-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UqAskubdzkZAe6Wxh4BoVFDhxeX0LLJ7YeVZzixEUSJxgAx92ivgNf+wJu0F2XbR XxN0VexA5QWQkQAKMyedYQ== 0001231742-04-000122.txt : 20040212 0001231742-04-000122.hdr.sgml : 20040212 20040212090714 ACCESSION NUMBER: 0001231742-04-000122 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20040212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELECOMMUNICATION PRODUCTS INC CENTRAL INDEX KEY: 0000725929 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-VIDEO TAPE RENTAL [7841] IRS NUMBER: 840916299 STATE OF INCORPORATION: CO FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-109030 FILM NUMBER: 04588396 BUSINESS ADDRESS: STREET 1: PO BOX 17013 CITY: GOLDEN STATE: CO ZIP: 80402 BUSINESS PHONE: 3032782725 MAIL ADDRESS: STREET 1: PO BOX 17013 CITY: GOLDEN STATE: CO ZIP: 80402 424B3 1 doc1.txt Filed Pursuant to Rule 424 (b) (3) Registration No. 333-109030 PROSPECTUS TELECOMMUNICATION PRODUCTS, INC. This prospectus relates to the sale of up to 24,400,000 shares of our common stock by current stockholders and by Dutchess Private Equities Fund, L.P., which will become a shareholder pursuant to an Investment Agreement. We are not selling any securities in this offering and therefore will not receive any proceeds from this offering. We will, however, receive proceeds from the sale of securities under the Investment Agreement, also referred to as an Equity Line of Credit, that we have entered into with Dutchess Private Equities Fund, which permits us to "put" up to $5 million in shares of common stock to Dutchess Private Equities Fund. All costs associated with this registration will be borne by us. The selling stockholders consist of:
Coast Communications, Inc. 2,000,000 Indigo Consultants, Ltd. 2,400,000 Multimedia Technologies Inc. 4,000,000 Dutchess Private Equities Fund, L.P. 16,000,000
The shares of common stock are being offered for sale by the selling stockholder at prices established on the Over-the-Counter Bulletin Board or in negotiated transactions during the term of this offering. Our common stock is quoted on the Over-the-Counter Bulletin Board under the symbol TCPD.OB. On January 30, 2004, the last reported sale price of our common stock was $0.06 per share. Dutchess Private Equities Fund, L.P. and Park Capital Securities are "underwriters" within the meaning of the Securities Act of 1933, as amended, in connection with the sale of common stock under the Investment Agreement. Dutchess will pay us 94% of the lowest closing bid price of the common stock during the five consecutive trading day period immediately following the date of our notice to them of our election to put shares pursuant to the Equity Line of Credit. The shares issued to Coast Communications, Inc., Indigo Consultants, Ltd., and Multimedia Technologies Inc. were issued in a prior private placement. This investment involves a high degree of risk. You should purchase securities only if you can afford a complete loss. We are a development stage company because we have yet to achieve significant revenues. SEE "RISK FACTORS" BEGINNING ON PAGE 8. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. THE DATE OF THIS PROSPECTUS IS FEBRUARY 12, 2004 3 TABLE OF CONTENTS PROSPECTUS SUMMARY 5 OUR CAPITAL STRUCTURE AND SHARES ELIGIBLE FOR FUTURE SALE 7 RISK FACTORS 8 USE OF PROCEEDS 13 DILUTION 14 CAPITALIZATION 15 DIVIDEND POLICY 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16 DESCRIPTION OF BUSINESS 21 DESCRIPTION OF PROPERTY 29 MANAGEMENT 29 LIMITATIONS ON OFFICER AND DIRECTOR LIABILITY 30 EXECUTIVE COMPENSATION 32 RELATED PARTY TRANSACTIONS 34 MARKET FOR OUR COMMON STOCK 34 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 35 SELLING STOCKHOLDERS 36 DESCRIPTION OF SECURITIES 37 PLAN OF DISTRIBUTION 38 LEGAL PROCEEDINGS 39 LEGAL MATTERS 40 EXPERTS 40 FINANCIAL STATEMENTS 42 4 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER BEFORE MAKING AN INVESTMENT DECISION. OUR COMPANY We provide in-room, on-demand video entertainment and satellite services to the lodging industry. Our technology delivers DVD-quality images via traditional cable networks and satellite channels. We also provide pay-per-view and free-to-guest television service in small hotels in the U.S. and the Caribbean. On March 31, 2003, we entered into a contact for the acquisition of the assets of Hotel Movie Network, Inc., which consist of contract rights with Pay Per View and Cable/Satellite access for approximately 8,000 installed rooms and associated hardware. The purchase transaction closed on August 1, 2003. Our revenues from Hotel Movie Network in the second quarter of 2003 were $120,181. Our losses for the same period were $(767,237). For the year ended March 31, 2003 we had no revenues and a net loss of $(1,032,582). HOW TO CONTACT US Our principal executive offices are located at 9171 Wilshire Blvd., Suite B, Beverly Hills, California. Our phone number is (310) 281-2571. THE OFFERING This prospectus relates to the sale of up to 24,400,000 shares of our common stock by four entities: three current stockholders, and Dutchess Private Equities Fund, L.P., which will become a stockholder pursuant to a put right under an Investment Agreement that we have entered into with Dutchess. The table below sets forth the shares that we are registering pursuant to the Registration Statement to which this prospectus is a part:
Shareholder Number of Shares - --------------------------------------- ---------------------- Dutchess Private Equities Fund, L.P 16,000,000(1) Coast Communications, Inc. 2,000,000 Indigo Consultants, Ltd. 2,400,000 Multimedia Technologies Inc. 4,000,000 ----------- Total common stock being registered 24,400,000 (1) Assumes we put 16,000,000 Shares to Dutchess during the term of the Investment Agreement.
5 We have entered into an Investment Agreement with Dutchess Private Equities Fund L.P., also referred to as an Equity Line of Credit. This agreement provides that, following notice to Dutchess, we may put to Dutchess up to $5 million in shares of our common stock for a purchase price equal to 94% of the lowest closing bid price on the Over-the-Counter Bulletin Board of our common stock during the five day period following that notice. The dollar value that we will be permitted to put pursuant to the Investment Agreement will be either: (A) 200% of the average daily volume in the U.S. market of the common stock for the 20 trading days prior to the notice of our put, multiplied by the average of the three daily closing bid prices immediately preceding the date of the put, or (B) $10,000. No single put can exceed $1,000,000. In turn, Dutchess has indicated that it will resell those shares in the open market, resell our shares to other investors through negotiated transactions or hold our shares in its portfolio. This prospectus covers the sale of our stock by Dutchess either in the open market or to other investors through negotiated transactions. Dutchess will only purchase shares when we meet the following conditions: - - a registration statement has been declared effective and remains effective for the resale of the common stock subject to the Equity Line; - - our common stock has not been suspended from trading for a period of five consecutive trading days and we have not have been notified of any pending or threatened proceeding or other action to de-list or suspend our common stock; - - we have complied with our obligations under the Investment Agreement and the Registration Rights Agreement; - - no injunction has been issued and remain in force, or action commenced by a governmental authority which has not been stayed or abandoned, prohibiting the purchase or the issuance of our common stock; - - the registration statement does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading or which would require public disclosure or an update supplement to the prospectus; and - - We have not filed a petition in bankruptcy, either voluntarily or involuntarily, and there shall not have commenced any proceedings under any bankruptcy or insolvency laws. The Investment Agreement will terminate when any of the following events occur: - - Dutchess has purchased an aggregate of $5,000,000 of our common stock; - - 36 months after the SEC declares this registration statement effective; - - we file or otherwise enter an order for relief in bankruptcy; - - trading of our common stock is suspended for a period of 5 consecutive trading days; or - - our common stock ceases to be registered under the 1934 Act. We are also registering for sale 8,400,000 shares of outstanding common stock which were issued in a private placement to Coast Communications, Inc., Indigo Consultants, Ltd., and Multimedia Technologies, Inc. prior to the filing of the registration statement of which this prospectus is a part. 6 OUR CAPITAL STRUCTURE AND SHARES ELIGIBLE FOR FUTURE SALE The following table outlines our capital stock as of September 10, 2003:
Common Stock outstanding Before the offering 43,913,805 shares After the offering 62,513,805 shares(1) (1) Assumes we put 16,000,000 shares to Dutchess during the term of the Investment Agreement.
SUMMARY FINANCIAL INFORMATION The following summary financial information has been derived from our financial statements and should be read in conjunction with the financial statements and the related notes thereto appearing elsewhere in this prospectus.
3/31/03 9/30/03 --------- ---------- Balance Sheet Data: Total Assets $ 119,106 $ 1,790,848 Total Liabilities $ 424,637 $ 2,242,530 Total Stockholders' Equity $ (305,531) $ (451,682) Statement of Operations: Revenues $ 0 $ 121,181 Expenses $(812,410) $ 887,418 Other income $ 385,935 Net Income (Loss) $(416,475) $ (767,237) Income (Loss) Per Share $ (0.02) $ (0.02) Shares Used In Computing Net Income (Loss) Per Share 27,062,000 41,136,000
7 RISK FACTORS An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors, other information included in this prospectus and information in our periodic reports filed with the SEC. If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected and you may lose some or all of your investment. We are a development stage company because we have yet to achieve significant revenues. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve risks and uncertainties. We generally use words such as "believe," "may," "could," "will," "intend," "expect," "anticipate," "plan," and similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described below and elsewhere in this report. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made, and our future results, levels of activity, performance or achievements may not meet these expectations. We do not intend to update any of the forward-looking statements after the date of this document to conform these statements to actual results or to changes in our expectations, except as required by law. RISKS RELATED TO OUR BUSINESS WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT WHICH MAY CONTINUE IN THE FUTURE AND WHICH MAY PREVENT US FROM OPERATING AND EXPANDING OUR BUSINESS. We have incurred significant net operating losses in each of the years ended March 31, 2002 and 2003. We realized a net loss of $416,475 for the twelve months ended March 31, 2003, as compared to incurring a net loss of $1,032,582 for the twelve months ended March 31, 2002. Our accumulated deficit through March 2003 was $2,812,775. We may continue to incur losses and may never achieve or sustain profitability. An extended period of losses and negative cash flow may prevent us from operating and expanding our business. OUR INDEPENDENT AUDITORS HAVE ISSUED A GOING CONCERN OPINION DUE TO OUR RECURRING LOSSES AND WORKING CAPITAL SHORTAGES, WHICH MEANS WE MAY NOT BE ABLE TO CONTINUE OPERATIONS UNLESS WE OBTAIN ADDITIONAL FUNDING. Our audited financial statements for the fiscal year ended March 31, 2003, reflect a net loss of $416,475. These conditions raised substantial doubt about our ability to continue as a going concern if we do not acquire sufficient additional funding or alternative sources of capital to meet our working capital needs. If we do not obtain additional funding, we may not be able to continue operations. WE NEED AND MAY BE UNABLE TO OBTAIN ADDITIONAL FUNDING ON SATISFACTORY TERMS, WHICH COULD DILUTE OUR STOCKHOLDERS' INTERESTS OR IMPOSE BURDENSOME FINANCIAL RESTRICTIONS ON OUR BUSINESS. 8 Historically, we have relied upon cash from financing activities to fund all of the cash requirements of our activities. We have not been able to generate any cash from our operating activities in the past and we may not be able to generate any significant cash in the future. Although we believe our Investment Agreement with Dutchess will provide sufficient funding for at least the next twelve months, we may require new financing commitments. Deteriorating global economic conditions and the effects of ongoing military actions against terrorists may cause prolonged declines in investor confidence in and accessibility to capital markets. Future financing may not be available on a timely basis, in sufficient amounts or on terms acceptable to us. Any future equity financing may also dilute existing stockholders' equity. Any debt financing or other financing of securities senior to common stock will likely include financial and other covenants that will restrict our flexibility. At a minimum, we expect these covenants to include restrictions on our ability to pay dividends on our common stock. If we find additional financing with satisfactory terms, your interests may be diluted an we may have to accept restrictions on our business. WE ONLY RECENTLY ACQUIRED HOTEL MOVIE NETWORK AND IF WE CAN NOT IMPLEMENT OUR PLANS, WE MAY NEVER BECOME PROFITABLE. Our business model includes leveraging the assets we acquired from Hotel Movie Network, Inc. We have just begun to incorporate these assets into our company. Accordingly, we are unable to predict the demand for our services and are therefore unable to predict whether our business model may be sustained. If we are unable to generate significant revenues under our current business model, we may never become profitable and, if we become profitable, we may not be able to sustain profitability. OUR REVENUES, IF ANY, MAY BE AFFECTED BY THE SEASONAL OCCUPANCY RATES OF HOTELS WE DO BUSINESS WITH. Our revenue, if any, will partly depend on the occupancy rate of the hotel properties we serve. Occupancy rates can vary season to season based on the property's location and attractions nearby. Generally, occupancy rates are higher during the summer and lower during the winter. Occupancy rates affect our potential number of customers, which affects our revenue. Because we do not control occupancy rates, we may not be able to significantly influence negative trends or seasonality in our revenues, if any. OUR REVENUES, IF ANY, WILL BE AFFECTED BY FACTORS OUT OF OUR CONTROL. In addition to occupancy rates, our revenues will be affected by many factors out of our control including: - - the rate at which hotel guests buy our services; - the popularity of movies we license; - - the amount of marketing studios use to promote their movies; and - other entertainment options at the hotel property. 9 While we may decide which hotels we enter into contracts with, many factors out of our control will ultimately affect the rate at which guests buy our services. We do not control all of the factors that could influence guests to make a decision to buy our services and therefore we can not control the amount of revenues we generate. WE DEPEND ON THIRD PARTIES FOR OUR PROGRAMMING CONTENT AND IF THEY INCREASE THEIR FEES, OUR PROFITABILITY COULD BE AFFECTED. Our programming content is provided by third parties. We currently pay a fee for the right to broadcast their programming. If these third parties increase their fees, we will have to either pass the increased costs on to our customers which could adversely affect our revenues or our profitability may decrease. IF WE DO NOT MANAGE OUR GROWTH EFFECTIVELY, WE MAY NOT BE ABLE TO IMPLEMENT OUR BUSINESS PLAN AND BECOME PROFITABLE. Our business strategy envisions a period of rapid growth that may strain our administrative and operational resources. Our ability to effectively manage growth will require us to continue to expand the capabilities of our operational and management systems and to attract, train, manage and retain qualified engineers, technicians, salespersons and other personnel. We may not be able to manage our growth, particularly if our losses continue or if we are unable to obtain sufficient financing. If we are unable to successfully manage our growth, we may not be able to implement our business plan and become profitable. IF WE CAN NOT PROTECT OUR PROPRIETARY RIGHTS AND INTELLECTUAL PROPERTY, WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THE MARKETPLACE. We will rely on a combination of trade secrets and contractual provisions to protect our proprietary rights and products. These protections may not be adequate and competitors may independently develop technologies that are similar or identical to our products. We may experience delays in the introduction and market acceptance of new products due to the expense of adopting new technology and customer resistance to learning new technology. If we can not protect our proprietary rights and intellectual property, we may not be able to compete effectively in the marketplace. IF COMMUNICATIONS TO OUR PRIMARY SERVERS ARE INTERRUPTED, OUR OPERATIONS MAY NOT GENERATE REVENUE. Although our servers are maintained by our host, all of our primary servers are vulnerable to interruption by damage from fire, flood, power loss, telecommunications failure, break-ins, terrorist attacks and other events beyond our control. We do not maintain business interruption insurance. A significant system disruption would adversely affect our business, because we would be unable to deliver our services during the disruption and may therefore lose existing and potential customers. WE OPERATE WITHIN A HIGHLY COMPETITIVE MARKET AND IF WE DO NOT SUCCEED IN ATTRACTING CUSTOMERS, WE WILL NOT BE ABLE TO IMPLEMENT OUR BUSINESS PLAN. 10 The market for on-demand video entertainment and satellite services is extremely competitive and can be significantly affected by many factors, including changes in local, regional or national economic conditions, changes in consumer preferences, brand name recognition and marketing and the development of new and competing technologies. We expect that existing businesses that compete with us have greater financial resources than we do and will be able to undertake more extensive marketing campaigns and adopt more aggressive advertising sales policies than we can. If we can not compete successfully, we may not be able to implement our business plan. RISKS RELATING TO OUR CURRENT FINANCING AGREEMENT EXISTING SHAREHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM OUR SALE OF SHARES UNDER THIS OFFERING. The sale of shares pursuant to our Investment Agreement with Dutchess may have a dilutive impact on our shareholders. As a result, our net income per share could decrease in future periods, and the market price of our common stock could decline. In addition, the lower our stock price at the time we exercise our put option, the more shares we will have to issue to Dutchess to draw down on the full equity line with Dutchess. If our stock price decreases, then our existing stockholders would experience greater dilution. DUTCHESS WILL PAY LESS THAN THE THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK WHICH MAY CAUSE OUR STOCK PRICE TO DECREASE. Pursuant to our Investment Agreement, we will issue our common stock at a 6% discount to the lowest closing bid price of our common stock during the five day period following our notice to Dutchess of our election to exercise our put right. These discounted sales could cause the price of our common stock to decline. RISKS RELATING TO OUR COMMON STOCK OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE AND YOU MAY FIND IT DIFFICULT TO SELL YOUR SHARES FOR A PROFIT. The trading price of our common stock has been and is likely to continue to be highly volatile. For example, during the 52-week period ended September 18, 2002, the price of our common stock ranged from $2.00 to $.01 per share. Our stock price could be subject to wide fluctuations in response to factors such as: - - actual or anticipated variations in quarterly operating results; - announcements of technological innovations, new products or services by us or our competitors; - - changes in our financial estimates or recommendations by securities analysts regarding us or our competitors; - - the addition or loss of strategic relationships or relationships with our key customers; - - announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; - legal, regulatory or political developments; - additions or departures of key personnel; - sales of our common stock by insiders or stockholders; and - general market conditions. 11 In addition, the stock market in general, and the Over-The-Counter Bulletin Board and the market for on demand video entertainment and satellite services companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors may reduce our stock price, regardless of our operating performance. OUR COMMON STOCK IS A "PENNY STOCK," AND COMPLIANCE WITH REQUIREMENTS FOR DEALING IN PENNY STOCKS MAY MAKE IT DIFFICULT FOR HOLDERS OF OUR COMMON STOCK TO RESELL THEIR SHARES. The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on NASDAQ, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. Prior to a transaction in a penny stock, a broker-dealer is required to: - - Deliver a standardized risk disclosure document prepared by the SEC; - - Provides the customer with current bid and offers quotations for the penny stock; - - Explain the compensation of the broker-dealer and its salesperson in the transaction; - - Provide monthly account statements showing the market value of each penny stock held in the customer's account; - - Make a special written determination that the penny stock is a suitable investment for the purchaser and receives the purchaser's; and - - Provide a written agreement to the transaction. These requirements may have the effect of reducing the level of trading activity in the secondary market for our stock. Because our shares are subject to the penny stock rules, you may find it more difficult to sell your shares. OUR COMMON STOCK HAS BEEN RELATIVELY THINLY TRADED AND WE CANNOT PREDICT THE EXTENT TO WHICH A TRADING MARKET WILL DEVELOP. Our common stock trades on the OTC Bulletin Board. Our common stock is thinly traded compared to larger, more widely known companies in our industry. Thinly traded common stock can be more volatile than common stock trading in an active public market. We cannot predict the extent to which an active public market for the common stock will develop or be sustained after this offering. 12 USE OF PROCEEDS This prospectus relates to shares of our common stock that may be offered and sold from time to time by the selling stockholders. We will not receive proceeds from the sale of shares of common stock in this offering. However, we will receive the proceeds from the sale of shares of common stock to Dutchess under the Investment Agreement. The purchase price of the shares purchased under the Investment Agreement will be equal to 94% of the lowest closing bid price of our common stock on the Over-the-Counter Bulletin Board for the five days immediately following the date of our notice of election to exercise our put. For illustrative purposes, we have set forth below our intended use of proceeds for the range of net proceeds indicated below to be received under the Investment Agreement. The table assumes estimated offering expenses of $25,000.
Proceeds Proceeds If 100% or If 50% or 16,000,000 8,000,000 shares sold* shares sold* ------------- ------------ Gross Proceeds $5,000,000 $2,500,000 Estimated remaining accounting, legal and associated expenses of Offering $ 25,000 $ 25,000 ---------- ---------- Net Proceeds $4,975,000 $2,475,000 =========== ========== Priority Proceeds Proceeds ----------------- ---------- Deployment of existing technology $3,504,521 $1,029,521 Short term debt and interest 1st $ 308,100 $ 308,100 Working capital and general corporate expenses 2nd $ 218,500 $ 218,500 New product development and testing 3rd $ 500,000 $ 500,000 Expansion of internal operations 4th $ 318,879 $ 318,879 Hotel Movie Network 5th $ 75,000 $ 75,000 Facilities and capital expenditures 6th $ 50,000 $ 25,000 ---------- ---------- $4,975,000 $2,475,000 ========== ========== * We can not predict with accuracy the number of shares we will issue pursuant to the Equity Line of Credit primarily because the number of shares we issue will depend on our future stock price. Additionally, we have not determined at this time the amount of draw-downs we will initiate in the future. The share numbers in this chart are estimates only.
13 The short term debt to be repaid consists of bonds and notes. $75,600 in bonds that are interest bearing and pay 8.8% annually. The bonds mature July 1, 2004. For each dollar invested there is a warrant attached with an exercise price of $0.20 cents. $232,500 in notes are due as funds become available either through the sale of securities or from sufficient cash flow. As of January 1, 2004, the notes shall bear interest rates of 12%. Proceeds of the offering which are not immediately required for the purposes described above will be invested in United States government securities, short-term certificates of deposit, money market funds and other high-grade, short-term interest-bearing investments. DETERMINATION OF OFFERING PRICE The shares of common stock are being offered for sale by the selling stockholders at prices established on the Over-the-Counter Bulletin Board or in negotiated transactions during the term of this offering. These prices will fluctuate based on the demand for the shares. DILUTION Our net tangible book value as of September 30, 2003 was $(1,251,682) or $(0.029) per share of common stock. Net tangible book value is determined by dividing our tangible book value (total tangible assets less total liabilities and preferred stock) by the number of outstanding shares of our common stock. Since this offering is being made solely by the selling stockholders and none of the proceeds will be paid to us, our net tangible book value will be unaffected by this offering. Our net tangible book value, however, will be impacted by the common stock to be issued under our Investment Agreement with Dutchess. The amount of dilution will depend on the offering price and number of shares to be issued under the Investment Agreement. Higher offering prices result in increased dilution to new investors. For example, if we were to issue 16,000,000 shares of common stock under The Investment Agreement at an assumed offering price of 94% of $0.33 per share, less offering expenses of $25,000, our net tangible book value as of September 30, 2003 would have been $3,723,318 or $0.063 per share. This represents an immediate increase in net tangible book value to existing shareholders of $0.092 per share and an immediate dilution to new shareholders of $0.238 per share, or 72%. The following table illustrates the per share dilution based on this example:
Assumed Public Offering Price Per Share $ 0.330 Net Tangible Book Value Per Share Before This Offering $(0.029) Increase Attributable To New Investors $ 0.092 ------ Net Tangible Book Value Per Share After This Offering $ 0.063 ------ Dilution Per Share To New Shareholders $ 0.238 ======
14 The offering price of our common stock is based on the then-existing market price. In order to give prospective investors an idea of the dilution per share they may experience, we have prepared the following table showing the dilution per share at various assumed trading prices (i.e., lowest closing prices during the applicable five day pricing period):
ASSUMED PER SHARE NUMBER OF DILUTION PER SHARE OFFERING PRICE SHARES TO BE ISSUED(1) TO NEW INVESTORS - - -------------- ------------------------ ------------------- 0.05 105,263,158 $ 0.025 0.10 52,631,579 $ 0.039 0.15 35,087,719 $ 0.047 0.20 26,315,790 $ 0.053 0.25 21,052,632 $ 0.058 0.30 17,543,860 $ 0.061 0.35 15,037,594 $ 0.064 0.40 13,157,895 $ 0.066 0.45 11,695,906 $ 0.068 0.50 10,526,316 $ 0.069 (1)We currently have no intent to exercise the put right in a manner that would result in our issuance of more than 16,000,000 shares, but if we were to exercise the put right in such a way that we were to exceed 16,000,000 shares, we would be required to file another registration statement with the SEC to register additional shares.
CAPITALIZATION The following table sets forth our capitalization as of September 30, 2003. The pro forma information includes and accounts for the effects of the anticipated results of the completion of the sale of 8,000,000 shares of our common stock if 50% are put to Dutchess under our Investment Agreement or 16,000,000 shares of our common stock if 100% are put to Dutchess under our Investment Agreement at an assumed offering price of $.004 per share (after deduction of the estimated expenses of the offering) This table should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements in the accompanying notes and other financial information in this prospectus. 15
50% or 100% or 8,000,000 16,000,000 shares shares --------------- ------------ September 30, 2003 September 30, 2003 --------------- ------------ Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,284 72,284 --------------- ------------ Liabilities: Current liabilities. . . . . . . . . . . . . . . . . . . . 803,852 803,852 Convertible notes payable . . . . . . . . . . . . . . . . 1,438,678 1,438,678 Total liabilities. . . . . . . . . . . . . . . . . . . . 2,242,530 2,242,530 --------------- ------------ Shareholders' Equity: Common stock, 100,000,000 shares authorized: 51,043,080 and 59,043,080, respectively, issued. . . . . . . . . 2,683,933 3,515,744 Common stock, 50,000,000 shares authorized: 800,000 issued 800,000 800,000 Accumulated deficit . . . . . . . . . . . . . . . . . . . . (3,903,585) (3,903,585) --------------- ------------ Total shareholders' equity . . . . . . . . . . . . . . . (419,652) 2,654,689 --------------- ------------ Total capitalization . . . . . . . . . . . . . . . . . . $ 1,822,878 $ 4,897,219 =============== ============
DIVIDEND POLICY We do not pay dividends on our common stock and we do not anticipate paying dividends on our common stock in the foreseeable future. We intend to retain our future earnings, if any, to finance the growth of our business. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion is intended to provide an analysis of our financial condition and should be read in conjunction with our financial statements and the accompanying notes. STRATEGIC PLAN OVERALL Our primary aim for the next twelve months is to leverage our existing assets and expertise within our newly acquired subsidiary, Hotel Movie Network. Hotel Movie Network already has 8,000 rooms deployed. We acquired from Satellite Systems sufficient equipment to deploy approximately 110,000 operating cable/satellite units. We believe our industry expertise will permit us to continue to enter into contracts to further leverage our assets. To satisfy the full value of our acquisition of Hotel Movie Network, we paid $75,000 cash consideration, $75,000 is due and owing and we issued 2 million shares of our common stock and agreed to issue 1 million shares of Preferred Series A shares at a par value of $1.00 convertible into common stock and to issue Series B Preferred Stock to fulfill the fair market value of the assets acquired. We have not yet issued the Series A or Series B Preferred Stock. 16 We have also entered into a non-binding Letter of Intent with Coast Communications, Inc., Hotel Movie Network, Inc. and the "Palmas del Mar" developers in Puerto Rico to construct and maintain a satellite cable system, a high-speed wireless Internet system, and a telephone and security system. Coast Communications owns the inventory to construct the network infrastructure and we will deliver programming content. In return, we will receive a percentage of the total amount billed to the consumer. We expect that our costs relating to this agreement will initially be paid from our Equity Line of Credit and ultimately covered by revenues resulting from the agreement. We expect the contract will have a thirty year duration with additional long-term extension options. SALES AND MARKETING Our Sales and Marketing strategy is divided into the following categories: - - SYSTEM SALES: With a large inventory at our disposal, we can offer hotels and multi-dwelling units the opportunity to purchase our systems outright through a lease-purchase program. The up-front cost to the customer is minimal but they then have the advantage of being able to scale the end-user subscription/viewing charges to best exploit the additional line of revenue that a Satellite/Cable system offers them while paying a fixed service cost to us of approximately $1,500 or 10% of the equipment value per month. - - VIDEO-ON-DEMAND: This is the existing line of business we acquired as part of Hotel Movie Network. Our current client base includes 8,000 units. Our goal to deploy another 10,000 units, or hotel rooms, in the next twelve months. - - PAY-PER-STAY: We intend to market our services towards longer stay properties and the increased number of private multi-dwelling communities such as retirement and vacation resorts. The guest demands in longer stay properties are for a wider range of entertainment content for a specific monthly cost. These systems often encompass single billing whereby a property management company collects fees directly from the guest via their hotel invoice or association dues. We believe this pay-per-stay model is attractive because there is (i) elimination of charge-offs inherent in video on demand operation; (ii) an increased and consistent revenue base per unit; and (iii) reduced costs due to centralized bill collection. STRATEGIC ALLIANCE: We will continue the strategy of affiliation with players in the property management and hospitality industry while developing new relationships directly with construction and development corporations. FINANCING We recently entered into an Equity Line with Dutchess Private Equities Fund whereby we can put to them up to $5 million in our common stock for up to 36 months. We believe this financing will be sufficient for the next twelve months. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER 30, 2002 We had revenues of $120,181 during the six months ended September 30, 2003 and no revenues during the six months ended September 30, 2002. 17 We incurred general and administrative expenses of $1,144,096 for the six months ended September 30, 2003 compared to $142,397 for the six months ended September 30, 2002. The increase in general and administrative expenses was due to the increase in consulting fees and an increase of operations expenses as we continue to develop a plan of operations. We incurred $22,000 in interest expense in the six months ended September 30, 2003 compared to none in 2002. We incurred an operating loss of ($1,090,810) for the six months ended September 30, 2003 as compared to an operating loss of ($166,897) for the six months ended September 30, 2002. During 2002, liabilities of a previous business venture which totaled $385,935 were written off and recorded as other income. The previous business entity developed data compression technology and video-conferencing software but failed in marketing the technology it developed. Operating loss per share totaled ($0.027) per share for the six months ended September 30, 2003 as opposed to a net operating loss per share of less than ($.007) for the six months ended September 30, 2002. The increase in loss per share for the six months ended September 30, 2003 was primarily due to increase in general and administrative expenses due to the increase in consulting fees and an increase of operations expenses as the company continue to develop on its plan of operations. We expect the trend of losses to continue although we expect to show revenues in the second quarter as a result of our acquisition of Hotel Movie Network. Even with the expected revenues, we may not be able to operate the business at a break-even rate. RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED MARCH 31, 2003 COMPARED TO THE FISCAL YEAR ENDED MARCH 31, 2002 General and administrative expenses totaled $787,910 for the fiscal year ended March 31, 2003 compared to $505,818 in the previous fiscal year. The $282,092 increase in general and administrative expenses was due to the increase in consulting fees and an increase of operations expenses as we continue to develop our plan of operations. We incurred a loss of ($426,475), for the fiscal year ended March 31, 2003 as compared to a loss of ($1,032,582) for the fiscal year ended March 31, 2002. During 2003, liabilities of a previous business venture totaling $385,935 were written off to other income. Basic losses per share totaled $0.015 per share for the fiscal year ended March 31, 2003 as opposed to $0.043 net loss per share for the fiscal year ended March 31, 2002. The increase in loss per share for the fiscal year ended March 31, 2002 was primarily due to additional acquisition and research costs related to our business plan. LIQUIDITY AND CAPITAL RESOURCES For the six months ended September 30, 2003, our cash flow came from the issuance of bonds that pay 10% annually. The interest is paid quarterly. The bonds mature after one year but can be renewed at the sole discretion of the investor. Some of the bonds are backed by security instruments issued by us. Additionally, we issued 500,000 shares of common stock for $98,500. We expect short term borrowings will be available to us until long term capital is in place. 18 We currently estimate that we will need approximately $1,000,000 to continue operations through the end of the fiscal year 2004. These operating costs include general and administrative expenses and the deployment of inventory. We believe our Investment Agreement with Dutchess will be sufficient to fund operations and capital requirements as presently planned over the next twelve months. We are also pursuing additional funds through either debt or equity instruments. We may also pursue a working capital line of credit to be secured by assets. However, such funds may not be available on favorable terms or at all. Should we be unable to retire debt obligations on their due dates, we will bear additional interest costs which will impact our earnings. RECENT ACCOUNTING PRONOUNCEMENTS The FASB issued the following pronouncements, none of which are expected to have a significant affect on the financial statements: In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Under SFAS No. 4, all gains and losses from extinguishment of debt were required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. This Statement eliminates SFAS No. 4 and, thus, the exception to applying APB No. 30 to all gains and losses related to extinguishments of debt. As a result, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in APB No. 30. Applying the provisions of APB No. 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. Under SFAS No. 13, the required accounting treatment of certain lease modifications that have economic effects similar to sale-leaseback transactions was inconsistent with the required accounting treatment for sale-leaseback transactions. This Statement amends SFAS No. 13 to require that those lease modifications be accounted for in the same manner as sale-leaseback transactions. This statement also makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 requires companies to record liabilities for costs associated with exit or disposal activities to be recognized only when the liability is incurred instead of at the date of commitment to an exit or disposal activity. Adoption of this standard is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this standard will not have a material impact on our financial statements. In October 2002, the FASB issued SFAS No. 147 - "Acquisitions of Certain Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9," which applies to the acquisition of all or part of a financial institution, except for a transaction between two or more mutual enterprises. SFAS No. 147 removes the requirement in SFAS No. 72 and Interpretation 9 thereto, to recognize and amortize any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset. This statement requires that those transactions be accounted for in accordance with SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." In addition, this statement amends SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to include certain financial institution-related intangible assets. This statement is effective for acquisitions for which the date of acquisition is on or after October 1, 2002, and is not applicable to us. 19 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, amending FASB No. 123, and "Accounting for Stock-Based Compensation". This statement amends Statement No. 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 amends APB Opinion No. 28 "Interim Financial Reporting" to require disclosure about those effects in interim financial information. We will adopt the disclosure provisions and the amendment to APB No. 28 are effective for interim periods beginning after December 15, 2002. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN45 clarifies and expands on existing disclosure requirements for guarantees, including loan guarantees. It also would require that, at the inception of a guarantee, the Company must recognize a liability for the fair value of its obligation under that guarantee. The initial fair value recognition and measurement provisions will be applied on a prospective basis to certain guarantees issued or modified after December 31, 2002. The adoption of FIN45 will not have a material impact on our financial position, results of operations or cash flows. In November 2002, the Emerging Issues Task Force, EITF reached a consensus on Issue No. 00-21 "Revenue Arrangements with Multiple Deliverables." EITF No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and rights to use assets. The provisions of EITF No. 00-21 will apply to revenue arrangements entered into in the fiscal periods beginning after June 1 5, 2003. We are currently evaluating the impact EITF No. 00-21 will have on its financial position and results of operations. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN46 is effective for all new interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN46 must be applied for the first interim or annual period beginning after June 15, 2003. Management is currently evaluating the effect that the adoption of FIN46 will have on its results of operations and financial condition. Adequate disclosure has been made for all off balance sheet arrangements that it is reasonably possible to consolidate under FIN46. The American Institute of Certified Public Accountants has issued an exposure draft SOP "Accounting for Certain Costs and Activities Related to Property, Plant and Equipment, or PP&E. This proposed SOP applies to all non-government entities that acquire, construct or replace tangible property, plant and equipment including lessors and lessees. A significant element of the SOP requires that entities use component accounting retroactively for all PP&E assets to the extent future component replacement will be capitalized. At adoption, entities would have to option to apply component accounting retroactively for all PP&E assets, to the extent applicable, or to apply component accounting as an entity incurs capitalizable costs that replace all or a portion of PP&E. We cannot evaluate the ultimate impact of this exposure draft until it becomes final. 20 DESCRIPTION OF BUSINESS OVERVIEW We provide in-room, on-demand video entertainment and satellite services to the lodging industry. Our technology delivers DVD-quality images via traditional cable networks and satellite channels. We also provide pay-per-view and free-to-guest television service in small hotels in the U.S. and the Caribbean. On March 31, 2003, we entered into a contact for the acquisition of the assets of Hotel Movie Network, Inc., which consist of contract rights with Pay Per View and Cable/Satellite access for approximately 8,000 installed rooms, and associated hardware. The purchase transaction closed on August 1, 2003. Our revenues from Hotel Movie Network in the second quarter of 2003 were $120,181. Our losses for the same period were $(767,237). We are a development stage company because we have yet to achieve significant revenues. HISTORY We incorporated in the state of Colorado on June 8, 1983. We were administratively dissolved in 1997 and, as a part of winding up of our affairs, the directors acting as trustees, entered into a Plan of Merger in 1999 with Telecommunication Products, Inc. a newly formed entity and merged into it. The predecessor business was to act as a developer of data compression technology and video-conferencing software but ventured into other market opportunities. We failed in our business efforts prior to 2002. ACQUISITION OF HOTEL MOVIE NETWORK, INC. On March 31, 2003, we entered into an agreement with Coast Communications, Inc. for the acquisition of privately-held Hotel Movie Network, Inc., a Nevada Corporation domiciled in Mesa, Arizona. Its assets consist of inventory, contracts and contract rights with certain production studios. To satisfy the full value of the acquisition, we paid $75,000 cash consideration, $75,000 is due and owing and we issued 2 million shares of our common stock and agreed to issue 1 million shares of Preferred Series A shares at a par value of $1.00 convertible into common stock and to issue Series B Preferred Stock to fulfill the fair market value of the assets acquired. We have not yet issued the Series A and Series B Preferred shares. The transaction closed on August 1, 2003. The Series B Preferred Stock will be convertible into restricted shares of our common stock. On August 1, 2005, the holders will be entitled to convert fifty percent of the total Series B Preferred Shares into shares of our restricted common stock at $2.00 per share. On August 1, 2006, the holders will be entitled to convert the remaining fifty percent of the total Series B Preferred Shares into shares of our restricted common stock at $3.00 per share. We have the right to redeem the Series B Preferred Stock at anytime prior to conversion into common stock upon an agreement by all Parties as to the value of said stock. The parties have not yet determined the final provisions of the Series B Preferred Stock, therefore the parties have not determined what the result will be if the Series B Preferred Stock does not convert on the above time table. 21 We have not yet authorized or issued the Series A and B shares. We have 50,000,000 authorized shares of preferred stock with rights and preferences to be designated by the board of directors at the time of issuance. In order to comply with our requirement to acquire Hotel Movie Network, Inc. the board is planning to designate one million shares as Series A Preferred. This series shall be entitled to dividends proportionate to common shares and the preferred shares will be convertible into common shares. In the event of liquidation, the preferred shares will have preference over the common shares. In addition, Class B Preferred Shares are intended to be designated to satisfy other contractual requirements. The former shareholders of Hotel Movie Network received 2,000,000 shares of our common stock and $75,000 cash. Additionally, upon the completion of the audited financials of Hotel Movie Network we will pay: (1) $75,000 in cash; and (2) 1,000,000 shares of Series A preferred stock that will pay 7.5% interest per annum. Additionally, we will issue sufficient Series B Preferred shares to approximately equal the net worth of the assets acquired from Hotel Movie Network minus the value of the other compensation of cash, common stock and Series A Preferred Stock worth approximately $1,550,000. We have not yet authorized or issued the Series A or Series B Preferred shares. Through the purchase of assets of Hotel Movie Network, we supply Video On Demand and Satellite Guest Entertainment systems to the mid-market hospitality industry. The purchase includes a customer base of over 8,000 rooms through contract rights and gross revenues of approximately $75,000 per month. These contracts consist mainly of "Free-to-Guest" or "Pay-per-Stay" guest services. The purchase of the assets of Hotel Movie Networks, Inc. provides affiliation with an established network of professional guest systems installation contractors who are experienced and familiar with the Hotel Movie Network business model. The acquisition transaction will be recorded by us as follows:
Assets purchased from Hotel Movie Network, Inc.: Cash $8,284 Accounts receivable 97,047 Inventory 1,283,160 Property and equipment 161,123 Total assets acquired 1,549,614 Liabilities assumed from Hotel Movie Network, Inc.: Accounts payable and accruals 110,936 Total liabilities assumed 110,936 Net purchase price $1,438,678
The following unaudited pro forma summary presents the results of operations for the year ended March 31, 2003. The transaction closed as of August 1, 2003 if the asset purchase of Hotel Movie Network had occurred on April 1, 2002. Revenues $ 546,377 Net income (loss) $(903,672) Earnings (loss) per share $(.03) 22 The above amounts are based upon certain assumptions and estimates which we believe are reasonable. The pro forma results do not necessarily represent results which would have occurred if the business combination had taken place at the date and on the basis assumed above. OUR OTHER ASSETS On January 20, 2003, we purchased the complete inventory of guest entertainment systems from of Omega Funding, Inc. consisting of hardware and peripherals for $100,000 in cash and 1,900,000 shares of common stock. This inventory can supply the necessary hardware for deployment into over 100,000 guest rooms at a savings over the current industry average installation cost per room. INDUSTRY BACKGROUND The provision of in-room entertainment and information services to the lodging industry includes offering pay-per-view motion pictures, archived television content, games, music, internet connectivity, guest programming of select pay cable channels, and an increasing array of interactive programs and information services. Pay-per-view services were introduced in the early 1970s and have since become a standard amenity offered by many hotels to their guests. Historically, providers of programming to hotels delivered their content on a fixed time schedule that did not provide the hotel guest flexibility in choosing when to watch a movie. Typically, a guest would be offered a choice of four to eight movies, each of which would be shown once every two to four hours. The development of video switches enabled providers of pay-per-view services to offer scheduling flexibility to the viewer. Depending on the type of system installed and the size of the hotel, guests can choose up to 50 different movies with an on-demand system. Changes in technology have also led to the ability to provide a number of on-demand interactive services such as guest folio review, automatic checkout, survey completion, guest messaging, video games, and internet service. OUR VIDEO SYSTEM PLATFORM The Video System will be our primary platform. It consists of a microprocessor controlling the television in each room and a central video rack and system computer located elsewhere in the hotel. Programming signals originate from videocassette players located within the head-end rack and are transmitted to individual rooms by way of video technology. The system computer controls movie starts automatically. The system computer also records the purchase by a guest of any title and reports billing data to the hotel's accounting system, which posts the charge to the guest's bill. In order to install our system in a hotel property, we must undertake a significant investment, sometimes including rewiring part or all of the hotel. Depending on the size of the hotel property, the quality of the cabling and antenna system at the hotel, and the configuration of the system installed, the installation cost of a new, on-demand system with movies, guest services, including the head-end equipment averages from approximately $80 to $120 per room. 23 The installation cost of a system with digital content storage is approximately $45 per room higher than the system in the same size hotel. The system can be modified to enable On Call functionality for movies, games, Internet, and guest services at a cost of $280 per room. Video On Call will only be installed in association with videocassette players, rather than digital content storage, in certain markets due to constraints placed on us by most movie studios that provide us with movie content. For example, in a typical hotel with 200 rooms, the central video rack would consist of approximately 30 videocassette recorders containing up to four copies of the most popular movies and a total of up to 15 different titles. The system includes a computerized in-room on-screen menu that offers guests a list of only those movie selections available to the guest at that time. As a result, even though the on-screen menu may not include a list of all titles available in the particular hotel, the list includes all movies currently available to the guest, thus eliminating the possibility of a guest being disappointed when the guest's selection is not available. SERVICES PAY-PER-VIEW MOVIE SERVICES Through the acquisition of Hotel Movie Network assets, we provide on-demand and, in some cases, scheduled in-room television viewing of major motion pictures and independent non-rated motion pictures for mature audiences, for which a hotel guest pays on a per-view basis. Depending on the type of system installed and the size of the hotel, guests can choose up to 30 different movies with a Video On Call system, or from eight to twelve movies with a scheduled system. We obtain the non-exclusive rights to show recently released motion pictures from major motion picture studios generally pursuant to a master agreement with each studio. The license period and fee for each motion picture are negotiated individually with each studio, which typically receives a percentage of that picture's gross revenues generated by the pay-per-view system. Typically, we obtain rights to exhibit major motion pictures during the "Hotel/Motel Pay-Per-View Window," which is the time period after initial theatrical release and before release for home video distribution or cable television exhibition. Our attempts to license pictures as close as possible to motion pictures' theatrical release date to benefit from the studios' advertising and promotional efforts. We also obtain independent motion pictures, most of which are non-rated and are intended for mature audiences, for a one-time flat fee that is nominal in relation to the licensing fees paid for major motion pictures. We offer service under contracts with hotels that generally provide for a term of five to seven years. Under these contracts, we install our system into the hotel at our cost and we retain ownership of all our equipment used in providing the service. We require the hotels to provide televisions. Our contracts with hotels generally provide that we will be the exclusive provider of in-room, pay-per-view video entertainment services to the hotel and generally permit us to set the movie price. Under certain circumstances, hotels may have the right to prior approval of the price increases, which approval may not be unreasonably withheld. The hotels collect movie-viewing charges from their guests and retain a commission equal to a negotiated percentage of the total pay-per-view revenue, which varies in relationship with the size and profitability of the system. Some contracts also require us to upgrade systems to the extent that new technologies and features are introduced during the term of the contract. At the scheduled expiration of a contract, we generally seek to extend the agreement on terms that are based upon the competitive situation in the market. 24 The revenue which may be generated from pay-per-view service is dependent on the occupancy rate at the property, the "buy rate" or percentage of occupied rooms that buy movies or other services at the property, and the price of the movie or service. Occupancy rates vary based on the property's location, its competitive position within the marketplace, seasonal factors and general economic conditions. For instance, occupancy rates and revenues per room typically are higher during the summer months and lower during the winter months due to seasonal travel patterns. Buy rates generally reflect the hotel's guest mix profile, the popularity of the motion pictures or services available at the hotel, and the guests' other entertainment alternatives. Buy rates also vary over time with general economic conditions and our business is closely related to the performance of the business and mid-sized hotel segments of the lodging industry. Movie price levels are set based on the guest mix profile at each property and overall economic conditions. Currently, movie prices typically range from $8.95 to $9.95 for a purchase by the hotel guest. GUEST PROGRAMMING SERVICES We market guest-programming services pursuant to which a hotel may elect to receive one or more programming channels, such as HBO, CNN, ESPN, TBS, Disney Channel, Discovery Channel, and other cable networks, which the hotel provides to guests at no additional cost. We will provide hotels with guest programming services through a variety of arrangements, including having the hotel pay the company a monthly fee per room for each programming channel selected or including the cost or part of the cost of such programming within our overall contractual arrangements with the hotel or hotels. We have a unique contract with each network vendor including approximately 30 vendors, serving 50-60 channels. Payment to network vendors is based on subscriber/room count but also use variables such as the combination of channels received, occupancy, volume, and penetration. The term of the contracts with network vendors average three to five years. SALES AND MARKETING As a result of our acquisition of Hotel Movie Network, substantially all of our revenue will be derived from obtaining contracts with hotels in the United States not under contract with existing vendors or whose contracts with other vendors are expiring or have expired. We believe that opportunities for additional growth in the markets in the United States are more limited than in the past. Our strategy for new customers will be to target both smaller hotels lower cost hotels as well. Management anticipates that the lower costs and flexibility afforded by our products will make marketing to smaller hotels and some lower cost hotels economically attractive than in the past. INSTALLATION AND SERVICE OPERATIONS Our installation and servicing consists primarily of independent installation and service contractors in the United States. Contract installation and service personnel will be responsible for all of the hotel rooms served by us including system maintenance and distribution of video and audio content. Installation personnel also will prepare site surveys to determine the type of equipment to be installed at each hotel, install systems and train the hotel staff to operate the systems, and perform quality control tests. We will also use local installation subcontractors supervised by our full-time personnel to install its systems. 25 We maintain a toll-free technical support hot line that is monitored 24 hours a day by trained support technicians. The on-line diagnostic capability of the systems, enables the technician to identify and resolve a majority of the reported system malfunctions from our service control center without visiting the hotel property. Should a service visit be required, the modular design of the systems rather than removing the entire system permits service personnel to replace defective components at the hotel site. HOTEL CONTRACTS We will typically negotiate and enter into a separate contract with each hotel for the services provided. However, for some of the large hotel management companies, we will negotiate and enter into a single master contract for the provision of services for all of the corporate-managed hotels of such management company. In the case of franchised or independently owned hotels, the contracts are generally negotiated separately with each hotel. Existing contracts generally have a term of five to seven years from the date the system becomes operational. At expiration, we typically seek to extend the term of the contract on then current market terms. SUPPLIERS In some cases, we contract directly with various electronics firms for the manufacture and assembly of its systems hardware. Historically, these suppliers have been dependable and able to meet delivery schedules on time. We believe that, in the event of a termination of any of our sources, alternate suppliers could be located without incurring significant costs or delays. However, certain electronic component parts used with our products are available from a limited number of suppliers and can be subject to temporary shortages. In such event, we could experience a temporary reduction in the rate of new installations and/or an increase in the cost of such installations. If we were to experience a shortage of any given electronic part we believe that alternative parts could be obtained or system design changes could be made. The head-end electronics for our systems will be assembled at our facilities for testing prior to shipping. Following assembly and testing of equipment designed specifically for a particular hotel, the system is shipped to each location, where our trained technicians install the system, typically assisted by independent contractors. We will, through our acquisition of assets of Hotel Movie Network, maintain direct contractual relations with various suppliers of pay-per-view and guest programming services, including the motion picture studios and/or their domestic and international distributors and programming networks. We believe our relationships with all suppliers are adequate. 26 COMPETITION In the U.S., taking into account the various providers of cable television services, there are numerous providers of in-room video entertainment to the lodging industry, and at least three of our competitors, On Command Corporation, LodgeNet Entertainment Corporation, and Inn Room Video, Inc., provide on-demand pay-per-view, guest programming and guest services by means of in-room television. Internationally, there are more companies competing in the pay-per-view lodging industry than in the United States. Pay-per-view, the most profitable component of the services currently offered, competes for a guest's time and entertainment resources with broadcast television, guest programming, and cable television services. In addition, there are a number of competitors that are developing ways to use their existing infrastructure to provide in-room entertainment and/or information services to the lodging industry, including cable and wireless cable companies telecommunications companies, internet and high-speed connectivity companies, and direct-to-home and direct broadcast satellite companies. Some of these competitors have been providing guest programming services to hotels and are beginning to provide video-on-demand, Internet and high-speed connectivity to hotels. We intend to be a competitive provider of in-room video entertainment services to the United States lodging industry. Domestically, we will compete with smaller providers for the mid to small lodging market. Competition with respect to the provision of in-room video entertainment and information systems centers on a variety of factors, depending upon the circumstances important to a particular hotel. We believe the more important factors are (i) the features and benefits of the entertainment and information systems,(ii) the quality of the vendor's technical support and maintenance services, and (iii) the financial terms and conditions of the proposed contract. With respect to hotel properties already receiving in-room entertainment services, the current provider may have certain informational and installation cost advantages compared to outside competitors. We believe our competitive advantages will include: (i) low price; and (ii) system reliability and high quality service. We believe that the acquisition of the Hotel Movie Networks assets will provide a customer base which reflects the competitive position of our products and services. We anticipate substantial competition in obtaining new contracts with hotel chains. We believe that hotels view the provision of in-room on-demand entertainment and information both as a revenue source and as a source of competitive advantage because sophisticated hotel guests are increasingly demanding a greater range of quality entertainment and information alternatives. At the same time, we believes that certain major hotel chains have awarded contracts based primarily on the level and nature of financial and other incentives offered by the service provider. Incentives generally include stock options and grants from our competitors to the hotel chains. While we believe our competitive position could enable us to continue to enter into contractual arrangements that are attractive to hotels, our competitors may attempt to maintain or gain market share at the expense of profitability. We may not always be willing to match incentives provided by our competitors. 27 REGULATION The Communications Act of 1934, as amended by the Cable Communications Policy Act of 1984, the Cable Television Consumer Protection and Competition Act of 1992 and the Telecommunications Act of 1996, governs the distribution of video programming by cable, satellite or over-the-air technology, through regulation by the Federal Communications Commission, or FCC. However, because our video distribution systems do not use any public rights of way, they are not classified as cable systems and are subject to minimal regulation. Thus, the FCC does not directly regulate the pay-per-view or free-to-guest services provided by us to hotel guests. Various laws and governmental regulations may affect the internet-based services potentially offered by us. There are currently few laws or regulations directly applicable to access to or commerce on commercial online services or the Internet. However, because of the increasing popularity and use of commercial online services and the Internet, a number of laws and regulations may be adopted with respect to commercial online services and the Internet. The adoption of such laws or regulations in the future may slow the growth of commercial online services and the internet, which could in turn cause a decline in the demand for our internet-based services and products or otherwise have an adverse effect on us. Moreover, the applicability to commercial online services and the internet of existing laws governing issues such as property ownership, libel, personal privacy and taxation is uncertain and could expose us to liability. On January 18, 2001, the FCC released a Notice of Inquiry regarding interactive television services, or ITV, over cable television. The FCC seeks comment on, among other things, an appropriate definition of ITV services, whether access to a high -speed connection is necessary to realize ITV capabilities, and whether a nondiscrimination rule is necessary and/or appropriate. The outcome of this proceeding and any rules ultimately adopted by the FCC could affect the ITV services currently offered by us and the ITV services which we may offer in the future. Although the FCC generally does not directly regulate the services provided by us, the regulation of video distribution and communications services is subject to the political process and has been in constant flux over the past decade. Further material changes in the law and regulatory requirements must be anticipated and our business could be adversely affected by future legislation or new regulations. Because most music is copyrighted, license agreements are required for the DMN service. Agreements and arrangements with major rights holders and/or organizations permit the distribution of music. However, such licensing has been the subject of industry-wide arbitration and/or litigation for a number of years. Depending upon the outcome of on-going proceedings, the license fees for such distribution may increase. 28 We do not purport to describe all present and proposed federal, state and local regulations and legislation relating to the video programming industry applicable to us. Other existing federal, state and local laws and regulations currently are, or may be, the subject of a variety of judicial proceedings, legislative hearings, and administrative and legislative proposals that could change in varying degrees the manner in which private cable operators, other video programming distributors, and Internet service providers operate. We cannot predict the outcome of these proceedings or their impact upon our operations at this time. PATENTS, TRADEMARKS AND COPYRIGHTS We have one patent registered in the Dominican Republic for our video technology. We own and, through our acquisition of Hotel Movie Network, our various trade names, trademarks, service marks, and logos to be used in our businesses, which we intend to actively protect. EMPLOYEES As of September 9, 2003, we employed 8 full-time employees. None of these employees are subject to a collective bargaining agreement, and there is no union representation. We believe our employee relationships are good. DESCRIPTION OF PROPERTY Our principal executive office address is 9171 Wilshire Boulevard, Suite B, Garden Level, Beverly Hills, California 90120. We lease our facilities month to month. Our rent expense was $12,000 for the year ended March 31, 2003. The facilities are of adequate size to allow us to grow to approximately eight people, after which time we will need to seek larger space. Our month-to-month agreement will allow us flexibility in moving if we employ more personnel. We took over a lease through the acquisition of Hotel Movie Network. The facilities are located at 1030 S. Mesa Drive, Mesa, Arizona 85210. These premises have 30,000 square feet of storage and 5,000 square feet of offices and work shops. We believe these facilities are adequate in size to handle all operations the United States and the Caribbean for the foreseeable future. MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS Our executive officers and directors and their ages as of the date of this prospectus are as follows:
Name Age Position - ----------------- -------------- --------------------------------- Robert C. Russell 35 Chief Executive Officer, Director Marcia A. Pearlstein 45 Interim Chief Financial Officer Igor Loginov 43 Chief Technical Officer, Director
29 Biographies of executive officers and directors Robert C. Russell has been our Chief Executive Officer and director since January 2002 and is responsible for managing our overall business affairs. Prior to this, Mr. Russell was President and Chief Executive Officer of Interleisure S.A. from January 1999 to January 2002 when InterLeisure was purchased by Telecommunication Products Inc. Interleisure S.A. was a technology company developing data compression software and systems for the internet market. He is a native of Northern Ireland who attended Damelin College in South Africa, where he obtained a National diploma in financial management Igor Loginov, PhD has been our Chief Technological Officer since May 2002 and is responsible for the design, development, and deployment of our technology. Prior to this, Mr. Loginov was a Senior Project Manager for Interleisure S.A. from July 2000 until July 2002 when InterLeisure was purchased by Telecommunication Products, Inc. From 1998 to 2000 Mr. Loginov held a role as a Senior Software Engineer for Semantica, Ltd, where he led development of accounting and business software applications. Mr. Loginov has over fifteen years of experience in computer and Internet-related technologies and a Doctorate degree in physics obtained from Belarussian State University. Marcia A. Pearlstein has been the Corporate Secretary of our subsidiary, Telpro, and our Interim Chief Financial Officer since December 21, 2003. Ms. Pearlstein joined Telpro in 2002. A native of the United States she obtained her B.S. and M.B.A. in Business Administration with a concentration in Finance from the University of Pennsylvania graduating Summa Cum Laude. Prior to joining Telpro Ms. Pearlstein worked at an executive placement service in which she was General Manager and Controller over a seven-year period. ELECTION OF DIRECTORS We elect our directors each year. EMPLOYMENT AGREEMENTS WITH KEY PERSONS We entered into a formal written employment agreement with Mr. Russell effective January 25, 2002 which provides payments aggregating $125,000 per year. The agreement has been suspended and is not accruing due to lack of revenues and may be reinstated in the future. LIMITATIONS ON OFFICER AND DIRECTOR LIABILITY Our Articles of Incorporation, as amended, provide that the Board of Directors has the power to: - - indemnify our directors, officers, employees and agents to the fullest extent permitted by the Colorado Business Corporate Act; - authorize payment of expenses incurred in defending a civil or criminal action; and - purchase and maintain insurance on behalf of any director, officer, employee or agent. 30 On September 5, 2003, we entered into an Investment Agreement with Dutchess Private Equities Fund, L.P., in which we agreed to defend, protect, indemnify and hold harmless Dutchess', officers, directors, employees, counsel, and direct or indirect investors, agents or other representatives, from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and reasonable expenses including reasonable attorneys' fees and disbursements, incurred by Dutchess as a result of, or arising out of, or relating to (I) any misrepresentation or breach of any representation or warranty made by the us or any other certificate, instrument or document; (II) any breach of any of our covenants, agreements or obligations or (III) any cause of action, suit or claim brought or made against Dutchess by a third party, except insofar as any such misrepresentation, breach or any untrue statement, alleged untrue statement, omission or alleged omission is made in reliance upon and in conformity with information furnished to Dutchess which is specifically intended for use in the preparation of any such Registration Statement, preliminary prospectus, prospectus or amendments to the prospectus. On September 5, 2003, we entered into a Registration Rights Agreement with Dutchess in which we agreed to indemnify, hold harmless and defend Dutchess and its officers, partners, employees, counsel, agents, and representatives against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, attorneys' fees, amounts paid in settlement or expenses, joint or several, incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not Dutchess is or may be a party thereto, to which any of them may become subject insofar as such claims or actions or proceedings, whether commenced or threatened, arise out of or are based upon: (I) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other "blue sky" laws of any jurisdiction in which Dutchess has requested in writing that we register or qualify the common stock, or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which the statements therein were made, not misleading, (II) any untrue statement or alleged untrue statement of a material fact contained in the final prospectus or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, or (III) any violation or alleged violation us of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the common stock pursuant to a Registration Statement. The indemnification agreement shall not apply to a claim arising out of or based upon a violation which is due to the inclusion in the Registration Statement of the information furnished to us by Dutchess expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto; (II) shall not be available to the extent such claim is based on (A) a failure of Dutchess to deliver or to cause to be delivered the prospectus made available by us or (B) Dutchess' use of an incorrect prospectus despite being promptly advised in advance by us in writing not to use such incorrect prospectus; (III) any claims based on the manner of sale of the common stock by Dutchess or of Dutchess' failure to register as a dealer under applicable securities laws; (IV) any omission of Dutchess to notify us of any material fact that should be stated in the Registration Statement or prospectus relating to Dutchess or the manner of sale; and (V) any amounts paid in settlement of any claim if such settlement is effected without the prior written consent of us, which consent shall not be unreasonably withheld. 31 Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling us under the foregoing provisions, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act, and is unenforceable for that reason. EXECUTIVE COMPENSATION Set forth in the following table is certain information relating to the approximate remuneration we paid during the past fiscal years to our Chief Executive Officer and each of our most highly compensated executive officers whose total compensation exceeded $100,000. SUMMARY COMPENSATION TABLE We have not paid compensation to our Chief Executive Officer during the last three fiscal years. Additionally, there are no bonuses, other annual compensation, restricted stock awards or stock options/SARs or any other compensation paid to executive officers. ANNUAL COMPENSATION
Year Salary Bonus All Other Compensation ------ ------ --------------------------- Donald E. Ranniger*, President, 2001 Director and Treasurer $ 0 $ 0 $ 0 - ---------------------------------------------- ------- ------ --------------------------- 2002 Robert C. Russell, President, CEO and Director $ 0 $ 0 $ 0 - ---------------------------------------------- ------- ------ --------------------------- 2003 Robert C. Russell, President, CEO and Director $ 0 $ 0 $ 0 - ---------------------------------------------- ------- ------ --------------------------- * Mr. Russell became our CEO in January 2002.
DIRECTOR COMPENSATION Currently, we do not compensate directors, although we intend to do so in accordance with industry standards when cash flow permits us to do so. There are no stock options, stock grants, plans or Stock Appreciation Rights in which any directors, have participated in the past fiscal year. OPTIONS 32 We have not issued options to our executive officers or directors in the last three fiscal years and they did not exercise any options. EQUITY COMPENSATION PLANS We amended the "Telecommunication Products, Inc. Non-Employee Directors and Consultants Retainer Stock Plan" during our fiscal year ended March 31, 2003. The purpose of the plan is to enable us to promote our interests and the interests of our shareholders by attracting and retaining non-employee directors and consultants capable of furthering our future success by aligning their economic interests more closely with those of our shareholders, by paying their retainer or fees in the form of shares of our common stock. In the period ended March 31, 2003, pursuant to agreements for past and future services, we issued 6 individuals a total of 1,950,000 shares of common stock pursuant to this plan. We also created the Telecommunication Products, Inc. Stock Incentive Plan during the fiscal year ended March 31, 2002. This plan is intended to allow designated directors, officers, employees, and certain non-employees to receive certain options to purchase our common stock, and to receive grants of common stock subject to certain restrictions. The maximum number of shares of common stock that may be issued pursuant to the plan is 1,000,000 shares. The purpose of this Plan is to provide employees with equity-based compensation incentives to make significant and extraordinary contributions to our long-term performance and growth, and to attract and retain Employees of exceptional ability. We have issued 500,000 options pursuant to this
Equity Compensation Plan Information ------------------------------------ Number of securities remaining available for future issuance under Number of securities to Weighted-average equity compensation be issued upon exercise exercise price of plans (excluding of outstanding options, outstanding options, securities reflected in warrants and rights warrants and rights column (a)) Plan category (a) (b) (c) - -------------------------- ------------------------ ---------------------- ----------------------- Equity compensation plans approved by security holders -- -- -- - -------------------------- ------------------------ ---------------------- ------------------------ Equity compensation plans not approved by security holders 4,950,000 $0.20 3,550,000 ------------------------ ------------------------ ----------------------- ------------------------- Total 4,950,000 $0.20 3,550,000 - ------------------------- -------------------------------------------------------------------------------
33 RELATED PARTY TRANSACTIONS In 2001, we entered into a $12,500 loan arrangement with Dennis H. Johnston, our officer and director. The note bears interest at 12% per annum and was due and payable on or before July 31, 2002. The note was reduced to $3,500 after payment of $9,000 was received by Mr. Johnson. In 2002, we issued 800,000 shares of Series A Preferred Stock to Robert Russell, our President, CEO and Director in conversion of cash advances of $800,000 he had made to us. In 2002, we issued 19,231,092 shares of our common stock to Robert Russell as part of the merger with Interleisure, SA. at a value of $0.001 per share. In July 2002, Paul La Barre and Ernest Mc Kay contributed a note receivable valued at $1,898,072 in exchange for the issuance of 25,000,000 shares of common stock. The note consisted of funds due from an entity, which had acquired the pay-per-view operations from these two individuals. The note contributed was valued at its predecessor cost. The note has a collateral clause securing all of the assets of the pay-per-view operations. The note was in default and we immediately foreclosed on the note and acquired all of the pay-per-view assets and related liabilities. The assets and liabilities were recorded at the carrying value of the note. Our board of directors carefully considers each potential related party transaction. Any director that could benefit from a related party transaction with the company does not participate in board deliberations or any vote regarding that related party transaction. MARKET FOR OUR COMMON STOCK Our common stock began trading on the Over-The-Counter Bulletin Board under the symbol "TCPD" on November 10, 2001. Prior to November 10, 2001, our common stock was quoted under the symbol "TLCR." The following table sets forth the high and low bid prices for shares of our common stock for the periods noted, as reported by the National Daily Quotation Service and the Over-The-Counter Bulletin Board. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
LOW HIGH --- ---- 2002 - ---- First Quarter .01 .04 Second Quarter .01 .04 Third Quarter .01 2.00 Fourth Quarter .70 2.00 2003 - ---- First Quarter .14 .55 Second Quarter .02 .22 Third Quarter .23 .50 Fourth Quarter .26 .44 2004 - ---- First Quarter .16 .26 Second Quarter .04 .15 Third Quarter .04 .11 As of December 31, 2003, our common stock was held by approximately 848 stockholders of record. The transfer agent of our common stock is Manhatten Transfer Registrar Company. Their phone number is (631)585-7341.
34 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, to our knowledge, certain information concerning the beneficial ownership of our common stock as of September 3, 2003 by each stockholder known by us to be (i) the beneficial owner of more than 5% of the outstanding shares of common stock, (ii) each current director, (iii) each of the executive officers named in the Summary Compensation Table who were serving as executive officers at the end of the 2002 fiscal year and (iv) all of our directors and current executive officers as a group:
AMOUNT AND ----------- NATURE OF BENEFICIAL PERCENTAGE NAME AND ADDRESS OF BENEFICIAL OWNER(1). . . . . . OWNERSHIP OF CLASS(2) Robert C. Russell. . . . . . . . . . . . . . . . . 19,031,092(3) 42.6% Igor Loginov . . . . . . . . . . . . . . . . . . . 40,000 * Marcia A. Pearlstein All directors and current executive officers as a group (3 persons). . . . . . . . . . . . . . . . 19,821,092 44.3% * Less than 1% of outstanding shares of Common Stock. (1) The address of all individual directors and executive officers is c/o Telecommunication Products, Inc., 9171 Wilshire Boulevard, Suite B, Beverly Hills, California 90210. (2)There were 43,913,805 shares of common stock issued and outstanding on September 9, 2003. The calculation of percentage ownership for each listed beneficial owner is based upon the number of shares of common stock issued and outstanding on September 9, 2003 , plus shares of common stock subject to options held by such person on September 20, 2003 and exercisable within 60 days thereafter. The persons and entities named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them, except as noted below. (3)Includes 800,000 shares of Series A Preferred Stock that can be converted into common stock at the holder's discretion.
35 SELLING STOCKHOLDERS Based upon information available to us as of December 31, 2003, the following table sets forth the name of the selling stockholders, the number of shares owned, the number of shares registered by this prospectus and the number and percent of outstanding shares that the selling stockholders will own after the sale of the registered shares, assuming all of the shares are sold. The selling stockholders may have sold, transferred or otherwise disposed of, or may sell, transfer or otherwise dispose of, at any time or from time to time since the date on which it provided the information regarding the shares beneficially owned, all or a portion of the shares of common stock beneficially owned in transactions exempt from the registration requirements of the Securities Act of 1933. As used in this prospectus, "selling stockholder" includes donees, pledgees, transferees or other successors-in-interest selling shares received from the named selling stockholder as a gift, pledge, distribution or other non-sale related transfer. The selling stockholders may be deemed underwriters. Beneficial ownership is determined in accordance with Rule 13d-3(d) promulgated by the Commission under the Securities Exchange Act of 1934. Unless otherwise noted, each person or group identified possesses sole voting and investment power with respect to the shares, subject to community property laws where applicable.
Name and address Number of Shares of beneficial owner Number of Shares Number of Shares Owned After Beneficially Owned Offered Offering(1) Dutchess Private Equities Fund, L.P (3). . . . . . . . -0- 16,000,000(2) -0- Coast Communications, Inc. . . . . . . . . . . . . 2,000,000 2,000,000 -0- Indigo Consultants, Ltd.. . . 2,400,000 2,400,000 -0- Mutimedia Technologies Inc. . . . . . . . . . . . . 4,000,000 4,000,000 -0- (1) These numbers assume the selling shareholders sell all of their shares prior to the completion of the offering. (2) Consists of shares that may be issued pursuant to an Equity Line Agreement. (3) Dutchess is a private limited partnership whose business operations are conducted through its general partner, Dutchess Capital Management, LLC. Michael Novielli and Douglas H. Leighton, are Managing Members of Dutchess Capital Management, LLC, and have voting and dispositive power with respect to securities held by Dutchess Private Equities Fund, L.P.
36 DESCRIPTION OF SECURITIES COMMON STOCK We have authorized 100,000,000 shares of common stock, $.001 par value per share. As of September 9, 2003 there were 43,913,805 issued and outstanding shares of common stock. Following the offering, there will be up to 62,513,805 shares issued and outstanding. All shares are of the same class and have the same rights, preferences and limitations. Holders of shares of common stock are entitled to one vote for each share on all matters to be voted on by the stockholders. Holders of common stock have cumulative voting rights. Holders of shares of common stock are entitled to share ratably in dividends, if any, as may be declared, from time to time by the Board of Directors in its discretion, from funds legally available therefore. In the event of a liquidation, dissolution, or winding up of the Company, the holders of shares of common stock are entitled to share pro rata all assets remaining after payment in full of all liabilities. Holders of common stock have no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to such shares. PLAN OF DISTRIBUTION This prospectus relates to the sale of up to 24,400,000 shares of our common stock by current stockholder, Coast Communications, Inc., Indigo Consultants, Ltd., and Multimedia Technologies, Inc. Additionally, Dutchess Private Equities Fund, L.P. will become a stockholder pursuant to a put right under an Investment Agreement that we have entered into Dutchess. DUTCHESS PRIVATE EQUITIES FUND, L.P. On September 5, 2003, we entered into an Investment Agreement with Dutchess Private Equities Fund, L.P. Pursuant to the Investment Agreement, we may, at our discretion, periodically "put to" or require Dutchess shares of our common stock. The aggregate amount that Dutchess is obligated to pay for our shares shall not exceed $5 million. For each share of common stock purchased under the Investment Agreement, Dutchess will pay 94% of the lowest closing bid price on the Over-the-Counter Bulletin Board or other principal market on which our common stock is traded for the five days immediately following the date on which we give notice to Dutchess of our intention to put such stock. Dutchess is a private limited partnership whose business operations are conducted through its general partner, Dutchess Capital Management, LLC. Our ability to put the shares under the Investment Agreement is conditioned upon us registering the shares of common stock with the Securities and Exchange Commission. The costs associated with this registration will be borne by us. The number of shares that we will be permitted to put pursuant to the Investment Agreement will be either: (A) 200% of the average daily volume in the U.S. market of the common stock for the 20 trading days prior to the notice of our put, multiplied by the average of the three daily closing bid prices immediately preceding the date of the put, or (B) $10,000. No single put can exceed $1,000,000. Subject to a variety of limitations, we may put shares pursuant to the Investment Agreement once the underlying shares are registered with the Securities and Exchange Commission. Thereafter, we may continue to put shares to Dutchess until Dutchess has paid a total of $5 million or until 36 months after the effectiveness of the accompanying Registration Statement, whichever occurs first. We cannot predict the actual number of shares common stock we will issue pursuant to the Investment Agreement, in part because the volume and purchase price of the shares will fluctuate based on prevailing market conditions and we have not determined the total amount of advances we intend to draw. 37 You should be aware that there is an inverse relationship between our stock price and the number of shares to be issued under the Investment Agreement. That is, if our stock price declines, we would be required to issue a greater number of shares under the Investment Agreement for a given advance. We engaged Park Capital Securities as our placement agent with respect to the securities to be issued under the Equity Line of Credit and for these services will be paid 1% upon each put. Park Capital Securities has no affiliation or business relationship with Dutchess. PLAN OF DISTRIBUTION The selling stockholders will act independently of us in making decisions with respect to the timing, manner and size of each sale. The selling stockholders may sell the shares from time to time - - at market prices prevailing on the OTC Bulletin Board at the time of offer and sale, or - - at prices related to such prevailing market prices, or - in negotiated transactions, or - - in a combination of such methods of sale. The selling stockholders may effect such transactions by offering and selling the shares directly to or through securities broker-dealers, and such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling stockholders and/or the purchasers of the shares for whom such broker-dealers may act as agent or to whom the selling stockholders may sell as principal, or both, which compensation as to a particular broker-dealer might be in excess of customary commissions. Dutchess and any broker-dealers who acts in connection with the sale of their shares may be deemed to be "underwriters" within the meaning of the Securities Act, and any discounts, concessions or commissions received by them and profit on any sale of the shares as principal may be deemed to be underwriting discounts, concessions and commissions under the Securities Act. On or prior to the effectiveness of the registration statement to which this prospectus is a part, we will advise the selling stockholders that they and any securities broker-dealers or others who may be deemed to be statutory underwriters will be governed by the prospectus delivery requirements under the Securities Act. Under applicable rules and regulations under the Securities Exchange Act, any person engaged in a distribution of any of the shares may not simultaneously engage in market activities with respect to the common stock for the applicable period under Regulation M prior to the commencement of such distribution. In addition and without limiting the foregoing, the selling security owners may be governed by the applicable provisions of the Securities and Exchange Act, and the rules and regulations there under, including without limitation Rules 10b-5 and Regulation M, which provisions may limit the timing of purchases and sales of any of the shares by the selling stockholder. All of the foregoing may affect the marketability of our securities. On or prior to the effectiveness of the registration statement to which this prospectus is a part, we will advise the selling stockholders that the anti-manipulation rules under the Securities Exchange Act may apply to sales of shares in the market and to the activities of the selling security owners and any of their affiliates. We have informed the selling stockholders that they may not: 38 - - engage in any stabilization activity in connection with any of the shares; - - bid for or purchase any of the shares or any rights to acquire the shares, or attempt to induce any person to purchase any of the shares or rights to acquire the shares other than as permitted under the Securities Exchange Act; - - effect any sale or distribution of the shares until after the prospectus shall have been appropriately amended or supplemented, if required, to describe the terms of the sale or distribution. We have informed the selling stockholders that they must effect all sales of shares in broker's transactions, through broker-dealers acting as agents, in transactions directly with market makers, or in privately negotiated transactions where no broker or other third party, other than the purchaser, is involved. The selling stockholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act. Any commissions paid or any discounts or concessions allowed to any broker-dealers, and any profits received on the sale of shares, may be deemed to be underwriting discounts and commissions under the Securities Act if the broker-dealers purchase shares as principal. In the absence of the registration statement to which this prospectus is a part, certain of the selling stockholders would be able to sell their shares only pursuant to the limitations of Rule 144 promulgated under the Securities Act. LEGAL PROCEEDINGS In July 2003, we were served with a lawsuit from William B. Krushenski in United States District court for Southern District of California. The complaint seeks in excess of $75,000 on a note allegedly due and $135,000 in other compensatory damages. We believe these claims are without merit and intend to vigorously defend this lawsuit. We settled the lawsuit filed by John M. Brazier against us, our transfer agent and Mr. Russell filed in May 2003 in the District Court of Denver in the state of Colorado. The settlement terms require us to issue Mr. Brazier 770,000 shares of our common stock and warrants to purchase an additional 2 million shares of our common stock at $0.15 per share. Additionally, we will pay Mr. Bazier $177,500 in cash. We have already issued the shares to Mr. Brazier. We are obligated to pay the cash settlement when the Equity Line with Dutchess becomes effective. Other than the legal matters disclosed above, we are not aware of any litigation or potential litigation affecting us or our assets. 39 LEGAL MATTERS The legality of our shares of common stock being offered hereby is being passed upon by Amy Trombly, Esq. Ms. Trombly will not receive a direct or indirect interest in the small business issuer and has never been a promoter, underwriter, voting trustee, director, officer, or employee of our company. Nor does Ms. Trombly have any contingent based agreement with us or any other interest in or connection to us. EXPERTS The financial statements included in this prospectus, have been audited by Larry O Donnell, CPA, P.C. an independent auditor, and have been included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. Larry O Donnell, CPA, P.C. has no direct or indirect interest in us, nor were they a promoter or underwriter. ADDITIONAL INFORMATION We are a reporting company required to file periodic reports with the SEC and copies of all such reports may be found in the SEC's reference room and on its web site.Additionally, we filed with the Securities and Exchange Commission a registration statement on Form SB-2 under the Securities Act of 1933 for the shares of common stock in the offering, of which this prospectus is a part. This prospectus does not contain all of the information in the registration statement and the exhibits and schedule that were filed with the registration statement. For further information with respect to us, we refer you to the registration statement and the exhibits and schedule that were filed with the registration statement. Statements contained in this prospectus about the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and we refer you to the full text of the contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedules that were filed with the registration statement may be inspected without charge at the Public Reference Room maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from the Securities and Exchange Commission upon payment of the prescribed fee. Information regarding the operation of the Public Reference Room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330. We intend to furnish our shareholders with annual reports containing audited financial information The Securities and Exchange Commission maintains a web site that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC. The address of the site is www.sec.gov. 40 TELECOMMUNICATION PRODUCTS, INC. (A Development Stage Company) Financial Statements March 31, 2003 And September 30, 2003 Contents Page Independent Auditor's Report F-1 Financial Statements Balance Sheet F-2 Statements of Operations F-3 Statements of Stockholders' Equity F-4 Statements of Cash Flows F5-6 Notes to Financial Statement F-7 to F-16 Larry O'Donnell, CPA, P.C. Telephone (303) 745-4545 2228 South Fraser Street Unit 1 Aurora, Colorado 80014 Board of Directors Telecommunication Products, Inc. Beverly Hills, California I have audited the accompanying balance sheet of Telecommunication Products, Inc. (A Development Stage Company)as of March 31, 2003 and the related statements of operations, stockholders' equity and cash flows for the two years then ended and the period from inception, June 17, 1996 to March 31, 2003. This financial statement is the responsibility of the Company's management. My responsibility is to express an opinion on this financial statement based on my audits. I conducted my audit in accordance with generally accepted auditing standards in the United States of America. Those standards require that I 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. I believe that my audits provide a reasonable basis for my opinion. In my opinion, based on my audits and the report of other auditors, the financial statements referred to above fairly present in all material respects, the financial position of Telecommunication Products, Inc. (A Development Stage Company)as of March 31, 2003 the results of its operations and cash flows for the two years then ended and the period from inception, June 17, 1996 to March 31, 2003 in conformity with generally accepted accounting principles in the United States of America. As discussed in Note 11 to the financial statements, the value off common stock issued for inventory was overstated resulting in overstatement of previously reported inventories as of March 31, 2003, which were restated during the current year. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 9 to the financial statements, the Company's significant operating losses raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Larry O'Donnell - ----------------------------- Larry O'Donnell, CPA, P.C. July 8, 2003 except notes 11 and 12 which are dated October 15, 2003 F-1
Telecommunication Products, Inc. (A Development Stage Company) Balance Sheets Assets September 30, March 31, 2003 2003 (Unaudited) Current Assets Cash $ 8,284 Accounts receivable 97,047 Inventories 1,383,160 $100,000 ----------- -------- Total current assets 1,488,491 100,000 ----------- -------- Property and equipment Hotel equipment 622,805 Office furniture and equipment 446,639 36,974 Leasehold improvements 28,300 ----------- -------- 1,097,744 36,974 Less accumulated depreciation 795,387 17,868 ----------- -------- 302,537 19,106 ----------- -------- $1,790,848 $119,106 ========== ========= Liabilities and Stockholders' Equity Current Liabilities Accounts payable and accrued expenses $429,352 $145,137 Related party loans payable 257,500 162,500 Loans payable 42,000 42,000 Bond payable 75,000 75,000 ----------- -------- Total current liabilities 803,852 424,637 ----------- -------- Convertible notes payable 1,438,678 ----------- Commitments and contingency Stockholders' Equity Preferred stock, no par value, 50,000,000 shares authorized, 800,000 shares issued and outstanding 800,000 800,000 Common stock, no par value, 100,000,000 shares authorized, 43,048,080 and 30,723,805 respectively shares issued and outstanding 2,651,933 1,707,244 Deficit accumulated during developmental stage (3,903,585) (2,812,775) ----------- ---------- (451,682) (305,531) ----------- ---------- $1,790,848 $119,106 ======== ========= See Notes to Financial Statements
Telecommunication Products, Inc. (A Development Stage Company) Statements of Operations (Unaudited) --------------------- Six Months ended Inception Years ended March 31 Inception to September 30 to September 30, March 31, 2003 2002 2003 2003 2002 2003 Revenues $ 120,181 $ 120,181 ---------- ----------- Expenses Cost of sales 44,695 44,695 General and Administrative Expenses 1,144,096 $142,397 3,296,096 $ 787,910 $ 505,818 $2,152,000 Research and Development 24,500 1,038,873 24,500 525,000 1,038,873 Foreign currency Translation 7,837 1,764 7,837 Interest 22,200 22,200 ----------- --------- --------- ------- ------- ---------- Operating Expenses 1,210,991 166,897 4,409,701 812,410 1,032,582 3,198,710 Other income - Writeoff of Liabilities 385,935 385,935 385,935 385,935 ----------- --------- --------- ------- ------- ---------- Net Income (Loss) $(1,090,810) $219,038 $(3,903,585) $ (426,475) $(1,032,582) $(2,812,775) ========= ========= ========== ========= ========== ========== Basis and Diluted Earnings (Loss) Per Share (.010) $.010 $(1.21) $ (.015) $ (.045) $(.115) ===== ====== ====== ====== ===== ===== Weighted average shares out- standing 39,966,473 21,227,466 25,977,000 27,062,000 23,122,685 24,554,000 See Notes to Financial Statements
Telecommunication Products, Inc. (A Development Stage Company) Statements of Stockholders' Equity Years Ended March 31, 2003 and 2002 And Six Months ended September 30, 2003 (Unaudited) And inception June 17, 1996 to March 31, 2003 and September 30, 2003 (Unaudited) Deficit Common Stock Preferred Stock Accumulated Total During Development Shares Amount Shares Amount Stage Interleisure common stock issued at $.125 per share . . . . 2,000,000 $250,000 $ -- $250,000 Net loss for the period ended March 31, 2001. . . . . . . . . . $ (695,033) (695,033) Net loss for the period ended March 31, 2002. . . . . . . . . . (658,685) (658,685) Contribution of capital. . . . . . 235,294 235,294 Exchange of Interleisure common stock for Telpro common stock. . . . . . . . . . 20,492,800 Issuance of common stock for services at $.222 per share based on value of services performed. . . . . . . . 3,381,000 749,450 749,450 Net loss for the year. . . . . . . (1,032,582) (1,032,582) Balance, March 31, 2002. . . . . . 25,873,800 1,234,744 (2,386,300) (1,151,556) Issuance of common stock for services at $.15 per share based on value of services performed . . . . . . . . . . . . 1,950,000 292,500 292,500 Common stock issued for inventory at no value per share . . . . . . . . . . . . . . 1,900,000 Conversion of debt . . . . . . . . 1,000,000 180,000 800,000 800,000 980,000 Net loss for the year. . . . . . . (426,475) (426,475) Balance, March 31, 2003. . . . . . 30,723,800 $1,707,244 800,000 $800,000 $(2,812,775) $(305,531) Issuance of common stock for Hotel Movie Network . . . . 2,000,000 Issuance of common stock for services based on value of services performed . . . . . . 8,419,280 748,159 748,159 Issuance of common stock As collateral for debt . . . . . 2,000,000 Common stock issued for cash . . . . . . . . . . . . . . . 500,000 98,500 98,500 Issuance of common stock for debt .2,400,000 96,000 96,000 Net loss for the period. . . . . . (1,090,810) (1,090,810) Balance, June 30, 2003 (Unaudited). . . . . . . . . . . 43,043,080 $2,651,903 800,000 $800,000 $(3,906,585) $(451,682) See Notes to Financial Statements
Telecommunication Products, Inc. (A Development Stage Company) Statements of Cash Flows (Unaudited) ------------------------------- Six Months ended Inception Years ended March 31 Inception to September 30 to September 30, March 31, 2003 2002 2003 2003 2002 2003 Cash Flows from Operating Activities Net income (loss). . . . . . . . . . . . . . . . .($1,090,810) $ 219,038 $(3,903,585) $ (426,475) $(1,032,582) $(2,812,775) Adjustments to reconcile net income to net cash from operating activities Depreciation . . . . . . . . . . . . . 27,872 3,462 45,740 6,924 6,924 17,868 Stock issued for Services. . . . . . . . . . . . . . . . 750,159 60,500 1,792,109 292,500 749,450 1,041,950 Write off of Liabilities . . . . . . . . . . . . . . (385,935) (385,935) (385,935) (385,935) Decrease (increase) in: Accounts receivable . . . . . . . . . . 112,305 (43,486) Inventory . . . . . . . . . . . . . . . (100,000) (100,000) (100,000) Other assets. . . . . . . . . . . . . . 60,812 (55,868) Increase (decrease) in: Accounts payable and accrued expenses. . . . . . . . . . . . . . . . 164,229 25,950 471,866 (110,126) (13,639) 307,637 ---------- ----------- ------------ ------------ ------------ ------------ Net cash provided (used) By operating Activities. . . . . . . . . . . . . . . (148,550) (76,985) (2,079,805) (549,995) (389,201) (1,931,255) ---------- ----------- ------------ ------------ ------------ ------------ Cash Flows From Investing Activities Acquisition of property And equipment . . . . . . . . . . . . . (60,202) (60,202) Withdrawal of fixed assets. . . . . . . . . . . . . . 23,228 23,228 Acquisition Home Movie Network, Inc. net of cash acquired . . . . . . . (66,716) (66,716) ---------- ----------- -------- Net cash provided (used) in investing activities. . . . . . . . . . . . . . . (66,716) (103,690) (36,974) ---------- ------------ ---------- --------- --------- ----------- Cash Flows From Financing Activities Increase in bond payable. . . . . . . . . . . . . . 55,000 75,000 75,000 75,000 Increase in loans payable . . . . . . . . . . . . . 125,050 50,000 1,352,985 294,995 155,421 1,227,935 Proceeds from sale of stock . . . . . . . . . . . . . 98,500 528,500 180,000 430,000 Contribution of Capital . . . . . . . . . . . . . . . . 235,294 235,294 235,294 ---------- ----------- ------------ ------------ ------------ ------------ Net cash used by financing Activities. . . . . . . . . . . . . . . 223,550 125,000 2,191,779 549,995 388,995 1,968,229 ---------- ----------- ------------ ------------ ------------ ------------ See Notes to Financial Statements
Telecommunication Products, Inc. (A Development Stage Company) Statements of Cash Flows (continued) (Unaudited) ----------------------------- Six Months ended Inception Years ended March 31 Inception to September 30 to September 30, March 31, 2003 2002 2003 2003 2002 2003 Net increase (decrease) in cash 8,284 30,000 8,284 (206) Cash, beginning 206 ------ ------ -------- -------- ------ -------- Cash, ending $8,284 30,000 $ 8,284 ======= ======= ======== ======== ======= ======= Schedule of noncash investing and financing transactions Common stock issued to inventory $ - $ - Converted Amounts Payable To preferred Stock $800,000 $800,000 $ 800,000 $ 800,000 Common stock issued For debt $96,000 $96,000
TELECOMMUNICATION PRODUCTS, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS 1. Summary of significant accounting policies Nature of operations - Telecommunication Products, Inc. (referred to herein as "Telecommunication Products," the "Company" or "Telpro"), a technological development corporation, was incorporated in Colorado on June 8, 1983, The company was established as a developer of data compression technology. The pending acquisition of Hotel Movie Networks Inc in under an agreement dated March,31 2003 provided a revenue-positive operations infrastructure and an extensive network of contractors throughout the United States to both deploy new technology and expand product lines. Operations consist of on going pay-per-view movie rentals from hotel establishments and related services with these hotel establishments. The company has not achieved significant revenue and is a development stage enterprise. Cash and cash equivalents - For purposes of the statement of cash flows, the Company considers all highly liquid debt with original maturities of ninety days or less, to be cash equivalents. Accounts receivable - The Company follows the allowance method of recognizing uncollectible accounts receivable. The allowance method recognizes bad debt expense as a percentage of accounts receivable based on a review of accounts receivable outstanding and the Company's prior history of uncollectible accounts receivable. Fair value of financials instruments - The Company's financial instruments includes accounts receivable, accounts payable, notes payable and long-term debt. The fair market value of accounts receivable and accounts payable approximate their carrying values because their maturities are generally less than one year. Long-term notes receivable and debt obligations are estimated to approximate their carrying values based upon their stated interest rates. Inventories - Inventories are stated at the lower of cost (first-in, first-out) or market. Property and equipment - Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is provided primarily by the straight-line method over the estimated useful lives of the related assets generally of five to seven years. Income taxes -The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce the deferred tax assets to the amount expected to be realized. Income tax expense is payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect 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. Revenue recognition - The Company's revenues are derived principally from the sale of satellite systems and pay-per-view movies to hotels. Revenue from the sale of satellite systems is recognized after the system has been installed, and there are no longer any material commitments to the customer. The Company recognizes revenue from the pay-per-view movies on the accrual basis. The Company bills its customers for the month that services are performed. Stock options - The Company accounts for stock options issued to employees in accordance with APB No.25. The Company has elected to adopt the disclosure requirements of SFAS No.123 "Accounting for Stock-based Compensation". This statement requires that the Company provide proforma information regarding net income (loss) and income (loss) per share as if compensation cost for the Company's stock options granted had been determined in accordance with the fair value based method prescribed in SFAS No. 123. Additionally, SFAS No. 123 generally requires that the Company record options issued to non-employees, based on the fair value of the options. Income (Loss) per share - Basic earnings per share includes no dilution and is computed by dividing net earnings (loss) available to stockholders by the weighted number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the Company's earnings. During the years ended March 31, 2002 and 2001, there were no dilutive securities. Recent accounting pronouncements - In April of 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,Amendment of FASB Statement No. 13, and Technical Corrections," which is effective for fiscal years beginning after May 15, 2002. Under SFAS No. 145, gains and losses from the extinguishment of debt should be classified as extraordinary items only if they meet the criteria of APB Opinion No. 30. SFAS No. 145 also addresses financial accounting and reporting for capital leases that are modified in such a way as to give rise to a new agreement classified as an operating lease. The Company believes that the adoption of SFAS No. 145 will not have a material impact on the consolidated financial position or results of the operations of the Company. In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities". SFAS No. 1446 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred in a Restructuring)." The scope of the SFAS No. 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002, but early application is encouraged. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS No. 146. Adopting the provision of SFAS No. 146 will change, on a prospective basis, the timing of when restructuring charges are recorded from a commitment date approach to when the liability is incurred. SFAS No. 147 -- In October 2002, the FASB issued Statement No. 147 "Acquisitions of Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9" (SFAS 147). SFAS 147 removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of this Statement. In addition, this Statement amends FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that Statement 144 requires for other long-lived assets that are held and used. SFAS 147 is effective October 1, 2002. The adoption of SFAS 147 did not have a material effect on the Company's financial statements. SFAS No. 148 -- In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure"(SFAS 148"). SFAS 148 amends SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for fiscal years beginning after December 15, 2002. The Company is currently evaluating the effect that the adoption of SFAS 148 will have on its results of operations and financial condition. SFAS No. 149 - In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", to provide clarification on the meaning of an underlying, the characteristics of a derivative that contains financing components and the meaning of an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. This statement will be applied prospectively and is effective for contracts entered into or modified after June 30, 2003. The statement will be applicable to existing contracts and new contracts relate to forward purchases or sales of when-issued securities or other securities that do not yet exist. The Company does not expect that the adoption of SFAS 149 will have a material effect on the Company's financial statements. SFAS No. 150 - In May 2003, the FASB issued Statement of Financial Accounting Standards No 159 ("SFAS 150"), Accounting for certain financial instruments with characteristics of both liabilities and equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement will be effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principal for financial instruments created before the issuance date of the statement and existing at the beginning of the interim period of adoption. The Company does not expect that the adoption of SFAS 150 will have material effect on the Company's financial statements. F-11 2. Purchase of assets of Hotel Movie Network, Inc. On March 31, 2003 the Company agreed to purchased of Hotel Movie Network, Inc. The transaction has not closed. The acquisition will be recorded as a purchase. The Company will pay $150,000 and issued the securities. The securities will be two million shares of common stock, a promissory note convertible into one million shares of Series A Preferred Stock, and a promissory note convertible for $1,276,809 convertible into an amount of preferred stock which has net to be determined (approximately 1,276,809 shares). The promissory note can be converted into preferred stock at $1per share. The transaction will be recorded as follows: Assets purchased from Hotel Movie Network, Inc.: Cash $ 8,284 Accounts receivable 97,047 Inventory 1,283,160 Property and equipment 161,123 Total assets acquired 1,549,614 Liabilities assumed from Hotel Movie Network, Inc.: Accounts payable and accruals 110,936 Total liabilities assumed 110,936 Net purchase price $1,438,678 he following unaudited pro forma summary presents the results of operations for the year ended March 31, 2003 of the Company as if the business combination had occurred on April 1, 2002. Revenues $ 546,377 Net income (loss) $(903,672) Earnings (loss) per share $(.03) The above amounts are based upon certain assumptions and estimates which the Company believes are reasonable. The pro forma results do not necessarily represent results which would have occurred if the business combination had taken place at the date and on the basis assumed above. In July 2002 two officers of the Hotel Movie Network, Inc. contributed a note receivable valued at $1,898,072 in exchange for the issuance of 25,000,000 shares of common stock. The note consisted of funds due from an entity, which had acquired the pay-per-view operations from the officers. That entity was an unrelated party. The note contributed was valued at its predecessor cost. The note has a collateral clause securing all of the assets of the pay-per-view operations. The note was in default and the Hotel Movie Network, Inc. immediately foreclosed on the note and acquired all of the pay-per-view assets and related liabilities. The assets and liabilities were recorded at the carrying value of the note. 3. Inventories Inventories consist of finished goods. On January 20, 2003 the Company acquired inventory for $100,000 ($95,000 is included in accounts payable) in cash and 1.9 million shares of common stock. 4. Note payable The Company has a promissory note which bears interest at six percent and is unsecured. The note is due September, 2003. If the note is not paid at maturity, the unpaid balance and accrued interest shall bear interest at twelve percent. 5. Bond payable The Company has a bond payable which bears interest at ten percent and is unsecured. The bond is due July, 2003. The Company has the right to extend the bond for another year under the same terms. 6. Preferred stock The Company has 50,000,000 authorized shares of no par value preferred stock with rights and preferences as designated by the board of directors at the time of issuance. The board has designate one million shares as Series A $1 par value of which 800,000 shares have been issued and are outstanding. In order to comply with its requirement to acquire Hotel Movie Network, Inc. the board is planning to designate increase the authorization of its Series A preferred stock and to create a Series B preferred stock. These series shall be entitled to dividends proportionate to common shares that the preferred shares are convertible into common shares. In the event of liquidation, the preferred shares have a preference over the common shares. The Series B Preferred Stock will be convertible into restricted shares of our common stock. On August 1, 2004, the holders will be entitled to convert fifty percent of the total Preferred Shares into shares of our restricted common stock at $2.00 per share. On August 1, 2005, the holder will be entitled to convert the remaining fifty percent of the total Preferred Shares into shares of our restricted common stock at $3.00 per share. We have the right to redeem the Series B Preferred Stock at anytime prior to conversion into common stock upon an agreement by all Parties as to the value of said stock. 7. Income taxes There is no provision for income taxes since the Company has incurred net operating losses. Income taxes at the federal statutory rate is reconciled to the Company's actual income taxes as follows:
2003 2002 Federal income tax benefit at statutory rate (34%) $(120,000) $(322,000) State income tax benefit net of federal tax effect (11,000) (31,000) Deferred income tax valuation allowance 131,000 353,000 ------- ------- $ -- $ -- The Company's deferred tax assets are as follows: Net operating loss carryforward $ 442,000 $ 353,000 Valuation allowance (442,000) (353,000) -------- -------- $ -- $ --
At March 31, 2003, the Company has net operating loss carry forwards of $1.3 million which may be available to offset future taxable income through 2022. 8. Litigation The Company is a defendant in two lawsuits filed in May, 2003. The Company, Robert Russell and the Company's transfer agent are defendants in a lawsuit filed in May, 2003, in the District Court of Denver, State of Colorado. The plaintiff, John M. Brazier, purchased certain accounts receivable and received an assignment of a pledge of share collateral held by Grimshaw & Harring that was allegedly due and owing from the Corporation in the amount of approximately $26,000. If Plaintiff is successful, he would own and control 19,231,092 common shares currently owned by Robert Russell. In addition, the plaintiff seeks compensatory damages in the amount of approximately $350,000. The Company intend to vigorously defend this suit and has brought a third party complaint and will seek appropriate damages from various parties. In July 2003 the Company was served with a lawsuit from William B. Krushenski in US District court for Southern District of California. The complaint seeks in excess of $75,000 on a note due and $135,000 in other damages. 9. Going Concern The Company's financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has incurred losses from operations which have resulted in an accumulated deficit of $2,812,775 at March 31, 2003, which together raises substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty. Management believes that the Company will generate sufficient revenue and commissions through its licensing agreements and hotel pay-per-view to cover operating expenses in the future, although no assurance of this can be given. 10. Merger with Telecommunication Products, Inc. On January 23, 2002 Telecommunication Products, Inc. ("Telpro") completed its acquisition of all outstanding shares of common stock of Interleisure, S.A. ("Interleisure"), pursuant to an Agreement and Plan of Merger and Reorganization, dated as of June 25, 2001 (the "Merger Agreement"), by and among Telpro, Interleisure and the shareholders of Interleisure. Pursuant to the Merger Agreement, Interleisure was merged into Telpro, with Telpro being the surviving corporation (the "Merger"). As a result of the transaction, the former shareholders of Interleisure received 10.68 shares of Telpro common stock per for each share of Interleisure common stock. Telpro issued 21,368,160 shares of its common stock to the former Interleisure shareholders. As a result, immediately following the merger, former Interleisure shareholders held 95.0% of the then-outstanding shares of Telpro common stock. For accounting purposes, the transaction has been treated as an acquisition of Telpro by Interleisure and as a recapitalization of Interleisure. 11. Restatement of value of common stock to acquire inventory On October 15, 2003 management revalued 1.9 million shares of common stock which had been issued to acquire inventory from $1 per share to no value per share. (See note 3). The result was to reduce the value of the inventory to the cash paid . Inventory was reduced b $1.9 million and common stock was also reduced by $1.9 million. 12. Subsequent event - line of credit and registration of securities The Company has entered into an Investment Agreement with Dutchess Private Equities Fund L.P., also referred to as an Equity Line of Credit. This agreement provides that, following notice to Dutchess, we may put to Dutchess up to $5 million in shares of our common stock for a purchase price equal to 94% of the lowest closing bid price on the Over-the-Counter Bulletin Board of our common stock during the five day period following that notice. The dollar value that we will be permitted to put pursuant to the Investment Agreement will be either: (A) 200% of the average daily volume in the U.S. market of the common stock for the 20 trading days prior to the notice of our put, multiplied by the average of the three daily closing bid prices immediately preceding the date of the put, or (B) $10,000. No single put can exceed $1,000,000. In turn, Dutchess has indicated that it will resell those shares in the open market, resell our shares to other investors through negotiated transactions or hold our shares in its portfolio. This prospectus covers the sale of our stock by Dutchess either in the open market or to other investors through negotiated transactions. The agreement is subject to several conditions including successful registration of the securities. The Company is in the process of filing a registration statement with the Securities and Exchange Commission to resister those and other shares.
Telecommunication Products, Inc. Unaudited Proforma Consolidated Balance Sheet March 31, 2003 Telpro Hotel Movie Adjustments Consolidated Assets Current assets. . . . . . . . . . . . . $ 100,000 $ 1,386,040 $ 1,486,040 (1,549,304)2 Property and equipment, net . . . . . . 19,106 197,452 1,588,678 1 255,932 Total . . . . . . . . . . . . . . . . . $ 119,106 $ 1,583,492 $ 39,374 $ 1,741,972 Liabilities and Stockholders Deficiency Current liabilities . . . . . . . . . . $ 424,637 $ 34,188 150,000 1 $ 608,825 Long term liabilities . . . . . . . . . 1,438,678 1 1,438,678 Total liabilities . . . . . . . . . . . 424,637 34,188 1,588,678 2,047,503 (1,898,072)2 Common and preferred stock. . . . . . . 2,507,244 1,898,072 - 1 2,507,244 Accumulated deficit . . . . . . . . . . (2,812,775) (348,768) 348,768 2 (2,737,775) Total stockholders' equity. . . . . . . (305,531) 1,549,304 (1,549,304) 169,469 Total . . . . . . . . . . . . . . . . . $ 119,106 $ 1, 583,492 $ 39,374 $ 2,980,103
Unaudited Proforma Consolidated Statement of Operations Year ended March 31, 2003 Telpro Hotel Movie Adjustments Consolidated Revenues . . . . . . . . . . . . . . . . . . . . . . . . $ 0 $ 546,377 $ 546,377 Cost of sales. . . . . . . . . . . . . . . . . . . . . . 407,561 407,561 Gross profit . . . . . . . . . . . . . . . . . . . . . . 0 138,816 138,816 General and administrative . . . . . . . . . . . . . . . 787,910 487,584 (20,000) 3 1,295,494 Research and development . . . . . . . . . . . . . . . . 24,500 24,500 Loss from operations . . . . . . . . . . . . . . . . . . (812,410) (348,768) (20,000) (1,181,607) Interest expense (108,000) 4 (108,000) Other income . . . . . . . . . . . . . . . . . . . . . . 385,935 385,935 Net income (loss). . . . . . . . . . . . . . . . . . . . ($426,475) ($348,768) ($128,000) $ (903,672) Earnings (loss) per share. . . . . . . . . . . . . . . . $ (.03) See notes to unaudited proforma financial statements
The proforma statement of operations assumes that the Hotel Movie Network transaction occurred on April 1, 2002. For the purposes of the proforma statement of operations for the year ended March 31, 2003, Telecommunication Products, Inc.'s statement of operations for the year and Hotel Movie Networks's statement of operations for the year were combined. The acquisition of Hotel Movie Network will be accounted for by the purchase method of accounting. Under purchase accounting, the total purchase price was allocated to the tangible and intangible assets and liabilities of Hotel Movie Network based on their respective fair values as of the closing date based upon valuations and other studies. Property and equipment are being depreciated over the estimated useful lives. NOTE 1 To reflect the issuance of two million common shares, Series A preferred stock and $150,000 for cash for the acquisition. NOTE 2 To eliminate investment in Hotel Movie Network, Inc. against the equity accounts of Hotel Movie Network, Inc. NOTE 3 To record depreciation on increase in value of assets of Hotel Movie Network, Inc. recorded using the purchase method. NOTE 4 To record interest on convertible notes payable issued to acquire Hotel Movie Network, Inc. at 7.5%. HOTEL MOVIE NETWORK, INC. FINANCIAL STATEMENTS MARCH 31, 2003 C O N T E N T S Independent Auditors' Report 3 Balance Sheet 4 Statement of Operations 5 Statement of Stockholders' Equity 6 Statement of Cash Flows 7 Notes to the Financial Statements 8 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors Hotel Movie Network, Inc. Mesa, Arizona We have audited the accompanying balance sheet of Hotel Movie Network, Inc. as of March 31, 2003 and the related statement of operations, stockholders' equity and cash flows for the year ended March 31, 2003. 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 audit in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hotel Movie Network, Inc. as of March 31, 2003, and the results of its operations and its cash flows for the year ended March 31, 2003, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 5 to the financial statements, the Company has suffered losses from operations. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 5. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. HJ & Associates, LLC Salt Lake City, Utah July 8, 2003
HOTEL MOVIE NETWORK, INC. Balance Sheet ASSETS ---------- - March 31, 2003 ----------- CURRENT ASSETS Cash . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,185 Accounts receivable - net (Note 2) . . . . . . . . . . 104,046 Inventory (Note 7) . . . . . . . . . . . . . . . . . . 1,276,809 ----------- Total Current Assets . . . . . . . . . . . . . . . . 1,386,040 ----------- PROPERTY AND EQUIPMENT, NET. . . . . . . . . . . . . . . 197,452 ----------- TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . $1,583,492 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable . . . . . . . . . . . . . . . . . . . $ 179,868 Accrued expenses . . . . . . . . . . . . . . . . . . . 4,100 ----------- Total Current Liabilities. . . . . . . . . . . . . . 183,968 ----------- Total Liabilities. . . . . . . . . . . . . . . . . . 183,968 ----------- COMMITMENTS AND CONTINGENCIES (NOTE 9) STOCKHOLDERS' EQUITY Common stock; $0.001 par value, 25,000,000 shares authorized, 25,000,000 shares issued and outstanding. 25,000 Additional paid-in capital . . . . . . . . . . . . . . 1,873,072 Accumulated deficit. . . . . . . . . . . . . . . . . . (498,548) ----------- Total Stockholders' Equity . . . . . . . . . . . . . 1,399,524 ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . $1,583,492 =========== The accompanying notes are an integral part of these financial statements.
HOTEL MOVIE NETWORK, INC. Statement of Operations For the Year Ended March 31, 2003 -------------- REVENUE Net sales . . . . . . . . . . . . $ 546,377 Cost of goods sold. . . . . . . . 407,561 -------------- Gross Margin. . . . . . . . . . . 138,816 -------------- EXPENSES General and administrative. . . . 463,882 Bad debt. . . . . . . . . . . . . 57,020 Depreciation. . . . . . . . . . . 116,462 -------------- Total Expenses. . . . . . . . . . 637,364 -------------- LOSS BEFORE INCOME TAXES. . . . . (498,548) -------------- Income tax expense. . . . . . . - -------------- NET LOSS. . . . . . . . . . . $ (498,548) ============== BASIC LOSS PER SHARE. . . . . . . $ (0.03) ============== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING. . . . . . . . . . . 16,643,836 ============== The accompanying notes are an integral part of these financial statements.
HOTEL MOVIE NETWORK, INC. Statement of Stockholders' Equity Additional Common Stock Paid-in Accumulated ------------ Shares Amount Capital Deficit ------------ -------- ------------ ---------- Balance, March 31, 2002. . . . . . - $ - $ - $ - Common stock issued for assets (Note 9). . . . . . . . . . . . . 25,000,000 25,000 1,873,072 - Net loss for the year ended March 31, 2003. . . . . . . . . . - - - (498,548) ------------ -------- ------------ ---------- Balance, March 31, 2003. . . . . . 25,000,000 $ 25,000 $ 1,623,500 $(498,548) ============ ======== ============ ========== The accompanying notes are an integral part of these financial statements.
HOTEL MOVIE NETWORK, INC. Statement of Cash Flows For the Year Ended March 31, 2003 -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss. . . . . . . . . . . . . . . . . . . $ (498,548) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation. . . . . . . . . . . . . . . . . 116,462 Bad debt. . . . . . . . . . . . . . . . . . . 57,020 Impairment of inventory . . . . . . . . . . . 200,000 Changes in assets and liabilities (Increase) in accounts receivable . . . . . . (9,358) (Increase) in inventory . . . . . . . . . . . (26,122) Increase in accounts payable. . . . . . . . . 167,007 Increase in accrued expenses. . . . . . . . . 4,100 -------------- Net Cash Provided by Operating Activities . . 10,561 ============== CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment. . . . . . (5,976) -------------- Net Cash (Used) in Investing Activities . . . (5,976) -------------- CASH FLOWS FROM FINANCING ACTIVITIES. . . . . - NET INCREASE IN CASH. . . . . . . . . . . . . 4,585 CASH AT BEGINNING OF YEAR . . . . . . . . . . 600 -------------- CASH AT END OF YEAR . . . . . . . . . . . . . $ 5,185 ============== SUPPLEMENTAL CASH FLOW INFORMATION CASH PAID FOR Interest. . . . . . . . . . . . . . . . . . . $ - Income taxes. . . . . . . . . . . . . . . . . $ - NON-CASH INVESTING AND FINANCING ACTIVITIES Common stock issued for assets. . . . . . . . $ 1,898,072 The accompanying notes are an integral part of these financial statements.
HOTEL MOVIE NETWORK, INC. Notes to the Financial Statements March 31, 2003 NOTE 1 - COMPANY BACKGROUND In September 2000 the Company was incorporated in the State of Nevada. The Company did not initiate any transactions since inception and has been idle until August of 2002. In August 2002 the Company obtained the assets of the operations known as Hotel Movie Network and officially began operations (See Note 9). Operations consist of on going pay-per-view movie rentals from hotel establishments and related services with these hotel establishments. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES CONSISTENTLY APPLIED IN THE PREPARATION OF THE ACCOMPANYING FINANCIAL STATEMENTS FOLLOWS: a. Accounting Method The Company's financial statements are prepared using the accrual method of accounting. The Company has elected a March 31 year-end. b. Property and Equipment PROPERTY AND EQUIPMENT ARE RECORDED AT COST. MAJOR ADDITIONS AND IMPROVEMENTS ARE CAPITALIZED. THE COST AND RELATED ACCUMULATED DEPRECIATION OF EQUIPMENT RETIRED OR SOLD ARE REMOVED FROM THE ACCOUNTS AND ANY DIFFERENCES BETWEEN THE UNDEPRECIATED AMOUNT AND THE PROCEEDS FROM THE SALE ARE RECORDED AS A GAIN OR LOSS ON SALE OF EQUIPMENT. DEPRECIATION IS COMPUTED USING THE STRAIGHT-LINE METHOD OVER THE ESTIMATED USEFUL LIVES AS FOLLOWS: Useful Description Lives ----------- ----- Pay-per-view equipment 5-7 years Leasehold improvements Life of Lease c. Accounts Receivable Accounts receivable are shown net of the allowance for doubtful accounts of $24,000 at March 31, 2003. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES d. Provision For Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax assets are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Net deferred tax assets consist of the following components as of March 31, 2003:
2003 --------- Deferred tax assets: NOL Carryover . . . . . $ 58,000 --------- 58,000 Deferred tax liabilities: - Valuation allowance . . . (58,000) --------- Net deferred tax asset. . $ - =========
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income from continuing operations for the year ended March 31, 2003 due to the following:
2003 ---------- Book income. . . . . $(194,450) Accrued compensation 58,400 Other. . . . . . . . 50 Impairment . . . . . 78,000 Valuation allowance. 58,000 ----------
At March 31, 2003, the Company had net operating loss carryforwards of approximately $147,000 that may be offset against future taxable income from the year 2003 through 2023. No tax benefit has been reported in the March 31, 2003 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount. d. Provision For Taxes (Continued) Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years. e. Cash Equivalents For the purposes of the Statement of Cash Flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. f. Basic Loss Per Share
For the Year Ended March 31, 2003 - ------------------- (Denominator) Weighted (Numerator) . . . . Average Basic Loss. . . . . . . . Number of Loss Per Amount. . . . . . . Shares Share ------------------- ----------- -------- $(498,548) 16,643,836 $ (0.03) ========== ========== ===========
The basic loss per share of common stock is based on the weighted average number of shares issued and outstanding at the date of the financial statements. g. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make 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. h. Revenue Recognition The Company's revenues are derived principally from the sale of satellite systems and pay-per-view movies to hotels. Revenue from the sale of satellite systems is recognized after the system has been installed, and there are no longer any material commitments to the customer. The Company recognizes revenue from the pay-per-view movies on the accrual basis. The Company bills its customers for the month that services are performed. i. Newly Issued Accounting Pronouncements SFAS NO. 145 -- On April 30, 2002, the FASB issued FASB Statement No. 145 (SFAS 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS 145 rescinds both FASB Statement No. 4 (SFAS 4), "Reporting Gains and Losses from Extinguishment of Debt," and the amendment to SFAS 4, FASB Statement No. 64 (SFAS 64), "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." Through this rescission, SFAS 145 eliminates the requirement (in both SFAS 4 and SFAS 64) that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. However, an entity is not prohibited from classifying such gains and losses as extraordinary items, so long as it meets the criteria in paragraph 20 of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Further, SFAS 145 amends paragraph 14(a) of FASB Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between the accounting for sale-leaseback transactions and certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The amendment requires that a lease modification (1) results in recognition of the gain or loss in the 9 financial statements, (2) is subject to FASB Statement No. 66, "Accounting for Sales of Real Estate," if the leased asset is real estate (including integral equipment), and (3) is subject (in its entirety) to the sale-leaseback rules of FASB Statement No. 98, "Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease Term, and Initial Direct Costs of Direct Financing Leases." Generally, FAS 145 is effective for transactions occurring after May 15, 2002. The adoption of FAS 145 did not have a material effect on its financial performance or results of operations. SFAS NO. 146 -- In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002 and early application is encouraged. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS 146. The effect on adoption of SFAS 146 will change on a prospective basis the timing of when the restructuring charges are recorded from a commitment date approach to when the liability is incurred. The adoption of SFAS 146 did not have a material effect on the Company's financial performance or results of operations. SFAS NO. 147 -- In October 2002, the FASB issued Statement No. 147 "Acquisitions of Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9" (SFAS 147). SFAS 147 removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of this Statement. In addition, this Statement amends FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that Statement 144 requires for other long-lived assets that are held and used. SFAS 147 is effective October 1, 2002. The adoption of SFAS 147 did not have a material effect on the Company's financial statements. SFAS NO. 148 -- In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure"(SFAS 148"). SFAS 148 amends SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for fiscal years beginning after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company is currently evaluating the effect that the adoption of SFAS 148 will have on its results of operations and financial condition. SFAS NO. 149 - In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", to provide clarification on the meaning of an underlying, the characteristics of a derivative that contains financing components and the meaning of an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. This statement will be applied prospectively and is effective for contracts entered into or modified after June 30, 2003. The statement will be applicable to existing contracts and new contracts relate to forward purchases or sales of when-issued securities or other securities that do not yet exist. The Company does not expect that the adoption of SFAS 149 will have a material effect on the Company's financial statements. SFAS NO. 150 - In May 2003, the FASB issued Statement of Financial Accounting Standards No 159 ("SFAS 150"), Accounting for certain financial instruments with characteristics of both liabilities and equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement will be effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principal for financial instruments created before the issuance date of the statement and existing at the beginning of the interim period of adoption. The Company does not expect that the adoption of SFAS 150 will have material effect on the Company's financial statements.
NOTE 3 PROPERTY AND EQUIPMENT Property and equipment, at cost, consists of the following: March 31, 2003 ----------------------------------- Office furniture and equipment . . . . . . . . . . . . . . . . . . . $ 409,665 Hotel equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . 470,313 Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . 28,300 ----------------------------------- 908,278 Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . (710,826) ----------------------------------- Net property and equipment . . . . . . . . . . . . . . . . . . . . . $ 197,452 ===================================
Depreciation expense for the year ended March 31, 2003 was $116,462. NOTE 4 - LICENSING AGREEMENTS The Company has several licensing agreements with major movie distribution companies, whereby the Company is granted the right to show the movies for profit within the contracted hotels. The Company is required to pay a license fee for every movie viewed. The fees paid vary depending on the movie. License fees are determined on a movie by movie basis and are expensed to cost of goods when incurred. NOTE 5 - GOING CONCERN The Company's financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has incurred losses from operations which have resulted in an accumulated deficit of $498,548 at March 31, 2003, which together raises substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty. Management believes that the Company will generate sufficient revenue and commissions through its licensing agreements and hotel pay-per-view to cover operating expenses in the future, although no assurance of this can be given. NOTE 6 - MATERIAL EVENTS On March 31, 2003 the Company entered into a Master Asset Purchase Agreement to sell all of the assets properties and business relating to the pay-per-view business. In consideration the Company would receive $150,000 in cash, 2,000,000 shares of the buyer's publicly traded restricted Common stock and 1,000,000 shares of the buyer's Series A Preferred stock. In addition, the Company would receive sufficient Series B Preferred stock to bring the total purchase price to $3,500,000. As of the date of this report, the agreement has not closed. NOTE 7 - INVENTORY Inventory consisted of the following: March 31, 2003 Finished goods $ 1,276,809 The Company values its inventory at the lower of cost (first-in, first-out method) on market. NOTE 8 - RELATED PARTY TRANSACTIONS In July 2002 two officers of the Company contributed a note receivable valued at $1,898,072 in exchange for the issuance of 25,000,000 shares of common stock. The note consisted of funds due from an entity, which had acquired the pay-per-view operations from the officers. The note contributed was valued at its predecessor cost. The note has a collateral clause securing all of the assets of the pay-per-view operations. The note was in default and the Company immediately foreclosed on the note and acquired all of the pay-per-view assets and related liabilities. The assets and liabilities were recorded at the carrying value of the note. The Company has accrued salaries to the two officers in the amount of $159,780 which is included in accounts payable. NOTE 9 - COMMITMENTS AND CONTINGENCIES The Company entered into a new lease agreement on March 31, 2003. The lease expires on March 31, 2011. The future minimum lease payments are as follows:
2004. . . . . . . . . . . $ 38,400 2005. . . . . . . . . . . 38,400 2006. . . . . . . . . . . 40,800 2007. . . . . . . . . . . 40,800 2008 and thereafter 177,600 -------- Total . . . . . $336,000 ========
No dealer, salesman or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied on as having been authorized by Telecommunication Products, Inc. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy, by any person in any jurisdiction in which it is unlawful for such person to make such offer or solicitation. Neither the delivery of this Prospectus nor any offer, solicitation or sale made hereunder, shall under any circumstances create an implication that the information herein is correct as of any time subsequent to the date of the Prospectus. All dealers effecting transactions in the registered securities, whether or not participating in the distribution thereof, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters. TELECOMMUNICATION PRODUCTS, INC. 24,400,000 Shares of Common Stock PROSPECTUS ---------- February 12, 2004 -----END PRIVACY-ENHANCED MESSAGE-----