10QSB 1 broadcast10qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the Quarterly Period ended March 31, 2005 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transitional period ________ to __________. Commission File Number: 0-13316 BROADCAST INTERNATIONAL, INC. ----------------------------- (Exact name of small business issuer as specified in its charter) Utah 87-0395567 ---- ---------- (State of Incorporation) (IRS Employer Identification No.) 7050 Union Park Ave. #600, Salt Lake City, Utah 84047 ------------------------------------------------------ (Address of Principal Executive Offices) (Zip Code) (801) 562-2252 ------------- (Issuer's telephone number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ( x ) Yes ( ) No State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Class Outstanding as of April 26, 2005 ----- -------------------------------- Common Stock 20,672,852 shares Transitional Small Business Disclosure Format: Yes [ ] No [ X ] Broadcast International, Inc. Form 10-QSB for the three months ended March 31, 2005 Table of Contents Part I - Financial Information Page ---- Item 1. Financial Statements 3 Item 2. Management's Discussion and Analysis or Plan of Operation 10 Item 3. Controls and Procedures 13 Part II - Other Information Item 1. Legal Proceedings 15 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits 15 Signatures 17 2 Item 1. Financial Information BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET (Unaudited) March 31, ASSETS 2005 ------ ------------- Current assets Cash and cash equivalents $ 277,581 Trade receivable (net) 283,992 Inventory 22,499 Prepaid expenses 190,364 ------------- Total current assets 774,436 ------------- Non-current assets Equipment and leasehold improvements, net 681,717 Patents 185,279 Other assets 7,824 ------------- Total assets $ 1,649,256 ============= LIABILITIES AND STOCKHOLDERS' DEFICIT ------------------------------------- Current liabilities Accounts payable $ 115,221 Accrued Payroll & related expenses 233,695 Other accrued liabilities 57,120 Unearned revenue 204,089 Current portion of long-term obligations 70,187 ------------ Total current liabilities 680,312 ------------ Long-term debt Long-term obligations 802,924 Deferred bonus 600,000 ------------ Total liabilities 2,083,236 ------------ Commitments and contingencies - Stockholders' deficit Preferred stock, no par value, 10,000,000 shares authorized; no shares issued - Common stock, $.05 par value, 40,000,000 shares authorized; 20,672,852 shares issued and outstanding 1,033,643 Additional paid-in capital 19,832,847 Accumulated deficit (21,300,470) ------------ Total stockholders' deficit (433,980) ------------ Total liabilities and stockholders' deficit $ 1,649,256 ============ See accompanying notes to consolidated condensed financial statements 3 BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended ------------------------- March 31, March 31, 2005 2004 ------------- ------------ REVENUES: Net sales $ 977,652 $ 1,375,856 Interest and other income 3,500 2,445 ------------- ------------ 981,152 1,378,301 COSTS AND EXPENSES: Cost of sales 1,103,350 1,358,047 Research and development in process - 1,175,432 Administrative and general 273,516 692,521 Selling and marketing 148,419 193,180 Interest 249,914 349,649 ------------- ------------ 1,525,285 3,768,829 ------------- ------------ LOSS FROM OPERATIONS BEFORE INCOME TAXES (794,047) (2,390,528) Income tax benefit - - ------------- ------------ NET LOSS $ (794,047) $(2,390,528) ============= ============ TOTAL NET LOSS PER SHARE - Basic and diluted $ (.04) $ (.13) ============= ============ WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING - Basic and diluted 20,681,000 18,307,000 ============= ============ See accompanying notes to consolidated condensed financial statements 4 BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended -------------------------- March 31, March 31, 2005 2004 ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (794,047) $(2,390,528) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 91,287 99,085 Beneficial conversion 249,914 349,580 Common stock issued for services - 795,000 Options issued for services - 800,432 Provision for losses on accounts receivable 5,000 6,500 (Increase) decrease in: Receivables 190,340 (259,942) Inventories (2,434) 19,286 Other assets 2,567 (10,036) Increase (decrease) in: Accounts payable and accrued expenses 19,488 258,586 Unearned revenue (989) 24,580 ------------- ------------ Net cash used in operating activities (238,874) (307,457) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment (8,233) (18,337) Technology patents (6,195) (124,324) Related party note receivable - (112,800) ------------- ------------ Net cash used in investing activities (14,428) (255,461) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on debt (17,547) (2,872) Proceeds from the sale of stock 124,980 375,000 Loan proceeds 249,914 349,580 ------------- ------------ Net cash provided by financing activities 357,347 721,708 ------------- ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 104,045 158,790 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 173,536 314,667 ------------- ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 277,581 $ 473,457 ============= ============ See accompanying notes to consolidated condensed financial statements 5 BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) March 31, 2005 NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary, in order to make the financial statements not misleading have been included. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2004 included in the Company's Annual Report on Form 10-KSB (file number 000-13316). NOTE B - GOING CONCERN The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitability. Potential sources of cash include external debt and the sale of new shares of company stock or alternative methods such as mergers or sale transactions. No assurances can be given, however, that the Company will be able to obtain any of these potential sources of cash. NOTE C - RECLASSIFICATIONS Certain 2004 financial statement amounts have been reclassified to conform to 2005 presentations. NOTE D - WEIGHTED AVERAGE SHARES The computation of basic earnings (loss) per common share is based on the weighted average number of shares outstanding during each period. The computation of diluted earnings per common share is based on the weighted average number of common shares outstanding during the period, plus the common stock equivalents that would arise from the exercise of stock options and warrants outstanding, using the treasury stock method and the average market price per share during the period. Options to purchase 6,457,317 and 4,330,903 shares of common stock at prices ranging from $.02 to 6 $60.63 per share were outstanding at March 31, 2005 and 2004, respectively, but were excluded for the calculation of diluted earnings per share because the effect of stock options was anti-dilutive. NOTE E - STOCK COMPENSATION The Company accounts for stock-based compensation under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No common stock was issued for compensation during the quarter ended March 31, 2005, however during the quarter ended March 31, 2004, 5,000 shares of common stock were issued to an individual of the management of the Company. The amount of expense recognized on the 2004 income statement was $20,000, which is included in the $795,000 of common stock issued for services. No options to purchase shares of the Company's common stock were granted during the quarter ended March 31, 2005, however, options to purchase 258,000 shares of the Company's common stock were granted to employees and management for the quarter ended March 31, 2004. All options granted had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. The options vested during the three months ended March 31, 2004 would have the following effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation: Three Months Ended March 31, 2005 2004 -------------- ------------- Net loss, as reported $ (794,047) $ (2,390,528) Addback: Stock-based employee compensation expense determined under intrinsic value based method for all awards, net of related tax effects - - Deduct: Total stock- based employee compensation expense determined under fair value based method for all awards, net of related tax effects (124,767) (117,206) -------------- ------------- Pro forma net loss $ (918,814) $(2,5607,734) ============== ============= (Loss) earnings per share: Basic and diluted - as reported $ (.04) $ (.13) ============== ============= Basic and diluted - pro forma $ (.05) $ (.14) ============== ============= The weighted average fair value of options granted during the three months ended March 31, 2004 was $2.32 per share. The fair value for the options granted in 2004 were estimated at the date of grant using a Black Scholes option pricing model with the following weighted average assumptions: Risk free interest rate 3.67% Expected life (in years) 8 Expected volatility 48.74% Expected dividend yield 0.00% 7 NOTE F - SIGNIFICANT ACCOUNTING POLICIES Patents Patents represent legal costs incurred to apply for US and international patents on the CodecSys technology, and are amortized on a straight-line basis over their useful life of approximately 15 years. Amortization expense recognized on all patents totaled $0 for the quarter ended March 31, 2005. Estimated amortization expense on patents for each of the next five years is as follows: Year ending December 31: 2005 $ 5,965 2006 11,930 2007 11,930 2008 11,930 2009 11,930 Long-Lived Assets We review our long-lived assets, including patents, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to future un-discounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, then the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Fair value is determined by using cash flow analyses and other market valuations. NOTE G - SUPPLEMENTAL CASH FLOW INFORMATION For the quarter ended March 31, 2004, a non-cash expense of $795,000 was recorded of which $420,000 recorded in administrative and general expense was for services rendered by consultants paid by the issuance of 105,000 shares of common stock, and $375,000 recorded in research and development in process expense by the issuance of 187,500 shares of common stock sold below fair market value to Streamware Solutions AB, a Swedish Corporation, pursuant to a Stock Purchase and Option Grant Agreement dated February 6, 2004. Additionally, the agreement granted Streamware options to purchase 1,312,500 shares of common stock of the Company at an exercise price of $4.50 per share, expiring February 6, 2006 and were immediately exercisable, resulting in an $800,432 non-cash expense recorded in research and development in process expense. On December 23, 2003, the Company entered into a convertible line of credit for up to $1,000,000 with Meridel LTD and Pascoe Holdings LTD, both foreign corporations. The Company may obtain advances as needed to fund operating expenses. On June 30, 2004, the line of credit was amended to increase the limit from $1,000,000 to $2,000,000 with the original due date of the line of credit extended from March 31, 2005 to April 1, 2006. Any 8 portion of the note under the line of credit is convertible at the lenders sole discretion, for common shares of the Company at the rate of $1.00 per share. During the quarters ending March 31, 2005 and 2004, the Company borrowed $249,914 and $349,580, respectively. The balance of the note at March 31, 2005 was $645,004. The note bears an annual interest rate of 6%. Accrued interest, however, is forgiven upon conversion pursuant to the terms of the line of credit. The Company believes the entire amount of the note will be converted, whereby it has recorded only the immediately exercisable beneficial conversion feature of the note into interest expense. During the quarters ended March 31, 2005 and 2004, the Company recorded $249,914 and $349,580, respectively, as there is an immediately convertible beneficial conversion feature associated with the advances made under the line of credit. These amounts are included in interest expense. The Company paid no cash for income taxes or interest expense during the quarters ended March 31, 2005 and 2004. NOTE H - RECENT ACCOUNTING PRONOUNCEMENTS In December 2003, the FASB issued Interpretation No. 46 ("FIN 46R") (revised December 2003), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 ("ARB 51"), which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity though means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 ("FIN 46"), which was issued in January 2003. Before concluding that it is appropriate to apply ARB 51 voting interest consolidation model to an entity, an enterprise must first determine that the entity is not a variable interest entity. As of the effective date of FIN 46R, an enterprise must evaluate its involvement with all entities or legal structures created before February 1, 2003, to determine whether consolidation requirements of FIN 46R apply to those entities. There is no grandfathering of existing entities. Public companies must apply either FIN 46 or FIN 46R immediately to entities created after January 31, 2003 and no later than the end of the first reporting period that ends after March 15, 2004. The adoption of FIN 46 had no effect on the Company's consolidated financial position, results of operations or cash flows. In December 2003, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition. SAB 104 revises or rescinds portions of the interpretive guidance included in Topic 13 of the codification of staff accounting bulletins in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The adoption of SAB 104 did not have a material effect on the Company's results of operations or financial condition In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which amends Accounting Principles Board (APB) Opinion No. 29, Accounting for Nonmonetary Transactions. The guidance in APB Opinion 29 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in APB Opinion 29, however, included certain exceptions to that principle. SFAS 153 amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general 9 exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for fiscal periods beginning after June 15, 2005. We do not expect that the adoption of SFAS 153 will have a material impact on our financial position or results of operations. In December 2004, the FASB issued SFAS No. 123R, Share Based Payment, which requires companies to measure and recognize compensation expense for all stock based payments at fair value. SFAS 123R is effective for small business insurers for interim periods or the fiscal year beginning after December 15, 2005 and, thus, will be effective for us beginning with the first quarter of 2006. Early adoption is encouraged and retroactive application of the provisions of SFAS 123R to the beginning of the fiscal year that includes the effective date is permitted, but not required. We are currently evaluating the impact of SFAS 123R and expect the adoption to have a material impact on our financial position and results of operations. See Stock Compensation in Note 2 of our Notes to Consolidated Financial Statements for more information related to the pro forma effects on our reported net income and net income per share of applying the fair value recognition provisions of the previous SFAS 123, Accounting for Stock Based Compensation, to stock based employee compensation. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Forward-Looking Information This quarterly report on Form 10-QSB includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products and services, anticipated market performance and similar matters. When used in this report, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," and similar expressions are intended to identify forward-looking statements regarding events, conditions, and trends that may affect the Company's future plans of operations, business strategy, operating results, and financial position. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. To comply with the terms of the safe harbor, we caution readers that a variety of factors, including various risks and uncertainties, could cause our actual results to differ materially from the anticipated results or other matters expressed in forward-looking statements. These risks and uncertainties, many of which are beyond our control, include (i) the sufficiency of existing capital resources and the Company's ability to raise additional capital to fund cash requirements for future operations; (ii) uncertainties involved in the rate of growth of the Company's business and acceptance of the Company's products and services, including the CodecSys technology; (iii) the ability of the Company to achieve and maintain a sufficient customer base to generate revenues sufficient to fund and maintain operations; (iv) volatility of the stock market, particularly within the technology sector;(v) general economic conditions; and (vi) other factors identified in the heading "Risk Factors" beginning on page 7 of the Company's annual report on Form 10-KSB for the year ended December 31, 2004. Although the Company believes the expectations reflected in these forward-looking statements are reasonable, such expectations may prove to be incorrect. Accordingly, readers should not place undue reliance on such forward-looking statements. The Company disclaims any obligation to update or revise any forward-looking statements or any underling assumptions. 10 Results of Operations for the Three Months ended March 31, 2005 and March 31, 2004 Revenues The Company generated $ 977,652 in revenue during the three months ended March 31, 2005. During the same three-month period in 2004, the Company generated revenue of $1,375,856. The decrease in revenue of $398,204 was due primarily to two factors. In the first quarter of 2004, the Company recognized revenue related to the sale and installation of equipment for two customers that was not duplicated in the quarter ended March 31, 2005. In addition, the Company's production studio was engaged more fully in 2004 as compared to 2005 and as a result the revenues from studio production decreased. The Company's accounts receivable include three customers whose combined balances represent approximately 52% and 26% of trade receivables as of March 31, 2005 and 2004, respectively, and whose related sales revenues account for approximately 74% and 53% of total revenues for the quarters ended March 31, 2005 and 2004, respectively. Any material reduction in revenues generated from any one of these customers could have a material adverse effect on the Company's results of operations, financial condition and liquidity. A contract with one of the Company's largest customers expires on May 31, 2005. The contract contains a covenant not to compete, which would have affected the Company's plans to perform certain services for new Company customers. Therefore, the Company would not have been willing to extend the contact under these same conditions. The Company anticipates to continue to provide limited services to this customer; however, revenue generated from this customer is expected to be significantly reduced beginning June 1, 2005. Total revenue generated from this customer represented approximately $263,953 and $305,559 of the total revenue for the quarters ended March 31, 2005 and 2004, respectively. Cost of Revenues Costs of Revenues decreased by approximately $255,000 to $1,103,350 for the three months ended March 31, 2005, from $1,358,047 for the three months ended March 31, 2004. The decrease was due primarily to a decrease in sales of equipment, which resulted in a decrease in the cost of equipment sold to the Company's customers. There was not a decrease in the cost of equipment relative to the sales price of the equipment. In addition the general operations department costs decreased by approximately $88,000 due to the decrease in installation of customer equipment. The other cost components were relatively unchanged. Expenses Administrative and general, selling and marketing, and research and development in process expenses for the three months ended March 31, 2005 were $421,935 compared with the same expenses for the three months ended March 31, 2004 of $2,061,133. The decrease of approximately $1,639,198 11 resulted largely from two non-cash items being included in operations for 2004; 1) $795,000 from the issuance of common stock for services rendered from Streamware Solutions and outside consultants assisting the Company in positioning the development and deployment of the Company's CodecSys technology, and 2) $800,432 to record the value of options granted to Streamware to purchase 1,312,500 shares of common stock of the Company at an exercise price of $4.50 per share. There was also a decrease of approximately $45,000 in sales and marketing expenses. Interest Expense For the three months ended March 31, 2005, the Company incurred interest expense of $249,914 compared to interest expense for the three months ended March 31, 2004 of $349,649. The full amount of the decrease resulted from the Company recording less interest expense related to the convertible line of credit's beneficial conversion feature than was recorded in the previous year due to less borrowings being required by the Company. The interest expense related to the convertible line of credit is recorded because the conversion price of $1.00 per share was less than the average trading price of the Company's stock during the quarter and assuming that the note holder will exercise its option to convert and satisfy the obligation through conversion. Net Loss The Company realized a net loss for the three months ending March 31, 2005 of $794,047 compared with a net loss for the three months ended March 31, 2004 of $2,390,528. The decrease in the net loss of $1,596,481 is due primarily to 1) a decrease of approximately $99,735 in interest expense as described above, and 2) the issuance of company stock and options valued at fair market value of approximately $1,595,432 in 2004,also described above. Liquidity and Capital Resources At March 31, 2005, the Company had cash of approximately $277,581 and total current assets of approximately $774,436 compared to total current liabilities of approximately $680,312 and total stockholder's deficit of approximately $433,980. For the three months ended March 31, 2005, the Company used approximately $238,874 of cash for operating activities as compared to cash used for operating activities for the quarter ended March 31, 2004 of $307,457. The cash used for operations was provided in both quarters primarily from proceeds from sales of Company common stock and from loan financing. The Company's Annual Report filed on Form 10-KSB for the year ended December 31, 2004 contained a "going concern" qualification. The Company has incurred losses and has not demonstrated the ability to generate sufficient cash flows from operations to satisfy its liabilities and sustain operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company will continue to have the need for infusions of capital over an undetermined period of time. Based on the cash flow statement, the Company experienced negative cash flow of approximately $125,000 per month during the year ended December 31, 2004 and approximately $80,000 per month during the three months ended March 31, 2005, and its development plan calls for additional expenditures of approximately $100,000 per month to complete 12 the development initiatives identified at this time. The Company believes it is important to increase expenditures for development to take advantage of the opportunities currently available and delay in implementing the increased expenditures of the CodecSys technology could adversely affect the Company's ability to bring products to market and take a meaningful market share. To date, the Company has met its working capital needs through sale of common stock under subscription agreements and through a convertible line of credit, and anticipates that availability of such capital will continue over the next year. The Company is actively engaged in raising additional equity capital to meets its development and operational needs. The Company entered into a senior secured convertible note as of May 12, 2005, which the Company feels is a placement of sufficient size to satisfy estimated short term liquidity needs. Additional investor capital will result in future dilution to the existing shareholders. Future investment may depend, to some extent, on results of operations, but there can be no assurance that the Company will be able to attract new investors or that the current investors and lenders will continue to fund operations. In the event capital is not secured or if additional loans are not secured, the Company would be in immediate need of another source of capital. There can be no assurance that, in such event, the Company will be able to locate a source of capital, or on terms acceptable to the Company or to reduce costs sufficient to maintain the operations of the Company at its current level. Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements. Item 3. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. As required by Rule 13a-15(b) of the Exchange Act, we conducted an evaluation, under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2005. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2005 in ensuring that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. For the quarter ended March 31, 2005, management of the Company, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, implemented corrective action with respect to a significant deficiency previously identified regarding new and recent accounting pronouncements and required disclosures. This action included changes to the way we obtain and process required information pursuant to which we have acquired and implemented a financial statement disclosure and 13 procedure checklist that will be updated on a regular basis through review of authoritative information sources and consultation with professional service providers. Changes in Internal Control Over Financial Reporting Except as noted above, there has been no change in our internal control over financial reporting for the quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Important Considerations The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures or internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management. 14 Part II - Other Information Item 1. Legal Proceedings None. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the quarter ended March 31, 2005, a total of 22,801 shares of common stock were returned to the Company. These shares were not repurchased by the Company, but resulted from the voluntary return by former debt holders of Interact Devices, Inc. ("IDI") who were issued common shares on the Company in connection with IDI's bankruptcy reorganization. In January 2005 the Company issued a total of 41,667 shares of common stock of the Company to two corporations in exchange for $124,980, which proceeds were used in the operations of the Company. In each of the forgoing transactions, the Company relied on the exemption from registration under the 1933 Act set forth in Section 4(2) thereof. The Company's working capital restrictions currently prevent it from paying dividends. Moreover, management intends to retain any and all earnings to finance the development of its business, at least in the foreseeable future. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to Vote of Security Holders. None. Item 5. Other Information None. Item 6. Exhibits Exhibit No. 3.1 Articles of Incorporation, as amended, of the Company (Incorporated by reference to Exhibit No. 3.1 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 2003 filed with the SEC on March 30, 2004.) 3.2 Bylaws of the Company 4.1 Specimen Stock Certificate of common stock 15 10.1 Employment Agreement of Rodney M. Tiede dated April 28, 2004 (Incorporated by reference to Exhibit No. 10.1 of the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004 filed with the SEC on May 12, 2004.) 10.2 Employment Agreement of Randy Turner dated April 28, 2004 (Incorporated by reference to Exhibit No. 10.2 of the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004 filed with the SEC on May 12, 2004.) 10.3 Employment Agreement of Reed L. Benson dated April 28, 2004 (Incorporated by reference to Exhibit No. 10.3 of the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004 filed with the SEC on May 12, 2004.) 10.4 Stock Option Plan (Incorporated by reference to Exhibit No. 10.4 of the Company's Annual Report of Form 10-KSB for the year ended December 31, 2003 filed with the SEC on March 30, 2004.) 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 16 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Broadcast International, Inc. Date: May 16, 2005 /s/ Rodney M. Tiede By: Rodney M. Tiede Its: President and Chief Executive Officer (Principal Executive Officer) Date: May 16, 2005 /s/ Randy Turner By: Randy Turner Its: Chief Financial Officer (Principal Financial and Accounting Officer) 17