As filed with the Securities and Exchange Commission on February 12, 2004
An Exhibit List can be found on page II-6.
Registration No.333-__________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POWERCHANNEL, INC.
(Name of small business issuer)
Sealant Solutions, Inc.
(Former name of small business issuer)
Delaware 7379 65-0952186
(State or other jurisdiction (Primary standard industrial (IRS Employer
of incorporation) code number) identification number)
16 North Main Street, Suite 395
New City, New York 10956
(845)634-7979
(Address and telephone number of principal executive offices and
principal place of business)
Steven Lampert, Chief Executive Officer
POWERCHANNEL, INC.
16 North Main Street, Suite 395
New City, New York 10956
(845)634-7979
(Name, address and telephone number of agent for service)
Copies to:
Richard A. Friedman, Esq.
Stephen M. Fleming, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Floor.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] If this Form is a
post-effective amendment filed pursuant to Rule 462(c) under the Securities Act,
check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering.
[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- ----------------------------- ---------------------------- --------------------------- ---------------------------- ----------------
Title of each class of Proposed maximum offering Proposed maximum aggregate Amount of
securities to be registered Amount to be registered price per share offering price registration fee
- ----------------------------- ---------------------------- --------------------------- ---------------------------- ----------------
Common stock, $.01 par value 9,845,365 $ 1.18(1) $ 11,617,530.70 $ 1471.94
per share
- ----------------------------- ---------------------------- --------------------------- ---------------------------- ----------------
Common stock, $.01 par value 4,250,000 $ .75(2) $ 3,187,500.00 $ 403.86
per share, issuable upon
exercise of common stock
purchase warrants
- ----------------------------- ---------------------------- --------------------------- ---------------------------- ----------------
Common stock, $.01 par value 1,200,000 $ .40(3) $ 480,000.00 $ 60.82
per share, issuable upon
exercise of stock options
- ----------------------------- ---------------------------- --------------------------- ---------------------------- ----------------
Common stock, $.01 par value 1,200,000 $ .20(4) $ 240,000.00 $ 30.41
per share, issuable upon
exercise of stock options
- ----------------------------- ---------------------------- --------------------------- ---------------------------- ----------------
Total 16,495,365 $ 15,525,030.70 $ 1,967.03
- ----------------------------- ---------------------------- --------------------------- ---------------------------- ----------------
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, using the average
of the high and low price as reported on the Over-The-Counter Bulletin Board on
February 9, 2004, which was $1.18 per share.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933, using the exercise
price of $.75.
(3) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933, using the exercise
price of $.40.
(3) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933, using the exercise
price of $.20.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
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PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED FEBRUARY 12, 2004
Powerchannel, Inc.
16,495,365 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up to
16,495,365 shares of our common stock, including 9,845,365 shares of common
stock, up to 4,250,000 issuable upon the exercise of common stock purchase
warrants and 2,400,000 shares of common stock issuable upon exercise of options.
The selling stockholders may sell common stock from time to time in the
principal market on which the stock is traded at the prevailing market price or
in negotiated transactions. The selling stockholders may be deemed underwriters
of the shares of common stock, which they are offering. We will pay the expenses
of registering these shares.
Our common stock is registered under Section 12(g) of the Securities Exchange
Act of 1934 and is listed on the Over-The-Counter Bulletin Board under the
symbol "PWRC". The last reported sales price per share of our common stock as
reported by the Over-The-Counter Bulletin Board on February 9, 2004, was $1.17.
Investing in these securities involves significant risks. See "Risk Factors"
beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _______, 2004.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by
PowerChannel, Inc., with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
4
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
PowerChannel, Inc.
Our principal service is the provision low-cost access to the Internet together
with the physical hardware to deliver it through the use of the consumer's
existing television. We are presently focusing primarily on the Hispanic market,
using a bilingual (English/Spanish) approach to meet the needs of the differing
generations within the Hispanic community, and offering value to the subscriber
through offers, discounts, coupons and prizes. We have our operations in
New York. We have formed a number of strategic alliances and
commercial relationships designed in aggregate to enable us to offer our
services including low-cost hardware and access to the Internet available
through the television. The alliances and relationships will focus initially on
the Hispanic markets in Los Angeles and New York. For the nine and three months
ended September 30, 2003, we did not generate revenues. For the nine and three
months ended September 30, 2003 we generated net losses of $2,108,469 and
$1,968,290, respectively, as compared to $1,691,525 and $271,994 for the
comparable periods in 2002. In addition, for the year ended December 31, 2002,
we did not generate revenue and incurred losses in the amount of $2,074,174. As
a result of recurring losses from operations and a net deficit in both working
capital and stockholders' equity, our auditors, in their report dated September
30, 2003, have expressed substantial doubt about our ability to continue as
going concern.
Our principal offices are located at 16 North Main Street, Suite 395, New City,
New York 10956, and our telephone number is (845) 634-7979. We are a Delaware
corporation.
- ----------------------------------------------------------- -----------------------------------------------------------------------
The Offering
- ----------------------------------------------------------- -----------------------------------------------------------------------
Common stock offered by selling stockholders.............. 16,495,365 shares of common stock, including 9,845,365 shares of
common stock, up to 4,250,000 shares of common stock underlying
common stock purchase warrants and up to 2,400,000 shares of common
stock underlying options, assuming full exercise of the common stock
purchase warrants and options. This number represents 52.8% of our
total number of shares outstanding assuming the exercise of all
common stock purchase warrants and options.
- ----------------------------------------------------------- -----------------------------------------------------------------------
Common stock to be outstanding after the offering.......... Up to 31,634,829 shares assuming the exercise of all common stock
purchase warrants and options.
- ----------------------------------------------------------- -----------------------------------------------------------------------
Use of proceeds We will not receive any proceeds from the sale of the common stock.
However, we will receive the exercise price for any shares of common
stock delivered in connection with the exercise of the common stock
purchase warrants. We expect to use the proceeds received from the
exercise of the common stock purchase warrants, if any, for general
working capital purposes. We have received gross proceeds in the
amount of $2,125,000 from the sale of common stock and common stock
purchase warrants.
- ----------------------------------------------------------- -----------------------------------------------------------------------
OTCBB Symbol PWRC
- ----------------------------------------------------------- -----------------------------------------------------------------------
The above information regarding common stock to be outstanding after the
offering is based on 24,984,829 shares of common stock outstanding as of
February 9, 2004 and assumes the exercise of warrants by our selling
stockholders.
To obtain funding for our ongoing operations, pursuant to an offering conducted
under Rule 506 of Regulation D, as promulgated under the Securities Act of 1933,
we sold units to accredited investors with each unit consisting of 50,000 shares
of common stock and 50,000 common stock purchase warrants at a price of $25,000
per unit. In connection with this offering we issued an aggregate of 4,250,000
shares of common stock and 4,250,000 common stock purchase warrants. The common
stock purchase warrants are each exercisable into one share of common stock at
the holder's option at an exercise price of $.75 per warrant. At anytime after
the filing of this registration statement, we may call the warrants when the
five-day average closing bid price of the common stock equals or exceeds $1.00.
The warrants are exercisable for a period of thirty-six months from the final
closing of the offering.
5
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
Risks relating to our company
We have a history of losses since our inception and expect to incur losses for
the foreseeable future.
Net losses for the nine months ended September 30, 2003 were $2,108,469. We have
not yet achieved profitability and we can give no assurances that we will
achieve profitability within the foreseeable future as we fund acquisitions,
operating and capital expenditures in areas such as establishment and expansion
of markets, sales and marketing, operating equipment and research and
development. We cannot assure investors that we will ever achieve or sustain
profitability or that our operating losses will not increase in the future.
We have a limited operating history in which to evaluate our business
Although our predecessor was in business for eight years, we have been in
business less than one year. We have limited operating history and limited
assets. Our limited financial resources are significantly less than those of
other companies, which can develop a similar product in the U.S.
If we do not obtain additional cash to operate our business, we may not be able
to execute our business plan and may not achieve profitability.
In the event that cash flow from operations is less than anticipated and we are
unable to secure additional funding to cover these added losses, in order to
preserve cash, we would be required to further reduce expenditures and effect
further reductions in our corporate infrastructure, either of which could have a
material adverse effect on our ability to continue our current level of
operations. To the extent that operating expenses increase or we need additional
funds to make acquisitions, develop new technologies or acquire strategic
assets, the need for additional funding may be accelerated and there can be no
assurances that any such additional funding can be obtained on terms acceptable
to us, if at all. If we are not able to generate sufficient capital, either from
operations or through additional financing, to fund our current operations, we
may not be able to continue as a going concern. If we are unable to continue as
a going concern, we may be forced to significantly reduce or cease our current
operations. This could significantly reduce the value of our securities, which
could result in our de-listing from the OTC Bulletin Board and cause investment
losses for our shareholders.
Our future success is dependent, in part, on the performance and continued
service of our President.
Our performance and future operating results are substantially dependent on the
continued service and performance of Steven Lampert, our President, Chief
Executive Officer and shareholder. We will rely on Mr. Lampert to develop our
business and possible acquisitions. If Mr. Lampert's services become
unavailable, our business and prospects would be adversely affected. We do not
currently maintain "key man" insurance for any of our executive officers or
other key employees and do not intend to obtain this type of insurance until
such time as the Company has positive cash flow and is profitable. The loss of
the services of Mr. Lampert could have a material adverse effect on our
financial condition, operating results, and, on the public market for our common
stock.
Increased competition in the Internet service industry may make it difficult for
our company to attract and retain members and to maintain current pricing
levels.
We operate in the Internet services market, which is extremely competitive. Our
current and prospective competitors include many large companies that have
substantially greater market presence, financial, technical, marketing and other
resources than we have. We compete directly or indirectly with the following
categories of companies:
o established online service providers, such as America Online, Inc., the
Microsoft Network and Prodigy Communications Corporation;
o local, regional and national Internet service providers;
o national telecommunications companies;
o regional Bell operating companies, such as BellSouth Corporation and SBC
Communications Inc.;
o personal computer manufacturers with Internet service provider businesses
such as Gateway, Inc. and Dell Computer Corporation;
o "free access" Internet service providers; and
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o online cable services; and
o television manufacturers with "built in Internet capabilities" such as
Sony, Toshiba and Mitsubishi.
We will also face competition from companies that provide broadband and other
high-speed connections to the Internet, including local and long-distance
telephone companies, cable television companies, electric utility companies, and
wireless communications companies. These companies may use broadband
technologies to include Internet access or Web hosting in their basic bundle of
services or may offer Internet access or Web hosting services for a nominal
additional charge. Broadband technologies enable consumers to transmit and
receive print, video, voice and data in digital form at significantly faster
access speeds than existing dial-up modems.
Our competition is likely to increase. We believe this will probably happen as
large diversified telecommunications and media companies acquire Internet
service providers, as Internet service providers consolidate into larger, more
competitive companies and as providers who offer free access to the Internet
grow in number and size. Diversified competitors may bundle other services and
products with Internet connectivity services, potentially placing us at a
significant competitive disadvantage. In addition, competitors may charge less
than we do for Internet services, or may charge nothing at all in some
circumstances, causing us to reduce, or preventing us from raising, our fees.
Furthermore, the increase in "wired" homes with high speed Internet access
equipment built directly into the home may prevent us from achieving a
substantial member based. As a result, our business may suffer.
Any disruption in the Internet access provided by our company could adversely
affect our business, results of operations and financial condition.
Our systems and infrastructure will be susceptible to natural and man-made
disasters such as earthquakes, fires, floods, power loss and sabotage. Our
systems also will be vulnerable to disruptions from computer viruses and
attempts by hackers to penetrate our network security.
We will be covered by insurance from loss of income from some of the events
listed above, but this insurance may not be adequate to cover all instances of
system failure. Any of the events described above could cause interference,
delays, service interruptions or suspensions and adversely affect our business
and results of operations.
We must continue to expand and adapt our system infrastructure to keep pace with
the increase in the number of members who use the services we expect to provide.
Demands on infrastructure that exceed our current forecasts could result in
technical difficulties with our servers. Continued or repeated system failures
could impair our reputation and brand names and reduce our revenues.
If, in the future, we cannot modify these systems to accommodate increased
traffic, we could suffer slower response times, problems with customer service
and delays in reporting accurate financial information. Any of these factors
could significantly and adversely affect the results of our operations.
If our third party network providers are unable or unwilling to provide Internet
access to our members on commercially reasonable terms, we may suffer the loss
of customers, higher costs and lower overall revenues.
We provide dial-up access through company-owned points of presence and through
third party networks. We will be able to serve our members through the
combination of network providers that we deem most efficient. Our ability to
provide Internet access to our members will be limited if:
o our third-party network providers are unable or unwilling to provide access
to our members;
o we are unable to secure alternative arrangements upon termination of
third-party network provider agreements; or
o there is a loss of access to third-party providers for other reasons.
These events could also limit our ability to further expand nationally and/or
internationally, which could have a material adverse affect on our business. If
we lose access to third-party providers under current arrangements, we may not
be able to make alternative arrangements on terms acceptable to us, or at all.
We do not currently have any plans or commitments with respect to alternative
third-party provider arrangements in areas served by only one network provider.
Moreover, while the contracts with the third-party providers require them to
provide commercially reliable service to our members with a significant
assurance of accessibility to the Internet, the performance of third-party
providers may not meet our requirements, which could materially adversely affect
our business, financial condition and results of operations.
Our revenues and results of operations will be dependent upon our proprietary
technology and we may not be successful in protecting our proprietary rights or
avoiding claims that we are infringing upon the proprietary rights of others.
7
Our success depends in part upon our software and related documentation. We
principally rely upon copyright, trade secret and contract laws to protect our
proprietary technology. We cannot be certain that we have taken adequate steps
to prevent misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or superior
to our technology.
We could incur substantial costs and diversion of management resources in the
defense of any claims relating to proprietary rights, which could materially
adversely affect our business, financial condition, and results of operations.
Parties making these claims could secure a judgment awarding substantial damages
as well as injunctive or other equitable relief that could effectively block our
ability to license our products in the United States or abroad. Such a judgment
could have a material adverse effect on our business, financial condition and
results of operations. If a third party asserts a claim relating to proprietary
technology or information against us, we may seek licenses to the intellectual
property from the third party. We cannot be certain, however, that third parties
will extend licenses to us on commercially reasonable terms, or at all. If we
fail to obtain the necessary licenses or other rights, we could materially
adversely affect our business, financial condition and results of operations.
If we fail to grow our user base, we may not be able to generate revenues,
decrease per user telecommunications costs or implement our strategy
If we are unable to grow our user base, we may not be able to generate revenues,
decrease per-user telecommunications costs or implement our strategy. We intend
to generate new users through other distribution channels, such as television,
radio and print media advertising, direct marketing campaigns, and bundling,
co-branding and retail distribution arrangements. However, we have little
practical experience with marketing our service through these channels. If these
distribution channels prove more costly or less effective than anticipated, it
could adversely impact our ability to grow. We would also be unable to grow our
user base if a significant number of our current registered users stopped using
our service. We cannot assure you that we will be able to successfully address
these issues and retain our existing user base.
Changed in government regulation could decrease our revenues and increase our
costs.
Changes in the regulatory environment could decrease our revenues and increase
our costs. As a provider of Internet access and e-mail services, we are not
currently subject to direct regulation by the Federal Communications Commission.
However, several telecommunications carriers are seeking to have communications
over the Internet regulated by the FCC in the same manner as other more
traditional telecommunications services. Local telephone carriers have also
petitioned the FCC to regulate Internet access providers in a manner similar to
long distance telephone carriers and to impose access fees on these providers,
and recent events suggest that they may be successful in obtaining the treatment
they seek. In addition, we operate our services throughout the United States,
and regulatory authorities at the state level may seek to regulate aspects of
our activities as telecommunications services. As a result, we could become
subject to FCC and state regulation as Internet services and telecommunications
services converge.
We remain subject to numerous additional laws and regulations that could affect
our business. Because of the Internet's popularity and increasing use, new laws
and regulations with respect to the Internet are becoming more prevalent. These
laws and regulations have covered, or may cover in the future, issues such as:
o user privacy;
o pricing;
o intellectual property;
o federal, state and local taxation;
o distribution; and
o characteristics and quality of products and services.
8
Legislation in these areas could slow the growth in use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium. Additionally, because we rely on the collection and use of
personal data from our subscribers for targeting advertisements shown on our
services, we may be harmed by any laws or regulations that restrict our ability
to collect or use this data. The Federal Trade Commission has begun
investigations into the privacy practices of companies that collect information
about individuals on the Internet. In addition, the FTC is conducting an ongoing
investigation into the marketing practices of Internet-related companies,
including Juno. As part of the FTC's activities, we have been requested to
provide, and have provided, marketing-related and customer service-related
information to the FTC. Depending on the outcome of the FTC inquiry, we could be
required to modify our marketing or customer service practices in a way that
could negatively affect our business.
It may take years to determine how existing laws such as those governing
intellectual property, privacy, libel and taxation apply to the Internet. Any
new legislation or regulation regarding the Internet, or the application of
existing laws and regulations to the Internet, could harm us. Additionally,
while we do not currently operate outside of the United States, the
international regulatory environment relating to the Internet market could have
an adverse effect on our business, especially if we should expand
internationally.
The growth of the Internet, coupled with publicity regarding Internet fraud, may
also lead to the enactment of more stringent consumer protection laws. For
example, numerous bills have been presented to Congress and various state
legislatures designed to address the prevalence of unsolicited commercial bulk
e-mail on the Internet. These laws may impose additional burdens on our
business. The enactment of any additional laws or regulations in this area may
impede the growth of the Internet, which could decrease our potential revenues
or otherwise cause our business to suffer.
Regulation of content and access could limit our ability to generate revenues
and expose us to liability
Prohibition and restriction of Internet content and access could dampen the
growth of Internet use, decrease the acceptance of the Internet as a
communications and commercial medium and expose us to liability. A variety of
restrictions on content and access, primarily as they relate to children, have
been enacted or proposed, including laws which would require Internet service
providers to supply, at cost, filtering technologies to limit or block the
ability of minors to access unsuitable materials on the Internet. Because of
these content restrictions and potential liability to us for materials carried
on or disseminated through our systems, we may be required to implement measures
to reduce our exposure to liability. These measures may require the expenditure
of substantial resources or the discontinuation of our product or service
offerings that subject us to this liability. Further, we could incur substantial
costs in defending against any of these claims and we may be required to pay
large judgments or settlements or alter our business practices. In addition, our
liability insurance may not cover potential claims relating to the Internet
services we provide or may not be adequate to indemnify us for all liabilities
that may be imposed on us.
We could be exposed to liability for defamation, negligence and infringement.
Because users download and redistribute materials that are cached or replicated
by us in connection with our Internet services, claims could be made against us
for defamation, negligence, copyright or trademark infringement, or other
theories based on the nature and content of such materials. While we have
attempted to obtain safe harbor protection against claims of copyright
infringement under the Digital Millenium Copyright Act of 1998, there can be no
guarantee that we will prevail in any such claims. We also could be exposed to
liability because of third-party content that may be accessible through our
services, including links to Web-sites maintained by our users or other third
parties, or posted directly to our Web-site, and subsequently retrieved by a
third party through our services. It is also possible that if any third-party
content provided through our services contains errors, third parties who access
such material could make claims against us for losses incurred in reliance on
such information. You should know that these types of claims have been
successfully brought against other online service providers. In particular,
copyright and trademark laws are evolving and it is uncertain how broadly the
rights provided under these laws will be applied to online environments. It is
impossible for us to determine who the potential rights holders may be with
respect to all materials available through our services.
We are dependent on strategic marketing alliances as a source of revenues and
our business could suffer if any of these alliances are terminated.
9
We have strategic marketing alliances with a number of third parties, and most
of our strategic marketing partners have the right to terminate their agreements
with us on short notice. Any termination may result in the substantial loss of
members obtained through the alliance. If any of our strategic marketing
agreements are terminated, we cannot assure you that we will be able to replace
the terminated agreement with an equally beneficial arrangement. We also expect
that we will not be able to renew all of our current agreements when they expire
or, if we are, that we will be able to do so on acceptable terms. We also do not
know whether we will be successful in entering into additional strategic
marketing alliances, or that any additional relationships, if entered into, will
be on terms favorable to us. Our receipt of revenues from our strategic
marketing alliances may also be dependent on factors which are beyond our
control, such as the quality of the products or services offered by our
strategic marketing partners.
Risks Related To Our Stock
The substantial number of shares that are or will be eligible for sale could
cause our common stock price to decline even if the we are successful.
Sales of significant amounts of common stock in the public market, or the
perception that such sales may occur, could materially affect the market price
of our common stock. These sales might also make it more difficult for us to
sell equity or equity-related securities in the future at a time and price that
we deem appropriate. As of September 30, 2003, we have outstanding options to
purchase 2,400,000 shares. There are also outstanding warrants to purchase
4,200,000 shares of common stock.
We have anti-takeover provisions, which could inhibit potential investors or
delay or prevent a change of control that may favor you.
Some of the provisions of our certificate of incorporation, our bylaws and
Delaware law could, together or separately, discourage potential acquisition
proposals or delay or prevent a change in control. In particular, our board of
directors is authorized to issue up to 5,000,000 shares of preferred stock (less
any outstanding shares of preferred stock) with rights and privileges that might
be senior to our common stock, without the consent of the holders of the common
stock.
If we cannot operate as a going concern, our stock price will decline and you
may lose your entire investment.
Our auditors included an explanatory paragraph in their report on our financial
statements for the year ended December 31, 2002 which states that, due to
recurring losses from operations since inception of the Company, there is
substantial doubt about our ability to continue as a going concern. Our
financial statements for the three months ended September 30, 2003 do not
include any adjustments that might result from our inability to continue as a
going concern. These adjustments could include additional liabilities and the
impairment of certain assets. If we had adjusted our financial statements for
these uncertainties, our operating results and financial condition would have
been materially and adversely affected.
10
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
could receive up to $3,150,000 upon exercise of the common stock purchase
warrants held by the selling stockholders. We expect to use the proceeds
received from the exercise of the common stock purchase warrants, if any, for
general working capital purposes.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol "PWRC".
For the periods indicated, the following table sets forth the high and low bid
prices per share of common stock. These prices represent inter-dealer quotations
without retail markup, markdown, or commission and may not necessarily represent
actual transactions.
High Low
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
2004
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
First Quarter* $1.70 $0.74
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
2003
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
Fourth Quarter $1.20 $0.09
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
Third Quarter $1.50 $0.12
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
Second Quarter $1.01 $0.10
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
First Quarter $2.25 $0.10
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
2002
11
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
Fourth Quarter $1.01 $0.01
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
Third Quarter $0.04 $0.01
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
Second Quarter $0.04 $0.01
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
First Quarter $0.10 $0.02
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
*Through January 30, 2004
As of February 9, 2004, there were 24,984,829 shares of common stock
outstanding.
As of February 9, 2004, there were approximately 3,020 stockholders of record of
our common stock. This does not reflect those shares held beneficially or those
shares held in "street" name.
We have not paid cash dividends in the past, nor do we expect to pay cash
dividends for the foreseeable future. We anticipate that earnings, if any, will
be retained for the development of our business.
Equity Compensation Plan Information
- ------------------------------------- ----------------------------------- ----------------------------------- ----------------------
Number of securities to be issued Weighted average exercise price Number of securities
upon exercise of outstanding of outstanding options, warrants remaining available
options, warrants and rights and rights for future issuance
Plan Category (a) (b) (c)
- ------------------------------------- ----------------------------------- ----------------------------------- ----------------------
Equity compensation plans approved N/A N/A N/A
by security holders
- ------------------------------------- ----------------------------------- ----------------------------------- ----------------------
Equity compensation plans not N/A N/A 428,877
approved by security holders
- ------------------------------------- ----------------------------------- ----------------------------------- ----------------------
Total N/A N/A 428,877
- ------------------------------------- ----------------------------------- ----------------------------------- ----------------------
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements
Some of the information in this Form SB-2 contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our financial
condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there may
be events in the future that we are not able to accurately predict or over which
we have no control. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under "Risk Factors,"
"Business" and elsewhere in this prospectus. See "Risk Factors."
Our History
We were incorporated in Delaware in 1995 under the name UC'NWIN Systems, Inc. In
August 1999, we changed our name to The Winners Edge.com, Inc. During 1999, as a
result of a Chapter 11 Bankruptcy Plan of Reorganization, we acquired the assets
of The Winners Edge Licensing Corporation. In addition to the assets, we also
acquired a ten-year license with the exclusive right to market the Winners Edge
handicapping product renewable for a second ten years. We did not acquire the
ownership of the handicapping program. In September 2000, we stopped marketing
the Winners Edge handicapping product due to insufficient income. On March 30,
2001, we acquired a roofing sealant product, Roof Shield. In July 2001, we
changed our name to Sealant Solutions, Inc. In September 2001, we acquired the
rights to sell and distribute in the United States the Lady Ole' line of
cosmetics products. In February 2002, we entered into a joint venture agreement
with IFG Goldstar Cement Company for the entitlement to a royalty payment based
upon the sale of certain concrete products. In April of 2002, we sold our rights
to the Lady Ole line of cosmetic products. In November of 2002, we agreed to
terminate and cancel the remaining term of our licensing agreement with the
Winners Edge Licensing Corporation.
On July 21, 2003, pursuant to a Stock Purchase Agreement and Share Exchange, as
amended, between our company and PowerChannel, Inc., a Delaware corporation,
PowerChannel merged into our company. Pursuant to the Stock Purchase Agreement,
PowerChannel ceased to exist and we continued as the surviving corporation. In
addition, we changed our name to Powerchannel, Inc. Under this agreement, we
issued shares equal to 85% of the fully diluted outstanding shares of our common
stock to PowerChannel, Inc.'s shareholders. Such shares are deemed "restricted"
as defined under Rule 144 as promulgated under the Securities Act of 1933, as
amended. Under the terms of the agreement, we are the acquiring company. The
merger was accounted for as a reverse merger, which effectively is a
recapitalization of the target company.
Pursuant to the Agreement, Michael Fasci remained on our Board of Directors
until his resignation in February 2004, Edward Fasci resigned from our Board of
Directors and Steven Lampert was appointed to our Board of Directors. In
addition, Michael Fasci resigned as President and Chief Executive Officer and
Steven Lampert was appointed as President, Chief Executive Officer, Chief
Financial Officer and Secretary. The Acquisition was approved by the unanimous
consent of the Board of Directors of our company and PowerChannel on July 21,
2003.
Business Summary
We provide low-cost access to the Internet. In order to accomplish this, we also
provide the physical hardware to deliver it through the use of the consumer's
existing television. We are primarily focused on the Hispanic market, using a
bilingual (English/Spanish) approach to meet the needs of the differing
generations within the Hispanic community. Our home page offers the subscriber
an English/Spanish language option at the click of a button. Our portal points
the subscriber to all the major Hispanic portals and to links with Hispanic
commercial, educational and community sites. The reach of our links is designed
to embrace the full extent of diverse Hispanic cultural and ethnic interests. As
we develop, we will continue to utilize the already existing and successful
Hispanic-specific content of others to enhance the practical sense of community
that its planned household penetration creates.
13
Results of Operations
Results of Operations - Nine Months Ended September 30, 2003 Compared to the
Nine Months Ended September 30, 2002.
Revenues
We did not generate revenues during the nine months ended September 30, 2003
and 2002.
Operating Expenses
Operating expenses for the nine months ended September 30, 2003 were $446,955,
as compared to $1,641,525 for the nine months ended September 30, 2002. The
decrease in operating expenses is due to our reducing our expenditures
substantially in 2003 due to the absence of revenue. In addition, we recorded
expense of $1,663,446 as equity based compensation for the three months ended
September 30, 2003 in relation to stock issued for services rendered.
Net Loss and Loss Per Share
The net loss and the loss per share was $2,108,469 and $.18 for the nine months
ended September 30, 2003, as compared to net loss of $1,691,525 and $.15 for the
nine months ended September 30, 2002. Net loss and loss per share increased from
the previous period primarily as a result of the reasons set forth above.
Results of Operations - Three Months Ended September 30, 2003 Compared to the
Three Months Ended September 30, 2002.
Revenues
We did not generate revenues during the three months ended September 30, 2003
and 2002.
Operating Expenses
Operating expenses for the quarter ended September 30, 2003 were $309,802
compared to expenses of $270,361 in the year earlier quarter. A portion of this
increase in operating expenses is attributable to a third quarter 2003 charge of
$32,000 in relation to costs incurred related to the merger. In addition, we
recorded expense of $1,663,446 as equity based compensation for the three months
ended September 30, 2003 in relation to stock issued for services rendered.
Net Loss and Loss Per Share
The net loss and the loss per share was $1,968,290 and $.16 for the three months
ended September 30, 2003, as compared to net loss of $271,994 and $.02 for the
three months ended September 30, 2002. Net loss and loss per share increased
from the previous period primarily as a result of the reasons set forth above.
Results of Operations - Year Ended December 31, 2002 compared to Year Ended
December 31, 2001
Revenues
We did not generate revenues during the year ended December 31, 2002. During
the year ended December 31, 2001, we generated license fees of $335,473, which
was offset by expenses reimbursed pursuant to the license fee in the amount of
$335,473.
Operating Expenses
Operating Expenses incurred for the year ended December 31, 2002, aggregated
$2,007,652 as compared to $1,752,286 for the year ended December 31, 2001. Our
operating expenses increased by $255,366 for the year ended December 31, 2002
when compared to the previous year. This increase is due to higher expenses
incurred during the year ended December 31, 2002 for payments made by
PowerChannel Europe on behalf of the Company including various administrative
expenses and professional fees.
Net Loss and Loss Per Share
The net loss was $2,074,174 for the year ended December 31, 2002, as compared to
a net loss of $1,612,122 for the year ended December 31, 2001. The net loss
increased by $462,052 from the previous period primarily as a result of the
reasons set forth above.
14
Liquidity and Capital Resources
At September 30, 2003, we had working capital deficit of $3,797,299 as compared
with $3,394,723 at December 31, 2002. The increase in the working capital
deficit is primarily the result of the following:
o a decrease in cash;
o a loan incurred in the third quarter; and
o increase in amounts due to related parties.
We have historically sustained our operations and funded our capital
requirements with the funds received from the sale of our common stock. To
obtain funding for our ongoing operations, pursuant to an offering conducted
under Rule 506 of Regulation D, as promulgated under the Securities Act of 1933,
we sold units to accredited investors with each unit consisting of 50,000 shares
of common stock and 50,000 common stock purchase warrants at a price of $25,000
per unit. In connection with this offering we issued an aggregate of 4,250,000
shares of common stock and 4,250,000 common stock purchase warrants. The common
stock purchase warrants are each exercisable into one share of common stock at
the holder's option at an exercise price of $.75 per warrant. At anytime after
the filing of this registration statement, we may call the warrants when the
five-day average closing bid price of the common stock equals or exceeds $1.00.
The warrants are exercisable for a period of thirty-six months from the final
closing of the offering.
If we need to obtain capital, no assurance can be given that we will be able to
obtain this capital on acceptable terms, if at all. In such an event, this may
have a materially adverse effect on our business, operating results and
financial condition. If the need arises, we may attempt to obtain funding
through the use of various types of short term funding, loans or working capital
financing arrangements from banks or financial institutions.
Our material funding requirements of $2,100,000 include working capital,
marketing costs, acquisition costs, general and administrative costs, debt
retirement and the purchase of inventory and technology.
Effect of Recently Issued Accounting Pronouncements
In November 2002, the FASB issued FIN No. 45, "Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees and
Indebtedness of Others," an interpretation of SFAS Nos. 5, 57 and 107, and
rescission of FIN No. 34,"Disclosure of Indirect Guarantees of Indebtedness of
Others." FIN No. 45 elaborates on the disclosures to be made by the guarantor in
its interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also requires that a guarantor recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and measurement
provisions of this interpretation are applicable on a prospective basis to
guarantees issued or modified after March 31, 2002; while, the provisions of the
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The adoption of such
interpretation on January 1, 2003 did not have a material impact on the
Corporation's results of operations, financial position or cash flows.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities," an interpretation of Accounting Research Bulletin No. 51. FIN No. 46
requires that variable interest entities be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or is entitled to receive a majority of the entity's
residual returns or both. FIN No. 46 also requires disclosures about variable
interest entities that companies are not required to consolidate but in which a
company has a significant variable interest. The consolidation requirements of
FIN No. 46 will apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements will apply to entities
established prior to January 31, 2003 in the first fiscal year or interim period
beginning after June 15, 2003. The disclosure requirements will apply in all
financial statements issued after January 31, 2003. We have adopted the
provisions of FIN No. 46, such provisions have not had a material effect on its
results of operation, financial position or the related financial statement
disclosures.
15
In April 2003, the FASB issued Statements of Financial Accounting Standards No.
149 ("SFAS No. 149"), an amendment to SFAS No. 133. SFAS No. 149 clarifies under
what circumstances a contract with initial investments meets the characteristics
of a derivative and when a derivative contains a financing component. This SFAS
is effective for contracts entered into or modified after June 30, 2003.
Accounting for Financial Instruments - In May 2003, the FASB issued Statements
of Financial Accounting Standards No. 150 ("SFAS No. 150") "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity". SFAS No. 150 established standards for how an issuer classifies and
measures in its statement of financial position certain financial instruments
with characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that financial instrument embodies an
obligation of the issuer. This SFAS is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. It is to be
implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of SFAS
No.150 and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The adoption of SFAS No. 150 will not have a
material effect on the financial statements. We adopted SFAS No. 150 in June 30,
2003.
BUSINESS
We are a developmental stage company incorporated in the State of Delaware on
December 11, 1995. We formerly operated under the name Sealant Solutions, Inc.
On July 21, 2003, PowerChannel, Inc. merged into our company and pursuant to
such agreement, the separate existence of PowerChannel, Inc. ceased to exist and
we continued as the surviving corporation. We subsequently changed our name to
PowerChannel, Inc. We currently trade on the OTC Electronic Bulletin Board under
the symbol PWRC.
Our principal product is low-cost access to the Internet. We offer an on-line
service that enables consumers to experience the Internet through their
televisions. We provide this service through a set-top terminal that attaches to
a television and telephone line and enables consumers to access our
subscription-based on-line service. By attempting to reduce the cost and
complexity barriers to Internet access, our goal is to make the Internet
available to a wider audience than has previously been possible.
We provide the physical hardware that is used to deliver the Internet through
the use of the consumer's existing television. We market our product as an
"introduction to the Internet". There is no need to buy a computer and there is
no need to know how to use one. We are primarily focused on the Hispanic market,
using a bilingual (English/Spanish) approach to meet the needs of the differing
generations within the Hispanic community, and offering value to the subscriber
through offers, discounts, coupons and prizes. We have our operations in
New York.
Our home page offers the subscriber an English/Spanish language option at the
click of a button. Our portal points the subscriber to all the major Hispanic
portals and to links with Hispanic and sometimes non-Hispanic commercial,
educational and community sites. The reach of our links is designed to embrace
the full extent of diverse Hispanic cultural and ethnic interests. As we
develop, we will continue to utilize the already existing and successful
Hispanic-specific content of others to enhance the practical sense of community
that our planned household penetration creates.
Strategic Alliances
Our goal is to have certain distinct, if not unique, features within a five-year
timeframe. These features include a sub-$100 Internet solution and a focus on
the Hispanic community. We have specifically targeted the Hispanic Community in
the United States, as well as Latin America, as we believe that this market is
not properly serviced due to the high cost of various Internet options and the
language barrier. We have formed a number of strategic alliances and commercial
relationships designed in the aggregate to enable us to offer our services, low
cost hardware and access to the Internet available through the television, to
the Hispanic market, in the United States and Latin America. Theses alliances
and relationships will focus initially on the Los Angeles and New York sectors
of the market. In order to access this segment of the industry, we have created
the following alliances:
16
o Terra Lycos - a global Internet group. The group, which resulted from Terra
Networks S.A.'s acquisition of Lycos, Inc. in October 2000, operates web
sites in the United States, Canada, Europe, Asia and Latin America, and is
an access provider in Spain and Latin America. We have entered into an
agreement with Terra Lycos for Terra Lycos to market our set top boxes.
o ESPN Deportes - a leader in sports news, information and broadcasting
targeted to the Spanish speaking markets. ESPN Deportes highlights
international sports news and events, with particular attention to Spanish
speaking countries and popular Hispanic sports. We have entered into an
agreement allowing us to provide their content through our network.
o Wal-Mart - a retailer in the United States with over 4,000 locations. Our
set top boxes are currently sold in six stores and we believe we will be
able to expand our presence in Wal-mart over the next several months.
o United Hospital Systems - founded in 1978, is a hospital management
companies. It is an operator of acute care hospitals, behavioral health
centers, ambulatory surgery centers and radiation oncology centers.
Currently, together with United Hospital Systems, we are offering daily
rental items to patients in two hospitals (Lansdale, PA and W. Palm Beach,
Fl).
o Caribe.Net - an Internet solution for Puerto Rico and the Caribbean.
Caribe.net intends to provide our Puerto Rican and Caribbean subscribers
our pre-paid Internet access bundle with immediate access to the most
advanced and experienced Internet access networks in the Caribbean.
Caribe.net has local dial-up numbers that cover the entire Island of Puerto
Rico.
o ISS-LG, Inc. is a distributor of computers and electronics in the
Caribbean. We have entered into a distribution agreement with ISS-LG for
our products in Puerto Rico
Products, Services and Technology
We offer an Internet on-line service primarily to the Hispanic community that
can be accessed by consumers via our set-top terminal which connects to a
television and a telephone line. Once our set-top terminal is connected, the
user pays a annual fee for unlimited access to the Internet via our network,
which performs all of the underlying operations necessary to provide the
consumer with access to the Internet.
The Set-Top Terminal
Our set-top terminal, or PowerChannel System, connects to a television and a
telephone line to enable the user to access the Internet via our service. In
addition to the power cord, the set-top terminal has two cables: one connects to
the consumer's television and the other plugs into the telephone line. A
t-splitter is also included, which enables the user to plug their telephone and
our PowerChannel System into the same phone line. The PowerChannel System
incorporate the following features:
o Simple Installation and Operation: Our set-top terminal utilizes standard
electrical and telephone connections to enable consumers to attach the unit
to a television and telephone line. Once our set-top terminal is connected
to the television and telephone line, the user turns the unit on by
pressing the power button, bringing up a brief on-screen registration,
requiring the subscriber will have to agree by clicking the "I Agree" which
includes name, address, phone number, credit card information and
preference information.
o Browsing Speed and Reliability: We utilize a variety of hardware, software
and network technologies to provide consumers with fast and reliable
Internet access, Web-based content and e-mail communication. The
PowerChannel Systems comes standard with a V90.56k modem. In addition, we
employ network management technology that connects the user to any one of
several alternative Internet service providers to help provide a reliable
and efficient connection to the Internet even if a particular Internet
service providers's network is overloaded or shut down.
o Infrared Keyboard: Our set top boxes come with a wireless keyboard that has
traditional keyboard functions.
Our Network
Our network is accessed through the PowerChannel System and consists of three
primary components:
o user interface and functionality;
o network content and features; and
o network operations technology.
User Interface and Functionality
17
We designed our bilingual browser for consumer viewing on a television by
incorporating certain video techniques such as scrolling screens to indicate
vertical page movement and fading to new pages as well as substantially
eliminating certain effects such as the piecemeal construction of web pages
typical of PC-based browsers, resizable windows and horizontal scroll bars. In
addition, our network offers an on-line help function which guides users through
certain aspects of the browsing process and introduces the user to certain of
our network's features.
Network Content and Features
Our network currently offers basic services, including unlimited access to the
Internet for an annual subscription price. Key features of the our services
include the following:
o The PowerChannel Home Page. The first page seen by the user of our network
is our home page. From the home page, the subscriber can access email,
chat, shop and explore other areas of the Internet.
o Search Capability. Our subscribers can search the Internet through
third-party search engines. This search capability allows users to search
Web sites for information on selected topics by key words input by the
user.
o E-mail. Our network has e-mail capability. Users can send HTML and
multimedia enhanced messages to, and receive messages from, anyone with an
address on the Internet. In addition, subscribers are allocated designated
storage space in order to save e-mail messages for future reference.
Network Operations Technology
Our network operations are based in San Jose, California. The technology
utilized by the our network includes the following:
o Internet Access and Load-Balancing Technology: We provides users with
Internet access service through the use of multiple ISP relationships. We
currently utilizes a number of different ISPs in order to provide Internet
access to our subscriber base. Our network management technology enables us
to perform load balancing among various ISPs and to employ a form of
least-cost routing across multiple ISPs.
o Proxy Caching: We are able to cache, transcode, reformat, stream and
reorder Web data from individual Web sites for downloading to the user's
set-top terminal. The PowerChannel System determines the timing for content
updates from standard periodicity data incorporated in many Web sites or
from learning algorithms where the periodicity data is not included.
o Modular Scalablity: We currently maintain our network through the use of
multiple workstations. Our network is designed so that it can be scaled to
accommodate increased volumes of activity by adding additional workstations
to our existing inventory.
o Security Encryption: Client/server encryption technology is employed to
help maintain a secure connection between the our network server and our
set-top terminal client.
Sales, Marketing and Distribution
The PowerChannel System is distributed primarily through the normal consumer
electronics distribution channels to retail stores. We complement this
distribution effort by installing the PowerChannel System for demonstration
purposes and training the dealers to demonstrate the use of our product.
Manufacturing
We have entered into agreements with various parties to manufacture our set-top
terminals. These manufacturers build our set-top boxes according to our
specifications.
Customer Service
We provide service and technical support organization to provide first-level
customer support services to our subscribers. Our customer support and care team
respond to customer service and technical support issues received via e-mail or
telephone and is available 24 hours a day, seven days a week.
18
Patents, Copyrights and Trademarks
We regard our patents, copyrights, trademarks, trade dress, trade secrets and
similar intellectual property as critical to our success and we rely upon patent
law, copyright law, trademark law, trade secret protection and confidentiality
and/or license agreements with our employees, customers, licensees and others to
protect our proprietary rights. We have filed United States and foreign patent
applications relating to our hardware, client software and network system
software inventions. We pursue the registration of our copyrights and trademarks
in the United States and internationally. Effective patent, copyright, trademark
and trade secret protection may not be available in every country in which our
products and services are distributed or made available through the Internet.
There can be no assurance that any pending registration or application will be
granted or that the denial of any such registration or application would not
have a material adverse effect on our business.
Competition
The business of providing Internet access services is extremely competitive,
rapidly evolving and subject to rapid technological change. We expect that such
competition will continue to intensify. We operate in the same space as many
other Internet access companies, such as other computer and TV based ISP
services, dial-up ISPs, cable companies, interactive television and other
providers of Internet access to the general public. A large number of companies
are developing or have introduced devices and technologies to facilitate access
to the Internet via a television. In addition, Microsoft currently offers its
MSNTV service. Such competitors include suppliers of low-cost Internet access
technologies. In addition, manufacturers of television sets have announced plans
to introduce Internet access and Web browsing capabilities into their products
or through set-top boxes, using technology supplied by and others. Operators of
cable television systems also have offered Internet access in conjunction with
cable service. We also competes with internet service providers and commercial
on-line services such as AOL and Compuserve. There can be no assurance that ours
competitors will not develop Internet access products and services that are
superior to, and priced competitively with our products, thereby achieving
greater market acceptance than our offerings. Many of our existing competitors,
as well as potential competitors, have longer operating histories, greater name
recognition, larger installed customer bases and significantly greater
financial, technical and marketing resources than our company. In addition,
certain of our current and prospective competitors may be acquired by, receive
investments from or enter into other commercial relationships with larger, more
well-established and well funded companies. Such competition could have a
material adverse effect on our business, operating results and financial
condition.
Employees
As of February 3, 2004, we had a total of eight employees, of which three are
full time and five are part time. Two of the employees are operating in the
areas of engineering, product development, one in marketing and sales and four
in finance and administration.
None of our employees is represented by a labor organization, and we are not a
party to any collective bargaining agreement. We have never had any employee
strike or work stoppage and considers its relations with our employees to be
good.
Regulation
We are not currently subject to direct regulation by any government agency in
the United States, other than regulations applicable to businesses generally,
such as registering to operate a business within each state or the collection of
sales tax. However, due to the increasing popularity of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet. Our business is also subject to the FCC regulations for compliance
with various suitability mandates in order for our set-top boxes to access the
public telephone networks. We have utilized highly reputable testing
organizations to ensure our compliance with all safety regulations.
Description of Properties
19
Our principal executive offices are located at 280 South Mountain Road, New
City, New York 10956 and our mailing address is located at 16 North Main Street,
Suite 395 New City, New York 10956. Our telephone number is (845)634-7979. The
facility is utilized in the following manner:
o administrative offices;
o professional offices; and
o storage and warehousing.
The facility consists of approximately 1,800 square feet and we lease it for
$2,000 per month from Steven Lampert, our Chief Executive Officer and director.
The lease expires in 2006. We believe that our existing facilities are adequate
for our current use.
Legal Proceedings
Except for the following, we are currently not a party to any material legal
proceedings.
o two lawsuits by stockholders alleging investment fraud have been asserted
against the Company seeking damages of approximately $60,000. The
shareholders filed a complaint in the Supreme Court of Nassau County and
Civil Court of the County. Management believes that the resolution of these
claims will not have a material effect on the financial position or results
of operations of the Company.
20
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and directors, and their ages and positions are:
- -------------------------------------- ----------------------------------------------- ---------------------------------------------
Name Age Position
- -------------------------------------- ----------------------------------------------- ---------------------------------------------
Steven Lampert 54 President, Chief Executive Officer, Chief
Financial and Chairman of the Board
- -------------------------------------- ----------------------------------------------- ---------------------------------------------
James Davidson 54 Director
- -------------------------------------- ----------------------------------------------- ---------------------------------------------
Directors are elected to serve until the next annual meeting of stockholders and
until their successors are elected and qualified. Directors serve without cash
compensation and without other fixed remuneration. Officers are elected by the
Board of Directors and serve until their successors are appointed by the Board
of Directors. Biographical resumes of each officer and director are set forth
below.
Steven Lampert, President, Chief Executive Officer, Chief Financial and Chairman
of the Board
Steven Lampert was appointed as President, Chief Executive Officer, Chief
Financial and Chairman of the Board on July 21, 2003. Mr. Lampert has been the
President and Chief Executive Officer of PowerChannel, Inc. since 1998. Prior to
1998, Mr. Lampert co-founded Long Distance Direct and was its Chief Executive
Officer from December 1991. Prior to founding Long Distance Direct, Mr. Lampert
was President of Comtec, Inc., a New York based telecommunications corporation
that provided voice-response telephony services, from November 1985 through
November 1991. Prior to 1985, Mr. Lampert served as a Director of
Telecommunications for NBC and Corning Labs. Mr Lampert holds a BA degree from
Hunter College, New York.
21
James Davidson, Director
James Dale Davidson, has served as a Director since inception. Mr. Davidson is a
private investor and analyst. He founded Agora, Inc. a worldwide publishing
group with offices in Baltimore, London, Dublin, Paris, Johannesburg, Melbourne
and other cities, The Hulbert Financial Digest and Strategic Investment. In
conjunction with Lord Rees-Mogg, co-editor of Strategic Investment and former
editor of the Times of London, he co-authored a series of books on financial
markets. Mr. Davidson also is a current or recent director of a number of
companies, many of which he founded. They include MIV Therapeutics, GeneMax, New
Paradigm Capital (Bermuda), Anatolia Minerals Development Corporation, and
Wharekauhau Holdings (New Zealand). In addition, Mr. Davidson is a director of
Plasmar, S.A. (La Paz, Bolivia) Martinborough Winery Ltd. (New Zealand) and New
World Premium Brands Ltd. (New Zealand). He is the editor of Vantage Point
Investment Advisory, a private financial newsletter with a worldwide
circulation. Mr. Davidson has a B.A., M.A. in Literature, Oxford University,
U.K.
Executive Officers of the Company
Officers are appointed to serve at the discretion of the Board of Directors.
None of the executive officers or directors of the Company has a family
relationship with any other executive officer or director of the Company.
Code of Ethics
We have adopted our Code of Ethics and Business Conduct for Officers, Directors
and Employees that applies to all of the officers, directors and employees of
our company.
Section 16(a) Beneficial Ownership Reporting Compliance
Based on the Company's review of copies of all disclosure reports filed by
directors and executive officers of our company pursuant to Section 16(a) of the
Securities Exchange Act of 1934, as amended, the Company believes that there was
compliance with all filing requirements of Section 16(a) applicable to directors
and executive officers of our company during 2003, except that Mr. James
Davidson failed to file once.
22
EXECUTIVE COMPENSATION
The following tables set forth certain information regarding our CEO and each of
our most highly compensated executive officers whose total annual salary and
bonus for the fiscal year ending December 31, 2002, 2001 and 2000 exceeded
$100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Other
Annual Restricted Options LTIP
Name & Principal Salary Bonus Compen- Stock SARs Payouts All Other
Position Year ($) ($) sation ($) Awards($) (#) ($) Compensation
- ------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Michael E. Fasci (1) 2002 37,500 0 0 12,500 - - -
CEO, CFO
(1) Mr. Fasci resigned as CEO and CFO in July 2003 and a director in February
2004.
Options/SARs Grants During Last Fiscal Year
During the fiscal year ended December 31, 2002, no executive officer or director
were granted options to purchase shares of common stock.
Directors and committee members did not receive, and were not eligible for,
compensation from us during the fiscal year ending December 31, 2002.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value
The following table provides information regarding the aggregate number of
options exercised during the fiscal year ended December 31, 2002 by each of the
named executive officers and the number of shares subject to both exercisable
and unexercisable stock options as of December 31, 2002. The common stock price
at December 31, 2002 was $0.40 per share.
- ------------------- -------------- -------------- -------------- ---------------- -------------- ----------------
# of
Securities Value of
Underlying Unexercised
Unexercised In-the-money
Shares Options at Options at
Acquired on Value FY-End FY-End
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------ -------------- -------------- -------------- ---------------- -------------- ----------------
Michael Fasci - - - - - -
- ------------------- -------------- -------------- -------------- ---------------- -------------- ----------------
Executive Employment Agreements
In February 2004, we have entered into an employment agreement with Steven
Lampert, our CEO and a director. The employment agreement provides Mr. Lampert
with $160,000 per annum in compensation. We currently have no other employment
agreements in place with any officers of our company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 2002, we issued 87,209 restricted shares of common stock to an
officer of our company in exchange for the cancellation of $87,209 of
indebtedness.
In February 2002, we sold 250 restricted common stock at $1.00 per share to an
accredited investor pursuant to a private placement which shares were
subsequently purchased by the sole officer of our company.
In April 2002, we issued 1,000 restricted shares of common stock to a
non-affiliate in consideration of a full release of all claims against us in
connection with the Lady Ole cosmetics business.
In November 2002, we issued 15,000 restricted shares of common stock to two
non-affiliates in full settlement of pending litigation.
In January 2004, we issued 250,000 shares of common stock under our 2004 Stock
Incentive Plan to Steven Lampert, our CEO and director, for services rendered.
These shares were registered on a Form S-8 Registration Statement.
In January 2004, we issued James Davidson, a director of our company, 750,000
shares of common stock for services rendered as a director. The shares are
restricted in accordance with Rule 144 as promulgated under the Securities Act
of 1933, as amended.
We currently lease our executive offices from Steven Lampert, our CEO and a
director. The facility consists of approximately 1,800 square feet and we lease
it for $2,000 per month.
23
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of February 9, 2004
o by each person who is known by us to beneficially own more than 5% of our
common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
Unless otherwise indicated, the shareholders listed in the table have sole
voting and investment power with respect to the shares indicated.
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
Name of Beneficial Owner Common Stock Beneficially Owned Percentage of Common Stock**
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
Steven Lampert*** 3,597,025 14.39%
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
James Davidson*** 1,024,101 4.09%
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
All of executive officers and directors (2
persons) 4,692,373 18.8%
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
* Less than 1% of the outstanding common stock.
** Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of February 10, 2004 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person. Percentages are
based on a total of 24,984,829 shares of common stock outstanding on February
10, 2004, and the shares issuable upon the exercise of options and warrants
exercisable on or within 60 days of February 10, 2004, as described below.
*** Executive officer and/or director.
24
DESCRIPTION OF SECURITIES BEING REGISTERED
Common Stock
We are authorized to issue up to 95,000,000 shares of common stock, par value
$.01. As of February 10, 2004, there were 24,984,829 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefore. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
Preferred Stock
We are authorized to issue up to 5,000,000 shares of preferred stock, par value
$.01 per shares. As of February 10, 2004, there were no shares of preferred
stock outstanding. The board of directors has authority, without action by the
stockholders, to issue all or any portion of the authorized but unissued
preferred stock in one or more series and to determine the voting rights,
preferences as to dividends and liquidation, conversion rights, and other rights
of such series. The preferred stock, if and when issued, may carry rights
superior to those of the common stock.
We do not have any plans to issue any shares of preferred stock. However, we
consider it desirable to have one or more classes of preferred stock to provide
us with greater flexibility in the future in the event that we elect to
undertake an additional financing and in meeting corporate needs that may arise.
If opportunities arise that would make it desirable to issue preferred stock
through either public offerings or private placements, the provision for these
classes of stock in our certificate of incorporation would avoid the possible
delay and expense of a stockholders' meeting, except as may be required by law
or regulatory authorities. Issuance of the preferred stock would result,
however, in a series of securities outstanding that may have certain preferences
with respect to dividends, liquidation, redemption, and other matters over the
common stock which would result in dilution of the income per share and net book
value of the common stock. Issuance of additional common stock pursuant to any
conversion right that may be attached to the preferred stock may also result in
the dilution of the net income per share and net book value of the common stock.
The specific terms of any series of preferred stock will depend primarily on
market conditions, terms of a proposed acquisition or financing, and other
factors existing at the time of issuance. As a result, it is not possible at
this time to determine the respects in which a particular series of preferred
stock will be superior to our common stock. The board of directors does not have
any specific plan for the issuance of preferred stock at the present time and
does not intend to issue any such stock on terms which it deems are not in our
best interest or the best interests of our stockholders.
Common Stock Purchase Warrants
We currently have 4,200,000 common stock purchase warrants outstanding. The
common stock purchase warrants are each exercisable into one share of common
stock at the holder's option at an exercise price of $.75 per warrant. At
anytime after the filing of a registration statement covering the shares of
common stock underlying the warrants, we may call the warrants when the five-day
average closing bid price of the common stock equals or exceeds $1.00. The
warrants are exercisable for a period of thirty-six months from issuance.
Stock Options
We currently have an aggregate of 2,400,000 options outstanding. Of the
2,400,000 outstanding, 1,200,000 are exercisable at a price of $0.20 per share
and 1,200,000 are exercisable at a price of $0.40 per share.
Transfer Agent
Our transfer agent is Olde Monmouth Stock Transfer Company, Inc. Their address
is 77 Memorial Parkway, Suite 101, Atlantic Highlands, NJ 07716 and their
telephone number is 732-872-2727.
25
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended and restated, provide to the fullest
extent permitted by Section 145 of the General Corporation Law of the State of
Delaware, that our directors or officers shall not be personally liable to us or
our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended and restated, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Our By Laws also provide that the Board of Directors may also authorize the
company to indemnify our employees or agents, and to advance the reasonable
expenses of such persons, to the same extent, following the same determinations
and upon the same conditions as are required for the indemnification of and
advancement of expenses to our directors and officers. As of the date of this
Registration Statement, the Board of Directors has not extended indemnification
rights to persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees, assignees
and other successors-in-interest may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the broker-dealer
solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and regulations of any
state or the United States;
o broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;
o through the writing of options on the shares
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders may also engage in short sales against the box, puts
and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
26
The selling stockholders or their respective pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the selling stockholders,
but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholders defaults on
a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
We have agreed to indemnify the selling stockholders, or their transferees or
assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material arrangement with
a broker-dealer for the resale of the common stock, then we would be required to
amend the registration statement of which this prospectus is a part, and file a
prospectus supplement to describe the agreements between the selling
stockholders and the broker-dealer.
27
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares of
common stock by the selling stockholders. We will not receive any proceeds from
the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering the
resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
28
Shares Beneficially Owned Shares Beneficially Owned
------------------------------- ----------------------------------
Prior to the Offering(1) After the Offering(2)
Total
-----------------
Name Number Percent Shares Number Percent
Registered
Steven Lampert(3) 3,597,025 14.39% 500,000 3,097,025 9.78%
Robert Tatum 1,010,943 4.05% 1,010,943 0 0
James Davidson 1,024,101 4.09% 1,024,101 0 0
SOS Resource Services, Inc.(4) 2,475,000 9.90% 1,950,000 525,000 1.65%
Jonathan Honig 1,218,587 4.88% 1,218,587 0 0
Herbert Hersey 499,672 2.00% 499,672 0 0
Douglas Clausen 420,634 1.68% 420,634 0 0
Ronald Hubbard 71,428 * 71,428 0 0
Barry Zide 186,500 * 50,000 136,500 *
Kenneth Friedman 100,000 * 50,000 50,000 *
Barry Honig(5) 1,200,000 3.79% 1,200,000 0 0
Gerald Wolfe(6) 100,000 * 100,000 0 0
Lawrence Gibbins(7) 500,000 2.00% 500,000 0 0
Ralph Schwartz(8) 100,000 * 100,000 0 0
Jeffrey McLaughlin(9) 100,000 * 100,000 0 0
Jordan Enterprises(10) 200,000 * 200,000 0 0
Peekskill, LLC(11) 400,000 1.60% 400,000 0 0
Tony Tseng(12) 200,000 * 200,000 0 0
Zalman Silber(13) 400,000 1.60% 400,000 0 0
Richard Cayner(14) 600,000 2.40% 600,000 0 0
Omega Capital Small Cap Fund(15) 100,000 * 100,000 0 0
Douglas Welpton(16) 100,000 * 100,000 0 0
LRG Holdings(17) 100,000 * 100,000 0 0
Tripp Family Trust (18) 100,000 * 100,000 0 0
North Bar Capital(19) 100,000 * 100,000 0 0
Mark Nordiicht(20) 600,000 2.40% 600,000 0 0
Chaim Gross(21) 400,000 1.60% 400,000 0 0
Abraham Schwartz(22) 100,000 * 100,000 0 0
Riddell Alexander(23) 400,000 1.60% 400,000 0 0
Hazelton Capital Ltd. (24) 200,000 * 200,000 0 0
Professional Traders(25) 1,000,000 4.00% 1,000,000 0 0
Reuven Rosenberg(26) 200,000 * 200,000 0 0
Veen Kaila(27) 200,000 * 200,000 0 0
Marketwise Trading, Inc. (28) 200,000 * 200,000 0 0
Omicron Master Trust (29) 1,000,000 4.00% 1,000,000 0 0
Eli Levitan(30) 200,000 * 200,000 0 0
Castle Creek Partners(31) 800,000 3.20% 800,000 0 0
Leonard Cohen(32) 100,000 * 100,000 0 0
TOTAL 16,495,365
- ------------------------------------------------------------------------------------------------------------------------------------
29
(1) The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days.
(2) Assumes that all securities registered will be sold and that all shares of
common stock underlying the options and common stock purchase warrants will be
issued.
(3) Executive officer and director of our company. Includes 254,652 shares of
common stock owned by Karen Lampert, the wife of Steven Lampert
(4) SOS Resources Services, Inc. is owned by Sal Russo who has beneficial and
dispositive control over the shares of common stock. Includes 1,275,000 shares
of common stock and 1,200,000 shares of common stock underlying options
exercisable at $.20.
(5) Represents 1,200,000 shares of common stock underlying stock options
exercisable at $.40 per share.
(6) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(7) Represents (i) 250,000 shares of common stock and (ii) 250,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(8) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(9) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(10) Represents (i) 100,000 shares of common stock and (ii) 100,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(11) Represents (i) 200,000 shares of common stock and (ii) 200,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(12) Represents (i) 100,000 shares of common stock and (ii) 100,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(13) Represents (i) 200,000 shares of common stock and (ii) 200,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(14) Represents (i) 300,000 shares of common stock and (ii) 300,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(15) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(16) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(17) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(18) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(19) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(20) Represents (i) 300,000 shares of common stock and (ii) 300,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
30
(21) Represents (i) 200,000 shares of common stock and (ii) 200,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(22) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(23)Represents (i) 200,000 shares of common stock and (ii) 200,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(24) Represents (i) 100,000 shares of common stock and (ii) 100,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(25)Represents (i) 500,000 shares of common stock and (ii) 500,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(26)Represents (i) 100,000 shares of common stock and (ii) 100,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(27)Represents (i) 100,000 shares of common stock and (ii) 100,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(28)Represents (i) 100,000 shares of common stock and (ii) 100,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(29)Represents (i) 500,000 shares of common stock and (ii) 500,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(30) Represents (i) 100,000 shares of common stock and (ii) 100,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(31) Represents (i) 400,000 shares of common stock and (ii) 400,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
(32) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75 per
share.
31
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an opinion
with respect to the validity of the shares of common stock being offered hereby.
A member of Sichenzia Ross Friedman Ference LLP has received 85,000 shares of
common stock, from us for general corporate matters.
EXPERTS
Yohalem Gillman & Company LLP, Independent Certified Public Accountants, have
audited, as set forth in their report thereon appearing elsewhere herein,
PowerChannel Holdings, Inc. and subsidiaries at December 31, 2002 and
2001(pre-merger), and for the year then ended that appear in the prospectus. The
financial statements referred to above are included in this prospectus with
reliance upon the auditors' opinion based on their expertise in accounting and
auditing. their expertise in accounting and auditing.
Radin Glass & Co., LLP, Independent Certified Public Accountants, have audited,
as set forth in their report thereon appearing elsewhere herein, our financial
statements at December 31, 2002 and 2001, and for the year then ended that
appear in the prospectus. The financial statements referred to above are
included in this prospectus with reliance upon the auditors' opinion based on
their expertise in accounting and auditing.
CHANGE IN ACCOUNTANTS
On January 23, 2004, we notified Radin Glass & Co., LLP, our independent public
accountants, that we were terminating its services, effective as of that date.
On January 26, 2004, we engaged Wolinetz, Lafazan & Company, P.C. as our
principal independent accountant. This decision to dismiss Radin and engage
Wolinetz was ratified by the majority approval of the Board of Directors of the
Company.
During the last two fiscal years ended December 31, 2002 and December 31, 2001
and through January 23, 2004, (i) there were no disagreements between our
company and Radin on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of Radin would have caused Radin to make reference to the
matter in its reports on our financial statements, and (ii) Radin's report on
our financial statements did not contain any other adverse opinion, disclaimer
of opinion, or modification or qualification of opinion, except that Radin's
report on the consolidated financial statements for the year ended December 31,
2002 contains an explanatory paragraph indicating that there is substantial
doubt as to our ability to continue as a going concern. In addition, Radin
resigned as our independent auditors on November 24, 2003. Radin informed our
company that the resignation resulted from the fact that we filed our Form
10-QSB on November 14, 2003, for the quarter ended September 30, 2003, without
adequate disclosure indicating that a review of the financial statements
included therein had not been completed by Radin. Effective as of December 16,
2003, we re-engaged Radin as our independent auditor. On January 5, 2004, we
filed an amended Form 10-QSB, which was reviewed by Radin. During the last two
most recent fiscal years ended December 31, 2002 and December 31, 2001 and
through January 23, 2004, there were no reportable events as the term described
in Item 304(a)(1)(iv) of Regulation S-B.
During the two most recent fiscal years and through January 26, 2004, we have
not consulted with Wolinetz regarding either:
o the application of accounting principles to any specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on our financial statements, and neither a written report was
provided to us nor oral advice was provided that Wolinetz concluded was an
important factor considered by us in reaching a decision as to the
accounting, auditing or financial reporting issue; or
o any matter that was either subject of disagreement or event, as defined in
Item 304(a)(1)(iv)(A) of Regulation S-B and the related instruction to Item
304 of Regulation S-B, or a reportable event, as that term is explained in
Item 304(a)(1)(iv)(A) of Regulation S-B.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities Act of
1933, as amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Powerchannel, Inc., filed as part of
the registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance with
the rules and regulations of the Securities and Exchange Commission.
32
We are subject to the informational requirements of the Securities Exchange Act
of 1934 that require us to file reports, proxy statements and other information
with the Securities and Exchange Commission. Such reports, proxy statements and
other information may be inspected at public reference facilities of the SEC at
Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549. Copies of such
material can be obtained from the Public Reference Section of the SEC at
Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed
rates. The public could obtain information on the operation of the public
reference room by calling the Securities and Exchange Commission at
1-800-SEC-0330 Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
33
INDEX TO FINANCIAL STATEMENTS
POWERCHANNEL, INC.
FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2003 and September 30, 2002
Balance Sheet F-1
Statement of Operations F-2
Statement of Stockholders' Equity (Deficit) F-4
Statement of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 to F-13
For the Years Ended December 31, 2002 and 2001 of PowerChannel Holdings, Inc. and Subsidiaries
Report of Independent Certified Public Accountants F-14
Consolidated Balance Sheet F-15
Consolidated Statement of Operations F-16
Consolidated Statement of Stockholders' Equity (Deficit) F-17
Consolidated Statement of Cash Flows F-20
Notes to Financial Statements F-21 to F-29
For the Years Ended December 31, 2002 and 2001 of Sealant Solutions, Inc.
Report of Independent Certified Public Accountants F-31
Balance Sheet F-32
Statement of Operations F-33
Statement of Deficiency in Assets F-34
Statement of Cash Flows F-35
Notes to Financial Statements F-36 to F-42
i
POWERCHANNEL, INC.
(A Development Stage Company)
BALANCE SHEET
(UNAUDITED)
September 30, 2003
September 30,
2003
(unaudited)
ASSETS (restated note 15)
CURRENT ASSETS:
Cash and cash equivalents $ -
Inventory 555,000
Prepaid Expenses and Advances -
---------------------
TOTAL CURRENT ASSETS 555,000
---------------------
Property and equipment, net 18,997
Investment in PowerChannel Europe, PLC 630,483
---------------------
$ 1,204,480
---------------------
LIABILITIES AND DEFICIENCY IN ASSETS
Accounts payable and accrued liabilities $ 531,039
Accrued Payroll Taxes payable 115,376
Due to related parties 3,593,884
Note Payable 112,000
---------------------
TOTAL CURRENT LIABILITIES 4,352,299
Convertible Notes Payable 280,000
DEFICIENCY IN ASSETS
Preferred Stock authorized 5,000,000 shares; issued
and outstanding -0- shares -
Common stock par value $.01 per share; authorized 95,000,000 135,940
shares, issued and outstanding 13,594,056 shares
Additional paid in capital 6,377,480
Subscription receivable (50,575)
Accumulated other comprehensive income (loss) (256,416)
Deficit accumulated during development stage (9,634,248)
----------------------
TOTAL STOCKHOLDERS' DEFICIT (3,427,819)
----------------------
----------------------
$ 1,204,480
----------------------
See accompanying notes to financial statements.
F-1
POWERCHANNEL, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
For the Period
NINE MONTHS ENDED NINE MONTHS ENDED July 8, 1998 (Inception)
September 30, 2003 September 30, 2002 to September 30, 2003
(Unaudited) (Unaudited) (Unaudited)
(restated note 15) (restated note 15) (restated note 15)
Gross License Fees - PowerChannel
Europe, PLC $ - $ - 1,894,348
Expenses reimbursed pursuant
to license agreement - - (1,884,348)
---------------------------------------------------------------------------
Net license income - - 10,000
SALES - - -
EXPENSES
Selling general and administrative 446,955 1,641,525 5,389,079
Equity Based Compensation 1,663,446 1,663,446
---------------------------------------------------------------------------
TOTAL EXPENSES 2,110,401 1,641,525 7,052,525
Loss before income (loss) from PowerChannel Europe PLC (2,110,401) (1,641,525) (7,042,525)
---------------------------------------------------------------------------
Income (loss) from PowerChannel Europe, PLC 1,932 (50,000) (2,591,723)
NET INCOME (LOSS) BEFORE INCOME TAXES
Income taxes (2,108,469) (1,691,525) (9,634,248)
---------------------------------------------------------------------------
Net Income (loss) (2,108,469) (1,691,525) (9,634,248)
Basic and diluted earnings (loss) per share $ (0.18) $ (0.15)
===========================================================================
Weighted average shares outstanding
basic and diluted 11,661,130 11,212,052
===========================================================================
See accompanying notes to financial statements.
F-2
POWERCHANNEL, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED THREE MONTHS ENDED
September 30, 2003 September 30, 2002
(Unaudited) (Unaudited)
(restated note 15) (restated note 15)
Gross License Fees - PowerChannel
Europe, PLC $ - $ -
Expenses reimbursed pursuant
to license agreement - -
-------------------------------------------------------
Net license income - -
SALES - -
EXPENSES
Selling general and administrative 309,802 270,361
Equity based compensation 1,663,446 -
TOTAL EXPENSES 1,973,248 270,361
Income (Loss) before income (loss) from PowerChannel
Europe PLC (1,973,248) (270,361)
-------------------------------------------------------
-
Income (loss) from PowerChannel Europe, PLC 4,958 (1,633)
NET INCOME (LOSS) BEFORE INCOME TAXES
Income taxes
-------------------------------------------------------
Net Income (loss) $ (1,968,290) $ (271,994)
=======================================================
Basic and diluted earnings (loss) per share $ (0.16) $ (0.02)
=======================================================
Weighted average shares outstanding
basic and diluted 12,334,748 11,212,052
=======================================================
See accompanying notes to financial statements.
F-3
PowerChannel, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit) (Unaudited) (restated note 15)
Common Stock Additional Subscription
Shares Amount Paid in Capital Receivable
Balance at inception
August 10, 1998 - - - -
Shares issued pursuant to initial
capitalization 17,650,000 17,650 (3,350)
Net Loss
---------------------------------------------------------------------
Balance at December 31, 1998 17,650,000 17,650 - (3,350)
Shares issued for exercise of
warrants 2,000,000 2,000 198,000 (200)
Shares issued pursuant to initial
capitalization 1,019,000 1,019 (1,019)
Shares issued pursuant to private
placement 500,000 500 249,500
Shares issued pursuant to
agreement 288,000 288 143,200
Net Loss
---------------------------------------------------------------------
Balance at December 31, 1999 21,457,000 21,457 590,700 (4,569)
Shares issued pursuant to private
placement 200,000 200 199,800
Shares issued for services 40,328 40 99,452
Additional paid in capital from
sale of common stock Powerchannel
Europe, PLC 3,103,764
Intrinsic value of beneficial
conversion feature 280,000
Net loss
Other comprehensive loss
---------------------------------------------------------------------
Balance at December 31, 2000 21,697,328 21,697 4,273,716 (4,569)
Shares issued pursuant to private
placement 183,500 183 458,567 (46,006)
Net loss
Other comprehensive loss
---------------------------------------------------------------------
Balance at December 31, 2001 21,880,828 21,880 4,732,283 (50,575)
Net loss
Other comprehensive income
---------------------------------------------------------------------
Balance at December 31, 2002 21,880,828 21,880 4,732,283 (50,575)
Recapitalization due to reverse
merger (10,668,776) 90,240 (107,091)
Shares issued for services 2,104,226 21,042 1,705,066
Shares issued pursuant to private
placement 277,778 2,778 47,222
Net loss
Other comprehensive loss
---------------------------------------------------------------------
Balance at September 30, 2003 13,594,056 $ 135,940 $ 6,377,480 $ (50,575)
=====================================================================
F-4
PowerChannel, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
(Unaudited)
(restated note 15) (continued;)
Deficit
Accumulated Accumulated
during Developmen Other Comprehens Total
Stage Income (Loss)
Balance at inception
August 10, 1998 - - $ -
Shares issued pursuant to initial
capitalization 14,300
Net Loss (79,169) (79,169)
-------------------------------------------------
Balance at December 31, 1998 (79,169) - $ (64,869)
Shares issued for exercise of
warrants 199,800
Shares issued pursuant to initial
capitalization -
Shares issued pursuant to private
placement 250,000
Shares issued pursuant to
agreement 143,488
Net Loss (801,212) (801,212)
-------------------------------------------------
Balance at December 31, 1999 (880,381) - (272,793
Shares issued pursuant to private
placement 200,000
Shares issued for services 99,492
Additional paid in capital from
sale of common stock Powerchannel
Europe, PLC 3,103,764
Intrinsic value of beneficial
conversion feature 280,000
Net loss (2,959,100) (2,959,100)
Other comprehensive loss (189,953) (189,953)
-------------------------------------------------
Balance at December 31, 2000 (3,839,481) (189,953) 261,410
Shares issued pursuant to private
placement 412,744
Net loss (1,612,122) (1,612,122)
Other comprehensive loss (147,663) (147,663)
-------------------------------------------------
Balance at December 31, 2001 (5,451,603) (337,616) (1,085,631)
Net loss (2,074,176) (2,074,176)
Other comprehensive income 130,199 130,199
-------------------------------------------------
Balance at December 31, 2002 (7,525,779) (207,417) (3,029,608)
Recapitalization due to reverse
merger (16,851)
Shares issued for services 1,726,108
F-5
Shares issued pursuant to private
placement 50,000
Net loss (2,108,469) (2,108,469)
Other comprehensive loss (48,999) (48,999)
-------------------------------------------------
Balance at September 30, 2003 $ (9,634,248) $ (256,416) $ (3,427,819)
=================================================
See accompanying notes to financial statements.
F-6
POWERCHANNEL, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
For the period
NINE MONTHS ENDED NINE MONTHS ENDED July 8, 1998 (Inception)
September 30, 2003 September 30, 2002 to September 30, 2003
(Unaudited (Unaudited) (Unaudited)
(restated note 15) (restated note 15) (restated note 15)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: $ (2,108,469) $ (1,691,525) $ (9,634,248)
Intrinsic value of beneficial conversion
feature of convertible notes - - 280,000
Expense recorded on issuance of
stock for services 1,726,108 - 1,825,560
(Loss) income on investment in
PowerChannel Europe PLC (19,458) - 2,265,871
Loss on asset disposal - (16,200) 20,456
Reserve on inventory 138,299 - 138,299
Depreciation 58,868
Change in current operating assets and liabilities
Decrease (increase) in inventory - (687,922) (693,299)
Decrease (increase) in other assets 21,502 (127,889) 1
Due to PowerChannel Europe PLC
relating to operations 122,668 - 820,810
Increase (decrease) in accounts payable - other (58,008) 137,888 645,660
----------------------------------------------------------------
Net cash used in operating activities (177,358) (2,385,648) (4,272,022)
----------------------------------------------------------------
Cash flows from investing activities
Purchases of property and equipment - - (113,416)
Advances to related parties - - (64,935)
Repayments for advances to related parties - - 64,935
Loans to related parties - - (278,027)
Repayments from loans to related parties - - 278,027
---------------------------------------------------------------
Net cash used in investing activities 0 0 (113,416)
---------------------------------------------------------------
Cash flows from financing activities
Proceeds from notes 112,000 - 112,000
Proceeds from issuance of common stock - - 1,220,364
Loans and advances from related parties - 2,400,831 2,773,074
Proceeds from convertible notes - - 280,000
---------------------------------------------------------------
Net cash provided by financing activities 112,000 2,400,831 4,385,438
---------------------------------------------------------------
---------------------------------------------------------------
Net increase (decrease) in cash (65,358) 15,183 0
---------------------------------------------------------------
Cash-beginning of period 65,358 26,980
---------------------------------------------------------------
Cash - end of period $ - $ 42,163
===============================================================
See accompanying notes to financial statements.
F-7
POWERCHANNEL, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Sealant
Solutions (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-QSB and Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation (consisting of normal recurring accruals) have been included. 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.
Operating results expected for the nine months ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 2002.
Note 2. Organization and Operations
PowerChannel Holdings, Inc. was incorporated under the laws of the State of
Delaware on March 26, 1999. The Company's wholly owned subsidiaries,
PowerChannel, Inc. and PowerChannel.com, Inc., were incorporated under the laws
of the State of Delaware on August 10, 1998, and April 19, 2000, respectively.
The Company is a consumer electronics marketing company dedicated to offering a
wide range of electronic appliances and services to the consumer market.
PowerChannel's product line includes low-cost, through-the-television Internet
access in the United States. The Company plans to furnish its products to the
Hispanic market, due to the fact that the product is tailored in all respects to
its audience's linguistic, ethnic, cultural and economic trends. At the same
time, PowerChannel provides these simple and cost-effective Internet access
solutions to the public at large.
Merger
On July 21, 2003 PowerChannel entered into a Stock Purchase and Share Exchange
Agreement whereby Sealant Solutions, Inc. acquired all of the outstanding shares
of PowerChannel, Inc. Under this agreement, Sealant agreed to issue shares equal
to 85% of the fully diluted outstanding shares (or 9,117,525 shares) and an
additional 485,552 shares on a pro-rata basis of Sealant Solutions, Inc. to
PowerChannel, Inc. shareholders. Such shares are deemed "restricted" as defined
under the SEC Rule 144. Under the terms of the agreement, Sealant Solutions is
the acquiring company.
The merger is to be accounted for as a reverse merger, which effectively is a
recapitalization of the target company. Subsequent to the merger agreement, the
surviving company changed its name to PowerChannel, Inc. In connection with the
Stock Purchase and Share Exchange Agreement, Sealant Solutions, Inc. increased
its authorized common shares to 95,000,000 and preferred shares to 5,000,000
having a par value of $.01.
Upon the closing date of the merger, the Company entered into an option
agreement with the CEO of Sealant. In exchange for consulting services, the
Company would issue common stock equal to 10% of the fully diluted outstanding
shares of Sealant. Such shares are restricted as defined under SEC Rule 144. The
Company will be granted options to purchase such shares under a right of first
refusal.
After the closing date of the merger, Michael Fasci shall remain on the Board of
Directors and Steven Lampert will be appointed to serve.
Note 3. Going Concern
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered recurring losses
amounting to approximately $9,634,246 since inception. The Company intends to
raise additional debt or equity financing to continue its operations; if they
are unsuccessful they may be required to cease operations and/or file for
bankruptcy.
Note 4. Summary of Significant Accounting Policies (continued)
F-8
Inventories
Inventories are stated at the lower of cost or market on a first-in, first-out
basis. A reserve of $138,299 was recorded for shrinkage or damaged products.
Investment in PowerChannel Europe PLC
The investment in an unconsolidated affiliate, PowerChannel Europe PLC, over
which the Company exercises significant influence but not control, is accounted
for by the equity method.
Property and Equipment
Property and equipment are stated at cost. Major property additions,
replacements and betterments are capitalized, while maintenance and repairs,
which do not extend the useful lives of these assets, are expensed as incurred.
Depreciation is provided over the estimated useful lives of the assets using the
straight-line and accelerated methods. Upon retirement or disposal of assets,
the cost and related accumulated depreciation are removed from the balance
sheet, and a gain or loss is reflected in earnings.
The estimated useful lives of the various classes of physical assets were as
follows:
Office equipment 5 years
Furniture & fixtures 7 years
Automobiles 5 years
Income Taxes
The Company is taxed as a C Corporation under the provisions of both the
Internal Revenue Code and state laws.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash, accrued expenses
approximate fair value of the short term maturity of these instruments.
Use of Estimates
The preparation of the consolidated financial statements, in conformity with
U.S. generally accepted accounting principles, requires management to make
estimates and assumptions that affects the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from these
estimates.
The Company has approximately 9,400 set-top boxes in inventory at December 31,
2002 and believes that these will eventually be sold. However, the Company
recognized no sales from August 10, 1998 (inception) through September 30, 2003.
It is at least reasonably possible that a change in this estimate will occur in
the near term.
Loss Per Share
The Company has adopted SFAS No.128, "Earnings per Share". Loss per common share
are computed by dividing income (loss) available to common shareholders by the
weighted average number of common shares outstanding during the period.
New Accounting Standards
In April 2002, the FASB issued FAS No. 145 (FAS 145), "Recission of FASB
Statements No. 4, 44 and 64, amendment of FASB Statement No. 13, and Technical
Corrections," which among other matters, limits the classification of gains and
losses from extinguishment of debt as extraordinary to only those transactions
that are unusual and infrequent in nature as defined by APB Opinion No. 30
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." FAS 145 are effective no later than January 1, 2003.
F-9
In June 2002, the FASB issued FAS No. 146 (FAS 146), "Accounting for Costs
Associated with Exit or Disposal Activities." FAS 146 generally requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. This pronouncement is effective for exit or disposal activities initiated
after December 31, 2002.
In November 2002, the FASB issued FIN No. 45, "Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees and
Indebtedness of Others," an interpretation of SFAS Nos. 5, 57 and 107, and
rescission of FIN No. 34,"Disclosure of Indirect Guarantees of Indebtedness of
Others." FIN No. 45 elaborates on the disclosures to be made by the guarantor in
its interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also requires that a guarantor recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and measurement
provisions of this interpretation are applicable on a prospective basis to
guarantees issued or modified after March 31, 2002; while, the provisions of the
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The adoption of such
interpretation on January 1, 2003 did not have a material impact on the
Corporation's results of operations, financial position or cash flows.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities," an interpretation of Accounting Research Bulletin No. 51. FIN No. 46
requires that variable interest entities be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or is entitled to receive a majority of the entity's
residual returns or both. FIN No. 46 also requires disclosures about variable
interest entities that companies are not required to consolidate but in which a
company has a significant variable interest. The consolidation requirements of
FIN No. 46 will apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements will apply to entities
established prior to January 31, 2003 in the first fiscal year or interim period
beginning after June 15, 2003. The disclosure requirements will apply in all
financial statements issued after January 31, 2003. The Corporation has adopted
the provisions of FIN No. 46, such provisions have not had a material effect on
its results of operation, financial position or the related financial statement
disclosures.
In April 2003, the FASB issued Statements of Financial Accounting Standards No.
149 ("SFAS No. 149"), an amendment to SFAS No. 133. SFAS No. 149 clarifies under
what circumstances a contract with initial investments meets the characteristics
of a derivative and when a derivative contains a financing component. This SFAS
is effective for contracts entered into or modified after June 30, 2003.
In May 2003, the FASB issued Statements of Financial Accounting Standards No.
150 ("SFAS No. 150") "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity". SFAS No. 150 established
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. This SFAS is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. It is to be implemented by
reporting the cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of SFAS No.150 and still
existing at the beginning of the interim period of adoption. Restatement is not
permitted. The adoption of SFAS No. 150 will not have a material effect on the
financial statements.
The Company adopted the above accounting pronouncements.
Note 5. Investment in Unconsolidated Affiliate
Prior to November 1999, the Company beneficially owned 100% of PowerChannel
Limited, which, at the time was an inactive company, with no assets and no
revenues. In November 1999, the Board passed a resolution distributing eighty
(80%) percent of its shareholding in PowerChannel Limited to the Company's
shareholders.
F-10
In January 2000, PowerChannel Limited changed its name to PowerChannel Europe
Limited and in April 2000 to PowerChannel Europe PLC ("PCE"). The Company
currently owns 19.68% of the outstanding ordinary shares of PCE. PCE holds the
European rights to the PowerChannel patent-pending business model and know-how,
owned and developed by the Company. A new company with the name PowerChannel
Limited has been incorporated as a subsidiary of PCE to roll out the
PowerChannel model in the UK and Ireland. PowerChannel Limited had entered into
a strategic partnership with Granada Media Group ("Granada").
Under the alliance, the strategic partner was allotted a five (5%) percent
equity investment in PowerChannel Limited convertible into shares in PCE for nil
consideration. PowerChannel Limited was to finance the procurement of the
set-top boxes.
In April 2000, the strategic partner converted its shares in PowerChannel
Limited into shares of PCE and invested approximately (pound) 13 million
(approximately $21 million) for new shares in PCE. As a result of the conversion
and the cash investment, the strategic partner owned 23.5% of the fully diluted
share capital of PCE.
The strategic partnership with Granada terminated in February 2001. As a result
the shares of PCE owned by Granada were returned
to PCE, which, in turn were distributed to its remaining shareholders.
In accordance with accounting for the investment in PCE under the equity method,
the Company is required to record capital transactions of PCE as if the investee
were a consolidated subsidiary. Pursuant to this requirement, the Company, in
2002, recorded an increase of $3,103,764 in their investment in PCE and a
corresponding increase in additional capital.
For the years ended December 31, 2002 and 2001, the Company has recorded its
pro-rata share of PCE's (loss) income amounting to ($66,522) and $140,164,
respectively.
Additionally, PCE's consolidated financial statements, which were audited by
auditors, were issued as a going concern since the majority of PCE's assets and
liabilities are to be transferred to the Company.
The following table provides condensed consolidated financial information about
PCE as of December 31, 2002:
2002
-----------
Current assets $ 3,475,844
Non-current assets $ --
Total assets $ 3,475,844
Current liabilities $ 371,043
Total liabilities $ 371,043
Equity $ 3,104,801
Revenues $ 773,145
Net (loss) income $ (338,018)
The current assets included in the above table includes receivables from the
Company aggregating approximately $3.4 million in 2002. Such receivable at
September 30, 2003 was $3.6 million.
Note 6. Series A Convertible Notes
On February 29, 2000, PowerChannel entered into subscription agreements with
seven individuals and in conjunction with such agreements, issued Series A
Convertible Notes. Pursuant to these notes, PowerChannel acquired $280,000 in
investment capital and issued security interests at 7% interest for a term of
three years. At the option of the note holders, these notes may be converted
into common stock for the value of the note at a price of $0.1287 per share. A
beneficial conversion amount was recorded in the amount of $280,000 and expensed
in 2000.
F-11
Note 7. Related Party Transaction
PCE
In 2002, the Company bought its entire inventory of set-top boxes from PCE. At
December 31, 2002, the amounts due to PCE consisted of approximately $690,000
related to the aforementioned inventory purchase and approximately $2.8 million
of loans and advances, which are due on demand and are not interest bearing.
Note 8. Stockholders' Equity
PowerChannel, Inc. shareholders exchanged all of their shares of stock for an
equal number of shares in PowerChannel Holdings, Inc. during 1999. Warrants for
the purchase of 300,000 shares of common stock were outstanding at December 31,
2002 and 2001. These warrants were subsequently cancelled during July 2003.
PowerChannel's certificate of incorporation authorizes the issuance of "blank
check" preferred stock with whatever designation, rights and preferences as may
be determined by the board of directors. Accordingly, the board is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation conversion, voting, or other rights, which could adversely affect
the voting power and other rights of the holders of common stock. The preferred
stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of PowerChannel. The
Company does not currently intend to issue any shares of preferred stock,
however there can be no assurance that it will not do so.
Note 9. Federal Income Taxes
The Company accounts for income taxes in accordance with the asset and liability
method prescribed by Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. Under the asset and liability method of Statement
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to the
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement 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.
As of December 31, 2002 and 2001 net operating loss (NOL) carryforwards amounted
to approximately $7,500,000 and $5,400,000, respectively and will expire in
between 2016 and 2022. Pursuant to SFAS No. 109, for financial reporting
purposes, a valuation allowance was recorded as of December 31, 2002 and 2001 to
fully offset the Company's net deferred tax assets of approximately $1,125,000
and $810,000, respectively, relating to the NOLs. The Company is not current
with respect to its corporate income tax filings.
Note 10. Commitment
The Company conducts its operations in office space under an operating lease
which expired in December 2002. The lease provided for increases in rent for
utilities and other building operating costs.
Rent expense for the years ended December 31, 2002 and 2001 amounted to
approximately $87,500 and $51,470, respectively.
The Company entered into employment agreements with James Gambrell, Michael
Preston and Steven Lampert on March 1, 2000. The agreements expired on February
28, 2003 and provided for annual salaries of $250,000 for Mr. Gambrell and
$200,000 each for Mr. Preston and Mr. Lampert. Additionally, the agreements
provide for certain fringe benefits and stock options (see Note 12). Amounts
paid to Messrs. Preston and Lampert aggregated to $390,000 and $323,000 for the
years ended December 31, 2002 and 2001, respectively. The aforementioned
employee agreements were cancelled in July 2003. All corresponding liabilities
owed to these employees under these agreements in excess of the amounts already
paid have been waived.
Note 11. Licensing Agreements
The Company entered into an Intellectual Property License Agreement in 2000 with
PCE (see Note 7). The Company is the owner of certain inventions, technology,
expertise, know-how and intellectual property, which PCE wishes to use. Pursuant
to the terms of the agreement, the Company has granted PCE a non-transferable
exclusive use of the technology in Europe. In consideration PCE has agreed to
pay the Company an initial payment of $10,000 as well as monthly costs incurred
by the Company for development work. During the period August 10, 1998
(inception) through December 31, 2002, PCE paid the Company $1,894,348, pursuant
to this agreement, of which $1,884,348 is recorded in the financial statements
as license fees.
F-12
On August 12, 1998, PowerChannel, Inc. entered into a licensing agreement with
American Interactive Media, Inc. (AIM) to offer free Internet access to
consumers, utilizing AIM supplied set-top appliances and AIM provided Internet
service provider (Web Passport Network). This licensing agreement was superseded
by a new agreement dated May 19, 1999. The new agreement granted to
PowerChannel, Inc. an exclusive worldwide license with the right to sublicense
the "WebPassport system", the "WebPassport intellectual property" and the
"WebPassport technology". PowerChannel, Inc. signed a convertible promissory
note in the amount of $1,090,000 at an interest rate of 3% above the prime rate,
which was scheduled to mature on December 31, 2000. This note represented
$90,000 in set-top appliances and $1,000,000 in prepaid license fees. During
1999, AIM sent PowerChannel, Inc. notification that it was terminating the
license agreement and requested payment in full of the underlying note.
PowerChannel, Inc. disputed the termination notice with AIM and entered into
discussions to settle the dispute. On June 30, 2000, the parties entered into a
termination agreement, which rescinded all previous agreements. Pursuant to this
termination agreement, PowerChannel Holdings, Inc. issued AIM 288,000 shares of
its common stock as payment in full for PowerChannel, Inc. retaining possession
of the set-top appliances (costing $90,000) and as settlement for the $53,000
which was owed to AIM as reimbursement of certain operating costs as called for
under the May 19th agreement. Additionally, the Company issued AIM 50,000
warrants for shares at $2.50 per share, which are exercisable for 3 years, these
warrants were cancelled in July 2003. AIM and PowerChannel, Inc. agreed to
release each other from all other liabilities associated with their
relationship.
Note 12. Litigation
Two lawsuits by stockholders alleging investment fraud have been asserted
against the Company seeking damages of approximately $60,000. Legal counsel
advises that due to the fact that the law firm was only recently retained, they
are not yet able to determine the viability of said claims. Management believes
that the resolution of these claims will not have a material effect on the
financial position or results of operations of the Company.
Note 13. Stock Option Plan
During 2001, the Company adopted the 2001 Stock Option Plan. The aggregate
number of common shares that may be issued is 2,500,000. Any key employee shall
be eligible to be granted options as determined by the Company's stock option
committee. The price of the shares subject to each option shall not be less than
100% of the fair market value of such shares on the date such option is granted.
Under this plan, options to purchase shares in the stock of PowerChannel
Holdings, Inc. were as follows: 600,000 to James Gambrel, 250,000 to Michael
Preston, and 250,000 shares to Steven Lampert. The exercise price is $1.00 per
share. This stock option plan and the outstanding options thereunder were
cancelled during July 2003.
Note 14. Stock Incentive Plan
In July 2003, the Company created a 2003 Stock Incentive Plan which permits the
Company to make awards of stock options, stock appreciation rights, warrants,
dividend equivalents, stock awards, restricted stock, phantom stock, performance
shares or other securities or rights. All employees of the Company and
affiliates are eligible to participate. The number of shares that may be
delivered or purchased under the plan are up to 3,000,000 shares at a par value
of $.01. Approximately 2,100,000 such shares under this 2003 Stock Incentive
Plan have been issued as of September 30, 2003.
Note 15. Restatement of Form 10QSB for quarter ended September 30, 2003
The primary reasons for the restatement were for as described below:
a) The accounting for the reverse merger equity transactions was not performed
adequately, since the accumulated deficit of the prior public entity was not
eliminated $(1,328,921).
b) The valuation of the shares issued was recorded at $.18 per share verses the
current market price, resulting in an additional $1.3 million in compensation
expense to record.
c) The cumulative cash flows and stockholders equity now has been included for a
development stage enterprise.
F-13
Independent Auditor's Report
To the Board of Directors and Stockholders PowerChannel Holdings, Inc.
We have audited the accompanying consolidated balance sheets of PowerChannel
Holdings, Inc. and Subsidiaries (a development stage company) as of December 31,
2002 and 2001, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the years ended December 31,
2002 and 2001, and for the period from August 10, 1998 (inception) to December
31, 2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to formulate an opinion based on our audits.
We did not audit the consolidated financial statements of PowerChannel Europe
PLC, a 19.68% owned affiliate, the investment in which, as discussed in Note 2
to the financial statements, is accounted for by the equity method of
accounting. The investment in PowerChannel Europe PLC was $611,025 and $616,713
as of December 31, 2002 and 2001, respectively, and the equity in its net (loss)
income was $(66,522) and $140,164 for the years ended 2002 and 2001,
respectively. The consolidated financial statements of PowerChannel Europe PLC
were audited by other auditors whose reports thereon have been furnished to us,
and our opinion insofar as it relates to the amounts included for PowerChannel
Europe PLC in 2002 and 2001 is based in part on the reports of other auditors.
We conducted our audits in accordance with U.S. 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 and the reports of other auditors provide a
reasonable basis for our report.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of PowerChannel Holdings, Inc. and
Subsidiaries as of December 31, 2002 and 2001 and the consolidated results of
their operations and cash flows for the years ended December 31, 2002 and 2001
and for the period from August 10, 1998 (inception) to December 31, 2002 in
conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has no continuing source of operating revenue, and is still in
the development stage. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans regarding
those matters also are described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Yohalem Gillman & Company LLP
- ----------------------------------
New York, New York
September 30, 2003
F-14
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
2002 2001
----------- -----------
ASSETS
Current assets
Cash $ 65,358 $ 26,980
Inventory 693,299 --
Prepaid expenses and advances 21,502 52,240
----------- -----------
Total current assets 780,159 79,220
----------- -----------
Property and equipment, net 34,092 63,589
----------- -----------
Investment in PowerChannel Europe PLC 611,025 616,713
----------- -----------
$1,425,276 $ 759,522
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Due to PowerChannel Europe PLC $3,471,216 $1,189,963
Accounts payable - others 703,666 375,190
----------- -----------
Total current liabilities 4,174,882 1,565,153
----------- -----------
Convertible notes payable 280,000 280,000
----------- -----------
Stockholders' deficit
Preferred stock par value $.001 per share;
authorized 100,000,000 shares; issued
and outstanding -0- shares -- --
Common stock par value $.001 per share;
authorized 100,000,000 shares; issued
and outstanding 21,880,828 shares 21,880 21,880
Additional capital 4,732,283 4,732,283
Subscription receivable (50,575) (50,575)
Accumulated other comprehensive income (loss) (207,417) (337,616)
Deficit accumulated during development stage (7,525,777) (5,451,603)
----------- -----------
Total stockholders' deficit (3,029,606) (1,085,631)
----------- -----------
$1,425,276 $ 759,522
=========== ===========
See accompanying notes and independent auditor's report.
F-15
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
AUGUST 10, 1998
(INCEPTION) TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
2002 2001 2002
------------ ------------ ------------
Gross license fees - PowerChannel $ -- $ 335,473 $ 1,894,348
Europe PLC
Expenses reimbursed pursuant
to license agreement -- (335,473) (1,884,348)
------------ ------------ ------------
Net license income -- -- 10,000
Operating expenses 2,007,652 1,752,286 4,942,122
------------ ------------ ------------
Loss before (loss) income from
PowerChannel Europe PLC (2,007,652) (1,752,286) (4,932,122)
(Loss) income from PowerChannel
Europe PLC (66,522) 140,164 (2,593,655)
------------ ------------ ------------
Net loss $(2,074,174) $(1,612,122) $(7,525,777)
============ ============ ============
See accompanying notes and independent auditor's report.
F-16
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2002 AND 2001 AND PERIOD
AUGUST 10, 1998 (INCEPTION) TO DECEMBER 31, 2002
-------------------------------------------------------------------------------------------
Deficit Accumulated
Accumulated Other
Common Stock During Comprehensive
----------------------- Additional Subscription Development Income
Shares $ Capital Receivable Stage (Loss) Total
Balance at inception
August 10, 1998 -- $ -- $ -- $ -- $ -- $ -- $ --
Shares issued at December 31,
1998 pursuant to initial
capitalization 17,650,000 17,650 -- (3,350) -- -- 14,300
-----------
14,300
-----------
Comprehensive income (loss)
Net loss -- -- -- -- (79,169) -- (79,169)
Other comprehensive income
(loss) -- -- -- -- -- -- --
-----------
Comprehensive income (loss) -- -- -- -- -- -- (79,169)
----------- ---------- ---------- ---------- ---------- ----------- -----------
Balance at December 31, 1998 17,650,000 17,650 -- (3,350) (79,169) -- (64,869)
-----------
Shares issued March 30, 1999
pursuant to exercise of warrants 2,000,000 2,000 198,000 (200) -- --
199,800
Shares issued June 7, 1999
pursuant to initial capitalization 1,019,000 1,019 -- (1,019) -- -- --
Distribution of shares in
PowerChannel Limited
(see Note 4) -- -- -- -- -- -- --
Shares issued November 11, 1999
pursuant to private placement 500,000 500 249,500 -- -- -- 250,000
Shares issued December 31, 1999
pursuant to agreement 288,000 288 143,200 -- -- -- 143,488
----------
593,288
Comprehensive income (loss)
Net loss -- -- -- -- (801,212) -- (801,212)
Other comprehensive income
(loss) -- -- -- -- -- -- --
----------
Comprehensive income (loss) -- -- -- -- -- -- (801,212)
----------- ---------- ---------- ---------- ---------- ----------- -----------
Balance at December 31, 1999 21,457,000 21,457 590,700 (4,569) (880,381) -- (272,793)
-----------
See accompanying notes and independent auditor's report.
F-17
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
YEARS ENDED DECEMBER 31, 2002 AND 2001 AND PERIOD
AUGUST 10, 1998 (INCEPTION) TO DECEMBER 31, 2002
-------------------------------------------------------------------------------------------
Deficit Accumulated
Accumulated Other
Common Stock During Comprehensive
----------------------- Additional Subscription Development Income
Shares $ Capital Receivable Stage (Loss) Total
Shares issued March 21, 2000
pursuant to private placement 200,000 $ 200 $ 199,800 $ -- $ -- $ -- $ 200,000
Shares issued May 12, 2000 in
consideration for professional
services rendered 4,000 4 9,996 -- -- -- 10,000
Shares issued June 2, 2000 in
consideration for professional
services rendered 15,261 15 38,138 -- -- -- 38,153
Shares issued June 25, 2000 in
consideration for professional
services rendered 16,667 17 40,322 -- -- -- 40,339
Shares issued September 30, 2000 in
consideration for professional
services rendered 4,400 4 10,996 -- -- -- 11,000
Additional capital resulting from
sale of common stock by
PowerChannel Europe PLC -- -- 3,103,764 -- -- -- 3,103,764
Intrinsic value of beneficial
conversion feature of
convertible notes -- -- 280,000 -- -- -- 280,000
-----------
3,683,256
-----------
Comprehensive income (loss)
Net loss -- -- -- -- (2,959,100) -- (2,959,100)
Other comprehensive income (loss) -
Equity adjustment from
translation -- -- -- -- -- (189,953) (189,953)
-----------
Comprehensive income (loss) -- -- -- -- -- -- (3,149,053)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 21,697,328 21,697 4,273,716 (4,569) (3,839,481) (189,953) 261,410
-----------
See accompanying notes and independent auditor's report.
F-18
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
YEARS ENDED DECEMBER 31, 2002 AND 2001 AND PERIOD
AUGUST 10, 1998 (INCEPTION) TO DECEMBER 31, 2002
-------------------------------------------------------------------------------------------
Deficit Accumulated
Accumulated Other
Common Stock During Comprehensive
----------------------- Additional Subscription Development Income
Shares $ Capital Receivable Stage (Loss) Total
Shares issued April 13, 2001
pursuant to private placement 100,000 $ 100 $ 249,900 $ -- $ -- $ -- $ 250,000
Shares issued July 24, 2001
pursuant to private placement 26,400 26 65,974 -- -- -- 66,000
Shares issued August 7, 2001
pursuant to private placement 47,100 47 117,703 (46,006) -- -- 71,744
Shares issued August 14, 2001
pursuant to private placement 10,000 10 24,990 -- -- -- 25,000
-----------
412,744
-----------
Comprehensive income (loss)
Net loss -- -- -- -- (1,612,122) -- (1,612,122)
Other comprehensive income (loss)
Equity adjustment from
translation -- -- -- -- -- (147,663) (147,663)
-----------
Comprehensive income (loss) -- -- -- -- -- -- (1,759,785)
------------ ----------- ----------- ----------- ------------ ----------- ------------
Balance at December 31, 2001 21,880,828 21,880 4,732,283 (50,575) (5,451,603) (337,616) (1,085,631)
-----------
Comprehensive income (loss)
Net loss -- -- -- -- (2,074,174) -- (2,074,174)
Other comprehensive income (loss)
Equity adjustment from
translation -- -- -- -- -- 130,199 130,199
-----------
Comprehensive income (loss) -- -- -- -- -- -- (1,943,975)
------------ ----------- ----------- ----------- ------------ ----------- ------------
Balance at December 31, 2002 21,880,828 $ 21,880 $4,732,283 $ (50,575) $(7,525,777) $ (207,417) $(3,029,606)
============ =========== =========== =========== ============ =========== ============
See accompanying notes and independent auditor's report.
F-19
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
AUGUST 10, 1998
YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2002
----------- ----------- -----------
Cash flows from operating activities
Net loss $(2,074,174) $(1,612,122) $(7,525,777)
Adjustments to reconcile net loss to net cash
used in operating activities
Intrinsic value of beneficial conversion
feature of convertible notes -- -- 280,000
Expense recorded on issuance of
stock for services -- -- 99,452
Loss (income) on investment in
PowerChannel Europe PLC 135,886 (517,846) 2,285,329
Loss on asset disposal 20,456 -- 20,456
Depreciation 20,243 17,689 58,868
Change in current operating
assets and liabilities:
Increase in inventory (693,299) -- (693,299)
Decrease (increase) in other assets 30,739 (42,160) (21,501)
Due to PowerChannel Europe PLC,
relating to operations 698,142 -- 698,142
Increase (decrease) in
accounts payable- other 328,476 225,164 703,666
----------- ----------- -----------
Net cash used in operating
activities (1,533,531) (1,929,275) (4,094,664)
----------- ----------- -----------
Cash flows from investing activities
Purchases of property and equipment (11,202) (41,385) (113,416)
Advances to related party -- -- (64,935)
Repayments for advances to related parties -- 64,935 64,935
Loans to related party -- -- (278,027)
Repayments from loans to related parties -- 278,027 278,027
----------- ----------- -----------
Net cash (used in) provided by
investing activities (11,202) 301,577 (113,416)
----------- ----------- -----------
Cash flows from financing activities
Proceeds from issuance of common stock -- 412,745 1,220,364
Loans and advances from related parties 1,583,111 1,189,963 2,773,074
Proceeds from convertible notes -- -- 280,000
----------- ----------- -----------
Net cash provided by financing
activities 1,583,111 1,602,708 4,273,438
----------- ----------- -----------
Net increase (decrease) in cash 38,378 (24,990) 65,358
Cash - beginning of period 26,980 51,970 --
----------- ----------- -----------
Cash - end of period $ 65,358 $ 26,980 $ 65,358
=========== =========== ===========
See accompanying notes and independent auditor's report.
F-20
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
1. Organization and Operations
PowerChannel Holdings, Inc. was incorporated under the laws of the State of
Delaware on March 26, 1999. The Company's wholly owned subsidiaries,
PowerChannel, Inc. and PowerChannel.com, Inc., were incorporated under the laws
of the State of Delaware on August 10, 1998, and April 19, 2000, respectively.
The Company is a consumer electronics marketing company dedicated to offering a
wide range of electronic appliances and services to the consumer market.
PowerChannel's product line includes low-cost, through-the-television Internet
access in the United States. The Company plans to furnish its products to the
Hispanic market, due to the fact that the product is tailored in all respects to
its audience's linguistic, ethnic, cultural and economic trends. At the same
time, PowerChannel provides these simple and cost-effective Internet access
solutions to the public at large.
Merger
On July 21, 2003, pursuant to a stock purchase agreement and share exchange, the
Company merged into Sealant Solutions, Inc. (Sealant); accordingly, the separate
existence of the Company will cease to exist and Sealant will continue as the
surviving corporation. Additionally, Sealant has agreed to change its name to
PowerChannel, Inc.
Financial Condition
The Company incurred net losses of $7,525,777 for the period August 10, 1998
(inception) to December 31, 2002. At December 31, 2002, the Company had no
continuing source of operating revenue and was still in the development stage.
The continuance of the Company depends on the financial support of its
shareholders and the development and implementation of its business plan.
Management's plans with respect to alleviation of the going concern issues
include establishment of strategic partnerships with key suppliers and
customers, the raising of capital by the sale of shares of common stock in the
Company, and through future potential operating revenues stemming from the sale
of set-top boxes and internet access.
As a result of the above factors, there is substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of PowerChannel
Holdings, Inc. and its wholly owned subsidiaries, PowerChannel Inc. and
PowerChannel.com, Inc. All significant intercompany balances and transactions
have been eliminated.
F-21
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
2. Summary of Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost or market on a first-in, first-out
basis.
Investment in PowerChannel Europe PLC
The investment in an unconsolidated affiliate, PowerChannel Europe PLC, over
which the Company exercises significant influence but not control, is accounted
for by the equity method.
Property and Equipment
Property and equipment are stated at cost. Major property additions,
replacements and betterments are capitalized, while maintenance and repairs,
which do not extend the useful lives of these assets, are expensed as incurred.
Depreciation is provided over the estimated useful lives of the assets using the
straight-line and accelerated methods. Upon retirement or disposal of assets,
the cost and related accumulated depreciation are removed from the balance
sheet, and a gain or loss is reflected in earnings.
Income Taxes
The Company is taxed as a C Corporation under the provisions of both the
Internal Revenue Code and state laws.
Use of Estimates
The preparation of the consolidated financial statements, in conformity with
U.S. 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 as of the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from these
estimates.
The Company has approximately 9,400 set-top boxes in inventory at December 31,
2002 and believes that these will eventually be sold. However, the Company
recognized no sales from August 10, 1998 (inception) through September 30, 2003.
It is at least reasonably possible that a change in this estimate will occur in
the near term.
New Accounting Standards
In August 2001, the Financial Accounting Standards Board issued FAS No. 143 (FAS
143), "Accounting for Obligations Associated with the Retirement of Long-Lived
Assets" which is required to be adopted in fiscal years beginning after June 15,
2002. FAS 143 establishes accounting standards for the recognition of and
measurement of an asset retirement obligation and its associated asset
retirement cost.
F-22
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
2. Summary of Significant Accounting Policies (continued)
In April 2002, the FASB issued FAS No. 145 (FAS 145), "Recission of FASB
Statements No. 4, 44 and 64, amendment of FASB Statement No. 13, and Technical
Corrections," which among other matters, limits the classification of gains and
losses from extinguishment of debt as extraordinary to only those transactions
that are unusual and infrequent in nature as defined by APB Opinion No. 30
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." FAS 145 is effective no later than January 1, 2003.
In June 2002, the FASB issued FAS No. 146 (FAS 146), "Accounting for Costs
Associated with Exit or Disposal Activities." FAS 146 generally requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. This pronouncement is effective for exit or disposal activities initiated
after December 31, 2002.
In May 2003, the FASB issued FAS No. 150 (FAS 150), "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement affects the classification, measurement and disclosure requirements of
certain freestanding financial instruments including mandatorily redeemable
shares. FAS 150 is effective for all financial instruments entered into or
modified after May 31, 2003.
The adoption of FAS 143, 145 (other than as noted below), 146 and 150 is not
expected to have a material effect on the Company's results of operations or
financial position. The adoption of FAS 145 in recording the Company's share of
PowerChannel Europe PLC's 2001 net income was not material.
3. Property and Equipment
The detail of property and equipment is as follows at December 31:
2002 2001
-------- --------
Office equipment $ 65,822 $ 55,306
Furniture and fixtures 21,275 21,275
Automobiles -- 25,307
-------- --------
87,097 101,888
Less accumulated depreciation 53,005 38,299
-------- --------
$ 34,092 $ 63,589
======== ========
F-23
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
3. Property and Equipment (continued)
The estimated useful lives of the various classes of physical assets were as
follows:
Office equipment 5 years
Furniture and fixtures 7 years
Automobiles 5 years
4. Investment in Unconsolidated Affiliate
Prior to November 1999, the Company beneficially owned 100% of PowerChannel
Limited, which, at the time was an inactive company, with no assets and no
revenues. In November 1999, the Board passed a resolution distributing eighty
(80%) percent of its shareholding in PowerChannel Limited to the Company's
shareholders.
In January 2000, PowerChannel Limited changed its name to PowerChannel Europe
Limited and in April 2000 to PowerChannel Europe PLC ("PCE"). The Company
currently owns 19.68% of the outstanding ordinary shares of PCE. PCE holds the
European rights to the PowerChannel patent-pending business model and know-how,
owned and developed by the Company. A new company with the name PowerChannel
Limited has been incorporated as a subsidiary of PCE to roll out the
PowerChannel model in the UK and Ireland. PowerChannel Limited had entered into
a strategic partnership with Granada Media Group ("Granada").
Under the alliance, the strategic partner was allotted a five (5%) percent
equity investment in PowerChannel Limited convertible into shares in PCE for nil
consideration. PowerChannel Limited was to finance the procurement of the
set-top boxes.
In April 2000, the strategic partner converted its shares in PowerChannel
Limited into shares of PCE and invested approximately (pound)13 million
(approximately $21 million) for new shares in PCE. As a result of the conversion
and the cash investment, the strategic partner owned 23.5% of the fully diluted
share capital of PCE.
The strategic partnership with Granada terminated in February 2001. As a result
the shares of PCE owned by Granada were returned to PCE, which, in turn were
distributed to its remaining shareholders.
In accordance with accounting for the investment in PCE under the equity method,
the Company is required to record capital transactions of PCE as if the investee
were a consolidated subsidiary. Pursuant to this requirement, the Company, in
2002, recorded an increase of $3,103,764 in their investment in PCE and a
corresponding increase in additional capital.
For the years ended December 31, 2002 and 2001, the Company has recorded its
pro-rata share of PCE's (loss) income amounting to ($66,522) and $140,164,
respectively.
F-24
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
4. Investment in Unconsolidated Affiliate (continued)
Additionally, PCE's consolidated financial statements, which were audited by
auditors other than Yohalem Gillman & Company LLP, were issued as a going
concern since the majority of PCE's assets and liabilities are to be transferred
to the Company.
The following table provides condensed consolidated financial information about
PCE as of December 31, 2002 and 2001 and for the years then ended:
2002 2001
----------- -----------
Current assets $ 3,475,844 $ 3,338,896
Non-current assets $ -- $ --
Total assets $ 3,475,844 $ 3,338,896
Current liabilities $ 371,043 $ 205,190
Total liabilities $ 371,043 $ 205,190
Equity $ 3,104,801 $ 3,133,706
Revenues $ 773,145 $ --
Net (loss) income $ (338,018) $ 349,575
The 2001 net income included in the above table includes a nonrecurring gain of
approximately $5.4 million on termination of the Granada strategic partnership
and $98,791 gain on forgiveness of debt. Additionally, it includes a loss on the
write-down of inventory amounting to approximately $2.5 million.
The current assets included in the above table includes receivables from the
Company aggregating approximately $3.4 million and $1.2 million in 2002 and
2001, respectively.
5. Series A Convertible Notes
On February 29, 2000, PowerChannel entered into subscription agreements with
seven individuals and in conjunction with such agreements, issued Series A
Convertible Notes. Pursuant to these notes, PowerChannel acquired $280,000 in
investment capital and issued security interests at 7% interest for a term of
three years. At the option of the note holders, these notes may be converted
into common stock for the value of the note at a price of $0.1287 per share.
These notes were satisfied pursuant to the merger described in Note 1.
6. Related Party Transactions
LDDI
In August 1998, the Company entered into an agreement with Long Distance Direct
Holdings, Inc. ("LDDI") (an affiliate), which stipulates that LDDI will make
certain employees available to the Company as needed to assist the Company in
conducting its business. This agreement expired in August 1999. In
consideration, the Company issued LDDI the right to purchase 2,000,000 shares at
$.10 per share of the Company's stock. In August 1999, LDDI exercised its right.
During 2000, the Company loaned LDDI approximately $278,000 pursuant to a
promissory note. The note requires interest to be paid at 7.5% per annum, with
principal and all accrued interest due on June 30, 2001. If LDDI fails to repay
the note in full at the maturity date, it shall deliver to the Company in
satisfaction of the note, the number of shares of the Company's common stock
based on each share being valued at $1 per share. In April 2001, the maturity
date of the note was extended to December 31, 2001 for additional consideration
of $10,000. The note was repaid in 2001.
F-25
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
6. Related Party Transaction (continued)
On January 7, 2000, the Securities and Exchange Commission filed an action in
federal court against Long Distance Direct Holdings, Inc., alleging violations
of the Securities and Exchange Act of 1934 for failing to file, or filing late,
a number of the annual reports required to be filed on Form 10-K and some
quarterly reports required to be filed on Form 10-Q from 1995 through 1999. Long
Distance Direct Holdings, Inc. subsequently entered into a final judgment with
the Commission, which was filed with the Court on March 7, 2000, enjoining Long
Distance Direct Holdings, Inc. from failing to file accurate and complete
reports required to be filed with the Commission. The final judgment further
ordered that on or before April 30, 2000, Long Distance Holdings, Inc. file:
o a complete and accurate annual report on Form 10-K for fiscal 1998;
o complete and accurate quarterly reports on Form 10-Q for the second through
fourth quarters of 1999; and
o such other periodic reports which may become due prior to entry of the
judgment.
The final judgment further provided the filing of a notification with the Court
of the filing of its delinquent reports, and also that a copy of the Final
Judgment be delivered to any incoming chief executive officer or president of
Long Distance Direct Holdings, Inc.
Long Distance Direct, Inc., a wholly owned subsidiary of Long Distance Direct
Holdings, Inc., is subject to an order of the Federal Communications Commission
dated February 9, 2000, for willfully or repeatedly violating section 258 of the
Communications Act of 1934.
LDDI has not complied with the terms of the final judgment concerning the Form
10-K and Form 10-Q filings. Long Distance Direct, Inc. filed for bankruptcy in
January 2002.
PCE
In 2002, the Company bought its entire inventory of set-top boxes from PCE. At
December 31, 2002, the amounts due to PCE consisted of approximately $690,000
related to the aforementioned inventory purchase and approximately $2.8 million
of loans and advances, which are due on demand and are not interest bearing.
F-26
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
7. Stockholders' Equity
PowerChannel, Inc. shareholders exchanged all of their shares of stock for an
equal number of shares in PowerChannel Holdings, Inc. during 1999.
F-27
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
7. Stockholders' Equity (continued)
Warrants for the purchase of 300,000 shares of common stock were outstanding at
December 31, 2002 and 2001. These warrants were subsequently cancelled during
July 2003.
PowerChannel's certificate of incorporation authorizes the issuance of "blank
check" preferred stock with whatever designation, rights and preferences as may
be determined by the board of directors. Accordingly, the board is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation conversion, voting, or other rights, which could adversely affect
the voting power and other rights of the holders of common stock. The preferred
stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of PowerChannel. The
Company does not currently intend to issue any shares of preferred stock,
however there can be no assurance that it will not do so.
8. Federal Income Taxes
The Company accounts for income taxes in accordance with the asset and liability
method prescribed by Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. Under the asset and liability method of Statement
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to the
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement 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.
As of December 31, 2002 and 2001 net operating loss (NOL) carryforwards amounted
to approximately $7,500,000 and $5,400,000, respectively and will expire in
between 2016 and 2022. Pursuant to SFAS No. 109, for financial reporting
purposes, a valuation allowance was recorded as of December 31, 2002 and 2001 to
fully offset the Company's net deferred tax assets of approximately $1,125,000
and $810,000, respectively, relating to the NOLs. The Company is not current
with respect to its corporate income tax filings.
9. Commitment
The Company conducts its operations in office space under an operating lease
which expired in December 2002. The lease provided for increases in rent for
utilities and other building operating costs.
Rent expense for the years ended December 31, 2002 and 2001 amounted to
approximately $87,500 and $51,470, respectively.
F-28
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
9. Commitment (continued)
The Company entered into employment agreements with James Gambrell, Michael
Preston and Steven Lampert on March 1, 2000. The agreements expired on February
28, 2003 and provided for annual salaries of $250,000 for Mr. Gambrell and
$200,000 each for Mr. Preston and Mr. Lampert. Additionally, the agreements
provide for certain fringe benefits and stock options (see Note 12). Amounts
paid to Messrs. Preston and Lampert aggregated to $390,000 and $323,000 for the
years ended December 31, 2002 and 2001, respectively. The aforementioned
employee agreements were cancelled in July 2003. All corresponding liabilities
owed to these employees under these agreements in excess of the amounts already
paid have been waived.
10. Licensing Agreements
The Company entered into an Intellectual Property License Agreement in 2000 with
PCE (see Note 4). The Company is the owner of certain inventions, technology,
expertise, know-how and intellectual property, which PCE wishes to use. Pursuant
to the terms of the agreement, the Company has granted PCE a non-transferable
exclusive use of the technology in Europe. In consideration PCE has agreed to
pay the Company an initial payment of $10,000 as well as monthly costs incurred
by the Company for development work. During the period August 10, 1998
(inception) through December 31, 2002, PCE paid the Company $1,894,348, pursuant
to this agreement, of which $1,884,348 is recorded in the financial statements
as license fees. The amounts paid for the years ended December 31, 2002 and 2001
amounted to $-- and $335,473, respectively.
On August 12, 1998, PowerChannel, Inc. entered into a licensing agreement with
American Interactive Media, Inc. (AIM) to offer free Internet access to
consumers, utilizing AIM supplied set-top appliances and AIM provided Internet
service provider (WebPassport Network). This licensing agreement was superseded
by a new agreement dated May 19, 1999. The new agreement granted to
PowerChannel, Inc. an exclusive worldwide license with the right to sublicense
the "WebPassport system", the "WebPassport intellectual property" and the
"WebPassport technology". PowerChannel, Inc. signed a convertible promissory
note in the amount of $1,090,000 at an interest rate of 3% above the prime rate,
which was scheduled to mature on December 31, 2000. This note represented
$90,000 in set-top appliances and $1,000,000 in prepaid license fees. During
1999, AIM sent PowerChannel, Inc. notification that it was terminating the
license agreement and requested payment in full of the underlying note.
PowerChannel, Inc. disputed the termination notice with AIM and entered into
discussions to settle the dispute. On June 30, 2000, the parties entered into a
termination agreement, which rescinded all previous agreements. Pursuant to this
termination agreement, PowerChannel Holdings, Inc. issued AIM 288,000 shares of
its common stock as payment in full for PowerChannel, Inc. retaining possession
of the set-top appliances (costing $90,000) and as settlement for the $53,000
which was owed to AIM as reimbursement of certain operating costs as called for
under the May 19th agreement. Additionally, the Company issued AIM 50,000
warrants for shares at $2.50 per share, which are exercisable for 3 years. AIM
and PowerChannel, Inc. agreed to release each other from all other liabilities
associated with their relationship.
F-29
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
11. Litigation
Two lawsuits by stockholders alleging investment fraud have been asserted
against the Company seeking damages of approximately $60,000. Legal counsel
advises that due to the fact that the law firm was only recently retained, they
are not yet able to determine the viability of said claims. Management believes
that the resolution of these claims will not have a material effect on the
financial position or results of operations of the Company.
12. Stock Option Plan
During 2001, the Company adopted the 2001 Stock Option Plan. The aggregate
number of common shares that may be issued is 2,500,000. Any key employee shall
be eligible to be granted options as determined by the Company's stock option
committee. The price of the shares subject to each option shall not be less than
100% of the fair market value of such shares on the date such option is granted.
Under this plan, options to purchase shares in the stock of PowerChannel
Holdings, Inc. were as follows: 600,000 to James Gambrell, 250,000 to Michael
Preston, and 250,000 shares to Steven Lampert. The exercise price is $1.00 per
share. This stock option plan and the outstanding options thereunder were
cancelled during July 2003.
F-30
INDEPENDENT AUDITOR'S REPORT
Shareholders and Directors
Sealant Solutions, Inc.
We have audited the accompanying balance sheet of Sealant Solutions, Inc. (a
development stage enterprise), as of December 31, 2002, and the related
statements of operations, deficiency in assets, and cash flows for the period
July 8, 1998 (inception) to December 31, 2002 and for each of the years ended
December 31, 2002 and 2001. 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 auditing standards generally accepted
in the United States. 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 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 the Company as of December 31,
2002, and the results of its operations and cash flows for the period July 8,
1998 (inception) to December 31, 2002 and each of the years ended December 31,
2002 and 2001 in conformity with accounting principles generally accepted in the
United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered from
recurring losses from operations, including a net loss of $424,822 and $217,275
for the years ended December 31, 2002 and 2001, respectively, and has minimal
working capital as of December 31, 2002. These factors raise substantial doubt
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Radin, Glass & Co., LLP
Certified Public Accountants
New York, New York
March 14, 2003
F-31
SEALANT SOLUTIONS, INC.
(A Development Stage Enterprise)
BALANCE SHEET
December 31,
2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................... $ 2,338
Prepaid Expenses ............................................ 2,576
-----------
TOTAL CURRENT ASSETS ........... 4,914
EQUIPMENT, net of accumulated depreciation of $41,381 ............ 885
SECURITY DEPOSITS ................................................ -
INVESTMENT IN CEMENT COMPANY ..................................... -
-----------
$ 5,799
===========
LIABILITIES AND DEFICEINCY IN ASSETS
CURRENT LIABILITIES:
Account payable and accrued liabilities ..................... $ 24,089
Due to related parties ...................................... 72,217
-----------
TOTAL CURRENT LIABILITIES ...... 96,305
DEFICEINCY IN ASSETS
Common shares, $.01 par value, 20,000,000 shares
authorized, 1,074,155 issued and outstanding ........... 10,742
Additional paid in capital .................................. 1,301,327
Accumulated deficit ......................................... (1,402,576)
-----------
TOTAL DEFICIENCY IN ASSETS ..... (90,507)
-----------
$ 5,799
===========
See accompanying notes to financial statements
F-31
SEALANT SOLUTIONS, INC.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
For the Period
July 8, 1998
Year ended December 31, (inception) to
--------------------- December 31,
2002 2001 2002
---------- ---------- ------------
SALES ................................. $ 3,646 $ 20,590 $ 54,484
EXPENSES:
Selling general and administrative 133,237 174,728 880,338
Write-down of equipment .......... - - 95,000
Equity based compensation ........ 3,000 56,250 165,500
Loss on investment in franchise .. 29,799 - 29,799
Loss on impairment of investment . 250,000 - 250,000
Advertising ...................... 3,000 27,574 47,680
---------- ---------- ------------
TOTAL EXPENSES ... 419,036 258,552 1,468,317
OTHER INCOME & EXPENSE
Interest income .................. 9 532 541
Other income ..................... 785 20,156 20,942
Loss on Securities ............... (10,226) - (10,226)
---------- ---------- ------------
TOTAL OTHER INCOME . (9,432) 20,688 11,257
NET LOSS .............................. $(424,822) $(217,275) $(1,402,576)
========== ========== ============
NET LOSS PER SHARE: ................... $ (0.46) $ (0.34)
========== ==========
Number of shares used in computation .. 920,022 646,467
========= =========
See accompanying notes to financial statements.
F-32
SEALANT SOLUTIONS, INC.
(A Development Stage Enterprise)
STATEMENTS OF DEFICIENCY IN ASSETS
Common Stock Additional Other
-------------------- Paid-in Accumulated Comprehensive
Shares Amount Capital Deficit Income * Total
---------- --------- ------------ ------------ -------------- ----------
BALANCE AT JULY 8, 1998 - Inception ....... 265,059 $ 2,651 $ 129,879 $ (402,045) $ - $(269,515)
NET LOSS .................................. - - - (55,798) - (55,798)
---------- --------- ------------ ------------ -------------- ----------
BALANCE AT DECEMBER 31, 1998 .............. 265,059 $ 2,651 $ 129,879 $ (457,843) $ - $(325,313)
Common stock issued to creditors pursuant
to the bankruptcy in exchange for debt 45,222 452 82,227 400,369 - 483,048
Common shares issued for litigation
settlement ............................ 1,000 10 11,590 - - 11,600
Common stock issued for services pre-
reverse merger ........................ 14,000 140 34,860 - - 35,000
Common shares issued for reverse merger . 198,337 1,983 (1,983) - - 0
Common shares issued for services post
reverse merger ........................ 14,500 145 36,105 - - 36,250
Common stock sold ....................... 1,000 10 9,990 - - 10,000
Net loss ................................ - - - (425,707) - (425,707)
---------- --------- ------------ ------------ -------------- ----------
BALANCE AT DECEMBER 31, 1999 .............. 539,119 $ 5,391 $ 302,668 $ (483,181) $ - $(175,122)
Stock issued for services ............... 15,500 155 69,845 - - 70,000
Contribution of capital ................. - - 5,000 - - 5,000
Debt converted to equity ................ 15,565 156 65,997 - - 66,153
Net loss ................................ - - - (277,300) - (277,300)
---------- --------- ------------ ------------ -------------- ----------
BALANCE AT DECEMBER 31, 2000 .............. 570,184 $ 5,702 $ 443,510 $ (760,481) $ - $(311,269)
Stock issued for debt ................... 34,538 345 244,731 - - 245,076
Stock issued for services ............... 15,850 159 87,958 - - 88,117
Stock issued for acquisition of
intangible assets ..................... 12,000 120 29,880 - - 30,000
Sale of common stock .................... 52,500 525 104,475 - - 105,000
Private placement memorandum equity
proceeds .............................. 1,000 10 14,990 - - 15,000
Unrealized gain on marketable securities
available for sale .................... - - - - 8,240 8,240
Net loss ................................ - - - (217,273) - (217,273)
---------- --------- ------------ ------------ -------------- ----------
BALANCE AT DECEMBER 31, 2001 .............. 686,072 $ 6,861 $ 925,544 $ (977,754) $ 8,240 $ (37,109)
Stock issued for debt ................... 130,455 1,305 112,360 - - 113,665
Stock issued for services and settlement 18,000 180 21,820 - - 22,000
Sale of common stock .................... 250,000 2,500 247,500 - - 250,000
Cancelled Stock ......................... (12,000) (120) (5,880) - - (6,000)
Fractional share adjustment 50/1 reverse
stock split ........................... 1,628 16 (16) - - -
Unrealized (loss) on marketable
securities available for sale ......... - - - - (8,240) (8,240)
Net loss ................................ - - - (424,822) - (424,822)
---------- --------- ------------ ------------ -------------- ----------
BALANCE AT DECEMBER 31, 2002 .............. 1,074,155 $ 10,742 $ 1,301,328 $(1,402,576) $ - $ (90,507)
========== ========= ============ ============ ============== ==========
See accompanying notes to financial statements.
F-33
SEALANT SOLUTIONS, INC.
(A Development Stage Enterprise)
STATEMENT OF CASH FLOWS
Period
July 8, 1998
(Inception)
Year ended December 31, TO
---------------------------- December 31,
2002 2001 2002
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss .............................................. $ (424,822) $ (217,275) $(1,400,902)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .................. 608 7,190 40,987
Write-down of equipment ........................ - - 95,000
Loss on impaired royalty agreement ............. (250,000) - (250,000)
Loss on investment in franchise ................ 29,799 - 29,799
Stock based on compensation .................... 22,000 88,116 221,366
Changes in assets and liabilities:
Security deposits & prepaid expenses ........... (2,576) (899) (3,475)
Accounts payable and accrued liabilities ....... (2,428) (50,063) 24,089
Due to related parties ......................... 1,226 50,448 301,103
------------ ------------ ------------
Net cash used in operating activites .................. (626,193) (122,483) (692,033)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of royalty agreement ......................... 250,000 - 250,000
Investment in marketable securities ................... 13,160 (13,160) -
Intangible assets purchase ............................ - (4,500) (4,500)
Equipment purchases ................................... - - (137,271)
------------ ------------ ------------
Net cash used in investing activies ................... 263,160 (17,660) 108,229
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt converted to equity .............................. - 16,191 82,344
Sale of common stock .................................. 363,665 120,000 753,798
------------ ------------ ------------
Net cash provided by financing activies ............... 363,665 136,191 836,142
NET (DECREASE) INCREASE IN CASH ............................. 632 (3,952) 2,338
------------ ------------ ------------
CASH AT BEGINNING OF THE PERIOD ............................. 1,706 5,658 -
------------ ------------ ------------
CASH AT THE END OF THE PERIOD ............................... $ 2,338 $ 1,706 $ 2,338
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest .............................................. $ - $ - $ -
============ ============ ============
Taxes ................................................. $ - $ - $ -
============ ============ ============
NON -CASH FINANCING ACTIVITIES:
Common stock issued for debt .......................... $ 113,665 $ 245,076 $ 358,741
============ ============ ============
Common stock issued for services ...................... $ 22,000 $ 88,116 $ 180,116
============ ============ ============
Common stock issued for acquistion of intangible assets $ - $ 30,000 $ 30,000
============ ============ ============
See accompanying notes to financial statements.
F-34
SEALANT SOLUTIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
NOTE 1. BUSINESS
Sealant Solutions, Inc. ("the Company"), has been the incubator of several
start-up enterprises all of which have been unsuccessful. During the last few
years, the Company has attempted to provide computerized handicapping to
thoroughbred horse racing patrons, distribute roofing sealant on a wholesale
basis and engage in the retail sale of a cosmetics line of products. In 2002,
the Company invested $250,000 to acquire certain royalty payments from the sale
and distribution of foreign made cement in the United States of America. See
notes on recapitalization and reorganization of Company.
NOTE 2. SUMMARY OF SIGNIFICANT OF ACCOUNTING POLICIES
RECAPITALIZATION
On August 11, 1999, the Company acquired WELC and issued 265,059 shares or 50.1%
for all of the assets, liabilities and contracts except for the handicapping
software, which were licensed to the Company by the shareholders of WELC. The
Company had no significant operations for three years prior to August 11, 1999,
while being operated as UC'NWIN. (See note Reorganization of Company).
Accordingly, the transaction has been accounted for as a reverse acquisition by
WELC. The capital structure of WELC has been recapitalized to account for the
equity structure subsequent to the acquisition, as if WELC had been the issuer
of the common stock for all periods presented.
GOING CONCERN
Due to the start up nature of the business, the financial statements are being
presented as a development stage enterprise pursuant to Statement of Financial
Accounting Standards No. 7. In addition, the accompanying financial statements
have been prepared assuming the Company will continue as a going concern. Since
the recapitalization of the Company, the Company has suffered cumulative
recurring losses amounting to approximately $642,097 for the recent two years
ended December 31, 2002. The Company intends to raise additional financing
through debt or equity financing in the near future to enable the Company to
continue operations for at least one year. If they are unsuccessful they may be
required to cease operations and/or file for bankruptcy.
BASIS OF PRESENTATION
Due to the start-up nature of the business, the financial statements are being
presented as a development stage enterprise pursuant to Statement of Financial
Accounting Standards No. 7.
REVENUE RECOGNITION
The Company recognizes revenues as such related services are performed.
F-35
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
The Company classifies its marketable securities as available for sale. The
securities consist of equity securities, which are stated at fair value, with
net unrealized gains or losses on securities recorded as accumulated other
comprehensive income (loss) in shareholders' equity. Realized gains and losses
are included in earnings and are derived using the specific identification
method for determining the cost of the securities.
EQUIPMENT
Equipment is stated at cost and is depreciated on a straight-line basis using
estimated lives, which range from three to seven years.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company reviews the carrying value of the long-lived assets to determine if
facts and circumstances exist, which would suggest that the intangible assets
may be impaired or that the depreciation period needs to be modified. If
impairment is indicated, then an adjustment will be made to reduce the carrying
amount of the long-lived asset to their fair value. Based on the Company's
review as of December 31, 2002, there is no impairment of long-lived assets.
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.
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS 130
requires the reporting of comprehensive income in addition to net income from
operations. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combination", SFAS No.
142, "Goodwill and Other Intangible Assets" and SFAS No. 143, "Accounting for
Asset Retirement Obligations". SFAS No. 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interest
F-36
method of accounting for business combinations initiated after June 30, 2001. It
also requires that the Company recognize acquired intangible assets apart from
goodwill. SFAS No. 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS No. 142 requires that the Company identify reporting units for
the purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. SFAS No. 143
establishes accounting standards for recognition and measurement of a liability
for an asset retirement obligation and the associated asset retirement cost,
which will be effective for financial statements issued for fiscal years
beginning after June 15, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which basically further clarifies SFAS No. 121
and methods of quantifying potential impairments or disposal of assets as well
as the related reporting of such impairments or disposals.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This SFAS applies to costs associated with an
"exit activity" that does not involve an entity newly acquired in a business
combination or with a disposal activity covered by SFAS No. 144. These costs
include, but are not limited to the following: termination benefits associated
with involuntary terminations, terminating contracts that are not capital leases
and costs to consolidate facilities or relocate employees. SFAS No. 146 will be
effective for exit or disposal activities initiated after December 31, 2002 with
early application encouraged.
During 2002, the FASB issued SFAS No. 145, 147 and 148, which were merely
amendments to existing SFAS's or other accounting pronouncements.
The adoption of SFAS No. 141, SFAS No. 142, SFAS No. 143, SFAS No. 144 and SFAS
No. 146 is not expected to have a material effect on the Company's financial
position, results of operations and cash flows.
LOSS PER SHARE
The Company has adopted SFAS 128, "Earnings per Share." Earnings per common
share are computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding during the period. The
earnings per common share computation, assuming dilution, gives effect to all
dilative potential common shares during the period. The computation assumes that
the outstanding stock options and warrants were exercised and that the proceeds
were used to purchase common shares of the Company.
REVERSE STOCK SPLIT
On August 11, 1999, the Company declared a four-for-one reverse stock split. All
common share data and per share data have been retroactively adjusted to reflect
such reverse stock split. On December 23, 2002, the Company declared a
one-for-fifty reverse stock split. All new shares commenced trading under the
new trading symbol of "SLTN" effective December 26, 2002. No fractional shares
were issued. All common share data and per share data have been retroactively
adjusted to reflect such reverse stock split.
F-37
NOTE 3. EQUIPMENT
Equipment consists of the following at December 31, 2002:
Kiosks ................. $ 9,642
Computer equipment ..... 20,715
Software ............... 5,300
Furniture & fixtures ... 6,609
--------
42,266
Accumulated depreciation (41,381)
--------
$ 885
Depreciation expense for the year ended December 31, 2002 and 2001 was $2,732
and $5,465 respectively.
NOTE 4. INTANGIBLE ASSET
On September 28, 2001, the Company entered into a distribution agreement with
Lady Ole International Cosmetics Incorporation. Per the terms of the agreement,
the Company would receive exclusive distribution rights of cosmetics and health
care products from Cosmotex Internacionales, S.A. DE C.V. in exchange for 12,000
shares of the Companies common stock valued at $30,000, see note 8(h), as well
as $4,500 in cash. The distribution rights covered the United States of America,
Canada, the Middle East, Far East and Puerto Rico. The agreement provided an
initial term of 2 years, which could be extended in writing by mutual agreement
of the parties for an additional 3 years. In April 2002, the Company terminated
the agreement and wrote off the remaining net investments with this cosmetics
company. Such write off is recorded as a separate line in the statement of
operations for the year ended December 31, 2002.
NOTE 5. INVESTMENT FOR ROYALTY AGREEMENT
In February 2002, the Company invested $250,000 in a cement company, IFG
Goldstar Cement Company ("IFG"), which contracted to import cement made in the
Ukraine and Thailand, and leased a distribution center in California. The
$250,000 investment provided the Company with the right to receive a royalty of
$.375 per metric ton of cement imported and delivered to the distribution center
through the Port of Los Angeles and Long Beach. The term of the agreement is 17
years unless the cement company renews their lease in with California
distribution center lease, then the entitlement to royalty payments will
continue to track with the term of any lease renewals. IFG has delayed the
importation of cement several times during the year for a variety of reasons. At
year end December 31, 2002, the Company was prevented from independently
verifying customer orders by the individual in control of IFG. Recent
independent correspondence with the Ukraine cement company noted IFG has had
made no meaningful progress toward importing cement from them in the last twelve
months, in fact the Ukraine cement company is contemplating terminating such
agreement from September 2001. Further background research with regard to the
individual in control of IFG, resulted in discovering this individual has an
outstanding $750,000 judgment entered against him by the Securities and Exchange
Commission "SEC" for a separate matter, unrelated to IFG. Management has
recorded a $250,000 impairment reserve against this investment, due to IFG's
general inability to culminate the importation of cement from the Ukraine or
Thailand, and the discovery of IFG's principal having prior investment
defalcation issues with the SEC. The Company is currently exploring the
recoverability of such investment and any recourse, if possible.
F-38
NOTE 6. PETITION FOR RELIEF UNDER CHAPTER 11 AND BASIS OF PRESENTATION
Reorganization and Basis of Presentation - On April 29, 1999, the Company filed
a petition for relief with the United States Bankruptcy Court, Southern District
of Florida, under the provisions of Chapter 11 of the Bankruptcy Code. In
accordance with AICPA Statement of Position 90-7 "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code", UC'NWIN had adopted
"fresh-start reporting", but due to the reverse acquisition by the Company such
financial data is not applicable and has not been presented. The carrying value
of the liabilities were reduced as a result of the adoption of fresh start
reporting and the balance of the deficit was offset against paid in capital, to
the extent available.
Pursuant to the terms of the Company's bankruptcy Plan of Reorganization, all
shareholders with an aggregate of 50,000 shares or more of common stock had to
file with the Clerk of the Bankruptcy Court a proof of interest in such common
shares otherwise such common shares would be extinguished. Common shareholders
with less than 50,000 shares of common stock were not required to provide such
proof. There were 5,800,000 of such shares cancelled due to the lack of adequate
proof of interest.
NOTE 7. LICENSE AGREEMENT
Pursuant to the terms of the license agreement WELC was issued 265,059 shares of
common stock or 50.1% of the Company to transfer all of the assets and contracts
of WELC and enter into a license agreement with WELC for the exclusive and
non-transferable right to use the handicapping thoroughbred horse racing
software in the United States. The license agreement also required the payment
of royalties in the amount of 15% of the gross revenues generated from the
licensed software. In December 1999 the Company increased the license to ten
years with an option to renew the license for another ten years and the royalty
was reduced to 0% by the former shareholders of WELC for the assumption of
$148,752 of liabilities. This license agreement was terminated in 2002 and
15,000 shares of common stock were issued in 2002 to settle a complaint
initiated by the former shareholders of WELC.
NOTE 8. EQUITY TRANSACTIONS
a. Pursuant to the terms of the bankruptcy the Company implemented a
one-for-four reverse stock split. In December 2002, the Company effectuated a
one-for-fifty shares reverse stock split. All common stock disclosure has been
retroactively adjusted to reflect such stock split.
b. The Company issued 14,000 shares of common stock for legal services to be
rendered for the year 2000. The legal services have been valued at $70,000
expensed. Also included in the shares issued is a 1,500 share reduction due to a
reclassification error from 1999.
c. In August 2000, the Company issued 15,565 shares of common stock for
conversion of $66,153 of indebtedness owed to an officer and shareholder of the
Company for advances to the Company in the past year.
d. A $5,000 contribution to capital for general and administrative expenses
incurred by an officer and principal shareholder has been recorded for calendar
2000.
F-39
e. In January 2001, the Company issued 27,630 shares of common stock to the sole
officer of the Company in exchange for $13,815 of indebtedness.
f. In April 2001, the Company issued 7,091 shares of common stock to the sole
officer of the Company in exchange for $4,284 of indebtedness and $16,250 of
services. Also, the Company issued 4,460 to its six creditors in cancellation of
debt. In May 2001, the Company issued another 207 shares for legal services.
There were 52,500 shares issued pursuant to a private placement memorandum for
$105,000.
g. In September and October 2001, the Company issued 8,000 shares of common
stock valued at $40,000 to the Company's board of directors, and 3,000 shares
for services rendered valued at $25,500.
h. In September 2001, the Company issued 12,000 restricted shares of common
stock at 50% of fair market value or $30,000 to purchase the distribution rights
of an unrelated entity. The acquisition was recorded using the purchase method
and the distribution rights were being amortized over 60 months. These
acquisition costs of this investment were written-off in 2002.
i. In November 2001, the Company issued 1,000 shares of common stock pursuant to
a private placement.
j. In January 2002, the Company issued 7,000 shares of common stock valued at
$7,000 for services rendered.
k. The Company issued 250,000 shares of common stock pursuant to a private
placement. The Company issued 87,209 shares of common stock to the sole officer
of the Company in exchange for $87,260 of indebtedness.
l. In May 2002, the Company returned and canceled 12,000 shares of common stock
at $6,000 for indebtedness.
m. In December 2002, the company issued 43,245 shares of common stock to the
sole officer of the Company in exchange for $26,405 of indebtedness. The Company
issued 15,000 shares of common stock at recorded at $15,000 for a legal
settlement.
NOTE 9. INCOME TAXES
The Company accounts for income taxes according to Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for income Taxes". Under the
liability method specified by SFAS No. 109, a deferred tax asset or liability is
determined based on the difference between the financial statement and tax basis
of assets and liabilities as measured by the enacted rates, which will be in
effect when these differences reverse.
The net operating loss carryforwards are subject to limitation in any given year
in the event of certain events, including significant changes in ownership. The
Company has not given recognition to these tax benefits in the accompanying
financial statement. At December 31, 2002, the Company had available net
F-40
operating loss carryforwards for tax purposes of approximately $12,500,000
mostly expiring through 2010 with some smaller net operating loss carryforwards
expiring through 2022. Substantially all of the carryforwards are subject to
limitations on annual utilization because upon completion of the reverse merger
there was an "equity structure shift" involving 5% stockholder (as these terms
are defined in Section 382 of the Internal Revenue Code), which have resulted in
a more than 50% change in ownership. The annual limitation is based on the value
of the Company as of the date of the ownership change multiplied by the
applicable Federal Long- Term Tax- Exempt Bond Rate. In August 1999, the Company
triggered a Section 382 net operating loss limitation on the cumulative net
operating loss carryforwards of approximately $12,000,000. Utilization of such
net operating losses is limited to approximately $500,000 per annum. The net
operating loss carryforwards result in an estimated $4,200,000 deferred tax
asset against which the Company has taken a valuation reserve for the same
amount due to the lack of assured taxable income.
The provision (benefit) for income taxes differs from the amounts computed by
applying the statutory federal income tax rate to income (loss) before provision
for income taxes is as follows:
December 31,
-----------------------
2002 2001
---- ----
Tax benefit computed at statutory rate $(54,000) $(74,000)
Losses for which no tax benefit realized 54,000 74,000
-------- --------
$ -0- $ -0-
======== ========
NOTE 10. RELATED-PARTY TRANSACTIONS
The Company rents office space from a related party on a month-to-month basis.
The Chariman advanced, as well as accrued, salary on a pro-rata basis of $50,000
per annum commencing September 2001, such monies due totaled $72,217. Such
payable is non-interest bearing and is due on demand.
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company also rents office space from a related party on a month-to-month
basis. Rent expense for the years ended December 31, 2002 and 2001 was $3,626
and $20,715, respectively.
In September 2001, the Company entered into an employment agreement, as amended,
with its CEO for a term of one year. The employment agreement includes annual
compensation at $50,000, plus 150,000 shares of common stock on the anniversary
of the employment agreement. The CEO has waived his right to receive the common
stock due for 2002. The employment agreement provides for a bonus should sales
exceed pre-determined sales levels, as well as vacation and severance pay
clauses. The bonus criterion was not met for a bonus to be distributed for 2002.
NOTE 12. FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
In the fourth quarter of 2002, the Company recorded a $250,000 impairment
reserve on its investment in a royalty agreement during the year. See note 5
above for further discussions.
F-41
You should rely only on the information contained in
this prospectus. We have not authorized anyone to
provide you with information different from the
information contained in this prospectus. This document
may only be used where it is legal to sell the
securities. The information in this document may only
be accurate on the date of this document.
16,495,365 SHARES
OF OUR
OF COMMON STOCK
TABLE OF CONTENTS
Page
Prospectus Summary 3
Risk Factors 6
Use Of Proceeds 12 PowerChannel, Inc.
Market For Common Equity And Related Stockholder
Matters 12
Management's Discussion And Analysis Or Plan Of
Operation 14
Business 24
Management 40
Certain Relationships And Related Transactions 46 ________________
Security Ownership Of Certain Beneficial Owners
And Management 48 PROSPECTUS
Description Of Securities 50 ________________
Plan Of Distribution 52
Selling Stockholders 55
Legal Matters 58
Experts 58
Available Information 59
Index To Financial Statements F-1 ______________, 2004
ii
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended and restated, provide to the fullest
extent permitted by Section 145 of the General Corporation Law of the State of
Delaware, that our directors or officers shall not be personally liable to us or
our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended and restated, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Our By Laws also provide that the Board of Directors may also authorize the
company to indemnify our employees or agents, and to advance the reasonable
expenses of such persons, to the same extent, following the same determinations
and upon the same conditions as are required for the indemnification of and
advancement of expenses to our directors and officers. As of the date of this
Registration Statement, the Board of Directors has not extended indemnification
rights to persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses, all of
which we will pay, in connection with the issuance and distribution of the
securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 1,999.31
Accounting fees and
expenses 10,000.00*
Legal fees and expenses 35,000.00*
Miscellaneous 5,000.00
-----------
TOTAL $ 51,999.31*
===========
* Estimated.
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ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In January 2001, the Company issued 1,381,500 pre-split shares of common stock
to the sole officer of the Company in exchange for the cancellation of $13,815
of indebtedness.
In April 2001, the Company issued 354,548 pre-split shares of common stock at
$.05 per share to the sole officer of the Company in exchange for $4,284 of
indebtedness and $16,250 of services rendered to the Company. Also, the Company
issued 222,977 pre-split shares to its six creditors in cancellation of debt. In
May 2001, the Company issued another 10,366 pre-split shares for legal services.
There was 2,625,000 pre-split shares at $.04 per share issued pursuant to a
placement memorandum for $105,000.
In September 2001, the Company issued 400,000 pre-split shares of common stock
at $.10 per share to the Company's board of directors.
In October 2001, the Company issued 150,000 shares of common stock at $.17 per
share for services rendered.
In November 2001, the Company issued 50,000 shares of common stock pursuant to a
private placement memorandum.
In January 2002, the Company issued 4,360,467 pre-split restricted shares of
common stock to the sole officer of the Company in exchange for the cancellation
of $87,209 of indebtedness.
In February 2002, the Company sold 12,500,000 pre-split shares of its restricted
common stock at $.02 per share to an accredited investor pursuant to a private
placement which shares were subsequently purchased by the sole officer of the
Company.
In April 2002, the Company issued 50,000 pre-split restricted shares of common
stock to a non-affiliate in consideration of a full release of all claims
against the Company in connection with the Lady Ole cosmetics business.
In November 2002, the Company issued 750,000 pre-split restricted shares of
common stock to two (2) non-affiliates in full settlement of pending litigation.
In December 2002, the Company effectuated a 1-for-50 reverse stock split of the
Company's common stock.
On July 21, 2003, we entered into a Stock Purchase and Share Exchange Agreement
whereby we acquired all of the outstanding shares of PowerChannel, Inc. Under
this agreement, we agreed to issue 9,117,525 shares and an additional 485,552
shares on a pro-rata basis of our company to the shareholders of PowerChannel,
Inc. Such shares are deemed "restricted" as defined under the SEC Rule 144.
Under the terms of the agreement, we are the acquiring company.
To obtain funding for our ongoing operations, pursuant to an offering conducted
under Rule 506 of Regulation D, as promulgated under the Securities Act of 1933,
we sold units to accredited investors with each unit consisting of 50,000 shares
of common stock and 50,000 common stock purchase warrants at a price of $25,000
per unit. In connection with this offering we issued an aggregate of 4,250,000
shares of common stock and 4,250,000 common stock purchase warrants. The common
stock purchase warrants are each exercisable into one share of common stock at
the holder's option at an exercise price of $.75 per warrant. At anytime after
the filing of this registration statement, we may call the warrants when the
five-day average closing bid price of the common stock equals or exceeds $1.00.
The warrants are exercisable for a period of thirty-six months from the final
closing of the offering.
* All of the above offerings and sales were deemed to be exempt under rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, business associates of PowerChannel or executive officers
of PowerChannel, and transfer was restricted by PowerChannel in accordance with
the requirements of the Securities Act of 1933. In addition to representations
by the above-referenced persons, we have made independent determinations that
all of the above-referenced persons were accredited or sophisticated investors,
and that they were capable of analyzing the merits and risks of their
investment, and that they understood the speculative nature of their investment.
Furthermore, all of the above-referenced persons were provided with access to
our Securities and Exchange Commission filings.
II-2
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References to
"the Company" in this Exhibit List mean PowerChannel, Inc., a Delaware
corporation.
Exhibit No. Name of Exhibit
3.1 Certificate of Incorporation(1)
3.2 Bylaws(2)
3.3 Certificate of Amendment to the Certificate of Incorporation(2)
3.4 Certificate of Amendment to the Certificate of Incorporation
3.5 First Amended Plan of Reorganization(2)
3.6 Order confirming Debtor's First Amended Plan of Reorganization(2)
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent
10.1 Stock Purchase Agreement and Share Exchange entered between Sealant
Solutions, Inc. and PowerChannel, Inc. (3)
10.2 Amendment No. 1 to Stock Purchase Agreement and Share Exchange
entered between Sealant Solutions, Inc. and PowerChannel, Inc. (3)
10.3 Employment Agreement entered between the Company and Steven Lampert
21.1 Subsidiaries of the Registrant.
23.1 Consent of Yohalem Gillman & Company LLP Independent Certified
Public Accountant.
23.2 Consent of Radin Glass & Co. LLP Independent Certified Public
Accountant.
23.3 Consent of legal counsel (see Exhibit 5.1).
_______________________
(1) Filed as an exhibit to the Company's registration statement of Form S-18 .
(2) Filed as an exhibit to the Company's annual report on Form 10-KSB for the
year ended December 31, 1999.
(3) Filed as an exhibit to the Company's Form 8-K Current Report filed July 27,
2003.
II-3
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of New
City, State of New York, on February 12, 2004.
POWERCHANNEL, INC.
By: /s/ Steven Lampert
------------------
Name: Steven Lampert
Title: CEO, President, CFO, Chairmand of the Board
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Name Title Date
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
/s/Steven Lampert CEO, President, CFO and Chairman of the February 12, 2004
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
Steven Lampert Board
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
/s/James Davidson Director February 12, 2004
- ------------------------------------------------- ----------------------------------------------- ----------------------------------
James Davidson
II-5