-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TCyhBCNQMyzR3gAhYRfILBaevYf5evvK7W7W8N1dS2l/lguVEt7GX1sS87npfWxX 2h9eBHUSHDiu+jf128vfcA== 0001023175-05-000192.txt : 20060906 0001023175-05-000192.hdr.sgml : 20060906 20050902170630 ACCESSION NUMBER: 0001023175-05-000192 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20050902 DATE AS OF CHANGE: 20060221 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROADCAST INTERNATIONAL INC CENTRAL INDEX KEY: 0000740726 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 870395567 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-125710 FILM NUMBER: 051068528 BUSINESS ADDRESS: STREET 1: 7050 UNION PARK AVENUE, #600 CITY: SALT LAKE CITY STATE: UT ZIP: 84047 BUSINESS PHONE: 801-562-2252 MAIL ADDRESS: STREET 1: 7050 UNION PARK AVENUE #600 CITY: SALT LAKE CITY STATE: UT ZIP: 84047 FORMER COMPANY: FORMER CONFORMED NAME: LASER CORP DATE OF NAME CHANGE: 19920703 S-3/A 1 broadcastamendeds3.txt As filed with the Securities and Exchange Commission on September 2, 2005 Registration No. 333-125710 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________________________________ PRE-EFFECTIVE AMENDMENT NO. 2 TO FORM S-3/A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _____________________________________ BROADCAST INTERNATIONAL, INC. (Exact Name of Registrant as Specified in Its Charter) Utah 87-0395567 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification Number) 7050 South Union Park Center, Suite 600 Midvale, Utah 84047 (801) 562-2252 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Rodney M. Tiede Chairman of the Board and Chief Executive Officer Broadcast International, Inc. 7050 South Union Park Center, Suite 600 Midvale, Utah 84047 (801) 562-2252 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) Copies to: Reed L. Benson, Esq. David G. Angerbauer, Esq. Broadcast International, Inc. Holland & Hart LLP 7050 South Union Park Center, Suite 600 60 East South Temple, Suite 2000 Midvale, Utah 84047 Salt Lake City, UT 84111 (801) 567-3211 (801) 595-7800 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------ Title Proposed Proposed of each class maximum maximum Amount of of securities Amount to be offering price aggregate registration to be registered registered(1) per unit(2) offering price(2) fee(3) - ------------------------------------------------------------------------------ Common Stock, par value $0.05 per share 8,817,466 $3.1983 $28,200,902 $3,319.25 - ----------------------------------------------------------------------------- (1) Assumes the exercise of all stock options and warrants and the conversion of all convertible notes to acquire common shares registered hereunder. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933 based upon the applicable stock option and warrant exercise prices and the conversion prices of the convertible notes. (3) Previously paid. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE SALE OR OFFER IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED September 2, 2005 PROSPECTUS _____________________________________ BROADCAST INTERNATIONAL, INC. 8,817,466 Shares of Common Stock _____________________________________ This prospectus relates to: . the issuance of shares of our common stock upon conversion of an outstanding convertible note; . the issuance of shares of our common stock upon exercise of outstanding stock options; . the issuance of shares of our common stock upon conversion of outstanding senior secured convertible notes and upon exercise of related warrants; and . the issuance of shares of our common stock upon conversion of senior secured convertible notes and upon exercise of related warrants to be issued upon exercise of outstanding additional investment rights and other securities. This investment involves significant risks. See "Risk Factors" beginning on page 5 to read about factors you should consider before buying our securities. We will receive proceeds from the exercise of the stock options, warrants and additional investment rights. We will not receive proceeds from the conversion of the convertible note or any senior secured convertible notes. If all of the outstanding stock options, warrants and additional investment rights are exercised in full and all of the warrants issuable upon exercise of the additional investment rights and other securities are also exercised, we will issue an aggregate of 5,572,500 shares of our common stock, and we will receive aggregate proceeds of $24,356,250. See "Use of Proceeds." Our common stock is currently traded over the counter on the Nasdaq OTC Bulletin Board under the symbol "BCST." On September 1, 2005, the closing sale price of our common stock was $3.40 per share. __________________ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is September 2, 2005. 1 3 PROSPECTUS SUMMARY This summary contains basic information about us and this offering. Because it is a summary, it does not contain all the information that you should consider before investing. You should read the entire prospectus carefully, including the section entitled "Risk Factors" and our consolidated financial statements, the accompanying notes and the other documents which are incorporated by reference in this prospectus. References in this prospectus to "our company," "we," "our," "us" and "Broadcast International" refer to Broadcast International, Inc. and our subsidiaries. Our Business We install, manage and support private communication networks for large organizations that have widely-dispersed locations or operations. Our enterprise clients use these networks to deliver training programs, product announcements, entertainment and other communications to their employees and customers. We use a variety of delivery technologies, including satellite, Internet streaming and WiFi, depending on the specific needs and applications of our clients. All of the communication networks we are involved with utilize industry standard products and equipment sold by other companies. We sell a limited number of proprietary network products in connection with the services we provide. We also offer audio and video production services for our clients. We own proprietary video compression technology that we call "CodecSys." Video compression is the process by which video content is converted into a digital data stream for transmission over satellite, cable, Internet or wireless networks. Today, video compression is accomplished by using a single technique or computer formula to create a particular data stream. Our CodecSys technology uses multiple techniques or computer formulas to create a particular data stream. With CodecSys, video content may be transmitted over decreased bandwidth while maintaining media quality. We believe our CodecSys technology will offer significant efficiencies and cost savings associated with video content transmission and storage. We are still developing and improving the CodecSys technology for a variety of applications, including video conferencing, Internet streaming, satellite encoding and transmitting video content to cellular phones and other hand-held electronic devices. We believe these applications may hold substantial licensing and other revenue opportunities for our business. Our Company We were incorporated in Utah on January 12, 1983. We did not commence our current business, however, until 2000. Our principal office is located at 7050 Union Park Avenue, Suite 600, Salt Lake City, Utah 84047, and our telephone number is (801) 562-2252. We maintain an internet site at www.brin.com, which contains information concerning us. Our internet Website and the information contained therein or connected thereto are not intended to be incorporated into this prospectus and should not be considered a part of this prospectus. Our common stock is considered "penny stock" under the Securities Exchange Act of 1934, as amended, which means that securities broker-dealers cannot recommend the common stock which may make trading the common stock difficult. Our independent auditors, in their report dated February 18, 2005 with respect to our financial statements as of December 31, 2004 and 2003, and for the years then ended, included a "going concern" qualification. As discussed in Note 3 to the financial statements, we have incurred significant losses and used cash from operations for the years ended December 31, 2004 and 2003. These conditions raise substantial doubt about our ability to continue as a going concern. Through June 30, 2005, our accumulated deficit was approximately $22,796,000. Risk Factors Investing in our securities involves significant risks. You should carefully read the section entitled "Risk Factors" beginning on page 5 for an explanation of these risks before investing in our securities. 2 4 Convertible Note We are offering shares of our common stock in this offering to holders of an outstanding convertible note. This note was issued when we entered into a convertible line of credit dated December 23, 2003 and amended June 30, 2004. The line of credit involves a loan to us, the total principal amount of which was $1,644,966 which is convertible into shares of our common stock at $1.00 per share. Of the total amount loaned to us pursuant to the line of credit, $800,000 has been previously converted to 800,000 shares of common stock and the remaining $844,966 principal amount is currently outstanding. The convertible note is due April 1, 2006 and bears interest at an annual rate of 6%. Accrued interest, however, is forgiven upon conversion pursuant to the terms of the line of credit. Any portion of the note is convertible at any time at the lenders' sole discretion. Stock Options We are also offering shares of our common stock in this offering to holders of outstanding stock options. These stock options were issued when we entered into a stock purchase and option grant agreement and a stock issuance and option grant agreement, both dated February 6, 2004, with Streamware Solutions AB, a Swedish corporation, and certain of its principals and shareholders. Under the terms of the Streamware agreements, we granted to Streamware principals and shareholders options to acquire a total of 2,812,500 shares of our common stock at an exercise price of $4.50 per share. The options may be exercised anytime prior to their expiration on February 6, 2006. Senior Secured Convertible Notes and Warrants We are also offering shares of our common stock in this offering to holders of outstanding senior secured convertible notes and related warrants. These senior secured convertible notes and warrants were issued when we entered into a securities purchase agreement dated May 16, 2005 with four institutional funds. Under the terms of the securities purchase agreement, we executed four senior secured convertible 6% notes for a total indebtedness of $3,000,000 in favor of the institutional funds, which senior secured convertible notes are convertible into our common stock at $2.50 per share, subject to adjustment in certain circumstances. In connection with the notes, we issued warrants to the institutional funds as follows: (i) A Warrants exercisable for a total of 600,000 shares of our common stock at $2.50 per share, subject to adjustment in certain circumstances; and (ii) B Warrants exercisable for a total of 600,000 shares of our common stock at $4.00 per share, subject to adjustment in certain circumstances. The senior secured convertible notes bear interest at the annual rate of 6% and are due May 16, 2008. The senior secured convertible notes are exercisable anytime until their due date. The A Warrants and B Warrants are exercisable anytime until May 16, 2010. When we issued the senior secured convertible notes and warrants described above, we also granted additional investment rights to the institutional funds to invest up to an additional $3,000,000 in convertible notes with the same terms and conditions as the senior secured convertible notes, including a grant of the same number of A Warrants and B Warrants with the same terms. These additional investment rights expire ninety (90) days from the date of this prospectus. The additional investment rights are exercisable at the discretion of the funds. This prospectus covers shares of our common stock issuable upon conversion of the senior secured convertible notes and upon exercise of all warrants to be issued upon exercise of the additional investment rights. At the time we entered into the securities purchase agreement, we agreed to issue A Warrants to affiliates (as defined in Rule 144 promulgated under the Securities Act of 1933, as amended) of the registered broker-dealer who acted as our placement agent with respect to the institutional funds if we obtain additional funding from the funds, whether by exercise of the additional investment rights or exercise of warrants. The broker-dealer affiliates may be issued A Warrants as follows: (i) up to 120,000 if the outstanding A Warrants and B Warrants are exercised in full by the institutional funds; (ii) up to 120,000 if the additional investment rights are exercised in full by the institutional funds; and (iii) up to 120,000 if the A Warrants and B Warrants issuable upon exercise of the additional investment rights are exercised in full by the institutional funds. This prospectus covers all shares of our common stock issuable upon exercise of the A Warrants issuable to the broker-dealer affiliates as described above. 3 Our senior secured convertible notes contain, among other things, covenants that may restrict our ability to finance future operations, to obtain additional capital, to declare or pay dividends or to engage in other business activities. More specifically, our senior secured convertible notes provide that we cannot do any of the following without the prior written approval of the institutional funds: . issue debt securities or incur, assume, suffer to exist, guarantee or otherwise become or remain, directly or indirectly, liable with respect to certain indebtedness; . except for those created under the securities purchase agreement, create, incur, assume or suffer to exist, directly or indirectly, any liens, restrictions, security interests, claims, rights of another or other encumbrances on or with respect to any of our assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom; . complete a private equity or equity-linked financing prior to the first anniversary of the closing date, except as set forth in the securities purchase agreement; . liquidate, wind up or dissolve (or suffer any liquidation or dissolution); . convey, sell, lease, license, assign, transfer or otherwise dispose of all or any substantial portion of our properties or assets, other than transactions in the ordinary course of business consistent with past practices, and transactions by non-material subsidiaries, if any; . cause, permit or suffer, directly or indirectly, any change in control transaction as defined in the senior secured convertible notes; . directly or indirectly enter into or permit to exist any transaction with any of our affiliates or any of our subsidiaries, if any, except for transactions that are in the ordinary course of our business, upon fair and reasonable terms, that are fully approved by our Board of Directors, and that are no less favorable to us than would be obtained in an arm's length transaction with a non-affiliate; . declare or pay a dividend or return any equity capital to any holder of any of our equity interests or authorize or make any other distribution to any holder of our equity interests in our capacity as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for consideration any of our equity interests outstanding (or any options or warrants issued to acquire any of our equity interests); provided that the foregoing shall not prohibit (i) the performance by us of our obligations under the warrants related to the senior secured convertible notes or the registration rights agreement entered into in connection with the securities purchase agreement, or (ii) us and any of our subsidiaries, if any, from paying dividends in common stock issued by us or such subsidiary that is neither puttable by any holder thereof nor redeemable, so long as, in the case of any such common stock dividend made by any such subsidiary, the percentage ownership (direct or indirect) of us in such subsidiary is not reduced as a result thereof; or . directly or indirectly, lend money or credit (by way of guarantee or otherwise) or make advances to any person, or purchase or acquire any stock, bonds, notes, debentures or other obligations or securities of, or any other interest in, or make any capital contribution to, any other person, or purchase or own a future contract or otherwise become liable for the purchase or sale of currency or other commodities at a future date in the nature of a futures contract, with very limited exceptions. 4 RISK FACTORS You should carefully consider the following risk factors and all of the other information contained in, or incorporated by reference in, this prospectus before purchasing our securities. Investing in our securities involves a high degree of risk. Any of the following risk could materially harm our business and could result in a loss of your investment. If we do not successfully commercialize our CodecSys technology, we may never achieve profitability or be able to raise future capital. It is imperative that we complete development of our CodecSys technology and commence sales of products or licensing of the technology to other parties. We have never been involved in a development project of the size and breadth that is involved with CodecSys and none of our management has ever been involved with a software development project. Management may lack the expertise to complete the project and we may not have the financial resources to commercialize the technology. If we are unsuccessful in our CodecSys commercialization efforts, it is highly doubtful we will achieve profitable operations or be able to raise additional funding in the future. There is substantial doubt about our ability to continue as a "going concern." Our independent auditors, in their report dated February 18, 2005 with respect to our financial statements as of December 31, 2004 and 2003, and for the years then ended, included a "going concern" qualification. As discussed in Note 3 to the financial statements, we have incurred significant losses and used cash from operations for the years ended December 31, 2004 and 2003. These conditions raise substantial doubt about our ability to continue as a going concern. We may need additional capital in the future. If we do and additional capital is not available, we may have to curtail or cease operation. In order to continue our planned operations, we may need additional funding. This funding will be required in approximately 12 months if we fail to execute on our business model described below. We may also need additional funding based upon the future development and application of our CodecSys technology. We have no source of working capital except the current operations and the prospect of obtaining new equity or debt financing. Current revenues from ongoing operations do not cover anticipated development or sales and marketing costs of the CodecSys technology. We must continue to sell equity or find another source of operating capital until our operations are profitable. Our business model relies upon generating new sales to existing and new customers, and on developing and marketing the CodecSys technology. If we do not generate significant new sales to existing and new customers, or raise additional capital, we will be required to pursue one or a combination of the following remedies: significantly reduce operating expenses, sell part or all of our assets, or terminate operations. We have a limited operating history with our current business and have sustained and may continue to sustain substantial losses. Although we have been in existence for many years, our current business has only been ongoing for five years. We have sustained operating losses in each of the last three years. Through June 30, 2005, our accumulated deficit was approximately $22,796,000. We may continue to sustain losses on a quarterly and annual basis. Covenant restrictions under our senior secured convertible notes may limit our ability to operate our business. Our senior secured convertible notes contain, among other things, covenants that may restrict our ability to finance future operations, to obtain additional capital, to declare or pay a dividend or to engage in other business activities. A breach of any of these covenants could result in a default under our senior secured convertible notes, in which event our lenders could elect to declare all amounts outstanding to be immediately due and payable, which could have a material adverse effect on our business. 5 We may be unable to respond adequately to rapid changes in technology The market for private communication networks is characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. The introduction of new technology and products and the emergence of new industry standards not only impacts our ability to compete, but could also render our CodecSys technology uncompetitive or obsolete. If we are unable to adequately respond to changes in technology and standards, we will not be able to serve our clients effectively. Moreover, the cost to modify our services, products or infrastructure in order to adapt to these changes could be substantial and we may not have the financial resources to fund these expenses. We face intense competition that could harm our business. The communications industry is extremely competitive. We compete with numerous competitors who are much larger than us and have greater financial and other resources. With respect to video conferencing, we compete with Sony, Polycom, Tandberg and others. In the satellite network and services segment, we compete with Convergent Media Systems, Globecast, IBM, Cisco, TeleSat Canada and others. Our competitors have established distribution channels and significant marketing and sales resources. Competition results in reduced operating margins for our business and may cause us to lose clients and/or prevent us from gaining new clients critical for our success. If we fail to retain key personnel in the future, we will not have the ability to successfully develop our technology or manage our business. We need to hire additional personnel to successfully develop and commercialize our CodecSys technology. If we are unable to hire or retain qualified software engineers and project managers, our ability to complete development and commercialization efforts will be significantly impaired. Our success is also dependent upon the efforts and abilities of our management team. If we lose the services of certain of our current management team members, we may not be able to find qualified replacements which would have a material adverse impact on our business. We rely heavily on a few significant customers and if we lose any of these significant customers, our business may be harmed. A small number of customers account for a large percentage of our revenue. Our business model relies upon generating new sales to existing and new customers. In 2004, our three largest customers accounted for approximately 53% of revenues. Our contract with one of these customers expired in May 2005; however, we continue to provide satellite installation services for this customer on a project-by-project basis. This customer accounted for 21% of revenues in 2004. Our contracts with the other two customers expire in December 2005 and in 2007, subject to renewal. Our largest customers may not continue to purchase our services and may decrease their level of purchases. To the extent that a significant customer reduces its reliance on us or terminates its relationship with us, revenues would decline substantially, which would harm our business. The uncertainty of patent and proprietary technology protection may adversely affect us. Our success is dependent upon our CodecSys technology and other intellectual property rights. If we are unable to protect and enforce these intellectual property rights, competitors will have the ability to introduce competing products that are similar to ours. If this were to occur, our revenues, market share and operating results would suffer. To date, we have relied primarily on a combination of patent, copyright, trade secret, and trademark laws, and nondisclosure and other contractual restrictions on copying and distribution to protect our proprietary technology. If we fail to deter misappropriation of our proprietary information or if we are unable to detect unauthorized use of our proprietary information, then our revenues, market share and operating results will suffer. The laws of some countries may not protect our intellectual property rights to the same extent as do the laws of the United States. Furthermore, litigation may be necessary to enforce our intellectual property rights, to protect trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. This litigation could result in substantial costs and diversion of resources that would harm our business. 6 Our products could infringe on the intellectual property rights of others, which may subject us to future litigation and cause financial harm to our business. To date, we have not been notified that our services, products and technology infringe the proprietary rights of third parties, but there is the risk that third parties may claim infringement by us with respect to current or future operations. We expect software developers will increasingly be subject to infringement claims as the number of products and competitors in the industry segment grows and the functionality of products in different industry segments overlaps. Any of these claims, with or without merit, could be time-consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays, or require us to enter into royalty or licensing agreements. These royalty or licensing agreements, if required, may not be available on terms acceptable to us. A successful claim against us of infringement and failure or inability to license the infringed or similar technology on favorable terms would harm our business. Our common stock is considered "penny stock" which may make selling the common stock difficult. Our common stock is considered to be a "penny stock" under the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g) of the Securities Exchange Act of 1934, as amended. Under the rules, stock is considered "penny stock" if: (i) the stock trades at a price less than $5.00 per share; (ii) it is not traded on a "recognized" national exchange; (iii) it is not quoted on the Nasdaq Stock Market, or even if quoted, has a price less than $5.00 per share; or (iv) is issued by a company with net tangible assets less than $2.0 million, if in business more than a continuous three years, or with average revenues at less than $6.0 million for the past three years. The principal result or effect of being designated a "penny stock" is that securities broker-dealers cannot recommend our stock but must trade it on an unsolicited basis. Section 15(g) of the Exchange Act and Rule 15g-2 promulgated thereunder by the SEC require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor's account. Potential investors in our common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be "penny stocks." Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise. Trading in our securities could be subject to extreme price fluctuations that could adversely affect your investment. Our stock price has fluctuated in the past and could continue to do so in the future. Our stock is thinly-traded, which means investors will have limited opportunities to sell their shares of common stock in the open market. Your investment in our stock could lose value. Some of the factors that could significantly affect the market price of our stock are discussed in these Risk Factors and elsewhere in this prospectus. A significant drop in our stock price could expose us to the risk of securities class action lawsuits. Defending against such lawsuits could result in substantial costs and divert management's attention and resources. An unfavorable outcome of such a matter may have a material adverse impact on our business. 7 Future sales of our common stock could adversely affect our stock price. Substantial sales of our common stock in the public market, or the perception by the market that such sales could occur, could lower our stock price. As of August 1, 2005, we had 20,887,123 shares of common stock outstanding. As of August 1, 2005, stock options, including options granted to our employees, and warrants to purchase an aggregate of 7,655,596 shares of our common stock were issued and outstanding, a substantial portion of which were fully exercisable. As of August 1, 2005, notes convertible into 2,044,966 shares of our common stock were issued and outstanding. We cannot predict if future sales of our common stock, or the availability of our common stock for sale, will harm the market price for our common stock. Adverse economic or other market conditions could negatively affect the purchase of services by existing and prospective customers, which could harm our business. Our business may be adversely affected from time to time by changes in general economic, business and international conditions and other similar factors. Adverse economic or other market conditions negatively affect the business spending of existing and prospective customers. In adverse market times, our network and other services may not be deemed critical for these customers. Therefore, our services are often viewed as discretionary and may be deferred or eliminated in times of limited business spending. If you purchase shares of common stock, your ownership interest may be substantially diluted by future issuances of securities. We may issue additional shares of our common stock to holders of outstanding convertible notes, stock options and warrants. Moreover, if our institutional fund investors exercise their additional investment rights, we will issue additional senior secured convertible notes and warrants. The conversion of the convertible notes and the exercise of options and warrants into shares of our common stock will be dilutive to shareholders. We also have offered and expect to continue to offer stock options to our employees and have reserved approximately 1,600,000 shares of common stock for future issuance under our incentive stock option plan. To the extent that additional investment rights are exercised and/or future stock options are granted and ultimately exercised, there will be further dilution to shareholders, including investors in this offering. We have never paid dividends and do not anticipate paying any dividends on our common stock in the future, so any return on your investment will depend on the market price of our common stock. We currently intend to retain any future earnings to finance our operations. The terms and conditions of our senior secured convertible notes restrict and limit payment or distributions in respect of our common stock. If you invest in our common stock, any return or your investment will depend on the future market price of our common stock and not on any potential dividends. 8 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus, including the documents that we incorporate by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "management believes," "we believe," "we intend" and similar words or phrases. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this prospectus. Among the key factors that could cause actual results to differ materially from the forward-looking statements are the following: . competitive factors; . general economic and market conditions; . rapid technological change; . dependence on commercialization of our CodecSys technology; . dependence on significant customers; . our ability to raise additional capital; . restrictions under our senior secured convertible notes; . our ability to execute our business model; . our ability to hire and retain qualified software personnel; . uncertainty of intellectual property protection; and . one-time or non-recurring events. Because the risk factors referred to above, as well as the risk factors referenced in other sections of this prospectus, could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 9 USE OF PROCEEDS We will receive proceeds from the exercise of the outstanding stock options granted to Streamware principals and shareholders. We have granted stock options to acquire a total of 2,812,500 shares of our common stock. Each stock option entitles the holder thereof to receive one share of our common stock at an exercise price of $4.50 per share. If all of the outstanding stock options are exercised, we will issue 2,812,500 shares of our common stock and we will receive proceeds of $12,656,250. We will also receive proceeds from the exercise of the outstanding warrants issued to the institutional funds. We have granted warrants to acquire 1,200,000 shares of our common stock. Of these warrants, we have granted A Warrants to acquire a total of 600,000 shares of our common stock at an exercise price of $2.50 per share, and we have granted B Warrants to acquire a total of 600,000 shares of our common stock at an exercise price of $4.00 per share. Each warrant, if exercised prior to any further adjustment in the exercise price, will entitle the holder thereof to receive one share of our common stock at an exercise price of either $2.50 per share or $4.00 per share, depending on the type of warrant exercised. If all of the outstanding warrants are exercised, we will issue 1,200,000 shares of our common stock and we will receive proceeds of $3,900,000. If the institutional funds exercise their additional investment rights, we will issue additional senior secured convertible notes in principal amount up to $3,000,000. We will also issue up to 1,200,000 warrants upon exercise of the additional investment rights, including up to 600,000 A Warrants and up to 600,000 B Warrants. If the additional investment rights are exercised in full and the warrants issuable upon such exercise are also subsequently exercised in full, we will issue a total of 1,200,000 shares of our common stock (not including any shares issuable upon conversion of the additional senior secured convertible notes) and we will receive proceeds of $6,900,000. If we obtain additional funding because the institutional funds exercise outstanding warrants, the additional investment rights or warrants issuable upon exercise of the additional investment rights, we will issue up to 360,000 A Warrants to the broker-dealer affiliates. If these affiliates exercise all A Warrants issuable to them, we will issue 360,000 shares of our common stock and we will receive proceeds of $900,000. All proceeds resulting from the exercise of stock options, warrants and additional investment rights will be used for working capital and general corporate purposes. We will not receive any proceeds from the conversion of the outstanding convertible note or any senior secured convertible notes. PLAN OF DISTRIBUTION The offering covered by this prospectus relates to: . the issuance of shares of our common stock upon conversion of an outstanding convertible note; . the issuance of shares of our common stock upon exercise of outstanding stock options; . the issuance of shares of our common stock upon conversion of outstanding senior secured convertible notes and upon exercise of related warrants; and . the issuance of shares of our common stock upon conversion of senior secured convertible notes and upon exercise of related warrants to be issued upon exercise of outstanding additional investment rights and other securities. We will issue our common stock to holders of the securities described above when the securities are duly exercised or converted under their applicable terms and conditions. We will pay for all costs, expenses and fees in connection with the registration of the common stock covered by this prospectus. 10 We have agreed to compensate Stonegate Securities, Inc., with principal offices in Dallas, Texas, and affiliates of Stonegate in connection with certain aspects of this offering as described below pursuant to the terms of a placement agency agreement entered into in January 2005. Stonegate is a registered broker-dealer who acted as our placement agent with respect to the initial funding obtained from the institutional funds in May 2005. The placement agency agreement provides that if we obtain additional funding from the institutional funds, whether by exercise of the additional investment rights or exercise of warrants, we will issue up to 360,000 A warrants to the Stonegate affiliates as follows: (i) up to 120,000 if the outstanding A Warrants and B Warrants are exercised in full by the institutional funds; (ii) up to 120,000 if the additional investment rights are exercised in full by the institutional funds; and (iii) up to 120,000 if the A Warrants and B Warrants issuable upon exercise of the additional investment rights are exercised in full by the institutional funds. The placement agency agreement also provides that we will pay a commission to Stonegate in the amount of 8% of any additional funding obtained from the institutional funds. We have also agreed to pay a finder's fee to the party who introduced us to Stonegate. This party did nothing but provide an introduction to Stonegate and has not been involved in any aspect of the purchase or sale of securities offered or sold to the institutional funds or others. We will pay a fee to this finder in the amount of 2% of any additional funding obtained through Stonegate from the institutional funds. DESCRIPTION OF OUR CAPITAL STOCK Our authorized capital stock presently consists of 40,000,000 shares of common stock, par value $0.05 per share and 10,000,000 shares of preferred stock, no par value. We currently have 20,887,123 shares of common stock outstanding, and no shares of preferred stock outstanding. The following is a summary of the terms of our capital stock. Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of the shareholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of common stock are entitled to receive ratably any dividends, as may be declared by the Board of Directors out of funds legally available therefor, subject to the rights of the holders of preferred stock. Upon the liquidation, dissolution or winding up of our company , the holders of common stock, subject to the rights of the holders of preferred stock, are entitled to receive ratably our net assets available after the payment of our debts and other liabilities. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of common stock are fully paid and nonassessable. Our Board of Directors has the authority, without further action by the shareholders, to issue up to 10,000,000 shares of preferred stock in one or more series and to fix the designations, powers, preferences, privileges and relative participating, option, or special rights and the qualifications, limitations, or restrictions of those series, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights of the common stock. The Board of Directors, without shareholder approval, can issue preferred stock with voting, conversion or other rights that could adversely affect the voting power and other rights of the holders of common stock. Preferred stock could thus be issued quickly with terms calculated to delay or prevent a change in control or make removal of management more difficult. The issuance of preferred stock may have the effect of decreasing the market price of our common stock and may adversely affect the voting and other rights of the holders of our common stock. 11 INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Our Articles of Incorporation provide for limitation of liability of our directors, and for indemnification of our directors and officers, to the fullest extent permitted by Utah law. Our directors and officers may be liable for a breach or failure to perform their duties in accordance with Utah law only if their breach or failure to perform constitutes gross negligence, willful misconduct or intentional harm on us or our shareholders. Our directors may not be personally liable for monetary damages for action taken or failure to take action as a director except in specific instances established by Utah law. In accordance with Utah law, we will indemnify a director or officer against liability incurred in the proceeding if he or she acts in good faith, believes that his or her conduct was in our best interest, and that he or she had no reason to believe his or her conduct was unlawful. We may not indemnify this same director or officer if the person was adjudged liable to us or in the event it is adjudicated that the director or officer received an improper personal benefit. Under Utah law, we will indemnify a director or officer who is successful on the merits or otherwise in defense of any proceeding, or in the defense of any claim, issue or matter in the proceeding, to which he or she was a party because he or she is or was a director or an officer, as the case may be, against reasonable expenses incurred by him or her in connection with the proceeding or claim with respect to which he or she has been successful. We maintain a directors' and officers' liability insurance policy which, subject to the limitations and exclusions stated therein, covers our directors and officers for certain actions or inactions they may take or omit to take in their capacities as directors and officers. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. EXPERTS Tanner LC, an independent registered public accounting firm, has audited our consolidated financial statements included in our Annual Report on Form 10-KSB for the year ended December 31, 2004, as set forth in their report dated February 18, 2005, which is incorporated by reference in this prospectus. Our financial statements are incorporated by reference in reliance on Tanner LC's report, given their authority as experts in accounting and auditing matters. LEGAL OPINION The validity of the securities offered by this prospectus will be passed upon for us by Reed L. Benson, Esq., the Secretary and General Counsel of Broadcast International, Salt Lake City, Utah. WHERE YOU CAN FIND MORE INFORMATION This prospectus is part of a registration statement on Form S-3 that we have filed with the Securities and Exchange Commission relating to the issuance of shares of our common stock covered by this prospectus. As described below, you may obtain from the Commission a copy of the registration statement and exhibits that we filed with the Commission when we registered our securities. The registration statement may contain additional information that may be important to you. Statements made in this prospectus about legal documents may not necessarily be complete and you should read the documents that are filed as exhibits to the registration statement or otherwise filed with the Commission. 12 We also file annual, quarterly and periodic reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information filed under the Exchange Act can be inspected and copied at the public reference facilities maintained by the Commission at Room 1580, 100 F Street N.E., Washington, D.C. 20549. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission, Room 1580, 100 F Street, N.E., Washington, D.C. 20549. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE We "incorporate by reference" into this prospectus certain information we file with the Commission, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus. We incorporate by reference the documents listed below, which have already been filed with the Commission: 1. Annual Report on Form 10-KSB and amendments for the year ended December 31, 2004; 2. Quarterly Report on Form 10-QSB for the quarter ended March 31, 2005; 3. Current Report on Form 8-K filed on May 16, 2005; 4. Current Report on Form 8-K filed on July 1, 2005; and 5. Quarterly Report on Form 10-QSB for the quarter and six months ended June 30, 2005. All documents filed by Broadcast International pursuant to Sections 14(a), 13(c) or 15(d) of the Exchange Act subsequent to the date of this prospectus and prior to the termination of the offering of common stock which is the subject of this prospectus shall be deemed to be incorporated by reference in this prospectus and to be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated by reference shall be deemed to be modified or superseded for purposes of this prospectus to the extent that a statement in this prospectus or in any subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as to modified or superseded, to constitute a part of this prospectus. We are not required to deliver an annual report to security holders and have not delivered one in the past. We make our annual report on Form 10-KSB, including our audited financial statements, available on our web site at www.brin.com. We will provide without charge to any person to whom a copy of this prospectus has been delivered, on the written or oral request of any such person, a copy of any or all of the documents referred to above which have been or may be incorporated in this prospectus by reference, other than exhibits to such documents, unless such exhibits are specifically incorporated by reference in such documents. Written or oral requests for such copies should be directed to Reed L. Benson, Secretary, Broadcast International, Inc., 7050 Union Park Ave., Suite 600, Salt Lake City, Utah, 84047, and his telephone number is (801) 562-2252. 13 You should rely only on the information contained in this prospectus. We have not authorized anyone to provide ______________________________ you with information different from that contained in this prospectus or 8,817,466 Shares any prospectus supplement. This prospectus is not an offer of these securities in any jurisdiction where Common Stock an offer and sale is not permitted. The information contained in this prospectus is accurate only as of the date of this BROADCAST prospectus, regardless of the time INTERNATIONAL, INC. of delivery of this prospectus or any sale of our common stock. ______________________________ TABLE OF CONTENTS Page PROSPECTUS SUMMARY...................... Prospectus Our Business............................ Our Company............................. Risk Factors............................ Convertible Notes....................... _______________________________ Stock Options........................... Senior Secured Convertible Notes and Warrants.......................... September 2, 2005 RISK FACTORS............................ CAUTIONARY NOTE REGARDING FORWARD- LOOKING STATEMENTS...................... USE OF PROCEEDS......................... PLAN OF DISTRIBUTION.................... DESCRIPTION OF OUR CAPITAL STOCK........ INDEMNIFICATION FOR SECURITIES ACT LIABILITIES............................. EXPERTS................................. LEGAL OPINION........................... WHERE YOU CAN FIND MORE................. INFORMATION............................. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution. The following table sets forth all expenses payable by Broadcast International in connection with the sale of common stock being registered. The security holders will not bear any portion of such expenses. All the amounts shown are estimates except for the registration fee. SEC registration fee ............................$3,355 Legal fees and expenses..........................$35,000 Transfer agent's fees............................$1,000 Accounting fees and expenses.....................$15,000 Blue Sky fees and expenses.......................$1,000 Miscellaneous....................................$4,645 Total.....................................$60,000 Item 15. Indemnification of Officers and Directors Our Articles of Incorporation provide for the indemnification of our directors and officers to the fullest extent permitted by the Utah Revised Business Corporation Act ("URBCA"). The liability of our directors and officers is limited such that a director or officer is not liable to Broadcast International or our shareholders for any action taken or any failure to take any action, as an officer or director, as the case may be, unless: (i) the director or officer has breached or failed to perform the duties of the office in compliance with Section 16-10a-841 of the URBCA; and (ii) the breach or failure to perform constitutes gross negligence, willful misconduct, or intentional infliction of harm on Broadcast International or our shareholders. Our directors are personally liable if such director votes for or assents to an unlawful distribution under the URBCA or our Articles of Incorporation. We will, pursuant to Section 16-10a-902 of the URBCA, indemnify an individual, made party to a proceeding because he or she was a director, against liability incurred in the proceeding if: (i) the director's conduct was in good faith; (ii) the director reasonably believed that his conduct was in, or not opposed to, our best interests; and (iii) in the case of any criminal proceeding, he or she had no reasonable cause to believe his conduct was unlawful; provided that, we may not indemnify the same director if (a) indemnification is sought in connection with a proceeding by or in the right of Broadcast International in which the director was adjudged liable to Broadcast International or (b) indemnification is sought in connection with any other proceeding charging that the director derived an impersonal personal benefit, whether or not including action in his official capacity, in which proceeding he was adjudged liable on the basis that he derived an improper personal benefit. Indemnification under this Section in connection with a proceeding by or in the right of Broadcast International is limited to reasonable expenses incurred in connection with the proceeding. In accordance with Section 16-10a-903 of the URBCA, we shall indemnify a director or an officer who is successful on the merits or otherwise in defense of any proceeding, or in the defense of any claim, issue or matter in the proceeding, to which he or she was a party because he or she is or was a director or an officer of Broadcast International , as the case may be, against reasonable expenses incurred by him or her in connection with the proceeding or claim with respect to which he or she has been successful. In accordance with Section 16-10a-904 of the URBCA, we will pay or reimburse the reasonable expenses incurred by a party to a proceeding in advance of the final disposition of the proceeding, provided that, (i) the director furnishes the corporation a written affirmation of his or her good faith belief that he or she has met the applicable standard of conduct described in Section 16-10a-902 of the URBCA; (ii) the director furnishes to us a written undertaking, executed personally or on his or her behalf, to repay the advance if it is ultimately determined that he or she did not meet such standard of conduct; and (iii) a determination is made that the facts then known to those making the determination would not preclude indemnification thereunder. II-1 Section 16-10a-905 permits a director or officer who is or was a party to a proceeding to apply for indemnification to the court conducting the proceeding or another court of competent jurisdiction. We will indemnify and advance expenses to an officer, employee, fiduciary or agent of Broadcast International to the same extent as a director; or to a greater extent in some instances if not inconsistent with public policy. We maintain a directors' and officers' liability insurance policy which, subject to the limitations and exclusions stated therein, covers the officers and directors of Broadcast International for certain actions or inactions that they may take or omit to take in their capacities as officers and directors of Broadcast International . Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Item 16. Exhibits Exhibit Number Description of Document - -------- --------------------------------------------------------------- 4.2 Form of 6.0% Senior Secured Convertible Note (Incorporated by reference to Exhibit No. 4.1 of the Company's Current Report on Form 8-K dated May 16, 2005 filed with the SEC on May 16, 2005.) 4.3 Form of A Warrant (Incorporated by reference to Exhibit No. 4.2 of the Company's Current Report on Form 8-K dated May 16, 2005 filed with the SEC on May 16, 2005.) 4.4 Form of B Warrant (Incorporated by reference to Exhibit No. 4.3 of the Company's Current Report on Form 8-K dated May 16, 2005 filed with the SEC on May 16, 2005.) 5.1 Opinion of Reed L. Benson, Esq.* 23.1 Consent of Reed L. Benson, Esq. (Included in Exhibit No. 5.1)* 23.2 Consent of Tanner LC, independent registered public accountant 24.1 Power of Attorney* * Previously filed. Item 17. Undertakings. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of Broadcast International pursuant to the provisions described in Item 15 or otherwise, we have been advised that in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer, or controlling person of Broadcast International in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-2 The undersigned small business issuer hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a) (3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that subparagraphs (i) and (ii) above do not apply if the information required to be included in a post-effective amendment by these subparagraphs is contained in periodic reports filed by Broadcast International pursuant to Section 13 or Section 15(d) of the Exchange Act that are incorporated by reference in this registration statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That, for purposes of determining any liability under the Securities Act, each filing of Broadcast International's annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act, Broadcast International certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Pre-Effective Amendment No. 2 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Salt Lake City, State of Utah, on the 1st day of September, 2005. BROADCAST INTERNATIONAL, INC. By: /s/ Rodney M. Tiede Name: Rodney M. Tiede Its: President and Chief Executive Officer Pursuant to the requirements of the Securities Act, the following persons, in the capacities and on the dates indicated, have signed this Pre-Effective Amendment No. 2 to Registration Statement as indicated below. Rodney M. Tiede Chairman of the Board and Chief September 1, 2005 - ------------------- Executive Officer Rodney M. Tiede (Principal Executive Officer) Randy Turner Chief Financial Officer September 1, 2005 - ------------------- and Director Randy Turner (Principal Accounting and Financial Officer) Reed L. Benson Director September 1, 2005 - ------------------- Reed L. Benson Director September 1, 2005 II-4 INDEX TO EXHIBITS Exhibit Number Description of Document - ------------- --------------------------------------------------------------- 4.2 Form of 6.0% Senior Secured Convertible Note (Incorporated by reference to Exhibit No. 4.1 of the Company's Current Report on Form 8-K dated May 16, 2005 filed with the SEC on May 16, 2005.) 4.3 Form of A Warrant (Incorporated by reference to Exhibit No. 4.2 of the Company's Current Report on Form 8-K dated May 16, 2005 filed with the SEC on May 16, 2005.) 4.4 Form of B Warrant (Incorporated by reference to Exhibit No. 4.3 of the Company's Current Report on Form 8-K dated May 16, 2005 filed with the SEC on May 16, 2005.) 5.1 Opinion of Reed L. Benson, Esq.* 23.1 Consent of Reed L. Benson, Esq. (Included in Exhibit No. 5.1)* 23.2 Consent of Tanner LC, independent registered public accountant 24.1 Power of Attorney* * Previously filed. II-5 EX-23.2 2 broadcastamendedex23.txt CONSENT OF TANNER LC, INDEPENDENT REGISTERED PUBLIC ACCOUNTANT EXHIBIT 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-3/A) and related prospectus of Broadcast International, Inc. for the registration of shares of its common stock and to the incorporation by reference therein of our report dated February 18, 2005 with respect to the consolidated financial statements of Broadcast International, Inc. included in its Annual Report (Form 10-KSB) for the year ended December 31, 2004, filed with the Securities and Exchange Commission. /s/ Tanner LC Tanner LC Salt Lake City, Utah August 29, 2005 CORRESP 3 filename3.txt HOLLAND & HART David G. Angerbauer Phone (801) 595-7808 Fax (801) 364-9124 dangerbauer@hollandhart.com 41564.0001 September 2, 2005 Ms. Elaine Wolff Branch Chief Division of Corporation Finance United States Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 Re: Broadcast International, Inc. Form S-3 Filed June 10, 2005, amended June 10, 2005 File No. 333-125710 Form 10-KSB/A for the year ended December 31, 2004 Filed April 27, 2005 File No. 0-13316 Form 10-QSB for the quarter ended March 31, 2005 Filed May 16, 2005 File No. 0-13316 Dear Ms. Wolff: This letter is submitted on behalf of Broadcast International, Inc. ("Broadcast International" or the "Company") in response to the comments of the staff of the Division of Corporation Finance of the Securities and Exchange Commission (the "Commission") with respect to the Company's Registration Statement on Form S-3 (filed on June 10, 2005, amended June 10, 2005, File No. 333-125710), the Company's Form 10-KSB/A for the year ended December 31, 2004 (filed on April 27, 2005, File No. 0-13316) and the Company's Form 10-QSB for the quarter ended March 31, 2005 (filed on May 16, 2005, File No. 0-13316), as set forth in your letter to Rodney M. Tiede, dated July 8, 2005. For your convenience, we have restated your comments in full and have numbered our responses to match the numbering of the comments and headings used in your letter. A capitalized term used in this letter that is not defined herein will have the same meaning as given in the Form S-3 filed on June 10, 2005, the Form 10-KSB/A filed on April 27, 2005 or the Form 10-QSB filed on May 16, 2005. HOLLAND & HART Ms. Elaine Wolfe September 2, 2005 Page 2 Please note that the Registration Statement and prospectus have been revised significantly. Originally, the Company anticipated registering secondary reoffer transactions pursuant to General Instructions I.B.3 of Form S-3. Based upon our review and analysis of the proposed transactions, the Company has now determined to offer its securities pursuant to General Instructions I.B.4 of Form S-3. As an OTC bulletin board company, Broadcast International is not eligible for secondary transactions under General Instructions I.B.3 of Form S-3, but is eligible for a primary offering under General Instructions I.B.4 of Form S-3. Accordingly, we have made the necessary modifications to the prospectus and have eliminated all selling shareholder information. Please also note that, with respect to certain accounting comments, the Company submitted a pre-filing clearance with the Office of the Chief Accountant of the Commission (File No. 0-13316) dated June 29, 2004, a copy of which is attached hereto as Exhibit 2. The Company discussed the various matters contemplated by Exhibit 2 with the Chief Accountant's Office and then resubmitted the pre-filing clearance by letter dated September 21, 2004, a copy of which is attached hereto as Exhibit 1. Subsequent to September 21, 2004, the Office of the Chief Accountant contacted the Company and acknowledged receipt of the submission and indicated it would contact the Company if there were any further questions or comments. To date, the Company has received no further contact from the Chief Accountant's Office. Exhibits 1 and 2 address many of the accounting comments, as indicated below. Form S-3 - -------- General - ------- 1. Please revise Part I of your prospectus to include all the information required by Item 510 of Regulation S-B. In this regard, we note your disclosure in Part II. Response: We have included the requested information required by Item 510 of Regulation S-B. Cover Page - ---------- 2. The cover page should contain only information required by Item 501 of Regulation S-B or that is key information. In this connection we note the last sentence of the last paragraph which contains references to Exchange Act rules and regulations, the import of which is not apparent and could be better explained in the Plan of Distribution section. HOLLAND & HART Ms. Elaine Wolff September 2, 2005 Page 3 Response: We have complied with your request and revised the cover page accordingly. 3. Please highlight the cross-reference to your risk factors section by prominent type or in another manner. See Item 501(a)(5) of Regulation S-B. Response: We have highlighted the risk factor cross-reference in accordance with your request. 4. We note your use here and throughout the prospectus of the term "Company" to refer to Broadcast International Inc. The term "Company" is a vague, abstract term. Rather than use plain vanilla "Company" to refer to your company, please revise to use your actual company name or a shortened version of it. Response: The term "Company" has been replaced throughout the prospectus with the term "Broadcast International." 5. On the cover page and throughout the document, please eliminate the use of defined terms like those in parentheses and quotation marks. In this connection we note the definition of Company and Selling Shareholders. These terms appear to be clear from the context of the document the first time they are used. Response: We have removed all defined terms. Available Information, page 2 - ----------------------------- 6. Please move this information so that it appears elsewhere in the prospectus after the risk factors. The forepart of the prospectus should only include the cover page, a brief summary and the risk factors. Response: The "Available Information" and "Incorporation of Certain Documents by Reference" sections have been moved to the end of Part I of the prospectus. We have renamed the "Available Information" section. 7. Please revise to note that the public reference room has relocated to Room 1580, 100 F Street N.E., Washington, D.C. 20549. HOLLAND & HART Ms. Elaine Wolff September 2, 2005 Page 4 Response: The new address for the public reference room has been noted in the prospectus. Incorporation of Certain Documents by Reference, page 2 - ------------------------------------------------------- 8. Please revise to specifically include your Form 8-K filed on July 1, 2005. Response: We have added the Form 8-K filed on July 1, 2005 to the list of documents incorporated by reference into the prospectus. Prospectus Summary, page 3 - --------------------------- 9. Please revise to clarify the nature of your services. It is not clear from your disclosure exactly what products and services you provide in connection with managing "networks of thousands of video receiving locations for its enterprise clients" and managing a "library of complex compression-decompression algorithm (codec's) in order to optimize streaming and static media." Further, please revise to clarify that you are still in the process of developing CodecSys and when you expect to commence sales of the CodecSys product or license its technology. Finally, it is not clear what you mean by the statement in the third paragraph that you were faced with "last mile issues." Response: We have revised substantially the summary disclosure regarding Broadcast International's services to conform more closely to other similar disclosures in the Company's periodic reports. We believe the revised disclosure provides greater clarity pursuant to your request. 10. Please revise so that the meaning of a term is clear from the context. For example, the meanings of the terms "compression-decompression algorithms" and "media compression technology" are not clear. Response: We have revised the meanings and disclosed the information in more understandable language in accordance with your request. HOLLAND & HART Ms. Elaine Wolff September 2, 2005 Page 5 11. Please avoid the use of jargon. For example, please revise the use of the term "solution." Its use implies that a problem is being solved when in fact none has been presented. Instead of using the term solution, describe your actual products and services. Please revise throughout your filing as necessary. Response: We have removed references to the term "solution" in the Prospectus Summary and have more accurately described the Company's products and services. 12. Please include the following in your summary: . your auditors have raised substantial doubt about your ability to continue as a going concern; . your securities are penny stock; . you have incurred losses since inception; and . quantify your total accumulated deficit. Response: We have included the requested information in the Prospectus Summary. 13. Please revise your summary to include a brief discussion of the Securities Purchase Agreement that you entered into with the institutional funds. Response: We have included a brief discussion of the Securities Purchase Agreement in the Prospectus Summary. 14. Please revise to disclose when the institutional funds may convert their notes, warrants and AIRs into shares of your common stock. Response: We have included the requested disclosure. 15. We note that Section 3.15 of the Security Purchase Agreement contains negative covenants which will limit Broadcast's ability to create security interests, change management, declare dividends, make loans or incur debt. Please describe these restrictions here, in the Management's Discussion and Analysis, risk factors section and in the description of the terms of the convertible debenture. HOLLAND & HART Ms. Elaine Wolff September 2, 2005 Page 6 Response: We have included disclosure of the required restrictions in the Prospectus Summary and Risk Factors sections of the prospectus. Risk Factors, page 3 - -------------------- 16. Please revise to include a risk factor that discusses the possible dilutive effect the issuance of securities pursuant to the Securities Purchase Agreement will have on your shareholders. Response: We have included a risk factor in response to your request. 17. Please revise the introductory paragraph to omit the reference to additional risks that are not described in the prospectus. You must disclose all material risks. Response: This language has been removed. 18. Many of your risk factors state that you can provide "no assurance" of certain facts or outcomes. The real risk is not a lack of assurance, but rather that, for example, third parties will claim infringement by you (page 5). Please review all risk factors with this comment in mind and revise to specifically state each risk. Response: We have revised each risk factor in accordance with your request. 19. Some of your risk factors appear generic in that they could apply to any issuer in your industry or are presented in a manner that does not show why they are risks to you. Either delete such boilerplate risks or revise both the subtitle and disclosure to address how they specifically apply to you. For example, refer to the risk factor "General Economic and Other Conditions" on page 4. Response: We have revised the risk factors in accordance with your request. Competition and Rate of Technological Change, page 4 - ---------------------------------------------------- 20. Please revise to quantify the number of competitors in each of your product segments. HOLLAND & HART Ms. Elaine Wolff September 2, 2005 Page 7 Response: We have included the requested disclosure. Funding Requirements, page 4 - ---------------------------- 21. In order to give depth to your risk factor, please revise to quantify the additional funds needed to continue your planned operations. In this connection, we note your disclosure in your recent 10-QSB that you experienced negative cash flow of approximately $125,000 per month during the year ended December 31, 2004 and your development plan calls for additional expenditures of approximately $100,000 per month to complete your identified development initiatives. We further note your statement that the senior secured convertible note entered as of May 12, 2005 will satisfy your short term liquidity needs. Response: We have revised the risk factor in accordance with your request. Reliance of Significant Customers, page 4 - ------------------------------------------ 22. Please revise to disclose whether you have any contracts with the customers upon which you relied for 53% of your revenues. In this connection, we note from your 10-QSB that your contract with one of your largest customers was set to expire on May 31, 2005 and that you expected revenue from this customer to be significantly reduced beginning June 1, 2005. Please revise to include disclosure with respect to this customer and the percentage of revenues that this customer represented. Response: We have included the requested disclosure. Absence of Dividends, page 4 - ---------------------------- 23. Explain why the fact that you do not intend to pay dividends makes this offering speculative or risky. Alternatively, you may delete this risk factor. Response: Please see the revised risk factor. HOLLAND & HART Ms. Elaine Wolff September 2, 2005 Page 8 Use of Proceeds, page 7 - ----------------------- 24. Please revise to disclose the restrictions on the use of proceeds received under the Securities Purchase Agreement set forth in section 2.1(aa) of that agreement. Response: We have included the requested disclosure. Selling Shareholder, page 8 - --------------------------- 25. Please revise to provide all the information required by Item 507 of Regulation S-B. For example, we note that you list Stonegate Securities as a selling shareholder, however, you do not provide the corresponding disclosure. Please advise or revise. Response: We have removed all information regarding selling shareholders. Please note the revisions to the prospectus identified above in the third paragraph of this letter. 26. Refer to the penultimate sentence in your description of the Streamware Issuances on page 7. Please revise to explain what you mean by "certain technology license agreements were amended to give the Company increased ownership rights to the Company's CodecSys technology." Also, please revise here and throughout to quantify your ownership in CodecSys. Response: Please see our response to comment number 25 above. 27. Please revise to identify the natural persons that control each of the selling stockholders. Additionally, please identify any selling shareholder that is a registered broker-dealer or an affiliate of a registered broker-dealer. Response: Please see our response to comment number 25 above. 28. If any selling shareholders are affiliates of broker-dealers, please provide an analysis supporting your position that the resale of securities by affiliates of broker-dealers is not an indirect primary offering. Your analysis should address the following points: HOLLAND & HART Ms. Elaine Wolff September 2, 2005 Page 9 . how long the selling shareholders have held the securities, . the circumstances under which the selling shareholders received the securities, . the selling shareholders' relationship to the issuer, . the amount of securities involved, . whether the sellers are in the business of underwriting securities, and . whether under all the circumstances it appears that the seller is acting as a conduit for the issuer. Assuming the resale of securities by affiliates of broker-dealers is not an indirect primary offering, you must clearly state in your prospectus: . the seller purchased in the ordinary course of business and . at the time of the purchase of the securities to be resold the seller had no agreements or understandings, directly or indirectly, with any person to distribute the securities. Response: Please see our response to comment number 25 above. 29. Please revise to provide a discussion of the services Stonegate Securities provided in connection with the sale of the convertible notes. Response: Please see our response to comment number 25 above. Description of Company Capital Stock, page 13 - --------------------------------------------- 30. Please revise to provide a detailed discussion of the material terms of the Senior Secured Convertible 6% Notes issued to the institutional funds. For example, but not limited to, the payment amounts, payment dates for interest and principal under the indebtedness, and maturity date. Also, provide the material terms of the additional investment rights. Response: Please refer to the additional disclosure of these notes and additional investment rights in the Prospectus Summary and the Risk Factors sections. 31. Please revise to provide a detailed discussion of the material terms of the warrants granted to the institutional funds and Stonegate Securities, Inc. HOLLAND & HART Ms. Elaine Wolff September 2, 2005 Page 10 Response: Please see our response to comment number 30 above. Part II - ------- Item 16. Exhibits - ------------------ 32. Please revise to include all the exhibits required by Item 601 of Regulation S-B. If you are incorporating the exhibits by reference, revise the exhibit table to indicate the file number of the registration statement and the date filed for each exhibit that is incorporated from a previous filing. Response: We have revised the exhibit list in accordance with your request. 33. We note that you have filed the agreements relating to the Security Purchase Agreement with your Form 8-K filed on May 16, 2005. We also note that the agreements have not been executed. Please file executed copies. Response: Executed copies will be filed either with the next Quarterly Report on Form 10-QSB or as an amendment to the previously filed Current Report on Form 8-K. Form 10-KSB/A for year ended December 31, 2004 - ----------------------------------------------- Form 10-KSB - ------------ Item 6 - Management's Discussion and Analysis or Plan of Operation - ------------------------------------------------------------------ Operating Expenses, page 15 - --------------------------- 34. We note that the co-founders of IDI returned approximately 6,098,000 shares of IDI common stock in exchange for certain assets and obligations of the parties of approximately $210K. Please tell us how this transaction was recorded in your financial statements and refer us to the GAAP literature that supports your conclusion. HOLLAND & HART Ms. Elaine Wolff September 2, 2005 Page 11 Response: The entries to record this transaction were as follows: Debt Credit -------- -------- Payable Due IDI Co-Founders $210,000 Research and Development Expense $210,000 The $210,000 due to the co-founders was part of the $300,000 obligation of Broadcast International included in a promissory note as part of a stock purchase agreement with the co-founders. The stock purchase agreement was not completed due to the less than anticipated value of the IDI technology by way of an arms-length settlement with the co-founders. Note 1- Organization and Basis of Presentation, page F-7 - -------------------------------------------------------- 35. Refer to the reverse acquisition that occurred on October 1, 2003. Advise us how you complied with Item 304 (a)(1) of Regulation S-B as it relates to reporting a change in principal auditors. Response: The principal auditor of the SEC reporting legal entity did not change. Because Tanner LC had been the auditor of Laser Corporation and was continuing as the independent auditor of the same entity, the Company believed there was no "change" to report. The auditors for BI Acquisitions, Inc., Haynie and Company, were not registered to perform audit work for publicly traded companies. Consequently, management of BI Acquisitions, Inc. determined to continue the engagement of Tanner. The Company recognizes, however, the reverse acquisition treatment and "change" in the auditor for BI Acquisitions, Inc. The Company will include a revised disclosure in its financial statement footnotes to this effect or file a Current Report on Form 8-K reflecting the auditor transition in October 2003 if the staff recommends either such action is prudent at this time. 36. We note that the Company's consolidated financial statements include the operations of IDI from May 18, 2004 through December 31, 2004. We also note from your disclosure on page F-11 that you held a 60% majority voting interest in IDI since the commencement of the April 2003 stock purchase agreement. Advise us on how IDI was accounted for in the Company's financial statements prior to May 18, 2004 and your basis in GAAP for your accounting treatment. Response: See Exhibit 2, Background - IDI and Exhibit 1, Questions 2 and 3. 37. In the fifth paragraph you state that you accounted for the transaction with IDI as a purchase. Advise us what consideration was given to providing financial statements pursuant to Item 310(c) of Regulation S-B. In addition, advise us how you complied with the disclosure requirements in paragraph 54 of SFAS 141. HOLLAND & HART Ms. Elaine Wolff September 2, 2005 Page 12 Response: IDI was an unaudited entity with no significant sales and very few physical assets. The Company maintains that providing proforma information in the footnotes would not be meaningful, significant or material for the period from January 1 to the date of the transaction or the prior year. Note 2 - Significant Accounting Policies - ----------------------------------------- Patents, page F-8 - ----------------- 38. Advise us to why no amortization expense relating to the patents on the CodecSys technology was recognized for the year ended December 31, 2004 and for the period ending March 31, 2005 within Form 10-QSB. In addition, provide your basis for using a 15 year life in light of your disclosures on page F-13 that CodecSys is an unproven technology with uncertainty regarding whether the technology will be commercially sustainable. Response: Broadcast International has filed several patents in the United States and foreign countries since obtaining the rights to the technology. To date, only Singapore has granted patent rights. The Company is in the final stages of patent registration with two other foreign countries and expects to receive registration status in the immediate future. While the Company is unsure whether it can develop the technology in order to obtain the full benefits, the Company believes that the patents themselves hold value for at least the amount reflected in the balance sheet and could be sold to those entities with more resources to complete the development. Accordingly, the Company has assigned a 15 year life consistent with the life of patent. The amortization of the Singapore patent was not recorded in the first quarter. Amortization on the Singapore patent (as it is the only patent granted) would be $80 and was not booked as it was immaterial. Revenue Recognition, page F-10 - ------------------------------- 39. Refer to the Results of Operations Section within MD&A on page 14. We note that revenue within fiscal year 2004 consisted of sales of equipment, license fees, and installation and service revenue. For each revenue stream, advise us how your revenue recognition policy complies with SAB Topic 13A3 and EITF 00-21. Specifically address how you account for the one-time revenues generated from the installation of satellite receivers and the timing in which these amounts are recognized when you are obligated to provide additional monthly services. Response: For revenue recognition purposes, Broadcast International's customer base can be divided into three groups as shown below: HOLLAND & HART Ms. Elaine Wolff September 2, 2005 Page 13 - ------------------------------------------------------------------------------ Equipment & License, Installation Service & Total Sales Other Fees Revenue - ---------------------------------------- ------------- ----------- ----------- Client Group 1 - No Equipment Sales 0 2,510,430 2,510,430 Client Group 2 - Only Equipment Sales 1,333,852 0 1,333,852 Client Group 3 - Combined Services 303,374 1,238,001 1,541,375 - ---------------------------------------- ------------- ----------- ----------- TOTAL 1,637,226 3,748,431 5,385,657 - ---------------------------------------- ------------- ----------- ----------- Customer A 69,129 780,000 849,129 Customer B 18,090 38,025 56,115 Customer C 216,154 419,976 636,130 - ---------------------------------------- ------------- ----------- ----------- TOTAL 303,374 1,238,001 1,541,375 - ---------------------------------------- ------------- ----------- ----------- Group 1 represents customers that require no equipment to be installed or provided by Broadcast International. Revenue for customers in this group with service agreements over multiple periods is recognized evenly over the length of the agreement. Group 2 represents customers with no long-term service agreements with revenue recognized as individual sites are installed or as projects are completed. Group 3 represents customers with on-going service agreements where equipment has been sold or installed. In all cases, any equipment provided by Broadcast International was added to an existing network and immediately became the property of the client. Customer A provides its own equipment and manages the content and use of its own network. Broadcast International provides installation coordination and help desk services for a contracted amount. On-site visits by a technician are additional charges. In accordance with EITF 00-21 and SAB Topic 13A3, the Company has accounted for the installation coordination and help desk services and the on-site visits as separate units of accounting as they 1) each have value on a standalone basis as Broadcast International sells these items separately, and 2) there is objective and reliable evidence of the fair value for each separate unit of accounting. Revenue for the contracted amount (installation coordination and help desk services) has been recognized evenly over the contracted period, and the individual site visits have been recognized in the period they occurred. Broadcast International provides equipment and installation, uplink and network management for Customer B. In accordance with EITF 00-21 and SAB Topic 13A3, the Company has accounted for the equipment and installation, and the uplink and network management as separate units of accounting as they HOLLAND & HART Ms. Elaine Wolff September 2, 2005 Page 14 1) each have value on a standalone basis as Broadcast International sells these items separately, and 2) there is objective and reliable evidence of the fair value for each separate unit of accounting. Revenue is recognized and billed to the client on a broadcast by broadcast basis for the uplink and network management services, and individual site installations (equipment and installation) have been recognized in the period they occurred. Customer C is a retailer with approximately 1,200 owned stores within the United States. Broadcast International had a 2-year contract with Customer C with an initial term that expired on December 31, 2004. Because the contract term expired in 2004, the Company believes all revenue associated with Customer C would be recognized in 2004. On December 14, 2004 the customer signed an extension for one year expiring on December 31, 2005. This client broadcasts corporate programming from its studio at the corporate headquarters. The studio and individual site equipment were installed by the provider prior to Broadcast International. Broadcast International provides uplink, network management and production assistance, as well as individual site coordination for service and installation for a contacted amount. On-site visits by a technician are additional charges. Of the $216,154 listed above as installation and equipment sales, approximately $31,326 was for studio equipment (equipment only) for the customer's corporate headquarters, which was unrelated and outside the scope of the services agreement with the customer. The balance of the revenue included in equipment and installation consisted of $75,510 for new installations (equipment and labor) and $109,318 (equipment and labor) for repair parts and maintenance for existing sites and site-moves associated with the relocation of customer stores. All new site installations immediately become the property of the customer and all on-site visits were performed by independent third-party technicians with the associated costs recognized in the same periods as the revenue. In accordance with EITF 00-21 and SAB Topic 13A3, the Company has accounted for the installation coordination and help desk services and the on-site visits as separate units of accounting as they 1) each have value on a standalone basis as Broadcast International sells these items separately, and 2) there is objective and reliable evidence of the fair value for each separate unit of accounting. Revenue for the contracted amount (uplink, network management and production assistance, as well as individual site coordination for service and installation) has been recognized evenly over the contracted period, and individual site visits have been recognized in the period they occurred. HOLLAND & HART Ms. Elaine Wolff September 2, 2005 Page 15 Note 5 - Investment in Interact Devices, Inc (IDI), pages F-11- F-13 - -------------------------------------------------------------------- Streamware Solutions AB, page F-12 - ---------------------------------- 40. We note that you have issued stock and stock options to Streamware Solutions AB, which resulted in a research and development expense of approximately $10 million. Explain to us how the settlement or renegotiation of certain license agreements meets the definition of research and development under SFAS 2 and FIN 4. In addition, please advise us how you determined the fair value of the equity instruments issued and your consideration of SFAS 123 in determining these values. Response: See Exhibit 2, Background-Streamware and Exhibit 1, Questions 4, 5 and 6, for background information and also how Broadcast International considered SFAS 123 and used the Black Scholes option pricing model to compute the value of the options. Also, in considering SFAS 2 and FIN 4, Broadcast International believes that the technology acquired requires further development to be economically viable, and that the technology appears to meet the definition of typical R&D activities listed in SFAS 2 paragraph 9. In SFAS 2 paragraph 11c (and as referred to in FIN 4 paragraph 5), "the costs of intangibles that are purchased from others for a particular research and development project and that have no alternative future uses (in other research and development projects or otherwise) and therefore no separate economic values are research and development costs at the time the costs are incurred." As the technology is unproven and uncertainty exists regarding whether the technology will be commercially sustainable, Broadcast International believes that the most appropriate treatment of the R&D amount is to expense it. Assumption and Consolidation of IDI, page F-12 - ---------------------------------------------- 41. We note that the Company issued to the creditors of IDI approximately 111,842 shares of common stock of the Company, valued at approximately $682,222. In relation to this transaction and any other costs incurred by your Company for the settlement of IDI's bankruptcy proceedings, tell us the consideration given to SFAS 15. Response: Broadcast International does not believe SFAS 15 applies. Broadcast International believes that, as described in Exhibits 1 and 2, unproven technology was acquired by purchasing IDI and the technology it held. The liabilities assumed as part of the bankruptcy proceedings were considered in the purchase accounting of the technology, and the subsequent payment of $682,222 of the HOLLAND & HART Ms. Elaine Wolff September 2, 2005 Page 16 liabilities with 111,842 shares of common stock were accounted for as a debit to assumed liabilities and a credit to common stock and additional paid in capital, or a non-cash payment of a portion of the assumed liability. IDI Co-Founders Settlement, page F-13 - -------------------------------------- 42. Advise us why you characterized the cash payment of $90K and issuance of stock options of $1.1 million to the co-founders of IDI as research and development in process. To the extent these amounts were settlements related to the bankruptcy proceedings explain how this expense meets the definition of R&D in SFAS 2. Response: The cash and stock options were a cost to acquire the IDI technology; please refer to our response to comment number 40 above. Summary, page F-13 - ------------------ 43. Given the entire purchase price of IDI and related transactions with Streamware was allocated to in-process research and development, tell us what consideration was given to disclosing the following: . Fair value of the research and development project and the appraisal method used to value the CodecSys project. Note that under FIN 4 and SFAS 141 the amount charged to expense for research and development should be based on the fair value of the acquired R&D. . Nature, timing and estimated costs of the efforts necessary to complete this technology and the anticipated completion dates. . Whether the technology has alternative future use. . Reconciling your discussion to clarify how you determined the CodecSys project represents research and development activities given you have generated sales from this product. Response: . Much of the value of the recorded research and development expense is based on the fair value of the shares of common stock paid based on the closing price on the date of the transaction, and also the fair value of the common stock options granted from Black Scholes option-pricing model calculations based on assumptions used as shown in Exhibit 2, Questions 4, 5 and 6. The Company has used the fair value of equity instruments (and other amounts, such as liabilities assumed) paid for the technology as the basis for the fair value of the acquired R&D, as the fair value of the equity instruments appears to be more readily calculated amount than the fair value of the acquired R&D. HOLLAND & HART Ms. Elaine Wolff September 2, 2005 Page 17 . The nature, timing and estimated costs of the efforts necessary to complete this technology and the anticipate completion dates are not currently known. The Company has recently raised $3,000,000 in capital, in most part to further development of the technology. . In considering SFAS 2 and FIN 4, and whether or not any alternative future uses exist for the technology, Broadcast International believes that the technology requires further development to be economically viable. As the technology is unproven and uncertainty exists regarding whether the technology will be commercially sustainable, Broadcast International believes that the most appropriate treatment of the R&D amount is to expense it. Broadcast International believes that any future uses of the technology are uncertain and do not rise to a sustainable enough use to capitalize the amounts. The Company does not believe the technology has reached feasibility and therefore all costs have been expensed. . The amount of sales generated to date from the CodecSys technology has been minimal and sporadic, as the technology is in a limited useful state. Additionally, the Company is still evaluating the capabilities and applications for the future. It is certain that additional development costs will be incurred before the technology will be available in a product form or ready for commercial licensing. Note 6 - Long Term Obligations, page F-14 - ----------------------------------------- Convertible Line of Credit Promissory Note, page F-14 - ----------------------------------------------------- 44. Tell us the consideration given to providing the disclosures required by paragraph 7 of EITF 98-5 in accounting for the beneficial conversion feature of the Company's convertible line of credit. In addition, explain why you have not accrued the 6% interest expense related to the note. Given the conversion is outside of your control, tell us your basis in GAAP for not recording a liability for this interest. Response: EITF 98-5 paragraph 7 states that "the issuer should disclose in the footnotes to its financial statements the terms of the transaction, including the excess of the aggregate fair value of the instruments that the holder would receive at conversion over the proceeds received and the period over which the discount is amortized." Broadcast International inadvertently omitted the HOLLAND & HART Ms. Elaine Wolff September 2, 2005 Page 18 disclosure in its footnotes of the excess of the aggregate fair value of the instruments that the holder would receive at conversion. This information will be incorporated into and disclosed in future financial statements filed with the Commission. Please inform us as to whether this will be adequate or if you require further action. The discount on the convertible line of credit and amortization of the discount was not recorded; the value of the beneficial conversion feature was expensed immediately. The Company believes the difference in immediately expensing the beneficial conversion feature, and recording a discount that is amortized is an immaterial amount to the financial statements taken as a whole. Please inform us as to whether this is adequate or if you require further action. Regarding the 6% interest rate that has not been recorded into expense and an accrued liability, Broadcast International has referred to SFAS 5, paragraph 3 to support its position. Broadcast International believes that the likelihood of the payment of accrued interest is remote. The $1.00 conversion price of the debt is below the market price of the common stock of Broadcast International by approximately $2.00-$4.00 over time, and has always been "in-the-money" by a substantial amount. Additionally, the two note holders have consistently converted debt obligations in the past and have indicated their preference to convert the remaining debt in the future. Based upon the agreement, at the time of conversion, any accrued interest is forgiven. Based on the historical experience, the conversion rate that has always been "in-the-money" by a substantial margin, and the indicated preference of the note holders to continue to convert the convertible line of credit into shares of common stock, Broadcast International believes that any accrued interest and payment has a remote possibility and is therefore not accrued. The Company believes that it has responded fully to the staff's comments. If, however, you have any questions concerning any of the foregoing responses or desire additional information, please do not hesitate to call me at (801) 595-7808. Sincerely, /s/ David G. Angerbauer David G. Angerbauer of Holland & Hart LLP Enclosures cc: Mr. Rodney M. Tiede Mr. Reed L. Benson, Esq. Mr. Randy Turner EXHIBIT 1 September 21, 2004 Mr. Robert K Herdman Chief Accountant Office of the Chief Accountant Securities & Exchange Commission 450 5th Street, N.W., Washington, D.C. 20549-1103 Fax: 202-942-9656 E-mail: oca@sec.gov Re: Broadcast International, Inc., File No. 000-13316- Pre-Filing Clearance regarding the proposed recording of shares of the company's common stock issued for 1) patent-pending technology license rights, and 2) for shares of preferred stock in another company. NOTE: This is a follow up response to our letter dated June 29, 2004. Based on conversations with the SEC, further accounting literature we researched, and additional information and analysis, we now believe that the proper accounting for the stock and stock options issued to Streamware transaction is treatment as a contract alteration and current expense. QUESTION TO THE SEC / OCA: Do you agree with the treatment of the stock and stock options issuances as a contract alteration as presented in this letter? Supplemental information following telephone conference of August 9, 2004 regarding the above. Additional information was requested concerning the following issues. 1. Is Interact Devices, Inc. ("IDI") a Business as defined by EITF 98-3? Response. IDI has never had any more than minimal revenues from sale of products or from any other source. It has only been a technology development company with the goal of incorporating its technology into products that could be sold to businesses and consumers. To date it has not been able to complete commercially deliverable products. We therefore consider IDI not to be a business within the definition included in EITF 98-3. Step 1 under EITF 98-3 - the set of items obtained includes an intangible asset (technology) Step 2 - The set does not include: employees, business processes, ability to access customers (no commercially available products yet) Step 3 - Broadcast International (BI) concludes that the missing elements taken as a whole are more than minor because they cannot be easily obtained and would require significant cost to obtain. Conclusion - The set is not able, on a stand-alone basis, to continue normal operations and sustain a revenue stream and, therefore, is not a business. 2. Why wasn't IDI consolidated with Broadcast International, Inc after the April 2003 acquisition of voting control of IDI? Response. In April 2003, BI entered into an agreement to purchase approximately 25% of the issued and outstanding stock of IDI from three founders of IDI. At that time BI owned approximately 7% of the IDI outstanding stock. In addition to the stock being purchased, BI acquired voting rights for a finite period of two years to the stock of the founders not purchased, which gave BI the right to vote approximately 57% of the issued and outstanding common stock even though it only actually owned 32%. After the two year period, the voting rights on the shares not owned would be returned to the original owners, unless BI had opted to actually purchase the additional 25% of the stock. IDI was also in Chapter 11 bankruptcy. Control was deemed to be temporary and therefore IDI was not consolidated. From that time until the completion of the IDI bankruptcy, BI never actually owned more than 50% of the issued and outstanding common stock of IDI. 3. Was Fresh Start Accounting used for IDI? If it was not used, should it have been used? Response. During the bankruptcy all accounting for IDI was subject to the Bankruptcy court and all reports were properly and timely filed. Following the Bankruptcy Court and creditor approval of the Plan of Reorganization as of May, 2004, fresh start accounting has been used and BI will roll forward the valuation of the assets as of that date (valuations were obtained just prior to IDI entering Chapter 11). Thus, the Company plans to use the rolled-forward valuation of IDI as the organizational value for IDI in using Fresh Start Accounting. Subsequent to May 2004, BI owned and controlled approximately 80% of the issued and outstanding stock of IDI and has included its operations in consolidated financial statements. 4. Why has the issuance of stock and stock options in exchange for the termination of Streamware Solutions, AB technology license rights been recorded as an expense? Response. The Company has taken the position that the issuance of stock and stock options in order to terminate certain of Streamware's license rights should be recorded as an expense because this transaction represents costs to terminate or alter the license rights contract. Also, we believe that to record the transaction otherwise could be misleading to a reader of the financial statements. The technology, which is the subject of the License and is referred to as CodecSys, was already owned and licensed in part by BI before the subject transaction took place. The termination merely cleared up a dispute as to certain geographical areas in the technology could be exploited and clarified other terms and conditions of the Streamware license. Further, treating the issuance of the stock as the acquisition of an intangible asset may give rise to write offs in the future related to the intangible asset. The current status of the CodecSys technology is that there have been only few sales of the products embodying the technology. There is a great deal of development that needs to be completed before any sales of the product can commence in a commercial fashion. Using accepted methods of evaluating the recoverability of an asset at BI's next audit at the end of the year would certainly result in an impairment write off of most, if not all, of the asset value at that time. At this time with the current funding of the Company there is no possibility that the Company will have sufficient resources to complete technology and product development to enable the Company to begin sales of products using the technology. At this time there is no certainty that the Company will ever be able to deliver enough sales to justify keeping an intangible asset on the books using standard valuation practices. With that in mind the Company has taken the position that it is most proper to expense transaction as a contract termination. 5. Does the reacquisition of contract rights from Streamware fall within EITF 04-1? Response. The Company does not believe that EITF 04-1 is applicable to the Streamware transaction because the Company does not believe that a business combination is involved. We believe that the Streamware transaction represents an alteration of existing license rights and not a business combination as we do not obtain any assets, liabilities, business processes or customers of Streamware in the transaction. The Streamware preferred stock that was acquired by the Company in this transaction appears to have little value. The most recent Streamware audited financial statements (as of the year ended August 31, 2003) indicated that Streamware has less than $75,000 in assets (other than its investment in IDI), limited revenues (less than $80,000) and liabilities in excess of $450,000. These facts lead us to believe that the Streamware stock held by the Company should not be valued and carried on the Company's balance sheet. Further, the substance of the transaction was the termination of the license rights, and the acquisition of the Streamware stock was merely a by-product of the transaction. EITF 04-1 appears to recommend that a business combination between two parties that have a preexisting relationship should be evaluated to determine if a settlement of a preexisting relationship exists. The Task Force observes that a business combination between two parties that have a preexisting relationship could be viewed as a multi-element transaction with one element being the business combination and the other element being the settlement of the preexisting relationship. However, as we do not believe that a business combination is involved, we do not believe that EITF 04-1 applies to the Streamware transaction. 6. Why didn't BI expense its original investment in IDI at the time of investment? Response. At the time that the initial investment was made in IDI, BI had no control over the use of the funds as it only purchased preferred stock in IDI which would have equated to approximately 7% of the voting stock of IDI. At the time that IDI filed bankruptcy, BI fully reserved the investment on the assumption that little if anything would come to the Company following the bankruptcy. 7. Summary of Accounting Treatment Stock Purchase and Option Grant Agreement Streamware purchased 187,500 shares of common stock at $2.00/share, and Streamware received 1,312,500 stock options Debit Credit ------- -------- Cash 375,000 General & Admin. Expense (1) 375,000 Common Stock 9,375 Additional paid in capital 740,635 General & Admin. Expense (2) 800,432 Additional paid in capital 800,432 (1) Represents the difference between the $2.00 per share purchase price and the $4.00 per share trading price on the date of purchase of the 187,500 shares. (2) Represents the value of the 1,312,500 options granted using the Black-Scholes formula on the date of grant. The options are exercisable at $4.50 per share of common stock, are immediately exercisable and expire two years after effective date (February 6, 2004). The Company used a 0 dividend yield, risk free interest rate of 1.28% as of February 6, 2004 (representing the one-year treasury constant maturity US government security interest rate obtained from http://www.federalreserve.gov/releases/h15/data/wf/tcm1y.txt), a volatility of 48.74%, and an expected life of one year. The fair value of these options was calculated as approximately $.61 each. A detailed calculation of this amount is available upon request. Stock Issuance and Option Grant Agreement The Company will issue to Streamware 1,000,000 shares of the Company's common stock as well a granting Streamware an option to purchase 1,500,000 shares of the Company's common stock at $4.50 over the next two years, immediately exercisable. The Company receives shares of Streamware preferred stock totaling 19.5% of the issued and outstanding shares of Streamware. Debit Credit ----------- --------- Investment in Streamware (19.5%) (6) 0 Expense (7) 9,052,587 Common stock (0.05 par value) (8) 50,000 Additional paid-in capital - value of stock (8) 5,950,000 Additional paid-in capital - value of options (9) 3,052,587 (6) Based upon the August 31, 2003 Streamware audited financial statements obtained by the Company (noted above), the Company has determined that no fair value appears to reside in the Streamware preferred shares. (7) As the shares of common stock and stock options issued to Streamware represent payment for a contract alteration, the Company believes that the appropriate accounting treatment is to expense the fair value of the consideration paid for the contract alteration. (8) Represents the fair value of the 1,000,000 shares of the Company's common stock issued to Streamware pursuant to the Stock Issuance and Option Grant Agreement. The Company valued the shares of common stock as of May 18, 2004, the date that the bankruptcy court confirmed the Debtor's Plan of Reorganization, using the closing stock price of $6.00 obtained from www.yahoo.com. (9) Represents the fair value, as calculated using a Black-Scholes option pricing model, of the 1,500,000 options to purchase the Company's common stock granted to Streamware pursuant to the Stock Issuance and Option Grant Agreement. The options are exercisable at $4.50 per share of common stock, are immediately exercisable and expire two years after effective date (May 18, 2004). The Company used a 0 dividend yield, risk free interest rate of 1.83% as of May 21, 2004 (representing the two-year treasury constant maturity US government security interest rate obtained from http://www.federalreserve.gov/releases/h15/data/wf/tcm1y.txt), a volatility of 52.09%, and an expected life of one year. The fair value of these options was calculated as approximately $2.04 each. A detailed calculation of this amount is available upon request. Assumption of IDI liabilities upon the June 17, 2004 acceptance of IDI's Debtors Plan of Reorganization, effective June 17, 2004 Debit Credit ------------- ------------ Investment in IDI subsidiary (approx) (3) 60,000 Technology / license rights (approx) (4) 1,471,862 Liabilities assumed by the Company from IDI (5) 1,066,773 Note receivable from IDI (3) 377,821 Accrued interest on IDI note receivable (3) 27,268 Additional paid-in-capital (approx) (3) 48,000 Minority Interest (approx) (3) 12,000 (3) The business valuation obtained prior to IDI's entry into Chap 11 bankruptcy was approximately $60,000. The Company plans to update this amount after finalizing the detail of any assets (computers, etc.) that were not transferred to the Company. The approximate minority interest in IDI is 20%. We further note that the Company's Note receivable from IDI and associated accrued interest was written off pursuant to the terms of the bankruptcy, and the Company will treat this cash forwarded to IDI as an additional investment in the technology. (4) We note that the majority of the fair value of this transaction is allocated to Technology / license rights as the Company is assuming IDI's liabilities pursuant to the Reorganization Plan in order to further assert its rights to the technology. Consistent with the provisions of SFAS No. 142, the Company will amortize this intangible asset over its finite life (associated patents pending), and also analyze the intangible for any impairment at December 31, 2004, the end of the Company's fiscal year. (5) Represents the liabilities assumed by the Company from IDI pursuant to the Debtor's Plan of Reorganization. A detail of these liabilities was approved by the bankruptcy court and is available upon request. SUMMARY Based on conversations with the SEC, further accounting literature we researched, and additional information and analysis, we now believe that the proper accounting for the stock and stock options issued to Streamware transaction is to expense them as a contract alteration. We hope that these responses can give you sufficient additional information to effectively guide us in the financial treatment described in our first letter. Thank you for your consideration of these issues. Sincerely, Broadcast International, Inc. /s/ Randy Turner Randy Turner Chief Financial Officer EXHIBIT 2 Broadcast International, Inc. 7050 Union Park Center #650 Midvale, UT 84047 Phone (801) 562-2252 Fax (801) 562-1773 June 29, 2004 Mr. Robert K. Herdman Chief Accountant Office of the Chief Accountant Securities & Exchange Commission 450 5th Street, N.W. Washington, D.C. 20549-1103 Fax: 202/942-9656 E-mail: oca@sec.gov Re: BROADCAST INTERNATIONAL, INC., File No. 000-13316 - Pre-Filing Clearance regarding the proposed recording of shares of the Company's common stock issued for 1) patent-pending technology license rights, and 2) for shares of preferred stock in another company. BROADCAST INTERNATIONAL, INC. ("Broadcast" or "the Company") submits this notification of proposed recording of shares of the Company's common stock issued for 1) the acquisition of patent-pending technology and 2) shares of preferred stock in another company, for SEC pre-filing clearance review for the Company's regular reporting requirement for the period ended June 30, 2004 and all subsequent periods. Background - IDI In November of 2001 the management of the Company was introduced to Interactive Devices, Inc. (IDI). IDI claimed to have a new patent-pending technology which involved using multiple codecs (encoding algorithms) in a single file to create audio and video files for playback. The advantage of using this technology was that files could be transmitted and displayed at higher than traditional quality at lower transmission rates. IDI named this technology Liquid Intelligence, and the Company now names this technology CodecSys. The Company in December 2001 began to obtain geographical exclusive market licensing rights from IDI for this technology. Additionally, as the Company made payments for these licensing rights to IDI, the Company obtained convertible, preferred stock in IDI. Between December 2001 and March 2003 the Company had paid IDI and aggregate of $1,725,000 for exclusive licensing rights to specific geographic areas and preferred stock. As of March 31, 2003 the Company had recorded the above transactions in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" with the allocation of Investment in IDI $400,000 and Intangible licensing rights $1,325,000. On the September 30, 2003 quarterly financial statements and pursuant to the IDI Chapter 11 bankruptcy filed in October 2003 (see below), the Company impaired the entire $1,725,000. IDI had limited revenues, negative working capital and equity and losses from operating activities. In March 2003, the management of IDI notified the Company that IDI had exhausted all of its operating capital and was in the process of shutting down until additional funds could be obtained. At that time IDI had accumulated approximately $1.5 million dollars in debt from vendors, employees and other creditors. This debt was in the form of notes, which had become due, unpaid wages due to current and former employees and vendor accounts payable. In April 2003, the Company entered into a Stock Purchase Agreement with the three principal shareholders (also acting as the senior management) of IDI in which the Company paid $300,000 to secure an option to purchase three million shares of stock (one million from each of the three principals) on or before August 20, 2004. Additionally, pursuant to a voting trust agreement, the voting rights of the three principals related to the principals' remaining stock of approximately 3,392,000 shares were assigned to the Company. Immediately following this event the three principals resigned from the Board of Directors and as officers of IDI. The Company, with the voting rights of the three principals and the stock it had purchased, held a majority interest in IDI. The Company filled the three vacant seats on the Board of Directors (two seats of the 5 person Board remained with non-Company individuals) and the senior management positions with members of the Company's management team. As the Company did not assume the liabilities of IDI until the confirmation and dismissal of the Chapter 11 bankruptcy noted below, the Company did not consolidate IDI until June 17, 2004. The Company recorded on April 2003 an additional $300,000 investment in IDI using the cost method, which was then impaired effective September 20, 2003 along with the $1,725,000 mentioned above. Prior to the Company taking over the management of IDI, all employees except for 4 technology engineers were terminated. The Company began funding the continued development of the technology in the form a note receivable from IDI, which was exchanged for IDI stock as part the Chapter 11 Plan of Reorganization noted below. In September 2003, legal actions were commenced relating to past due notes and unpaid wages and on October 23,2003 filed for Chapter 11 Federal Bankruptcy protection. A Debtor's Plan of Reorganization was prepared in which the Company agreed to satisfy the debts of IDI by issuing approximately 120,300 shares of common stock of the Company and approximately $336,500 in cash paid over a 4 yr period to the creditors of IDI. In exchange for satisfying the debts of IDI the Company received approximately 50,127,200 shares of common stock of IDI. After returning the 3,000,000 shares of IDI stock to the three principals of IDI (by not exercising its purchase option) the Company will have accumulated approximately 51,426,700 shares of IDI stock representing approximately 79% of the total issued and outstanding stock of IDI. On May 18, 2004 the Plan was confirmed and on June 17, 2004 the case was dismissed. Effective June 17, 2004, the Company consolidated IDI. Background - Streamware In April 2002, IDI entered into a Partner Agreement with Streamware Solutions, AB ("Streamware") a Swedish corporation, in which certain market licensing rights for Europe and Africa were granted to Streamware from IDI. In April 2003, when the management of the Company took over the management of IDI it was discovered that a possible conflict existed between the license rights IDI had granted the Company and the license rights IDI had granted Streamware. Given the financial condition of IDI, the Company felt it was in its best interest to negotiate a new agreement with Streamware to clarify each company's respective rights and to further ensure the Company's rights to the Liquid Intelligence / CodecSys technology. New agreements were signed on February 6, 2004, while IDI was in Chapter 11 Bankruptcy. All agreements between the Company and IDI and the Company and Streamware, other than the stock sale for $375,000 described below, became effective on June 17, 2004 (date of bankruptcy dismissal). The terms of the agreements are provided below. License Agreement-Streamware's previous rights to the technology extended to all of Europe and parts of Africa, and were greater than the current rights under the new license agreement. Under the new license agreement between IDI and Streamware, Streamware now has limited exclusive rights (essentially in Scandinavia and certain existing customers of Streamware) through July 1, 2006 and certain non-exclusive rights (the rest of the world) through June 2014 from IDI to the technology. Streamware has the option to extend the exclusive rights for an additional two year term, and the license agreement (essentially the non-exclusive rights) can be mutually extended for an additional ten year term. Payment from Streamware to IDI (consolidated into the Company beginning June 17, 2004) is based upon sales activity (royalty payments). Stock Issuance and Option Grant Agreement- The Company will issue to Streamware 1,000,000 shares of the Company's common stock as well a granting Streamware an option to purchase 1,500,000 shares of the Company's common stock at $4.50 at any time during the next two years, immediately exercisable. The Company is to receive shares of Streamware preferred stock totaling 19.5% of the then issued and outstanding shares of Streamware. Stock Purchase and Option Grant Agreement- Shareholders of Streamware had the right to purchase up to 250,000 shares of the Company's common stock at the per share price of $2.00 per share, additionally, the Streamware shareholders also received options to purchase common shares of the Company common stock at the exercise price of $4.50 per share, at the rate of seven times the purchased shares (for each share purchased, the Streamware shareholders received options to purchase seven shares of common stock). On March 4, 2004, the shareholders purchased 187,500 shares for $375,000 and were granted 1,312,500 stock options. The Stock Issuance and Option Grant Agreement was contingent upon the Debtors Plan of Reorganization being accepted by the bankruptcy court. Therefore, as of March 31, 2004, the only financial transaction in the Company's form 10QSB was the shares of common stock purchased by Streamware. The Company had received $375,000 from the Streamware shareholders for the 187,500 shares of Company stock associated with the Stock Purchase and Option Grant Agreement and had included this transaction in the Company's for 10QSB for the period ending March 31, 2004 as follows: Previously reported Debit Credit ------------ ----------- Cash 375,000 General & Admin. Expense (1) 375,000 Common Stock 9,375 Additional paid in capital 740,635 General & Admin. Expense (2) 800,432 Additional paid in capital 800,432 (3) Represents the difference between the $2.00 per share purchase price and the $4.00 per share trading price on the date of purchase of the 187,500 shares. (4) Represents the value of the 1,312,500 options granted using the Black-Scholes formula on the date of grant. The options are exercisable at $4.50 per share of common stock, are immediately exercisable and expire two years after effective date (February 6, 2004). The Company used a 0 dividend yield, risk free interest rate of 1.28% as of February 6, 2004 (representing the one-year treasury constant maturity US government security interest rate obtained from http://www.federalreserve.gov/releases/h15/data/wf/tcm1y.txt), a volatility of 48.74%, and an expected life of one year. The fair value of these options was calculated as approximately $.61 each. A detailed calculation of this amount is available upon request. As noted below in the Proposed Accounting Entries section, it appears that instead of debiting General & Admin. Expense for $1,175,432 for this transaction, that the Company should have debited an intangible asset of technology / licenses. The Company had initially considered that the shares of common stock issued below market value and the related options to purchase shares of common stock were considered additional compensation to Streamware for rescinding the previous Partner Agreement and entering into a new License Agreement. However, based on further review, it appears that the Company obtained additional technology and license rights pursuant to the rescinded Partner Agreement and new License Agreement. As such, it appears that the Company should have recorded the $1,175,432 as an intangible asset. See Propose Accounting Entries section below for the proposed restatement entry for the March 31, 2004 quarterly filing. Authoritative pronouncements Pursuant to SFAS No. 142, paragraph 9, an acquired intangible asset shall be initially recognized and measured based on its fair value. Pursuant to SFAS No. 141 paragraphs 5-6, the fair value for the acquired patent-pending technology appears to be properly based on the fair value of consideration given by the Company, namely the shares of common stock and options to purchase shares of common stock, as the fair value of the consideration given appears to be more readily determinable than the fair value of the consideration received by the Company, or the technology. As the technology has patents-pending associated with it, pursuant to SFAS No. 142 paragraphs 11-13 and Appendix A, it appears that the technology has a finite useful life over which the fair value of the technology and associated patents should be amortized. The Company has assigned a residual value of $0 to the technology. Further, pursuant to paragraphs 14 and 15 of SFAS No. 142, the Company will annually review the technology for potential impairment and the potential need to revise the remaining useful life of the unamortized portion of the technology, or more frequently than on an annual basis if circumstances indicate a potential impairment. Proposed accounting entries Quarter ended March 31, 2004 Restatement Entry Based on the facts and circumstances, and the authoritative pronouncements, the Company proposes the following restatement adjustment as of March 31, 2004 for the issuance of common stock and options for increased license rights to the technology: Debit Credit ---------- ----------- Technology / license rights 1,175,432 G&A expense 375,000 G&A expense 800,432 Quarter ended June 30, 2004 entries Based on the facts and circumstances, and the authoritative pronouncements, the Company proposes the accounting entries for the February 6, 2004 agreements, and the assumption of IDI liabilities upon the June 17, 2004 acceptance of IDI's Debtors Plan of Reorganization, effective June 17, 2004 to be included in the June 30, 2004 quarterly filing: Debit Credit -------------- ------------ Investment in IDI subsidiary (approx) (3) 93,125 Technology/license rights (approx) (4) 1,471,862 Liabilities assumed by the Company from IDI (5) 1,066,773 Note receivable from IDI (3) 377,821 Accrued interest on IDI note receivable (3) 27,268 Additional paid-in-capital (approx) (3) 74,500 Minority Interest (approx) (3) 18,625 Investment in Streamware (19.5%) (6) XXX Technology / license rights - to change (7) 9,052,587 less XXX Common stock (0.05 par value) (8) 50,000 Additional paid-in capital - value of stock (8) 5,950,000 Additional paid-in capital - value of options (9) 3,052,587 (5) The approximate equity of IDI after the bankruptcy court's acceptance of the Debtor's Plan of Reorganization is $135,000. The approximate minority interest in IDI is 20%. The finalized amount of the equity will impact the amount of Technology / license rights recorded, as the fair value of this transaction (the Company assuming the liabilities of IDI pursuant to the Debtor's Plan of Reorganization) will be allocated between the Investment in IDI and the Technology / license rights. We further note that the Company's Note receivable from IDI and associated accrued interest was written off pursuant to the terms of the bankruptcy, and the Company will treat this cash forwarded to IDI as an additional investment in the technology. (6) As mentioned above in tickmark (3), the amount of fair value allocated to Technology / license rights will change slightly when the approximate $135,000 of Investment in IDI is finalized. We note that a portion of the fair value of this transaction is allocated to Technology / license rights as the Company is assuming IDI's liabilities pursuant to the Reorganization Plan in order to further assert its rights to the technology. (7) Represents the liabilities assumed by the Company from IDI pursuant to the Debtor's Plan of Reorganization. A detail of these liabilities was approved by the bankruptcy court and is available upon request. (8) Upon determining the fair value of the 19.5% investment in Streamware, the Company will allocate this amount to an investment in Streamware, using the cost method of accounting. The Company is awaiting Streamware financial statements to substantiate the initial allocation of fair value to the investment in Streamware. (9) As the Company entered into these agreements to assure its rights to the technology, it appears appropriate to allocate the fair value of the transaction to an intangible asset of Technology. When the amount of fair value to be allocated to the Investment in Streamware is determined, then the amount allocated to Technology will be adjusted accordingly. As noted above in the Authoritative Pronouncements section, the Company will account for this Technology asset as an intangible asset with a finite life pursuant to the provisions of SFAS No. 142. As such, the Company plans to use the remaining useful life of the associated patent (assumed to be 17 years upon issuance of the patent) to amortize the value of the technology, with a $0 residual value. The Company will annually review this amount for impairment and the appropriateness of the remaining useful life, or more frequently than annually if circumstances warrant. (10) Represents the fair value of the 1,000,000 shares of the Company's common stock issued to Streamware pursuant to the Stock Issuance and Option Grant Agreement. The Company valued the shares of common stock as of May 18, 2004, the date that the bankruptcy court confirmed the Debtor's Plan of Reorganization, using the closing stock price of $6.00 obtained from www.yahoo.com. (11) Represents the fair value, as calculated using a Black-Scholes option pricing model, of the 1,500,000 options to purchase the Company's common stock granted to Streamware pursuant to the Stock Issuance and Option Grant Agreement. The options are exercisable at $4.50 per share of common stock, are immediately exercisable and expire two years after effective date (May 18, 2004). The Company used a 0 dividend yield, risk free interest rate of 1.83% as of May 21, 2004 (representing the two-year treasury constant maturity US government security interest rate obtained from http://www.federalreserve.gov/releases/h15/data/wf/tcm1y.txt), a volatility of 52.09%, and an expected life of one year. The fair value of these options was calculated as approximately $2.04 each. A detailed calculation of this amount is available upon request. Broadcast has discussed the above-mentioned transaction with our independent certified public accountants, Tanner + Co. who, based on its review of current accounting guidance, the documentation provided by the Company and the representations of the Company's management, concurs that the Company has reasonable support to record the stock purchase and issuance agreement transactions as stated above. Further, Tanner + Co. concurs with the Company's decision to discuss the matters mentioned herein in advance with the SEC staff prior to filing financial statements for the period ending June 30, 2004. Please contact me directly with questions or comments. Very truly yours, /s/ Randy Turner Randy Turner Chief Financial Officer Broadcast International, Inc. 7050 Union Park Center #650 Midvale, UT 84047 Phone (801) 567-3259 Fax (801) 562-1773 Email: randy.turner@brin.com -----END PRIVACY-ENHANCED MESSAGE-----