ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[X] Annual Report Pursuant to Section 13 or 15(d) of The
Securities Exchange Act of 1934 [Fee Required] For the
fiscal year ended March 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Commission file number 0-18612
I.R.S. Employer Identification Number 84-1062555
TV COMMUNICATIONS NETWORK, INC.
(a Colorado Corporation)
10020 E. Girard Avenue, #300
Denver, Colorado 80231
Telephone: (303) 751-2900
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
The Securities and Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has
been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date: 50,835,954 shares of the Company's Common
Stock ($.0005 par value) were outstanding as of March 31,
1999.
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Forward Looking Statements
Certain oral and written statements of management of the
Company included in the Form 10 KSB 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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
TV Communications Network, Inc. ("TVCN" or the "Company") was organized
as a Colorado corporation on July 7, 1987. Its executive offices are at
10020 E. Girard Avenue, Suite 300, Denver, Colorado 80231, its
telephone number is (303) 751 2900 and its fax number is (303) 751-
1081. The Company was formed to seek business opportunities that, in
the opinion of management, will provide profit to the Company in any
industry in general and the Wireless Cable TV ("WCTV") industry in
particular. During its early years, TVCN focused its attention on WCTV
operations. After early success, TVCN began to diversify. 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.
<PAGE>
Wireless Cable TV ("WCTV") Operations
The WCTV industry was created in 1983 when the FCC began licensing WCTV
stations to broadcast multiple TV channels per station on microwave
frequencies. The WCTV frequency spectrum is now divided by the FCC
into groups of frequencies such as MMDS ("Multichannel Multi-Point
Distribution Service"), ITFS ("Instructional Television Fixed
Service"), OFS ("Operational Fixed Service"), as well as the MDS band
previously available. MMDS, MDS and OFS frequencies are licensed to
commercial entities for commercial use, while ITFS frequencies are
licensed to educational institutions for educational, instructional and
cultural TV programs. However, educational institutions are allowed to
lease any excess capacity on their ITFS channels to commercial entities
for commercial use. A television station that employs MMDS, MDS, OFS
and/or leased ITFS microwave channels to broadcast cable TV programming
to subscribers for monthly fees, is referred to as a WCTV station.
The FCC regulates the construction, operation, and reporting
requirements of WCTV stations, which transmit from 4 to 33 analog TV
channels of programming and have a range of 25 to 50 miles from the
transmitting station. With new digital equipment coming to the
marketplace, each 6 MHz channel will be able to deliver up to six
different TV programs. The costs involved in digital transmissions are
very prohibitive now, but as demand increases, these costs should
become more affordable. A WCTV station can deliver a variety of
signals, including subscription television, data, and other related
entertainment and communications services. WCTV station subscribers
capture the microwave signals by means of a specially designed partial
parabolic antenna. The captured microwave signals are then converted
to frequencies recognizable by a standard television set.
Wireless Cable Stations
Salina, Kansas. TVCN is currently operating a 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 the 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 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 needs more TV
channels to be competitive, the Company acquired from non-affiliated
entities, the three H-Group channels 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 channels 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 station 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 in 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 year, renewable every five years thereafter at the Company's
option.
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.
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.
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.
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 1977.
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.
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 operation." The following is a summary of
these operations:
Mining and Energy International Corp./Liberty Hill Mine -
On September 2, 1997 the company's subsidiary, Mining and Energy
International Corp. ("MEICO") entered into two agreements with "Big
Trees' Trust" and "Naylor 1996 Charitable Remainder Trust under date of
December 30, 1996," of Applegate, California (collectively, "Big Trees
Trust") concerning the Liberty Hill Mine in Nevada County, California.
Under the first agreement MEICO agreed to lease ten unpatented mining
claims, consisting of about 200 acres of the Liberty Hill Mine, for
thirty years. Under the second agreement, MEICO acquired an option to
lease 109 other unpatented mining claims, consisting of approximately
1,750 acres of the Liberty Hill Mine, for a nominal option price. Big
Trees Trust is controlled by Ray Naylor, who for many years was an
officer of the Company's Century 21 mining subsidiary.
Under the terms of the lease agreement, MEICO agreed to lease the
subject mining property for thirty years, with an option to terminate
the lease without penalty. MEICO agreed to pay the out-of-pocket costs
of operating the mine. In addition to these out-of-pocket expenses
MEICO agreed to pay Big Trees Trust a nonrefundable advance against
royalties of $40,000 per month (or 15% of the ores mined and sold,
whichever is greater). As of March 31, 1999 MEICO had expended a total
of $2,110,224 in out-of-pocket expenses to bring the mine into
operation. In addition, to these expenses, MEICO has paid Big Trees
Trust a total of $955,000 in advance royalties. Capital expenditures
on the mine amounted to $433,399. Thus total expenditures of all kinds
through March 31, 1999 were $3,498,624. An additional $33,800 was
spent on Century 21 mining equipment used at the Liberty Hill Mine. No
funds were spent for development or operations in fiscal year 98/99.
The U.S. Forest Service performed limited remediation (erosion control)
activities on the site in the fall of 1998. An existing money market
bond payable to the U.S. Forest Service was the source of funds for
this expenditure.
Development of the Liberty Hill Project began in the winter of 1996.
MEICO contracted with Ray Naylor to be the operator of the mine and to
develop the project. Beginning in the summer of 1996, Ray Naylor
assured MEICO that the mine was on the verge of production. However,
for one reason or another, including inclement weather, inadequate
water purification equipment, unanticipated clay content of the ore,
etc., Mr. Naylor never actually brought the mine into operation.
Therefore, in the fall of 1997 MEICO began to suspect that Mr. Naylor
was unable or unwilling to bring the mine into production. On March 5,
1998 TVCN and MEICO sued, inter alia, Big Trees Trust and Ray Naylor in
a dispute over the lease and operation of the Liberty Hill Mine. In
its complaint MEICO alleges that it was fraudulently induced to enter
into the mining lease and that Ray Naylor breached his contract to
operate the mine on MEICO's behalf in a good and miner-like fashion.
MEICO and TVCN claim damages in excess of $3.5 million. While no
answer has been filed in the case, Mr. Naylor has informed MEICO that
he believes it is in default under the lease and has served a notice of
termination of the lease on the Company. On May 20, 1998 the Court
entered an order on the parties' stipulated motion submitting the
matter to binding arbitration. The parties have agreed to the
appointment of Mr. Murray Richtel of the Judicial Arbiter Group, Inc.
as the arbitrator in this matter, and an arbitration hearing had been
set for September 10, 1998. However, before the arbitration hearing the
parties met on September 1, 1998 and entered into a preliminary
agreement to settle the dispute by selling the mine at auction and
splitting the proceeds. However, Mr. Naylor subsequently attempted to
disavow this settlement agreement. The Company has placed Mr. Naylor on
notice that it intends to file a second court action to enforce the
settlement agreement if he does not follow through with his obligations
thereunder. At this preliminary stage it is not possible to predict
with any certainty the probable outcome of this matter. However, TVCN
intends to prosecute its claims vigorously.
Century 21/Mountain House Mine - The Company acquired a controlling
interest in Century 21 Mining, Inc. in December 1989. Century 21's
principal asset is the Mountain House Mine. The mine is not in
operation. The Company held this mine without development for
investment purposes. The decision as to whether or not to commercially
develop that mine was contingent upon the success of the mining
operation of the Liberty Hill Mine. Since the development of the
latter was not successful, the Company decided to sell its interest in
this Century 21 mine, but no offer has been made to buy the mine. If
the sale is successful, the Company does not expect such sale to have
any material effect on the Company's financial statements.
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 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.
Middle East Investment Authorization
At a special meeting of the Company's Board of Directors held on
December 13, 1995, Omar Duwaik was authorized to explore investment
opportunities in the Middle East. Mr. Duwaik was authorized to enter
into such agreements as were necessary and to invest in a holding
company on behalf of the Company if he deemed such an investment to be
in the best interests of the Company. To date Mr. Duwaik has explored
numerous investment opportunities. However, none have met the criteria
he thought of for making such an investment. No specific criteria has
been established, other than reasonable degree of risk and rate of
return as determined by Duwaik on a project by-project basis. Although
Mr. Duwaik was authorized to commit up to $3 million, no funds have
been expended to date pursuant to the Board's authorization, and no
current plans to expend any funds. Pursuant to its general policy of
seeking shareholders' approval of major investments, the Company will
seek shareholder approval of any investment made pursuant to this
authority.
Qatar WCTV Station
In 1992 the Company received a contract from the Qatari Government
Telecommunications Corporation ("Q-Tel") to build a WCTV station in
Doha, Qatar and train operations personnel. The Company built the
station in 1993, and a provisional acceptance certificate for the
station was issued on August 14, 1993. Through May 1996, TVCN
personnel assisted in the management and operation of the station and
trained Qatari personnel. TVCN has guaranteed the supply of all-
compatible equipment and spare parts that may be needed for the
maintenance, and refurbishment of the equipment, and the continuation
of the WCTV operation without interruption over a period of 10 years.
The Qatar wireless cable system was awarded Cable Operator of the Year
honors at the CABSAT 95 (cable and satellite exhibition).
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.
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 that the plant is not currently in operation. The giant
oil company Exxon announced recently that it has completed the
construction of a pilot GTL plant for the production of 250 bpd of
transportation fuels. As of this date, other than the foregoing,
neither Exxon nor others have built any other commercial GTL plant
anywhere in the world.
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 Limited (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 th 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 sulfar-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 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.
Principal Services and Markets
The Company owns MMDS licenses in Mobile, Alabama; San Luis Obispo,
California; Salina, Kansas; Hays, Kansas; and Scranton/Wilkes-Barre,
PA. The Company's MMDS license in Mobile is leased to an independent
WCTV operator. The Company constructed stations in Myrtle Beach, South
Carolina; Quincy, Illinois; Rome, Georgia; Woodward, Oklahoma; and
Scottsbluff, Nebraska under authority from MDA. Currently, the only
WCTV stations the Company is operating are in the Salina, Kansas and
San Luis Obispo, California areas. The Company is leasing its Mobile,
Alabama license as well as the Woodward, Oklahoma license (under
authority from MDA). The company has had inquiries concerning the
leasing of the channels in Scottsbluff, Nebraska; Hays, Kansas; and
Myrtle Beach, South Carolina, but no serious lease offer was ever
submitted to the Company. The license in Rome, Georgia was sold to
BellSouth. The Quincy, IL license was assigned to Nucentrix Broadband
networks, Inc (formerly Heartland). Nucentrix in turn, entered into a
"Partition Agreement" with TVCN to allow the Company the same
protections and channel rights for the Company's Salina wireless
system. The Agreement was filed with the FCC in late December 1998 and
went on public notice on May 26, 1999. The Company is awaiting final
FCC approval.
The Company offers its services to private homes, apartments and
commercial properties including stores, bars, restaurants, office
buildings, and hotels/motels.
Distribution Methods
In any given market, the number of channels a WCTV station is able to
offer to its subscribers is limited by the number of WCTV channels
available to the operator (including any channels leased from other
licensees) and the terms of the leases under which leased channels are
used. In addition, the nature of the subscribers receiving equipment
and the availability of funds for the necessary capital investment
affects the quality of the station's services.
The so-called head-end equipment at a WCTV broadcast station typically
includes satellite receiving equipment, descramblers, transmitters,
encoders (scramblers), combiners, waveguides and omni-directional or
cardioid antenna located at the tower site in each location.
Television programming, received via satellite at each broadcast
facility, is retransmitted over microwave frequencies in a scrambled
mode over the WCTV channels owned or leased by the WCTV operator. The
signal is received by the subscribers' reception equipment. The
scrambled signal is then decoded at each television outlet by an
authorized set-top converter.
Subscriber reception equipment typically consists of a television
antenna designed to provide reception of VHF/UHF off-air programming
(provided as an option to consumers), a microwave receive antenna
(about 27" tall and 18" wide), a down-converter, a set-top converter
(descrambler and channel selector) and various other component parts.
Competition
The Company competes for viewers with the television networks,
independent television stations and other video suppliers such as cable
television, satellite television program services, Direct Broadcast
Satellite ("DBS") and video cassettes.
The most common source of competition to a WCTV station is traditional
cable television. Most cable television systems are able to offer a
greater number of channels to their audiences than most WCTV stations.
In addition, most cable television systems supply some programming that
is not available on WCTV stations, including a wide range of advertiser
supported and subscription supported video programming services. New
compression technology is presently being tested which could allow WCTV
operators to offer many more channels by compressing more than one TV
channel of programming onto each licensed channel. However, the same
technology is being developed for cable usage and DBS usage, so the
effect of the technology cannot be predicted with certainty at this
time. In addition, there is no certainty that deployment of such
technology for any of its present or future stations will be within the
Company's financial capacity.
Other sources of competition include low power television stations and
DBS transmissions to homes. Wireless and traditional cable
communication systems face substantial competition from alternative
methods of distributing and receiving television signals, and from
other sources of entertainment such as movie theaters and home video
rentals.
Finally, in most areas of the country, including areas served by the
Company, off-air programming can be received by viewers who use their
own antenna. The extent to which a WCTV operator competes with off-air
programming depends upon the quality and quantity of the broadcast
signals available by direct antenna reception compared to the quality
and diversity of programming offered by WCTV operators.
Advances in communications technology and changes in the marketplace
are constantly occurring. Thus, it is not possible to predict the
effect that ongoing or future developments might have on the cable
communications industry. The ability of the Company's systems to
compete with present, emerging and future distribution media will
depend to a great extent on obtaining attractive programming. The
continued availability of sufficient quality programming may in turn be
affected by the developments in regulation or copyright law. In
addition to management and experience factors, which are material to
the Company's competitive position, other competitive factors include
authorized broadcast power allowance, number of leased channels, access
to programming and the strength of local competition. The Company
competes with a great number of other firms in all phases of its
operations, many of which have substantially greater resources than the
Company.
Agreements with Program Suppliers
A WCTV operator can offer its subscribers a broad range of television
programming, including popular channels like ESPN, CNN, WTBS,
DISCOVERY, LIFETIME, CNBC, WGN, NICKELODEON, A&E, USA, CMTV, MTV, and
SHOWTIME. As well as offering the local ABC, NBC, CBS, FOX, Warner
Brothers TV, United Paramount Network and FOX affiliates, PBS stations,
independent stations and local UHF channels. The Company has
agreements with World Satellite Network to provide certain programming
for its Salina and San Luis Obispo stations, and directly with the
programming sources ESPN, The Family Channel and The Nashville Network.
Patents, Trademarks and Licenses
The Company owns MMDS licenses in Mobile, Alabama; San Luis Obispo,
California; Salina, Kansas; Hays, Kansas; and Scranton/Wilkes-Barre,
Pennsylvania. All licenses issued by the FCC are subject to renewal.
The Company has also constructed stations in Myrtle Beach, South
Carolina; Quincy, Illinois; Rome, Georgia; Woodward, Oklahoma; and
Scottsbluff, Nebraska under authority from MDA, an affiliate that holds
the MMDS licenses for these stations. The Company subsequently sold
the Rome, Georgia station and license to BellSouth Wireless, Inc. The
Company has acquired the MMDS license and station in Quincy from MDA,
and is in the process of assigning same to Heartland as part of a
business deal with Heartland to enhance the Salina, KS wireless system.
In addition, the Company successfully bid on twelve BTAs in the recent
FCC auction of a portion of the microwave spectrum (see FCC Spectrum
Auction herein). The Company received these 12 BTA licenses in October
of 1996 with grant dates of August 16, 1996 and build-out dates of
August 16, 2001. The company applied for the transfer of the San Luis
Obispo, California BTA license and received FCC approval of the
transaction on May 23, 1997.
The Company's wholly owned subsidiary, Planet Internet Corporation,
registered the trade names fun.edu and TVCN.NET with the Colorado
Secretary of State (see Internet Business Opportunities herein). The
Company sold Planet, but the trade names remain with the Company.
The Company holds no patents. However, the Company has filed a patent
application concerning its GTL technology. The application is pending.
Governmental Regulation/FCC Licensing
The licenses of the Company are not subject to regulation by any state
or local government. However, the WCTV portion of the Company's
activities are subject to FCC regulations. The Company's ability to
continue providing WCTV programming is dependent upon continued FCC
qualification of the Company as the licensee (or lessee) of the
channels comprising such system. In any given market the microwave
broadcast spectrum is divided into 33 channels. These channels are
further divided into groups as follows:
<TABLE>
Channel Group No. of
Channels
<S> <C>
A Group 4
B Group 4
C Group 4
D Group 4
E Group 4
F Group 4
G Group 4
H1, H2, and/or H3 3
Channel 1 1
Channel 2 (or 2A) 1
Total 33
</TABLE>
Of the 33 channels in this part of the spectrum a commercial WCTV
operator can directly own the licenses for the eight MMDS channels
(groups E and F), the OFS channels (H1, H2 and/or H3) and the MDS
channels (1 and 2 or 2A). This allows a WCTV operator to directly own
up to thirteen (13) channels. In addition, the FCC has authorized
educational licensees of ITFS channels (groups A, B, C, D and G) to
lease their excess capacity for commercial use, including subscription
television service.
Broadcasting licenses for WCTV facilities are granted for a maximum
period of ten years and are renewable upon application. Prior to the
expiration of a license, the licensee must submit an application for
renewal of the license evidencing that the licensee has been complying
with the FCC's rules and regulations. While there can be no assurance
that renewal of a license will be granted, historically, such licenses
have been renewed if the licensee has complied with the FCC's rules and
regulations for the operation of the facilities, as well as the rules
relating to the types and nature of transmission equipment.
From time to time legislation may be introduced in Congress, which, if
enacted, might affect the Company's operations. Proceedings,
investigations, hearings and studies are periodically conducted by
congressional committees and by the FCC and other government agencies
with respect to problems and practices of, and conditions in the
subscription TV industry.
On February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996 ("The Act"), the most sweeping overhaul
in the 60 year history of the Communications Act. The Act does not
completely replace the older law, but rather deletes some parts, adds
new ones and augments others. The Act's primary purpose is to open the
entire range of telecommunications services to greater competition and
cross service providers. The Act is not completely self-executing,
however, so the FCC must enact regulations to implement the Act's
provisions.
Two actions taken by the FCC as a result of The Act are particularly
important to the Company's ongoing business in the wireless cable
industry. First, the FCC has proposed a rule that would preempt the
local zoning regulation of MMDS antennas, thus allowing the placement
of antennas in areas in which they had been prohibited. The rule would
establish a rebuttal presumption that state or local regulations are
unreasonable if they affect the installation, maintenance or use of
MMDS antennas. The FCC has also streamlined its ITFS application
process by delegating processing authority to the FCC staff. As many
WCTV systems rely on leasing excess ITFS channel capacity, the new
procedures should benefit the wireless cable industry by making more
such licenses available.
On March 14, 1997 over 100 industry participants submitted a proposal
to the FCC for a petition for rulemaking. The petition suggests some
sweeping changes, such as: 1) allowing an operator to cellularize
transmissions within its market; 2) allowing neighboring operators to
police their own borders to prevent unwanted interference, with the FCC
being called in only if such cooperation fails; 3) allowing an operator
the right to turn a channel or parts of a channel around for two-way
communications; 4) allowing an operator to put all required educational
programming on any channel within a system instead of on a certain
channel licensed to the educator; and 5) allow that if an operator sets
up some twenty transmission points within its market, that the sum of
the output power of all twenty transmitters does not exceed the
authorized power of the original license.
In October 1998, the FCC approved most of the aforementioned changes,
in effect giving operators "two-way" capability, and the ability to
offer voice, data, internet, TV and any other broadband services. The
Company is considering the sale of its remaining TV properties to
concentrate its energies on Reema's Gas to Liquid project. Sprint, MCI
Worldcom and several other telecommunications companies have recently
purchased other wireless cable operators. The Company is also in
discussions with these purchasers.
The information contained under this section does not purport to be a
complete summary of all the provisions of the Communications Act and
the rules and regulations of the FCC thereunder, or of pending
proposals for other regulation of MMDS stations and related activities.
For a complete statement of such provisions, reference is made to The
Communications Act, and to such rules, regulations and pending
proposals thereunder and are incorporated herein by reference.
Employees
As of March 31, 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.
The Company's ability to carry out its proposed activities is
dependent, to a substantial degree on a limited number of personnel.
There can be no assurance that the company will be able to retain such
personnel. The Company's success is also dependent on the Company's
ability to recruit and motivate high quality personnel. If the Company
fails to retain the services of one or more of these persons or if the
Company is unable to attract a sufficient number of skilled employees,
the Company's operations may be adversely affected. The Company does
not currently maintain any key man insurance on any of its officers,
directors, or significant employees.
Capital
Constructing and developing WCTV stations, and providing television
programming require substantial initial capital outlays. While
contracts with respect to providing programming are intended to have
terms sufficient to provide for the recovery of the Company's
investment, together with a favorable return on its investment, the
Company's continued expansion is largely dependent on its ability to
raise capital for the costs of any of its new business endeavors.
Since inception, the Company has financed its capital and operating
cash requirements through loans and advances from the Company's
president, other shareholders, and the sale of common and preferred
stock. The Company is now considering different debt financing options
as well as continued asset sales. There is no certainty that the
Company will be able to obtain all required financing.
Business Development Strategies
The dominant business activities of the Company since its inception in
1987 has been the acquisition, obtaining TV channel leases, and the
development and sale of Wireless Cable TV (WCTV) licenses and stations.
The development of WCTV stations to their full growth potentials
requires substantial capital resources which have not been
satisfactorily available to the Company. As a result, the Company has
been able to only partially developed certain of its WCTV stations,
while holding other stations and/or licenses without development, and
sell such stations and/or licenses to potential buyers at a profit.
Over the last several years, the Company has been successful in selling
sufficient number of stations and licenses to reasonably finance its
activities. See "Purchase/Sale of WCTV Stations" herein. 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 (see "Governmental Regulation FCC Licensing" herein).
Using the concept of "cellular phone" or "cellular communications", the
WCTV frequencies can now be used for two way communication connecting
customers directly with long-distance telephone networks, circumventing
local telephone lines.
As a result, long-distance telecommunications companies such as Sprint
and MCI-World Com 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 $54.00 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 BTAs. 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 if potential buyers continue to pay the
foregoing $54.00/household, 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, or if any of them were
sold, the selling price would be anything close to the $54.00/household.
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 entering
into any partnership agreement with any entity.
If the Company is successful in selling any of its WCTV assets, or in
obtaining the GTL project financing, neither of which there can be
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.
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 fund the
Company's activities and meet its current obligations. The receivable
Additional Detroit Note 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.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company retains ownership of substantially all system equipment
necessary to provide its services to subscribers. Such system
equipment includes all reception and transmission equipment located at
the tower (i.e., the head-end equipment), reception equipment located
at each subscriber location (i.e., subscriber equipment) and related
computers, diagnostic equipment and service vehicles, and facilities.
The Salina, Kansas system equipment is valued at $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 book value of this acreage at year-
end was $64,700. The acreage has also been listed for sale for $1.1
million.
ITEM 3. LEGAL PROCEEDINGS
(1) Mining and Energy International Corporation and TV Communications
Network, Inc. v. Big Trees Trust et al., Case No. 98 WM 537 in the
United States District Court for the District of Colorado. On March
5, 1998 TVCN and its wholly-owned subsidiary MEICO sued, inter alia,
Big Trees Trust and Ray Naylor in a dispute over the lease and
operation of the Liberty Hill Mine in Nevada County, California. In
its complaint MEICO alleges that it was fraudulently induced to
enter into the mining lease and that Ray Naylor has breached his
contract to operate the mine on MEICO's behalf in a good and miner-
like fashion. MEICO and TVCN claim damages in excess of $3.5
million. While no answer has been filed in the case, Mr. Naylor has
informed MEICO that he believes it is in default under the lease and
has served a notice of termination of the lease on the Company. On
May 20, 1998 the Court entered an order on the parties' stipulated
motion submitting the matter to binding arbitration. The parties
have agreed to the appointment of Mr. Murray Richtel of the Judicial
Arbiter Group, Inc. as the arbitrator in this matter, and an
arbitration hearing had been set for September 10, 1998.The
arbitration proceeding was in its initial stages, and no discovery
had been conducted. However, before the arbitration hearing the
parties met on September 1, 1998 and entered into a preliminary
agreement to settle the dispute by selling the mine at auction and
splitting the proceeds. However, Mr. Naylor subsequently attempted
to disavow this settlement agreement. The Company has placed Mr.
Naylor on notice that it intends to file a second court action to
enforce the settlement agreement if he does not follow through with
his obligations thereunder. At this preliminary stage it is not
possible to predict with any certainty the probably outcome of this
matter. However, TVCN intends to prosecute its claims vigorously.
(2) The Company knows of no other material litigation pending,
threatened or contemplated, or unsatisfied judgment against it, or
any proceedings in which the Company is a party. The Company knows
of no material legal actions pending or threatened or judgments
entered against any officers or directors of the Company in their
capacity as such in connection with any matter involving the Company
or the business.
Settlement of Class Action
On April 2, 1994, two TVCN shareholders filed a class action suit
against TVCN in the United States District Court for the District of
Colorado under Case No. 94-D-837. MERTON FREDERICK, as Trustee of the
M&M Frederick, Inc. Profit Sharing Plan, f/k/a M&M Frederick, Inc.
Defined Benefit Pension Plan; and F.S. WORKMAN; on Behalf of Themselves
and All Others Similarly Situated, were the Plaintiffs, and the
Defendants were TV COMMUNICATIONS NETWORK, INC.; TVCN OF MICHIGAN,
INC.; TVCN OF WASHINGTON, D.C., INC.; INTERNATIONAL INTEGRATED SYSTEMS;
TVCN INTERNATIONAL, INC.; INTERNATIONAL EXPORTS, INC.; OMAR DUWAIK;
JACOB A. DUWAIK; KENNETH D. ROZNOY; SCOTT L. JENSON; AND SCOTT L.
JENSON, P.C.
The Company has always emphatically denied the plaintiffs' allegations
in this legal action and was vigorously defending the case. However,
because of the continued drain on the Company's resources caused by
nearly four years of protracted and expensive litigation, on October
31, 1997 the Company agreed to settle the case. Pursuant to the terms
of the settlement agreement, the Company agreed to pay the plaintiffs
the sum of $1.5 million in full settlement of all their claims of any
nature whatsoever. On March 3, 1998 the Court approved the settlement
and dismissed the class action with prejudice.
Of the $1.5 million paid pursuant to the settlement agreement,
$705,268.82 was paid as fees and expense to the plaintiff class's
counsel. The remaining funds were ordered distributed to the members
of the class that had filed valid proofs of claim. In addition,
pursuant to the settlement agreement, those class members who had
purchased shares of TVCN stock during the class period and who still
retained the stock at the time of the settlement, were required to
relinquish those shares back to the Company in order to participate in
the settlement. Pursuant to this provision, the Company received
359,960 shares of stock from class members participating in the
settlement. The Company canceled the shares of common stock returned
as a result of the settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS
No matters were submitted for a vote of security holders of the Company
during the fourth quarter of the fiscal year ended March 31, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock has traded on the over the counter market
("OTC") since January 11, 1988. As of March 31, 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:
<TABLE>
Quarter High Bid Low Ask
Per Per
Ending Share Share
<S> <C> <C>
3/31/92 3.88 4.00
3/31/93 .25 .38
3/31/94 .19 .14
3/31/95 .13 .15
3/31/96 .02 .07
3/31/97 .08 .17
6/30/97 .07 .12
9/30/97 .056 .09
12/31/97 .31 .39
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
</TABLE>
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. As of March 31, 1999 there were 50,835,954 shares of
common stock outstanding.
The Company has not paid cash dividends on its common stock and does
not anticipate paying cash dividends for the foreseeable future. The
Company anticipates that all earnings, if any, will be retained for
development of the Company's business.
Low Volume Trading; Possible Volatility of Stock Price
In 1989, the Company made an application to have its common stock
listed and quoted on the NASDAQ System. The application was denied.
One of the requirements for listing on NASDAQ is that the common stock
of the company requesting inclusion have a minimum bid price of $5.00
per share. The current price of the stock does not meet the
requirements of NASDAQ. The Company intends to reapply for listing
when and if the listing requirements are met, of which there can be no
assurance of success.
The Company's Common Stock is subject to certain "penny stock" rules
promulgated by the Securities and Exchange Commission. Under such
rules, broker-dealers who recommend "penny stocks" to persons other
than established customers and accredited investors must make a special
written suitability determination for the purchases and receive the
purchaser's written agreement to a transaction prior to sale.
Securities are exempt from this rule if the market price is at least
$5.00 per share.
The SEC has adopted regulations that generally define a "penny stock"
to be an equity security that has a market price of less than $5.00 per
share, subject to certain exceptions. Such exceptions include equity
securities listed on NASDAQ and equity securities of a company that
has: (a) net tangible assets of at least $2,000,000, if such company
has been in continuous operation for more than three years, or (b) net
tangible assets of at least $5,000,000, if such company has been in
continuous operation for less than three years, or (c) average revenue
of at least $6,000,000 for the proceeding three years. Unless an
exemption is available, the regulations require the delivery, prior to
any transaction involving a penny stock, of a risk of disclosure
schedule explaining the penny stock market and the risks associated
therewith.
Control by Management
The officers and directors own and or control approximately 92.8% of
the Company's currently outstanding Common stock. As a result, if the
officers and directors act together, they will have significant
influence on the outcome of all matters requiring shareholder approval
(including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of the Company's
assets) and significant influence on the management and affairs of the
Company. Such influence could discourage others from initiating
potential merger, takeover or other changes of control transactions. As
a result, the market price of the Company's Common Stock would be
adversely affected.
Description of Securities
Class C Preferred Stock - Class C Preferred Stock is non-cumulative.
Holders of Class C Preferred Stock are entitled to receive non-
cumulative dividends of up to six percent (6%) per annum from the net
profits of the Company, when and if declared by its Board of Directors.
The conversion rate is two shares of Class C Preferred Stock for one
share of Common Stock. A thirty day (30) notice is given as required
to holders in a call for redemption by the Company, during which thirty
day (30) period the holders of Class C Preferred Stock are entitled to
convert their Preferred Stock into Common Stock. The Company had
issued 400,000 Class C Preferred Shares to MDA (a company related by
virtue of having several mutual stockholders, officers and directors,
including Omar Duwaik) in exchange for Transmission Equipment. After
MDA requested the conversion of its Class C Preferred Stock, the
Company issued 200,000 Restricted Common Shares to MDA on May 29, 1997.
Another 380,000 Class C Preferred Shares were issued to AT&I (a company
related by virtue of having mutual stockholders, officers and
directors, including Omar Duwaik), as partial payment for the
acquisition of the Company's Headquarters Building. The headquarters
building had a fair market value of $930,000 and the Company assumed a
$550,000 mortgage. AT&I requested the conversion of its Class C
Preferred Stock and the Company issued 190,000 Restricted Common Shares
to AT&I on May 29, 1997.
Class D Preferred Stock - The Class D Preferred Stock is convertible
into common stock of TVCN at the rate of one Class D Preferred Share
for one Common Share of TVCN, provided that such conversion is not made
for a period of four (4) years from October 1991; and holders of Class
D Preferred Stock shall be entitled to receive non-cumulative and non-
participating dividends from TVCN's net profits at the rate of up to
nine percent (9%), when and if declared by TVCN.
In connection with the acquisition of the two WCTV stations in
Washington, D.C. and Detroit, Michigan (see "Purchase/Sale of Two WCTV
stations" herein), in 1991, the company issued to Miroband Companies, a
non-affiliated company, 4,864,000 shares of the Company class D
Preferred stock, which shares were subsequently purchased by MDA, an
affiliated company substantially owned and controlled by the Company's
president. Pursuant to MDA's request for converting the 4,864,000
preferred shares to common stock, the company issued to MDA 4,864,000
shares of the Company'' common stock on May 29, 1997.
ITEM 6. 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.
Business Segments - The Company maintains accounting records for TV
Communications Network, Inc. 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 and meeting its obligations for years to
come.
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:
<TABLE>
Cash provided by March 31,
(used in) 1999 1998
<S> <C> <C>
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
</TABLE>
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. See "Business
Development Strategies", herein.
Management's plans to maintain sufficient future cash flows for
continued existence 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 and operations. Management is also looking into the sale of
the Company's basic trade area (BTA) license rights. 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 ensure confirmed existence through the fiscal
year 2000.
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.
Income Tax Developments
Since its inception the Company has incurred operating losses through
March 31, 1999, which include certain accrued expenses that are not
deductible for tax purposes until paid. The Company has net operating
loss carry-forward available to offset future year taxable income. The
following summarizes these losses.
Net Operating
Loss Carry- Year of
Forward Expiration
As of March 31, 1999 $ 5,300,000 2014
The Company believes that with the sale of appreciated assets that it
will be able to utilize the net operating loss carry-forward in the
near future to reduce cash outflows for income tax expenses. Based on
its track record of its ability to sell WCTV stations at substantial
profits, and current favorable market conditions, the Company
anticipates no difficulty in selling WCTV stations. See "Purchase/Sale
of WCTV stations". As shown therein, the value of the Company's WCTV
assets could be substantial if potential buyers continue to pay
premium prices, of which there can be no assurance. See "Business
Development Strategies", herein. Further, the Company is optimistic
about its gas project. However, no assurance can be given that the
Company will succeed in selling WCTV stations nor recognizing any profit
from its proposed gas project in order to utilize the loss carry-forward.
<TABLE>
<CAPTION>
Selected Financial Data
1999 1998 1997 1996 1995
Year
ended
March 31,
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Stockholders equity (deficit)
March 31
- -----------------------------------------------------------------------------
Description 1999 1998 1997 1996
<S> <C> <C> <C> <C>
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
</TABLE>
Forward Looking Statements
Certain oral and written statements of management of the Company
included in the Form 10 KSB 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, 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.
Year 2000 Readiness Disclosure
Based upon the Company's assessment to date, the Company believes the
current versions of its software products and services are "Year 2000
compliant". In order to insure further compliance, the software is
being upgraded at an estimated cost of about $7,400.00. Although the
Company believes that any potential 2000 related problems will not
materially affect the Company's business, operations or financial
condition, there can no assurance that the Company will timely identify
and remedy all significant Year 2000 problems, that remediation efforts
will not involve significant time and expense, or that such problems
will not have a material adverse effect on the Company's business,
results of operations and financial condition.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are filed under
this Item, and are included herein by reference.
Investments
For those investments, which consist primarily of money market
investments, the carrying amount is a reasonable estimate of fair
value.
Notes Receivables
Interest rates on notes receivable are consistent with the interest
rates on current purchases by the Company of contracts with similar
maturates and collateral. Notes receivable are continually assessed as
to the collectability 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 maturates are used to estimate the fair value of existing
debt.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On April 12, 1999, the Company signed an engagement letter with the
auditing firm of Ehrhardt Keefe Steiner & Hottman, P.C. of 7979 East
Tufts Avenue, Suite 400, Denver, CO 80237 ("EKS&H or Auditor")
(Telephone Number: (303) 740-9400, Fax Number: (303) 740-9009). EKS&H
also audited the Company's financial records for fiscal years 1998,
1997, 1996, 1995, 1994 and 1993. The Auditor agreed to audit the
Company's financial records for fiscal year 1999 and assist the Company
in the preparation of the Company's Annual Report on Form 10 KSB.
A representative(s) of the firm may be available at the annual meeting
to respond to any questions and make a statement.
The accountants report on the financial statements for the fiscal years
1994, 1995, 1996, 1997 and 1998 contained no adverse opinions,
disclaimers of opinion, or qualifications as to uncertainty, audit
scope, or accounting principles.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth the name, age, salary and business experience
for the last five years of the directors and executive officers of TVCN
as of March 31, 1999. Unless otherwise noted, the positions described
are positions with the Company or its subsidiaries.
Mr. Dennis J. Horner, Vice President Finance, Treasurer, and Director
resigned from TVCN, and is no longer an officer or director of TVCN
effective February 10, 1999. Mr. Horner cited personal reasons and
other career opportunities as his reason for his resignation. The
company has no disagreements with Mr. Horner. His letter of resignation
did not disclose, nor did he request the disclosure of, any
disagreements with the Company regarding operations, policies, or
practices.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Age Position Period Served
Omar A. Duwaik 55 Chairman of the 1987 to
Board, Chief present
Executive Officer
and President (1)
Armand DePizzol 67 Director (2) 1989 to
present
Kenneth D.
Roznoy 51 Vice President, 1998 to
Secretary present
Director (1)
</TABLE>
(1) Mr. Omar Duwaik also serves in the same capacities in each of the
Company's wholly-owned subsidiaries: TVCN of Washington, D.C., Inc.
(1991 to Present); TVCN of Michigan, Inc. (1991 to present); TVCN of
Kansas, Inc. (1996); TVCN of California, Inc. (1996); International
Exports, Inc. (1992 to present); Integrated Systems (1993 to present);
Mining Energy International, Inc. (1995 to present); Reema
International Corp. (1993 to present); and Planet Internet (1996 until
sold in May, 1999).
Mr. Kenneth Roznoy also serves in the same capacities in the Company's
wholly owned subsidiaries.
(2) Armand DePizzol became a director of the Company in September of
1989.
The Company is not aware of any filings on Forms 3 or 4.
All directors hold office until the next annual shareholders meeting or
until their successors have been elected and qualified. Vacancies in
the existing Board are filled by majority vote of the remaining
directors. 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. See Item 11. "Security Ownership" herein.
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 Elitches 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
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 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.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash remuneration paid or accrued by
the Company and its subsidiaries for services to the Company in all
capacities during the fiscal year ended March 31, 1999, to (i) each of
the two most highly compensated officers of the company, and (ii) all
executive officers of the Company as a group (includes compensation
only for those periods of the fiscal year ended March 31, 1999, for
which each such individual was an executive officer). Following are
the salaries of individuals who are officers receiving a salary from
the Company:
<TABLE>
Name of Capacity in Which Served Cash Compensation
Individual
<S> <C> <C>
Omar A. Duwaik Chairman of the Board of
Directors, President and
Chief Executive Officer $ 91,720
Dennis J. Horner Vice President,
Treasurer, and Director $ 46,615
Barry K. Arrington Vice President, General
Counsel $ 67,793
Kenneth D. Roznoy Vice President,
Secretary, and Director $ 30,161
</TABLE>
Mr. Barry K. Arrington, Vice President and General Counsel resigned
from TVCN effective February 28, 1999. Mr. Arrington continued to
provide legal services for TVCN on an hourly basis. Mr. Arrington
cited personal reasons and other career opportunities as his reason for
his resignation. The company has no disagreements with Mr. Arrington.
His letter of resignation did not disclose, nor did he request the
disclosure of, any disagreements with the Company regarding operations,
policies, or practices. Mr. Arrington continues to represent the
Company, for an hourly fee, on limited legal matters. Mr. Horner
resigned from TVCN, see "Directors and Executive Officers", herein.
Mr. Duwaik currently does not receive in cash all his $91,720
compensation. Mr. Duwaik's current cash compensation is $54,079 and
the remaining balance is defferred until such time as more funds become
available to the Company.
Stock Option Plan
The Company has in effect an incentive Stock Option Plan and has
reserved a total of 2,000,000 shares of the Company's common stock for
issuance pursuant to the plan, designed as an incentive for key
employees, and for acquisitions of business opportunities, and is to be
administered by the compensation committee of the Board of Directors,
which selects optionees and determines the number of shares subject to
each option. The plan provides that no option may be granted at an
exercise price less than the fair market value of the shares of the
common stock of the Company on the date of grant. Fair market value is
determined by calculation of an average of the highest and lowest sale
prices of the stock, as reported by a responsible reporting service the
committee may select. The committee is also empowered to determine
fair market value in such other manner as is deemed equitable for
purposes of the plan. The committee expects to determine fair market
value in accordance with quotations of share prices maintained by the
market makers in the Company's shares, if any. Unless otherwise
specified, the options expire five years from date of grant and may not
be exercised during the initial one-year period from date of grant.
Thereafter, options may be exercised in whole or in part, depending on
terms of the particular option. The Board of Directors has not
selected the compensation committee. As of March 31, 1999, no options
under this stock option plan were issued. The total number of shares
allocated to the plan is 2,000,000.
Compensation Pursuant to Plans
No compensation was paid to executive officers pursuant to any plan
during the fiscal year just ended, and the Company has no agreement or
understanding, express or implied, with any officer or director
concerning employment or cash compensation for services.
Other Compensation
For the fiscal year ended March 31, 1999, executive officers received
reimbursement of out of pocket expenses incurred on behalf of the
Company.
On February 14, 1995, the Board Directors granted Mr. Omar Duwaik a
cash bonus of $100,000. Because of cash flow constraints, the bonus
has not been paid. This transaction is reflected as a liability on the
balance sheet.
Compensation of Directors
None.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of common stock by each director and nominee and
by all directors and officers of the Company as a group and of certain
other beneficial owners of more than 5% of any class of the Companies
voting securities as of March 31, 1999. The number of shares
beneficially owned is deemed to include shares of common Stock which
directors or officers have a right to acquire pursuant to the exercise
of options within sixty days (60) of March 31, 1999. Each such person
has sole voting and dispositive power with respect to such securities.
<TABLE>
Name and Position with TVCN, or Amount of Percent
Name and Address of Greater Beneficial of
than 5% Holders Ownership Class
<S> <C> <C>
Omar A. Duwaik **
Chairman of the Board of
Directors, President and
Chief Executive Officer 22,354,223* 44.0%
10020 E. Girard Ave., #300
Denver, CO 80231
Multichannel Distribution **
of America, Inc. (MDA)
c/o Omar Duwaik 23,845,892 46.9%
Taher Aldweik **
c/o Omar Duwaik 950,233 1.9%
Total as a Group 47,150,348 92.8%
</TABLE>
* All information refers to common stock.
** On May 29,1997 MDA became greater than a 5% Shareholder of TVCN's
Common Stock by converting its Preferred Stock to Common. MDA is
substantially owned and controlled by Omar Duwaik, its President. Mr.
Taher Aldweik is Mr. Duwaik's brother. Adding all shares that are
under Mr. Duwaik's ownership and/or control, the total will be
47,150,348 shares or 92.8% of the outstanding and issued shares of the
Company's common stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain related transactions were entered into between the Company and
its president, Omar Duwaik and other companies owned/controlled by him.
For a specific transaction, see the following titles elsewhere herein:
"Conversion of Preferred Stock", "Quincy, Illinois and Salina, Kansas",
"Auto Salvage and Parts Recycling Business", and "Rome, GA".
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8
K
- - Financial Statements
- Included under this Item:
* Independent Auditors' Report
* Consolidated Balance Sheet
* Consolidated Statements of Operations
* Consolidated Statements of Changes in Stockholder Equity
* Consolidated statements of Cash Flow
* Notes to Financial statements
- - Exhibits
3.1 Copy of Certificate of Incorporation of the corporation
(incorporated by reference to the Exhibits filed with the
Registration Statement dated September 28, 1987, File No. 33-
16113-D)
3.2 Copy of By Laws of the corporation (incorporated by reference
to the Exhibits filed with the Registration Statement dated
September 28, 1987, file No. 33-16113-D)
10. Material Contracts attached herewith:
10.1 Memorandum of Understanding (page 1).
10.2 Acquisition Agreement (page 13)
21. Subsidiaries of the Registrant (attached herewith page 22)
The required attached Exhibits have been filed separately in hard-
copy forms,and can be made available upon request to TVCN,
10020 E. Girard Ave., Denver, CO 80231. All other Exhibits are either
not applicable, not required or incorporated by reference to the
Exhibits filed with the Registration Statement dated September 28,
1987, File No. 33-16113-D.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TV COMMUNICATIONS NETWORK, INC
Date: October 1, 1999
/S/ JACKIE PORTER
Jackie Porter
Assistant Controller
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the date indicated:
/S/ OMAR A. DUWAIK /S/ KENNETH D. ROZNOY
Omar A. Duwaik Kenneth D. Roznoy
President, CEO & Vice President &
Director Director
Dated: October 1, 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
<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 28,813
outstanding
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
===========
<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
========== ==========
<PAGE>
<TABLE>
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended March 31, 1999 and 1998
Preferred Stock Common Stock
-------------------------- --------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
------------- -------------- ------------
<S> <C> <C> <C>
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
============= ============== ============
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
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).
<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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
===========
<PAGE>
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.
<PAGE>
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 claim
form 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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
<TABLE>
Note 13 - Business Segments (continued)
WCTV Station
Salvage WCTV License Construction Natural Gas Fuel
March 31, 1999 Yard Leases Contracts Conversion
------------ ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Lease 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 $ - $ -
(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 $ 459,955 $ 650 $ 115,747 $ 747,329
</TABLE>
<PAGE>
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.
<PAGE>
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 carryforward 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.
<PAGE>
June 17, 1997
Mr. Dennis Horner
TV Communications Network, Inc. and Subsidiaries
10020 E. Girard Avenue, #300
Denver, Colorado 80231
Dear Dennis:
Please find enclosed two bound copies of the financial statements for
TV Communications Network, Inc. and Subsidiaries for the year ended
March 31, 1997.
If you have any questions, please feel free to call.
Very truly yours,
Robert B. Hottman
Ehrhardt Keefe Steiner & Hottman PC
RBH/acb
Enclosures
<PAGE>
June 28, 1995
Mr. Dennis Horner
TV Communications Network, Inc. and Subsidiaries
10020 E. Girard Avenue, #300
Denver, Colorado 80231
Dear Dennis:
Please find enclosed the representative letter for TV Communications
Network, Inc. and Subsidiaries for March 31, 1995. After you and Omar
have signed the letter, please send it back to us.
If you have any questions, please feel free to call. Thank you.
Sincerely,
Robert B. Hottman
Ehrhardt Keefe Steiner & Hottman PC
RBH/acb
Enclosures
