Securities and Exchange Commission
Washington, D.C. 20549
Form 8-K/A
Current Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 29, 1999.
Internet Media Corporation
(Exact name of registrant as specified in its charter)
NEVADA 333-26385 72-1346591
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation) Identification No.)
8748 Quarters Lake Road, Baton Rouge, Louisiana 70809
(Address of principal executive offices, including zip code)
Registrant's telephone number,
including area code: (225) 922-7744
Form 8-K
Internet Media Corporation
Item 2. Acquisition or Disposition of Assets.
On January 29,1999, Internet Media Corporation, a Nevada corporation (the
"Company"), acquired, pursuant to an Agreement and Plan of Reorganization
(the "Reorganization Agreement"), all of the outstanding capital stock of
CyberHighway, Inc., an Idaho corporation ("CyberHighway"), a full-service
Internet Service Provider (ISP) based in Boise, Idaho. The shares of
capital stock of CyberHighway were acquired in exchange for 2,000,000
shares of the Company's $.0001 par value Common Stock, as follows: (1)
1,394,000 shares were issued to Julius W. Basham II; (2) 303,000 shares
were issued to Wm. Kim Stimpson; and (3) 303,000 shares to David W. Brown.
The shares of Company Common Stock issued to the CyberHighway shareholders
were valued at $7.50 per share, the closing bid price, as reported by the
OTC Electronic Bulletin Board, of the Company's Common Stock, pursuant to
the terms of the Reorganization Agreement. The valuation of the shares of
Company Common Stock was determined through negotiations with the
shareholders of CyberHighway. No cash was used in the acquisition of
CyberHighway.
Pursuant to the terms of the Reorganization Agreement, Julius W. Basham,
II, was elected as a director and Chief Operating Officer of the Company.
In connection with the Reorganization Agreement, Mr. Basham executed an
Employment Agreement with the Company.
Pursuant to the terms of the Reorganization Agreement, Wm. Kim Stimpson
executed an Employment Agreement with CyberHighway and will continue to
serve as an officer and a director of CyberHighway.
Pursuant to the terms of the Reorganization Agreement, David W. Brown
executed an Employment Agreement with CyberHighway and will continue to
serve as an officer and a director of CyberHighway.
Following the consummation of the Reorganization Agreement, Julius W.
Basham, II, Wm. Kim Stimpson, David W. Brown, David M. Loflin, President
and a director of the Company, and Waddell D. Loflin, Vice President and a
director of the Company, entered into a Voting Agreement with respect to
all of their respective shares of Company Common Stock. For the seven-year
term of the Voting Agreement, each of such persons have agreed to vote, in
an election of directors of the Company, all of their respective shares of
Company Common Stock for election of Julius W. Basham, II, David M. Loflin
and Waddell D. Loflin as directors of the Company.
Item 7. Financial Statements and Exhibits.
The financial statements required by this Item 7 are attached to this
Current Report on Form 8-K. The financial statements filed herewith are:
Pro Forma Internet Media Corporation/CyberHighway, Inc.
-------------------------------------------------------
- Unaudited Pro Forma Condensed Balance Sheets
as at December 31, 1998
- Unaudited Pro Forma Condensed Statements of Operations
for the Year Ended December 31, 1998
CyberHighway, Inc.
------------------
- Independent Auditor's Report
- Balance Sheets as at January 31, 1999 and 1998
- Statements of Operations for the Years Ended
January 31, 1999, 1998 and 1997
- Statements of Changes in Stockholders' Equity for
the Years Ended January 31, 1999, 1998 and 1997
- Statements of Cash Flows for the Year Ended
December 31, 1999, 1998 and 1997
- Notes to Financial Statements
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: April 14, 1999.
INTERNET MEDIA CORPORATION
By: /s/ David M. Loflin
David M. Loflin
President
INDEX OF EXHIBITS
Exhibit # Description of Document
- --------- -----------------------
* 2.1 Agreement and Plan of Reorganization, dated as of
January 21, 1999, among Internet Media Corporation, a
Nevada corporation, Julius W. Basham, II, Wm. Kim
Stimpson and David W. Brown.
* 10.1 Employment Agreement, dated as of January 29, 1999,
between Internet Media Corporation, a Nevada
corporation, and Julius W. Basham, II.
* 10.2 Employment Agreement, dated as of January 29, 1999,
between CyberHighway, Inc., an Idaho corporation, and
Wm. Kim Stimpson.
* 10.3 Employment Agreement, dated as of January 29, 1999,
between CyberHighway, Inc., an Idaho corporation, and
David W. Brown.
* 10.4 Confidentiality Agreement, dated as of January 29, 1999,
between Internet Media Corporation, a Nevada
corporation, and Julius W. Basham, II.
* 10.5 Confidentiality Agreement, dated as of January 29, 1999,
between CyberHighway, Inc., an Idaho corporation, and
Wm. Kim Stimpson.
* 10.6 Confidentiality Agreement, dated as of January 29, 1999,
between CyberHighway, Inc., an Idaho corporation, and
David W. Brown.
* 10.7 Agreement Not to Compete, dated as of January 29, 1999,
between Internet Media Corporation, a Nevada
corporation, and Julius W. Basham, II.
* 10.8 Agreement Not to Compete, dated as of January 29, 1999,
between CyberHighway, Inc., an Idaho corporation, and
Wm. Kim Stimpson.
* 10.9 Agreement Not to Compete, dated as of January 29, 1999,
between CyberHighway, Inc., an Idaho corporation, and
David W. Brown.
* 10.10 Voting Agreement, dated as of January 29, 1999, among
Julius W. Basham, II, Wm. Kim Stimpson, David W. Brown,
David M. Loflin and Waddell D. Brown.
- ----------------------
Incorporated by Reference from Current Report on Form 8-K filed with the
Commission on February 12, 1999.
- -------------------------------------------------------
Pro Forma Internet Media Corporation/CyberHighway, Inc.
- -------------------------------------------------------
On January 29, 1999, the Company acquired all of the tangible and
intangible assets and rights used in connection with the Internet services
business operated in the United States by CyberHighway, Inc.
(CyberHighway), a Idaho corporation.
The acquisition was effected pursuant to a Plan and Agreement of
Reorganization dated January 20, 1999 between Media and CyberHighway.
Media paid the shareholders of CyberHighway approximately $15,940,000
through the issuance of 2,000,000 shares of Media common stock. The
purchase price was based upon the weighted average closing price of Media
common stock for five days prior and subsequent to the acquisition date.
The transaction will be accounted for as a purchase. The purchase price
will be allocated to the underlying assets purchased and liabilities
assumed based on their fair market values at the acquisition date.
The following table summarizes the net assets purchased in connection with
the CyberHighway acquisition and the amount attributable to cost in excess
of net assets acquired:
Working capital $ 23,126
Property and equipment 335,866
Acquired customer base 15,566,787
Other assets 13,480
Goodwill 5,260,690
Deferred tax liability (5,260,690)
The preliminary estimate of net assets represents management's best
estimate based on currently available information; however, such estimate
may be revised up to one year from the acquisition date. Acquired customer
bases are amortized over 3 years.
The following shows the unaudited proforma condensed balance sheets of
Media and CyberHighway as if the acquisition occurred on December 31, 1998:
Historical
-------------------
Internet Cyber- Proforma Proforma
Media Highway Adjustments Consolidated
Current
assets $ 8,265 $306,018 $ - $ 314,283
Property
and
equipment,
net 247,267 408,558 (72,692)(1) 583,133
Other
assets 170 13,480 - 13,650
Intangibles 34,207 - 20,827,477(1) 20,861,684
Total
assets $289,909 $728,056 $20,754,785 $21,772,750
Current
liabil-
ities $191,552 $282,892 $ - $ 474,444
Deferred
tax
liabil-
ity - - 5,260,690(1) 5,260,690
Stock-
holders'
equity 98,357 445,164 15,494,095(1) 16,037,616
Total
liabil-
ities
and
stock-
holders'
equity $289,909 $728,056 $20,754,785 $21,772,750
The following unaudited proforma condensed statements of operations assumes
the CyberHighway acquisition occurred on January 1, 1998. In the opinion
of management, all adjustments necessary to present fairly such unaudited
pro forma condensed statements of operations have been made.
Historical
-------------------
Internet Cyber- Proforma Proforma
Media Highway Adjustments Consolidated
Revenues $ 5,440 $2,449,156 $ - $ 2,454,596
Expenses
Internet
access
cost - 510,036 - 510,036
Equip-
ment cost - 326,488 - 326,488
Deprecia-
tion and
amorti-
zation 4,394 138,674 6,918,262(2) 7,061,330
General
and
admini-
strative 1,030,070 1,292,526 - 2,322,596
Selling - 110,397 - 110,397
Total
oper-
ating
expense 1,034,464 2,378,121 6,918,262 10,330,847
Operating
income
(loss) ( 1,029,024) 71,035 ( 6,918,262) ( 7,876,251)
Other
income
(expense) ( 8,602) 6,960 - ( 1,642)
Income
(loss)
before
taxes ( 1,037,626) 77,995 ( 6,918,262) ( 7,877,893)
Income
tax
benefit - - (1,753,563)(3) (1,753,563)
Net
income
(loss) ($1,037,626) $ 77,995 ($5,164,699) ($6,124,330)
Net
income
(loss)
per
share ($0.14) $31.51 ($0.84)
Weighted
average
number
of shares
out-
standing 7,360,506 2,475 9,360,506
- -----------------
(1) To record the net assets purchased in connection with the CyberHighway
acquisition and the amount attributable to cost in excess of net assets
acquired based upon total purchase price of $15,940,000.
(2) Depreciation and amortization expense on acquired customer base,
goodwill and property and equipment have been computed by amortizing them
over their useful lives of 3 years.
(3) To record the income tax benefit based on temporary differences
related to acquired customer base and property and equipment.
- ------------------
CyberHighway, Inc.
- ------------------
INDEPENDENT AUDITOR'S REPORT
To the Shareholders
CyberHighway, Inc.
We have audited the accompanying balance sheets of CyberHighway, Inc. (the
Company) as of January 31, 1999 and 1998, and the related statements of
operations, changes in stockholders' equity and cash flows for each of the
three years in the period ended January 31, 1999. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are 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 audits
provide 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 CyberHighway, Inc. at
January 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended January 31, 1999, in
conformity with generally accepted accounting principles.
WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
March 23, 1999
CYBERHIGHWAY, INC.
BALANCE SHEETS
JANUARY 31, 1999 AND 1998
1999 1998
ASSETS
CURRENT ASSETS
Cash $177,270 $ 56,730
Trade receivables 58,023 17,165
Inventory 70,725 42,696
Total current assets 306,018 116,591
PROPERTY AND EQUIPMENT, net 408,558 367,648
OTHER ASSETS 13,480 16,489
TOTAL ASSETS $728,056 $500,728
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities
of long-term debt $ 30,912 $ 29,577
Current maturities
of capital lease
obligations 722 8,142
Accounts payable
and accrued expenses 184,050 102,221
Deferred revenue 64,342 49,204
Total current liabilities 280,026 189,144
LONG-TERM LIABILITIES
Long-term debt 2,866 33,778
Capital lease obligations - 722
2,866 34,500
STOCKHOLDERS' EQUITY
Common shares, no par
value, 10,000 shares
authorized, 2,475 issued
and outstanding 623,500 623,500
Retained earnings (deficit) (178,336) (256,331)
Stock subscription receivable - (90,085)
445,164 277,084
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $728,056 $500,728
CYBERHIGHWAY, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
1999 1998 1997
REVENUES
Access fees $1,175,051 $ 947,229 $ 405,111
Licensed affiliate
fees 875,025 627,992 406,753
Equipment sales 399,080 483,280 235,651
Total revenues 2,449,156 2,058,501 1,047,515
COSTS AND EXPENSES
Internet access
cost 510,036 267,807 166,323
Equipment cost 326,488 360,083 180,800
General and
administrative 1,292,526 1,215,052 848,462
Selling 110,397 75,402 64,719
Depreciation and
amortization 138,674 115,784 65,167
Total operating
expenses 2,378,121 2,034,128 1,325,471
Income (loss)
from operations 71,035 24,373 ( 277,956)
OTHER INCOME AND EXPENSES
Miscellaneous
income, net 12,147 8,519 20,532
Interest expense ( 5,187) ( 10,638) ( 3,642)
Income (loss)
before income
taxes 77,995 22,254 ( 261,066)
INCOME TAXES - - -
NET INCOME (LOSS) $ 77,995 $ 22,254 ($ 261,066)
Basic earnings
(loss) per
common share $31.51 $9.11 ($196.00)
Weighted average
number of shares
outstanding 2,475 2,444 1,332
CYBERHIGHWAY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
Retained Stock
Common Shares Earnings Subscription
Number Amount (Deficit) Receivable Total
BALANCE,
January
31, 1996 1,000 $ 2,000 ($ 17,519) $ - ($ 15,519)
Issuance
of
common
stock,
net of
1,000
shares
can-
celled 815 256,000 - - 256,000
Net loss - - (261,066) - (261,066)
------ ------- --------- -------- ---------
BALANCE,
January
31, 1997 1,815 258,000 (278,585) - ( 20,585)
Issuance
of
common
stock 660 365,500 - ( 90,085) 275,415
Net
income - - 22,254 - 22,254
------ ------- --------- -------- ---------
BALANCE,
January
31, 1998 2,475 623,500 (256,331) ( 90,085) 277,084
Collec-
tion of
stock
sub-
scrip-
tion
receiv-
able - - - 90,085 90,085
Net
income - - 77,995 - 77,995
------ ------- --------- -------- ---------
BALANCE,
January
31, 1999 2,475 $623,500 ($178,336) $ - $445,164
====== ======= ========= ======== =========
CYBERHIGHWAY, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
1999 1998 1997
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) $ 77,995 $ 22,254 ($261,066)
Adjustments to
reconcile net
income (loss) to
net cash provided
by (used in)
operating
activities:
Depreciation and
amortization 138,674 115,784 65,167
Impairment loss 18,488 - -
Changes in
operating assets
and liabilities
Trade receivables ( 40,858) 10,599 ( 24,281)
Inventory ( 28,029) ( 28,782) ( 13,914)
Other assets 3,009 ( 13,135) ( 1,262)
Accounts payable
and accrued
expenses 81,829 ( 44,931) 89,886
Deferred revenue 15,138 28,373 18,995
Other - ( 169) -
--------- ---------- ---------
Net cash
provided
by (used in)
operating
activities 266,246 89,993 ( 126,475)
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital
expenditures ( 198,072) ( 125,069) ( 319,586)
--------- ---------- ---------
Net cash
used in
investing
activities ( 198,072) ( 125,069) ( 319,586)
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from sale
of common stock - 70,000 236,000
Proceeds from
subscription
receivable 90,085 - -
Proceeds from
long-term debt - - 275,478
Proceeds from
capital lease
obligations - - 6,085
Payments on
long-term debt ( 29,577) ( 27,123) ( 61,185)
Payments on
capital lease
obligations ( 8,142) ( 24,273) ( 23,875)
--------- ---------- ---------
Net cash
provided
by investing
activities 52,366 18,604 432,503
Net increase
(decrease)
in cash 120,540 ( 16,472) ( 13,558)
CASH, beginning
of period 56,730 73,202 86,760
--------- ---------- ---------
CASH, end of period $177,270 $ 56,730 $ 73,202
SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
In 1997, the Company exchanged 550 shares of common stock for the balance
of a note payable to a shareholder of $20,000.
In 1998, the Company exchanged 660 shares of common stock for the balance
of notes payable to shareholders of $205,415. The difference between the
notes payable and the value of the shares exchanged of $90,085 was
transferred to a stock subscription agreement.
CYBERHIGHWAY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
CyberHighway, Inc. (the Company) is a regional Internet service provider
incorporated in the State of Idaho on February 27, 1995. The Company is a
full-service ISP, offering its services, directly and through licensees to
residential and business customers in eleven states throughout the
midwestern United States. On January 29, 1999, the Company became a
wholly-owned subsidiary of Internet Media Corporation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less
to be cash equivalents.
Inventory
Inventory consists of internet access equipment held for sale and is valued
at the lower of cost or market. Cost is determined using the specific
identity method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives ranging from
three to seven years.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property or
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards No. 121 (SFAS
121), Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of.
Revenue Recognition
The Company maintains license agreements with affiliate ISP's to provide
Internet access to affiliate's customers. License fees are typically
billed in the month the services are provided. The Company charges direct
customers (residential and business subscribers) monthly access fees to the
Internet and recognizes the revenue in the month the access is provided.
For certain subscribers billed in advance, the Company recognizes the
revenue over the period the billing covers. Revenue for other services
provided, including set-up fees charged to customers and affiliates, and
equipment sales are recognized as the service is performed or the equipment
is delivered.
Costs of Access Revenues
Costs of access revenues primarily consist of telecommunications expenses
inherent in the network infrastructure. Costs of access revenues also
include fees paid for lease of the Company's backbone, as well as license
fees for Web browser software based on a per-user charge, other license
fees paid to third-party software vendors, product costs, and contractor
fees for distribution of software to new subscribers.
Advertising Costs
The Company expenses advertising costs as incurred. During the years ended
January 31, 1999, 1998 and 1997, the Company incurred approximately
$110,500, $75,500 and $65,000, respectively, in advertising costs.
Income Taxes
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. For all periods presented, the Company's net deferred tax
asset has been fully reserved with a valuation allowance.
Financial Instruments and Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and trade
receivables. The Company maintains its cash in bank deposit accounts,
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to
any significant credit risk on cash.
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers and markets, which comprise the
Company's customer base. The Company generally does not require collateral
and receivables are generally due within 30 days.
The carrying amounts of financial instruments including cash, trade
receivables, accounts payable and accrued expenses approximate fair value
because of the immediate or short-term maturities of these instruments.
The difference between the carrying amount and fair value of the Company's
long-term debt is not significant.
Sources of Supplies
The Company relies on local telephone companies and other companies to
provide data communications. Although management believes alternative
telecommunications facilities could be found in a timely manner, any
disruption of these services could have an adverse effect on operating
results.
The Company maintains various vendors for required products, such as
modems, terminal services and high-performance routers, which are important
components of its network. Some of the Company's suppliers have limited
resources and production capacity. If the suppliers are unable to meet the
Company's needs as it is building out its network infrastructure, then
delays and increased costs in the expansion of the Company's network
infrastructure could result, having an adverse effect on operating results.
Earnings Per Share
Basic earnings (loss) per share are computed by dividing net income (loss)
by the weighted average number of common shares outstanding for the period.
The Company has no potential common shares.
NOTE 3. PROPERTY AND EQUIPMENT
Classifications of property and equipment and accumulated depreciation were
as follows for the years ended January 31, 1999 and 1998:
1999 1998
Equipment $367,100 $274,076
Furniture and fixtures 32,738 24,009
Office equipment 286,531 247,045
Leasehold improvements 19,680 16,915
-------- --------
706,049 562,045
Accumulated depreciation 297,491 194,397
-------- --------
Property and
equipment, net $408,558 $367,648
======== ========
NOTE 4. IMPAIRED EQUIPMENT
On January 31, 1999, management determined that various network operating
center computer equipment was impaired based on criteria established in
SFAS 121, including the fact that the computer equipment has been replaced
by other equipment due to changes in technology. The equipment is included
in inventory for resale on January 31, 1999. The impairment loss of
$18,488 recognized in the accompanying 1999 financial statements was
measured as the amount by which the carrying amount of the computer
equipment exceeded its fair value. Fair value was determined based upon
market value. No impairment loss occurred during 1998 or 1997.
NOTE 5. LONG-TERM DEBT
Long term debt on January 31, 1999 and 1998 consists of the
following:
1999 1998
Note payable to bank with interest
at 9.25%, due in monthly payments
of $2,887, with final payment due
February 25, 2000, secured by
accounts receivable, inventory and
equipment. (Additional borrowing
up to $90,478, the original amount
of the note, is allowed under the
note agreement.) $ 33,778 $ 63,355
Less current maturities: 30,912 29,577
-------- ---------
$ 2,866 $ 33,778
======== =========
1999 1998
Aggregate maturities of long-term
debt are as follows:
2000 $ 30,912 $ 29,577
2001 2,866 30,912
2002 - 2,866
-------- ---------
$ 33,778 $ 63,355
NOTE 6. CAPITAL LEASES
The Company is the lessee of communication and data processing equipment
under capital leases expiring through 2000. The assets and liabilities
under capital lease are recorded at the lower of the present value of
minimum lease payments or the fair value of the assets. The equipment is
amortized over the related useful lives of the assets. Amortization of
assets under capital leases is included in depreciation expense.
Property held under capital leases is summarized as follows:
1999 1998
Communication and data
processing equipment $ 66,770 $ 66,770
Less accumulated
amortization 46,729 33,375
-------- ---------
$ 20,041 $ 33,395
======== =========
Pursuant to the terms of the capital lease agreements, the Company will be
required to make future minimum payments as follows:
Year Ended
January 31
----------
2000 $763
Less amount representing interest 41
----
722
Less current maturities 722
----
$ -
NOTE 7. OPERATING LEASES
The Company has contracts with various telephone companies and other
companies to provide data communication services. The terms on these
agreements range from month-to-month to three years. Future obligations
under these agreements as of January 31, 1999 are approximately $240,000
for fiscal 2000 and 2001.
NOTE 8. INCOME TAXES
The Company provides for deferred income taxes resulting from temporary
differences between the tax basis of assets and liabilities, and their
reported amounts in the financial statements that will result in taxable or
deductible amounts in future years. The Company uses the cash basis of
accounting for preparation of U.S. Federal income tax returns. Under the
provisions of the Internal Revenue Code, the Company has net operating loss
carryforwards of approximately $160,000, which begin to expire in 2012.
The tax effect of this and other temporary differences are as follows:
1999 1998
Deferred tax assets
Net operating loss carryforwards $ 54,326 $ 89,669
Cash to accrual differences 66,003 45,124
--------- ---------
120,329 134,793
Deferred tax liabilities
Property and equipment 5,260 21,552
Cash to accrual differences 23,797 9,158
Accumulated depreciation 29,644 17,047
--------- ---------
58,701 47,757
--------- ---------
Net deferred tax asset before
valuation allowance 61,628 87,036
Valuation allowance ( 61,628) ( 87,036)
--------- ---------
Net deferred tax asset $ - $ -
The Company's tax provision for 1999, 1998 and 1997 consists of the following:
1999 1998 1997
Current taxes $ - $ - $ -
Deferred taxes 25,408 7,566 -
Re-evaluation of
valuation allowance
on beginning
temporary
differences ( 25,408) ( 7,566) -
--------- -------- ------
$ - $ - $ -
The 1999, 1998 and 1997 tax provision differs from the amount calculated by
applying statutory tax rates to pre-tax income as follows:
1999 1998 1997
Tax at statutory
rates $ 26,518 $ 7,566 ($88,762)
Re-evaluation of
valuation
allowance on
beginning
temporary
differences ( 25,408) ( 7,566) -
Loss not providing
tax benefit - - 88,762
Other ( 1,110) - -
--------- -------- --------
$ - $ - $ -
NOTE 9. LITIGATION
The Company is involved in a dispute with a vendor with potential exposure
of approximately $60,000. Management believes the vendor's claim is
without merit and is vigorously defending its position. Management does
not expect the ultimate outcome to materially affect the Company's
financial position.
NOTE 10. YEAR 2000
The Company is working to resolve the potential impact of the Year 2000 on
the ability of the Company's computerized information systems to accurately
process information that may be date sensitive. Any of the Company's
programs that recognize a date using "00" as the year 1900 rather than the
year 2000 could result in errors or system failures. The Company utilizes
a number of computer programs across its entire operation. The Company has
not completed its assessment, but currently believes that costs of
addressing this issue will not have a material adverse impact on the
Company's financial position. However, if the Company and third parties
upon which it relies are unable to address this issue in a timely manner,
it could result in a material financial risk to the Company. In order to
assure that this does not occur, the Company plans to devote all resources
required to resolve any significant Year 2000 issues in a timely manner.
Because of the unprecedented nature of the Year 2000 issue, its effects and
the success of related remediation efforts will not be fully determinable
until the year 2000 and thereafter. Management cannot assure that the
Company is or will be Year 2000 ready, that the Company's remediation
efforts will be successful in whole or in part, or that parties with whom
the Company does business will be Year 2000 ready.
