debt and
capital lease 2,203,549
Less current portion (405,428)
--------------
$ 1,798,121
==============
As of March 31, 1999, the cost and net book value of equipment under capital
lease was approximately $432,614 and $284,472, respectively.
Stockholder Advances
Stockholder advances bear interest at 8%. Interest expense on stockholder
advances totaled $68,464 (1999) and $77,956 (1998).
Note 7 - Commitments and Contingencies
Leases
The Company leases radio towers with leases expiring through 1999 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, 1999 and 1998 was $94,362 and $64,888, 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.
Note 7 - Commitments and Contingencies (continued)
Leases (continued)
Future minimum lease receipts are as follows:
1999 $ 62,332
2000 27,906
2001 6,996
-------------
97,234
=============
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.
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 claimform thereby
relinquishing their rights to all TVCN stock owned and release the Company
from all future claims, liabilities and damages. The Company recorded an
expense of 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 7 - Commitments and Contingencies (continued)
In 1999, it was determined that the actual number of shareholders electing to
relinquish their rights to TVCN stock was less then estimated by the Company
in 1998. This resulted in an adjustment to increase equity by 433,151 shares
of common stock valued at $117,052 and to increase litigation expense by
$117,052 in 1999.
Note 8 - 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.
Note 8 - Stockholders' Equity (continued)
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.
Note 8 - Stockholders' Equity (continued)
Class D Preferred Stock (continued)
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.
Note 9 - 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.
Note 9 - Income Taxes (continued)
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 and liabilities for 1999 were as follows:
Net operating loss $ 1,810,647
Recognition of gain on sale of stations (72,732)
Alternative minimum tax credit 113,532
Shareholder interest and bonus 34,000
Depreciation 103,528
Other 8,306
Valuation allowance -
----------------
$ 1,997,281
================
The net current and long-term deferred tax assets and liabilities in the
accompanying balance sheet includes the following deferred tax assets and
liabilities.
March 31,
1999
------------
Current deferred tax asset $ 121,838
------------
Net current deferred tax asset $ 121,838
============
Long-term deferred tax asset $ 1,948,175
Long-term deferred tax liability (72,732)
-------------
Net long-term deferred tax asset $ 1,875,443
=============
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
$5,300,000 which expire through 2014.
Note 9 - Income Taxes (continued)
The following is a reconciliation of income taxes at the Federal Statutory
rate with income taxes recorded by the Company.
Years Ended
March 31,
--------------------------------
1999 1998
-------------- ---------------
Computed income taxes at statutory rate $ (554,227) $ (281,810)
State income taxes, net of Federal income
tax benefit - (27,352)
Section 453A interest - 22,290
Non deductible items and net operating loss - 29,162
--------------- ---------------
$ (554,227) $ (257,710)
=============== ===============
Note 10 - 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, 1999 is approximately $2,343,500.
The Company received cash payments of $1,098,909 and $1,051,292 during 1999
and 1998, respectively, related to sales of Wireless Cable licenses from
prior years.
Note 10 - Sale of Domestic Wireless Cable Operations (continued)
Long-Term Receivables
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%; payable semi-annually, secured by the assets of the systems.
$ 2,343,500
Notes receivable - other 1,300
---------------
2,344,800
Less current portion (1,300)
---------------
$ 2,343,500
===============
The aggregate maturities of notes receivable at March 31, 1999 are as
follows:
Year Ending March 31,
2000 $ 1,300
2001 2,343,500
------------
$ 2,344,800
============
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 11 - 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.
On November 25, 1998, the Forest Service called and used $28,000 of the
reclamation bonds for required winter stabilization. The remaining bonds are
held for future restoration of the mine.
Note 12 - 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.
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.
On June 11, 1999, the National Gas Company of Trinidad and Tobago Limited (a
government agency) and Reema International Corporation signed an agreement
titled "Term Sheet for Supply of Natural Gas Agreement", detailing the terms
and conditions for a definitive agreement.
Note 13 - Business Segments
Operating results and other financial data are presented for the principal
business segments of the Company for the years ended March 31, 1999 and 1998.
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.
Note 13 - Business Segments (continued)
<TABLE>
CTV Station
Salvage WCTV License Construction Natural Gas Fuel
March 31, 1999 Yard Leases Contracts Conversion
<S> <C> <C> <C> <C>
------------ ------------- ------------- ----------------
Lease income Interest income $ 30,009 $ 198,550 $ - $ -
Interest income - - - -
Other income - - - -
------------ ------------- ------------- ----------------
Total revenue 30,009 198,550 - -
Operating loss $ (79,711) $ (53,477) $ (50,208) $ (130,705)
Identifiable assets $ 332,013 $ 3,363,021 $ 16,033 $ 71,175
Depreciation $ 5,040 $ 3,883 $ 32,271 $ 8,186
Capital expenditures $ - $ 8,248 $ - $ 58,594
March 31, 1998
Lease income $ - $ 204,342 $ - $ -
Interest income - - - -
Other income - - - -
------------ ------------- ------------- ----------------
Total revenue - 204,342 - -
Operating loss $ - $ (67,529) $ (12,515) $ (311,915)
Identifiable assets $ - $ 3,120,710 $ 52,377 $ 20,777
Depreciation $ - $ 2,058 $ 12,465 $ 11,867
Capital expenditures $ - $ 137,724 $ - $ -
</TABLE>
<TABLE>
(Discontinued-
Note 14) Internet Access
Mining and Service Pager Corporate
March 31, 1999 Exploration Provider Rental and Other Consolidated
-------------- --------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Lease income $ - $ 281,077 $ 109,408 $ 138,570 $ 757,614
Interest income - - - 275,405 275,405
Other income - - - 1,554 1,554
-------------- --------------- -------------- ------------- -------------
Total revenue - 281,077 109,408 415,529 1,034,573
Operating loss $ (72,426) $ (575,200) $ (104,986) $ (1,811,324) $ (2,878,037)
Identifiable assets $ 312,372 $ 392,912 $ 42,751 $ 3,706,614 $ 8,236,891
Depreciation $ 38,285 $ 148,386 $ 11,900 $ 602,769 $ 850,720
Capital expenditures $ - $ 3,875 $ 1,903 $ 29,745 $ 102,365
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 $ (1,234,816) $ (508,084) $ (155,083) $ (2,796,320) $ (5,086,262)
Identifiable assets $ 378,729 $ 515,784 $ 63,848 $ 6,860,242 $ 11,012,467
Depreciation $ 84,203 $ 85,112 $ 12,467 $ 423,548 $ 631,720
Capital expenditures $ 33,253 $ 59,955 $ 650 $ 115,747 $ 747,329
</TABLE>
Note 14 - Discontinued Operations
During the year ended March 31, 1996, Mining and Energy International Corp. 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.
On September 1, 1998, the Company and the operator entered into a preliminary
agreement to settle the dispute of selling the mine at auction and setting
the proceeds. No sale has occurred to date.
The Company has ceased operations of the mining segment and accordingly has
included this as discontinued operations in the accompanying consolidated
financial statements. The Company had no revenues from this segment in 1999
or 1998.
As of March 31, 1999, Mining and Energy International Corp.'s primarily
assets consisted of a reclamation bond, and mining equipment. Liabilities
consisted of a note payable on mining equipment. The subsidiary had a net
loss from operations of $47,801 and $814,979 including an income tax benefit
allocated to discontinued operations of $24,625 and $419,837 for the years
ended March 31, 1999 and 1998, respectively.
Note 15 - Significant Fourth Quarter Adjustments
In the fourth quarter for the year ended March 31, 1999, the Company made the
following adjustments to the financial statements:
The Company recorded approximately $302,000 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 15 - Significant Fourth Quarter Adjustments (continued)
The Company also recorded an income tax benefit of approximately $554,000
primarily related to the net operating loss carry forward generated in 1999.
Note 16 - Subsequent Events
On April 15, 1999, the Company sold one of its residential lots in Cherry
Hills Village, Colorado previously held for investment purposes. The lot was
sold to an unrelated third party for cash of $630,000. The lot had a net
book value of approximately $322,000 at March 31, 1999.
Effective May 18, 1999, the Company sold 100% of the common stock of Planet
Internet Corp. to an unrelated third party corporation for 303,328 restricted
shares of the acquiring privately held Company's common stock valued at
$1,516,638. Certain liabilities were retained by TVCN in connection with the
sale.
