8-K/A 1 form8ka090804.txt FORM 8-K/A DATED SEPTEMBER 8, 2004 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________ FORM 8-K/A Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) ------------------------------------------------ September 8, 2004 FARADAY FINANCIAL, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 000-22236 33-0565710 -------------------------------- ------------------------ ------------------- (State or other jurisdiction of (Commission file number) (IRS employer incorporation) identification no.) 175 South Main, Suite 1240, SLC, Utah 84111 ---------------------------------------- ---------- (Address of principal executive offices) (Zip code) (801) 502-6100 ---------------------------------------------------- (Registrant's telephone number, including area code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2.below): [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13c-4(c) This document contains a total of __ pages. Item 9.01 Financial Statements and Exhibits a. Financial statements of businesses acquired See index to consolidated financial statements and consolidated financial statement schedules beginning on page F-1 hereof. b. Pro forma financial information See Unaudited Condensed Combined Pro Forma Financial Statements beginning on page F-30 hereof. c. Exhibits Not applicable. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. FARADAY FINANCIAL, INC. Date: December 16, 2004 By /s/ Frank Gillen -------------------------- Frank Gillen President 2 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 F-1 C O N T E N T S Independent Auditors' Report................................................F-3 Consolidated Balance Sheets ................................................F-4 Consolidated Statements of Operations.......................................F-6 Consolidated Statements of Stockholders' Equity (Deficit)...................F-7 Consolidated Statements of Cash Flows.......................................F-9 Notes to the Consolidated Financial Statements.............................F-11 F-2 INDEPENDENT AUDITORS' REPORT Board of Directors Video Internet Broadcasting Corporation and Subsidiary Ephrata, Washington We have audited the accompanying consolidated balance sheets of Video Internet Broadcasting Corporation and Subsidiary (the Company) as of December 31, 2003 and 2002 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years ended December 31, 2003 and 2002 and from inception on March 23, 2001 through December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Video Internet Broadcasting Corporation and Subsidiary as of December 31, 2003 and 2002 and the results of their consolidated operations and their consolidated cash flows for the years ended December 31, 2003 and 2002 and from inception on March 23, 2001 through December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. Management's plans regarding these matters are described in Note 9. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ HJ & Associates, LLC HJ & Associates, LLC Salt Lake City, Utah July 29, 2004 F-3
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Consolidated Balance Sheets ASSETS December 31, --------------------------------------- 2003 2002 ----------------- ----------------- CURRENT ASSETS Accounts receivable (Note 1) $ 72,147 $ 107,072 Other current assets 6,764 - ----------------- ----------------- Total Current Assets 78,911 107,072 ----------------- ----------------- PROPERTY AND EQUIPMENT (Note 1) Computer and multimedia equipment 253,344 92,172 Office equipment and furniture 12,479 12,479 Less - accumulated depreciation (109,238) (41,001) ----------------- ----------------- Total Property and Equipment 156,585 63,650 ----------------- ----------------- OTHER ASSETS Software development costs - net (Note 1) 72,279 91,285 ----------------- ----------------- Total Other Assets 72,279 91,285 ----------------- ----------------- TOTAL ASSETS $ 307,775 $ 262,007 ================= ================= The accompanying notes are an integral part of these consolidated financial statements. F-4 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Consolidated Balance Sheets (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) December 31, --------------------------------------- 2003 2002 ----------------- ----------------- CURRENT LIABILITIES Cash overdraft $ 12,319 $ 25,628 Accounts payable 61,374 553,459 Accrued liabilities 82,370 115,930 Capital leases payable - related party (Note 2) 16,771 - Current portion of notes payable to related parties (Note 2) 32,000 - Current portion of notes payable (Note 3) 395,500 51,375 Current portion of convertible debt (Note 4) 194,250 - ----------------- ----------------- Total Current Liabilities 794,584 746,392 ----------------- ----------------- LONG-TERM LIABILITIES Notes payable to related parties (Note 2) 89,000 - Notes payable (Note 3) 147,837 154,125 Convertible debt (Note 4) 161,000 - ----------------- ----------------- Total Long-Term Liabilities 397,837 154,125 ----------------- ----------------- Total Liabilities 1,192,421 900,517 ----------------- ----------------- COMMITMENTS AND CONTINGENCIES (Note 5) STOCKHOLDERS' EQUITY (DEFICIT) Series A preferred stock: 20,000,000 shares authorized of $0.001 par value, 350,555 and 350,555 shares issued and outstanding, respectively 351 351 Common stock: 30,000,000 shares authorized of $0.001 par value, 1,393,292 and 952,488 shares issued and outstanding, respectively 1,393 952 Additional paid-in capital 1,926,419 728,390 Deferred compensation (145,566) - Accumulated deficit (2,667,243) (1,368,203) ----------------- ----------------- Total Stockholders' Equity (Deficit) (884,646) (638,510) ----------------- ----------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 307,775 $ 262,007 ================= ================= The accompanying notes are an integral part of these consolidated financial statements. F-5
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Consolidated Statements of Operations From Inception on March 23, For the Years 2001 Ended December 31, Through ------------------------------------- December 31, 2003 2002 2001 ----------------- ----------------- ----------------- REVENUE Subscription television services $ 683,935 $ 585,359 $ 2,280 Other subscriber-related revenue - 26,422 66,715 ----------------- ----------------- ----------------- Total Revenue 683,935 611,781 68,995 ----------------- ----------------- ----------------- COST OF SALES Subscriber-related expenses 140,093 69,234 70,907 Transmission expenses 249,886 379,969 - ----------------- ----------------- ----------------- Total Cost of Sales 389,979 449,203 70,907 ----------------- ----------------- ----------------- GROSS MARGIN (DEFICIT) 293,956 162,578 (1,912) ----------------- ----------------- ----------------- OPERATING EXPENSES General and administrative 1,060,624 1,008,012 469,183 Stock-based compensation 16,784 - - Depreciation and amortization 76,821 27,724 13,277 ----------------- ----------------- ----------------- Total Expenses 1,154,229 1,035,736 482,460 ----------------- ----------------- ----------------- LOSS FROM OPERATIONS (860,273) (873,158) (484,372) ----------------- ----------------- ----------------- OTHER INCOME (EXPENSE) Software sales 55,578 - - Interest expense (494,345) (10,673) - ----------------- ----------------- ----------------- Total Other Income (Expense) (438,767) (10,673) - ----------------- ----------------- ----------------- NET LOSS $ (1,299,040) $ (883,831) $ (484,372) ================= ================= ================= BASIC LOSS PER SHARE $ (1.17) $ (1.11) $ (1.47) ================= ================= ================= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 1,113,452 799,462 330,375 ================= ================= ================= The accompanying notes are an integral part of these consolidated financial statements. F-6
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Consolidated Statements of Stockholder's Equity (Deficit) Preferred Stock Common Stock Additional ------------------- -------------------- Paid-in Deferred Accumulated Shares Amount Shares Amount Capital Compensation Deficit ------ ------ ------ ------ ------- ------------ ------- Balance at inception on March 23, 2001 - $ - - $ - $ - $ - $ - Common stock issued to founders for services at $0.001 per share - - 470,000 470 - - - Common stock issued to founders for cash at $0.001 per share - - 180,000 180 - - - Preferred stock issued for cash at $1.00 per share 300,000 300 - - 299,700 - - Preferred stock issued for debt extinguishment at $1.00 per share 555 1 - - 554 - - Common stock issued for cash at $5.00 per share - - 18,000 18 89,982 - - Net loss for the period from inception on March 23, 2001 through December 31, 2001 - - - - - - (484,372) ------- ------- --------- -------- ---------- ---------- ------------ Balance, December 31, 2001 300,555 301 668,000 668 390,236 - (484,372) Common stock issued for cash at $5.00 per share - - 1,000 1 4,999 - - Common stock issued for cash at $1.00 per share - - 184,000 184 183,816 - - Common stock issued for services at $1.00 per share - - 35,700 36 35,664 - - Common stock issued for debt at $1.00 per share - - 63,788 63 63,725 - - Preferred stock issued for cash at $1.00 per share 50,000 50 - - 49,950 - - ------- ------- --------- -------- ---------- ---------- ------------ Balance Forward 350,555 $ 351 952,488 $ 952 $ 728,390 $ - $ (484,372) ------- ------- --------- -------- ---------- ---------- ------------ The accompanying notes are an integral part of these consolidated financial statements. F-7 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Consolidated Statements of Stockholder's Equity (Deficit) (Continued) Preferred Stock Common Stock Additional ------------------- -------------------- Paid-in Deferred Accumulated Shares Amount Shares Amount Capital Compensation Deficit ------ ------ ------ ------ ------- ------------ ------- Balance Forward 350,555 $ 351 952,488 $ 952 $ 728,390 $ - $ (484,372) Net loss for the year ended December 31, 2002 - - - - - - (883,831) ------- ------- --------- -------- ---------- ---------- ------------ Balance, December 31, 2002 350,555 351 952,488 952 728,390 - (1,368,203) Common stock issued for fixed assets at $1.00 per share - - 100,000 100 99,900 - - Common stock issued for cash at $3.00 per share - - 60,250 60 180,690 - - Common stock issued for services at $3.00 per share - - 15,315 15 45,930 - - Common stock issued for cash at $1.00 per share - - 90,500 91 90,409 - - Common stock issued for services at $1.00 per share - - 174,679 175 174,504 - - Discount on convertible debt - - - - 444,246 - - Options granted to non-employees - - - - 162,350 (145,566) - Net loss for the year ended December 31, 2003 - - - - - - (1,299,040) ------- ------- --------- -------- ---------- ---------- ------------ Balance, December 31, 2003 350,555 $ 351 1,393,232 $ 1,393 $1,926,419 $ (145,566) $ (2,667,243) ======= ======= ========= ======== ========== ========== ============ The accompanying notes are an integral part of these consolidated financial statements. F-8
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows From Inception on March 23, For the Years 2001 Ended December 31, Through ---------------------------------- December 31, 2003 2002 2001 -------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (1,299,040) $ (883,831) $ (484,372) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization expense 76,821 27,724 13,277 Common stock issued for services 220,624 35,700 470 Common stock options issued for services 16,784 - - Gain on sale of software (55,578) - - Amortization of debt discount 444,246 - - Changes in assets and liabilities: (Increase) decrease in accounts receivable 34,925 (99,981) (7,091) (Increase) decrease in other assets (6,764) - - Increase (decrease) in accounts payable (492,085) 416,368 137,091 Increase (decrease) in accrued expenses (33,560) 85,382 30,548 -------------- -------------- -------------- Net Cash Used by Operating Activities (1,093,627) (418,638) (310,077) -------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Cash paid for software development costs (84,000) (91,285) - Cash received for sale of software 150,000 - - Cash paid for fixed assets (24,464) (38,268) (66,383) -------------- -------------- -------------- Net Cash Provided (Used) by Investing Activities 41,536 (129,553) (66,383) -------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in cash overdraft (13,309) 25,628 - Proceeds from issuance of common stock 271,250 189,000 90,180 Proceeds from issuance of preferred stock - 50,000 300,000 Proceeds from notes payable 369,406 269,288 555 Proceeds from notes payable - related 32,000 - - Proceeds from convertible debt 355,250 - - Proceeds from convertible debt - related 89,000 - - Principal payments on capital leases (19,937) - - Principal payments on notes payable (31,569) - - -------------- -------------- -------------- Net Cash Provided by Financing Activities 1,052,091 533,916 390,735 -------------- -------------- -------------- NET INCREASE (DECREASE) IN CASH - (14,275) 14,275 CASH AT BEGINNING OF YEAR - 14,275 - -------------- -------------- -------------- CASH AT END OF YEAR $ - $ - $ 14,275 ============== ============== ================= The accompanying notes are an integral part of these consolidated financial statements. F-9 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows (Continued) From Inception on March 23, For the Years 2001 Ended December 31, Through ---------------------------------- December 31, 2003 2002 2001 -------------- -------------- -------------- SUPPLEMENTAL SCHEDULE OF CASH FLOW ACTIVITIES CASH PAID FOR: Interest $ 8,070 $ 1,083 $ - Income taxes $ - $ - $ - NON-CASH FINANCING ACTIVITIES Common stock issued for services rendered $ 220,624 $ 35,700 $ 470 Common stock options issued for services $ 16,784 $ - $ - Common stock issued for equipment $ 100,000 $ - $ - Common stock issued for debt $ - $ 63,788 $ - Preferred stock issued for debt $ - $ - $ 555 Fixed assets purchased under capital Lease $ 36,708 $ - $ - The accompanying notes are an integral part of these consolidated financial statements. F-10
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of Video Internet Broadcasting Corporation and Subsidiary is presented to assist in understanding the Company's financial statements. The consolidated financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the consolidated financial statements. a. Organization and Business Activities Video Internet Broadcasting Corporation and Subsidiary, (the "Company") was incorporated under the laws of the State of Washington on March 23, 2001. The Company provides fiber optic cable television broadcast subscription services. In addition to its television services, the Company also provides high-speed internet service through its fiber optic network. The Company's principal business strategy is to continue developing their subscription television and Internet services in the United States to provide consumers with a fully competitive alternative to cable television and internet service. During January 2003, the Company incorporated Digital Media Solutions, LLC (DMS) as a wholly-owned subsidiary under the laws of the State of Arizona. b. Accounting Method The Company's consolidated financial statements are prepared using the accrual method of accounting. The Company has elected a December 31, year-end. c. Basic Loss Per Share The computation of basic loss per share of common stock is based on the weighted average number of shares outstanding during the period. From Inception For the Years Ended On March 23, December 31, 2001 through -------------------------- December 31, 2003 2002 2001 ------------ ------------ ------------ Loss (numerator) $ (1,299,040) $ (883,831) $ (484,372) Shares (denominator) 1,113,452 799,462 330,375 Per share amount $ (1.17) $ (1.11) $ (1.47) For the years and period ended December 31, 2003, 2002 and 2001 the Company has excluded 1,006,131, 22,500 and 0 common stock equivalents, respectively, from the basic net loss per share calculation as they are anti-dilutive. F-11 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) d. Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. e. Income Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Net deferred tax assets consist of the following components as of December 31, 2003, 2002 and 2001: 2003 2002 2001 ---------- ---------- ---------- Deferred tax assets: NOL Carryover $ 922,200 $ 480,800 $ 182,300 Accrued Expenses 12,000 39,700 9,700 Deferred tax liabilities: - - - Depreciation (7,300) (4,100) (3,400) Valuation allowance (926,900) (516,400) (188,600) ---------- ---------- ---------- Net deferred tax asset $ - $ - $ - ========== ========== ========== The income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income tax rates of 39% to pretax income from continuing operations for the years and period ended December 31, 2003, 2002 and 2001 due to the following: F-12 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) e. Income Taxes (Continued) 2003 2002 2001 ----------- ----------- ----------- Book Income $ (506,625) $ (344,694) $ (188,866) Stock for Services/Options 92,589 13,923 180 Other 3,536 3,063 (6) Valuation allowance 410,500 327,708 188,692 ----------- ----------- ----------- Tax Expense (Benefit) $ - $ - $ - =========== =========== =========== At December 31, 2003, the Company had net operating loss carryforwards of approximately $2,365,000 that may be offset against future taxable income from the year 2003 through 2023. Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years. f. Property and Equipment Property and equipment are stated at cost. Expenditures for small tools, ordinary maintenance and repairs are charged to operations as incurred. Major additions and improvements are capitalized. Depreciation is computed using the double declining balance method over estimated useful lives as follows: Leasehold improvements Over the term of the lease Equipment 5 years or lease term Furniture and fixtures 5 years Depreciation expense for the years ended December 31, 2003 and 2002 and for the period from inception on March 23, 2001 through December 31, 2001 was $68,237, $27,724 and $13,277, respectively. g. Accounts Receivable Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company does not have any off-balance-sheet credit exposure related to its customers. Due to their short-term nature, book values of $72,147 and $107,072 at December 31, 2003 and 2002, respectively, approximate fair market value for trade accounts receivable, net of allowance of $0 and $0 for the periods ending December 31, 2003 and 2002, respectively. F-13 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) h. Revenue Recognition Subscription Television Services and Other Subscriber-Related Revenue Subscription television service revenues are derived principally from monthly fees paid by subscribers. In addition to recurring subscriber revenues, the Company also derives revenues from the sales of pay-per-view movies and events, and from installation charges. The Company recognizes cable television, high-speed data, telephony and programming revenues as services are provided to subscribers. Subscriber fees for multiple receivers and equipment rental are recognized as revenue monthly as earned. Revenues derived from other sources are recognized when services are provided or events occur. Software Revenue The Company applies the provisions of Statement of Position 97-2, "Software Revenue Recognition " in conjunction with the applicable provisions of Staff Accounting Bulletin No. 104, " Revenue Recognition." Accordingly, the Company recognizes revenue for software when there is (1) persuasive evidence that an arrangement exists, which is generally a customer purchase order, (2) the software is delivered, (3) the selling price is fixed and determinable and (4) collectibility of the customer receivable is deemed probable. The Company has yet to complete the development of its software developed for sale and has not yet recognized any revenue from the sale of software developed for sale. i. Cost of Sales Subscriber-related expenses Subscriber-related expenses consist primarily of monthly fees to the National Cable Television Cooperative and other programming providers and are generally based on the average number of subscribers to each program. The cost of television programming and distribution rights is generally incurred on a per subscriber basis and is recognized when the related programming is distributed to subscribers. Transmission expenses Transmission expenses consist primarily of transport cost and network access fees specifically associated with subscription services. j. Advertising The Company follows the policy of charging the costs of advertising to expense as incurred. Advertising expense for the years ended December 31, 2003 and 2002 and for the period from inception on March 23, 2001 through December 31, 2001 was $24,861, $45,067 and $4,507, respectively. F-14 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) k. Newly Adopted Accounting Pronouncements During the year ended December 31, 2003, the Company adopted the following accounting pronouncements: SFAS No. 143 -- In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which established a uniform methodology for accounting for estimated reclamation and abandonment costs. The statement was effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a material effect on the consolidated financial statements of the Company. SFAS No. 145 -- On April 30, 2002, the FASB issued FASB Statement No. 145 (SFAS 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS 145 rescinds both FASB Statement No. 4 (SFAS 4), "Reporting Gains and Losses from Extinguishment of Debt," and the amendment to SFAS 4, FASB Statement No. 64 (SFAS 64), "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." Through this rescission, SFAS 145 eliminates the requirement (in both SFAS 4 and SFAS 64) that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. However, an entity is not prohibited from classifying such gains and losses as extraordinary items, so long as it meets the criteria in paragraph 20 of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Further, SFAS 145 amends paragraph 14(a) of FASB Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between the accounting for sale-leaseback transactions and certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The amendment requires that a lease modification (1) results in recognition of the gain or loss in the 9 financial statements, (2) is subject to FASB Statement No. 66, "Accounting for Sales of Real Estate," if the leased asset is real estate (including integral equipment), and (3) is subject (in its entirety) to the sale-leaseback rules of FASB Statement No. 98, "Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease Term, and Initial Direct Costs of Direct Financing Leases." Generally, FAS 145 is effective for transactions occurring after May 15, 2002. The adoption of SFAS 145 did not have a material effect on the consolidated financial statements of the Company. SFAS No. 146 -- In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of F-15 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) k. Newly Adopted Accounting Pronouncements (Continued) SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002 and early application is encouraged. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS 146. The effect on adoption of SFAS 146 will change on a prospective basis the timing of when the restructuring charges are recorded from a commitment date approach to when the liability is incurred. The adoption of SFAS 146 did not have a material effect on the consolidated financial statements of the Company. SFAS No. 147 -- In October 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 147, "Acquisitions of Certain Financial Institutions" which is effective for acquisitions on or after October 1, 2002. This statement provides interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, this Statement removes acquisitions of financial institutions from the scope of both SFAS 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with SFAS No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets". The adoption of SFAS No. 147 did not have a material effect on the consolidated financial statements of the Company. SFAS No. 148 -- In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123" which is effective for financial statements issued for fiscal years ending after December 15, 2002. This Statement amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The adoption of SFAS No. 148 did not have a material effect on the consolidated financial statements of the Company. SFAS No. 149 -- In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" which is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. This statement amends and clarifies financial accounting for derivative instruments embedded in other contracts (collectively referred to as derivatives) and hedging activities under SFAS 133. The adoption of SFAS No. 149 did not have a material effect on the consolidated financial statements of the Company. F-16 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) k. Newly Adopted Accounting Pronouncements (Continued) SFAS No. 150 -- In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" which is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. This Statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. The adoption of SFAS No. 150 did not have a material effect on the consolidated financial statements of the Company. FASB Interpretation No. 45 -- "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No. 5, 57 and 107". The initial recognition and initial measurement provisions of this Interpretation are to be applied prospectively to guarantees issued or modified after December 31, 2002. The disclosure requirements in the Interpretation were effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FASB Interpretation No. 45 did not have a material effect on the consolidated financial statements of the Company. FASB Interpretation No. 46 -- In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities." FIN 46 provides guidance on the identification of entities for which control is achieved through means other than through voting rights, variable interest entities, and how to determine when and which business enterprises should consolidate variable interest entities. This interpretation applies immediately to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 did not have a material impact on the Company's consolidated financial statements. During the year ended December 31, 2003, the Company adopted the following Emerging Issues Task Force Consensuses which did not have a material impact on the Company's financial statements: EITF Issue No. 00-21 "Revenue Arrangements with Multiple Deliverables", EITF Issue No. 01 -8 " Determining Whether an Arrangement Contains a Lease", EITF Issue No. 02-3 "Issues Related to Accounting for Contracts Involved in Energy Trading and Risk Management Activities", EITF Issue No. 02-9 "Accounting by a Reseller for Certain Consideration Received from a Vendor", EITF Issue No. 02-17, "Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination", EITF Issue No. 02-18 "Accounting for Subsequent Investments in an Investee after Suspension of Equity Method Loss Recognition", EITF Issue No. 03-1, "The Meaning of Other Than Temporary and its Application to Certain Instruments", EITF Issue No. 03-5, "Applicability of AICPA F-17 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) k. Newly Adopted Accounting Pronouncements (Continued) Statement of Position 97-02, `Software Revenue Recognition' to Non-Software Deliverables in an Arrangement Containing More Than Incidental Software", EITF Issue No. 03-7, "Accounting for the Settlement of the Equity Settled Portion of a Convertible Debt Instrument That Permits or Requires the Conversion Spread to be Settled in Stock", EITF Issue No. 03-10, "Application of EITF Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers. l. Concentrations of Credit Risk The Company maintains several accounts with financial institutions. The accounts are insured by the Federal Deposit Insurance Corporation up to $100,000. The Company's balances occasionally exceed that amount. Credit losses, if any, have been provided for in the financial statements and are based on management's expectations. The Company's accounts receivable are subject to potential concentrations of credit risk. The Company does not believe that it is subject to any unusual risks, or significant risks in the normal course of its business. The Company has no customers who account for greater than 10% of the accounts receivable balance at December 31, 2003 and 2002 or who account for greater than 10% of total sales for the years ended December 31, 2003 and 2002. The Company is dependent on municipalities to provide the necessary transport facilities and to cable television content providers for content. m. Cash and Cash Equivalents The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. n. NCTC Patronage Capital Distributions The Company is a member of the National Cable Television Cooperative ("NCTC"), which is a not-for-profit, member-operated purchasing organization. The NCTC is a cooperative organization whose members and affiliates are engaged in the business of providing television reception or service to the public, primarily by means of a cable television system consistent with the definition of a "cable television system" in section 602 of the 1984 Cable Act. The NCTC negotiates and administers master affiliation agreements with cable television programming networks, cable hardware and equipment manufacturers and other service providers on behalf of its member companies. More than 1,000 NCTC member companies currently serve more than 13 million cable TV subscribers throughout the United States. NCTC membership includes a one-time, non-refundable initiation fee of $1.50 per subscriber. Should the Company acquire other cable systems in the future, the fees are covered under the original initiation fee. However, if the member has no active subscribers at the time of application, the one-time, non-refundable initiation fee is $1.00 per home in that member's franchise area. The minimum fee is $1,000 and the maximum fee is $50,000. F-18 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) n. NCTC Patronage Capital Distributions (Continued) The Company made payments, net of rebates, of $46,012, $33,052 and $0 during the years ended December 31, 2003 and 2002 and from inception on March 23, 2001 through December 31, 2001, respectively. o. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Digital Media Solutions, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation. p. Internal Use Software The Company accounts for costs incurred to develop internal use software applications in accordance with the American Institute of Certified Public Accountants Statement of Position No. 98-1 (SOP 98-1), "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires that entities capitalize certain internal use software costs, which includes software design, coding, installation, configuration and testing, once technical feasibility of the developed software is attained. Costs incurred in the process of attaining technological feasibility, which includes the conceptual formulation and evaluation of the software alternatives, and costs to upgrade and enhance software once developed are expensed as incurred. Under SOP 98-1, overhead, general and administration costs, support costs and training costs are not capitalized. The Company capitalized $11,721 and $91,285 in internal use software development costs for the years ended December 31, 2003 and 2002. Capitalized internal use software costs are being depreciated on a straight-line basis over the estimated useful life of the application of two years. The Company recognized $8,584, $0 and $0 in amortization expense for the years ended December 31, 2003, 2002 and for the period from inception on March 23, 2001 through December 31, 2001, respectively. The above-mentioned software was originally developed for internal use. During 2003, a single copy of the software was sold to a municipality for $150,000. In accordance with SOP 98-1, the proceeds from the sale were applied against the carrying amount of the software until the carrying value of the software reached zero. The additional proceeds of $55,578 were recognized as other income as earned. q. Software Developed for Sale The Company plans to sell or lease certain development software and have accounted for the costs to develop this software in accordance with SFAS No. 86 , "Accounting for Computer Software to be Sold, Leased, or Otherwise Marketed." Computer software development costs are charged to research and development expense until technological feasibility or a detail design document of the software is F-19 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) q. Software Developed for Sale (Continued) established, after which remaining significant software production costs are capitalized. Once capitalized software cost products are made available for sale or when the related product is put into use, the costs will be amortized on a straight-line basis over the estimated economic life of the software. The Company will make ongoing assessments of recoverability of capitalized software projects by comparing the amount capitalized for each product to the estimated net realizable value ("NRV") of the product. If the NRV is less than the amount capitalized, a write-down of the amount capitalized is recorded. The Company capitalized $72,279 in software development for sale costs for the year ended December 31, 2003, which have yet to placed into service. These costs are classified in other assets in the accompanying consolidated balance sheet. r. As permitted by FASB Statement 148 "Accounting for Stock Based Compensation-Transition and Disclosure" (SFAS No. 148), the Company elected to measure and record compensation cost relative to employee stock option costs in accordance with Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees", and related interpretations and make proforma disclosures of net income and earning per share as if the fair value method of valuing stock options had been applied. Under APB opinion 25, compensation cost is recognized stock options granted to employees when the option price is less than the market price of the underlying common stock on the date of grant. NOTE 2 - RELATED PARTY TRANSACTIONS Development Costs The Company has employed certain family members of management on a contract basis for the development of software. The Company paid a total of $31,559, $38,597 and $0 to these individuals for the years ended December 31, 2003 and 2002 and for the period from inception on March 23, 2001 through December 31, 2001, respectively. Accounts Payable The Company has $1,163 and $32,630 in payables for services to related parties at December 31, 2003 and 2002. These amounts are included in accounts payable. Common Stock The Company issued 100,000 shares of common stock to a related party in February 2003 to purchase $100,000 of multimedia equipment. The equipment was valued at predecessor's cost. F-20 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 2 - RELATED PARTY TRANSACTIONS (Continued) Common Stock (Continued) In December of 2003 the Company issued 138,846 shares of its common stock to an employee in payment of consulting services valued at $138,846. During 2002, the Company issued 94,500 shares of its common stock to board members and directors of the Company for cash of $94,500. Also during 2002, the Company issued 43,788 shares of its common stock to two board members and directors of the Company in payment of debt of $43,788. After inception on March 23, 2001, the Company issued 470,000 shares to founders of the Company for services provided. The stock was valued at $0.001 per share, par value. During 2001, the Company issued 2,000 shares of common stock to a director of the Company for $10,000 in cash. Lease Guarantees The Company's Chief Executive Officer has personally guaranteed several equipment leases and the Company's current office space lease. Capital Leases Payable During 2003, the Company entered into three capital leases for computer and office equipment with a related company totaling $36,708. The assets are being depreciated over the term of the leases, between one and two years. Capital leases payable consisted of the following at December 31,
December 31, -------------------------- 2003 2002 ---------- ---------- Capital lease payable to a related company, interest at 8% per annum, secured by equipment, due May 1, 2004, monthly payments of $866 $ 7,263 $ - Capital lease payable to a related company, interest at 8% per annum, secured by equipment, due March 1, 2004, monthly payments of $805 5,672 - Capital lease payable to a related company, interest at 8% per annum, secured by equipment, due May 1, 2004, monthly payments of $566 3,836 - ---------- ---------- Total Capital Leases Payable 16,771 - Less current portion (16,771) - ---------- ---------- $ - $ - ========== ==========
F-21 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 2 - RELATED PARTY TRANSACTIONS (Continued) Capital Leases Payable (Continued) Annual maturities of capital leases payable are as follows: Years Ending December 31, 2004 $ 18,116 ---------- Total minimum lease payments 18,116 Less amounts representing interest (1,345) Present value of future minimum lease payments $ 16,771 ========== Notes Payable The Company has the following outstanding notes payable to related parties at:
December 31, -------------------------- 2003 2002 ---------- ---------- Notes payable to an employee and director, unsecured, interest at 6% per annum, payable upon demand $ 25,000 $ - Note payable to the director and president unsecured, bearing interest at 8% per annum, payable on demand 7,000 - Convertible note payable, bearing interest at 10% per annum, convertible to common stock at a rate of one share for each dollar loaned, conversion price of $1.00 per share, note also carries warrants to purchase common stock at the rate of two warrants for each dollar of interest plus principal and are exercisable at $1.00 per share, due February 2005 89,000 - ---------- ---------- Total Related Party Notes Payable 121,000 - Less Current Portion (32,000) - ---------- ---------- $ 89,000 $ - ========== ==========
Interest expense on the above payables amounted to $8,455 and $0 for the years ended December 31, 2003 and 2002, respectively. F-22 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 3 - NOTES PAYABLE Notes payable consisted of the following at December 31,
December 31, -------------------------- 2003 2002 ---------- ---------- Note payable bearing interest at 2.5% per annum, unsecured, due by April 1, 2007, monthly payments of $3,000 $ 172,837 $ - Note payable bearing interest at 8% per annum, unsecured, annual payments of $51,375 plus interest due on May 30 each year until paid in full. As of December 31, 2003 this note is in default. 205,500 205,500 Note payable bearing interest at 10% per annum, unsecured, payable on demand 50,000 - Note payable bearing interest at 10% per annum, unsecured, payable on demand 50,000 - Note payable bearing interest at 10% per annum, unsecured, payable on demand 30,000 - Note payable bearing interest at 8% per annum, unsecured, monthly payments of $2,000 plus interest for the first six months, then monthly payments of $4,000 plus interest thereafter. As of December 31, 2003 this note is in default. 35,000 - ---------- ---------- Total Notes Payable 543,337 205,500 Less current portion (395,500) (51,375) ---------- ---------- $ 147,837 $ 154,125 ========== ========== Interest expense on the above notes payable amounted to $31,178 and $9,590 for the years ended December 31, 2003 and 2002, respectively. NOTE 4 - CONVERTIBLE DEBT Convertible debt consisted of the following at December 31, December 31, -------------------------- 2003 2002 ---------- ---------- Convertible note payable, bearing interest at 10% per annum, convertible to common stock at a rate of one share for each dollar loaned, conversion price of $1.00 per share, note also carries warrants to purchase common stock at the rate of two warrants for each dollar of interest plus principal and are exercisable at $1.00 per share $ 161,000 $ - ---------- ---------- Balance Forward $ 161,000 $ - ========== ========== F-23
VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 4 - CONVERTIBLE DEBT (Continued)
December 31, -------------------------- 2003 2002 ---------- ---------- Balance Forward $ 161,000 $ - Convertible note payable, bearing interest at 8% per annum, convertible to Series B preferred stock at a rate of two shares for each dollar loaned, conversion price of $1.00 per share, note also carries warrants to purchase Series B preferred at the rate of 25% of the total shares the note is convertible to and are exercisable at $1.00 per share 109,250 - Convertible note payable, bearing interest at 8% per annum, convertible to common stock at a rate of one share for each dollar loaned, conversion price of $1.00 per share, note also carries warrants to purchase common stock at the rate of 50% of the total shares the note is convertible to and are exercisable at $2.10 per share 85,000 - ---------- ---------- Total Convertible Debt 355,250 - Less current portion (194,250) - ---------- ---------- $ 161,000 $ - ========== ==========
During the year December 31, 2003, the Company raised $444,250 of operating capital in the form of convertible debentures ($89,000 from related parties, $355,250 from other investors). The debentures have varying terms of 1 to 2 years and accrue interest at 8% to 10% per annum. All convertible debentures are convertible at the option of the holder. Upon issuance of the debentures, the Company recognized a debt discount related to the beneficial conversion feature of the debentures totaling $444,246. This beneficial conversion feature was expensed during the year ended December 31, 2003 pursuant to the EITF 96-18 and has been included in interest expense in the accompanying consolidated statement of operations. NOTE 5 - COMMITMENTS AND CONTINGENCIES Operating Leases On August 30, 2001, the Company entered into a seven-year lease agreement for office space in Ephrata, Washington. The monthly rental payment is currently $1,321 per month. The payment is adjusted on each anniversary to reflect the change in the Consumer Price Index from the previous twelve months. Future minimum lease payments under this non-cancelable operating lease, subject to CPI adjustments, are as follows: F-24 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued) Operating Leases (Continued) Years Ending December 31, 2004 $ 15,852 2005 15,852 2006 15,852 2007 15,852 2008 7,926 -------------- $ 71,334 ============== Litigation As of December 31, 2003, a Summary Judgment had been entered against the Company in the amount $26,395 arising from a dispute with a vendor and has been accrued by the Company in notes payable and accrued interest in the consolidated balance sheet. The balance was paid in full in March 2004 and the judgment was dismissed. See Note 11 to these financial statements. The Company has been contacted by an attorney for its investment banker regarding a claim for fees owed. No claim amount has been asserted and the Management believes that any claim arising from this relationship will be without merit. NOTE 6 - COMMON STOCK The Company has authorized 30,000,000 shares of common stock with a par value of $0.001 per share. During the year ended December 31, 2003 the Company issued 150,750 shares of its common stock to various investors for cash of $271,250. During February 2003, the Company issued 100,000 shares of its common stock to purchase multimedia equipment valued at $100,000. Also during 2003 the Company issued 189,994 shares of its common stock for services valued at $220,624. During the year ended December 31, 2002, the Company issued 185,000 shares of its common stock for cash of $189,000. In June 2002 the Company issued 63,788 shares of its common stock in payment of debt of $63,788. Also in 2002, the Company issued 35,700 shares of its common stock for services valued at $35,700. During the year ended December 31, 2001, the Company issued 198,000 shares of its common stock for cash of $90,180. In June 2001, the Company issued 470,000 shares of its common stock to founders of the Company in payment of services valued at $470. NOTE 7 - PREFERRED STOCK The Company has authorized 20,000,000 shares of preferred stock with a par value of $0.001 per share. At December 31, 2003 351,000 of those F-25 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 7 - PREFERRED STOCK (Continued) shares were designated as Series A preferred. The preferred stock is convertible at the option of the holder, at any time after the date of issuance, into that number of shares of common stock determined by dividing the original issue price for the preferred stock by the conversion price of $1.00 per share. Conversion will occur automatically and registered concurrently with any public offering of the common shares of the Company. There was no beneficial conversion feature associated with the Series A preferred stock. In the event of any liquidation, dissolution or winding up of the Corporation, the holders of the preferred stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the common stock, an amount per share for each share of preferred stock equal to the sum of (i) the liquidation preference of $1.00 per share of preferred stock and (ii) all declared but unpaid dividends (if any). In December of 2002, the Company issued 50,000 shares of its Series A preferred stock to an investor for cash of $50,000. In August of 2001, the Company issued 300,000 shares of its Series A preferred stock to an investor for cash of $300,000 and 555 shares in payment of debt of $555. NOTE 8 - OUTSTANDING STOCK OPTIONS AND PURCHASE WARRANTS The Company has elected to follow the intrinsic value method of accounting under Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," ("APB 25") and related interpretations in accounting for their stock-based compensation plans. Under APB 25, the Company generally does not recognize compensation expense on the grant of options under their Stock Incentive Plan because typically the option terms are fixed and the exercise price equals or exceeds the market price of the underlying stock on the date of the grant. The Company applies the disclosure only provisions of Statement of Financial Accounting Standards No. 148, "Accounting and Disclosure of Stock-Based Compensation," ("FAS 148"). Pro forma information regarding net income and earnings per share is required by FAS 148 and has been determined as if the Company had accounted for its stock-based compensation plans using the fair market value method prescribed by that statement. For purposes of pro forma disclosures, the estimated fair market value of the options is amortized to expense over the options' vesting period on a straight-line basis. All options are initially assumed to vest. Compensation previously recognized is reversed to the extent applicable to forfeitures of unvested options. Under FASB Statement 148, the Company estimates the fair value of each stock award at the grant date by using the Black-Scholes option pricing model with the following weighted average assumptions used for grants: dividend yields of 0%; expected volatility of 172%; risk-free interest rates of between 1.33% and 1.65% and expected lives of between 1 and 4 years. F-26 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 8 - OUTSTANDING STOCK OPTIONS AND PURCHASE WARRANTS (Continued) A summary of the status of the Company's stock options and warrants as of December 30, 2001 and changes during the years ended December 31, 2002 and 2003 is presented below: Weighted Weighted Options Average Average and Exercise Grant Date Warrants Price Fair Value -------- -------- ---------- Outstanding, December 31, 2001 - $ - $ - Granted 22,500 1.50 1.00 Expired/Canceled - - - Exercised - - - --------- ------- ------- Outstanding, December 31, 2002 22,500 1.50 1.00 Granted 1,038,850 1.33 1.28 Expired/Canceled - - - Exercised - - - --------- ------- ------- Outstanding, December 31, 2003 1,061,350 $ 1.33 $ 1.30 ========= ======= ======= Exercisable, December 31, 2003 715,895 $ 1.14 $ 1.29 ========= ======= ======= During 2001, the Company's board of directors approved the "Video Internet Broadcasting Corporation 2001 Stock Option Plan," (2001 Plan). Under the terms of this Plan, the Company registered 50,000 shares of its $0.001 par value common stock at a proposed offering price per share of $1.50. During the year ended December 31, 2002, the Company granted 22,500 stock options to employees under the 2001 Plan, exercisable at $1.50 per share for four years. During 2003, the Company's board of directors approved the "Video Internet Broadcasting Corporation 2003 Stock Option Plan," (2003 Plan). Under the terms of this Plan, the Company registered 350,000 shares of its $0.001 par value common stock at a proposed offering price per share of $1.50. During the year ended December 31, 2003 the Company granted 349,000 stock options to employees under the 2003 Plan. During September 2003, the Company issued 62,500 options to purchase common stock to various consultants for services. The options had an exercise price of $3.00 per share and a term of three years. The Company recognized a total of $16,784 in expense associated with the issuance of these options. During 2003, the Company issued warrants to purchase common stock with convertible debt (discussed in Note 3 to the financial statements). At December 31, 2003 a total of 572,131 warrants to purchase common stock were outstanding. Also during 2003, the Company issued warrants to purchase Series B preferred stock with convertible debt (see Note 3). At December 31, 2003 a total of 55,219 warrants to purchase Series B preferred were outstanding. F-27 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 8 - OUTSTANDING STOCK OPTIONS AND PURCHASE WARRANTS (Continued) Had compensation cost for the Company's stock options granted to directors and employees been based on the fair value as determined by the Black-Scholes option pricing model at the grant date under the accounting provisions of SFAS No. 123, the Company would have recorded additional expense of $70,347 and $3,370 for the years ended December 31, 2003 and 2002, respectively. Also under these same provisions, the Company's net loss would have been changed by the pro forma amounts indicated below: From Inception For the Years Ended On March 23, December 31, 2001 through ---------------------------- December 31, 2003 2002 2001 ----------- ----------- -------------- Net loss: As reported $(1,299,040) $ (883,831) $ (484,372) Pro forma $(1,369,387) $ (887,201) $ (484,372) Basic loss per share: As reported $ (1.17) $ (1.11) $ (1.47) Pro forma $ (1.23) $ (1.11) $ (1.47) NOTE 9 - GOING CONCERN The Company's financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has had limited revenues, has generated significant losses from operations and has a deficit in its working capital. In order to continue as a going concern and achieve a profitable level of operations, the Company will need, among other things, additional capital resources and revenues. Management's plans include concentrating its efforts on increasing the number of subscribers to its fiber optic television and Internet services. Management estimates it will need approximately $13,000,000 to accomplish these plans. The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plan described in the preceding paragraph and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. NOTE 10 - SUBSEQUENT EVENTS Subsequent to December 31, 2003, the following events occurred which, management believes, are material to the financial statements: F-28 VIDEO INTERNET BROADCASTING CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements December 31, 2003 and 2002 NOTE 10 - SUBSEQUENT EVENTS (Continued) On February 17, 2004, the Company entered into an agreement to borrow $500,000 from a lender. This is a convertible note, convertible into Common stock of the Company at $1.00 per share. The note carries interest at 12% per annum and is payable in full not later than December 31,2004. The note is secured by all of the tangible and intangible assets of the Company. On April 21, 2004, the convertible note was increased to $750,000. All other terms of the note were unchanged. The Company used a portion of the proceeds of this loan to repay short-term loans and the current portion of long-term debt in the amount of $222,000, including the judgment described in Note 4. In March 2004, holders of the One Year Convertible Note in the amount of $250,000 converted their notes to 531,654 shares of common stock of the Company per the terms of the note. See Note 5 to these financial statements. In addition, the note holders agreed to surrender the two for one stock warrants attached to the note in exchange for an additional 250,000 shares of the Company's Common stock. In June 2004, the Company secured a line of credit in the amount of $1,500,000 from a national bank. As of the date of this report, $150,000 had been drawn from the line. In July 2004, the Mayor of Provo, Utah signed the Company's contract to provide Internet, phone and cable services over iProvo, the city's new municipally owned fiber-optic network. The Company also entered a memorandum of understanding (MOU) with Provo City in February 2004 to purchase Provo Cable. Upon the Mayor's signing of the iProvo contract, the Company acquired Provo Cable's 2,400-plus subscribers, which includes multiple dwelling units. The Company began managing Provo Cable for the City in late February. F-29 UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL STATEMENTS In accordance with Article 11 of Regulation S-X under the Securities Act, an unaudited condensed combined pro forma balance sheet (the "pro forma balance sheet") as of June 30, 2004, and unaudited condensed combined pro forma statement of income for the six months ended June 30, 2004, and the audited condensed combined pro forma statement of income for the year ended December 31, 2003 (the "pro forma statements of income"), have been prepared to reflect, for accounting purposes, the acquisition by HC of HCI. The following pro forma financial statements have been prepared based upon the historical financial statements of HC and HCI. The pro forma financial statements should be read in conjunction with (a) the historical consolidated financial statements and related notes thereto of HC as of March 31, 2004, for the period ended March 31, 2004, and (b) the historical consolidated financial statements and related notes thereto of HCI as of December 31, 2003, and 2002, and for the years ended December 31, 2003, 2002, and 2001. The June 30, 2004, pro forma balance sheet assumes that the HCI merger was completed on June 30, 2004. The June 30, 2004, pro forma balance sheet includes the historical unaudited consolidated balance sheet data of HC as of June 30, 2004, and the historical unaudited consolidated balance sheet data of HCI as of June 30, 2004. Intercompany activity has been eliminated in preparing the pro forma financial statements. The pro forma statement of income for the six months ended June 30, 2004, assumes that the HCI merger occurred on January 1, 2004, and includes the unaudited historical consolidated statement of income data of HC for the three months ended June 30, 2004, and the unaudited historical consolidated statement of income data of HCI for the six months ended June 30, 2004. The pro forma statement of income for the year ended December 31, 2003, assumes that the HCI merger occurred on January 1, 2003, and includes the audited historical consolidated statement of income data of HC for the year ended March 31, 2004, and the audited historical consolidated statement of income data of HCI for the year ended December 31, 2003. The pro forma financial statements are provided for illustrative purposes only, and are not necessarily indicative of the operating results or financial position that would have occurred if the mergers had been consummated at the beginning of the periods or on the dates indicated, nor are they necessarily indicative of any future operating results or financial position. The pro forma financial statements do not include any adjustments related to any restructuring charges or one-time charges which may result from the mergers or the final result of valuations of inventories, property, plant and equipment, intangible assets, debt, and other obligations. F-30
HOMENET CORPORATION UNAUDITED CONDENSED COMBINED PRO FORMA BALANCE SHEET Pro Forma HC HCI Combined as of as of Combined HC & HCI March 31, December 31, HC & HCI Pro Forma March 31, 2004 2003 Historical Adjustments 2004 ------------- ------------ ------------- ------------- ------------- ASSETS Current Assets: Cash $ 141,786 $ - $ 141,786 $ - $ 141,786 Receivables - 72,147 72,147 - 72,147 Accrued interest receivable 7,068 - 7,068 - 7,068 Other current assets 5,000 6,764 11,764 - 11,764 ------------ ----------- ------------ ------------ ------------ Total Current Assets 153,854 78,911 232,765 - 232,765 ------------ ----------- ------------ ------------ ------------ Note receivable 500,000 - 500,000 - 500,000 Available-for-sale securities - - - - - ------------ ----------- ------------ ------------ ------------ Total Other Assets 500,000 - 500,000 - 500,000 ------------ ----------- ------------ ------------ ------------ Equipment - net 14,075 228,864 242,939 - 242,939 ------------ ----------- ------------ ------------ ------------ - TOTAL ASSETS $ 667,929 $ 307,775 $ 975,704 $ - $ 975,704 ============ =========== ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Cash overdraft $ - $ 12,319 $ 12,319 $ - $ 12,319 Accounts payable 15,350 61,374 76,724 - 76,724 Accrued liabilities 212,443 82,370 294,813 - 294,813 Capital leases payable - related party - 16,771 16,771 - 16,771 Current portion of notes payable to related parties - 32,000 32,000 - 32,000 Current portion of notes payable - 395,500 395,500 - 395,500 Current portion convertible debt - related parties 919,531 - 919,531 - 919,531 Current portion of convertible debt - 194,250 194,250 - 194,250 ------------ ----------- ------------ ------------ ------------ Total Current Liabilities 1,147,324 794,584 1,941,908 - 1,941,908 ------------ ----------- ------------ ------------ ------------ Long Term Debt: Notes payable to related parties - 89,000 89,000 - 89,000 Notes payable - 147,837 147,837 - 147,837 Convertible debt - 161,000 161,000 - 161,000 ------------ ----------- ------------ ------------ ------------ Total Long-Term Liabilities - 397,837 397,837 - 397,837 ------------ ----------- ------------ ------------ ------------ Total Liabilities 1,147,324 1,192,421 2,339,745 - 2,339,745 ------------ ----------- ------------ ------------ ------------ Stockholders' Equity (Deficit): Preferred stock - 351 351 (351) - Common stock 3,000 1,393 4,393 508 4,901 Additional paid-in capital 4,902 1,926,419 1,931,321 (453,079) 1,478,242 Treasury stock (34,375) - (34,375) - (34,375) Deferred Compensation - (145,566) (145,566) - (145,566) Other comprehensive income - - - - - Accumulated deficit (452,922) (2,667,243) (3,120,165) 452,922 (2,667,243) ------------ ----------- ------------ ------------ ------------ Total Stockholders' Equity (Deficit) (479,395) (884,646) (1,364,041) - (1,364,041) ------------ ----------- ------------ ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 667,929 $ 307,775 $ 975,704 $ - $ 975,704 ============ =========== ============ ============ ============ F-31
HOMENET CORPORATION UNAUDITED CONDENSED COMBINED PRO FORMA BALANCE SHEET Pro Forma HC HCI Combined as of as of Combined HC & HCI March 31, December 31, HC & HCI Pro Forma March 31, 2003 2002 Historical Adjustments 2003 -------------- ------------ ------------- ------------- ------------- ASSETS Current Assets: Cash $ - $ - $ - $ - $ - Receivables - 107,072 107,072 - 107,072 Accrued interest receivable - - - - Other current assets - - - - - ----------- ----------- ----------- ----------- ----------- Total Current Assets - 107,072 107,072 - 107,072 ----------- ----------- ----------- ----------- ----------- Note receivable - - - - - Available-for-sale securities 662,157 662,157 - 662,157 ----------- ----------- ----------- ----------- ----------- Total Other Assets 662,157 - 662,157 - 662,157 ----------- ----------- ----------- ----------- ----------- Equipment - net - 154,935 154,935 - 154,935 ----------- ----------- ----------- ----------- ----------- - TOTAL ASSETS $ 662,157 $ 262,007 $ 924,164 $ - $ 924,164 =========== ========= =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Cash overdraft $ - $ 25,628 $ 25,628 $ - $ 25,628 Accounts payable 9,800 553,459 563,259 - 563,259 Accrued liabilities 133,732 115,930 249,662 - 249,662 Capital leases payable - related party - 0 0 - - Current portion of notes payable to related parties - 0 0 - - Current portion of notes payable - 51,375 51,375 - 51,375 Current portion convertible debt - related parties 500,295 500,295 - 500,295 Current portion of convertible debt - - 0 - - ----------- ----------- ----------- ----------- ----------- Total Current Liabilities 643,827 746,392 1,390,219 - 1,390,219 ----------- ----------- ----------- ----------- ----------- Long Term Debt: Notes payable to related parties - - 0 - - Notes payable - 154,125 154,125 - 154,125 Convertible debt - - 0 - - ----------- ----------- ----------- ----------- ----------- Total Long-Term Liabilities - 154,125 154,125 - 154,125 ----------- ----------- ----------- ----------- ----------- Total Liabilities 643,827 900,517 1,544,344 - 1,544,344 ----------- ----------- ----------- ----------- ----------- Stockholders' Equity (Deficit): Preferred stock - 351 351 (351) - Common stock 3,000 952 3,952 469 4,421 Additional paid-in capital 4,902 728,390 733,292 (151,847) 581,445 Treasury stock - - - - Deferred Compensation - - - - Other comprehensive income 162,157 162,157 162,157 Accumulated deficit (151,729) (1,368,203) (1,519,932) 151,729 (1,368,203) ----------- ----------- ----------- ----------- ----------- Total Stockholders' Equity (Deficit) 18,330 (638,510) (620,180) - (620,180) ----------- ----------- ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 662,157 $ 262,007 $ 924,164 $ - $ 924,164 =========== =========== =========== =========== =========== F-32
HOMENET CORPORATION UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS Pro Forma Combined HC HCI HC and HCI For the Year For the Year For the Year Ended Ended Ended March 31, December 31, Combined Pro Forma March 31, 2004 2003 HC and HCI Adjustments 2004 ------------- -------------- -------------- -------------- -------------- REVENUE Subscription television services $ - $ 683,935 $ 683,935 $ - $ 683,935 Other revenue - - - - - ------------ ------------ ------------ ------------ ------------ Total Revenue - 683,935 683,935 - 683,935 ------------ ------------ ------------ ------------ ------------ COST OF SALES Subscriber-related expenses - 389,979 389,979 - 389,979 Other costs of sales - - - - - ------------ ------------ ------------ ------------ ------------ Total Cost of Sales - 389,979 389,979 - 389,979 ------------ ------------ ------------ ------------ ------------ GROSS MARGIN (DEFICIT) - 293,956 293,956 - 293,956 ------------ ------------ ------------ ------------ ------------ OPERATING EXPENSES General and administrative 103,148 1,060,624 1,163,772 (103,148) 1,060,624 Stock-based compensation - 16,784 16,784 - 16,784 Depreciation and amortization 165 76,821 76,986 (165) 76,821 ------------ ------------ ------------ ------------ ------------ Total Expenses 103,313 1,154,229 1,257,542 (103,313) 1,154,229 ------------ ------------ ------------ ------------ ------------ LOSS FROM OPERATIONS (103,313) (860,273) (963,586) 103,313 (860,273) ------------ ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE) Software sales - 55,578 55,578 - 55,578 Loss on sale of securities (311,004) - (311,004) 311,004 - Gain on legal settlement 184,767 - 184,767 (184,767) - Interest income 7,068 - 7,068 (7,068) - Interest expense (78,711) (494,345) (573,056) 78,711 (494,345) ------------ ------------ ------------ ------------ ------------ Total Other Income (Expense) (197,880) (438,767) (636,647) 197,880 (438,767) ------------ ------------ ------------ ------------ ------------ NET LOSS (301,193) (1,299,040) (1,600,233) 301,193 (1,299,040) ------------ ------------ ------------ ------------ ------------ OTHER COMPREHENSIVE INCOME Change in marketable securities (162,157) - (162,157) 162,157 - ------------ ------------ ------------ ------------ ------------ Total Other Comprehensive Income (162,157) - (162,157) 162,157 - ------------ ------------ ------------ ------------ ------------ COMPREHENSIVE INCOME (LOSS) $ (463,350) $ (1,299,040) $ (1,762,390) $ 463,350 $ (1,299,040) ============ ============ ============ ============ ============ BASIC LOSS PER SHARE $ (0.11) $ (1.17) $ (0.58) $ (0.47) ============ ============ ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,750,000 1,113,452 2,750,000 2,750,000 ============ ============ ============ ============ F-33
HOMENET CORPORATION UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004 Pro Forma Combined HC HCI HC and HCI For the Period For the Period For the Period Ended Ended Ended June 30, September 30, Combined Pro Forma September 30, 2004 2004 HC and HCI Adjustments 2004 ------------- -------------- -------------- -------------- -------------- REVENUE Subscription television services $ - $ 661,048 $ 661,048 $ - $ 661,048 Other revenue 332,672 - 332,672 - 332,672 ------------ ------------ ------------ ------------ ------------ Total Revenue 332,672 661,048 993,720 - 993,720 ------------ ------------ ------------ ------------ ------------ COST OF SALES Subscriber-related expenses - 412,229 412,229 - 412,229 Other costs of sales 165,383 - 165,383 - 165,383 ------------ ------------ ------------ ------------ ------------ Total Cost of Sales 165,383 412,229 577,612 - 577,612 ------------ ------------ ------------ ------------ ------------ GROSS MARGIN (DEFICIT) 167,289 248,819 416,108 - 416,108 ------------ ------------ ------------ ------------ ------------ OPERATING EXPENSES General and administrative 302,458 763,525 1,065,983 7,070 1,073,053 Stock-based compensation 113,400 40,248 153,648 - 153,648 Depreciation and amortization 712 92,516 93,228 - 93,228 ------------ ------------ ------------ ------------ ------------ Total Expenses 416,570 896,289 1,312,859 7,070 1,319,929 ------------ ------------ ------------ ------------ ------------ LOSS FROM OPERATIONS (249,281) (647,470) (896,751) (7,070) (903,821) ------------ ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE) Software sales - - - - - Loss on sale of securities - - - - - Gain on legal settlement - - - - - Interest income 18,004 - 18,004 (18,004) - Interest expense (44,385) (44,840) (89,225) - (89,225) ------------ ------------ ------------ ------------ ------------ Total Other Income (Expense) (26,381) (44,840) (71,221) (18,004) (89,225) ------------ ------------ ------------ ------------ ------------ NET LOSS (275,662) (692,310) (967,972) (25,074) (993,046) ------------ ------------ ------------ ------------ ------------ OTHER COMPREHENSIVE INCOME Change in marketable securities - - - - - ------------ ------------ ------------ ------------ ------------ Total Other Comprehensive Income - - - - - ------------ ------------ ------------ ------------ ------------ COMPREHENSIVE INCOME (LOSS) $ (275,662) $ (692,310) $ (967,972) $ (25,074) $ (993,046) ============ ============ ============ ============ ============ BASIC LOSS PER SHARE $ (0.12) $ (0.30) $ (0.42) $ (0.43) ============ ============ ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,318,000 2,318,000 2,318,000 2,318,000 ============ ============ ============ ============ F-34