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, 2000.
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. ("TVCN")
(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: 68,469,788 shares of TVCN's
Common Stock ($.0005 par value) were outstanding as of March 31, 2000.
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Forward Looking Statements
Certain statements of management of TVCN included in the
Form 10 KSB and elsewhere contain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbor created thereby. These statements include the plans and objectives
of management for future operations, Gas-To-Liquids ("GTL") Technology based
on TVCN's Gas-To-Liquids process, anticipated capital and operating costs of
Gas-To-Liquids plants, signing a definitive agreement, obtaining required
financing for such plants, the continued development of our Gas-To-Liquids
process and the projected economic use of it. 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 our control. 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 Gas-To-Liquids plants, and produce a salable product from
the proposed Gas-To-Liquids plant, and the ability to successfully develop
the BTAs and markets, satisfactory resolution of legal maters, and economic,
competitive and market conditions for our business. Although we believe 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 we or any
other person that our objectives and plans 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 these Wireless TV operations. After early success,
we began to diversify. Since then, TVCN has been a diversified holding
enterprise with operations in gas and oil opportunities; Wireless Cable TV;
Internet; mining; auto salvage and wireless communications. However, we
recently sold our Internet operations, and we are considering the sale of
other operations in order to focus on our gas and oil opportunities.
Wireless Cable TV ("WCTV") Operations
The WCTV industry was created in 1983 when the FCC began licensing Wireless
Cable TV stations to broadcast multiple TV channels per station on microwave
frequencies. The Wireless Cable 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 (single channel) 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, the educational institutions are allowed to lease any
excess capacity on their channels to commercial entities for commercial use.
A television station that employs any microwave channels to broadcast cable
TV programming to subscribers for monthly fees, is referred to as a Wireless
Cable TV station.
The capacity of a channel is defined in terms of frequency and time. When
all the frequencies of a particular channel are utilized 24 hours a day
seven-days a week, it is said that the channel capacity is full
or fully utilized. When the frequencies (or any part of them) are not used
24 hours a day, seven-days a week, then it is said that the channel capacity
is not full, and in that event the channel has an excess capacity. An
educational institution normally leases its excess channel capacity (i.e.,
the use of the frequencies) to a commercial operator during the time(s) when
such frequencies are not used or utilized for educational purposes by the
educational Institution.
The FCC regulates the construction, operation, and reporting requirements of
Wireless Cable 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 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 Wireless Cable station can
deliver a variety of signals, including subscription television, data, and
other related entertainment and communications services. Wireless Cable
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. We are currently operating a wireless cable TV system in
Salina. The system broadcasts on 19 channels to a base of 447 subscribers
and has two employees. Zenith scrambling equipment was introduced into the
Salina head-end equipment in November and December, 1996, each subscriber's
household received a new descrambler (set-top converter), and we added ESPN,
Showtime and Flix to the programming package. The number of subscribers
remain limited because of the limited number of TV channels. With only 19
TV channels, we have been unable to compete effectively against conventional
cable TV operators. Through an agreement with Nucentrix Broadband (formerly
known as Heartland), which agreement was approved by the FCC in May, 2000, we
hope to increase the number of TV channels to as many as 33.
Mobile, Alabama. TVCN's 4-TV channel station in Mobile, Alabama was leased
to Mobile Wireless TV, Inc. ("Mobile Wireless") pursuant to a lease
agreement dated May 9, 1994. The lease was for an initial period of five
years at the greater of $2,000.00 per month, 0.50 per month per subscriber
or 2.0% of the gross monthly revenues of the station. Mobile Wireless was
hoping to lease many additional TV channels from other licensees in order to
offer a reasonable alternative to conventional cable TV in Mobile. However,
Mobile Wireless was able to lease or buy only seven more channels in
addition to our four channels. With only 11 TV channels, Mobile Wireless
was unable to mount a viable commercial wireless cable TV system that could
compete adequately against cable TV systems. The revenues of the station
remained limited, and only the minimum monthly transmission fees were
received by us during the last five years. The lease expired in May, 1999.
Mobile Wireless expressed its interest to renew the lease for five more
years under the same terms and conditions. We declined to enter into a long
term lease because of our desire to sell our rights and interest in the
station. However, we agreed to lease the station on a month-to-month basis
at the rate of $1,200.00 per month. We are considering the sale of the
assets in the Mobile market.
San Luis Obispo, California. TVCN owns a 4-TV channel station (E1, E2, E3,
E4) in San Luis Obispo, California which was leased to Wireless
Telecommunications, Inc. ("WTCI") in 1995. In January, 1996, Wireless
Telecommunications defaulted on its payments. We repossessed the station in
June 1996 and have been operating it since that time. As part of the
settlement with Wireless Telecommunications, we agreed to purchase the Basic
Trading Area License of San Luis Obispo from Wireless Telecommunications. In
exchange, Wireless Telecommunications conveyed and transferred all of its
assets and interest in the License to us. (See "The FCC Spectrum Auction"
on page 5.) The purchase price for the Basic Trading Area License was
$452,168. Of this amount $90,000 was paid in cash, and $362,168 was paid in
the form of our assumption of an obligation in that amount payable to the
FCC over 10 years, with interest only payments for the first two years and
principal and interest payments for the final eight years. The FCC approved
the transfer of the License to us on May 23, 1997. Since we need more TV
channels to be competitive, we also acquired from non-affiliated entities,
the three individual H-Group channel licenses (H1, H2, and H3) for
$20,000.00. The FCC also approved this acquisition. Currently, we are
broadcasting on seven channels (3 H-Group channels and 4 E-Group channels)
to 59 subscribers. As the new owner of the Basic Trading Area License, we
applied for the 4 F-Group channels (F1, F2, F3, and F4) and for the two
single channels MDS1 and MDS2. The FCC approved TVCN's applications for the
last six channels. We have not yet constructed the transmission facilities
for these six additional channels. We have until August, 2001 to complete
such construction. The construction of those six channels would expand the
station capacity to 13 channels, which is still not commercially viable to
compete against conventional cable TV systems. We are negotiating with
other licensees in San Luis Obispo for the purpose of leasing additional
channels. In the meantime, we are considering selling all of our assets in
this market.
Other stations. TVCN owns 4-TV channel stations in each of Hays, Kansas;
Woodward, Oklahoma; and Quincy, Illinois. In cooperation with our affiliate,
Multichannel Distribution of America, Inc. (MDA), we have also constructed
four-channel stations in Myrtle Beach, South Carolina; Rome, Georgia; and
Scottsbluff, Nebraska. MDA is owned and controlled by our president. The
Quincy station is involved in a three-way transaction. We acquired the
station from our affiliate MDA and entered into an agreement with Heartland
Communications to transfer and assign the rights and interest in the Quincy
station to Heartland in exchange for transferring certain of Heartland's
rights and interest in its Basic Trading Area License in Salina, Kansas to
us. The agreement with Heartland is awaiting a final approval from the FCC
(see the discussion under "Quincy, Illinois and Salina, Kansas"). The
Woodward station is being leased to Heartland for $500.00 per month for a
period of two years expiring April 2001. Our stations in Myrtle Beach and
Scottsbluff have not been placed into commercial operation yet, nor are they
the subject of any lease because no reasonable lease has been offered.
Because of the limited number of channels (4-channel each) of these stations,
We have no immediate plans to place these two stations into commercial
operations. We are considering the sale of these and other stations.
In addition, in an effort to expand our concentration of Wireless Cable
stations in the West Virginia and Pennsylvania areas, we applied for five
vacant channels in the Scranton/Wilkes-Barre/Hazelton Basic Trading Area
License. Also in order to increase the channel capacity of the Scranton
station, TVCN purchased the F Group lease ("Lease") and station equipment
from American Telecasting, Inc. for $200,000. This Lease entitles us to
utilize the Four Channels of frequencies 24-hours a day, seven-days a week
during the term(s) of the lease. The lease is for $750.00 per month for
five years, renewable every five years thereafter at our option. However,
at the expiration of the Lease, a dispute arose as to whether or not the
Lease was renewed in a timely manner. The parties settled their dispute by
agreeing on June 23, 2000 to sell the F-Group license and equipment in
Scranton. According to the settlement agreement, the monthly lease payments
of $750 is canceled, and is replaced by a lease payment of $1.00 per year. In
addition, TVCN will receive the first $300,000 from the sale. The remaining
balance from the sale proceeds, if any, will be divided such that TVCN will
receive 40% and the Lessor (or Licensee) will receive 60% of said balance.
TVCN will continue to have the right of first refusal to purchase the License
and the equipment as originally set forth in the Lease.
Governmental Regulation/FCC Licensing
The licenses of TVCN are not subject to regulation by any state or local
government. However, the Wireless Cable Frequencies are subject to FCC
regulations. Our ability to continue providing programming is dependent
upon our continued FCC qualification 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 FCC Designation & Usage
A Group 4 ITFS (educational)
B Group 4 ITFS (educational)
C Group 4 ITFS (educational)
D Group 4 ITFS (educational)
E Group 4 MMDS (commercial)
F Group 4 MMDS (commercial)
G Group 4 ITFS (educational)
H1, H2, and/or H3 3 MMDS (commercial)
Channel 1 1 MDS1 (commercial)
Channel 2 (or 2A) 1 MDS2 (commercial)
Total 33
Of the 33 channels in this part of the spectrum a commercial Wireless Cable
TV 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 an operator to directly own up to thirteen (13)
channels. In addition, the FCC has authorized educational licensees (groups
A, B, C, D and G) to lease their excess capacity for commercial use,
including subscription television service.
The FCC Spectrum Auction
Until November, 1995, the FCC used to grant licenses in the Wireless Cable
TV frequency spectrum to qualified applicants on a first-come first-served
basis. From November 13, 1995 to March 28, 1996 the FCC changed policy and
conducted an auction of the frequency spectrum used by these stations. In
this Auction, the FCC divided the country into Basic Trading Areas adopting
the same 487 geographic areas as defined by Rand McNally's Commercial Atlas
and marketing guide. plus 6 other areas not so defined. The successful
bidder on each area acquired the right to obtain the licenses for all parts
of the commercial Wireless Cable spectrum in the area, which were not
already under license. Prior to the Auction, a licensee could be granted a
license for up to four commercial TV channels only. Now, an area winner can
receive a license for up to 13 commercial TV channels. In order to qualify
to participate in the Auction, each bidder was required to pay an up-front
payment to the FCC. TVCN's up-front payment was $300,000, which included a
small business bidding credit of $400,000.
TVCN was the successful bidder on the following 12 Basic Trading Areas:
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. Our net bid was $1,276,000
(taking into account the 15% small business credit TVCN received). This
made us 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 $882,580, which TVCN is
financing over ten years as described in the notes to our financial
statements. We have not yet finalized plans with respect to the development
of Wireless Cable stations in these areas. The development is dependent on
our ability to obtain substantial capital resources. There is no assurance
that we will obtain sufficient financing to develop these stations. In the
meantime, we will attempt to sell our rights and interest in the Area
Licenses, of which there can be no assurance.
Purchase/Sale of Wireless Cable TV Stations
In 1991, TVCN, together with its affiliate Multichannel Distribution of
America ("MDA"), Inc., made a successful bid in the U.S. Bankruptcy Court in
New York to purchase the Wireless Cable station in Washington, D.C., and
another station in Detroit, Michigan. MDA is substantially owned and
controlled by our president. The two acquired Wireless stations were owned
by the Microband Companies, Inc. which were under bankruptcy proceedings.
The purchase price for the two stations was $6,264,000.00 of which the
amount of $4,864,000 was paid in the form of issuing to Microband 4,864,000
shares of TVCN's Class D, preferred stock, and the remaining balance of
$1,400,000 was paid in cash and a short term note. A few months later, MDA
purchased from Microband Companies the foregoing 4,864,000 shares of preferred
shares for a cash payment of $152,000.
The acquisition cost of the two Wireless Cable stations in Detroit and
Washington, D.C. was initially recorded on TVCN's books at the purchase
price of $6,264,000. However, in our 10-KSB of March 31, 1994 the recorded
purchase price of the two stations was adjusted to $1,552,000 instead of the
original $6,264,000. Subsequently, the two stations were sold for a total of
$13.5 million payable in cash and notes that carried an annual interest of
8.0% as follows:
The Wireless Cable station in Washington, D.C., was sold in 1993 to Eastern
Cable Network Corp. for $2,500,000 payable as follows: (1) a non-
refundable deposit of $50,000; (2) payment upon closing of $550,000;
(3) payment of $600,000 six months after Closing; and (4) balance of $1.3
million dollars under a promissory note at eight percent (8%) interest
payable in sixteen (16) equal quarterly installments, commencing November 22,
1994, secured by a lien upon the entire System.
In 1994, TVCN also sold the Wireless Cable station in Detroit, Michigan to
Eastern Cable Networks of Michigan, Inc. EASTERN, a subsidiary of Eastern
Cable Network Corp. The consideration received by us 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 EASTERN's 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, Eastern Cable Network Corp. ("EASTERN") sold the Detroit
station to a subsidiary of Peoples Choice TV. In September 1995 TVCN 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 EASTERN in 1994. On
January 12, 1996 the parties settled the lawsuit effective December 31, 1995.
Pursuant to the settlement, we released EASTERN from all liability and
consented to Peoples Choice assumption of the note secured by the Detroit
station. In return, EASTERN and Peoples Choice paid us $614,120 in cash;
Peoples Choice assumed the Original Detroit Note; and one of Peoples Choice
wholly-owned subsidiaries executed a second note (the Additional Detroit
Note) in favor of TVCN in the amount of $2.15 million. As of March 31, 1999,
all payments under the Washington station sale, and the original Detroit
Note have been received, and the remaining balance (principal and interest)
in the amount of $2,448,957.50, as required under the Additional Detroit
Note is due to the Company by December 30, 2000. The Latter Note carries
an annual interest of 9%, payable semiannually until the Note is fully paid.
In January 2000, Sprint Corporation, the successor of People's Choice, paid
off the Note in full. The Company recognized the remaining gain previously
deferred in the amount of $2,343,500.
Denver, Colorado - In December 1993 we sold our Denver, Colorado Wireless
Cable TV station to American Telecasting, Inc., of Colorado Springs,
Colorado. The gross purchase price was determined pursuant to a contractual
formula to be $6,073,500. After adjustments, the net purchase price was
$5,868,434. As of March 31, 1999 all payments under the sale of the Denver
station were received.
Quincy, Illinois and Salina, Kansas
As mentioned on page 3, we are operating a Wireless Cable TV station with a
limited number of TV channels in Salina, Kansas. During the FCC auction
(see "The FCC Spectrum Auction" on page 5), Heartland Communications Corp.
(now known as Nucentrix Brodband) was the successful bidder for the Salina
Basic Trading Area. That limited our ability to lease or license additional
TV channels in Salina. That also gave Heartland the exclusive right to
obtain the remaining licenses which we had not applied for in the Salina
market. These remaining licenses were also limited in number. Specifically,
our Salina system had been effectively limited to 19 TV channels, hardly
adequate to compete against conventional cable TV systems. Since Heartland
was the FCC auction winner for the Salina Area License, Heartland got the
exclusivity over the remaining 14 TV channels in Salina. Dividing the
frequency spectrum in Salina, with 14 channels under Heartland's control,
and 19 channels under TVCN's control, severely limits the ability of either
Heartland or TVCN to independently develop the Salina market to its growth
potential. As a result, the two companies began to discuss the possibility
of finding a solution.
After several rounds of negotiations, Heartland gave us what we deemed to be
an acceptable offer, i.e., the two companies would partition the BTA off so
that TVCN would receive 40.6% of the BTA that covers the central part, and
Heartland would keep the 59.4%. According to the offer, the two companies
would share payments to the FCC in those percentages. As a condition, TVCN
had to transfer a 4 channel TV license in another market to Heartland. To
meet this condition, we offered Heartland our E-Group license in Hays,
Kansas. Heartland rejected TVCN's offer, but was willing to accept the
transfer of the 4-Channel E-Group license in Quincy, Illinois. But, TVCN did
not own the Quincy license/station. The 4-channel Quincy station and
license was owned by MDA - Illinois which is a wholly-owned subsidiary of
Multichannel Distribution of America ("MDA") Inc., and is substantially
owned and controlled by TVCN's president.
The aforementioned Salina partition is favorable to TVCN. First, it allows
us to assume only 40.6% of the remaining payments to the FCC, or the balance
amount of $59,909.36 payable in quarterly payments of $2,693.81 to the FCC
over the next 8 years. Second, the 40.6% of the Area License covers the vast
majority of the population in the Salina market. Third, it enables TVCN to
obtain the remaining 14 TV channels in Salina, which should increase the
commercial value of the Salina system and increase the likelihood of its
development and its growth potential.
However, before the partition agreement with Heartland could be concluded, we
had to buy the Quincy station and license from MDA. Since Mr. Duwaik owns
and controls the majority of both TVCN and MDA, any business between the two
entities would not be an arm-length transaction. Mr. Horner, a former TVCN
board director, and Mr. Roznoy, a current director of TVCN's board,
cooperated in evaluating the Quincy transaction without Mr. Duwaik's
involvement. Since the Quincy license was applied for by MDA in 1983, among
other factors, the documents concerning the actual cost associated with the
issuance of the License and construction of the Quincy station/license were
not readily available.
Based on the cost of a comparable station's construction and licensing (and
market values), the Quincy station and license were evaluated at $425,373 for
which TVCN offered to issue, and Mr. Duwaik agreed to receive, restricted
shares of TVCN common stock. An evaluation of our common stock was conducted
by an independent appraiser (Houlihan Valuation Advisors of Denver,
Colorado). Based on such factors as similarly situated companies, book
value, thinly traded stock, pink-sheet listing limitation, TVCN's
liabilities, cash flow and liquidity, etc., the appraiser determined that
the restricted shares of TVCN common stock in such a transaction would be
worth $0.05 per share. Accordingly, TVCN issued 8,507,460 shares of its
restricted common stock to MDA (at the rate of $0.05/share) for the acquisition
of MDA's Quincy station and license. The trading quoted price of TVCN stock
at the time of the transaction had an asking and bidding price of $ 0.09/share
and $ 0.07/share respectively. Since Mr. Duwaik is already in control of
both TVCN and MDA, no change in control is affected.
The Quincy transaction was submitted to and approved by a vote of the
majority of shareholders of TVCN during the 1998 Annual Meeting of our
shareholders. The majority of the votes counted, excluding those of
Mr. Duwaik's holdings, were also in favor of the transaction.
As a result, the partition agreement was submitted to the FCC in December
1998. It went on public notice on May 26, 1999 and was approved by the FCC
in May, 2000.
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 Multichannel
Distribution of America ("MDA"), Inc., Inc. through the acquisition of all
outstanding shares of its wholly owned subsidiary MDA of Georgia. MDA, Inc.
is owned and controlled by our president. In exchange for the acquisition
of the Rome Station, TVCN issued 17,953,321 restricted shares of TVCN's
common stock to MDA. The number of shares issued in the transaction was
derived by averaging the high bid price of TVCN's stock at the close on each
of the previous four Fridays, which were $0.14, $0.13, $0.15 and $0.15, as
reported by the National Quotation Bureau. The average of those high bids
was $0.1425 per share. Since the shares issued by TVCN are restricted
shares, and TVCN historically discounted restricted shares by 20%, the stock
price used in the transaction was adjusted to $0.1114 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 Company's
shareholders during their annual meeting in 1997.
Principal Services and Markets
TVCN offers its Wireless Cable 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 Wireless Cable TV ("WCTV")
station is able to offer to its subscribers is limited by the number of
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 Wireless Cable broadcast station
typically includes satellite receiving equipment, descramblers, transmitters,
encoders (scramblers), combiners, waveguides and an omni-directional or a
cardioide 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
Wireless Cable channels owned or leased by the 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
In its wireless TV operations, TVCN 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 Wireless Cable TV station is
traditional cable television. Most cable television systems are able to
offer a greater number of channels to their audiences than most Wireless
Cable stations. In addition, most cable television systems supply some
programming that is not available on our stations, including a wide range of
advertiser supported and subscription supported video programming services.
New compression technology is presently being tested which could allow
operators like us to offer many more channels by compressing more than
channel of programming onto each licensed channel. However, the same
technology is being developed for cable usage and Direct Broadcast Satellite
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 our
financial capacity.
Other sources of competition include low power television stations and the
Dish Network and DIRECTV. 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 we serve, off-air
programming can be received by viewers who use their own antenna. The
extent to which a Wireless Cable operator competes with off-air programming
depends upon the quality and quantity of the broadcast signals available by
direct antenna reception compared to the quality and diversity of
programming offered by us.
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 Wireless cable
communications industry. The ability of our 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 our competitive position, other competitive
factors include authorized broadcast power, number of leased channels, access
to programming and the strength of local competition. TVCN competes with a
great number of other firms in all phases of its operations, many of which
have substantially greater resources than we do.
Agreements with Program Suppliers
A Wireless Cable 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. TVCN 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.
Broadcasting licenses for Wireless Cable 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, our licenses have been
renewed because we, as the licensee, have 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 TVCN'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 our ongoing business in the wireless cable industry. First,
the FCC has proposed a rule that would preempt the local zoning regulation
of Wireless Cable antennas, thus allowing the placement of antennas in areas
in which they once 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 our antennas. The FCC has also
streamlined its Educational application process by delegating processing
authority to the FCC staff. As many Wireless Cable systems rely on leasing
excess Educational 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. TVCN is considering the
sale of its remaining TV properties to concentrate its energies on our
subsidiary Reema's Gas-To-Liquids project. Sprint, MCI Worldcom and several
other telecommunications companies have recently purchased other wireless
cable operators. We also held discussions with these potential 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 Wireless Cable 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.
Reema International Corp.
In 1993, TVCN incorporated a wholly-owned subsidiary under the name Reema
International Corporation ("Reema") for the purpose of evaluating and
developing a Gas-To-Liquids ("GTL") process. The process converts natural
gas into finished products such as diesel, jet fuels and other specialty
products. Additionally, Reema began to negotiate with various gas
producing countries around the world the possibility of constructing and
operating commercial Gas-To-Liquids plants at gas fields.
As of March 31, 2000, Reema's activities were limited to the research and
development of the technology, and the negotiations with various governments
of gas producing countries, and with various financial institutions,
engineering firms, manufacturers, vendors, and suppliers. Reema has
generated no revenues from these activities, nor does it expect to generate
any revenues any time soon, and does not have any Gas-To-Liquids plants
under operation or construction. Reema is simply negotiating with various
entities the possibility of constructing its first plant, of which there can
be no assurance of success.
GTL Plant
A typical Gas-To-Liquids 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 Fisher-Tropsche process unit in which the syngas from the
first step is converted into "soupy" waxy hydrocarbon products. The last
unit is for hydrocracking/hydroisomerization of the wax into the desired
product mix such as diesel, jet fuel, naphtha, etc. The front end
(gasification) and the back end (hydrocracking) units of the plant are
relatively standard commercial units that are commercially available today
and have been in use for about 40 years. The Fisher-Tropsche 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 Fisher-Tropsche process for
conversion into transportation fuels. South Africa used the Fisher-Tropsche
process in the 1950's. However, because of the inefficiency of the early
processes, the old Gas-To-Liquids technology was not commercially viable.
In 1992, Sasol of South Africa began to experiment on a 2,500 bpd Gas-To-
Liquids 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 Gas-To-Liquids
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 barrels per day. In 1997, a fire destroyed part of the plant and
it is not known whether or not the plant is currently in operation. The
giant oil company Exxon announced recently that it has completed the
construction of a pilot Gas-To-Liquids plant for the production of 250
barrels per day of transportation fuels. As of this date, other than the
foregoing, neither Exxon nor others have built any other commercial Gas-To-
Liquids plant anywhere in the world.
Memorandum of Understanding
After years of negotiations, in December of 1997, our subsidiary, Reema, and
the government of Trinidad and Tobago signed a Memorandum of Understanding
("MOU") for the construction and operation of a Gas-To-Liquids plant in
Trinidad. The proposed Gas-To-Liquids conversion plant will be employing
Reema's proprietary technological information. Reema's 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. If and when the
proposed plant is constructed successfully, of which there can be no
assurance, the natural gas will be converted into approximately 10,000
barrels per day of quality finished petroleum products such as sulfur-free
diesel, jet fuel, naphtha and others.
The initial capitalization of the Gas-To-Liquids plant in Trinidad is
expected to be between $275 and $300 million, for a production capacity of
10,000 barrels per day over a period of at least 20 years. Reema has
been discussing various financing options with financial institutions and
interested parties. On May 10, 2000, Reema signed an agreement with a
private investor to provide Reema with a loan of $150 million for the gas
project in Trinidad. The loan is over a period of 20 years and carries an
interest rate tied to the London Inter Banking Operating Rate,
known internationally as LIBOR. The Company paid a loan origination fee
of $150,000.
On June 5, 2000, Reema announced the signing of an agreement with Parsons
Energy and Chemical Group, Inc. ("Parson") to commence the engineering work
for the engineering design, procurement and construction ("EPC") for the
proposed Gas-To-Liquids Plant in Trinidad. Upon the engineering design
completion, the desired manufacturers, vendors, suppliers and sub-
contractors necessary for the procurement and construction of the Plant will
be selected through a bidding process. The engineering design, procurement
and construction of the Plant is expected to be completed in about three
years.
We continued our discussions and negotiations with various financial
institutions, manufacturers, vendors and suppliers. But, no agreement has
been signed with any of said entities, and none is expected until after the
engineering design is completed and the procurement process is commenced.
There is no assurance that agreements can be negotiated and executed with
any of said entities, and if executed, they will be favorable to the Company.
Based on our management experience and that of Parsons, and on the early
discussions and negotiations with various entities, we are confident that
the remaining $150 million financing will be obtained in due course.
However, no assurance can be given that we will obtain all necessary
financing. Further, even if the entire $300 million financing is obtained,
no assurance can be given that the proposed Plant can or will be designed
and constructed successfully.
Gas-To-Liquids Competition
While the Gas-To-Liquids technology is at its infancy, the competition in
this new emerging technology and industry is expected to be intense. We do
not expect the competition to adversely affect the implementation of the
first Gas-To-Liquids project in Trinidad. But, in our attempt to negotiate
similar agreements with other gas producing countries around the world, we
will be competing against giant companies such as Exxon, Shell and others
which have vastly greater resources and capabilities. Even with what we
hope will be the success of constructing the first Gas-To-Liquids plant in
Trinidad, we will be facing extremely tough competition for constructing
additional plants. There is no assurance that the Company will be able to
succeed in constructing any Gas-To-Liquids plant.
Premium Quality of Gas-To-Liquids Produced Products
It is frequently reported that one cause of air pollution in some regions is
the presence of sulfur and other impurities in crude oil-derived products.
Additionally, aromatics are the major cause of engine wear and tear.
Governments are constantly limiting the contents of sulfur and other
impurities in crude oil-based products in order to curb the rising levels of
pollution. The recent announcement in California regarding the danger of
diesel produced from crude oil underscores the significance of the Gas-To-
Liquids process. On August 27, 1998, United Press International reported
that "California has become the first state to declare that soot emitted in
diesel exhaust is a cancer threat that requires new controls. On August 28,
1998, the Denver Rocky Mountain News reported eleven members of the
California Air Resources Board "voted unanimously to declare 40 chemicals
found in (crude oil-derived) diesel exhaust as toxic air pollutants."
Further, the Associate Press reported on May 17, 2000 that the Federal
National Toxicology Program said: "cancerous tumors have been found in rats
after exposure to diesel exhausts", produced from crude oil, and that such
diesel exhausts "are reasonably anticipated to be a human carcinogen." The
same report said that the White House intended to propose a new regulation
that would require refineries to reduce sulfur content in crude-oil produced
diesel by 97% in seven years.
In contrast, diesel and jet fuel processed and produced by the Gas-To-Liquids
process will have zero sulfur, zero aromatics, higher cetane, and a higher
smoke point. The quality of the finished products of Reema's 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. Reema is a wholly-
owned subsidiary of TVCN.
Pager Business
In February 1997, TVCN purchased the assets of a pager business in Georgia
for $100,000. The business sold pagers, cellular phones, airtime for pagers,
and accessories from locations in Calhoun and Dalton, Georgia. The
business had about 1,000 airtime customers, each was paying monthly fees of
about $12.95. In order to reduce our negative cash flow and to focus on the
Gas-To-Liquids Project, the Pager business was discontinued in November 2000.
This business had nominal impact on the financial statements of the Company.
Auto Salvage and Parts Recycling Business
In November of 1998, TVCN entered into an agreement with JBA Wholesalers,
Inc. ("JBA") to acquire all of the issued and outstanding stock of JBA
Wholesalers, Inc. JBA owns an auto salvage and parts recycling business in
Calhoun, Georgia. The appraised market value of JBA at the time of the
transaction was $125,000.
Omar Duwaik, the Company's president, had a 60 % private interest in JBA
prior to the transaction. The Board of Directors of TVCN approved a
resolution for TVCN to acquire his 60% of the stock in JBA to go along with
the 40% which TVCN already owned from an April 1998 transaction.
We issued 1,500,000 shares of restricted Common Stock to Omar Duwaik based
upon a share price of $.05 per share, which is the value per share estimated
by Houlihan Valuation Advisors in a report dated March 25, 1998.
The business maintains an inventory of used autos and parts to be sold to
the public in Calhoun, Georgia. The grounds and buildings are on a Lease
Purchase Agreement payment plan of $1,500 per month. The last payment is due
in March of 2006, at which time the property and buildings will be conveyed
to JBA for $1.
The business has 3 employees. Because of our intent to now focus on the gas
project, we are considering the sale of JBA.
Mining Business
TVCN invested in two mines, but neither was ever brought into commercial
operation. After considerable development losses, we have decided not to
make any further mining investment, and to discontinue the mining operations.
We have no current commercially viable mining operations, and the mining
activities are considered "discontinued operation." The following is a
summary of these operations:
Mining and Energy International Corp./Liberty Hill Mine -
On September 2, 1997 TVCN's wholly-owned 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 we agreed to lease ten unpatented mining claims, consisting of
about 200 acres of the Liberty Hill Mine, for thirty years. Under the second
agreement, we also 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 TVCN'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. We agreed to pay the out-of-pocket costs of operating the
mine. In addition to these out-of-pocket expenses we 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 we had expended a total of $2,110,224 in out-of-pocket expenses to
bring the mine into operation. In addition, to these expenses, we have
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. No
expenses were incurred subsequent to March 31, 1999.
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 us 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 we 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 our complaint we allege that we were fraudulently induced to
enter into the mining lease and that Ray Naylor breached his contract to
operate the mine on our 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 us that he believes we are in default
under the lease and has served a notice of termination of the lease on us.
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. We
have placed Mr. Naylor on notice that we intend to file a second court
action to enforce the settlement agreement if he does not follow through
with his obligations thereunder. Subsequently, the Company filed a second
court action. The court entered a default against the Naylor entities.
The Company has moved for a default judgment. The motion is pending. 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 - TVCN acquired a controlling interest in
Century 21 Mining, Inc. in December 1989. Century 21's principal asset is
the Mountain House Mine. The mine is not in operation. We held this mine
without development for investment purposes. The decision as to whether or
not to commercially develop that mine was contingent upon the success of the
mining operation of the Liberty Hill Mine. Since the development of the
latter was not successful, we decided to sell our interest in the Century 21
mine, but no offer has been made to buy the mine. If the sale is successful,
TVCN does not expect such sale to have any material effect on our financial
statements.
Internet Business Opportunities
On February 16, 1996 TVCN incorporated its wholly-owned subsidiary, Planet
Internet Corp. as an Internet Service Provider (ISP). Planet Internet
provided internet service to subscribers. By March 31, 1999, Planet had 836
subscribers, and was running a negative cash flow of about $40,000 per month.
On May 18, 1999, TVCN signed an agreement to sell Planet to BeWell Net Corp.,
another ISP. The Company negotiated the sale at $1,508,640 payable in common
stock of BeWell Net at the rate of $5.00 per share. Accordingly, we received
301,728 shares of the no par value common stock of BeWell Net. As part of
the sale, TVCN has allocated 80,000 shares for distribution to various
employees as performance bonuses. None of the officers or directors of TVCN
received any of the stock other than Kenneth Roznoy who was allocated a bonus
of 5,000 shares of said stock. The transfer of the shares to employees has
not been completed as of march 31, 2000. BeWell Net is a private company and
has no public trading market for its stock. The foregoing $5.00 stock price
was based on BeWell Net's representations that it was involved in an arms-
length transaction with a third party at a price of $5.00/share. However,
subsequently, said transaction was not completed, and the document submitted
by BeWell Net to the Company indicated a value of only $2.00/share of BeWell
Net's stock. Accordingly, the Company valued the sale of its subsidiary,
Plant Internet, at 301,728 x $2.00 or $603,256. In connection with the sale,
the Company transferred to BeWell Net property and equipment that had a book
value of $345,592. BeWell assumed a capital lease of $208,422. The
difference between the property and equipment value and the capital lease is
$137,170. Accordingly, the Company recorded the sale at $137,170 with a
deferred gain of $466,286 until it can be realized.
InterOmni Services - The InterOmni Wallet
TVCN had incorporated another wholly-owned subsidiary, InterOmni Services,
Inc., in order to develop the InterOmni Wallet, a digital profile that
tracks and records information about individuals. We attempted to sell
InterOmni, but the sale did not go through. We ceased any further
development in InterOmni, and consider it discontinued.
Middle East Investment Authorization
At a special meeting of TVCN'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 our behalf if he deemed such an
investment to be in the Company's best interests. To date Mr. Duwaik has
explored numerous investment opportunities. However, none have met the
criteria he thought of for making such an investment. No specific criteria
has been established, other than reasonable degree of risk and rate of
return as determined by Duwaik on a project by-project basis.
Although Mr. Duwaik was authorized to commit up to $3 million, no funds have
been expended to date pursuant to the Board's authorization, and no current
plans to expend any funds. Pursuant to its general policy of seeking
shareholders' approval of major investments, we will seek shareholder
approval of any investment made pursuant to this authority.
Qatar WCTV Station
In 1992 TVCN received a contract from the Qatari Government
Telecommunications Corporation ("Q-Tel") to build a WCTV station in Doha,
Qatar and train operations personnel. TVCN built the station in 1993, and a
provisional acceptance certificate for the station was issued on August 14,
1993. Through May 1996, our 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 Qatari Wireless station (without interruption) for a period of 10
years. The Qatar wireless cable system was awarded Cable Operator of the
Year honors at CABSAT 95 (the cable and satellite show).
Patents, Trademarks and Licenses
(See discussion about licensing in "Wireless Cable TV" operations on pages 3
and 4; See also "The FCC Spectrum Auction" on page 5.)
TVCN'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" on page 15). TVCN sold Planet, but the
trade names remain ours.
We hold no patents. However, TVCN has filed a patent application concerning
its Gas-To-Liquids technology. The application is pending.
Employees
As of March 31, 2000, we had 16 employees. None of our employees are the
subject of a collective bargaining agreement. we believe that relations with
our employees are good.
Our ability to carry out our proposed activities is dependent, to a
substantial degree, on a limited number of personnel. There can be no
assurance that we will be able to retain such personnel. TVCN's success is also
dependent on our ability to recruit and motivate high quality personnel. If we
fail to retain the services of one or more of these key persons or if we are
unable to attract a sufficient number of skilled employees, our operations
may be adversely affected. We do not currently maintain any key man
insurance on any of our officers, directors, or significant employees.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company retains ownership of substantially all system equipment necessary
to provide its Wireless Cable services to subscribers. Such system equipment
includes all reception and transmission equipment located at the tower (i.e.,
the head-end equipment), reception equipment located at each subscriber
location (i.e., subscriber equipment) and related computers, diagnostic
equipment and service vehicles, and facilities. The Salina, Kansas system
equipment is valued at $566,579. Our facilities are, in the opinion of
management, suitable and adequate by industry standards. All equipment and
assets are not subject to any lease or encumbrance.
The Company did own its executive offices in Denver, Colorado. On October
15, 1999, the Company sold its office building to a non-related party for a
sale price of $1,200,000 consisting of cash and a promissory note receivable
of $34,500. In connection with the sale, the company entered into a three-
year lease for its executive offices of approximately 3600 square feet at
the rate of $3625/month. The first two years of the lease in the amount of
$87,000 was prepaid as part of the sale. The building had a book value of
about $902,000.
On November 5, 1999, the Company sold its warehouse building in Detroit,
Michigan, to a non-related party for $200,000 in cash. The warehouse had a
net book value of $220,000.
Additionally, the Company owned two undeveloped residential lots in Cherry
Hill Village, Colorado, neither of which is subject to any mortgage. On
April 15, 1999, the company sold the first lot to a non-related party for
$630,000 in cash. The lot had a book value of $322,000. The second lot
also was sold to a non-related party on March 20, 2000 for $695,000 in cash.
The second lot had a book value of $303,000.
The Company also owns an undeveloped acreage in Jefferson County, Colorado,
not subject to any mortgage. The book value of this acreage at year-end was
$64,700. The acreage has been listed for sale for $1.1 million, but has not
been sold.
ITEM 3. LEGAL PROCEEDINGS
(1) Mining and Energy International Corporation ("MEICO") and TV
Communications Network, Inc. ("TVCN") 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 TVCN. 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. TVCN 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) Pursuant to the Securities & Exchange Commission's (SEC) rules and
regulations promulgated under Item 401(d) (4), the following information
is not required to be disclosed because, in our opinion, the court judgment
disclosed herein was limited in its scope, and does not fall within the
disclosure requirement, and because it happened more than five years ago.
However, since disclosure of information is one of the underpinnings of
public companies, the following information is being given as a further
disclosure by the Company. This information involved a Civil Action No.
93-M-2295 which was filed by the SEC on November 2, 1993 in US District
Court in Denver, Colorado against the Company, its president, Omar Duwaik,
and one of its vice presidents, Jacob Duwaik. The SEC alleged among other
things, that the Company improperly inflated its balance sheet by
overstating the value of certain assets acquired by the Company. The SEC
also alleged that the Duwaiks were involved in "sham" stock transactions.
The SEC asked the Federal Court in Denver to permanently enjoin TVCN and the
Duwaiks from repeating such violations, barring Omar Duwaik from serving as
an officer or director of TVCN, and imposing unspecified monetary penalties.
The Company and the principals involved denied the allegations and vigorously
defended against the court action.
After the Court rejected the SEC's argument for a temporary restraining
order, the SEC made an offer for a settlement. The attorneys representing
the Company and other defendants recommended acceptance of the settlement
offer. The Company and its officers and directors accepted the SEC
settlement offer in order to avoid further expensive litigation. The terms
of the settlement agreement were approved by the various attorneys and the
principal parties including TVCN, the SEC in Denver and the SEC in
Washington, D.C.. Pursuant to the terms of the settlement agreement, TVCN
and the Duwaiks would pay a total of $225,000, be enjoined from committing
violations of certain laws, and not be held to have admitted any allegations
of the Complaint, except as to jurisdiction. Omar Duwaik's position with
the Company would not be affected by the settlement agreement. The settlement
agreement was submitted to the Court and the final judgment was entered on
March 3, 1994. The judgment was limited in nature such that it did not
enjoin, bar, suspend or otherwise limit the Duwaiks' involvement in
securities or banking activities or any type of business.
(3) TVCN knows of no other material litigation pending, threatened or
contemplated, or unsatisfied judgment against it, or any proceedings in
which TVCN is a party. TVCN knows of no material legal actions pending or
threatened or judgments entered against any officers or directors of TVCN in
their capacity as such in connection with any matter involving TVCN or the
business.
Settlement of Class Action
On April 2, 1994, two TVCN shareholders filed a class action suit against us
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. We have always emphatically denied the plaintiffs'
allegations in this legal action and were vigorously defending the case. The
Plaintiffs made several settlement offers, the first of which was made only
two weeks after filing their allegations. But, all offers were rejected by
the Company. However, because of the continued drain on our resources caused
by nearly four years of protracted and expensive litigation, on October 31,
1997 we agreed to settle the case. Pursuant to the terms of the settlement
agreement, TVCN agreed to pay the plaintiffs the sum of $1.5 million in full
settlement of all their claims of any nature whatsoever, and that the
participating shareholders agreed to relinquish their stock of TVCN back to
the Company. On March 3, 1998 the Court approved the settlement and
dismissed the class action with prejudice.
Of the $1.5 million paid pursuant to the settlement agreement, $705,268.82
was paid as fees and expense to the plaintiff class' 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 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. TVCN then
canceled the shares of common stock returned as a result of the settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
SHAREHOLDERS
No matters were submitted for a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
TVCN's common stock has traded on the over the counter market ("OTC") since
January 11, 1988. As of March 31, 2000, there were eleven stock brokerage
firms making a market in our common stock. The high bid and low asked
prices of the common stock have been as follows:
Quarter High Bid Per Low Ask Per
Ending Share Share
3/31/98 .17 .19
6/30/98 .39 .41
9/30/98 .47 .56
12/31/98 .19 .24
3/31/99 .16 .19
6/30/99 .16 .15
9/30/99 .18 .18
12/31/99 .12 .12
3/31/00 .38 .31
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, 2000, there were 2,750 record holders of TVCN's common stock,
and 68,469,788 shares of common stock outstanding.
TVCN has not paid cash dividends on its common stock and does not anticipate
paying cash dividends for the foreseeable future. We anticipate 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 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. We intend to reapply
for listing when and if the listing requirements are met, of which there
can be no assurance of success.
TVCN'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 TVCN'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 TVCN's assets) and significant influence on the
management and affairs. Such influence could discourage others from
initiating potential merger, takeover or other changes of control
transactions. As a result, the market price of TVCN Common Stock would be
adversely affected.
Description of Securities
Class C Preferred Stock - Class C Preferred Stock is non-cumulative. Holders
of Class C Preferred Stock are entitled to receive non-cumulative dividends
of up to six percent (6%) per annum from the Company net profits, 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 must be given as required to holders in a call for redemption, during
which thirty day (30) period the holders of Class C Preferred Stock are
entitled to convert their Preferred Stock into Common Stock. In exchange for
Transmission Equipment, TVCN had issued 400,000 Class C Preferred Shares to
Multichannel Distribution of America ("MDA"), Inc. (a company substantially
owned and controlled by the Company's president, Omar Duwaik). 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 Headquarters Building.
The headquarters building had a fair market value of $930,000 and we 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, 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 our
net profits at the rate of up to nine percent (9%), when and if declared.
In connection with the acquisition of the two Wireless Cable TV stations in
Washington, D.C. and Detroit, Michigan (see "Purchase/Sale of Two WCTV
stations" on page 5), in 1991, TVCN issued to Miroband Companies, a non-
affiliated company, 4,864,000 shares of TVCN class D Preferred stock, which
shares were subsequently purchased by MDA, an affiliated company
substantially owned and controlled by the Company's president. Pursuant to
MDA's request for converting the 4,864,000 preferred shares to common stock,
the Company issued to MDA 4,864,000 shares of its common stock on May 29, 1997.
On January 3, 2000, in connection with the conversion of certain debt and
other considerations, the Company agreed to issue to its President, Omar A.
Duwaik, 17,633,334 restricted shares of its common stock. The total
considerations given for the restricted shares were the conversion to equity
of debt in the amount of $850,000, and a $100,000 bonus that was granted to
Mr. Duwaik in 1995, but was never paid, and $108,000 in his salary reduction
in 1999 and 2000. The shares were issued based on the value of the assets
given up for $1,058,000.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The total revenues for fiscal year ended March 31, 2000 were
$483,924 from active operations, $87,910 from discontinued operations,
$2,343,505 from payments of previously sold cable operations, and $765, 367
from the sale of assets. This is compared to revenues of $644,088 were from
active operations, $390,485 were from discontinued operations, and
$1,020,388 were from the sale of cable operations. The increase in revenues
in 2000 over those of 1999, in the net amount of $1,527,830 was due to the
collection of a promissory note receivable in the approximate amount of $2.3
million and that there was no sale of assets in 1999. See "Purchase/Sale of
Wireless Cable TV Stations". The operating revenues in 2000 were less than
those of 1999 by $550,649 due to the sale of the company's subsidiary,
Planet Internet, and the sale of the Company's office building.
Operating expenses in fiscal year 2000 were $2,105,894 as compared to
$2,841,949 in 1999, a decrease of $736,055. The decrease is due to lower
general and administrative expenses (from $1,812,651 in 1999 to $1,361,271
in 2000). The reduction in legal expenses by $117,052, and the reduction in
depreciation and amortization by $151,002, and lower interest expenses
contributed to the reduction in total operating expenses in 2000.
These and other activities resulted in a net income of $854,286 in 2000 as
compared to a net loss of $1,075,848 in 1999.
The Company generated statutory income taxes of $441,074 in 2000 as compared
to tax benefits of $554,227 in 1999.
While revenues from the gas project are not expected to materialize for at
least three years, we intend to manage the proceeds from the sale of assets
such that we anticipate no difficulty in maintaining our operations and
meeting our obligations.
Capital
Constructing and developing Wireless Cable stations, and providing two-way
communications and television programming require substantial initial capital
outlays. While contracts with respect to providing programming are intended
to have terms sufficient to provide for the recovery of our investment,
together with a favorable return on its investment, our continued expansion
is largely dependent on our ability to raise capital for the costs of any of
our new business endeavors.
The design, development and construction of a Gas-To-Liquids Plant also
require substantial capital investments. Our continued gas operations are
dependent on our ability to raise the necessary financing for
the Project. Specifically, the capital cost of the proposed Gas-To-Liquids
Plant in Trinidad is estimated at $300 million. The Company has contacted
and discussed potential financing of the proposed Plant with many foreign
investors, financial institutions, manufacturers, vendors, suppliers and
other entities. As of March 31, 2000, no bona-fide offer has been executed
or negotiated. On May 10, 2000, the Company, through its wholly-owned
subsidiary, Reema International, signed an agreement with a private investor
to provide a loan of $150 million for the gas project. On June 5, 2000,
Reema signed an agreement to engage the services of Parsons Energy and
Chemical Group, Inc. for the engineering, procurement and construction of
the Plant. The Company is currently holding discussions and negotiations
with various entities for obtaining the remaining $150 million financing,
of which there can be no assurance of success.
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 assets, and common stock. We are now engaged
in debt financing options as well as continued asset sales. There is no
certainty that we will be able to obtain all required financing.
Liquidity and Capital Resources
TVCN's primary source of liquidity has been from the sale of appreciated
assets. Our business requires substantial capital investment on a continuing
basis and the availability of a sufficient credit line or access to capital
financing is essential to our continued expansion. TVCN's cash flows for
the years ended March 31, 2000, and 1999, are summarized as follows:
Cash provided by (used in) March 31, March 31,
2000 1999
Operations $ (1,381,186) $ (1,049,013)
Investing activities $ 2,684,119 $ 639,921
Financing activities $ (617,378) $ 18,887
Net increase (decrease) $ 685,555 $ (390,025)
Currently, we have $1,128,789 in long-term debt, which is primarily for the
purchase of 12 Basic Trading Area Licenses from the FCC (see FCC Spectrum
Auction on page 5), and the acquisition of an Area license from Wireless
Tele-Communications of Pennsylvania.
Our current assets and liabilities are $3,662,843 and $988,438 respectively.
The cash position is such that management anticipates no difficulty in its
ability to sell appreciated assets to continue meeting its current
obligations. (See "Business Development Strategies" below).
Cash Investments
The Company's president and a shareholder have advanced loans to the Company
totaling $262,620.
Business Development Strategies
The Company's dominant business activity since inception in 1987 has been
the acquisition of licensees, obtaining TV channel leases, and the
development and sale of Wireless Cable TV licenses and stations. The
development of Wireless Cable stations to their full growth potentials
requires substantial capital resources which have not been satisfactorily
available to the Company. As a result, we have been able to only partially
develop certain of our Wireless Cable stations, while holding other stations
and/or licenses without development, and sell such stations and/or licenses
to potential buyers at a profit.
Over the last several years, TVCN has been successful in selling sufficient
number of stations and licenses to reasonably finance its activities. (See
"Purchase/Sale of WCTV Stations", on page 5) herein. Until October, 1998,
our stations have been limited to a one-way transmission: broadcasting cable
TV programming over the air to potential subscribers. However, in October,
1998, the FCC changed its rules such that it is now allowed the use the
wireless cable TV channels for two-way communications (see "Governmental
Regulation FCC Licensing", on page 9). Using the concept of "cellular phone"
or "cellular communications", the Wireless Cable frequencies can now be used
for two-way communications connecting customers directly with long-distance
telephone networks, circumventing local telephone lines.
As a result, long-distance telecommunications companies such as Sprint and
MCI-World Com began to acquire Wireless Cable companies. During 1999, it
has been reported that Sprint and MCI have acquired most of the large
Wireless Cable companies in the USA.
Based upon the foregoing, we believe that this might be an opportune time to
sell the Company's Wireless Cable stations, licenses and rights and interest
in its Basic Trading Areas. The Company has approximately 1.1 million
households in its markets. We have commenced preliminary discussions with
Sprint, MCI and others about the possibility of selling our Wireless Cable
assets. There has been no agreement signed or negotiated. It is
impossible to predict as to the outcome of such discussions, or the amount
that may be generated, if any, from the possible sale of such assets. There
is no assurance that we will succeed in selling any of our Wireless Cable
assets.
As mentioned earlier, we intend to focus our future activities on the gas
project. The proposed Gas-To-Liquids plant in Trinidad is expected to cost
about $300 million. We are discussing with various financial institutions
obtaining the necessary financing for the plant. We are also discussing with
different entities the possibility of entering into a partnership agreement
for the purpose of financing and implementing the proposed plant, but no
agreement was signed by March 31, 2000. However, on May 10, 2000, the
Company signed an agreement with a private investor to provide a loan of
$150 million for the gas project. On June 5, 2000, the Company signed an
agreement with Parsons to commence the engineering design procurement and
construction of the proposed Plant. The Company is currently negotiating and
discussing with various entities the possibility of obtaining the remaining
$150 million needed for the gas Project. Although we are confident of our
ability to obtain said remaining financing, there is no assurance that we
will succeed in obtaining the necessary financing or entering into any
partnership agreement with any entity.
With the reduction in expenditures, and the streamlining of operations, the
proceeds from the sale of the residential land, the Detroit warehouse and
office building and the note receivable, which has already been paid off,
should be sufficient to fund our activities and meet current obligations.
Stockholder Advances
The president has been advancing loans to TVCN since its inception. The
loans carry an annual interest of 8%. The advances are long-term loans, and
are expected to be paid back at such time when we have sufficient funds to
do so. As of March 31, 2000, after the conversion of $850,000 loan to
equity, the remaining loans totaled $262,620. Interest expense on
shareholder's advances totaled $81,878 in 2000, and $ 68,464 in 1999.
Income Tax Developments
Since its inception TVCN has incurred operating losses through March 31,
2000, which include certain accrued expenses that are not deductible for tax
purposes until paid. We have a net operating loss carry-forward available
to offset future year taxable income. The following summarizes these losses.
Net Operating
Loss Carry- Year of
Forward Expiration
As of March 31, 2000 $ 4,200,000 2014
<TABLE>
<CAPTION>
Selected Financial Data
Year ended March 31, 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Revenues $ 3,680,701 $ 2,062,961 $ 1,201,829 $ 1,146,144 $ 1,195,368
Net income (loss) $ 854,286 $ (1,075,848) $ (571,143) $ (959,079) $ 512,387
Per share: net income
(loss) (.02) (.03) (.02) (.05) .03
Total assets $ 7,341,871 $ 9,907,925 $ 11,012,467 $ 12,419,656 $ 15,287,790
Plant and equipment,
net $ 992,963 $ 3,252,830 $ 3,579,109 $ 3,265,350 $ 2,543,499
Current assets $ 3,662,843 $ 887,393 $ 2,071,619 $ 7,136,684 $ 6,560,906
Total liabilities $ 3,437,847 $ 6,858,322 $ 7,079,069 $ 7,700,974 $ 9,610,028
Long-term debt $ 1,128,789 $ 1,798,121 $ 2,173,678 $ 1,518,165 $ 1,510,240
</TABLE>
Capitalization
Our capitalization as of March 31, 2000 is as set forth in the following
table and as more detailed in the attached audited financial statement:
<TABLE>
<CAPTION>
Stockholders Equity (Deficit)
____________________________________________________________________________________________________________
Description 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Common Stock $ 25,418 $ 25,418 $ 20,197 $ 9,016 $ 9,016
Preferred Stock $ 28,813 $ 28,813 $ 28,813 $ 960,813 $ 960,813
Additional Paid-in Capital $ 8,518,039 $ 7,468,721 $ 7,281,889 $ 6,575,211 $ 6,575,211
Deficit Accumulated $ (3,619,063) $ (4,473,349) $ (3,397,501) $ (2,826,358) $ (1,867,279)
Total Stockholders Equity $ 4,962,024 $ 3,049,603 $ 3,933,398 $ 4,718,682 $ 5,677,761
</TABLE>
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of TVCN are filed under this Item, and
are included herein by reference.
Investments
For those investments, which consist primarily of money market investments,
the carrying amount is a reasonable estimate of fair value.
Notes Receivables
Interest rates on notes receivable are consistent with the interest rates
on current purchases by TVCN of contracts with similar maturates and
collateral. Notes receivable are continually assessed as to the
collectability of the notes and adjusted to approximate the estimated
collectible amount, accordingly the fair value is net of the related
deferred gain on the notes receivable.
Long-Term Debt
Rates currently available to us for debt with similar terms and remaining
maturates are used to estimate the fair value of existing debt.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
In March 2000, TVCN signed an engagement letter with the auditing firm of
Ehrhardt Keefe Steiner & Hottman, P.C. of 7979 East Tufts Avenue, Suite 400,
Denver, CO 80237 ("EKS&H or Auditor") (Telephone Number: (303) 740-9400,
Fax Number: (303) 740-9009). EKS&H also has been auditing our financial
records since 1993. The Auditor agreed to audit our financial records for
fiscal year and assist in other related matters.
A representative(s) of the firm may be available at the annual meeting to
respond to any questions and make a statement.
The accountants' reports on the financial statements for the fiscal years
1994, 1995, 1996, 1997, 1998, 1999, and 2000 contained no adverse opinions,
disclaimers of opinion, or qualifications as to uncertainty, audit scope, or
accounting principles.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth the name, age, salary and business experience for
the last five years of the directors and executive officers as of March 31,
2000. Unless otherwise noted, the positions described are positions with
TVCN or its subsidiaries.
Mr. Dennis J. Horner, Vice President Finance, Treasurer, and Director
resigned, and is no longer an officer or director effective February 10,
1999. Mr. Horner cited personal reasons and other career opportunities as his
reason for his resignation. TVCN has no disagreements with Mr. Horner. His
letter of resignation did not disclose, nor did he request the disclosure
of, any disagreements with the Company regarding operations, policies, or
practices.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Age Position Period Served
Omar A. Duwaik 56 Chairman of the Board,
Chief Executive Officer
and President (1) 1987 to present
Armand DePizzol 68 Director (2) 1989 to present
Kenneth D. Roznoy 52 Vice President, Secretary
Director (1) 1998 to present
</TABLE>
(1) Mr. Omar Duwaik also serves in the same capacities in each of the
company's wholly-owned subsidiaries: TVCN of Washington, D.C., Inc. (1991 to
Present); TVCN of Michigan, Inc. (1991 to present); TVCN of Kansas, Inc.
(1996); TVCN of California, Inc. (1996); International Exports, Inc. (1992
to present); Integrated Systems (1993 to present); Mining Energy
International, Inc. (1995 to present); Reema International Corp. (1993 to
present); and Planet Internet (1996 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 TVCN in September of 1989.
TVCN 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 our officers. Omar Duwaik and Kenneth Roznoy are
employed on a full-time basis. Omar Duwaik should be considered a founder
and controlling shareholder of TVCN (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 39,797,557 shares of TVCN common stock,
and also owns the majority of MDA, an affiliated company, which also owns 23,
845,892 shares of TVCN common stock and 950,233 shares beneficially
by virtue of his voting control by power of attorney of 950,233 shares
which are owned by his brother Tahar Aldweik. Mr. Duwaik also owns
a majority of American Technology and Information, which owns 190,000
shares of TVCN common stock. Mr. Duwaik is employed on a full-time
basis and is compensated at an annual salary of $108,000 of which
$54,079 are paid in cash. (See Item 11. "Security Ownership",
on page 29.)
Kenneth D. Roznoy - Vice President, Assistant Secretary and Director.
Mr. Roznoy returned to us 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 previously as one of the
Company's Directors from 1989 - October 1994. Prior to joining TVCN in July
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 and is compensated at
the temporarily reduced rate of $31,161 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. 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.
Bradford J. Lam, Vice-President - General Counsel. As an attorney, Mr. Lam
has been providing legal advice on SEC-related matters for the Company since
1993. On August 9, 2000, Mr. Lam will be joining the Company on a full-time
basis. At Dworkin, Chambers & Williams, P.C. from 1995 to June 2000, he
specialized in securities regulation, corporate finance, and mergers and
acquisitions, where he was involved in preparations of registration
statements, periodic reports, stock purchase and acquisition agreements and
other related functions. At different law firms from 1989 to 1995, he was
involved in securities fraud and complex commercial litigation. From 1987
to 1989, he was an attorney with the U.S. Securities & Exchange Commission
at the Philadelphia Regional Office, where he was involved in Federal
securities law enforcement, including conducting major securities fraud
investigations. Prior to joining the SEC, he was with the California
Department of Corporations in State securities law enforcement. Mr. Lam
received his Juris Doctorate Degree in May, 1985 from California Western
School of Law and his BA in Economics from Lafayette College, PA in 1980.
Glen Clark, Mr. Clark is the president of Reema International in charge of
the Gas-To-Liquids project. Reema is a wholly-owned subsidiary of TVCN.
Prior to joining Reema in 1993, Mr. Clark 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.W. Kellogg, Mr. Clark was
responsible for world-wide start-up to completion operations of an average of
over 30 projects employing over 2,500 people around the world. The projects
included LNG (and regasification), ammonia, fertilizer, methanol,
cogeneration, carbon dioxide (recover, 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 Bachelor of Science
("B.S.") degree in chemical engineering from Penn State and a master of
business administration ("MBA") degree from New York state University. He
has completed graduate marketing and management courses at Columbia
University and an advanced management program at Harvard University.
Robert L. Bighouse, Reema's Vice-President - Project Director, brings over
40 years of project management experience to the Reema team with project
management ranging from Union Carbide's Chemical & Plastics Division to
Petromont Ltd.'s UNIPOL Polyethalene Project Montreal to Petrokenya's
Ethylene Plant in Saudi Arabia. Since 1996, Mr. Bighouse has provided
engineer Project Management work to Reema on a consulting basis as well as
to Brown and Root and Union Carbide Corp. In 1995, he supplied Reema
Project Definition for a 20 MW congeneration power plant in Equatorial
Guinea. Prior to that, Mr. Bighouse served on a Management Reorganization
Team at Union Carbide, as well as a Project Manager for their Seadrift Plant
Rebuild Project following the aftermath of an explosion that occurred in
March 1991. Under UNIPOL contract to their licensee, Petromont, he served
as the Project Manager on the design and construction of the HDPE unit of
their Polyethline Project in Montreal, Canada. Since 1953, he
has served Union Carbide in many other capacities and on many other of their
projects traveling to West Virginia (Olefins Business Team), Louisiana (Plant
Management), Houston, Texas (Gulf Coast Plant Engineering Support), and two
other Project jobs at Carbide UCC Seadrift Plant. Mr. Bighouse has a
Chemical Engineering Degree from Ohio State University and an MBA from the
University of Houston. Mr. Bighouse joined Reema on a full-time basis in
June, 2000.
James A, Shields, Reema's Vice-President - Finance, has twenty-five years
business experience in senior management and financial management. Prior to
joining Reema, he was its financial consultant. As such, he built the
financial model to measure the sensitivity of capital cost, gas price and
product price for Reema's $300 million GTL plant. Prior to Reema,
Mr. Shields worked with Investors Brokerage Services in Houston, TX for six
years and for THE ACACIA GROUP in Houston for five years. In both cases, he
worked in Account Management and as a Certified Planner. As a CFP,
Mr. Shields is certified in the areas of risk management, investments, tax
planning and management, retirement planning, employee benefits
and estate planning. Prior to ACACIA, Mr. Shields was the Manager of
Project Controls for the M.W. Kellogg Company in Houston where he managed the
financial, cost and scheduling functions of M.W. Kellogg's Plant Services
Division. Earlier, Jim served as M.W. Kellogg's contract Manager overseeing
contracts in world scale chemical complexes in Algeria and Nigeria, plus
developed financial procedures for M.W. Kellogg in their LNG plant in Algeria.
Mr. Shields has a BS in Business Administration from Lehigh University in
Bethlehem, Pennsylvania; a MIM-Masters of International Management from the
American Graduate School of International Management (Thunderbird) in
Glendale, AZ; and became a Certified Financial Planner in 1991 as approved
by the International Board of Standards and Practices.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash remuneration paid or accrued by
TVCN and its subsidiaries for services to TVCN in all capacities during the
fiscal year ended March 31, 2000, to (i) each of the two most highly
compensated officers of the Company, and (ii) all its executive officers as
a group (includes compensation only for those periods of the fiscal year
ended March 31, 2000, for which each such individual was an executive
officer). Following are the salaries of individuals who are officers
receiving a salary from TVCN:
Cash
Name of Individual Capacity in Which Served Compensation
Omar A. Duwaik Chairman of the Board of Directors,
President and Chief Executive
Officer $ 108,000
Glen L. Clark President-Reema $ 75,000
Kenneth D. Roznoy Vice President, Secretary, and
Director $ 30,161
Stock Option Plan
TVCN has in effect an incentive Stock Option Plan and has reserved a total
of 2,000,000 shares of 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 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 market makers. 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, 2000, no options under this stock option plan
were issued.
Compensation Pursuant to Plans
No compensation was paid to executive officers pursuant to any plan during
the fiscal year just ended, and there is no agreement or understanding,
express or implied, with any officer or director concerning employment or
cash compensation for services other than their aforementioned salaries.
Other Compensation
For the fiscal year ended March 31, 2000, executive officers received
reimbursement of out of pocket expenses incurred on the Company's behalf.
On February 14, 1995, the Board of Directors had granted Mr. Omar Duwaik a
cash bonus of $100,000. Because of cash flow constraints, the bonus was not
paid. This transaction was reflected as a liability on the balance sheets
through December 31, 1999. However, in January, 2000, Mr. Duwaik agreed to
convert this bonus into equity for which the Company issued restricted
shares. See "Description of Securities", page 23.
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 TVCN 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,
2000. 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, 2000. Each
such person has sole voting and dispositive power with respect to such
securities. All information refers to common stock.
Name and Position with TVCN, or Name and Amount of 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 64,783,682 94.6%
10020 E. Girard Ave., #300
Denver, CO 80231
Multichannel Distribution
Of America, Inc. (MDA)
10020 E. Girard Ave., #300
Denver, CO 80231 23,845,892 34.8%
All other officers
or beneficial owners of
of 5% or more -0- Less than .001%
Total shares owned by management
As a group (1) 64,783,682 94.6%
(1) Mr. Duwaik owns 39,797,557 shares directly and 23,845,892 shares
beneficially by virtue of his controlling stake in Multichannel Distribution
of America, 190,000 shares by virtue of controlling America Technology &
Information, and 950,233 shares beneficially by virtue of his voting control by
Power of Attorney of 950,233 shares which are owned by his brother Taher
Aldweik. 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. Adding all
shares that are under Mr. Duwaik's ownership and/or control, the total will
be 64,783,682 shares or 94.6% of the outstanding and issued shares of TVCN's
common stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain related transactions were entered into between TVCN and its president,
Omar Duwaik and other companies owned/controlled by him. [For a specific
transaction, see the following titles elsewhere herein: "Description of
Securities", "Conversion of Preferred Stock", Quincy, Illinois and Salina,
Kansas", Auto Salvage and Parts Recycling Business", and Rome, GA".]
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8 K
- Exhibits
3.1.1 Copy of Certificate of Incorporation of the corporation (incorporated
by reference to the Exhibits filed with the Registration Statement dated
September 28, 1987, File No. 33-16113-D).
3.1.2 Copy of Amendment No. 1 to the Certificate of Incorporation (incorporated
by reference to the 10 KSB for the period ended March 31, 1989, File
No. 33-16113-D.)
3.1.3 Copy of Amendment No. 2 to the certificate of Incorporation (incorporated
by reference to the 10 KSB for the period ended March 31, 1995.
File No. 33-16113-D)
3.2 Copy of By Laws of the corporation (incorporated by reference to the
Exhibits filed with the Registration Statement dated September 28, 1987, file
No. 33-16113-D)
10. Material Contracts.
10.1 Memorandum of Understanding dated December 17, 1997 between The National
Gas Company of Trinidad and Tobago Limited and Reema International Corp. *
10.2 Acquisition Agreement dated May 18, 1999 between BeWell Net Corporation
("Buyer") and TV Communications Network, Inc./Planet Internet Corporation
("Seller").*
21. Subsidiaries of the Registrant.
Financial Data Schedule
99. Additional Exhibits
99.1(P) Copy of a report by Houlihan Valuation Advisors titled "Valuation of
a 10,000,000 Shares Block of Restricted Common Stock of TV Communications
Network, Inc. as of March 25, 1998." *
* Previously Filed
<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 14, 2000
/s/ OMAR A. DUWAIK
Omar A. Duwaik
President, CEO &
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
/s/ OMAR A. DUWAIK /s/ KENNETH D. ROZNOY
Omar A. Duwaik Kenneth D. Roznoy
President, CEO & Vice President &
Director Director
/s/ JACKIE PORTER
Jackie Porter
Acting Controller
Dated: July 14, 2000
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 2000
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
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, 2000 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the years
in the two year period ended March 31, 2000. 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, 2000 and the results of their operations and their
cash flows for each of the years in the two year period ended March 31, 2000 in
conformity with generally accepted accounting principles.
/S/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
May 26, 2000
Denver, Colorado
<PAGE>
TV CCOMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, 2000
Assets
Current assets
Cash and cash equivalents $ 1,147,712
Investments 2,188,477
Accounts receivable 6,855
Inventory 88,017
Notes receivable 37,600
Deferred income taxes (Note 8) 119,585
Other current assets 74,597
----------
Total current assets 3,662,843
Property and equipment - net (Note 3) 715,945
Property and equipment, net - discontinued
operations (Note 3) 207,018
Other assets
License agreements - net of accumulated
amortization of $1,243,745 (Note 5) 1,196,726
Deferred income taxes (Note 8) 1,436,652
Other assets 80,504
Reclamation bonds - discontinued
operations (Note 11) 42,183
----------
Total other assets 2,756,065
----------
Total assets $7,341,871
==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $182,879
Accounts payable - discontinued operations 97,741
Accrued expenses (Note 4) 465,259
Current maturities of long-term debt (Note 5) 199,174
Current maturities of long-term debt -
discontinued operations (Notes 5 and 14) 37,500
Subscriber deposits 5,885
-----------
Total current liabilities 988,438
Long-term liabilities
Long-term debt (Note 5) 1,128,789
Advances from stockholder (Note 5) 262,620
-----------
Total liabilities 2,379,847
-----------
Commitments and contingencies (Notes 5, 6 and 7)
Stockholders' equity (Note 7)
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,
68,469,788 shares issued and outstanding 34,235
Additional paid-in capital 8,518,039
Accumulated deficit (3,619,063)
-----------
Total stockholders' equity 4,962,024
-----------
Total liabilities and stockholders' equity $ 7,341,871
===========
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended
March 31,
------------------------------
2000 1999
Revenues
Lease income (Note 6) $ 259,549 $ 367,129
Interest income 209,286 275,405
Other revenue 15,089 1,554
----------- -----------
Total revenue 483,924 644,088
----------- -----------
Operating expenses
General and administrative 1,361,271 1,812,651
Litigation settlement expense (Note 6) - 117,052
Depreciation and amortization 501,057 652,059
Interest expense 243,566 260,187
------------ -----------
Total expenses 2,105,894 2,841,949
------------ -----------
Operating loss (1,621,970) (2,197,861)
Lawsuit settlement - 300,000
Gain on sale of cable operations (Note 9) 2,343,500 1,020,388
Gain on sale of assets (Note 10) 765,367 -
----------- -----------
Income (loss) before income taxes 1,486,897 (877,473)
Income tax expense (benefit) (Note 8)
Current - -
Deferred 506,197 (298,342)
----------- -----------
Net income (loss) from continuing operations 980,700 (579,131)
Discontinued operations (Note 14)
Loss from discontinued operations
net of income tax benefit of
$52,362 and $255,888 for 2000
and 1999, respectively (101,643) (496,717)
Loss on disposal of Page TVCN, Inc.
net of income tax benefit of
$12,761 for 2000 (24,771) -
---------- -----------
(126,414) (496,717)
---------- -----------
Net income (loss) $ 854,286 $(1,075,848)
========== ===========
Income (loss) per weighted average share
of common stock
Basic from continuing operations $ .02 $ (.02)
Basic from discontinued operations - (.01)
---------- -----------
Total basic $ .02 $ (.03)
========== ===========
Diluted from continuing operations $ .02 $ (.02)
Diluted from discontinued operations - (.01)
---------- -----------
Total diluted $ .02 $ (.03)
========== ===========
Weighted average common shares outstanding
Basic 55,087,778 41,119,281
========== ===========
Diluted 55,087,778 41,119,281
========== ===========
See notes to consolidated financial statements.
F - 3
<PAGE>
<TABLE>
<CAPTION>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
solidated Statement of Changes in Stockholders' Equity
For the Years Ended March 31, 2000 and 1999
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 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 - - 1,500,000 750 74,250 - 75,000
Acquisition of business - - 8,507,460 4,254 (4,253) - 1
Stock repurchase adjustment
(Note 6) - 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
Net income for the year ended
March 31, 2000 - - - - - 854,286 854,286
Stock issued to Company's
President for settlement
of services provided - - 17,633,334 8,817 1,049,183 - 1,058,000
Stock repurchase adjustment
(Note 6) - - 500 - 135 - 135
---------- ---------- ----------- ---------- ----------- ----------- -----------
Balance at March 31, 2000 28,813 $ 28,813 68,469,788 $ 34,235 $ 8,518,039 $(3,619,063) $ 4,962,024
========== ========== =========== ========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F - 4
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended
March 31,
--------------------------
2000 1999
----------- -----------
Cash flows from operating activities
Net income (loss) $ 854,286 $(1,075,848)
----------- -----------
Adjustments to reconcile net income
(loss) to net cash used in operating
activities -
Adjustment to repurchase of common stock 135 117,052
Gain on sale of cable operations (2,343,500) (1,020,388)
Gain on the sale of assets (765,367) -
Depreciation and amortization 568,864 850,720
Deferred income taxes 441,074 (554,227)
Change in certain assets and liabilities -
Accounts receivable 21,995 10,648
Prepaid expenses and other current assets 63,375 15,284
Other assets 29,127 34,006
Accounts payable (213,079) 170,834
Accrued expenses (19,602) 62,611
Income taxes payable - (21,850)
Subscriber deposits (18,494) (251)
----------- -----------
(2,235,472) (335,561)
----------- -----------
Net cash flows used in operating
activities (1,381,186) (1,411,409)
----------- -----------
Cash flows from investing activities
Cash paid for business acquisitions net of
cash acquired - (47,426)
Issuance of notes receivable (1,800) 736,513
Proceeds from sale of Wireless Cable license 2,343,500 362,396
Net investing activity (2,024,107) 60,459
Property and equipment purchases (60,857) (102,365)
Proceeds from sale of property and equipment 2,427,383 -
Purchase of broadcasting licenses - (7,260)
----------- -----------
Net cash flows provided by investing
activities 2,684,119 1,002,317
----------- -----------
Cash flows from financing activities
Proceeds from stockholder advances 188,289 151,379
Payments on stockholder advances (176,003) (69,132)
Payments on long-term debt and capital leases (629,664) (63,360)
---------- -----------
Net cash flows (used in) provided by
financing activities (617,378) 18,887
---------- -----------
Net increase (decrease) in cash and
cash equivalents 685,555 (390,205)
Cash and cash equivalents - beginning of year 462,157 852,362
---------- -----------
Cash and cash equivalents - end of year $ 1,147,712 $ 462,157
=========== ===========
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 $262,312 (2000) and $213,707
(1999).
Cash paid during the year for income taxes was $0 (2000) and (1999).
Supplemental disclosure of non-cash investing activities
During 2000, the Company's Board of Directors approved the issuance of
17,633,334 shares of stock to the Company's president valued at
$1,058,000 for past services rendered, settlement of previously accrued
unpaid bonuses and for repayment of advances.
During 2000, the Company transferred $107,029 of inventory to fixed
assets.
During 2000, the Company sold its office building and received a note
receivable of $34,500 and prepaid rent expense of $87,000.
During 2000, the Company sold property and equipment of $345,592 and
the purchaser assumed a capital lease of $208,422 of Planet Internet
Corp. for restricted shares in a privately held company totally $137,170.
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 7).
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
(discontinued in 2000), and retail sale of paging equipment (discontinued in
2000) 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. (discontinued in 2000) 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.
Leasing of Wireless Cable Licenses
The Company records revenue on the leasing of wireless cable licenses
monthly as access to use of the broadcast licenses is provided
and no significant continuing obligations under such license agreements
exist.
Cable Television Services
Cable television service revenue is recorded on a monthly basis as
services are provided and no significant continuing obligations
to the subscriber exist.
Auto Salvage Yard
Revenue from auto salvage sales is recorded at the time of delivery to
the customer as no significant continuing obligations or right of
return obligation exists.
Internet Access Services
Internet access service revenue is recorded on a monthly basis as
services are provided and no significant continuing obligations
to the subscriber exist.
Paging Equipment Sales
Paging equipment sales revenue is recorded at the time of delivery to
the customer as no significant continuing obligations or right of
return obligation exists.
Sale of Cable Operations
Profits with respect to sale of the Company's Denver Cable operations
are being recorded on the installment sale method while profit with
respect to the Detroit and Washington D.C. sales are being recorded using
the cost recovery method (Note 8).
F - 8
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
Basic Loss Per Share
The Company follows the provisions of Statement of Financial Accounting Standard
No. 128, "Earnings Per Share" (FAS 128). 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, 2000 and 1999, 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 to seven
years. When assets are retired or otherwise disposed of the assets and related
allowances for depreciation and amortization are eliminated from the accounts
and any resulting gain or loss is reflected in income. 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, 2000 and 1999 were $14,229 and $43,623,
respectively.
Research and Development Expenses
The Company expenses research and development costs as incurred.
The Company incurred approximately $309,000 and $423,000 in research and
development related expenses associated with its gas-to-liquids conversion
process for the years ended March 31, 2000 and 1999, respectively.
F - 9
<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 by
comparable selling values and 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, 2000, there was approximately $998,000 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 and Cash Equivalents
The carrying value approximates fair value due to its liquid or short-term
nature.
Investments
For those investments, which consist primarily of mutual fund investments, the
carrying amount approximates fair value.
F - 10
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
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.
Reclassifications
Certain amounts in the 1999 financial statements have been reclassified to
conform to the 2000 presentation.
Note 2 - Management's Plans for Continued Operations
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. The Company also had negative cash flows from operations in 2000
and 1999. 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 (GTL) technology, including the possible sale of the Company's
basic trade area (BTA) license rights and negotiating financing arrangements
with third-parties to fund GTL plant construction. Based on a review of current
cash balances and estimated future cash flows management believes that
sufficient cash flow will be provided to meet the Company's financial
obligations through the fiscal year 2001.
F - 11
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 3 - Property and Equipment
The following summarizes property and equipment:
Continuing Discontinued
Operations Operations
----------- ------------
Land $ 177,195 $ -
Office building and improvements 125,000 -
Office furniture and equipment 357,616 7,436
Mining equipment - 425,963
Gas to liquids testing equipment 77,309 -
Transmission equipment 882,619 -
Transportation equipment 137,850 -
----------- ------------
1,757,589 433,399
Less accumulated depreciation (1,041,644) (226,381)
----------- ------------
Total $ 715,945 $ 207,018
=========== ============
Note 4 - Accrued Liabilities
Accrued liabilities consist of the following:
Payroll taxes payable $ 31,436
Interest payable 64,092
Commission payable 369,143
Other 588
-----------
$ 465,259
===========
F - 12
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 5 - Long-Term Debt and Stockholder Advances
Long-Term Debt
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 beginning November 1998
totaling $45,886. The notes are secured by the BTA
license rights (Note 6) $ 1,244,748
Note payable with monthly payments of $5,000.
Collateralized by the equipment with a net book
value of approximately $34,970. 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. 83,215
-----------
1,365,463
Less current maturities:
Continuing (199,174)
Discontinued (37,500)
-----------
Long-term debt $ 1,128,789
===========
The aggregate annual maturities of long-term debt at March 31, 2000 are as
follows:
Year Ending March 31,
----------------------------
2001 $ 236,674
2002 165,462
2003 180,566
2004 199,590
2005 219,210
Thereafter 363,961
-----------
$ 1,365,463
===========
Stockholder Advances
Stockholder advances bear interest at 8%. Interest expense on stockholder
advances totaled $81,878 (2000) and $68,464 (1999).
Note 6 - Commitments and Contingencies
Leases
The Company leases radio towers under leases 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, 2000 and 1999 was
$94,362 and $64,888, respectively.
The Company entered into a lease for office space on November 1, 1999 and
expiring October 31, 2002 in connection with the sale of it's building (Note
11). The Company prepaid the first two years of the lease on the amount of
$87,000. The final year of the lease calls for monthly payments of $3,625. Total
lease expenses for the year ended March 31, 2000 was $18,125.
Future minimum lease payments are as follows:
2001 $ 18,125
2002 25,375
-----------
$ 43,500
===========
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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. The Company has until August 2001 to begin build
out of its BTA licenses (Note 5).
Contingencies
In 1999 and 2000, in connection with a settlement of a class action suit in
prior years, 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 500 and 433,151
shares of common stock valued at $135 and $117,052 and to increase litigation
expense by $135 and $117,052 in 2000 and 1999, respectively.
F - 13
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 7 - Stockholders' Equity
Class A Preferred Stock
Class A Preferred Stock entitles the holder to convert the Preferred Stock at
the rate of one Class A Preferred Share for 4,167 shares of Common Stock of the
Company. Class A Preferred Stock is participating stock, and carries a
cumulative dividend of nine percent (9%) per annum, compounded quarterly, on the
issued and outstanding Class A Preferred Stock. Holders of the Class A Preferred
Stock are not entitled to convert their Class A Preferred Stock into Common
Stock in the event the Company calls such Preferred Stock to redemption at $1.00
per share, plus any unpaid dividends, if any. No Class A Preferred Shares have
been issued to date.
Class B Preferred Stock
Class B Preferred Stock is participating but non-cumulative stock. The holders
of Class B Preferred Stock are entitled to receive non-cumulative dividends from
the Company's net profits at the rate of up to nine percent (9%) when and if
declared by the Board of Directors. Holders of Class B Preferred Stock are not
entitled to receive dividends if profits are not allocated for such distribution
by the Board of Directors. Class B holders are entitled to convert their
Preferred Stock into Common Stock at the rate of two shares of Class B Preferred
Stock for one share of Common Stock, and are given a thirty day (30) notice to
convert, if such Preferred Stock is called for redemption by the Company.
Pursuant to the Century 21 Mining acquisition, 28,813 Class B Preferred Shares
were issued.
Class C Preferred Stock
Class C Preferred Stock is non-participating and non-cumulative. Holders of
Class C Preferred Stock are entitled to receive non-cumulative dividends of up
to six percent (6%) per annum from the net profits of the Company, when and if
declared by its Board of Directors. The conversion rate is two shares of Class C
Preferred Stock for one share of Common Stock. Similar to Class B Preferred
Stock, a thirty day (30) notice is given to holders of Class C Preferred Stock
upon a call for redemption by the Company, during which thirty day (30) period
the holders of Class B or Class C Preferred Stock are entitled to convert their
Preferred Stock into Common Stock. Other rights and restrictions may apply on
any class of Preferred Stock as agreed upon prior to issuance. The Company
issued 400,000 Class C Preferred Shares to MDA (a company related by virtue of
having several mutual stockholders, officers and directors) in exchange for
Transmission Equipment, and 380,000 Class C Preferred Shares to AT&I (a company
related by virtue of having several mutual stockholders, officers and directors)
as partial payment for the acquisition of the Company's headquarters building.
The headquarters building had a fair market value of $930,000 and the Company
assumed a $550,000 mortgage (Note 14). During the year ended March 31, 1998, the
Company converted 400,000 shares of Class C Preferred Stock, previously issued
to MDA (a related company), into 200,000 shares of TV Communications Network,
Inc. common stock; and 380,000 shares of Class C Preferred Stock, previously
issued to AT&I (a related company), and into 190,000 shares of TV Communications
Network, Inc. common stock.
F - 14
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 7 - 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 - 15
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 8 - 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.
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 2000 were as follows:
Net operating loss $ 1,435,112
Alternative minimum tax credit 113,532
Shareholder interest and bonus 34,000
Depreciation (32,461)
Valuation allowance 6,054
-----------
$ 1,556,237
===========
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,
2000
-----------
Current deferred tax asset $ 119,585
-----------
Net current deferred tax asset $ 119,585
===========
Long-term deferred tax asset $ 1,469,113
Long-term deferred tax liability (32,461)
-----------
Net long-term deferred tax asset $ 1,436,652
===========
F - 16
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 8 - Income Taxes (continued)
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 $4,200,000
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,
--------------------------
2000 1999
--------------------------
Computed income taxes at statutory rate $ 441,074 $ (554,227)
----------- ------------
$ 441,074 $ (554,227)
=========== ============
Note 9 - 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. In January 2000, the
Company received a cash payment and recognized a gain of $2,343,500 for the
entire balance due on the note receivable.
The Company received cash payments of $1,098,909 during 1999, related to sales
of Wireless Cable licenses from prior years.
Note 10 - Sale of Assets
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 21, 1999.
F - 17
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 10 - Sale of Assets (continued)
On October 15, 1999, the Company sold its office building in Denver, Colorado.
The building was sold to an unrelated third party for total purchase price of
$1,200,000. The Company received cash, a $34,500 note receivable and prepaid
lease payments of $87,000. The building had a net book value of approximately
$902,000.
On November 5, 1999, the Company sold its land and building in Detroit,
Michigan. The land and building were sold to an unrelated third party for cash
of $200,000. The land and building had a net book value of approximately
$220,000.
On March 20, 2000, the Company sold its other residential lot in Cherry Hills
Village, Colorado previously held for investment purposes. The lot was sold to
an unrelated third party for cash of $695,000. The lot had a net book value of
approximately $303,000.
The following summarizes the gain (loss) on sale of these assets:
Cherry Hills Village Lot #1 $ 244,290
Cherry Hills Village Lot #2 339,258
Office building 231,015
Detroit land and building (49,196)
-----------
$ 765,367
===========
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, 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.
F - 18
<PAGE>
TV COMMUNICATIONS NETWORK, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 12 - REEMA International (continued)
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 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, 2000 and 1999.
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 - 19
<PAGE>
Note 13 - Business Segments (continued)
<TABLE>
<CAPTION>
Dis-
Dis- continued
WCTV continued Internet Dis-
WCTV Station Natural Mining Access continued
Salvage License Construction Gas Fuel and Service Pager Corporate
Yard Leases Contracts Conversion Exploration Provider Rental and Other Consolidated
--------- ---------- ------------ ---------- ----------- -------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 2000
Lease income $ 63,617 $134,631 $ - $ - $ - $ 43,272 $ 44,638 $ 61,300 $ 347,458
Interest income - - - - - - - 209,286 209,286
Other income - 15,090 - - - - - - 15,090
-------- ---------- ------------ ---------- ----------- --------- --------- ---------- ------------
Total revenue 63,617 149,721 - - - 43,272 44,638 270,586 571,834
Operating loss $(99,486) $ (89,779) $ (185) $ (335,283) $ (40,559) $ (94,646) $ (18,790) $(1,097,247) $ (1,775,975)
Identifiable assets $367,375 $ 601,532 $ 15,935 $ 63,851 $ 250,297 $ 2,390 $ - $ 4,484,254 $ 5,785,634
Depreciation and
amortization $ 7,010 $ 3,580 $ - $ 26,023 $ 62,003 $ - $ 5,804 $ 464,444 $ 568,864
Capital expenditures $ 22,495 $ 9,495 $ - $ 18,715 $ - $ - $ - $ 10,152 $ 60,857
March 31, 1999
Lease income $ 30,009 $ 198,550 $ - $ - $ - $ 281,077 $ 109,408 $ 138,570 $ 757,614
Interest income - - - - - - - 275,405 275,405
Other income - - - - - - - 1,554 1,554
-------- ---------- ------------ ---------- ----------- --------- --------- --------- ------------
Total revenue 30,009 198,550 - - - 281,077 109,408 415,529 1,034,573
Operating loss $(79,711) $ (53,477) $ (50,208) $ (130,705) $ (72,426) $(575,200) $(104,986) $(1,883,760) $ (2,950,473)
Identifiable assets $332,013 $3,363,021 $ 16,033 $ 71,175 $ 312,372 $ 392,912 $ 42,751 $ 3,706,614 $ 8,236,891
Depreciation and
amortization $ 5,040 $ 3,883 $ 32,271 $ 8,186 $ 38,285 $ 148,386 $ 11,900 $ 602,769 $ 850,720
Capital expenditures $ - $ 8,248 $ - $ 58,594 $ - $ 3,875 $ 1,903 $ 29,745 $ 102,365
</TABLE>
F - 20
<PAGE>
Note 14 - Discontinued Operations
During the year ended March 31, 1996, Mining and Energy International Corp. a
wholly owned subsidiary of the Company entered into a lease agreement with an
unrelated Company where it has an option to enter into a 30 year lease to
explore and mine certain mining claims held by this unrelated company during the
term of the lease. The option provides for the greater of $40,000 per month, or
15% of the monthly gold production of the mine. The lease agreement requires a
$500,000 non-refundable advance royalty payment and a minimum monthly royalty
payment of the greater of $40,000, 15% of the monthly gold production of the
mine unless the average concentration of gold produced is greater than .03
ounces per short ton, when the share of gold production is increased to 20% of
production. In addition, the Company would be required to pay $3.00 per ton for
silica and barite sold from the premises. During 1998 the Company negotiated a
reduced royalty rate of $15,000 per month as the mine is not currently in
production.
In the fourth quarter ended March 31, 1998, the Company filed a lawsuit against
the operator of the mine alleging, among other things breach of contract for
failure to operate the mine in the best interests of the Company. 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.
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 2000 and
1999.
As of March 31, 2000, 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 $26,776 and $47,801 including an income tax benefit allocated to
discontinued operations of $13,783 and $24,625 for the years ended March 31,
2000 and 1999, respectively.
Effective May 18, 1999, the Company sold certain assets and the purchaser
assumed certain liabilities of Planet Internet Corp. (an unrelated third party
corporation) for 301,728 restricted shares of the acquiring privately held
Company's common stock valued at $137,170 which reflects the carrying value of
the net assets of Planet Internet, deferring the gain of $466,286 until
realized. Certain liabilities were retained by TVCN in connection with the sale.
The subsidiary had a net loss from operations of $62,466 and $379,632 including
an income tax benefit allocated to discounted operations of $32,180 and $195,568
for the years ended March 31, 2000 and 1999, respectively.
During November 1999, the Company ceased operations of the page rental segment
and accordingly had included this as discontinued operations in the accompanying
consolidated financial statements. The Company had revenues of $44,638 and
$109,408 from this segment in 2000 and 1999, respectively. The subsidiary had a
net loss from operations of $12,401 and $69,284 including an income tax benefit
allocated to discontinued operations of $6,389 and $35,695 for the years ended
March 31, 2000 and 1999, respectively. The subsidiary also had a net loss on
disposal of $24,771 including an income tax benefit of $12,761 for the year
ended March 31, 2000.
F - 21
<PAGE>
Note 15 - Significant Fourth Quarter Adjustments
In the fourth quarter for the year ended March 31, 2000, the Company made the
following adjustments to the financial statements:
The Company recorded an entry to defer approximately $466,000 of gain, which was
previously recorded related to the sale of Planet Internet Corp. (Note 14).
The Company recorded approximately $506,000 of deferred income tax expense in
the fourth quarter.
F - 22
<PAGE>
