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
[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
this 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, and compliance with the
Year 2000 issue. 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.
Gas and Oil Operations
TVCN has an ambitious goal ... to become a recognizable force in the gas and oil
industry. With assets of only $10 million, it is hardly apparent that TVCN would
become a recognized force in the giant gas and oil industry. But, TVCN is now
ready to offer a process for the gas and oil industry in competition against the
likes of Exxon and Shell.
How Did It All Begin
Qatar has the third largest gas reserves in the world with the largest single
natural gas field. In 1992 as TVCN was constructing the world's first WCTV
station (outside the USA) in Qatar, it came to the realization that Qatar was
not making much profit on exporting its Liquefied-Natural-Gas ("LNG"). The Qatar
government requested TVCN to explore for more efficient and profitable
applications and utilization of natural gas. It wasn't too long before TVCN's
management ran into a technology used by the Germans in the 1920's and then by
the South Africans in the 1950's. At the heart of such technology was the
Fisher-Tropsch ("F-T") process that converted coal/gas into transportation
fuels. The initial F-T process was not efficient and was not commercially
viable, but few companies claimed the introduction of certain innovations and
improvements to optimize the process efficiency. Worldwide reviews were
conducted by TVCN of the improvements and innovations claimed at that time.
After extensive reviews and evaluations, TVCN decided to develop its own F-T
process in order to overcome many of the deficiencies identified in then
existing technological processes or claimed innovations. Accordingly, TVCN
incorporated Reema International in 1993 as a wholly owned subsidiary for the
development of its own Gas-To-Liquid ("GTL") process. A team of industry experts
was put together and headed by Glen Clark, who is considered one of the top
authorities in the GTL industry. As TVCN, through Reema, began to develop its
own technology, it began to negotiate with several foreign countries for
securing a gas supply source for a GTL plant. Now, TVCN would like to construct
as many GTL plants as the world can demand, perhaps at least 50 GTL plants
throughout the world.
The Name is GTL
At the center of TVCN's ambitious plan is a technological process known as
Gas-To-Liquid. It is the GTL conversion technology for transforming natural gas
into finished petroleum products such as diesel, jet fuel, naphtha, etc. The new
technological improvements could transform trillions of cubic feet of stranded
natural gas in Alaska and other remote areas around the world into valuable
finished petroleum products. These petroleum products could generate hundreds of
millions of dollars in profits, reduce the U.S. dependency on imported petroleum
products, and possibly prevent what Senator Jesse Helms referred to as a
potential "economic calamity ... in America, if and when foreign producers shut
off our supply."
Memorandum of Understanding
After years of negotiations, Reema and the government of Trinidad and Tobago
signed 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 the signing of a definitive agreement. No assurance can be given that the
definitive agreement will be executed. In any event, depending on if and when
the proposed plant construction is completed, the proposed GTL plant might be
the world's first commercial GTL plant to process natural gas into about 10,000
barrels per day ("bpd") of high-quality finished petroleum products such as
sulfur-free diesel, jet fuel, naphtha and others.
The initial capitalization of Reema's proposed GTL plant in Trinidad is expected
to be between $275 and $300 million, for a production capacity of 10,000 bpd
over a period of at least 20 years. Reema is discussing various financing
options with financial institutions and interested parties, of which there can
be no assurance of success..
How Does GTL Work?
A typical GTL conversion plant consists of three major units. The first section
is a gasification or gas reforming unit for converting natural gas into syngas
(a mixture of hydrogen and carbon monoxide). The second step is the F-T process
unit in which the syngas from the first step is converted into 'soupy' waxy
hydrocarbon products. The last unit is for hydrocracking/hydroisomerization of
the wax into the desired product mix such as diesel, jet fuel, naphtha, etc.
Historical Background and Competition
The "heart" of a GTL conversion plant is the Fisher-Tropsch process. The front
end (gasification) and the back end (hydrocracking) units of a GTL plant are
relatively standard commercial units that are commercially available today and
have been in use for about 40 years. The F-T process itself is not new. It was
used by the Germans since the 1920's to convert coal into syngas, which was then
fed into the F-T process for conversion into transportation fuels. South Africa
used the F-T process in the 1950's. However, because of the inefficiency of the
early F-T processes, the old GTL technology was not commercially viable. In
1992, Sasol of South Africa began to experiment on a 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.
The Critical Significance of the GTL Process
"Refiners will kill for it because it solves formidable clean-air problems,
crucial in the United States and other environmentally sensitive countries. Use
of no-sulfur feedstocks will save refiners billions of dollars in investments
they would have to make to reduce sulfur in motor fuels", reported National
Petroleum News, June, 98 ("NPN"). "Crude oil refining could be replaced by
integrated gasification synfuel plants to produce fuels of the highest quality.
... the consequences of a breakthrough in this area are so significant that no
company in the energy business can afford not to follow developments", continued
NPN.
The critical significance of the GTL conversion process stems from three facts.
The first is related to the location of the gas fields around the world. The
second is related to the premium quality of the finished products as compared to
that of those produced from crude oil. The third is due to the impact of GTL
products on the U.S. trade deficit and national security.
A. Gas Locations
More than half of the estimated 5,086 trillion cubic feet of natural gas is
stranded in remote areas. GTL "... could make use of gas which would otherwise
be wasted..." said the Norwegian state firm Statoil. This is obvious because
transporting natural gas through conventional pipelines across continents and
oceans is not commercially viable. The alternative has been to liquefy the
natural gas through very expensive LNG plants and transport it through
specialized and expensive tankers to specialized terminals under special
handling to end-users. The entire LNG process is so expensive, costing billions
of dollars, that it leaves little profit for the gas producing countries and
makes the price of gas expensive for end-users. In addition LNG plants have been
used only when the amount of gas liquefied and exported is very large, and that
the gas price to the end-users at the importing countries is very high.
On the other hand, a typical GTL conversion plant can be built at a cost of
approximately $300 million, producing 10,000 bpd of finished petroleum products
such as diesel, jet fuel and naphtha which can be transported by conventional
means without special terminals or handling. Further, the production capacity of
a typical GTL plant can be expanded through a series of modules. Thus, a small
plant can start production at the rate of 10,000 bpd, then the production
capacity can modularly be increased to 20,000; 30,000; 40,000 etc. bpd. The
capacity appears to be almost endless with one limitation, which is the amount
of natural gas available for the process.
In a study conducted by Arthur D. Little ("ADL"), a global consulting firm, it
was said that "recent technological improvements and operational experience have
finally made GTL an attractive alternative way to commercializing remote natural
gas, i.e., LNG and pipeline gas." Tim Patridge, VP of ADL, predicted that "GTL
will revolutionize the gas industry the way the first LNG plant did about 40
years ago". Patridge expects "to see 1-2 million bpd GTL industry ... to the
tune of 25-50 billion dollars of investment ... And that's just a fraction of
the potential 11 million bpd of GTL capacity that could be built based on known
economic gas reserves." GTL plants can be built near remote gas fields around
the world and transform such fields into massive profit centers.
B. Premium Quality of GTL Produced Products
"Recent advances in converting natural gas into clean, environmentally friendly
oil products could trigger revolutionary changes in the world energy industry,"
reported Reuters from London, 6-22-98.
In order to appreciate the high quality products produced through the GTL
process, one needs to understand that the major cause of pollution in most major
cities throughout the world is the presence of sulfur and other impurities in
crude oil-derived products. Additionally, aromatics are the major cause of
engine wear and tear. Governments are constantly limiting the contents of sulfur
and other impurities in crude oil-based products in order to curb the rising
levels of pollution. For example, the U.S. Congress has adopted a resolution to
reduce the standard level of sulfur content in diesel from 0.35% to 0.20%.
Similar standards were adopted for aromatics content.
In the early 1990's, Congress attempted to reduce the sulfur content to 0.05%.
Oil giants lobbied against the proposed legislation under the claim, among other
things, that it would cost upward of $50 billion to meet the proposed standards.
The proposed Federal legislation did not pass in Congress. However, the State of
California adopted a state resolution to reduce the sulfur standard to 0.05%,
whenever available. It is not known at this time if there is any refinery in the
USA or the world that has the production capability of meeting the California
standard of 0.05%. It is believed that most foreign countries are still
operating at the 0.35% high level of impurities. In Great Britain alone, it was
reported that some 10,000 deaths occurred as a result of diesel pollution.
The recent announcement in California regarding the danger of diesel produced
from crude oil underscores the significance of the GTL technology. On 8-27-98,
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
8-28-99, 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.
C. Impact on U.S. Trade Deficit
Petroleum imports, accounting for the largest single item of the U.S. trade
deficit in 1997, could top 65% of total consumption within the next five years,
according to IOGCC (a 29-state Commission on oil and gas). IOGCC reported to
Congress that the "U.S. may have to abandon 60-80% of discovered domestic oil
resources by 2015 ... Clearly the situation as it now stands is intolerable. As
Senator Jessie Helms said earlier that year: "Economic calamity will occur in
America, if and when foreign producers shut off our supply."
In the meantime, it is reported that there are trillions of cubic feet of
natural gas in Alaska that cannot be transported economically and competitively
to the 48 states. GTL plants can be built in Alaska that can produce badly
needed high-quality diesel, jet fuel, naphtha, etc. This can generate huge
profits, reduce the U.S. trade deficit, reduce U.S. dependence on foreign oil
and reduce pollution.
Projected Growth Potential
See Forward Looking Statements on Page 1.
There are only two commercial GTL plants in the world today -- the Shell plant
of 12, 500-bpd capacity, and the 2,500 bpd plant of Sasol in South Africa. While
Exxon has a pilot GTL plant, Exxon, at the present, does not have any commercial
GTL plant. There is little information about the South African plant. The
capital cost of the Shell plant reportedly ranged from $850 million to as high
as $2.0 billion. However, the Shell plant is concentrating on the high-value
finished products instead of transportation fuel. Therefore, the Shell plant is
not really a typical GTL plant. Based on Reema's proprietary design criteria and
specifications, the following parameters are projected for a typical GTL plant:
Capital Cost: $300 million
Feedstock: Natural gas
Production: 10,000 bpd
Life Span: Minimum 20 years
Projected Total Gross Revenues: $2.32 billion
Projected Avg. Yearly Revenues: $116 million
The current estimate of world reserves of natural gas is 5086 trillion cubic
feet. More than one-half of known natural gas is in stranded gas fields far away
from world markets. This is a sufficient feedstock for thousands of GTL plants
around the world. The dwindling crude oil reserves throughout the world
underscores the critical role that the GTL conversion process will play in the
coming years. Moreover, with the advent of the GTL conversion process,
exploration activities for natural gas may intensify in the coming years.
According to Arthur D. Little, 11 million bpd could potentially be produced by
GTL plants. Using the size of Reema's proposed plant of 10,000 bpd, and a
20-year average operating revenues of $116 million per year, the market
potential for GTL as projected by ADL would be as follows:
Number of Finished Petroleum Oper. Revenues
GTL Plants Products (1000 bpd) Per Year
------------------ ------------------- --------------
1 10 $116.0 million
50 500 $5.8 billion
100 1,000 $11.6 billion
500 5,000 $58.0 billion
1,100 11,000 $127.6 billion
2,000 20,000 $232.0 billion
In order to evaluate the growth potential of GTL in the U.S. market alone, the
following should be taken into account:
o Trillions of cubic feet of natural gas are stranded in Alaska. Giant oil
and gas companies reportedly cannot even place a book value on their gas
reserves because of a current lack of marketability.
o Oil consumption in the U.S. in 1996 was 18.3 million-bpd. It is projected
to reach 21.3 mbpd by 2005.
o U.S. Petroleum imports could top 65% of total consumption within five
years.
o Petroleum imports account for the largest single item of the U.S. trade
deficit.
o The U.S. may have to abandon 60-80% of discovered domestic oil resources by
2015.
Taking the foregoing into account, the U.S. market alone could handle hundreds
of GTL plants of the size proposed by Reema, generating revenues in the tens of
billions of dollars per year.
Wireless Cable TV ("WCTV") Operations
The WCTV industry was created in 1983 when the FCC began licensing WCTV stations
to broadcast multiple TV channels per station on microwave frequencies. The WCTV
frequency spectrum is now divided by the FCC into groups of frequencies such as
MMDS ("Multichannel Multi-Point Distribution Service"), ITFS ("Instructional
Television Fixed Service"), OFS ("Operational Fixed Service"), as well as the
MDS band previously available. MMDS, MDS and OFS frequencies are licensed to
commercial entities for commercial use, while ITFS frequencies are licensed to
educational institutions for educational, instructional and cultural TV
programs. However, educational institutions are allowed to lease any excess
capacity on their ITFS channels to commercial entities for commercial use. A
television station that employs MMDS, MDS, OFS and/or leased ITFS microwave
channels to broadcast cable TV programming to subscribers for monthly fees, is
referred to as a WCTV station.
The FCC regulates the construction, operation, and reporting requirements of
WCTV stations, which transmit from 4 to 33 analog TV channels of programming and
have a range of 25 to 50 miles from the transmitting station. With new digital
equipment coming to the marketplace, each 6 MHz channel will be able to deliver
up to six different TV programs. The costs involved in digital transmissions 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 WCTV in Salina, Kansas. The
Salina operation 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.
Mobile, Alabama - The Company's Mobile, Alabama license is operated by Mobile
Wireless TV. For the use of this license the Company received two cash payments
totaling $200,000. In addition, the Company receives a transmission fee, which
is $1,200 per month.
San Luis Obispo, California - Currently, the Company is broadcasting on seven
channels to 15 subscribers in the San Luis Obispo area.
Other Stations - The Company also owns a WCTV station in Hays, Kansas and
Quincy, Illinois. In cooperation with its affiliate MDA, the Company has
constructed four channel WCTV stations in Myrtle Beach, South Carolina and
Scottsbluff, Nebraska. Neither of these stations have been leased.
In addition, in an effort to expand its concentration of WCTV stations in the
West Virginia and Pennsylvania areas, the Company has applied for five vacant
channels in the Scranton/Wilkes-Barre/Hazelton BTA. The Company purchased the F
Group lease from American Telecasting, Inc. for $200,000.
The FCC Spectrum Auction
From November 13, 1995 to March 28, 1996 the FCC conducted an auction of a
certain portion of the microwave spectrum used by WCTV stations. In this auction
the FCC divided the country into Basic Trade Areas ("BTAs"), according to
certain geographic WCTV markets. The successful bidder on each BTA acquired the
right to obtain the licenses for all parts of the commercial WCTV spectrum in
the BTA, which were not already under license. In order to qualify to
participate in the auction, each bidder was required to pay an up-front payment
to the FCC. The Company's up-front payment was $300,000 with a small business
bidding credit of $400,000.
The FCC conducted the auction as an electronic simultaneous multiple round
auction through a specially prepared automated auction software program. The
auction closed after 181 rounds. Sixty-seven auction participants made
successful bids on one or more BTAs. CAI Wireless Systems, Inc. was the largest
participant in terms of dollar volume, purchasing 32 BTAs for $48.8 million.
Heartland Wireless Communications, Inc. purchased the most BTAs, acquiring 93
BTAs for a total of $19.8 million.
The Company was the successful bidder on the following 12 BTAs:
Clarksburg-Elkins, Fairmount, Logan, Morgantown, Wheeling, West Virginia;
Steubenville, Ohio/Weirton, West Virginia; Dickinson and Williston, North
Dakota; Scranton/Wilkes Barre/Hazleton and Stroudsburg, Pennsylvania;
Scottsbluff, Nebraska; and Watertown, New York. The Company's net bid was
$1,276,000 (taking into account the 15% small business credit TVCN received).
This made TVCN the tenth largest participant in terms of the number of BTAs
acquired, and the 22nd largest participant in terms of dollar volume. The total
amount outstanding on this obligation is $1,020,445, which the Company is
financing over ten years as described in the notes to the company's financial
statements. The Company has not yet finalized its plans with respect to
development of WCTV stations in these BTAs, and there is no assurance that the
Company will have sufficient resources to develop such stations.
Sale of WCTV Stations
Detroit, Michigan - In 1994 the Company sold its WCTV station in Detroit,
Michigan to Eastern Cable Networks of Michigan, Inc. ("ECNM"), a subsidiary of
Eastern Cable Network Corp. ("ECNC"). The consideration received by TVCN was
$11,000,000 payable as follows: (1) a deposit of $250,000; (2) $2.25 million
cash at closing; (3) $500,000 90 days after closing; (4) up to $2.0 million
payable as a function of ECNMs ability to successfully expand its services; (5)
$500,000 nine months after closing; and (6) a $5.5 million promissory note
secured by a lien upon the entire station.
On August 30,1995, ECNM sold the Detroit station to a subsidiary of Peoples
Choice TV ("PCTV"). In September 1995 the Company filed a lawsuit in the
District of Columbia Superior Court seeking damages and to set aside the
transaction on the grounds that it violated the agreement pursuant to which TVCN
sold the Detroit station to ECNM in 1994. On January 12, 1996 the parties
settled the lawsuit effective December 31, 1995. Pursuant to the settlement, the
Company released ECNC from all liability and consented to 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 the total outstanding deferred purchase price of the Detroit station was
$3,061,186, consisting of the $717,686 principal balance of the Original Detroit
Note and the $2,343,500 principal balance of the Additional Detroit Note.
Denver, Colorado - In December 1993 the Company sold its Denver, Colorado WCTV
station to American Telecasting, Inc. ("ATI"), of Colorado Springs, Colorado.
The gross purchase price was determined pursuant to a contractual formula to be
$6,073,500. After adjustments, the net purchase price was $5,868,434. As of
March 31, 1999 the principal on the note was paid in full.
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) since August of 1997. On
August 4, 1998, Heartland gave management an acceptable offer, i.e., the two
companies would partition the BTA off so that TVCN will receive 40.6% of the BTA
that covers the central part, and Heartland will keep the 59.4%. The companies
will share payments to the FCC in those percentages. To entice Heartland to
enter into such an agreement, TVCN offered them its E-Group license in Hays,
Kansas, since Heartland has already paid $65,000 to the FCC towards the Salina
BTA payments. Heartland countered that it would rather have the E-Group license
in Quincy, Illinois that TVCN controlled, but did not own. The Company
negotiated a no-arms-length agreement with its affiliated company, Multichannel
Distribution of America and MDA-Illinois ("MDA") to acquire that license to be a
part of the Salina deal. MDA agreed to take TVCN common stock as payment for the
Quincy license. MDA is largely owned and controlled by Mr. Duwaik, TVCN
President.
TVCN discerned that the Quincy, Illinois market has about forty-nine thousand
two hundred and thirty-three (49,233) lines of site households ("LOS/HH"). The
Company offered eight dollars and sixty-four cents ($8.64) for each LOS/HH.
(This is reasonable in today's marketplace, considering that BellSouth's
purchases in the Atlanta area were in the $39.00 per LOS Household range.) This
would bring the purchase price for the Quincy license to four hundred
twenty-five thousand, three hundred and seventy-three dollars ($425,373).
Management also thought this was reasonable in light of the fact that BellSouth
Wireless had paid the Company two million dollars ($2,000,000) a year earlier
for the Rome, Georgia E-Group license. An evaluation had been conducted by an
independent appraiser (Houlihan Valuation Advisors of Denver, Colorado) in the
possible transfer of ten million (10,000,000) shares of Restricted Stock, and
the valuation of five cents ($.05) a share was determined. That being the case,
TVCN issued to MDA eight million five hundred seven thousand, four hundred and
sixty shares (8,507,460) of Restricted Common Stock in exchange for receiving
100% of the outstanding shares of MDA--Illinois which owns the Quincy license,
and TVCN will transfer ownership of that license to Heartland. TVCN will acquire
in return, 40.6% of the Salina BTA license, plus MDS1, MDS2A (only four
megahertz wide, but ideal for data transfer), the F-Group (4 channels) and H1 in
the Company's name. The Company will also have easier access to the educational
license in the market (the A-Group, C-Group and G-Group - 12 more channels in
all). Through this transaction, the Company believes the value of the Salina
System would be greatly enhanced. It will be further improved through the
ability of adding more channels. Further, the Company will no longer have to pay
lease fees to Token, nor pay any more legal fees on their behalf. We will also
be saving tower fee payments in Quincy. This transaction was submitted to and
approved by a vote of the shareholders at last year's annual meeting.
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.
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 discounted average high bids of $0.1425
was discounted by 20% 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. The Company is considering the sale of
this operation.
Auto Salvage and Parts Recycling Business
In November of 1998, TV Communications Network, Inc. entered into an agreement
with JBA Wholesalers, Inc. ("JBA") to acquire all of the issued an outstanding
stock of JBA Wholesalers, Inc. JBA owns and 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
estimate 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. The Company believes that this is a business with
significant asset growth potential.
Mining Business
Mining and Energy International Corp./Liberty Hill Mine - On September 2, 1997
the company's subsidiary, Mining and Energy International Corp. ("MEICO")
entered into two agreements with "Big Trees' Trust" and "Naylor 1996 Charitable
Remainder Trust under date of December 30, 1996," of Applegate, California
(collectively, "Big Trees Trust") concerning the Liberty Hill Mine in Nevada
County, California. Under the first agreement MEICO agreed to lease ten
unpatented mining claims, consisting of about 200 acres of the Liberty Hill
Mine, for thirty years. Under the second agreement, MEICO acquired an option to
lease 109 other unpatented mining claims, consisting of approximately 1,750
acres of the Liberty Hill Mine, for a nominal option price. Big Trees Trust is
controlled by Ray Naylor, who for many years was an officer of the Company's
Century 21 mining subsidiary.
Under the terms of the lease agreement, MEICO agreed to lease the subject mining
property for thirty years, with an option to terminate the lease without
penalty. MEICO agreed to pay the out-of-pocket costs of operating the mine. In
addition to these out-of-pocket expenses MEICO agreed to pay Big Trees Trust a
nonrefundable advance against royalties of $40,000 per month (or 15% of the ores
mined and sold, whichever is greater). As of March 31, 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 yet in operation. The status of this mine
has not changed since the last fiscal year. For more information, see the
company's previous annual reports, which are incorporated by reference.
Reema International Corp.
Reema's day-to-day operations are managed by its Senior Vice President, Glen
Clark. Mr. Clark is the manager and driving force behind the GTL project with
some 45 years broad management experience domestically and internationally.
Previously, Mr. Clark was with Ford Bacon & Davis Technologies in charge of the
Environmental Department. Prior to that, he was responsible for managing a
300-person Engineering and Design Drafting Group at Gulf Interstate Engineering,
where they provided design and drafting services to the pipeline (Liquid & Gas)
and related process industries. At M.K. Kellogg, Mr. Clark was responsible for
worldwide start-up to completion operations of an average of over 30 projects
employing over 2,500 people around the world. The projects included LNG (and
regasification), ammonia, fertilizer, methanol, cogeneration, carbon dioxide
(recovery, purification and reinjection), catalytic cracking and refinery
operations and maintenance. At Bechtel Petroleum, Mr. Clark was responsible for
all synfuel project activities. The projects included coal gasification, heavy
oils, tar sands, oil shale, biomas conversion and coal liquefication. At Allied
Chemical, for over 27 years, Mr. Clark progressed from an entry-level foreman to
become the vice president with a wide range of responsibilities that included
managing the operations of 20 chemical plants. Mr. Clark has a BS in Chemical
Engineering from Penn State, and an MBA from NYSU. He has completed graduate
marketing and management courses at Columbia University and an advanced
management program at Harvard University.
Internet Business Opportunities
On February 16, 1996 the Company incorporated its wholly owned subsidiary,
Planet Internet Corp. ("Planet") as an Internet Service Provider ("ISP"). Planet
provides Internet service to subscribers. During the first year of testing and
operation, Planet concentrated its efforts on local individual
accounts.Individual dial-up subscribers are charged an average of $19.95 per
month per subscriber with a certain discount for a pre-paid yearly subscription.
Planet offers a wide range of services to commercial accounts for as little as
$50.00 per month for dial-up subscribers to as high as $350.00 per month per
subscriber for accounts with high speed digital modems and other internet
services. As of March 31, 1999, Planet had 836 subscribers.
As of March 31, 1999, Planet Internet has purchased internet equipment worth
$588,572, and has spent $1,304,535 for the development of its internet services.
On May 18, 1999, TVCN entered into an agreement with BeWell Net Corporation of
19555 East Parker Square, Parker, Colorado 80134 to purchase the assets of the
Company's wholly owned internet service provisioning subsidiary, Planet Internet
Corp. of 910 16th Street, Suite 801, Denver, Colorado 80202.
Omar Duwaik, TVCN's President negotiated the agreement with BeWell's Dr. William
Shepperd. Mr. Duwaik related to the Board that BeWell seemed better positioned
to access growth capital. Based on BeWell's representations, BeWell has some
38,000 subscribers, and that BeWell's management had received and turned down an
offer to be purchased for $30 million, and that BeWell was planning a private
placement offering of 1,000,000 shares of its common stock at $5.00 a share. Mr.
Duwaik presented to the Board that he had negotiated a purchase price of
$1,746,515.00 less certain liabilities. The net purchase price will be paid in
restricted shares of BeWell common stock, at the rate of $5.00 per share. BeWell
will assume approximately $229,000 in long and short-term liabilities of Planet
Internet. Other Liabilities will be the responsibility of TVCN. BeWell agreed to
register the restricted shares that will be issued to TVCN when and if BeWell
filed a registration statement for a contemplated public offering in the future.
The financial impact of this transaction is not reflected in the financial
statement herein because the transaction did not take place until after the end
of TVCN's fiscal year.
A certain number of BeWell's shares that will be issued to TVCN will be
transferred to former Planet Internet employees in the form of a performance
bonus by the Company.
Middle East Investment Authorization
At a special meeting of the Company's Board of Directors held on December 13,
1995, Omar Duwaik was authorized to explore investment opportunities in the
Middle East. Mr. Duwaik was authorized to enter into such agreements as were
necessary and to invest in a holding company on behalf of the Company if he
deemed such an investment to be in the best interests of the Company. To date
Mr. Duwaik has explored numerous investment opportunities. However, none have
met the criteria he has established for making such an investment. Therefore,
although Mr. Duwaik was authorized to commit up to $3 million, no funds have
been expended to date pursuant to the Board's authorization. Pursuant to its
general policy of seeking shareholder approval of major investments, the Company
will seek shareholder approval of any investment made pursuant to this
authority.
Qatar WCTV Station
In 1992 the Company received a contract from the Qatari Government
Telecommunications Corporation ("Q-Tel") to build a WCTV station in Doha, Qatar
and train operations personnel. The Company built the station in 1993, and a
provisional acceptance certificate for the station was issued on August 14,
1993. Through May 1996, TVCN personnel assisted in the management and operation
of the station and trained Qatari personnel. TVCN has guaranteed the supply of
all-compatible equipment and spare parts that may be needed for the maintenance,
and refurbishment of the equipment, and the continuation of the WCTV operation
without interruption over a period of 10 years. The Qatar wireless cable system
was awarded Cable Operator of the Year honors at the CABSAT 95 (cable and
satellite exhibition).
Business of Issuer
TVCN has not constructed any commercial GTL plants as of this date. Therefore,
the gas and oil operations are not discussed in this section. For the
development of these operations, see "Business Development" herein.
Principal Services and Markets
The Company owns MMDS licenses in Mobile, Alabama; San Luis Obispo, California;
Salina, Kansas; Hays, Kansas; and Scranton/Wilkes-Barre, PA. The Company's MMDS
license in Mobile is leased to an independent WCTV operator. The Company
constructed stations in Myrtle Beach, South Carolina; Quincy, Illinois; Rome,
Georgia; Woodward, Oklahoma; and Scottsbluff, Nebraska under authority from MDA.
Currently, the only WCTV stations the Company is operating are in the Salina,
Kansas and San Luis Obispo, California areas. The Company is leasing its Mobile,
Alabama license as well as the Woodward, Oklahoma license (under authority from
MDA). The company has had inquiries concerning the leasing of the channels in
Scottsbluff, Nebraska; Hays, Kansas; and Myrtle Beach, South Carolina. 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 to
acquire additional protection and channel rights for its Salina WCTV system. The
Agreement was filed with the FCC in December 1998 and went on public notice on
May 26, 1999. The Company is awaiting final FCC approval.
The Company offers its WCTV services to private homes, apartments and commercial
properties including stores, bars, restaurants, office buildings, and
hotels/motels.
Distribution Methods
In any given market, the number of channels a WCTV station is able to offer to
its subscribers is limited by the number of WCTV channels available to the
operator (including any channels leased from other licensees) and the terms of
the leases under which leased channels are used. In addition, the nature of the
subscribers receiving equipment and the availability of funds for the necessary
capital investment affects the quality of the station's services.
The so-called head-end equipment at a WCTV broadcast station typically includes
satellite receiving equipment, descramblers, transmitters, encoders
(scramblers), combiners, waveguides and omni-directional or cardioid antenna
located at the tower site in each location. Television programming, received via
satellite at each broadcast facility, is retransmitted over microwave
frequencies in a scrambled mode over the WCTV channels owned or leased by the
WCTV operator. The signal is received by the subscribers' reception equipment.
The scrambled signal is then decoded at each television outlet by an authorized
set-top converter.
Subscriber reception equipment typically consists of a television antenna
designed to provide reception of VHF/UHF off-air programming (provided as an
option to consumers), a microwave receive antenna (about 27" tall and 18" wide),
a down-converter, a set-top converter (descrambler and channel selector) and
various other component parts.
Competition
The Company competes for viewers with the television networks, independent
television stations and other video suppliers such as cable television,
satellite television program services, Direct Broadcast Satellite ("DBS") and
video cassettes.
The most common source of competition to a WCTV station is traditional cable
television. Most cable television systems are able to offer a greater number of
channels to their audiences than most WCTV stations. In addition, most cable
television systems supply some programming that is not available on WCTV
stations, including a wide range of advertiser supported and subscription
supported video programming services. New compression technology is presently
being tested which could allow WCTV operators to offer many more channels by
compressing more than one TV channel of programming onto each licensed channel.
However, the same technology is being developed for cable usage and DBS usage,
so the effect of the technology cannot be predicted with certainty at this time.
In addition, there is no certainty that deployment of such technology for any of
its present or future stations will be within the Company's financial capacity.
Other sources of competition include low power television stations and DBS
transmissions to homes. Wireless and traditional cable communication systems
face substantial competition from alternative methods of distributing and
receiving television signals, and from other sources of entertainment such as
movie theaters and home video rentals.
Finally, in most areas of the country, including areas served by the Company,
off-air programming can be received by viewers who use their own antenna. The
extent to which a WCTV operator competes with off-air programming depends upon
the quality and quantity of the broadcast signals available by direct antenna
reception compared to the quality and diversity of the operator's WCTV
programming.
Advances in communications technology and changes in the marketplace are
constantly occurring. Thus, it is not possible to predict the effect that
ongoing or future developments might have on the cable communications industry.
The ability of the Company's systems to compete with present, emerging and
future distribution media will depend to a great extent on obtaining attractive
programming. The continued availability of sufficient quality programming may in
turn be affected by the developments in regulation or copyright law. In addition
to management and experience factors, which are material to the Company's
competitive position, other competitive factors include authorized broadcast
power allowance, number of leased channels, access to programming and the
strength of local competition. The Company competes with a great number of other
firms in all phases of its operations, many of which have substantially greater
resources than the Company.
Agreements with Program Suppliers
A WCTV operator can offer its subscribers a broad range of television
programming, including popular channels like ESPN, CNN, WTBS, DISCOVERY,
LIFETIME, CNBC, WGN, NICKELODEON, 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. and is in the process of assigning the Quincy, IL license as part of a
separate business deal 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 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:
Channel Group No. of Channels
------------- ---------------
A Group 4
B Group 4
C Group 4
D Group 4
E Group 4
F Group 4
G Group 4
H1, H2, and/or H3 3
Channel 1 1
Channel 2 (or 2A) 1
-----
Total 33
=====
Of the 33 channels in this part of the spectrum a commercial WCTV operator can
directly own the licenses for the eight MMDS channels (groups E and F), the OFS
channels (H1, H2 and/or H3) and the MDS channels (1 and 2 or 2A). This allows a
WCTV operator to directly own up to thirteen (13) channels. In addition, the FCC
has authorized educational licensees of ITFS channels (groups A, B, C, D and G)
to lease their excess capacity for commercial use, including subscription
television service.
Broadcasting licenses for WCTV facilities are granted for a maximum period of
ten years and are renewable upon application. Prior to the expiration of a
license, the licensee must submit an application for renewal of the license
evidencing that the licensee has been complying with the FCC's rules and
regulations. While there can be no assurance that renewal of a license will be
granted, historically, such licenses have been renewed if the licensee has
complied with the FCC's rules and regulations for the operation of the
facilities, as well as the rules relating to the types and nature of
transmission equipment.
From time to time legislation may be introduced in Congress, which, if enacted,
might affect the Company's operations. Proceedings, investigations, hearings and
studies are periodically conducted by congressional committees and by the FCC
and other government agencies with respect to problems and practices of, and
conditions in the subscription TV industry.
On February 8, 1996, President Clinton signed into law the Telecommunications
Act of 1996 ("The Act"), the most sweeping overhaul in the 60 year history of
the Communications Act. The Act does not completely replace the older law, but
rather deletes some parts, adds new ones and augments others. The Act's primary
purpose is to open the entire range of telecommunications services to greater
competition and cross service providers. The Act is not completely
self-executing, however, so the FCC must enact regulations to implement the
Act's provisions.
Two actions taken by the FCC as a result of The Act are particularly important
to the Company's ongoing business in the wireless cable industry. First, the FCC
has proposed a rule that would preempt the local zoning regulation of MMDS
antennas, thus allowing the placement of antennas in areas in which they had
been prohibited. The rule would establish a 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
Providing television programming requires substantial initial capital outlays.
While contracts with respect to providing such services are intended to have
terms sufficient to provide for the recovery of the Company's investment,
together with a favorable return on its investment, the Company's continued
expansion is largely dependent on its ability to raise capital for the costs of
any of its new business endeavors.
Since inception, the Company has financed its capital and operating cash
requirements through loans and advances from the Company's president, other
shareholders, and the sale of common and preferred stock. The Company is now
considering different debt financing options as well as continued asset sales.
There is no certainty that the Company will be able to obtain all required
financing.
Summary
The most dominant business about which financial information is presented
elsewhere in this report is the construction, sale, lease and operation of WCTV
stations. The principal service is the providing of subscription TV programs to
commercial and private subscribers. As of this date, the method of distribution
is by over the air microwave signals. The leasing of MMDS and other microwave TV
channels is essential to this business. The practice of the Company relating to
working capital is to have an adequate amount of inventory and in particular,
the receiving equipment for the installation of new subscribers. The Company's
principal methods of competition include lower price, better service, and
product performance (better picture quality). Another advantage is the ability
of the microwave signal to reach subscribers in areas not economically feasible
for cable TV operators. Increasingly, satellite television program services are
competing with the Company. The negative factors include a lesser number of
channels and consequently a lesser number of programs. As disclosed above, the
Company is also involved in other business opportunities, including mining,
internet access, and gas conversion projects. The mining operations are being
discontinued while the Internet operation is being sold.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company owned its executive offices in Denver, Colorado at year-end. 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. Under the
terms of the sales agreement, the Company will enter into a three year lease for
the rental of its' executive offices.
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
land subject to closing. The net book value at year-end of the building and land
was $158,379.
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. This acreage has also been listed for sale.
The Company owns its executive offices in Denver, Colorado. The Company also
owns a warehouse in Detroit, which was leased to PCTV at the rate of $4,000 per
month until March 1999, and vacant land in Arapahoe and Jefferson Counties in
Colorado, which is being held for future development. However, all these assets
are being listed for sale. Physical assets of the Company, except for the
mortgage on corporate headquarters and a lease on Internet equipment with Ascend
Equipment Leasing Corporation., are not held subject to any major encumbrance.
Subsequent to March 1999, the Ascend lease is being assigned and transferred to
BeWell Net as part of the sale of Planet Internet.
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, $705,269 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.
Year 2000 Risks
The risks posed by Year 2000 issues could adversely affect the Company's
business in a number of significant ways. Additionally, the Company faces risks
to the extent that suppliers of products, services and systems purchased by the
Company, and others with whom the Company does business on a worldwide basis, do
not have business systems or products that comply with the Year 2000
requirements.
The Company is currently expending resources to review its products and
services, as well as our internal management information systems in order to
identify and modify those products, services and systems that are not Year 2000
compliant. The company expects that such modifications will be made on a timely
basis and does not believe that the costs of such modifications will have a
material effect on its operating results. The Company, however, cannot guarantee
that its own systems will be Year 2000 compliant in a timely manner, that any
third parties who provide us with products, services or systems will be Year
2000 compliant in a timely manner. Given the pervasive nature of the Year 2000
problem, the Company cannot guarantee that disruptions in other industries and
market segments will not adversely affect the Company's business.
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:
Years High Bid Per Low Ask Per
Ended Share Share
--------- ------------ ------------
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
Quarter High Bid Per Low Ask Per
Ending Share Share
--------- ------------ ------------
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
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.
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.
Conversion of Preferred Stock
Class C Preferred Stock - Class C Preferred Stock is non-cumulative. Holders of
Class C Preferred Stock are entitled to receive non-cumulative dividends of up
to six percent (6%) per annum from the net profits of the Company, when and if
declared by its Board of Directors. The conversion rate is two shares of Class C
Preferred Stock for one share of Common Stock. A thirty day (30) notice 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 1991, the Company made a successful bid on certain assets and businesses of
Microband together with MDA, an affiliated company substantially owned and
controlled by TVCN's president, in addition to having some mutual officers and
directors. When TVCN and MDA became the successful bidders, it was partially due
to the fact that MDA had collateralized the bid with a number of licenses. The
Company issued 4,864,000 Class D Preferred Shares pursuant to the asset
acquisition from Microband. Consequently, when the opportunity came to buy back
the TVCN preferred stock from Microband for $152,000, it was mutually agreed
that MDA should derive the benefit from the discount as consideration for its
part in making the winning bid. TVCN received the assets and businesses for its
part. The Class D Preferred Stock was recorded at the repurchase price. MDA
requested this preferred stock be converted into common stock, and the company
issued to MDA 4,864,000 Restricted Common Shares on May 29, 1997.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The operating revenue for 1999 was $1,035,000 compared to $1,202,000 in 1999, 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 $1,140,000. 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. Interest expense was
$286,000 in 1999 compared to $154,000 in 1998, an increase of $132,000.
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.
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.
The net loss for 1999 was $1,076,000 million compared to a loss of $571,000 in
1998.
These 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 benefit generated was $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. Note 13 of the
audited financial statements on page F-23 reflects the segment data of the
Company's business segments for the years 1999 and 1998. The salvage yard was
consolidated into the Company's operations at the beginning of 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.
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
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, as a result of
downsizing, less travel expenditures, lower legal expenses and other
money-saving measures. However, the Company intends to continue its research and
development in the GTL technology.
Liquidity and Capital Resources
The Company's primary source of liquidity has been from the sale of appreciated
assets. The business of the Company requires substantial capital investment on a
continuing basis and the availability of a sufficient credit line or access to
capital financing is essential to the company's continued expansion. The
Company's cash flows for the years ended March 31, 1999, and 1998, are
summarized as follows:
Cash provided by (used in)
March 31,
-----------------------------
1999 1998
------------ ------------
Operations ............ $(1,411,409) $(1,315,000)
Investing activities .. $(1,002,317) $ 2,167,185
Financing activities .. $ 18,887 $ (490,808)
Net increase (decrease) $ (390,205) $ 361,377
Currently, the Company has $2,203,549 in long-term debt with current maturities
of $405,428, 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 Company incurred losses during the last three fiscal years. The Company's
current assets and liabilities are $887,393 and $1,616,367 respectively. The
Company intends to finance its research and development activity in the GTL
echnology, and to meet its current financial obligations through the sale of
certain of its assets. After its fiscal year end, the Company sold one of its
two residential lots for $630,000. It has listed for sale its property in
Detroit for $200,000, and its mountain properties for $1.1 million. The Company
has accepted an offer on its building which houses its corporate headquarters
for $1.2 million, subject to closing. The Company is considering the sale of
many of its WCTV systems and BTA rights to partially finance its GTL projects.
In general, 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. The Company has a note receivable in the approximate amount
of $2.4 million due at the end of year 2000. The Company may have to sell the
note at a discount if it becomes necessary to do so.
The Company believes that with the sale of appreciated assets, it will be able
to utilize the net operating loss carryforward in the near future to reduce cash
outflows for income tax expenses.
Stockholder Advances
The president continued to advance loans to the Company. As of March 31, 1999,
the loans totalled $1,100,334. 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-forwards available
to offset future years taxable income. The following summarizes these losses.
Net Operating
Loss Carry- Year of
Forward Expiration
-------------- -----------
As of March 31, 1999 $5,300,000 2014
<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 $2,203,549 $ 2,173,678 $ 1,518,165 $ 1,510,240 $ 512,560
</TABLE>
Capitalization
Stockholders equity consists of the following:
<TABLE>
<CAPTION>
Stockholders equity
March 31
--------------------------------------------------------------
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>
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". That
is they are capable of adequately distinguishing twenty-first century dates from
twentieth century dates. Although the Company's computer systems have undergone,
or will undergo, the Company's normal quality testing procedures, there can,
however be no assurance that the Company's computer systems will contain all
necessary date code changes. Any failure of the Company's computer systems to
perform, including system malfunctions associated with the onset of year 2000,
could result in claims against the Company.
Although the Company has not been a party to any litigation or arbitration
proceeding to date that involves year 2000 compliance issues with its products
or services, there can be no assurances that the Company will not in the future
be required to defend its services in such proceedings, or to negotiate
resolutions of claims based upon Year 2000 issues. The costs of defending and
resolving Year 2000-related disputes, regardless of the merits of such disputes,
and any liability of the company for the Year200-related damages, including
consequential damages, could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company's business depends on numerous computer systems that could
potentially be impacted by Year 2000 related problems. Those systems include,
among others: the hardware and software systems used internally by the Company
in the management of its business; and non-information technology systems and
services used by the Company in the management of its business, such as power,
telephone systems and building systems.
The Company is currently in the process of evaluating its information technology
infrastructure in order to identify and modify any products, services or systems
that are not Year 2000 compliant. Based on its initial analysis of the systems
potentially impacted by conducting business in the twenty-first century, the
Company is applying a phased approach to making such systems, and accordingly,
the Company's operations, ready for the year 2000. Beyond awareness of the
issues and scope of systems involved, the phases of activities in process
include: an assessment of specific underlying computer systems, programs and
hardware; renovation or replacement of Year 2000 non-compliant technology,
validation and testing of critical systems certified by third-party suppliers to
be Year 2000 compliant; and implementation of Year 2000 compliant systems.
The Company is reviewing what further actions are required to make all software
systems used internally Year 2000 compliant as well as actions needed to
mitigate vulnerability to problems with suppliers and other third party's
systems.
Costs to Address Year 2000 Issues
The total cost of these Year 2000 compliance activities has not been, and is not
anticipated to be, material to the Company's business, results of operations and
financial condition. However, there can be 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.
Contingency Plans
The Company does not presently have a contingency plan for handling Year 2000
problems not detected and corrected prior to their occurrence. Any failure of
the Company to address any unforeseen Year 2000 issue could adversely affect the
Company's business, financial condition and results of operations.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company are filed under this Item,
and are included herein by reference.
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.
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
June 4, 1999
Denver, Colorado
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
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 (Note 6) .................................... 1,396,945
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 (Note 14) ...................................... 37,500
Subscriber deposits ........................................ 24,379
-----------
Total current liabilities ............................ 1,616,367
Long-term liabilities
Long-term debt (Note 6) .................................... 1,798,121
Long-term deferred gain (Note 10) .......................... 2,343,500
Advances from stockholder (Note 6) ......................... 1,100,334
-----------
Total liabilities .................................... 6,858,322
-----------
Commitments and contingencies (Notes 6, 7 and 8)
Stockholders' equity (Note 8)
Class A preferred stock, $1 par value; no shares outstanding --
Class B preferred stock, $1 par value; 28,813 shares
issued and outstanding .................................... 28,813
Class C preferred stock, $1 par value; no shares outstanding --
Class D preferred stock, $1 par value; no shares outstanding --
Common stock, $.0005 par value; 100,000,000 shares
authorized, 50,835,954 shares issued and outstanding ...... 25,418
Additional paid-in capital ................................. 7,468,721
Accumulated deficit ........................................ (4,473,349)
-----------
Total stockholders' equity ........................... 3,049,603
-----------
Total liabilities and stockholders' equity ................... $ 9,907,925
===========
See notes to consolidated financial statements.
F - 2
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended
March 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
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 (47,801) (814,979)
------------ ------------
for 1999 and 1998, respectively
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
============ ============
</TABLE>
See notes to consolidated financial statements.
F - 3
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------------- -------------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital (Deficit) Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1997 ..... 5,672,813 $ 960,813 17,981,133 $ 9,016 $ 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) .......... (5,644,000) (932,000) 5,254,000 2,627 929,373 -- --
Stock repurchases (Note 5) ..... -- -- (793,111) (423) (213,718) -- (214,141)
Acquisition of business (Note 2) -- -- 17,953,321 8,977 (8,977) -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances at March 30, 1998 ..... 28,813 28,813 40,395,343 20,197 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) -- -- 1,500,000 750 74,250 -- 75,000
Acquisition of business (Note 2) -- -- 8,507,460 4,254 (4,253) -- 1
Stock repurchase
adjustment (Note 5) ........... -- -- 433,151 217 116,835 -- 117,052
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 1999 ...... 28,813 $ 28,813 50,835,954 $ 25,418 $ 7,468,721 $(4,473,349) $ 3,049,603
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F - 4
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
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.
See notes to consolidated financial statements.
F - 5
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
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).
See notes to consolidated financial statements.
F - 6
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies
Organization
TV Communications Network, Inc. (the "Company") is engaged primarily in the
business of leasing Wireless Cable TV (WCTV) licenses. In addition, the Company
engages in research regarding the conversion of natural gas into alternative
fuels, 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.
F - 7
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
Profits with respect to sale of the Company's Denver Cable operations are being
recorded on the installment sale method while profit with respect to the Detroit
and Washington D.C. sales are being recorded using the cost recovery method
(Note 8).
Basic Loss Per Share
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.
F - 8
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
F - 9
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
F - 10
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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
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.
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
========
F - 11
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 3 - Business Acquisitions (continued)
The following consideration was issued to fund the 1999 acquisitions.
Cash paid, net of cash acquired $ 47,426
Issuance of common stock 75,001
--------
$122,427
========
The results of operations have been included from the dates of acquisition
forward. The historical results of operations of MDA of Illinois, Inc. and JBA
were insignificant in 1999 and 1998 prior to the acquisitions and accordingly no
pro forma results of operations have been presented as the Company's pro forma
results of operations would approximate the historical results of operations
presented in the accompanying consolidated financial statements.
Note 4 - Property and Equipment
The following summarizes the property and equipment:
Continuing Discontinued
Operations Operations
---------- ------------
Land $1,297,926 $ -
Office building and improvements 1,092,573 -
Office furniture and equipment 1,002,482 7,436
Mining equipment - 425,963
Gas to liquids testing equipment 58,595 -
Transmission equipment 735,346 -
Transportation equipment 141,850 -
---------- --------
4,328,772 433,399
Less accumulated depreciation (1,344,963) (164,378)
---------- --------
Total $2,983,809 $ 269,021
========== ==========
F - 12
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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
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
F - 13
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 6 - Long-Term Debt and Stockholder Advances (continued)
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
==========
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).
F - 14
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
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.
F - 15
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 7 - Commitments and Contingencies (continued)
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.
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.
F - 16
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 8 - Stockholders' Equity (continued)
Class B Preferred Stock
Class B Preferred Stock is participating but non-cumulative stock. The holders
of Class B Preferred Stock are entitled to receive non-cumulative dividends from
the Company's net profits at the rate of up to nine percent (9%) when and if
declared by the Board of Directors. Holders of Class B Preferred Stock are not
entitled to receive dividends if profits are not allocated for such distribution
by the Board of Directors. Class B holders are entitled to convert their
Preferred Stock into Common Stock at the rate of two shares of Class B Preferred
Stock for one share of Common Stock, and are given a thirty day (30) notice to
convert, if such Preferred Stock is called for redemption by the Company.
Pursuant to the Century 21 Mining acquisition, 28,813 Class B Preferred Shares
were issued.
Class C Preferred Stock
Class C Preferred Stock is non-participating and non-cumulative. Holders of
Class C Preferred Stock are entitled to receive non-cumulative dividends of up
to six percent (6%) per annum from the net profits of the Company, when and if
declared by its Board of Directors. The conversion rate is two shares of Class C
Preferred Stock for one share of Common Stock. Similar to Class B Preferred
Stock, a thirty day (30) notice is given to holders of Class C Preferred Stock
upon a call for redemption by the Company, during which thirty day (30) period
the holders of Class B or Class C Preferred Stock are entitled to convert their
Preferred Stock into Common Stock. Other rights and restrictions may apply on
any class of Preferred Stock as agreed upon prior to issuance. The Company
issued 400,000 Class C Preferred Shares to MDA (a company related by virtue of
having several mutual stockholders, officers and directors) in exchange for
Transmission Equipment, and 380,000 Class C Preferred Shares to AT&I (a company
related by virtue of having several mutual stockholders, officers and directors)
as partial payment for the acquisition of the Company's headquarters building.
The headquarters building had a fair market value of $930,000 and the Company
assumed a $550,000 mortgage (Note 14). During the year ended March 31, 1998, the
Company converted 400,000 shares of Class C Preferred Stock, previously issued
to MDA (a related company), into 200,000 shares of TV Communications Network,
Inc. common stock; and 380,000 shares of Class C Preferred Stock, previously
issued to AT&I (a related company), and into 190,000 shares of TV Communications
Network, Inc. common stock.
F - 17
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 8 - Stockholders' Equity (continued)
Class D Preferred Stock
The Class D Preferred Stock is convertible into common stock of TVCN at the rate
of one Class D Preferred Share for one Common Share of TVCN, provided that such
conversion is not made for a period of four (4) years from October 1991; and
holders of Class D Preferred Stock shall be entitled to receive non-cumulative
and non-participating dividends from TVCN's net profits at the rate of up to
nine percent (9%) when and if declared by TVCN. The Company issued 4,864,000
Class D Preferred Shares pursuant to the asset acquisition from Microband.
The Company bid on certain assets and businesses of Microband together with MDA,
a company related by virtue of having some mutual stockholders, officers, and
directors. When TVCN and MDA became the successful bidders, it was partially due
to the fact that MDA had collateralized the bid with a number of licenses.
Consequently, when the opportunity came to buy back the TVCN preferred stock
from Microband for $152,000, it was mutually agreed that MDA should derive the
benefit from the discount as consideration for its part in making the winning
bid. TVCN received the assets and businesses for its part. The Class D Preferred
Stock was recorded at the repurchase price.
During the year ended March 31, 1998, 4,864,000 shares of Class D preferred
stock were converted into 4,864,000 shares of TV Communications Network, Inc.
common stock.
Incentive Stock Option Plan
Effective July 14, 1987, the Company adopted an Incentive Stock Option Plan for
Company executives and key employees. The Company has reserved 2,000,000 common
shares for issuance pursuant to the plan. The plan provides that no option may
be granted at an exercise price less than the fair market value of the common
shares of the Company on the date of grant. To date, no options have been
granted pursuant to the plan. Under current terms, the plan will terminate in
2007.
F - 18
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
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
==========
F - 19
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 9 - Income Taxes (continued)
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.
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)
========= =========
F - 20
<PAGE>
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.
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.
F - 21
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 11 - Other Assets
During the year ended March 31, 1997, the Company purchased approximately
$70,000 of reclamation bonds related to its mine development efforts (Note 4),
in addition to the $27,000 purchased in prior years. The bonds are held for the
purpose of offsetting the cost of restoration following completion of the
related mining efforts. Cost of the reclamation bonds will be amortized over the
necessary reclamation period.
On November 25, 1998, the Forest Service called and used $28,000 of the
reclamation bonds for required winter stabilization. The remaining bonds are
held for future restoration of the mine.
Note 12 - REEMA International
REEMA International (REEMA) was incorporated on October 27, 1993 with the
primary purpose of converting natural gas into usable petroleum products. On
April 1, 1995, the Company purchased 100% of the outstanding shares of REEMA.
During 1998, REEMA and the government of Trinidad and Tobago signed a Memorandum
of Understanding (MOU) for the construction and operation of a gas-to-liquid
(GTL) plant in Trinidad. The GTL plant construction costs are estimated at
approximately $300 million, which REEMA is currently reviewing various financing
alternatives. There are no binding obligations for either party under the MOU
and both parties are in continued negotiations towards reaching a definitive
agreement. There can be no assurances that REEMA will be successful in
negotiating a definitive agreement or that the necessary financing will be
obtained to cover the costs of constructing the GTL plant. On June 11, 1999, the
National Gas Company of Trinidad and Tobago Limited (a government agency) and
Reema International Corporation signed an agreement titled "Term Sheet for
Supply of Natural Gas Agreement", detailing the terms and conditions for a
definitive agreement.
Note 13 - Business Segments
Operating results and other financial data are presented for the principal
business segments of the Company for the years ended March 31, 1999 and 1998.
Total revenue by business segment includes wireless cable TV (WCTV) station
leases and WCTV international station construction contracts, as reported in the
Company's consolidated financial statements. Operating profit by business
segment is total revenue less cost of sales, where appropriate, and other
operating expenses. In computing operating profit by business segment, the
following items were considered in the Corporate and Other category: portions of
administrative expenses, interest expense, income taxes and any unusual items.
Identifiable assets by business segment are those assets used in Company
operations in each segment. Corporate assets are principally cash, notes
receivable, investments, intangible assets and deferred charges.
F - 22
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 13 - Business Segments (continued)
<TABLE>
<CAPTION>
(Discontinued-
WCTV Station Natural Note 14)
Salvage WCTV License Construction Gas Fuel Mining and
Yard Leases Contracts Conversion Exploration
------------ ------------ ------------ ------------ ------------
<S> <C> <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) $ (72,426)
Identifiable assets $ 332,013 $ 3,363,021 $ 16,033 $ 71,175 $ 312,372
Depreciation ....... $ 5,040 $ 3,883 $ 32,271 $ 8,186 $ 38,285
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) $ (1,234,816)
Identifiable assets $ -- $ 3,120,710 $ 52,377 $ 20,777 $ 378,729
Depreciation ....... $ -- $ 2,058 $ 12,465 $ 11,867 $ 84,203
Capital expenditures $ -- $ 137,724 $ -- $ -- $ 33,253
</TABLE>
THE TABLE IS CONTINUED BELOW
<TABLE>
<CAPTION>
Internet Access
Service Pager Corporate
Provider Rental and Other Consolidated
------------ ------------ ------------ ------------
<S> <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 ..... $ (575,200) $ (104,986) $ (1,811,324) $ (2,878,037)
Identifiable assets $ 392,912 $ 42,751 $ 3,706,614 $ 8,236,891
Depreciation ....... $ 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 ..... $ (508,084) $ (155,083) $ (2,796,320) $ (5,086,262)
Identifiable assets $ 515,784 $ 63,848 $ 6,860,242 $ 11,012,467
Depreciation ....... $ 85,112 $ 12,467 $ 423,548 $ 631,720
Capital expenditures $ 459,955 $ 650 $ 115,747 $ 747,329
</TABLE>
F - 23
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
F - 24
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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. Liabilities totaling approximately $283,000 were retained by TVCN in
connection with the sale. Planet Internet had net assets of approximately
$282,000 at March 31, 1999.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 2, 1998, the Registrant hired as its cerifying accountants the first of
Ehrhardt Keefe Steiner & Hottman PC ("EKS&H"). EKS&H had resigned from that
position on March 30, 1998.
On March 30, 1998, the Registrant's certifying accountants, EKS&H resigned from
their representation of the Registrant because EKS&H did not have adequate
manpower to perform the audit according to a mutually acceptable audit schedule.
Neither of EKS&H's reports on the Registrant's financial statements for 1996 or
1997 : (1) contained an adverse opinion or a disclaimer of opinion; or (2) was
qualified or modified as to uncertainty, audit scope, or accounting principles.
During the Registrant's 1996 and 1997 fiscal years and the subsequent interim
period preceding EKS&H's resignation and rehiring, the registrant had no
disagreements with EKS&H on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of EKS&H, would have caused
it to make reference to the subject matter of the disagreements in connection
with its report.
As of April 6, 1998, the Registrant and EKS&H were still discussing a new audit
schedule pursuant to which the Registrant may rehire the services of EKS&H.
On May 29, 1998, the Registrant and EKS&H arrived at a mutually acceptable audit
schedule and the Registrant reengaged EKS&H as their certifying accountants.
During the period from March 31, 1998 to June 2, 1998, the Registrant had no
disagreements with EKS&H on any matter of accounting principles or practice,
financial statement disclosures or auditing scope or procedure.
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.
Period
Name Age Position Served
- ----------------- ----------- ---------- -----------
Omar A. Duwaik 55 Chairman of the 1987 to
Board, Chief present
Executive
Officer and
President (1)
Armand DePizzol 67 President, 1989 to
Alert Systems present
and CEO of
National Direct
Connect Corp.,
since 1986,
Director (2)
Kenneth D. Roznoy 51 Vice President, 1998 to
Secretary present
Director (1)
(1) Mr. Omar Duwaik also serves in the same capacities in each of the Company's
wholly-owned subsidiaries: TVCN of Washington, D.C., Inc. (1991 to
Present); TVCN of Michigan, Inc. (1991 to present); TVCN of Kansas, Inc.
(1996); TVCN of California, Inc. (1996); International Exports, Inc. (1992
to present); Integrated Systems (1993 to present); Mining Energy
International, Inc. (1995 to present); Reema International Corp. (1993 to
present); and Planet Internet (1996 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 20,030,816 shares of
common stock of TVCN, and also owns the majority of MDA, an affiliated company,
which owns 23,845,892 shares of common stock. Mr. Duwaik also owns a majority of
American Technology and Information, which owns 190,000 shares of common stock.
Mr. Duwaik is employed on a full-time basis with the Company and is compensated
at the temporarily reduced rate of $54,079 a year. 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:
Cash
Name of Individual Capacity in Which Served Compensation
------------------------ ---------------------------- ---------------
Omar A. Duwaik Chairman of the Board of
Directors, President and
Chief Executive Officer $91,720
Dennis J. Horner (former) Vice President, Treasurer, $46,615
and Director
Barry K. Arrington (former) Vice President, General
Counsel $67,793
Kenneth D. Roznoy Vice President, Secretary,
and Director $30,161
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.
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.
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, 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
None.
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.
<PAGE>
Amount of
Name and Position with TVCN, or Name and Beneficial Percent of
Address of Greater than 5% Holders Ownership Class
------------------------------------------ -------------- -------------
Omar A. Duwaik **
Chairman of the Board of
Directors, President and
Chief Executive Officer 20,030,816 39.4%
All officers and directors
as a group (One in number) 20,030,816 39.4%
Multichannel Distribution **
of America, Inc. (MDA) 23,845,892 46.9%
Omar A. Duwaik family 3,323,832 6.5%
Total as a Group
(Three in Number) 47,200,540 92.8%
* All information refers to common stock.
** On May 29,1997 MDA became greater than a 5% Shareholder of TVCN's Common
Stock by converting its Preferred Stock to Common. MDA is substantially
owned and controlled by Omar Duwaik, its President. See Conversion of
Preferred Stock. Additionally, Mr. Duwaik owns/controls other stock of TVCN
that makes the total stock under his direct ownership/control 47,200,540
shares, or 92.8% of the class
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 AND REPORTS ON FORM 8 K
(a) Exhibits
Index to Exhibits
21 Listing of Subsidiaries
27 Financial Data Schedule
(b) Reports on Form 8-K during the fourth quarter
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TV COMMUNICATIONS NETWORK, INC
Date: July 28, 1999
/s/Omar A. Duwaik /s/Kenneth Roznoy
____________________________________ ____________________________
Omar A. Duwaik Kenneth Roznoy
PRESIDENT/CEO Director
TV Communications Network, Inc.
Century 21 Mining, Inc.
International Exports, Inc.
International Integrated Systems, Inc.
JBA Wholesalers, Inc.
Mining and Energy International Corporation
Page TVCN, Inc.
Planet Internet Corporation
Reema International, Inc.
TVCN International, Inc.
MDA of Georgia, Inc.
MDA of Illinois, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 462,157
<SECURITIES> 0
<RECEIVABLES> 68,800
<ALLOWANCES> 39,950
<INVENTORY> 165,261
<CURRENT-ASSETS> 887,393
<PP&E> 4,762,171
<DEPRECIATION> 1,509,341
<TOTAL-ASSETS> 9,907,925
<CURRENT-LIABILITIES> 1,616,367
<BONDS> 0
0
28,813
<COMMON> 25,418
<OTHER-SE> 2,995,372
<TOTAL-LIABILITY-AND-EQUITY> 9,907,925
<SALES> 0
<TOTAL-REVENUES> 1,034,573
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,627,012
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 285,598
<INCOME-PRETAX> (1,557,649)
<INCOME-TAX> (529,602)
<INCOME-CONTINUING> (1,028,047)
<DISCONTINUED> (47,801)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,072,848)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
