SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 8-K/A
Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
------------------------------------------------
September 8, 2004
FARADAY FINANCIAL, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 000-22236 33-0565710
- -------------------------------- ------------------------ -------------------
(State or other jurisdiction of (Commission file number) (IRS employer
incorporation) identification no.)
175 South Main, Suite 1240, SLC, Utah 84111
---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(801) 502-6100
----------------------------------------------------
(Registrant's telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2.below):
[ ] Written communications pursuant to Rule 425 under the Securities
Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b)
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13c-4(c)
This document contains a total of __ pages.
Item 9.01 Financial Statements and Exhibits
a. Financial statements of businesses acquired
See index to consolidated financial statements and consolidated
financial statement schedules beginning on page F-1 hereof.
b. Pro forma financial information
See Unaudited Condensed Combined Pro Forma Financial Statements
beginning on page F-30 hereof.
c. Exhibits
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FARADAY FINANCIAL, INC.
Date: December 16, 2004 By /s/ Frank Gillen
--------------------------
Frank Gillen
President
2
VIDEO INTERNET BROADCASTING CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
F-1
C O N T E N T S
Independent Auditors' Report................................................F-3
Consolidated Balance Sheets ................................................F-4
Consolidated Statements of Operations.......................................F-6
Consolidated Statements of Stockholders' Equity (Deficit)...................F-7
Consolidated Statements of Cash Flows.......................................F-9
Notes to the Consolidated Financial Statements.............................F-11
F-2
INDEPENDENT AUDITORS' REPORT
Board of Directors
Video Internet Broadcasting Corporation and Subsidiary
Ephrata, Washington
We have audited the accompanying consolidated balance sheets of Video Internet
Broadcasting Corporation and Subsidiary (the Company) as of December 31, 2003
and 2002 and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the years ended December 31, 2003 and 2002
and from inception on March 23, 2001 through December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits 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 consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Video
Internet Broadcasting Corporation and Subsidiary as of December 31, 2003 and
2002 and the results of their consolidated operations and their consolidated
cash flows for the years ended December 31, 2003 and 2002 and from inception on
March 23, 2001 through December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. Management's plans regarding these matters are described in Note 9.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ HJ & Associates, LLC
HJ & Associates, LLC
Salt Lake City, Utah
July 29, 2004
F-3
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
ASSETS
December 31,
---------------------------------------
2003 2002
----------------- -----------------
CURRENT ASSETS
Accounts receivable (Note 1) $ 72,147 $ 107,072
Other current assets 6,764 -
----------------- -----------------
Total Current Assets 78,911 107,072
----------------- -----------------
PROPERTY AND EQUIPMENT (Note 1)
Computer and multimedia equipment 253,344 92,172
Office equipment and furniture 12,479 12,479
Less - accumulated depreciation (109,238) (41,001)
----------------- -----------------
Total Property and Equipment 156,585 63,650
----------------- -----------------
OTHER ASSETS
Software development costs - net (Note 1) 72,279 91,285
----------------- -----------------
Total Other Assets 72,279 91,285
----------------- -----------------
TOTAL ASSETS $ 307,775 $ 262,007
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
F-4
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 31,
---------------------------------------
2003 2002
----------------- -----------------
CURRENT LIABILITIES
Cash overdraft $ 12,319 $ 25,628
Accounts payable 61,374 553,459
Accrued liabilities 82,370 115,930
Capital leases payable - related party (Note 2) 16,771 -
Current portion of notes payable to related parties (Note 2) 32,000 -
Current portion of notes payable (Note 3) 395,500 51,375
Current portion of convertible debt (Note 4) 194,250 -
----------------- -----------------
Total Current Liabilities 794,584 746,392
----------------- -----------------
LONG-TERM LIABILITIES
Notes payable to related parties (Note 2) 89,000 -
Notes payable (Note 3) 147,837 154,125
Convertible debt (Note 4) 161,000 -
----------------- -----------------
Total Long-Term Liabilities 397,837 154,125
----------------- -----------------
Total Liabilities 1,192,421 900,517
----------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY (DEFICIT)
Series A preferred stock: 20,000,000 shares authorized of
$0.001 par value, 350,555 and 350,555 shares issued
and outstanding, respectively 351 351
Common stock: 30,000,000 shares authorized of
$0.001 par value, 1,393,292 and 952,488 shares issued
and outstanding, respectively 1,393 952
Additional paid-in capital 1,926,419 728,390
Deferred compensation (145,566) -
Accumulated deficit (2,667,243) (1,368,203)
----------------- -----------------
Total Stockholders' Equity (Deficit) (884,646) (638,510)
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 307,775 $ 262,007
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
F-5
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
From Inception
on March 23,
For the Years 2001
Ended December 31, Through
------------------------------------- December 31,
2003 2002 2001
----------------- ----------------- -----------------
REVENUE
Subscription television services $ 683,935 $ 585,359 $ 2,280
Other subscriber-related revenue - 26,422 66,715
----------------- ----------------- -----------------
Total Revenue 683,935 611,781 68,995
----------------- ----------------- -----------------
COST OF SALES
Subscriber-related expenses 140,093 69,234 70,907
Transmission expenses 249,886 379,969 -
----------------- ----------------- -----------------
Total Cost of Sales 389,979 449,203 70,907
----------------- ----------------- -----------------
GROSS MARGIN (DEFICIT) 293,956 162,578 (1,912)
----------------- ----------------- -----------------
OPERATING EXPENSES
General and administrative 1,060,624 1,008,012 469,183
Stock-based compensation 16,784 - -
Depreciation and amortization 76,821 27,724 13,277
----------------- ----------------- -----------------
Total Expenses 1,154,229 1,035,736 482,460
----------------- ----------------- -----------------
LOSS FROM OPERATIONS (860,273) (873,158) (484,372)
----------------- ----------------- -----------------
OTHER INCOME (EXPENSE)
Software sales 55,578 - -
Interest expense (494,345) (10,673) -
----------------- ----------------- -----------------
Total Other Income (Expense) (438,767) (10,673) -
----------------- ----------------- -----------------
NET LOSS $ (1,299,040) $ (883,831) $ (484,372)
================= ================= =================
BASIC LOSS PER SHARE $ (1.17) $ (1.11) $ (1.47)
================= ================= =================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 1,113,452 799,462 330,375
================= ================= =================
The accompanying notes are an integral part of these consolidated financial statements.
F-6
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholder's Equity (Deficit)
Preferred Stock Common Stock Additional
------------------- -------------------- Paid-in Deferred Accumulated
Shares Amount Shares Amount Capital Compensation Deficit
------ ------ ------ ------ ------- ------------ -------
Balance at inception on March 23, 2001 - $ - - $ - $ - $ - $ -
Common stock issued to founders for
services at $0.001 per share - - 470,000 470 - - -
Common stock issued to founders for
cash at $0.001 per share - - 180,000 180 - - -
Preferred stock issued for cash at $1.00
per share 300,000 300 - - 299,700 - -
Preferred stock issued for debt
extinguishment at $1.00 per share 555 1 - - 554 - -
Common stock issued for cash at $5.00
per share - - 18,000 18 89,982 - -
Net loss for the period from inception on
March 23, 2001 through December 31, 2001 - - - - - - (484,372)
------- ------- --------- -------- ---------- ---------- ------------
Balance, December 31, 2001 300,555 301 668,000 668 390,236 - (484,372)
Common stock issued for cash at $5.00
per share - - 1,000 1 4,999 - -
Common stock issued for cash at $1.00
per share - - 184,000 184 183,816 - -
Common stock issued for services at $1.00
per share - - 35,700 36 35,664 - -
Common stock issued for debt at $1.00
per share - - 63,788 63 63,725 - -
Preferred stock issued for cash at $1.00
per share 50,000 50 - - 49,950 - -
------- ------- --------- -------- ---------- ---------- ------------
Balance Forward 350,555 $ 351 952,488 $ 952 $ 728,390 $ - $ (484,372)
------- ------- --------- -------- ---------- ---------- ------------
The accompanying notes are an integral part of these consolidated financial statements.
F-7
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholder's Equity (Deficit)
(Continued)
Preferred Stock Common Stock Additional
------------------- -------------------- Paid-in Deferred Accumulated
Shares Amount Shares Amount Capital Compensation Deficit
------ ------ ------ ------ ------- ------------ -------
Balance Forward 350,555 $ 351 952,488 $ 952 $ 728,390 $ - $ (484,372)
Net loss for the year ended
December 31, 2002 - - - - - - (883,831)
------- ------- --------- -------- ---------- ---------- ------------
Balance, December 31, 2002 350,555 351 952,488 952 728,390 - (1,368,203)
Common stock issued for fixed assets
at $1.00 per share - - 100,000 100 99,900 - -
Common stock issued for cash at
$3.00 per share - - 60,250 60 180,690 - -
Common stock issued for services at
$3.00 per share - - 15,315 15 45,930 - -
Common stock issued for cash at
$1.00 per share - - 90,500 91 90,409 - -
Common stock issued for services at
$1.00 per share - - 174,679 175 174,504 - -
Discount on convertible debt - - - - 444,246 - -
Options granted to non-employees - - - - 162,350 (145,566) -
Net loss for the year ended
December 31, 2003 - - - - - - (1,299,040)
------- ------- --------- -------- ---------- ---------- ------------
Balance, December 31, 2003 350,555 $ 351 1,393,232 $ 1,393 $1,926,419 $ (145,566) $ (2,667,243)
======= ======= ========= ======== ========== ========== ============
The accompanying notes are an integral part of these consolidated financial statements.
F-8
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
From Inception
on March 23,
For the Years 2001
Ended December 31, Through
---------------------------------- December 31,
2003 2002 2001
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,299,040) $ (883,831) $ (484,372)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization expense 76,821 27,724 13,277
Common stock issued for services 220,624 35,700 470
Common stock options issued for services 16,784 - -
Gain on sale of software (55,578) - -
Amortization of debt discount 444,246 - -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 34,925 (99,981) (7,091)
(Increase) decrease in other assets (6,764) - -
Increase (decrease) in accounts payable (492,085) 416,368 137,091
Increase (decrease) in accrued expenses (33,560) 85,382 30,548
-------------- -------------- --------------
Net Cash Used by Operating Activities (1,093,627) (418,638) (310,077)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for software development costs (84,000) (91,285) -
Cash received for sale of software 150,000 - -
Cash paid for fixed assets (24,464) (38,268) (66,383)
-------------- -------------- --------------
Net Cash Provided (Used) by Investing
Activities 41,536 (129,553) (66,383)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in cash overdraft (13,309) 25,628 -
Proceeds from issuance of common stock 271,250 189,000 90,180
Proceeds from issuance of preferred stock - 50,000 300,000
Proceeds from notes payable 369,406 269,288 555
Proceeds from notes payable - related 32,000 - -
Proceeds from convertible debt 355,250 - -
Proceeds from convertible debt - related 89,000 - -
Principal payments on capital leases (19,937) - -
Principal payments on notes payable (31,569) - -
-------------- -------------- --------------
Net Cash Provided by Financing Activities 1,052,091 533,916 390,735
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH - (14,275) 14,275
CASH AT BEGINNING OF YEAR - 14,275 -
-------------- -------------- --------------
CASH AT END OF YEAR $ - $ - $ 14,275
============== ============== =================
The accompanying notes are an integral part of these consolidated financial statements.
F-9
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
From Inception
on March 23,
For the Years 2001
Ended December 31, Through
---------------------------------- December 31,
2003 2002 2001
-------------- -------------- --------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW
ACTIVITIES
CASH PAID FOR:
Interest $ 8,070 $ 1,083 $ -
Income taxes $ - $ - $ -
NON-CASH FINANCING ACTIVITIES
Common stock issued for services rendered $ 220,624 $ 35,700 $ 470
Common stock options issued for services $ 16,784 $ - $ -
Common stock issued for equipment $ 100,000 $ - $ -
Common stock issued for debt $ - $ 63,788 $ -
Preferred stock issued for debt $ - $ - $ 555
Fixed assets purchased under capital
Lease $ 36,708 $ - $ -
The accompanying notes are an integral part of these consolidated financial statements.
F-10
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Video Internet
Broadcasting Corporation and Subsidiary is presented to assist in
understanding the Company's financial statements. The consolidated
financial statements and notes are representations of the Company's
management, which is responsible for their integrity and objectivity.
These accounting policies conform to accounting principles generally
accepted in the United States of America and have been consistently
applied in the preparation of the consolidated financial statements.
a. Organization and Business Activities
Video Internet Broadcasting Corporation and Subsidiary, (the "Company")
was incorporated under the laws of the State of Washington on March 23,
2001. The Company provides fiber optic cable television broadcast
subscription services. In addition to its television services, the
Company also provides high-speed internet service through its fiber
optic network. The Company's principal business strategy is to continue
developing their subscription television and Internet services in the
United States to provide consumers with a fully competitive alternative
to cable television and internet service.
During January 2003, the Company incorporated Digital Media Solutions,
LLC (DMS) as a wholly-owned subsidiary under the laws of the State of
Arizona.
b. Accounting Method
The Company's consolidated financial statements are prepared using the
accrual method of accounting. The Company has elected a December 31,
year-end.
c. Basic Loss Per Share
The computation of basic loss per share of common stock is based on the
weighted average number of shares outstanding during the period.
From Inception
For the Years Ended On March 23,
December 31, 2001 through
-------------------------- December 31,
2003 2002 2001
------------ ------------ ------------
Loss (numerator) $ (1,299,040) $ (883,831) $ (484,372)
Shares (denominator) 1,113,452 799,462 330,375
Per share amount $ (1.17) $ (1.11) $ (1.47)
For the years and period ended December 31, 2003, 2002 and 2001 the
Company has excluded 1,006,131, 22,500 and 0 common stock equivalents,
respectively, from the basic net loss per share calculation as they are
anti-dilutive.
F-11
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. Estimates
The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
e. Income 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
liabilities 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
December 31, 2003, 2002 and 2001:
2003 2002 2001
---------- ---------- ----------
Deferred tax assets:
NOL Carryover $ 922,200 $ 480,800 $ 182,300
Accrued Expenses 12,000 39,700 9,700
Deferred tax liabilities: - - -
Depreciation (7,300) (4,100) (3,400)
Valuation allowance (926,900) (516,400) (188,600)
---------- ---------- ----------
Net deferred tax asset $ - $ - $ -
========== ========== ==========
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal and state income tax rates of
39% to pretax income from continuing operations for the years and
period ended December 31, 2003, 2002 and 2001 due to the following:
F-12
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
e. Income Taxes (Continued)
2003 2002 2001
----------- ----------- -----------
Book Income $ (506,625) $ (344,694) $ (188,866)
Stock for Services/Options 92,589 13,923 180
Other 3,536 3,063 (6)
Valuation allowance 410,500 327,708 188,692
----------- ----------- -----------
Tax Expense (Benefit) $ - $ - $ -
=========== =========== ===========
At December 31, 2003, the Company had net operating loss carryforwards
of approximately $2,365,000 that may be offset against future taxable
income from the year 2003 through 2023.
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.
f. Property and Equipment
Property and equipment are stated at cost. Expenditures for small
tools, ordinary maintenance and repairs are charged to operations as
incurred. Major additions and improvements are capitalized.
Depreciation is computed using the double declining balance method over
estimated useful lives as follows:
Leasehold improvements Over the term of the lease
Equipment 5 years or lease term
Furniture and fixtures 5 years
Depreciation expense for the years ended December 31, 2003 and 2002 and
for the period from inception on March 23, 2001 through December 31,
2001 was $68,237, $27,724 and $13,277, respectively.
g. Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear
interest. The Company does not have any off-balance-sheet credit
exposure related to its customers. Due to their short-term nature, book
values of $72,147 and $107,072 at December 31, 2003 and 2002,
respectively, approximate fair market value for trade accounts
receivable, net of allowance of $0 and $0 for the periods ending
December 31, 2003 and 2002, respectively.
F-13
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
h. Revenue Recognition
Subscription Television Services and Other Subscriber-Related Revenue
Subscription television service revenues are derived principally from
monthly fees paid by subscribers. In addition to recurring subscriber
revenues, the Company also derives revenues from the sales of
pay-per-view movies and events, and from installation charges. The
Company recognizes cable television, high-speed data, telephony and
programming revenues as services are provided to subscribers.
Subscriber fees for multiple receivers and equipment rental are
recognized as revenue monthly as earned. Revenues derived from other
sources are recognized when services are provided or events occur.
Software Revenue
The Company applies the provisions of Statement of Position 97-2,
"Software Revenue Recognition " in conjunction with the applicable
provisions of Staff Accounting Bulletin No. 104, " Revenue
Recognition." Accordingly, the Company recognizes revenue for software
when there is (1) persuasive evidence that an arrangement exists, which
is generally a customer purchase order, (2) the software is delivered,
(3) the selling price is fixed and determinable and (4) collectibility
of the customer receivable is deemed probable. The Company has yet to
complete the development of its software developed for sale and has not
yet recognized any revenue from the sale of software developed for
sale.
i. Cost of Sales
Subscriber-related expenses
Subscriber-related expenses consist primarily of monthly fees to the
National Cable Television Cooperative and other programming providers
and are generally based on the average number of subscribers to each
program. The cost of television programming and distribution rights is
generally incurred on a per subscriber basis and is recognized when the
related programming is distributed to subscribers.
Transmission expenses
Transmission expenses consist primarily of transport cost and network
access fees specifically associated with subscription services.
j. Advertising
The Company follows the policy of charging the costs of advertising to
expense as incurred. Advertising expense for the years ended December
31, 2003 and 2002 and for the period from inception on March 23, 2001
through December 31, 2001 was $24,861, $45,067 and $4,507,
respectively.
F-14
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k. Newly Adopted Accounting Pronouncements
During the year ended December 31, 2003, the Company adopted the
following accounting pronouncements:
SFAS No. 143 -- In August 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations, which established a
uniform methodology for accounting for estimated reclamation and
abandonment costs. The statement was effective for fiscal years
beginning after June 15, 2002. The adoption of SFAS No. 143 did not
have a material effect on the consolidated financial statements of the
Company.
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 SFAS 145 did not have a material effect on the consolidated
financial statements of the Company.
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
F-15
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k. Newly Adopted Accounting Pronouncements (Continued)
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 consolidated
financial statements of the Company.
SFAS No. 147 -- In October 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 147, "Acquisitions of Certain Financial Institutions" which is
effective for acquisitions on or after October 1, 2002. This statement
provides interpretive guidance on the application of the purchase
method to acquisitions of financial institutions. Except for
transactions between two or more mutual enterprises, this Statement
removes acquisitions of financial institutions from the scope of both
SFAS 72 and Interpretation 9 and requires that those transactions be
accounted for in accordance with SFAS No. 141, "Business Combinations"
and No. 142, "Goodwill and Other Intangible Assets". The adoption of
SFAS No. 147 did not have a material effect on the consolidated
financial statements of the Company.
SFAS No. 148 -- In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123" which is effective for financial
statements issued for fiscal years ending after December 15, 2002. This
Statement amends SFAS 123, Accounting for Stock-Based Compensation, 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, this Statement 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 compensation and the effect of the method used on
reported results. The adoption of SFAS No. 148 did not have a material
effect on the consolidated financial statements of the Company.
SFAS No. 149 -- In April 2003, the FASB issued SFAS No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities"
which is effective for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003.
This statement amends and clarifies financial accounting for derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and hedging activities under SFAS 133. The adoption of
SFAS No. 149 did not have a material effect on the consolidated
financial statements of the Company.
F-16
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k. Newly Adopted Accounting Pronouncements (Continued)
SFAS No. 150 -- In May 2003, the FASB issued SFAS No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" which is effective for financial instruments
entered into or modified after May 31, 2003, and is otherwise effective
at the beginning of the first interim period beginning after June 15,
2003. This Statement establishes standards for how an issuer classifies
and measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances) because
that financial instrument embodies an obligation of the issuer. The
adoption of SFAS No. 150 did not have a material effect on the
consolidated financial statements of the Company.
FASB Interpretation No. 45 -- "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others - an Interpretation of FASB Statements No. 5, 57
and 107". The initial recognition and initial measurement provisions of
this Interpretation are to be applied prospectively to guarantees
issued or modified after December 31, 2002. The disclosure requirements
in the Interpretation were effective for financial statements of
interim or annual periods ending after December 15, 2002. The adoption
of FASB Interpretation No. 45 did not have a material effect on the
consolidated financial statements of the Company.
FASB Interpretation No. 46 -- In January 2003, the FASB issued FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities."
FIN 46 provides guidance on the identification of entities for which
control is achieved through means other than through voting rights,
variable interest entities, and how to determine when and which
business enterprises should consolidate variable interest entities.
This interpretation applies immediately to variable interest entities
created after January 31, 2003. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The adoption of FIN 46 did not have a
material impact on the Company's consolidated financial statements.
During the year ended December 31, 2003, the Company adopted the
following Emerging Issues Task Force Consensuses which did not have a
material impact on the Company's financial statements: EITF Issue No.
00-21 "Revenue Arrangements with Multiple Deliverables", EITF Issue No.
01 -8 " Determining Whether an Arrangement Contains a Lease", EITF
Issue No. 02-3 "Issues Related to Accounting for Contracts Involved in
Energy Trading and Risk Management Activities", EITF Issue No. 02-9
"Accounting by a Reseller for Certain Consideration Received from a
Vendor", EITF Issue No. 02-17, "Recognition of Customer Relationship
Intangible Assets Acquired in a Business Combination", EITF Issue No.
02-18 "Accounting for Subsequent Investments in an Investee after
Suspension of Equity Method Loss Recognition", EITF Issue No. 03-1,
"The Meaning of Other Than Temporary and its Application to Certain
Instruments", EITF Issue No. 03-5, "Applicability of AICPA
F-17
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k. Newly Adopted Accounting Pronouncements (Continued)
Statement of Position 97-02, `Software Revenue Recognition' to
Non-Software Deliverables in an Arrangement Containing More Than
Incidental Software", EITF Issue No. 03-7, "Accounting for the
Settlement of the Equity Settled Portion of a Convertible Debt
Instrument That Permits or Requires the Conversion Spread to be Settled
in Stock", EITF Issue No. 03-10, "Application of EITF Issue No. 02-16
by Resellers to Sales Incentives Offered to Consumers by Manufacturers.
l. Concentrations of Credit Risk
The Company maintains several accounts with financial institutions. The
accounts are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company's balances occasionally exceed that amount.
Credit losses, if any, have been provided for in the financial
statements and are based on management's expectations. The Company's
accounts receivable are subject to potential concentrations of credit
risk. The Company does not believe that it is subject to any unusual
risks, or significant risks in the normal course of its business.
The Company has no customers who account for greater than 10% of the
accounts receivable balance at December 31, 2003 and 2002 or who
account for greater than 10% of total sales for the years ended
December 31, 2003 and 2002.
The Company is dependent on municipalities to provide the necessary
transport facilities and to cable television content providers for
content.
m. Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
n. NCTC Patronage Capital Distributions
The Company is a member of the National Cable Television Cooperative
("NCTC"), which is a not-for-profit, member-operated purchasing
organization. The NCTC is a cooperative organization whose members and
affiliates are engaged in the business of providing television
reception or service to the public, primarily by means of a cable
television system consistent with the definition of a "cable television
system" in section 602 of the 1984 Cable Act. The NCTC negotiates and
administers master affiliation agreements with cable television
programming networks, cable hardware and equipment manufacturers and
other service providers on behalf of its member companies. More than
1,000 NCTC member companies currently serve more than 13 million cable
TV subscribers throughout the United States.
NCTC membership includes a one-time, non-refundable initiation fee of
$1.50 per subscriber. Should the Company acquire other cable systems in
the future, the fees are covered under the original initiation fee.
However, if the member has no active subscribers at the time of
application, the one-time, non-refundable initiation fee is $1.00 per
home in that member's franchise area. The minimum fee is $1,000 and the
maximum fee is $50,000.
F-18
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
n. NCTC Patronage Capital Distributions (Continued)
The Company made payments, net of rebates, of $46,012, $33,052 and $0
during the years ended December 31, 2003 and 2002 and from inception on
March 23, 2001 through December 31, 2001, respectively.
o. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Digital Media Solutions, LLC.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
p. Internal Use Software
The Company accounts for costs incurred to develop internal use
software applications in accordance with the American Institute of
Certified Public Accountants Statement of Position No. 98-1 (SOP 98-1),
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires that entities capitalize certain
internal use software costs, which includes software design, coding,
installation, configuration and testing, once technical feasibility of
the developed software is attained. Costs incurred in the process of
attaining technological feasibility, which includes the conceptual
formulation and evaluation of the software alternatives, and costs to
upgrade and enhance software once developed are expensed as incurred.
Under SOP 98-1, overhead, general and administration costs, support
costs and training costs are not capitalized. The Company capitalized
$11,721 and $91,285 in internal use software development costs for the
years ended December 31, 2003 and 2002.
Capitalized internal use software costs are being depreciated on a
straight-line basis over the estimated useful life of the application
of two years. The Company recognized $8,584, $0 and $0 in amortization
expense for the years ended December 31, 2003, 2002 and for the period
from inception on March 23, 2001 through December 31, 2001,
respectively.
The above-mentioned software was originally developed for internal use.
During 2003, a single copy of the software was sold to a municipality
for $150,000. In accordance with SOP 98-1, the proceeds from the sale
were applied against the carrying amount of the software until the
carrying value of the software reached zero. The additional proceeds of
$55,578 were recognized as other income as earned.
q. Software Developed for Sale
The Company plans to sell or lease certain development software and
have accounted for the costs to develop this software in accordance
with SFAS No. 86 , "Accounting for Computer Software to be Sold,
Leased, or Otherwise Marketed." Computer software development costs are
charged to research and development expense until technological
feasibility or a detail design document of the software is
F-19
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
q. Software Developed for Sale (Continued)
established, after which remaining significant software production
costs are capitalized. Once capitalized software cost products are made
available for sale or when the related product is put into use, the
costs will be amortized on a straight-line basis over the estimated
economic life of the software.
The Company will make ongoing assessments of recoverability of
capitalized software projects by comparing the amount capitalized for
each product to the estimated net realizable value ("NRV") of the
product. If the NRV is less than the amount capitalized, a write-down
of the amount capitalized is recorded.
The Company capitalized $72,279 in software development for sale costs
for the year ended December 31, 2003, which have yet to placed into
service. These costs are classified in other assets in the accompanying
consolidated balance sheet.
r. As permitted by FASB Statement 148 "Accounting for Stock Based
Compensation-Transition and Disclosure" (SFAS No. 148), the Company
elected to measure and record compensation cost relative to employee
stock option costs in accordance with Accounting Principles Board
("APB") Opinion 25, "Accounting for Stock Issued to Employees", and
related interpretations and make proforma disclosures of net income and
earning per share as if the fair value method of valuing stock options
had been applied. Under APB opinion 25, compensation cost is recognized
stock options granted to employees when the option price is less than
the market price of the underlying common stock on the date of grant.
NOTE 2 - RELATED PARTY TRANSACTIONS
Development Costs
The Company has employed certain family members of management on a
contract basis for the development of software. The Company paid a
total of $31,559, $38,597 and $0 to these individuals for the years
ended December 31, 2003 and 2002 and for the period from inception on
March 23, 2001 through December 31, 2001, respectively.
Accounts Payable
The Company has $1,163 and $32,630 in payables for services to related
parties at December 31, 2003 and 2002. These amounts are included in
accounts payable.
Common Stock
The Company issued 100,000 shares of common stock to a related party in
February 2003 to purchase $100,000 of multimedia equipment. The
equipment was valued at predecessor's cost.
F-20
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 2 - RELATED PARTY TRANSACTIONS (Continued)
Common Stock (Continued)
In December of 2003 the Company issued 138,846 shares of its common
stock to an employee in payment of consulting services valued at
$138,846.
During 2002, the Company issued 94,500 shares of its common stock to
board members and directors of the Company for cash of $94,500.
Also during 2002, the Company issued 43,788 shares of its common stock
to two board members and directors of the Company in payment of debt of
$43,788.
After inception on March 23, 2001, the Company issued 470,000 shares to
founders of the Company for services provided. The stock was valued at
$0.001 per share, par value.
During 2001, the Company issued 2,000 shares of common stock to a
director of the Company for $10,000 in cash.
Lease Guarantees
The Company's Chief Executive Officer has personally guaranteed several
equipment leases and the Company's current office space lease.
Capital Leases Payable
During 2003, the Company entered into three capital leases for computer
and office equipment with a related company totaling $36,708. The
assets are being depreciated over the term of the leases, between one
and two years.
Capital leases payable consisted of the following at December 31,
December 31,
--------------------------
2003 2002
---------- ----------
Capital lease payable to a related company,
interest at 8% per annum, secured by equipment,
due May 1, 2004, monthly payments of $866 $ 7,263 $ -
Capital lease payable to a related company,
interest at 8% per annum, secured by equipment,
due March 1, 2004, monthly payments of $805 5,672 -
Capital lease payable to a related company,
interest at 8% per annum, secured by equipment,
due May 1, 2004, monthly payments of $566 3,836 -
---------- ----------
Total Capital Leases Payable 16,771 -
Less current portion (16,771) -
---------- ----------
$ - $ -
========== ==========
F-21
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 2 - RELATED PARTY TRANSACTIONS (Continued)
Capital Leases Payable (Continued)
Annual maturities of capital leases payable are as follows:
Years Ending
December 31,
2004 $ 18,116
----------
Total minimum lease payments 18,116
Less amounts representing interest (1,345)
Present value of future minimum lease payments $ 16,771
==========
Notes Payable
The Company has the following outstanding notes payable to related
parties at:
December 31,
--------------------------
2003 2002
---------- ----------
Notes payable to an employee and director,
unsecured, interest at 6% per annum,
payable upon demand $ 25,000 $ -
Note payable to the director and president
unsecured, bearing interest at 8% per annum,
payable on demand 7,000 -
Convertible note payable, bearing interest at 10%
per annum, convertible to common stock at a rate
of one share for each dollar loaned, conversion
price of $1.00 per share, note also carries
warrants to purchase common stock at the rate
of two warrants for each dollar of interest plus
principal and are exercisable at $1.00 per share,
due February 2005 89,000 -
---------- ----------
Total Related Party Notes Payable 121,000 -
Less Current Portion (32,000) -
---------- ----------
$ 89,000 $ -
========== ==========
Interest expense on the above payables amounted to $8,455 and $0 for
the years ended December 31, 2003 and 2002, respectively.
F-22
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 3 - NOTES PAYABLE
Notes payable consisted of the following at December 31,
December 31,
--------------------------
2003 2002
---------- ----------
Note payable bearing interest at 2.5% per annum,
unsecured, due by April 1, 2007, monthly
payments of $3,000 $ 172,837 $ -
Note payable bearing interest at 8% per annum,
unsecured, annual payments of $51,375 plus
interest due on May 30 each year until paid in
full. As of December 31, 2003 this note is in
default. 205,500 205,500
Note payable bearing interest at 10% per annum,
unsecured, payable on demand 50,000 -
Note payable bearing interest at 10% per annum,
unsecured, payable on demand 50,000 -
Note payable bearing interest at 10% per annum,
unsecured, payable on demand 30,000 -
Note payable bearing interest at 8% per annum,
unsecured, monthly payments of $2,000 plus
interest for the first six months, then monthly
payments of $4,000 plus interest thereafter.
As of December 31, 2003 this note is in default. 35,000 -
---------- ----------
Total Notes Payable 543,337 205,500
Less current portion (395,500) (51,375)
---------- ----------
$ 147,837 $ 154,125
========== ==========
Interest expense on the above notes payable amounted to $31,178 and
$9,590 for the years ended December 31, 2003 and 2002, respectively.
NOTE 4 - CONVERTIBLE DEBT
Convertible debt consisted of the following at December 31,
December 31,
--------------------------
2003 2002
---------- ----------
Convertible note payable, bearing interest at 10%
per annum, convertible to common stock at a rate
of one share for each dollar loaned, conversion
price of $1.00 per share, note also carries
warrants to purchase common stock at the rate of
two warrants for each dollar of interest plus
principal and are exercisable at $1.00 per share $ 161,000 $ -
---------- ----------
Balance Forward $ 161,000 $ -
========== ==========
F-23
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 4 - CONVERTIBLE DEBT (Continued)
December 31,
--------------------------
2003 2002
---------- ----------
Balance Forward $ 161,000 $ -
Convertible note payable, bearing interest at 8%
per annum, convertible to Series B preferred
stock at a rate of two shares for each dollar
loaned, conversion price of $1.00 per share, note
also carries warrants to purchase Series B
preferred at the rate of 25% of the total shares
the note is convertible to and are exercisable at
$1.00 per share 109,250 -
Convertible note payable, bearing interest at 8%
per annum, convertible to common stock at a rate
of one share for each dollar loaned, conversion
price of $1.00 per share, note also carries
warrants to purchase common stock at the rate of
50% of the total shares the note is convertible
to and are exercisable at $2.10 per share 85,000 -
---------- ----------
Total Convertible Debt 355,250 -
Less current portion (194,250) -
---------- ----------
$ 161,000 $ -
========== ==========
During the year December 31, 2003, the Company raised $444,250 of
operating capital in the form of convertible debentures ($89,000 from
related parties, $355,250 from other investors). The debentures have
varying terms of 1 to 2 years and accrue interest at 8% to 10% per
annum. All convertible debentures are convertible at the option of the
holder.
Upon issuance of the debentures, the Company recognized a debt discount
related to the beneficial conversion feature of the debentures totaling
$444,246. This beneficial conversion feature was expensed during the
year ended December 31, 2003 pursuant to the EITF 96-18 and has been
included in interest expense in the accompanying consolidated statement
of operations.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Operating Leases
On August 30, 2001, the Company entered into a seven-year lease
agreement for office space in Ephrata, Washington. The monthly rental
payment is currently $1,321 per month. The payment is adjusted on each
anniversary to reflect the change in the Consumer Price Index from the
previous twelve months. Future minimum lease payments under this
non-cancelable operating lease, subject to CPI adjustments, are as
follows:
F-24
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
Operating Leases (Continued)
Years Ending
December 31,
2004 $ 15,852
2005 15,852
2006 15,852
2007 15,852
2008 7,926
--------------
$ 71,334
==============
Litigation
As of December 31, 2003, a Summary Judgment had been entered against
the Company in the amount $26,395 arising from a dispute with a vendor
and has been accrued by the Company in notes payable and accrued
interest in the consolidated balance sheet. The balance was paid in
full in March 2004 and the judgment was dismissed. See Note 11 to these
financial statements.
The Company has been contacted by an attorney for its investment banker
regarding a claim for fees owed. No claim amount has been asserted and
the Management believes that any claim arising from this relationship
will be without merit.
NOTE 6 - COMMON STOCK
The Company has authorized 30,000,000 shares of common stock with a par
value of $0.001 per share.
During the year ended December 31, 2003 the Company issued 150,750
shares of its common stock to various investors for cash of $271,250.
During February 2003, the Company issued 100,000 shares of its common
stock to purchase multimedia equipment valued at $100,000. Also during
2003 the Company issued 189,994 shares of its common stock for services
valued at $220,624.
During the year ended December 31, 2002, the Company issued 185,000
shares of its common stock for cash of $189,000. In June 2002 the
Company issued 63,788 shares of its common stock in payment of debt of
$63,788. Also in 2002, the Company issued 35,700 shares of its common
stock for services valued at $35,700.
During the year ended December 31, 2001, the Company issued 198,000
shares of its common stock for cash of $90,180. In June 2001, the
Company issued 470,000 shares of its common stock to founders of the
Company in payment of services valued at $470.
NOTE 7 - PREFERRED STOCK
The Company has authorized 20,000,000 shares of preferred stock with a
par value of $0.001 per share. At December 31, 2003 351,000 of those
F-25
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 7 - PREFERRED STOCK (Continued)
shares were designated as Series A preferred. The preferred stock is
convertible at the option of the holder, at any time after the date of
issuance, into that number of shares of common stock determined by
dividing the original issue price for the preferred stock by the
conversion price of $1.00 per share. Conversion will occur
automatically and registered concurrently with any public offering of
the common shares of the Company. There was no beneficial conversion
feature associated with the Series A preferred stock.
In the event of any liquidation, dissolution or winding up of the
Corporation, the holders of the preferred stock shall be entitled to
receive, prior and in preference to any distribution of any of the
assets of the Company to the holders of the common stock, an amount per
share for each share of preferred stock equal to the sum of (i) the
liquidation preference of $1.00 per share of preferred stock and (ii)
all declared but unpaid dividends (if any).
In December of 2002, the Company issued 50,000 shares of its Series A
preferred stock to an investor for cash of $50,000.
In August of 2001, the Company issued 300,000 shares of its Series A
preferred stock to an investor for cash of $300,000 and 555 shares in
payment of debt of $555.
NOTE 8 - OUTSTANDING STOCK OPTIONS AND PURCHASE WARRANTS
The Company has elected to follow the intrinsic value method of
accounting under Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees," ("APB 25") and related interpretations
in accounting for their stock-based compensation plans. Under APB 25,
the Company generally does not recognize compensation expense on the
grant of options under their Stock Incentive Plan because typically the
option terms are fixed and the exercise price equals or exceeds the
market price of the underlying stock on the date of the grant. The
Company applies the disclosure only provisions of Statement of
Financial Accounting Standards No. 148, "Accounting and Disclosure of
Stock-Based Compensation," ("FAS 148").
Pro forma information regarding net income and earnings per share is
required by FAS 148 and has been determined as if the Company had
accounted for its stock-based compensation plans using the fair market
value method prescribed by that statement. For purposes of pro forma
disclosures, the estimated fair market value of the options is
amortized to expense over the options' vesting period on a
straight-line basis. All options are initially assumed to vest.
Compensation previously recognized is reversed to the extent applicable
to forfeitures of unvested options.
Under FASB Statement 148, the Company estimates the fair value of each
stock award at the grant date by using the Black-Scholes option pricing
model with the following weighted average assumptions used for grants:
dividend yields of 0%; expected volatility of 172%; risk-free interest
rates of between 1.33% and 1.65% and expected lives of between 1 and 4
years.
F-26
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 8 - OUTSTANDING STOCK OPTIONS AND PURCHASE WARRANTS (Continued)
A summary of the status of the Company's stock options and warrants as
of December 30, 2001 and changes during the years ended December 31,
2002 and 2003 is presented below:
Weighted Weighted
Options Average Average
and Exercise Grant Date
Warrants Price Fair Value
-------- -------- ----------
Outstanding, December 31, 2001 - $ - $ -
Granted 22,500 1.50 1.00
Expired/Canceled - - -
Exercised - - -
--------- ------- -------
Outstanding, December 31, 2002 22,500 1.50 1.00
Granted 1,038,850 1.33 1.28
Expired/Canceled - - -
Exercised - - -
--------- ------- -------
Outstanding, December 31, 2003 1,061,350 $ 1.33 $ 1.30
========= ======= =======
Exercisable, December 31, 2003 715,895 $ 1.14 $ 1.29
========= ======= =======
During 2001, the Company's board of directors approved the "Video
Internet Broadcasting Corporation 2001 Stock Option Plan," (2001 Plan).
Under the terms of this Plan, the Company registered 50,000 shares of
its $0.001 par value common stock at a proposed offering price per
share of $1.50. During the year ended December 31, 2002, the Company
granted 22,500 stock options to employees under the 2001 Plan,
exercisable at $1.50 per share for four years.
During 2003, the Company's board of directors approved the "Video
Internet Broadcasting Corporation 2003 Stock Option Plan," (2003 Plan).
Under the terms of this Plan, the Company registered 350,000 shares of
its $0.001 par value common stock at a proposed offering price per
share of $1.50. During the year ended December 31, 2003 the Company
granted 349,000 stock options to employees under the 2003 Plan.
During September 2003, the Company issued 62,500 options to purchase
common stock to various consultants for services. The options had an
exercise price of $3.00 per share and a term of three years. The
Company recognized a total of $16,784 in expense associated with the
issuance of these options.
During 2003, the Company issued warrants to purchase common stock with
convertible debt (discussed in Note 3 to the financial statements). At
December 31, 2003 a total of 572,131 warrants to purchase common stock
were outstanding.
Also during 2003, the Company issued warrants to purchase Series B
preferred stock with convertible debt (see Note 3). At December 31,
2003 a total of 55,219 warrants to purchase Series B preferred were
outstanding.
F-27
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 8 - OUTSTANDING STOCK OPTIONS AND PURCHASE WARRANTS (Continued)
Had compensation cost for the Company's stock options granted to
directors and employees been based on the fair value as determined by
the Black-Scholes option pricing model at the grant date under the
accounting provisions of SFAS No. 123, the Company would have recorded
additional expense of $70,347 and $3,370 for the years ended December
31, 2003 and 2002, respectively. Also under these same provisions, the
Company's net loss would have been changed by the pro forma amounts
indicated below:
From Inception
For the Years Ended On March 23,
December 31, 2001 through
---------------------------- December 31,
2003 2002 2001
----------- ----------- --------------
Net loss:
As reported $(1,299,040) $ (883,831) $ (484,372)
Pro forma $(1,369,387) $ (887,201) $ (484,372)
Basic loss per share:
As reported $ (1.17) $ (1.11) $ (1.47)
Pro forma $ (1.23) $ (1.11) $ (1.47)
NOTE 9 - GOING CONCERN
The Company's financial statements are prepared using accounting
principles generally accepted in the United States of America
applicable to a going concern, which contemplates the realization of
assets and liquidation of liabilities in the normal course of business.
The Company has had limited revenues, has generated significant losses
from operations and has a deficit in its working capital.
In order to continue as a going concern and achieve a profitable level
of operations, the Company will need, among other things, additional
capital resources and revenues. Management's plans include
concentrating its efforts on increasing the number of subscribers to
its fiber optic television and Internet services. Management estimates
it will need approximately $13,000,000 to accomplish these plans.
The ability of the Company to continue as a going concern is dependent
upon its ability to successfully accomplish the plan described in the
preceding paragraph and eventually attain profitable operations. The
accompanying financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going
concern.
NOTE 10 - SUBSEQUENT EVENTS
Subsequent to December 31, 2003, the following events occurred which,
management believes, are material to the financial statements:
F-28
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 10 - SUBSEQUENT EVENTS (Continued)
On February 17, 2004, the Company entered into an agreement to borrow
$500,000 from a lender. This is a convertible note, convertible into
Common stock of the Company at $1.00 per share. The note carries
interest at 12% per annum and is payable in full not later than
December 31,2004. The note is secured by all of the tangible and
intangible assets of the Company. On April 21, 2004, the convertible
note was increased to $750,000. All other terms of the note were
unchanged.
The Company used a portion of the proceeds of this loan to repay
short-term loans and the current portion of long-term debt in the
amount of $222,000, including the judgment described in Note 4.
In March 2004, holders of the One Year Convertible Note in the amount
of $250,000 converted their notes to 531,654 shares of common stock of
the Company per the terms of the note. See Note 5 to these financial
statements. In addition, the note holders agreed to surrender the two
for one stock warrants attached to the note in exchange for an
additional 250,000 shares of the Company's Common stock.
In June 2004, the Company secured a line of credit in the amount of
$1,500,000 from a national bank. As of the date of this report,
$150,000 had been drawn from the line.
In July 2004, the Mayor of Provo, Utah signed the Company's contract to
provide Internet, phone and cable services over iProvo, the city's new
municipally owned fiber-optic network. The Company also entered a
memorandum of understanding (MOU) with Provo City in February 2004 to
purchase Provo Cable. Upon the Mayor's signing of the iProvo contract,
the Company acquired Provo Cable's 2,400-plus subscribers, which
includes multiple dwelling units. The Company began managing Provo
Cable for the City in late February.
F-29
UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL STATEMENTS
In accordance with Article 11 of Regulation S-X under the Securities
Act, an unaudited condensed combined pro forma balance sheet (the "pro forma
balance sheet") as of June 30, 2004, and unaudited condensed combined pro forma
statement of income for the six months ended June 30, 2004, and the audited
condensed combined pro forma statement of income for the year ended December 31,
2003 (the "pro forma statements of income"), have been prepared to reflect, for
accounting purposes, the acquisition by HC of HCI.
The following pro forma financial statements have been prepared based
upon the historical financial statements of HC and HCI. The pro forma financial
statements should be read in conjunction with (a) the historical consolidated
financial statements and related notes thereto of HC as of March 31, 2004, for
the period ended March 31, 2004, and (b) the historical consolidated financial
statements and related notes thereto of HCI as of December 31, 2003, and 2002,
and for the years ended December 31, 2003, 2002, and 2001.
The June 30, 2004, pro forma balance sheet assumes that the HCI merger
was completed on June 30, 2004. The June 30, 2004, pro forma balance sheet
includes the historical unaudited consolidated balance sheet data of HC as of
June 30, 2004, and the historical unaudited consolidated balance sheet data of
HCI as of June 30, 2004. Intercompany activity has been eliminated in preparing
the pro forma financial statements.
The pro forma statement of income for the six months ended June 30,
2004, assumes that the HCI merger occurred on January 1, 2004, and includes the
unaudited historical consolidated statement of income data of HC for the three
months ended June 30, 2004, and the unaudited historical consolidated statement
of income data of HCI for the six months ended June 30, 2004.
The pro forma statement of income for the year ended December 31, 2003,
assumes that the HCI merger occurred on January 1, 2003, and includes the
audited historical consolidated statement of income data of HC for the year
ended March 31, 2004, and the audited historical consolidated statement of
income data of HCI for the year ended December 31, 2003.
The pro forma financial statements are provided for illustrative
purposes only, and are not necessarily indicative of the operating results or
financial position that would have occurred if the mergers had been consummated
at the beginning of the periods or on the dates indicated, nor are they
necessarily indicative of any future operating results or financial position.
The pro forma financial statements do not include any adjustments related to any
restructuring charges or one-time charges which may result from the mergers or
the final result of valuations of inventories, property, plant and equipment,
intangible assets, debt, and other obligations.
F-30
HOMENET CORPORATION
UNAUDITED CONDENSED COMBINED PRO FORMA BALANCE SHEET
Pro Forma
HC HCI Combined
as of as of Combined HC & HCI
March 31, December 31, HC & HCI Pro Forma March 31,
2004 2003 Historical Adjustments 2004
------------- ------------ ------------- ------------- -------------
ASSETS
Current Assets:
Cash $ 141,786 $ - $ 141,786 $ - $ 141,786
Receivables - 72,147 72,147 - 72,147
Accrued interest receivable 7,068 - 7,068 - 7,068
Other current assets 5,000 6,764 11,764 - 11,764
------------ ----------- ------------ ------------ ------------
Total Current Assets 153,854 78,911 232,765 - 232,765
------------ ----------- ------------ ------------ ------------
Note receivable 500,000 - 500,000 - 500,000
Available-for-sale securities - - - - -
------------ ----------- ------------ ------------ ------------
Total Other Assets 500,000 - 500,000 - 500,000
------------ ----------- ------------ ------------ ------------
Equipment - net 14,075 228,864 242,939 - 242,939
------------ ----------- ------------ ------------ ------------
-
TOTAL ASSETS $ 667,929 $ 307,775 $ 975,704 $ - $ 975,704
============ =========== ============ ============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current Liabilities:
Cash overdraft $ - $ 12,319 $ 12,319 $ - $ 12,319
Accounts payable 15,350 61,374 76,724 - 76,724
Accrued liabilities 212,443 82,370 294,813 - 294,813
Capital leases payable - related party - 16,771 16,771 - 16,771
Current portion of notes payable to
related parties - 32,000 32,000 - 32,000
Current portion of notes payable - 395,500 395,500 - 395,500
Current portion convertible debt - related
parties 919,531 - 919,531 - 919,531
Current portion of convertible debt - 194,250 194,250 - 194,250
------------ ----------- ------------ ------------ ------------
Total Current Liabilities 1,147,324 794,584 1,941,908 - 1,941,908
------------ ----------- ------------ ------------ ------------
Long Term Debt:
Notes payable to related parties - 89,000 89,000 - 89,000
Notes payable - 147,837 147,837 - 147,837
Convertible debt - 161,000 161,000 - 161,000
------------ ----------- ------------ ------------ ------------
Total Long-Term Liabilities - 397,837 397,837 - 397,837
------------ ----------- ------------ ------------ ------------
Total Liabilities 1,147,324 1,192,421 2,339,745 - 2,339,745
------------ ----------- ------------ ------------ ------------
Stockholders' Equity (Deficit):
Preferred stock - 351 351 (351) -
Common stock 3,000 1,393 4,393 508 4,901
Additional paid-in capital 4,902 1,926,419 1,931,321 (453,079) 1,478,242
Treasury stock (34,375) - (34,375) - (34,375)
Deferred Compensation - (145,566) (145,566) - (145,566)
Other comprehensive income - - - - -
Accumulated deficit (452,922) (2,667,243) (3,120,165) 452,922 (2,667,243)
------------ ----------- ------------ ------------ ------------
Total Stockholders' Equity (Deficit) (479,395) (884,646) (1,364,041) - (1,364,041)
------------ ----------- ------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 667,929 $ 307,775 $ 975,704 $ - $ 975,704
============ =========== ============ ============ ============
F-31
HOMENET CORPORATION
UNAUDITED CONDENSED COMBINED PRO FORMA BALANCE SHEET
Pro Forma
HC HCI Combined
as of as of Combined HC & HCI
March 31, December 31, HC & HCI Pro Forma March 31,
2003 2002 Historical Adjustments 2003
-------------- ------------ ------------- ------------- -------------
ASSETS
Current Assets:
Cash $ - $ - $ - $ - $ -
Receivables - 107,072 107,072 - 107,072
Accrued interest receivable - - - -
Other current assets - - - - -
----------- ----------- ----------- ----------- -----------
Total Current Assets - 107,072 107,072 - 107,072
----------- ----------- ----------- ----------- -----------
Note receivable - - - - -
Available-for-sale securities 662,157 662,157 - 662,157
----------- ----------- ----------- ----------- -----------
Total Other Assets 662,157 - 662,157 - 662,157
----------- ----------- ----------- ----------- -----------
Equipment - net - 154,935 154,935 - 154,935
----------- ----------- ----------- ----------- -----------
-
TOTAL ASSETS $ 662,157 $ 262,007 $ 924,164 $ - $ 924,164
=========== ========= =========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current Liabilities:
Cash overdraft $ - $ 25,628 $ 25,628 $ - $ 25,628
Accounts payable 9,800 553,459 563,259 - 563,259
Accrued liabilities 133,732 115,930 249,662 - 249,662
Capital leases payable - related party - 0 0 - -
Current portion of notes payable to
related parties - 0 0 - -
Current portion of notes payable - 51,375 51,375 - 51,375
Current portion convertible debt - related
parties 500,295 500,295 - 500,295
Current portion of convertible debt - - 0 - -
----------- ----------- ----------- ----------- -----------
Total Current Liabilities 643,827 746,392 1,390,219 - 1,390,219
----------- ----------- ----------- ----------- -----------
Long Term Debt:
Notes payable to related parties - - 0 - -
Notes payable - 154,125 154,125 - 154,125
Convertible debt - - 0 - -
----------- ----------- ----------- ----------- -----------
Total Long-Term Liabilities - 154,125 154,125 - 154,125
----------- ----------- ----------- ----------- -----------
Total Liabilities 643,827 900,517 1,544,344 - 1,544,344
----------- ----------- ----------- ----------- -----------
Stockholders' Equity (Deficit):
Preferred stock - 351 351 (351) -
Common stock 3,000 952 3,952 469 4,421
Additional paid-in capital 4,902 728,390 733,292 (151,847) 581,445
Treasury stock - - - -
Deferred Compensation - - - -
Other comprehensive income 162,157 162,157 162,157
Accumulated deficit (151,729) (1,368,203) (1,519,932) 151,729 (1,368,203)
----------- ----------- ----------- ----------- -----------
Total Stockholders' Equity (Deficit) 18,330 (638,510) (620,180) - (620,180)
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 662,157 $ 262,007 $ 924,164 $ - $ 924,164
=========== =========== =========== =========== ===========
F-32
HOMENET CORPORATION
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS
Pro Forma
Combined
HC HCI HC and HCI
For the Year For the Year For the Year
Ended Ended Ended
March 31, December 31, Combined Pro Forma March 31,
2004 2003 HC and HCI Adjustments 2004
------------- -------------- -------------- -------------- --------------
REVENUE
Subscription television services $ - $ 683,935 $ 683,935 $ - $ 683,935
Other revenue - - - - -
------------ ------------ ------------ ------------ ------------
Total Revenue - 683,935 683,935 - 683,935
------------ ------------ ------------ ------------ ------------
COST OF SALES
Subscriber-related expenses - 389,979 389,979 - 389,979
Other costs of sales - - - - -
------------ ------------ ------------ ------------ ------------
Total Cost of Sales - 389,979 389,979 - 389,979
------------ ------------ ------------ ------------ ------------
GROSS MARGIN (DEFICIT) - 293,956 293,956 - 293,956
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES
General and administrative 103,148 1,060,624 1,163,772 (103,148) 1,060,624
Stock-based compensation - 16,784 16,784 - 16,784
Depreciation and amortization 165 76,821 76,986 (165) 76,821
------------ ------------ ------------ ------------ ------------
Total Expenses 103,313 1,154,229 1,257,542 (103,313) 1,154,229
------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (103,313) (860,273) (963,586) 103,313 (860,273)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Software sales - 55,578 55,578 - 55,578
Loss on sale of securities (311,004) - (311,004) 311,004 -
Gain on legal settlement 184,767 - 184,767 (184,767) -
Interest income 7,068 - 7,068 (7,068) -
Interest expense (78,711) (494,345) (573,056) 78,711 (494,345)
------------ ------------ ------------ ------------ ------------
Total Other Income (Expense) (197,880) (438,767) (636,647) 197,880 (438,767)
------------ ------------ ------------ ------------ ------------
NET LOSS (301,193) (1,299,040) (1,600,233) 301,193 (1,299,040)
------------ ------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME
Change in marketable securities (162,157) - (162,157) 162,157 -
------------ ------------ ------------ ------------ ------------
Total Other Comprehensive Income (162,157) - (162,157) 162,157 -
------------ ------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (463,350) $ (1,299,040) $ (1,762,390) $ 463,350 $ (1,299,040)
============ ============ ============ ============ ============
BASIC LOSS PER SHARE $ (0.11) $ (1.17) $ (0.58) $ (0.47)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 2,750,000 1,113,452 2,750,000 2,750,000
============ ============ ============ ============
F-33
HOMENET CORPORATION
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004
Pro Forma
Combined
HC HCI HC and HCI
For the Period For the Period For the Period
Ended Ended Ended
June 30, September 30, Combined Pro Forma September 30,
2004 2004 HC and HCI Adjustments 2004
------------- -------------- -------------- -------------- --------------
REVENUE
Subscription television services $ - $ 661,048 $ 661,048 $ - $ 661,048
Other revenue 332,672 - 332,672 - 332,672
------------ ------------ ------------ ------------ ------------
Total Revenue 332,672 661,048 993,720 - 993,720
------------ ------------ ------------ ------------ ------------
COST OF SALES
Subscriber-related expenses - 412,229 412,229 - 412,229
Other costs of sales 165,383 - 165,383 - 165,383
------------ ------------ ------------ ------------ ------------
Total Cost of Sales 165,383 412,229 577,612 - 577,612
------------ ------------ ------------ ------------ ------------
GROSS MARGIN (DEFICIT) 167,289 248,819 416,108 - 416,108
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES
General and administrative 302,458 763,525 1,065,983 7,070 1,073,053
Stock-based compensation 113,400 40,248 153,648 - 153,648
Depreciation and amortization 712 92,516 93,228 - 93,228
------------ ------------ ------------ ------------ ------------
Total Expenses 416,570 896,289 1,312,859 7,070 1,319,929
------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (249,281) (647,470) (896,751) (7,070) (903,821)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Software sales - - - - -
Loss on sale of securities - - - - -
Gain on legal settlement - - - - -
Interest income 18,004 - 18,004 (18,004) -
Interest expense (44,385) (44,840) (89,225) - (89,225)
------------ ------------ ------------ ------------ ------------
Total Other Income (Expense) (26,381) (44,840) (71,221) (18,004) (89,225)
------------ ------------ ------------ ------------ ------------
NET LOSS (275,662) (692,310) (967,972) (25,074) (993,046)
------------ ------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME
Change in marketable securities - - - - -
------------ ------------ ------------ ------------ ------------
Total Other Comprehensive Income - - - - -
------------ ------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (275,662) $ (692,310) $ (967,972) $ (25,074) $ (993,046)
============ ============ ============ ============ ============
BASIC LOSS PER SHARE $ (0.12) $ (0.30) $ (0.42) $ (0.43)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 2,318,000 2,318,000 2,318,000 2,318,000
============ ============ ============ ============
F-34