U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-KSB
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 2004.
[ ] Transition report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from ____ to ____.
COMMISSION FILE NO: 0-31497
VIDEO WITHOUT BOUNDARIES INC.
(Name of small business in its charter)
FLORIDA 65-1001686
(State or other jurisdiction (IRS Employer
of Incorporation) Identification No.)
888 EAST LAS OLAS BLVD, SUITE 710
FORT LAUDERDALE, FL 33301
(Address of Principal Executive Offices)
(954) 527-7780
Issuer's telephone number including area code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Title of Class: Common
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [ ]
No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
Issuer's revenues for its most recent fiscal year ended December 31, 2004 were
$14,167.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of October 13, 2005 was approximately $26,973,319.
The number of shares outstanding of each of the issuer's common stock, as of
October 13, 2005: 77,066,626 shares of common stock.
Documents incorporated by reference:
None
Video Without Boundaries, Inc.
FORM 10-KSB
INDEX
PART I
Item 1. Description of Business 3
Item 2. Description of Property 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market of Common Equity and Related Stockholder Matters 11
Item 6. Management's Discussion and Analysis of Financial Condition 11
And Results of Operations
Item 7. Financial Statements 15
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure 15
Item 8A. Controls and Procedures 15
Item 8B. Other Information 15
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 15
Item 10. Executive Compensation 15
Item 11. Security Ownership of Certain Beneficial Owners and Management
And Related Stockholder Matters 16
Item 12. Certain Relationships and Related Transactions 16
Item 13. Exhibits and Reports on Form 8-K 16
Item 14. 17
Signatures 18
Financial Statements F-1 through F-19
Certifications
2
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Report on Form 10-KSB, contains forward-looking statements within the
meaning of and which are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are subject to risks and uncertainties that could cause actual
results to be materially different from historical results or from any results
expressed or implied by such forward-looking statements. Forward-looking
statements generally are accompanied by words such as "anticipates," "belief,"
"believes," "estimates," "expects," "intends," "plans" and similar statements,
and should be considered uncertain and forward-looking. Any forward-looking
statements speak only as of the date on which such statement is made, are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions that are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or forecast in such
forward-looking statements, whether as a result of new information, future
events or otherwise. Factors that could cause our results to differ materially
from the results discussed in such forward-looking statements include, without
limitation: going-concern considerations; uncertain continued ability to meet
our development and operational needs in view of our serious working capital
shortage; no assurances of and uncertainty of future profitability; our plan to
enter new, untested markets; our dependence on our management and the
requirement of additional management in order to execute our operating plan; the
uncertainty of the U.S. economic recovery and economic trends; the impact of
competitive services and pricing; the Sarbanes Oxley Act has increased our
legal, accounting and administrative costs; and many of such risk factors that
are beyond our control. New factors emerge from time to time and it is not
possible for management to predict all of such factors, nor can it assess the
impact of each such factor on the 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. In light of these risks and
uncertainties, there can be no assurance that the results anticipated in these
forward-looking statements contained in this Report will in fact occur. All
forward-looking statements wherever they may appear are expressly qualified in
their entirety by the cautionary statements in this section. We undertake no
obligation to update any such forward-looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
CORPORATE HISTORY
Video Without Boundaries, Inc. a Florida corporation (the "Company") is the
result of a merger between a then existing public company and a private
corporation in 1999. The Company developed as a single-source internet and
streaming media product and solutions provider.
Since 2003, the Company has repositioned itself within the entertainment and
home broadband marketplace as it continues to develop its MediaREADYTM product
line. The Company now provides products and services in the converging digital
media on demand, enhanced home entertainment and emerging interactive consumer
electronics markets.
GENERAL
The Company is focused on home entertainment media products and solutions that
enhance the consumer experience, while providing new revenue opportunities for
online music and movie content providers. The Company is becoming a supplier of
broadband products, services and content including its ability to deliver
broadcast quality digital video and web interactivity at transfer rates as low
as 56K.
The Company's goals are: 1) to become a developer/licenser, producer and
distributor of interactive consumer electronics equipment; 2) establish itself
as a software infrastructure player within the home entertainment
media-on-demand marketplace; and 3) attempt to capture revenue and market share
from services and products within the video on demand (IP) marketplace.
BROADBAND MEDIA MARKETPLACE
Just when broadband growth in the United States appeared to be waning, Leichtman
Research Group, Inc. (LRG) found that the twenty largest cable and DSL providers
in the US - representing about 95% of the market - achieved record net additions
in the third quarter
3
of 2004. Combined net additions for the quarter totaled over 2.3 million
subscribers - a total that slightly exceeded the previous record set in the
first quarter of 2004.
The top broadband providers now account for over 30.9 million high-speed
Internet subscribers, with cable having nearly 18.8 million broadband
subscribers, and DSL having close to 12.2 million subscribers.
Other key findings include:
o The top cable providers added 1.28 million subscribers, representing
55% of the net broadband additions for the quarter versus DSL -
rebounding from last quarter when DSL, for the first quarter ever, had
a greater share of net additions than cable
o Comcast alone added a record 549,000 net additional subscribers in the
quarter - representing 44% of total additions for the top cable
operators, and nearly a quarter of all broadband adds in the quarter
o The top cable broadband providers retain a 6.6 million subscriber
advantage over DSL and have a 61% share of the total market versus DSL
o In the past year, from the end of third quarter of 2003 to the end of
the third quarter of 2004, cable and DSL added 8.3 million net
subscribers - a record for any one year period
Broadband Internet Provider Subscribers at End of Q3 2004 Net Adds in Q3 2004
Cable
Comcast 6,554,000 549,000
Time Warner 3,716,000 168,000
Cox 2,430,555 184,446
Charter 1,819,900 108,500
Adelphia** 1,253,407 85,605
Cablevision 1,259,024 79,984
Bright House Networks* 700,000 25,000
Mediacom 350,000 23,000
Insight 311,500 37,600
RCN* 215,000 5,000
Cable One 165,600 13,300
Total Top Cable 18,774,986 1,279,435
DSL
SBC 4,679,000 402,000
Verizon 3,253,000 309,000
Bell South 1,872,000 134,000
Qwest 956,000 103,000
Covad 524,900 10,555
Sprint 432,000 49,000
ALLTEL 216,885 22,351
Cincinnati Bell 123,000 6,000
Century Tel 120,869 12,049
Total Top DSL 12,177,654 1,047,955
Total Broadband 30,952,640 2,327,390
4
Sources: The companies and Leichtman Research Group, Inc. * Bright House
Networks and RCN subscriber counts are estimates ** Adelphia subscriber counts
do not include properties owned by the Rigas family Top cable and DSL providers
represent approximately 95% of all subscribers Company subscriber counts may not
represent solely residential households.
Similar research in the industry also points out that over 50% of broadband
customers are installing in-home networks as a means for sharing high speed data
connections, files and resources. With this mass adoption of broadband
connectivity and in-home networking technology, consumers have the ability to
access a wide range of digital media over the internet and move that media
around our homes. The world is moving away from the storefront delivery of media
to a new all-digital distribution system. Consumers are becoming acclimated to
the benefits and quality of digital media goods and on-line digital media. In
addition, PCs, digital cameras, USB storage devices, MP3 players, CDs and DVDs
are all broadly accepted consumer devices that are changing the way we view
media. Consumers no longer store their pictures, videos or audio files on tapes
or other antiquated storage mechanisms.
The acceptance of digital media and storage options, coupled with new digital
distribution (IP) methods, is resulting in new convergence devices being
introduced to consumers that allow for:
o Universal Playback and storage of all digital media rented and purchased by
the consumer o Consumers to have "on-demand" or immediate access to all digital
media purchased & available for rental. o All forms of digital media to be
played on all traditional audio/video equipment within the home, but also on
relatively new, increasingly portable equipment (laptops, MP3 players)
As a result of the above, consumer interaction with media is changing in
significant ways. Supporting and exploiting this new consumer behavior requires:
o Simple to use devices that conform to existing consumer behavior and media
needs o Conceptual bridge between the "home PC" and the living room environment
o Robust Digital Rights Management (DRM) solution to support secure IP media
delivery
PRINCIPAL PRODUCTS
Consumer Products:
MediaREADYTM 4000:
The MediaREADYTM 4000, retail price $449, connects to the home user's TV,
Stereo, home network and Internet to bring the best of what digital media can be
into a single device. As the medium of media delivery is shifting from tangible
products to electronic media, new capabilities are required from the essential
entertainment devices in the consumer's living rooms. The MediaREADYTM 4000 is a
product that was designed to give the answer. The MediaREADY 4000 comes with
support for an essential suite of TV-centric media applications to help create
an easy to navigate environment for controlling a consumer's entertainment
choices. In addition, the product serves as an upgradeable platform that allows
consumers to constantly update the features and content to ensure their ability
to enjoy this product well into the future.
MediaREADYTM 4000 Highlights
o Media Jukebox - burn and manage music, movies and pictures on the
MediaREADYTM hard drive, any PC connected to the same home network or
connected peripherals (ex. digital cameras, external storage devices)
o Rip CDs onto the MediaREADYTM 4000 - Provides easy access to a
consumer's music collection from the TV screen, creates play lists of
favorite songs
o Present Your Pictures on The TV - Transfer pictures from digital camera
to be displayed on the TV, transfer pictures from a consumer's PC to be
displayed on the TV, create slideshows to auto-play while music plays
at the same time
o Play Music and Video from PC on the TV - Access all the pictures, music
and video stored on the PC from the TV
5
o Download and stream full-Screen DVD quality video and music over the
Internet on one's TV
o High speed internet browsing with TV-centric website portal to provide
the best surfing experience on the TV o Enhanced DVD/CD Player with 5.1
Digital Surround
o Create and manage multiple email accounts
o TV-friendly games of all genres and skill levels
o Simple to use Karaoke feature to sing along with one's entire music
collection or access new content on demand
o Wireless Keyboard and Remote Controls both with trackball mouse built
in for easy navigation
o Unmatched level of connectivity for USB, 1394, Component or composite
video peripherals
o Remotely upgradeable to ensure the latest applications, services and
content are kept current and competitive
MediaREADYTM 4000+RW:
The MediaREADYTM 4000+RW, retail price $599, connects to one's TV, Stereo, home
network and Internet to bring the best of what digital media can be into a
single device. The unit supports an essential suite of TV-centric media
applications that create an easy to navigate environment for controlling one's
entertainment choices. The product also allows the user to easily archive all of
their digital media through the DVD+RW loader. In addition, the product serves
as an upgradeable platform that allows the consumer to constantly update the
features and content to ensure their ability to enjoy this product well into the
future.
MediaREADYTM 4000+RW Highlights
o Broadband Connectivity
o Remotely upgradeable to ensure the latest applications, services and
content are kept current and competitive
o In-home Network Ready
o PCMCIA Wireless card or Ethernet capable
o DVD+RW
o Enhanced DVD/CD Player and Recorder with 5.1 Digital Surround
o Media Jukebox - Burn and manage your music, movies and pictures on the
MediaREADY(TM)'s hard drive, any PC connected to the same home network
or connected peripherals (ex. digital cameras, external storage
devices). Rip CDs onto the MediaREADY 4000. Play Music and Video from
PC on the TV.
o Support for Streaming and Downloaded Media
o Full-Screen DVD quality Video and Music over the Internet on your TV
o Web Browsing
o High speed internet browsing with TV-centric website portal to provide
the best surfing experience on the TV
o TV E-Mail
o Create and manage multiple email accounts
MediaREADYTM 5000 PVR+RW:
The MediaREADYTM 5000 PVR+RW, suggested retail price $899, allows users to
customize viewing by recording shows on a built-in computer hard drive or DVD
recorder. Made popular by TiVo, the concept of time shifting television is
gaining mass acceptance. The functionality of this unit is, however, unmatched
in the industry. Users can access digital media files on the unit's internal
drive, any PC or on the same in-home network, connected peripheral devices. In
addition, the unit brings On-demand content, E-mail, Internet browser, Games,
and MP3/CD/DVD/MPEG-1/MPEG-2/MPEG-4 playback to any connected television.
Professional Products:
In July 2004, the Company announced plans to license the MediaREADY(TM) 400,
MediaREADY(TM) 4000 and the MediaREADY(TM) Module to consumer electronics
manufacturers interested in deploying a variety of competitive broadband-enabled
devices. The Company has recently added the MediaREADY 5000 PVR+RW to the list
of available products. All MediaREADY(TM) products are tightly integrated
hardware designs which provide broadband media capabilities, fast time-to-market
and recurring revenue opportunities for licensees. The MediaREADY(TM) Module is
a
6
low-cost small footprint module designed to empower television sets and other
consumer electronics devices with a wide range of broadband media applications.
Hardware available for license:
MediaREADYTM 4000 hardware:
The MediaREADYTM 4000 connects to a person's TV, home stereo, home network and
Internet, combining the best of digital media into a single device. As media
delivery continues to shift from tangible products to electronic media, new
capabilities are required from the essential entertainment devices found in
consumers' living rooms. The MediaREADY(TM) 4000 offers the answer with an
essential suite of easy to navigate, TV-centric media applications that control
all the user's various entertainment choices. In addition, the product serves as
an upgrade platform for future features and content, thus ensuring the product's
performance and enjoyment well into the future.
MediaREADYTM 5000 PVR+RW:
The MediaREADY(TM) 5000 PVR+RW combines a suite of popular TV-centric
applications for digital media management and communication with an advanced
electronic program guide and the ability to record broadcast media on either the
internal hard drive or DVD recorder.
MediaREADY(TM)400 hardware:
The MediaREADY(TM) 400 takes the best features and functionality of the
MediaREADY(TM) 4000 and encases them in a small, discreet enclosure. By offering
an integrated hard drive, smart card support, Ethernet connectivity,
USB/1394/superior A/V connectivity and a full go-to-market suite of TV-centric
applications, the MediaREADY(TM) 400 brings today's high speed internet users a
feature-rich solution to access their digital media.
MediaREADY(TM) Module:
The MediaREADY(TM) Module can be designed into many different types of consumer
electronics, including televisions, DVD players, home theater amplifiers and
receivers, and a host of other devices. This design flexibility allows the
Company to provide a wide range of solutions for manufacturers looking to expand
the feature-set of their devices. In an era when time-to-market is key, having a
partner with proven hardware capabilities is fundamental to success. The Company
works with the top IC solution providers in the world; what's more, no design or
feature-set combination is too complicated for MediaREADY(TM) design products.
The Company has made its MediaREADY(TM) technology available for consumer
electronic manufacturers beginning in Q4 2004.
In addition, the MediaREADYTM platform allows consumers to upgrade their units
with additional services based on a one-time or subscription charge. The Company
offers value-added applications and upgrades that include: o Games (Single or
Multiplayer) o On Demand Media Rental and Purchase
Content Delivery Network:
In September 2004, the Company announced the launch of the Content Delivery
Network (CDN) supported by its then technology partner C.A.C Media. The CDN will
be deployed by the Company on all MediaREADYTM products and will deliver DVD
quality video content to MediaREADYTM enabled TVs over the Internet. The network
will support a wide range of content including Channel Programming (Subscription
Video on Demand) and Library Subscription Video on Demand. The CDN is a major
step forward in consumer electronics as we will be in a position to generate an
ongoing revenue stream from every unit sold.
About the content available:
Channel Program (SVOD)
Using a TV-based navigation screen, MediaREADYTM users can log on a channel,
select a show they are interested in watching and click to play it
instantaneously. Channels may consist of daily or weekly episode updates.
Individual Titles - VOD:
Home users can browse between available titles and select titles they wish to
view. The content is sent over the Internet to a MediaREADYTM device and will
play on a TV screen connected to any enabled device. The content network will
support DVD and High Definition
7
quality video transmission. Content owners have the option of allowing users to
"purchase" instead of rent. If purchased, the user will receive a physical DVD
of the purchased material along with unlimited access to the title on their MCSS
device.
Library SVOD:
The CDN also provides a great platform for instructional content and large
archives of content to generate income by offering up to 1 year of unlimited
access libraries of content and instructional video classes. From wine tasting
and magic lessons to archival music collections of the 60s, the Library SVOD
feature serves both consumers and content owners.
At the Digital Hollywood Conference in Los Angeles in 2004, the Company
announced the TV FOR THE PEOPLE BY THE PEOPLETM Concept. In partnership with CAC
Media, the Company is creating a number of independently developed "channels"
scheduled for the 2005 season which are currently in production including;
Celebrity Gossip, Console Game Review, Yoga Instruction, Beat'em at Hold'em,
Muscle Cars, $500 US Travel, Become a Magician, Daily Soap Review, Diet Channel,
Knit 1 Perl 2, Frat Party USA, Dance Channel and Extreme Pranks & Jokes.
This Content Delivery Network will be available on the Company's MediaREADYTM
hardware and is also available for license by other CE/PC manufacturers.
Our MediaREADYTM product line provides retailers and resellers with royalty
commissions (sales incentive) on future upgrades and point-of-sale add-on
purchases (i.e. external storage for media). Since consumers already understand
the basic MediaREADYTM features (DVD, PVR, Internet Access) and broadly accept
the $299 - $499 price point, the key sales/marketing proposition is that the
products:
o Consolidate several popular devices (and features) into one universal
unit
o Are easily and inexpensively upgradeable via software downloads
o Stand out as the "best buy for the dollar" (also provides the best
profit for the retailer/salesperson)
The Company expects to eventually become cash flow positive primarily through
retail distribution (VAR and End User) and OEM licensing sales. In addition, the
Company will also receive incremental revenue streams based upon: o Purchases of
value-added applications through the MediaREADYTM platform o Professional
Services Revenue based upon customized value-added applications
SALES AND MARKETING
The Company plans to promote itself by direct sales efforts using telephone
sales, conventional media advertising, and Internet marketing. These
advertisements will be targeted at small, medium, and large business customers
as well as retail consumers who are likely to respond to specific ads or visit
specific web sites to make a purchase.
The Company employs three inside and outside sales people to help customers and
to prospect business from various forms of lead generation. The Company also
plans to engage independent sales agents in various geographic areas as well as
product dealers and resellers.
Our marketing strategy is to promote and enhance our brand by participating in
targeted industry conferences and seminars, as well as engaging in a public
relations campaign. This strategy is designed to strengthen our brand name and
generate new clients by increasing the awareness of our brand with high quality
comprehensive converging digital media on demand, enhanced home entertainment
and emerging interactive consumer electronics companies. The extent of the sales
and marketing of our products and services is dependent on the Company's
continued ability to raise capital and grow revenues, of which no assurances are
given.
The Company believes that establishing and maintaining a good reputation and
name recognition is critical for attracting and expanding our customer base. We
also believe that the importance of product acceptance and market validation
will increase due to the growth in the converging digital media on demand,
enhanced home entertainment and emerging interactive consumer electronics
markets. If the various product markets and customers do not perceive our
products and services to be effective or of high quality, our brand name and
reputation could be materially and adversely affected.
8
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company utilizes an outsourcing product development model. Therefore, many
of the products' materials and components are provided as assemblies by the
Company's suppliers. Most of those suppliers are in Asia and procurement is
either contract-development based or by purchase order.
The MediaREADYTM media center products, while architected by the Company, are
designed and manufactured for the Company under contract with original design
and manufacturing partners. Components such as the main board, enclosure, and
peripheral boards are outsource designed and produced uniquely for the Company.
Integrated circuits and other components used in the design of such electronic
assemblies are primarily off-the-shelf silicon from industry providers such as
Sigman Designs, Via Technology, Philips, Samsung, Hitachi, and Texas
Instruments. Other components of these products, eg. power supply, hard drive,
and DVD/CD drives are industry standard components from companies providing the
personal computer industry. Mechanical components are designed and produced by
original design and manufacturing partners in Asia as well.
The mix between Company-specific components and off-the-shelf components is a
result of finding the optimal trade off between what is available in the market
place and what the Company must create in order to have the most marketable
products. This result is very much part and parcel of the Company's outsourced
model advantage.
CUSTOMERS
The Company continues to focus on long-term relationships with clients that will
range from retail consumers to small, medium, and large business customers.
Agreements and purchase orders that may be entered into in connection with
product sales are generally on an order by order basis. If our clients terminate
purchase orders or if the Company is unable to enter into new engagements or
sell its new products and services, our business, financial condition and
results of operations could be materially and adversely affected. In addition,
because a proportion of the Company's expenses is relatively fixed, a variation
in the number of products sold can cause significant variations in operating
results from quarter to quarter.
The Company's product sales will vary in size; therefore, a customer that
accounts for a significant portion of the Company's revenues in one period may
not generate a similar amount of revenue in subsequent periods. During the
period ended December 31, 2004, 62.5% of the Company's revenues, which only
aggregated $14,167, related to a product trial order which began in late 2004.
Based upon recent informal discussions with various prospective customers, the
Company does not currently believe that it will derive a significant portion of
its revenues from a limited number of clients in the near term. However, we can
not assure that this will be the case and in such an event, any cancellation,
deferral, or significant reduction in future orders could have a material
adverse affect on the Company's business, financial condition, and results of
operations.
COMPETITION
Broadband Media Device Competition
Industry: Product Line Example
PC Manufacturers: Multimedia PC "Media Station"
o Form factor (design), connectivity and usability are not living room &
stereo/TV friendly
o Designed for early adopter market
o Expensive (averaging $2,000)
Networking/Wireless Approach: Media Receiver
o Requires PC and extensive PC proficiency from the user
o Expensive (averaging $849)
Consumer Electronics Manufacturers: Media Server
o Expensive (averaging $7442)
9
Many of the Company's competitors have longer operating histories, larger client
bases, longer relationships with clients, greater brand or name recognition and
significantly greater financial, technical, marketing and public relations
resources. Several of these competitors may provide or intend to provide a
broader range of products and services than the Company. Furthermore, greater
resources may enable a competitor to respond more quickly to new or emerging
technologies and changes in customer requirements and to devote greater
resources to the development, promotion and sale of its products and services
than we can. In addition, competition may intensify in the converging digital
media on demand, enhanced home entertainment and emerging interactive consumer
electronics markets by major companies which could have an adverse on the
Company.
While as of December 31, 2004, the Company had no portion of the converging
digital media on demand, enhanced home entertainment and emerging interactive
consumer electronics market due to its development and testing of products for
distribution launch in the United States, we have recently entered the retail
market on a limited basis through a limited number of distributors. There can be
no assurances that we will be able to further penetrate retail markets in the
future because of the need for the Company to raise additional capital to fund
its sales and marketing efforts.
TRADEMARKS
As of December 31, 2004, the Company had submitted the following mark for
listing on the trademark registry:
MediaREADYTM
GOVERNMENTAL APPROVALS
The Company's MediaREADYTM set top boxes are required to pass radiation emission
testing as per FCC compliance. The Company uses the services of a full service
importer that handles the logistics of importing the products which includes the
emissions testing.
RESEARCH AND DEVELOPMENT
The Company expended research and development cost of $5,304 and $40,000 for the
years ended December 31, 2004 and 2003, respectively.
OTHER DEVELOPMENTS
Acquisition of Graphics Distribution, Inc.:
On August 11, 2004 (with an effective date of June 1, 2004) the Company entered
into a stock purchase agreement with the sole shareholder of a privately-held
company engaged in the business of selling and distributing electrical products.
The principal terms of the agreement provide for the Company to acquire all of
the issued and outstanding shares of the acquired entity for a purchase price of
$1,500,000 plus the issuance of 1,000,000 restricted common stock shares in the
acquiring entity. Additional consideration included in this stock purchase
agreement required the Company to collateralize an existing line of credit in
the amount of $2,500,000 as well as retain the services of the selling
shareholder, pursuant to a consulting agreement dated August 11, 2004, for a
term consistent with the fulfillment of the stock purchase agreement. The
Company, at time of closing, gave its initial deposit of $350,000, but has
defaulted on the remaining balance due and is also in default of the
collateralization provision. Management has written off the deposit of $350,000
and is actively negotiating with the seller a resolution to this matter.
Management anticipates, but can not assure that a settlement will be forthcoming
and that the Company loss will consist of their forfeited deposit.
CAC Investment write off:
The Company reviewed the investment in CAC Media for possible impairment and
provided for a decline in value of $70,000, $93,000 and $865,000 at December 31,
2002, 2003 and 2004 respectively.
On December 3, 2005, the Company and a stockholder/creditor entered into an
agreement which amended a prior agreement concerning the terms and conditions
attached to the conversion of outstanding debt into restricted or free trading
stock of the Company. The original agreement conveyed upon the stockholder the
right to convert amounts owed to him at a price of one ($.01) cent per share
without restrictions as to time periods. Based upon the terms and conditions of
the amended agreement, the stockholder, effective with the period commencing
July 1, 2005, will have conversion rights as follows; for the third calendar
quarter of 2005 the conversion of debt to stock shall be at twenty (20%) percent
of the then closing price on the date of conversion; for all subsequent periods
this conversion formula shall be at forty (40%) percent of the then closing
price of the stock on the date of conversion. In addition, effective October 10,
2005, the stockholder shall be limited in respect to the amount of outstanding
debt he will be permitted to convert in any calendar quarter. This limitation
has been set at three (3%) percent of the outstanding debt.
As of December 31, 2004, the Company had cash and net working capital of $79,765
and ($2,490,310), respectively. The Company believes that its current working
capital and cash generated from operations will not be sufficient to meet the
Company's cash requirements for the next twelve months without the ability to
obtain profitable operations and/or obtain additional financing. If the Company
is not successful in generating sufficient cash flows from operations or in
raising additional capital when required in sufficient amounts and on acceptable
terms, these failures could have a material adverse effect on the Company's
business, results of operations and financial condition. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
the Company's then-current stockholders would be diluted. Our independent public
accountant has included as a footnote in their report on our financial
statements, stating that certain factors raise substantial doubt about our
ability to continue as a going concern.
There can be no assurance that the Company will be able to raise any required
capital necessary to achieve its targeted growth rates and future continuance on
favorable terms or at all.
EMPLOYEES
As of December 31, 2004 the Company employed a total of six persons on a
full-time and part-time basis. In addition the Company had consulting agreements
with six outside individuals or firms for sales and marketing, technical
consulting, and public relations. Our personnel are not subject to any
collective bargaining agreements and Company has not experienced any work
stoppages. The Company believes that its labor relations are satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate office is located at 888 East Las Olas Blvd, Suite 710,
Fort Lauderdale, FL 33301. Pursuant to a written lease, as amended, the Company
leases 2,689 square feet at approximately $70,000 per annum. Such lease, as
amended, expires May 31, 2006.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to and none of our property is subject to any pending
or threatened legal proceeding. In addition, no director, officer or affiliate
of the Company and no owner of record or beneficial owner of more than 5.0% of
the securities of the Company or any associate of any such director, officer or
security holder is a party adverse to the Company or has a material interest
adverse to the Company in reference to pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of the fiscal year which ended December 31, 2004.
10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 2004, the Company's common stock commenced trading on the pink
sheets under symbol VDWB. Prior thereto, the Company's common stock traded on
the OTC electronic bulletin board under the symbol VDWB. The Company's common
stock moved to the pink sheets as a result of the Company not being deemed
current with its annual report filing with the SEC due to the auditor's report
for 2003 not being prepared by an auditor registered with the Public Company
Accounting Oversight Board ("PCAOB"). There was no trading in the Company's
common stock prior to May 2000. The following table shows the quarterly high and
low bid prices for the calendar year 2004 as reported by the National Quotations
Bureau Incorporated. These prices reflect inter-dealer quotations without
adjustments for retail markup, markdown or commission, and do not necessarily
represent actual transactions.
YEAR PERIOD HIGH LOW
---- ------ ---- ---
2004 First Quarter $1.99 $0.25
Second Quarter $1.23 $0.66
Third Quarter $0.77 $0.42
Fourth Quarter $1.05 $0.47
As of December 31, 2004, there were approximately 191 holders of record of the
Company's common stock. Holders of the Company's common stock are entitled to
dividends when, as and if declared by the Board of Directors out of funds
legally available therefore. The Company does not anticipate the declaration or
payment of any dividends in the foreseeable future.
The Company intends to retain earnings, if any, to finance the development and
expansion of its business. Future dividend policy will be subject to the
discretion of the Board of Directors and will be contingent upon future
earnings, if any, the Company's financial condition, capital requirements,
general business conditions and other factors. Therefore, there can be no
assurance that any dividends of any kind will ever be paid.
All of the securities described below were sold pursuant to Section 4(2) under
the Securities Act of 1933, as amended (the "Securities Act"), based upon the
limited number of offerees, their relationship to the Company, the number of
shares offered, the size of the offering, and the manner of such offering.
During 2001 through 2003 the Company issued convertible debentures in the
amounts of $268,000 and $482,000, respectively. The debentures mature 90 days
after issuance, with interest accruing at the rate of 12% per annum. The 2001
issuance entitles the holder of each debenture to have the right at anytime
before maturity, to convert the principal and accrued interest into shares of
common stock of the Company at $0.05 per share. During 2002 the holders of the
2001 debenture issuance converted their debentures and associated interest into
stock amounting to $526,549.
The 2003 and 2002 issuances entitles the holder of each debenture to have the
right at anytime before maturity, to convert the principal and accrued interest
into shares of restricted common stock at 50% of the bid price of the stock. As
a consequence of the latter beneficial conversion feature the discount
associated with the conversion feature reduced the amounts due to the debenture
holders to zero at December 31, 2002. The recorded debt discount was calculated
as the difference between the conversion price and the relative fair value of
the common stock into which the security is convertible. During 2003 the holders
of the 2002 debenture issue converted their debentures and associated interest
and finance expense into stock amounting to $755,920.
In 2004 the Company issued 150,000 shares of its restricted common stock for
services rendered, pursuant to an employment agreement with the Chief Technology
Officer, valued at prices ranging from $.35 to $.50 per share. The Company also
converted debt due to shareholders into 34,399,879 shares of restricted common
stock, sold 3,500,000 shares of restricted common stock to investors, and
cancelled 379,500 shares of restricted common stock.
On November 1, 2004 the Company increased its authorized common stock from 50
million to 100 million shares.
The Company's transfer agent is Interwest Transfer Co., Inc., which is located
at 1981 East 4800 South, Suite 100, Salt Lake City, UT 84117 with telephone
number (801) 272-9294.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report on Form 10-KSB, contains forward-looking statements within the
meaning of and which are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are subject to risks and uncertainties that could cause actual
results to be materially different from historical results or from any results
expressed or implied by such forward-looking statements. Forward-looking
statements generally are accompanied by words such as "anticipates," "belief,"
"believes," "estimates," "expects," "intends," "plans" and similar statements,
and should be considered uncertain and forward-looking. Any forward-looking
statements speak only as of the date on which such statement is made, are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions that are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or forecast in such
forward-looking statements, whether as a result of new information, future
events or otherwise. Factors that could cause our results to differ materially
from the results discussed in such forward-looking statements include, without
limitation: going-concern considerations; uncertain continued ability to meet
our development and operational needs in view of our serious working capital
shortage; no assurances of and uncertainty of future profitability; our plan to
enter new, untested markets; our dependence on our management and the
requirement of additional management in order to execute our operating plan; the
uncertainty of the U.S. economic recovery and economic trends; the impact of
competitive services and pricing; the Sarbanes Oxley Act has increased our
legal, accounting and administrative costs; and many of such risk factors that
11
are beyond our control. New factors emerge from time to time and it is not
possible for management to predict all of such factors, nor can it assess the
impact of each such factor on the 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. In light of these risks and
uncertainties, there can be no assurance that the results anticipated in these
forward-looking statements contained in this Report will in fact occur. All
forward-looking statements wherever they may appear are expressly qualified in
their entirety by the cautionary statements in this section. We undertake no
obligation to update any such forward-looking statements.
The following is a discussion of the financial condition and results of
operations of the Company for the year ended December 31, 2004 and significant
factors that could affect our prospective financial condition and results of
operations. You should read this discussion in conjunction with the financial
statements, including the notes thereto, of the Company included elsewhere in
this Form 10-KSB. Historical results may not be indicative of future
performance.
OVERVIEW
The Company is developing new products and services in regard to its media
convergence business within the home entertainment marketplace. All major PC,
consumer electronics, and set-top box manufactures have added streaming media
players within their products to capitalize on the growth of broadband
connections and streaming content offered over the Internet. With more than 10
million broadband households and nearly 35 million broadband-enabled screens,
the Company is attempting to capitalize on the growth of this market through its
professional services division and potential new partnerships and business
ventures.
The Company has repositioned itself within the entertainment and home broadband
marketplace. The Company's goals are: 1) to become a developer/licenser,
producer and distributor of interactive consumer electronics equipment; 2)
establish itself as a software infrastructure player within the home
entertainment media-on-demand marketplace; and 3) attempt to capture revenue and
market share from services and products within the video on demand (IP)
marketplace.
Quarter-to-quarter fluctuations in margins:
The Company's operating results and quarter-to-quarter margins may fluctuate in
the future as a result of many factors, some of which are beyond the Company's
control. Historically, the Company's quarterly margins have been impacted by:
o the number of client purchase orders completed
o seasonality
o the number of days during the quarter
o marketing and business development expenses
o pricing changes
o economic conditions generally or in the information technology products
and services markets
The Company expects these trends to continue.
The Company's MediaREADYTM products are the first consumer electronic products
to achieve the long-awaited promise of convergent home entertainment. All
MediaREADYTM units have the ability to connect PC's wirelessly to home
entertainment stereo and TV systems, linking all digital media content stored on
PC's to its onboard hard drive. The products leverage the power of VIA
Technologies EPIA processing, a breakthrough product offering low power
consumption, quiet operation, and high-bandwidth connectivity options including
IEE1394, USB2.0, S-Video, RCA TV-Out (NTSC and PAL), 10/100 Ethernet and
wireless PCMCIA card support, enabling MediaREADYTM units to download, play, and
manage digital movies, music and pictures from the Internet, or from a home
networked PC. The recently announced MediaREADYTM 5000 also adds the ability to
record live TV and burn DVDs. Similar in size to a standard DVD player, the
MediaREADYTM products retail between $449-$899.
12
RESULTS OF OPERATIONS
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003.
REVENUES
Net revenues are comprised of product and services revenues, net of returns and
allowances. In 2004, revenues were $14,167 compared to $1,770 for 2003. The
increase in net sales was due to a product trial order placed in late 2004.
GROSS PROFIT
Gross Profit for 2004 was ($4,862) compared to $724 for 2003. The decrease in
gross profit was primarily due to additional shipping costs associated with the
product trial order placed in late 2004.
GENERAL AND ADMINISTRATIVE
General and administrative expense includes personnel costs, administrative
expenses, general office expenses, depreciation expenses, advertising costs,
professional fees, and research and development. General and administrative
expenses for 2004 were $1,660,651 compared to $1,210,680 for 2003. The increase
in general and administrative expenses was a result of company investment in the
development of new products and services.
Net cash used in operating activities for 2004 was $1,126,743 compared to
$122,844 for 2003. Net cash used in operating activities was primarily
attributable to net losses.
Net cash provided by financing activities for 2004 was $2,482,100 compared to
$450,677 for 2003. Net cash provided by financing activities resulted from
advances from a shareholder and a convertible debenture.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2004, the Company had cash and net working capital of $79,765
and ($2,490,310), respectively. The Company believes that its current working
capital and cash generated from operations will not be sufficient to meet the
Company's cash requirements for the next twelve months without the ability to
obtain profitable operations and/or obtain additional financing. If the Company
is not successful in generating sufficient cash flows from operations or in
raising additional capital when required in sufficient amounts and on acceptable
terms, these failures could have a material adverse effect on the Company's
business, results of operations and financial condition. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
the Company's then-current stockholders would be diluted. Our independent public
accountant has included as a footnote in their report on our financial
statements, stating that certain factors raise substantial doubt about our
ability to continue as a going concern.
There can be no assurance that the Company will be able to raise any required
capital necessary to achieve its targeted growth rates and future continuance on
favorable terms or at all.
On December 3, 2005, the Company and a stockholder/creditor entered into an
agreement which amended a prior agreement concerning the terms and conditions
attached to the conversion of outstanding debt into restricted or free trading
stock of the Company. The original agreement conveyed upon the stockholder the
right to convert amounts owed to him at a price of one ($.01) cent per share
without restrictions as to time periods. Based upon the terms and conditions of
the amended agreement, the stockholder, effective with the period commencing
July 1, 2005, will have conversion rights as follows; for the third calendar
quarter of 2005 the conversion of debt to stock shall be at twenty (20%) percent
of the then closing price on the date of conversion; for all subsequent periods
this conversion formula shall be at forty (40%) percent of the then closing
price of the stock on the date of conversion. In addition, effective October 10,
2005, the stockholder shall be limited in respect to the amount of outstanding
debt he will be permitted to convert in any calendar quarter. This limitation
has been set at three (3%) percent of the outstanding debt.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Revenues
The Company recognizes revenues on product sales when the product is shipped and
title has passed to the customer. Service revenue is recognized when the
services are performed.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenue and expenses during the
reported period. Actual results could differ from those estimates.
13
Inventory
Inventory is valued using the first-in, first-out method of accounting and is
stated at the lower of cost or net realizable value.
Property and Equipment
Property and equipment is recorded at cost, net of accumulated depreciation,
which is provided for by a charge to operations over the estimated useful life
of the assets using the straight-line method. The useful life of the assets is
3-4 years.
Expenditures that extend the useful life of the respective assets are
capitalized and depreciated over the lives of the respective assets.
Maintenance, repairs and other expenses that do not extend their useful life are
expensed as incurred.
Financial Instruments
The Company's financial instruments are cash, accounts receivable, loans
receivable, accounts payable, accrued expenses, and notes payable. The recorded
values of cash, accounts receivable, loans receivable, accounts payable, and
accrued expenses approximates their fair values based on their short-term
nature. The fair value of notes payable is based on current rates at which the
Company could borrow funds with similar remaining maturities, and the carrying
amount approximates fair value.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" (SFAS No. 109). Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributed to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax base. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. If
it is more likely than not that some portion of a deferred tax asset will not be
realized, a valuation allowance is recognized.
Convertible Debentures
Convertible debentures with beneficial conversion features, are accounted for in
accordance with guidance supplied by Emerging Issues Task Force ("EITF") No 98-5
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios" and EITF No. 00-27 "Application of
Issue 98-5 to Certain Convertible Instruments."
In addition, since the debt is convertible into equity at the option of the note
holder at the date of issuance at beneficial conversion rates, an embedded
Beneficial Conversion Feature ("BCF") has been recorded as discount against the
debentures in the accompanying balance sheet and as an increase to additional
paid-in capital at the time of issuance.
For convertible debt, the recorded debt discount is calculated at the issuance
date as the difference between the conversion price and the relative fair value
of the common stock into which the security is convertible. The discount has
been accredited through interest and financing costs during 2003.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Corporation to concentration
of credit risk consist primarily of accounts receivable. The Company believes
that it is not exposed to any significant credit risk on accounts receivable.
14
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements and the notes thereto appear on pages F-1
through F-19 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
This information was previously disclosed in a Form 8-K filed with the
Commission by the Company on July 27, 2005.
ITEM 8A. CONTROLS AND PROCEDURES
The Company's principal executive, financial and accounting officer evaluated
the effectiveness of the design and operation of the Company's disclosure
controls and procedures as of the end of the period covered by this annual
report. Based on the evaluation, such person concluded at that time that the
Company's disclosure controls and procedures as of the end of the period covered
by this annual report, have been designed and are functioning effectively to
provide reasonable assurance that the information required to be disclosed by
the Company in reports filed under the Securities Exchange Act of 1934, is
recorded, processed, summarized and reported within the time period specified in
the SEC's rules and forms. There have been no changes in our internal controls
or in other factors that could significantly affect internal controls that
occurred during the fiscal year ending December 31, 2004 except as follows;
subsequent to the fiscal year ending December 31, 2004, the Company has retained
the services of two consultants with substantial auditing, accounting and
business experience. Their services are expected to enhance our controls and
procedures as we begin to maintain and ship products. The Company believes that
a control system, no matter how well designed and operated, cannot provide
absolute assurance that all control issues and instances of fraud, if any,
within a company have been detected.
ITEM 8B.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The current executive officers, directors and significant employees of the
Company are as follows:
The following are the Directors and Executive Officers of the Company. None of
the Directors hold similar positions in any reporting company. The Directors
named below will serve until the next annual meeting of the Company's
stockholders. Thereafter, Directors will be elected for one-year terms at the
annual stockholders' meeting.
V. Jeffrey Harrell, age 39 is the Chairman of the Board, President, CEO,
Principal Financial and Accounting Officer, and Secretary of the Company and has
held these positions since December 1999. Mr. Harrell joined the Company from
the financial services industry where he worked as Vice President and partner.
Previously he worked as Director of IT and Cost Accountant for two major
manufacturers.
The Company has not yet adopted a code of ethics but intends to adopt a code of
ethics at a meeting of the Board of Directors in the near future.
The Company does not currently have an audit committee.
ITEM 10. EXECUTIVE COMPENSATION
The following table represents salaries paid to the Company's corporate officer:
Name and
Position Year Salary
-------- ---- ------
Harrell, V. Jeffrey 2004 $39,750
CEO, President, 2003 $32,250
Chairman of the Board, 2002 $29,025
Secretary
The director was not compensated for any Board of Directors meetings.
The following table represents salaries paid to non-officer employers pursuant
to Item 402(a)(2)(iii):
Name and
Position Start Date Year Salary
-------- ---------- ---- ------
Glatt, Terry 04/2004 2004 $89,307
Chief Technology Officer
Novak, David 08/2004 2004 $42,225
EVP-Sales and Marketing
15
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of October 13, 2005, the Company had 77,066,626 shares of its common stock
issued and outstanding. The following table sets forth, as of December 31, 2004,
the beneficial ownership of the Company's common stock (i) by the only persons
who are known by the Company to own beneficially more than 5% of the Company's
common stock; (ii) by each director of the Company; and (iii) by all directors
and officers as a group.
Class Name & Address of owner # of shares % of class
----- ----------------------- ----------- ----------
Common V. Jeffrey Harrell 1,523,440 2.0%
PO Box 30057
Ft. Lauderdale, FL 33303
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The director named above will serve until the next annual meeting of the
Company's stockholders. Thereafter, directors will be elected for one year terms
at the annual stockholders' meeting. Officers will hold their positions at the
pleasure of the board of directors, absent any employment agreement, of which
none currently exists. There is no arrangement or understanding between any of
the directors or officers of the Company and any other person pursuant to which
any director or officer was or is to be selected as a director or officer.
During 2004 and 2003 the Company expensed $200,000 and $150,000, respectively
for the salary of the President. At December 31, 2004 a total of $399,725 for
the years 2002 through 2004 was unpaid and has been accrued.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The Exhibits listed below are filed as part of this Annual Report.
3.1 Articles of Incorporation (incorporated by reference from Registration
Statement on Form 10SB filed with the Securities and Exchange
Commission under File No. 0-31497 filed 09/11/00)
3.2 Amended Articles of Incorporation (incorporated by reference from
Registration Statement on Form 10SB filed with the Securities and
Exchange Commission under File No. 0-31497 filed 09/11/00)
3.3 Bylaws (incorporated by reference from Registration Statement on Form
10SB filed with the Securities and Exchange Commission under File No.
0-31497 filed 09/11/00)
10.1 Office Lease (incorporated by reference from Registration Statement on
Form 10SB Amendment #1 filed with the Securities and Exchange
Commission under File No. 0-31497 filed 11/06/00)
10.2 Office Lease (incorporated by reference from Registration Statement on
Form 10SB Amendment #1 filed with the Securities and Exchange
Commission under File No. 0-31497 filed 11/06/00)
10.3 Office Lease (incorporated by reference from Annual Report filed with
the Securities and Exchange Commission under File No. 0-31497 filed
06/28/02)
10.4 Office Lease (incorporated by reference from Annual Report filed with
the Securities and Exchange Commission under File No. 0-31497 filed
06/28/02)
10.5 Office Lease (incorporated by reference from Quarterly Report filed
with the Securities and Exchange Commission under File No. 0-31497
filed 05/15/03)
10.6 Lease Extention and Amendment Agreement between The Las Olas Company,
Inc. and Video Without Boundaries, Inc. dated June 1, 2005.
10.10 Executive Employment Contract - Pete Fisher (incorporated by reference
from Registration Statement on Form 10SB Amendment #1 filed with the
Securities and Exchange Commission under File No. 0-31497 filed
11/06/00)
10.11 Executive Employment Contract - Jonathan Silverstein (incorporated by
reference from Registration Statement on Form 10SB Amendment #1 filed
with the Securities and Exchange Commission under File No. 0-31497
filed 11/06/00)
10.12 Executive Employment Contract with Terry Glatt dated April 2, 2004.
10.13 Executive Employment Contract with David Novak dated August 15, 2004.
10.14 Debt Conversion Agreement with David Aubel dated December 3, 2005.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 USC Section 1350, Section 906 of the
Sarbanes-Oxley Act of 2002
16
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Each of the following have served as the Company's Principal Accountant:
1) Norman Stumacher, PA
2) Berkovits, Lago & Company, LLP
3) Baum & Company, PA
Their fees billed to the Company for the past two fiscal years are set forth
below:
2004 2003
------- -------
Audit Fees $ 29,718 $ 69,080
Audit-Related Fees - $ -
Tax Fees - $ 2,500
All Other Fees $ 3,895 $ 32,397
-------- --------
$ 33,613 $103,977
======== ========
o AUDIT FEES
Includes fees for professional services for the audit of our annual
financial statements, for the reviews of the financial statements
included in each of our quarterly reports on Form 10-QSB.
o AUDIT-RELATED FEES
Includes fees for assurance and related services related to the
performance of the audit or review of financial statements.
o TAX FEES
Includes fees for services rendered for tax compliance, advice, and
planning.
o ALL OTHER FEES
Includes time and procedures related to change in independent accountants
and research and assistance provided to the Company.
As of December 31, 2004, the Company did not have an Audit Committee and the
Company's President and CEO pre-approved all fees of the Principal Accountant.
17
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
VIDEO WITHOUT BOUNDARIES, INC.
December 5, 2005 By: /s/ V. JEFFREY HARRELL
----------------------
V. Jeffrey Harrell,
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ V. JEFFREY HARRELL Chief Executive Officer, December 5, 2005
---------------------- President, Principal Financial
V. Jeffrey Harrell and Accounting Officer, Secretary
and Chairman of the Board of Directors
18
VIDEO WITHOUT BOUNDARIES, INC.
Financial Statements
For The Years Ended December 31, 2004 and 2003
Contents
Page
Reports of Public Accounting Firms........................................F-2
Financial Statements:
Balance Sheets..........................................................F-4
Statements of Operations................................................F-5
Statement of Stockholders' Deficit......................................F-6
Statements of Cash Flows................................................F-7
Notes to Financial Statements..............................F-8 through F-19
F-1
BAUM & COMPANY, P.A.
1515 UNIVERSITY DRIVE, SUITE 226
CORAL SPRINGS, FLORIDA 33071
Report of Independent Registered Public Accounting Firm
Board of Directors
Video Without Boundaries, Inc.
888 Las Olas Boulevard, Suite 710
Ft. Lauderdale, Florida 33301
We have audited the accompanying balance sheets of Video Without Boundaries,
Inc. as of December 31, 2004 and 2003 and the related statements of
stockholders' (deficit), operations, and cash flows for the years ended December
31, 2004 and 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Video Without Boundaries, Inc.
as of December 31, 2004 and 2003 and the results of its operations and its cash
flows for the years then ended, in conformity with accouting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 4 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 4. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
(continued)
F-2
Page 2
As discussed in Note 3 to the financial statements, the accompanying balance
sheets and related statements of stockholders" (deficit), operations, and cash
flows have been restated to reflect the proper accounting for certain
transactions which took place during the year ended December 31, 2003.
Baum & Company, P.A.
Coral Springs, Florida
November 15, 2005, except for Note 17, as to which the date is December 3, 2005.
/s/ Baum & Company, P.A.
F-3
VIDEO WITHOUT BOUNDARIES, INC.
BALANCE SHEETS
DECEMBER 31
ASSETS
2004 2003
------------ ------------
Restated (1)
Current assets:
Cash and cash equivalents $ 79,765 $ 20
Accounts receivable 9,605 --
Inventory 61,747 3,250
Prepayments and other current assets 106,107 --
------------ ------------
Total current assets 257,224 3,270
------------ ------------
Property and equipment, net 176,741 514,553
------------ ------------
Other assets:
Investments (at cost), net of allowance for decline in value of
$1,308,000 and $93,000 in 2004 and 2003, respectively -- --
Deposits 12,000 1,850
------------ ------------
12,000 1,850
------------ ------------
Total assets $ 445,965 $ 519,673
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft -- 2,693
Accounts payable trade 44,239 224,762
Accrued compensation 399,725 238,725
Other accruals 190,998 --
Notes payable and accrued interest - shareholder 2,088,145 903,661
Loans payable - shareholder 24,427 --
Notes payable and accrued interest -- 37,900
------------ ------------
Total current liabilities 2,747,534 1,407,741
------------ ------------
Stockholders' deficit:
Preferred stock - $.001 par value, 5,000,000 shares authorized,
-0- shares issued and outstanding at December 31, 2004 and 2003,
respectively -- --
Common stock - $.001 par value,100,000,000 shares authorized, 53,119,126 and 15,448,747
shares issued and outstanding at December 31, 2004 and 2003, respectively 53,119 15,449
Additional paid-in capital 4,935,219 3,152,679
Accumulated deficit (7,042,407) (4,056,196)
------------ ------------
(2,054,069) (888,068)
Stock subscription receivable (60,000) --
Treasury stock - at cost (187,500) --
------------ ------------
Total stockholders' deficit (2,301,569) (888,068)
------------ ------------
Total liabilities and stockholders' deficit $ 445,965 $ 519,673
============ ============
(1) See note 3 - restatement of financial statements
The accompanying notes are an integral part of these financial statements.
F-4
VIDEO WITHOUT BOUNDARIES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
Restated (1)
Sales $ 14,167 $ 1,770
Cost of sales 19,029 1,046
------------ ------------
Gross profit (4,862) 724
------------ ------------
Operating expenses:
Selling, general and administrative 1,444,422 936,153
Depreciation 210,925 234,527
Research and development 5,304 40,000
Loss due to decline in value of investments 1,215,000 93,000
Interest and financing expense 105,698 567,296
------------ ------------
2,981,349 1,870,976
------------ ------------
Net loss
$ (2,986,211) $ (1,870,252)
============ ============
Basic and fully diluted loss per share $ (0.09) $ (0.47)
============ ============
Weighted-average number of shares
used in computing per share amounts 31,552,205 3,996,667
============ ============
(1) See note 3 - restatement of financial statements
The accompanying notes are an integral part of these financial statements.
F-5
VIDEO WITHOUT BOUNDARIES, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Restated 1
Additional Stock
Common Stock Paid-In Accumulated Subscription Treasury
Shares Amount Capital Deficit Receivable Stock Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 2002 119,087 $ 119 $ 1,519,138 $(2,185,944) -- -- $ (666,687)
Stock issued for services 885,000 885 249,115 -- -- -- 250,000
Stock issued for development of
software 200,000 200 159,800 -- -- -- 160,000
Stock issued for convertible
debentures and
related accrued interest 949,660 950 754,970 -- -- -- 755,920
Notes payable to stockholders'
contributed as capital 12,795,000 12,795 220,156 -- -- -- 232,951
Stock issued for purchase of web
portal 500,000 500 249,500 -- -- -- 250,000
Net loss for the year -- -- -- (1,870,252) -- -- (1,870,252)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 2003 15,448,747 15,449 3,152,679 (4,056,196) -- -- (888,068)
Stock cancelled for services
issued (50,000) (50) (4,950) -- -- -- (5,000)
Notes payable to stockholders'
converted to capital 34,399,879 34,399 629,361 -- -- -- 663,760
Stock cancelled (329,500) (329) (164,471) (164,800)
Stock issued for cash 3,500,000 3,500 1,255,500 -- (60,000) -- 1,199,000
Stock issued under employment
agreement 150,000 150 67,100 -- -- -- 67,250
Purchase of treasury stock -- -- -- -- -- (187,500) (187,500)
Net loss for the year -- -- -- (2,986,211) -- -- (2,986,211)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 2004 53,119,126 $ 53,119 $ 4,935,219 $(7,042,407) (60,000) $ (187,500) $(2,301,569)
=========== =========== =========== =========== =========== =========== ===========
(1) See note 3 - restatement of financial statements
The accompanying notes are an integral part of these financial statements.
F-6
VIDEO WITHOUT BOUNDARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
----------- -----------
Restated 1
Cash flows from operating activities:
Net loss $(2,986,211) $(1,870,252)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 210,925 234,527
Interest on debentures converted to stock -- 14,460
Interest on shareholder loans and notes payable 105,841 55,376
Interest and discount accretion on convertible debentures -- 496,460
Selling, general and administrative expenses 103,386 348,233
Loss due to decline in value of investments 1,215,000 93,000
Stock issued for services and under employment agreement 62,250 250,000
Change in assets and liabilities
(Increase) decrease in accounts receivable (9,605) 621
(Increase) in inventories (58,497) (3,250)
(Increase) in prepayments and other current assets (106,107) (1,850)
(Increase) in deposits (10,150) --
Increase (decrease) in cash overdraft (2,693) 2,693
Increase (decrease) in accounts payable (2,880) 139,388
Increase in other accruals 190,998 --
Increase in accrued compensation 161,000 117,750
----------- -----------
Net cash used in operating activities (1,126,743) (122,844)
----------- -----------
Cash flows from investing activities:
Purchases of stock in closely-held corporations' (1,215,000) (93,000)
Purchases of property, plant and equipment (60,612) (246,860)
----------- -----------
Net cash used in investing activities (1,275,612) (339,860)
----------- -----------
Cash flows from financing activities:
Proceeds from shareholder loans 1,321,000 269,050
Repayment of shareholder loans -- (43,373)
Proceeds from issue of debentures -- 245,000
Payment of notes payable (37,900) (20,000)
Proceeds from issuance of stock 1,199,000 --
----------- -----------
Net cash provided by financing activities 2,482,100 450,677
----------- -----------
Net increase (decrease) in cash and cash equivalents 79,745 (12,027)
Cash and cash equivalents at beginning of year 20 12,047
=========== ===========
Cash and cash equivalents at end of year $ 79,765 $ 20
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 3,600 $ --
=========== ===========
Non-cash movements affecting investing and financing transactions:
Stock issued for services and under employment agreement $ 62,250 $ 250,000
=========== ===========
Stock issued for convertible debentures $ -- $ 755,920
=========== ===========
Stock issued for development of software $ -- $ 160,000
=========== ===========
Notes payable to stockholders' converted to capital $ 663,760 $ 232,951
=========== ===========
Stock issued for purchase of web portal $ -- $ 250,000
=========== ===========
Notes payable to stockholders' for professional and other fees $ 103,386 $ 348,233
=========== ===========
Accounts payable converted to loans payable shareholder $ 8,928 $ 53,110
=========== ===========
Accounts payable converted to note payable shareholder $ 160,000 $ --
=========== ===========
Web portal sold in exchange for treasury stock retired $ 187,500 $ --
=========== ===========
See note 3 - restatement of financial statements
The accompanying notes are an integral part of these financial statements.
F-7
VIDEO WITHOUT BOUNDARIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 1 - BUSINESS DESCRIPTION
Video Without Boundaries, Inc. (the "Company") is in the converging digital
media on demand, enhanced home entertainment and emerging interactive consumer
electronics markets. The Company is focused on home entertainment media products
and solutions that enhance the consumer experience, while providing new revenue
opportunities for online music and movie content providers. The Company is a
supplier of broadband products, services and content including its ability to
deliver broadcast quality digital video and web interactivity at transfer rates
as low as 56K.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company, a Florida corporation is the result of a merger between a then
existing public company and a private corporation in 1999. The company changed
its name to Video Without Boundaries, Inc. on November 16, 2001.
Revenues
The Company recognizes revenues on product sales when the product is shipped and
title has passed to customer. Service revenue is recognized when the services
are performed.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenue and expenses during the
reported period. Actual results could differ from those estimates.
Inventory
Inventory is valued using the first-in, first-out method of accounting and is
stated at the lower of cost or net realizable value.
Property and Equipment
Property and equipment is recorded at cost, net of accumulated depreciation,
which is provided for by a charge to operations over the estimated useful life
of the assets using the straight-line method. The useful life of the assets is
3-4 years.
Expenditures that extend the useful life of the respective assets are
capitalized and depreciated over the lives of the respective assets.
Maintenance, repairs and other expenses that do not extend their useful life are
expensed as incurred.
F-8
Financial Instruments
The Company's financial instruments are cash, accounts receivable, loans
receivable, accounts payable, accrued expenses, and notes payable.The recorded
values of cash, accounts receivable, loans receivable, accounts payable, and
accrued expenses approximates their fair values based on their short-term
nature. The fair value of notes payable is based on current rates at which the
Company could borrow funds with similar remaining maturities, and the carrying
amount approximates fair value.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" (SFAS No. 109). Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributed to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax base. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. If
it is more likely than not that some portion of a deferred tax asset will not be
realized, a valuation allowance is recognized.
Convertible Debentures
Convertible debentures with beneficial conversion features, are accounted for in
accordance with guidance supplied by Emerging Issues Task Force ("EITF") No 98-5
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios" and EITF No. 00-27 "Application of
Issue 98-5 to Certain Convertible Instruments."
In addition, since the debt is convertible into equity at the option of the note
holder at the date of issuance at beneficial conversion rates, an embedded
Beneficial Conversion Feature ("BCF") has been recorded as discount against the
debentures in the accompanying balance sheet and as an increase to additional
paid-in capital at the time of issuance.
For convertible debt, the recorded debt discount is calculated at the issuance
date as the difference between the conversion price and the relative fair value
of the common stock into which the security is convertible. The discount has
been accredited through interest and financing costs during 2003.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Corporation to concentration
of credit risk consist primarily of cash and accounts receivable. The Company
believes that it is not exposed to any significant credit risk on accounts
receivable.
F-9
The Company maintained cash balances at one financial institution in excess of
the amount insured by the Federal Deposit Insurance Corporation. At December 31,
2004 the Company's uninsured cash balance totaled $4,187.
NOTE 3 - RESTATEMENT OF FINANCIAL STATEMENTS OF 2003
The restatement was undertaken due to the auditor of the 2003 fiscal year not
having been registered with the PCAOB at the time of the original Form 10-KSB
filing on April 14, 2004. The restatement corrects the accounting of the
following transactions:
(1) reversal of sales and cost of sales where ownership of the product had
not passed (2) reversal of a cash-in-transit entry incorrectly made (3)
reclassification of the purchase of a web portal and media ready
software to property and equipment (4) increase in depreciation expense
on property and equipment (5) reclassification of a loan receivable to
investments and subsequent provision for decline in value (6) provision
for bad debts against loan receivable (7) expensing a prepayment to
research and development (8) revision of the interest charge on
shareholder loans (9) reversal of expenses charged to the Company by a
shareholder (10) accrual for salary to president (11) revision of
interest on third party loans (12) booking of financing expense to
recognize the beneficial conversion feature of convertible debentures,
and revision of interest expense (13) correction to classifications of
various operating costs.
The components of the restatement are explained in the notes below the table.
Adjustment to
As filed restate Restated
-------- ------- --------
Balance sheet data as at December 31, 2003
Cash (a) $ 73,912 $ (73,892) $ 20
Accounts receivable (b) 300,000 (300,000) --
Property and equipment (b) (c) 94,198 420,355 514,553
Investments (d) -- -- --
Loans receivable (d) 163,000 (163,000) --
Media ready software (c) 198,668 (198,668) --
Prepaid box tooling (e) 40,000 (40,000) --
Notes payable shareholders (f) 1,238,258 (334,597) 903,661
Checks drawn in excess of bank balance (a) -- 2,693 2,693
Accrued salary to president (g) -- 238,725 238,725
Interest payable (h) 7,301 (7,301) --
Notes payable (i) 30,000 7,900 37,900
Additional paid-in capital (j) 2,789,851 362,828 3,152,679
Accumulated deficit (a) (c) (d) (e) (f) (g) (h) (i) (j) (3,430,750) (625,446) (4,056,196)
Statement of operations for the year ended
December 31, 2003
Revenues (a) $ 190,770 $ (189,000) $ 1,770
Cost of sales (a) 176,046 (175,000) 1,046
Selling, general and administrative (f) (g) (k) (l) 1,277,027 (340,874) 936,153
Depreciation (c) -- 234,527 234,527
Research and development (e) -- 40,000 40,000
Loss due to decline in value of investments (d) -- 93,000 93,000
Interest and finance expense (f) (h) (i) (j) -- 567,296 567,296
Net loss (1,262,302) (607,950) (1,870,252)
Basic and fully diluted loss per share (0.32) (0.15) (0.47)
F-10
As a consequence of changes made to the balance sheet and statement of
operation, as noted above, the statement of cash flows and changes in
stockholders' equity have been restated accordingly.
a) Cash
The Company identified an amount of $14,000 that had incorrectly been
booked to cash-in-transit. This comprised sales and cost of sales of
$189,000 and $175,000, respectively. It was determined that ownership of
the product had not passed. The Company has reversed this entry to sales
and cost of sales for the year ended December 31, 2003 and reversed the net
entry of $14,000 to cash-in-transit at December 31, 2003.
The Company has reclassed checks drawn in excess of the bank balance
totaling $2,693 as a liability.
The Company identified an incorrect entry of $62,585 to cash-in-transit and
shareholders funds. This entry has been reversed at December 31, 2003.
b) Accounts Receivable
The Company discovered that the purchase of a web portal had been recorded
as an accounts receivable. This asset, totaling $300,000 has now been
reclassed to property and equipment.
c) Property and Equipment
The Company has booked depreciation on a web portal of $75,000 (see note b)
in order to write off this asset on a straight line basis over its useful
life. Accordingly, depreciation expense has been increased by $75,000 for
the year ended December 31, 2003 with a corresponding increase in
accumulated depreciation of $75,000 at December 31, 2003.
The Company has booked additional depreciation on computer hardware
totaling $19,527 in order to write off this asset on a straight line basis
over its useful life. Accordingly, depreciation expense has been increased
by $19,527 for the year ended December 31, 2003, with a corresponding
increase in accumulated depreciation at December 31, 2003. The Company had
also revised its charge for depreciation on this asset in the year ended
December 31, 2002 which resulted in a reduction in depreciation during 2002
of $16,214.
The Company has reclassed media ready software totaling $198,668 to
property and equipment.
d) Investments
The Company has reviewed the classification of a loan receivable of $93,000
with CAC Media and has determined that the correct accounting treatment is
to show this amount as an investment in CAC Media at December 31, 2003. The
Company additionally reviewed the investment for possible impairment and
has decided to provide for a decline in value of $93,000 at December 31,
2003. The Company also revised its accounting treatment of the balance at
December 31, 2002 and decided to provide a bad debt provision of $70,000
and incur a bad debt expense of $70,000 for the year ended December 31,
2002.
F-11
e) Prepaid Box Tooling
Management has reviewed the prepaid box tooling asset and determined that
this meets the criterion of a research and development expenditure.
Accordingly, the amount of $40,000 has been expensed to research and
development in the year ended December 31, 2003.
f) Notes Payable and Accrued Interest - Shareholders
An incorrect entry to cash-in-transit and shareholder funds has been
reversed (see note a).
It was determined that interest had not been properly accrued on the
shareholder loans at the rate of 8% per annum, as stipulated in the
relevant agreements. Accordingly, the Company has booked an additional
amount of $9,621 as interest expense for the year ended December 31, 2003
with a corresponding increase in the liabilities on shareholder loans of
$9,621 at December 31, 2003.
Management has reviewed the documentation relating to expenses paid on
behalf of the Company by a major shareholder. Due to the inability of the
shareholder to produce suitable documentation to support the expenses paid
on behalf of the Company, and reflected as shareholder loans, the amount
due to the shareholder has been reversed by the Company. Accordingly, the
liabilities to the shareholders' has been reduced by $9,536 at December 31,
2003 with a corresponding reduction in selling, general and administrative
expenses of $9,536 for the year ended December 31, 2003.
The liability on shareholder loans was reduced by $252,854 at December 31,
2002 due to a restatement of the financial statements for the 2002 year.
g) Accrued Salary to President
Management has accrued the salary of the President which resulted in an
increase in salary expense totaling $117,750 for the year ended December
31, 2003 and a corresponding increase in accrued salary to president of
$117,750 at December 31, 2003.
The Company recorded an accrual for the president's salary of $120,975 at
December 31, 2002 due to a restatement of the financial statements for
2002. This has resulted in a total liability for accrued salary to
president of $238,725 at December 31, 2003.
h) Interest Payable
An entry to reduce accrued interest on debentures and increase interest
payable totaling $5,400 has been reversed.
The Company determined that accrued interest totaling $1,900 had been
incorrectly recorded. Accordingly, interest expense for the year ended
December 31, 2003 was reduced by $1,901 with a corresponding reduction in
the accrual of $1,900 at December 31, 2003.
i) Notes Payable and Accrued Interest
Management determined that interest had to be recognized totaling $3,600 on
a third party note. Accordingly, interest expense for the year ended
December 31, 2003 was increased by
F-12
$3,600 with a corresponding increase in the accrual for notes payable and
interest of $3,600 at December 31, 2003.
j) Additional Paid-In Capital
The Company completed a review of all debenture documents relating to the
issuance of convertible debentures which revealed that the Company had not
properly accounted for the beneficial conversion feature contained within
each debenture. Accordingly, the Company has booked a financing expense
totaling $496,460 to recognize the accretion of the debt discount which
resulted from the beneficial conversion feature, with a corresponding
increase in additional paid-in capital of $496,460 at December 31, 2003.
The Company recognized the discount in the debentures at December 31, 2002
with a total of $237,000 being moved from convertible debentures to
additional paid-in capital, as part of a restatement of the financial
statements for 2002. The Company had initially, booked this entry in 2003
and the restatement of the financial statements for 2002 has now resulted
in a reversal of the 2003 entry.
Due to a restatement of the 2002 financial statements the Company had
increased additional paid-in capital by $103,368 including the correction
of $237,000 relating to the convertible debentures mentioned above. These
corrections have also caused an increase in additional paid-in capital at
December 31, 2003.
k) Other Reclassifications
Management has evaluated the nature of the expenses previously classified
in the statement of operations and determined that the following
reclassifications are required:
Depreciation of $234,527 had been included with selling, general and
administrative expenses and this has now been reclassed to a separate line
item.
Interest expense of $60,033 had been included with selling, general and
administrative expenses and this has now been reclassed to a separate line
item.
l) Selling, General and Administrative
During its revision of the 2002 financial statements the Company wrote off
an investment in Cornerstone Entertainment totaling $210,871. This write
off had initially taken place in 2003 and this write off has now been
reversed in the current year. The result of the adjustment is to reduce
selling, general and administrative expenses by $210,871 for the year ended
December 31, 2003.
During its revision of the 2002 financial statements the Company wrote off
a $25,000 receivable as a bad debt. This write off had initially taken
place in 2003 and this write off has now been reversed in the current year.
The result of the adjustment is to reduce selling, general and
administrative expenses by $25,000 for the year ended December 31, 2003.
F-13
NOTE 4 - GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis. The Company has generated minimal revenue since its inception and has
incurred net losses of approximately $7.1 million. The Company's ability to
continue as a going concern is dependent upon its ability to obtain the
necessary financing to meet its obligations and repay its liabilities arising
from normal business operations when they become due, to fund possible
acquisitions, and to generate profitable operations in the future. While the
Company has sustained losses, certain current shareholders' of the Company have
committed to fund the operational needs of the Company. Additionally, management
plans to continue to provide for its capital requirements by issuing additional
equity securities and debt. Between the period January 1, 2005 through October
31, 2005 the Company has received approximately $1,300,000 as advances from
major shareholders and sale of equity securities. The outcome of these matters
cannot be predicted at this time and there are no assurances that if achieved,
the Company will have sufficient funds to execute its business plan or generate
positive operating results.
These matters, among others, raise substantial doubt about the ability of the
Company to continue as a going concern. These financial statements do not
include any adjustments to the amounts and classification of assets and
liabilities that may be necessary should the Company be unable to continue as a
going concern.
NOTE 5 - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
2004 2003
-------- ------
Trade receivables $ 9,605 $ -
======== ======
NOTE 6 - PREPAYMENTS AND OTHER ASSETS
Prepayments and other current assets consist of the following:
2004 2003
--------- ------
Advance deposit for manufacturing units $ 100,000 $ -
Other 6,107 -
--------- ------
$ 106,107 $ -
========= ======
NOTE 7 - LOANS RECEIVABLE
The Company loaned $60,000 to an unrelated organization to provide financing for
the development of a software browser. The loan was non-interest bearing,
non-collateralized and repayable on demand. The loan was reclassified to
property and equipment at December 31, 2003.
F-14
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
2004 2003
--------- ---------
Computer equipment $ 197,376 $ 150,027
Software 361,163 360,603
Web portal -- 300,000
Furniture and equipment 14,914 2,210
--------- ---------
573,453 812,840
Less accumulated depreciation (396,712) (298,287)
--------- ---------
$ 176,741 $ 514,553
========= =========
For the years ended December 31, 2004 and 2003, depreciation totaled $210,925
and $234,527, respectively.
NOTE 9 - NOTES PAYABLE
The Company is obligated to a shareholder for $2,088,145 advanced to fund
operations. The notes are collateralized by the assets of the Company, bear
interest at 8% per annum and are repayable on demand. During the years ended
December 31, 2004 and 2003, the Company incurred interest on notes payable to
shareholders' totaling $105,844 and $51,776, respectively.
The Company had an obligation for money due to two former debenture holders
totaling $37,900 at December 31, 2003 who had elected not to convert debentures
into common stock. The notes are non-collateralized, bearing interest at 12% per
annum and repayable on demand. These notes were fully repaid, including
interest, on February 13, 2004.
During the year ended December 31, 2004 a major shareholder transferred 329,500
shares of his unrestricted common stock to two former shareholders'. The terms
of the transfer were that the 329,500 shares held by the two former
shareholders' in the Company would be cancelled. The proceeds of the amount
originally paid for the stock by the two former shareholders' totaling $164,800
has been transferred to the note payable account of the major shareholder, at
$0.50 per share. The major shareholder, in accordance with an agreement signed
with the Company, is entitled to convert this amount of $164,800 into 16,480,000
shares of restricted common stock at $0.01 per share (see note 11).
NOTE 10 - CONVERTIBLE DEBENTURES
During 2001 through 2003 the Company issued convertible debentures in the
amounts of $268,000 and $482,000, respectively. The debentures mature 90 days
after issuance, with interest accruing at the rate of 12% per annum. The 2001
issuance entitles the holder of each debenture to have the right at anytime
before maturity, to convert the principal and accrued interest into shares of
common stock of the Company at $0.05 per share. During 2002 the holders of the
2001 debenture issuance converted their debentures and associated interest into
stock amounting to $526,549.
The 2003 and 2002 issuances entitles the holder of each debenture to have the
right at anytime before maturity, to convert the principal and accrued interest
into shares of restricted common stock at 50% of the bid price of the stock. As
a consequence of the latter beneficial conversion feature the discount
associated with the conversion feature reduced the amounts due to the
F-15
debenture holders to zero at December 31, 2002. The recorded debt discount was
calculated as the difference between the conversion price and the relative fair
value of the common stock into which the security is convertible. During 2003
the holders of the 2002 debenture issue converted their debentures and
associated interest and finance expense into stock amounting to $755,920.
NOTE 11 - STOCKHOLDERS' EQUITY
On November 1, 2004 the Company increased its authorized common stock from 50
million to 100 million shares.
During the year ended December 31, 2004 a major stockholder converted $319,000
in notes payable into 31,899,879 shares of restricted common stock at $0.01 per
share.
During the year ended December 31, 2004 the Company cancelled 329,500 shares of
restricted common stock at $0.50 per share, for a total of $164,800. The amount
due to the two former stockholders' was credited to the note payable account of
a major stockholder (see note 9).
During the year ended December 31, 2004 a major stockholder converted $344,760
in notes payable into 2,500,000 shares of restricted common stock at prices
ranging $0.08 to $0.18 per share.
During the year ended December 31, 2004 the Company cancelled 50,000 shares of
restricted common stock issued to third parties for services rendered during
October 2003 at $0.10 per share, for a total of $5,000.
During the year ended December 31, 2004 the Company issued 150,000 shares of
restricted common stock to its Chief Technology Officer, under an employment
agreement, at prices ranging $0.35 to $0.50 per share, for a total of $67,250
(see note 15).
During the year ended December 31, 2004 the Company sold 3 million shares of
restricted common stock to investors at prices ranging $0.25 to $0.60 per share,
for a total of $1,100,000.
During the year ended December 31, 2004 the Company sold 500,000 shares of
restricted common stock to one investor at $0.32 per share, for a total of
$159,000, with a stock subscription receivable at December 31, 2004 totaling
$60,000.
During the second quarter of 2004 the Company determined that a certain
depreciable asset termed as a "Web Portal" no longer was necessary for the
long-term goals of the Company. As a result, on June 14, 2004, the Company
completed a transaction with a major shareholder for the sale of its "Web
Portal" in exchange for 500,000 shares of the Company's common stock. Both
parties to the transaction agreed that the fair value of the asset approximated
the net book value at the date of the sale or $187,500. The Company's receipt of
the 500,000 shares has been recorded as treasury stock. The Company, in 2003,
had originally acquired this "Web Portal" from a third-party by issuing 500,000
shares of its common stock. This transaction, at the time, was valued at
$300,000.
NOTE 12 - RELATED PARTIES
During 2004 and 2003 the Company expensed $200,000 and $150,000, respectively
for the salary of the President. At December 31, 2004 a total of $399,725 for
the years 2002 through 2004 was unpaid and has been accrued.
F-16
During 2004 the Company expensed $103,386 in overhead costs incurred and paid by
two major stockholders' with a corresponding increase in amounts due for notes
payable.
Consulting services were provided to the Company by two major stockholders.
During the year ended December 31, 2003 the Company issued 12,795,000 post-
split shares of restricted common stock, valued at $232,951 to two organizations
affiliated with these stockholders.
NOTE 13 - ADVERTISING
The Company expenses advertising costs as incurred. During the year ended
December 31, 2004 a total of $41,146 was expensed.
NOTE 14 - INCOME TAXES
The provision for federal income taxes as of December 31, 2004 and 2003 consists
of the following:
2004 2003
--------- ---------
Current (benefit) $(661,372) $(564,231)
Valuation allowance 661,372 564,231
--------- ---------
$ -- $ --
========= =========
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the net deferred taxes, at December 2004 and 2003 are as follows:
2004 2003
----------- -----------
Deferred tax assets:
Net operating loss carryforward $(1,889,833) $(1,228,462)
Valuation allowance 1,889,833 1,228,462
----------- -----------
$ -- $ --
=========== ===========
SFAS No. 109 requires a valuation allowance to reduce the deferred tax assets
reported, if any, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Management has determined that a valuation allowance of $1,889,833 and
$1,228,462 at December 31, 2004 and 2003, respectively, is necessary to reduce
the deferred tax assets to the amount that will more likely than not be
realized. The change in the valuation allowance during the years ended December
31, 2004 and 2003 was $661,372 and $564,231, respectively.
The Company has incurred net operating losses since inception. At December 31,
2004 and 2003 the Company had a net operating loss carry forward for tax
purposes amounting to approximately $5.3 million and $3.7 million, respectively.
Tax losses will begin expiring in the year 2019.
F-17
The federal statutory tax rate reconciled to the effective tax rate during the
years ended December 31, 2004 and 2003 is as follows:
2004 2003
---- ----
Tax at U.S. statutory rate 35.0% 35.0%
State tax rate, net of federal benefits 5.5% 5.5%
Change in valuation allowance (40.5)% (40.5%)
----- -----
Effective tax rate 0.0% 0.0%
===== =====
NOTE 15 - COMMITMENTS
On April 2, 2004 the Company entered into a three year employment agreement with
its Chief Technology Officer, with automatic one year extensions after the
expiry of the initial term. The terms of the agreement calls for a minimum
salary of $180,000 per annum. The agreement also provides for a signing on bonus
of $50,000, a minimum annual bonus equal to the lesser of the base salary or 15%
of the gross profit as agreed or determined in accordance with generally
accepted accounting principles, and participation in other compensation plans
and programs for the Company's senior executives. The agreement further calls
for the issue of 100,000 shares of restricted common stock upon the signing of
the agreement (see note 11) and a further 150,000 shares of restricted common
stock shall be vested and delivered in fifty thousand share lots in three equal
installments through the first year following the execution of the agreement. At
December 31, 2004 a total of 50,000 shares had been issued as the first lot (see
note 11). At each anniversary of the effective date the Company shall issue the
executive five-year warrants to purchase at least 100,000 shares of restricted
common stock, with the exercise price being set within the 30 days prior to each
Anniversary.
On April 13, 2004 the Company entered into a thirteen month lease for
approximately 2,689 square feet of office space in Fort Lauderdale, Florida. The
lease requires a minimum base rental of $59,158 per annum. Additionally, the
landlord is entitled to sales tax and its pro-rata share of all real estate
taxes. Approximate minimum future rentals on the non-cancelable lease during the
year ended December 31, 2005 totals $36,664. Rent expense for the year ended
December 31, 2004 totaled $63,733.
On June 1, 2005 the Company signed a lease extension and amendment to the above
referenced lease which extends the term for one year and amends the minimum base
rent to $59,903.
On August 15, 2004 the Company entered into a three year employment agreement
with its Executive Vice-President - Sales and Marketing, with automatic one year
extensions after the expiration of the initial term. The terms of the agreement
calls for a minimum annual salary of $150,000 per annum. The agreement also
provides for a minimum annual bonus of between 50% and 100% of base salary based
on certain criterion to be agreed between the executive and the Company, and a
further bonus of 2% of the gross profit of the Company as agreed or determined
in accordance with generally accepted accounting principles. The agreement
further calls for the issue of 120,000 shares of restricted common stock upon
signing of the agreement. At each anniversary of the effective date the Company
shall issue the executive 300,000 shares of restricted common stock for the
three year period of his employment.
NOTE 16 - CONTINGENCIES
On August 11, 2004 (with an effective date of June 1, 2004) the Company entered
into a stock purchase agreement with the sole shareholder of a privately-held
company engaged in the business of selling and distributing electrical products.
The principal terms of the agreement provide for the Company to acquire all of
the issued and outstanding shares of the acquired entity for a purchase price of
$1,500,000 plus the issuance of 1,000,000 restricted common stock shares
F-18
in the acquiring entity. Additional considerations included in this stock
purchase agreement require the Company to collateralize an existing line of
credit in the amount of $2,500,000 as well as retain the services of the selling
shareholder, pursuant to a consulting agreement dated August 11, 2004, for a
term consistent with the fulfillment of the stock purchase agreement. The
Company, at time of closing, gave their initial deposit of $350,000, but has
defaulted on the remaining balance due and is also in default of the
collateralization provision. Management has written off the deposit of $350,000
and is actively negotiating with the seller a resolution to this matter.
Management anticipates that a settlement will be forthcoming and that their loss
will consist of their forfeited deposit, however, if a settlement is not
reached, management believes this could have a material adverse effect on the
Company's financial statements.
On October 10, 2005, the Company and a major stockholder/creditor entered into
an agreement which amended a prior agreement concerning the terms and conditions
attached to the conversion of outstanding debt into restricted or free trading
stock of the Company. The original agreement conveyed upon the stockholder the
right to convert amounts owed to him at a price of one ($.01) cent per share
without restrictions as to time periods. Based upon the terms and conditions of
the amended agreement, the stockholder, effective with the period commencing
July 1, 2005, will have conversion rights as follows; for the third calendar
quarter of 2005 the conversion of debt to stock shall be at twenty (20%) percent
of the then closing price on the date of conversion; for all subsequent periods
this conversion formula shall be at forty (40%) percent of the then closing
price of the stock on the date of conversion. In addition, effective October 10,
2005, the stockholder shall be limited in respect to the amount of outstanding
debt he will be permitted to convert in any calendar quarter. This limitation
has been set at three (3%) percent of the outstanding debt.
F-19