SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO.1 TO FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest reported): July 21, 2003
Sealant Solutions, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
0-22954 65-0952186
(Commission File Number) (IRS Employer Identification No.)
16 North Main Street, Suite 395
New City, NY 10956
(Address of Principal Executive Offices)(Zip Code)
(845) 634-7979
(Registrant's Telephone Number, Including Area Code)
29 Abbey Lane, Middleboro, Massachusetts 02346
(Former Name or Former Address, if Changed Since Last Report)
INFORMATION TO BE INCLUDED IN THE REPORT
Item 1. Changes in Control of Registrant
On July 21, 2003 (the "Effective Date"), Pursuant to a Stock Purchase Agreement
and Share Exchange ("Agreement") and Amendment thereto ("Amendment") between
Sealant Solutions, Inc., a Delaware corporation with its principal place of
business located at 29 Abbey Lane, Middleboro, Massachusetts 02346 ("Sealant" or
the "Company") and PowerChannel, Inc., a Delaware corporation with its principal
place of business located at 16 North Main Street, Suite 395, New City, New York
10956 ("PowerChannel"), PowerChannel merged into Sealant. Pursuant to the
Amendment, the separate existence of PowerChannel ceased to exist and Sealant
continued as the surviving corporation. In addition, Sealant has agreed to
change its name to Powerchannel, Inc.
Pursuant to the terms of the Agreement, Michael Fasci remained on the Board of
Directors of the Company, Edward Fasci resigned from the Company's Board of
Directors and Steven Lampert was appointed to fill the vacancy on the Board of
Directors of the Company. In addition, Michael Fasci resigned as President and
Chief Executive Officer of Sealant and Steve Lampert was appointed as President,
Chief Executive Officer, Chief Financial Officer and Secretary of Sealant.
The Acquisition was approved by the unanimous consent of the Board of Directors
of Sealant and PowerChannel on July 21, 2003.
The following table sets forth information regarding the beneficial ownership of
the shares of the Common Stock (the only class of shares previously issued by
Sealant) at July 21, 2003, by (i) each person known by the Company to be the
beneficial owner of more than five percent (5%) of the Company's outstanding
shares of Common Stock, (ii) each director of the Company, (iii) the executive
officers of the Company, and (iv) by all directors and executive officers of the
Company as a group, prior to and upon completion of this Offering. Each person
named in the table, has sole voting and investment power with respect to all
shares shown as beneficially owned by such person and can be contacted at the
address of the Company.
NAME OF SHARES OF
TITLE OF CLASS BENEFICIAL OWNER COMMON STOCK PERCENT OF CLASS
- ------------------------------------------------------------------------------
5% STOCKHOLDERS
Common Steven Lampert 4,097,025(1) 36.54%
Common Michael E. Fasci 1,126,433 10.05%
(1) Includes 254,652 shares held in the name of Karen Lampert, the wife of
Steven Lampert.
DIRECTORS AND NAMED EXECUTIVE
OFFICERS
Common Steven Lampert 4,097,025 36.54%
Common Michael E. Fasci 1,126,433 10.05%
DIRECTORS AND 5,223,458 46.59%
OFFICERS AS A
GROUP
The following is a biographical summary of the directors and officers of the
Company:
Steven Lampert
Steven Lampert was appointed as President, Chief Executive Officer, Chief
Financial and Director of the Company on July 21, 2003. Mr. Lampert has been the
President and Chief Executive Officer of PowerChannel, Inc. since 1998. In such
capacities his responsibilities include managing the day to day operations of
the Company and its divisions. Prior to PowerChannel, Mr. Lampert co-founded
Long Distance Direct and was its Chief Executive Officer from December 1991.
Prior to founding LDDI, Mr. Lampert was President of Comtec, Inc., a New York
based telecommunications corporation that pioneered interactive voice-response
telephony, 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. Mr Lampert also serves as
Director and Executive Deputy Chairman of PowerChannel Europe and PowerChannel
Limited.
Michael Fasci
Michael E. Fasci joined the Company in August, 1998, as a director and has
served as Chairman of the Company's Audit Committee since January 1999, and as
Chief Executive Officer since August, 2000. Mr. Fasci is the founder, President
and Chief Executive Officer of Process Engineering Services, Inc., which has its
principal executive offices located in Raynham, Massachusetts. Process
Engineering Services, Inc. designs and manufactures pollution recovery equipment
for the manufacturing industry with clients worldwide. Since founding the
company in 1987, he has grown the company in each successive year to where it is
today with annual sales in excess of 1 million. In 1997, Mr. Fasci qualified
for, and currently maintains Enrolled Agent status with the Internal Revenue
Service. He also has developed a financial consulting and tax practice that
serves primarily corporate clients. Mr. Fasci also currently owns and manages a
number of other small businesses.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Pursuant to the Amendment to Stock Purchase Agreement and Share Exchange,
PowerChannel merged with and into Sealant and PowerChannel shall cease to exist
and Sealant shall continue as the surviving corporation. In addition, Sealant
has agreed to change its name to PowerChannel, Inc.
Based on such merger, we have adopted a new business plan. Our principal product
is low-cost access to the Internet and the physical hardware to deliver it
through the use of the consumer's existing television. It is the only product of
its kind focused specifically 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 mainly in New York and Los
Angeles but aspire to expand throughout the United States and South America.
We believe that our subscription-based business will be profitable. We have
formed a number of strategic alliances and commercial relationships designed in
aggregate to enable it to offer our services to the Hispanic market, both in the
United States and South America, the lowest-cost hardware and access to the
Internet available through the television. The alliances and relationships will
focus initially on the Los Angeles and New York sectors of the market.
The PowerChannel 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.
The management team has considerable experience in building businesses from a
standing start. Most relevant of the varied businesses which between them they
have built or managed are companies in telecommunications (where substantial
consumer audiences were addressed and captured) and marketing services (where
data and data-related marketing services were sold to major international
consumer product and services groups). As a team, the present management was
responsible for developing the PowerChannel product and service to the point of
launch in an associated company in the United Kingdom. The management team also
includes a strong Hispanic element, with extensive marketing experience in
relation to the Hispanic community in the United States.
We aim to have certain distinct, if not unique, features within a five-year
timeframe. These features include the only sub-$100 Internet solution in the US,
a core paying subscriber base of 200,000, and an unrivalled focus on the
Hispanic community. At the same time, the financial model is designed to
generate profits at relatively modest subscriber levels. We believe that
demonstration of progress towards achieving its business model will make us an
attractive acquisition target for companies in various fields including
Internet, marketing services and Hispanic media.
We offer low-cost access to the Internet and the physical hardware to deliver it
through the use of the consumer's existing television. The product is targeted
specifically at the Hispanic market and primarily to households who are
currently not online. A review of the United States consumer market indicates
that domestic Internet penetration in certain minority groupings is below 25%.
It is these minority groups that we are targeting. We are working with a number
of affinity groups and Hispanic organizations to establish marketing programs to
attract these minority groups.
We have specifically targeted the Hispanic Community in the United States. The
Hispanic population comprises 12.5% of the 283.8 million people in the United
States. Despite being the fastest growing minority community in the United
States today, Hispanic Americans have the lowest Internet penetration of any
major ethnic group. Language barriers are a major deterrent for Hispanics use of
the Internet. We offer a Spanish Language option on its product.
We realize that creating strategic alliances are key to building a successful
business. Currently, we have alliances with the following businesses:
o Famsa - one of Mexico's largest retail chains with more than
250 locations, is rapidly expanding a major retail presence in
Southern California and other US Hispanic major markets, with
5 stores already open in Southern California and plans for at
least fifteen more.
o Terra Lycos - a global Internet group with a presence in 43
countries in 20 languages, reaching 115 million users per
month around the world. The group, resulting from Terra
Networks S.A.'s acquisition of Lycos, Inc. in October 2000,
operates some of the most popular Web sites in the United
States, Canada, Europe, Asia and Latin America, and is the
largest access provider in Spain and Latin America.
Terra Lycos has the largest global footprint of any Internet
portal with more than 140 sites in 41 countries through its
network of Web sites as well as through joint venture
partnerships. Terra Lycos's financial strength, including a
cash balance of more than 2 billion euros, the company is one
of the best capitalized Internet companies and is poised to
continue with the rapid expansion of its global presence.
o ESPN Deportes is the world 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.
o Wal-Mart is the largest retailer in the US with over 4,000
locations. PowerChannel will be in 6 stores before the end of
July and an additional fifty locations by the end of 2003.
We are also in negotiations with several other significant commercial entities
that address the Hispanic market in order to extend our strategic alliances in
that market.
We have recently received favorable publicity for its product, with features on
Telemundo and in the Hispanic press. We have identified our target customer
profile as companies that are focusing their marketing efforts on reaching out
to ethnic communities such as Hispanics for test marketing, direct sales and
market research applications. The United States Hispanic market has become
fruitful ground for companies who want to expand their market share or increase
revenues. We believe that we will bring the new age of advertising via the
Internet into the homes of many Hispanic communities.
Our product was launched by Powerchannel, Inc. in June 2002 and since then has
been generating revenues. We have identified marketing approaches that are both
economically and sales effective. The marketing approach is a four pronged
approach that includes a relationship with Terra Lycos which will enable us to
launch in Peru; a relationship with Famsa in both their Los Angeles and Mexico
stores; a relationship with Walmart where we will be in 50 locations by the end
of 2003; and a relationship with Salton who is a leading domestic designer.
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. We do not know of any other competitor who is targeting the Hispanic
community through low cost TV Internet access. MSN TV is the only realistic
provider of through the television Internet access, however, our offering is far
lower than the MSN TV package.
Our business involves the collection of consumer data and the distribution of
information about consumers to numerous entities, including, to a limited
extent, direct marketers. Using the Internet to acquire consumer or household
data has created hypersensitivity towards privacy standards in data collection.
We believe that our business method of data collection will benefit tremendously
from this legislative environment because we only acquire and use data developed
from permission-based sources.
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 collect 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 such as FCC Part 68 and Underwriter's laboratory for
electrical and fire safety. We have utilized highly reputable testing
organizations to ensure its compliance with all safety regulations.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired:
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
Independent Auditor's Report 1
Consolidated Financial Statements
Balance Sheets 2
Statements of Operations 3
Statements of Stockholders' Equity (Deficit) 4
Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
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 693,119 --
Prepaid expenses and advances 21,501 52,240
----------- -----------
Total current assets 779,978 79,220
----------- -----------
Property and equipment, net 34,092 63,589
----------- -----------
Investment in PowerChannel Europe PLC -- 657,857
----------- -----------
$ 814,070 $ 800,666
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable to PowerChannel Europe PLC 2,588,521 1,189,963
Accounts payable - others $ 703,666 $ 375,194
----------- -----------
Total current liabilities 3,292,187 1,565,157
----------- -----------
Convertible notes payable 280,000 280,000
----------- -----------
Stockholders' deficit
Common stock par value $.001 per share;
authorized 100,000,000 shares; issued
and outstanding 21,880,828 shares 21,880 21,880
Preferred stock par value $.001 per share;
authorized 100,000,000 shares; issued
and outstanding -0- shares -- --
Additional capital 4,732,283 4,732,283
Subscription receivable (50,575) (50,575)
Accumulated other comprehensive income (338,348) (338,348)
Deficit accumulated during development stage (7,123,357) (5,409,731)
----------- -----------
Total stockholders' deficit (2,758,117) (1,044,491)
----------- -----------
$ 814,070 $ 800,666
=========== ===========
- --------------------------------------------------------------------------------
See accompanying notes and independent auditor's report.
2
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
Europe PLC $ -- $ 335,473 $ 1,894,348
Expenses reimbursed pursuant
to license agreement -- (335,473) (1,884,348)
----------- ----------- -----------
Net license income -- -- 10,000
Operating expenses 1,374,028 1,931,669 4,487,881
----------- ----------- -----------
Loss before (loss) income from
PowerChannel Europe PLC (1,374,028) (1,931,669) (4,477,881)
(Loss) income from PowerChannel
Europe PLC (339,598) 361,419 (2,645,476)
----------- ----------- -----------
Net loss $(1,713,626) $(1,570,250) $(7,123,357)
----------- ----------- -----------
- --------------------------------------------------------------------------------
See accompanying notes and independent auditor's report.
3
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
Common Stock During Other
----------------------- Additional Subscription Development Comprehensive
Shares $ Capital Receivable Stage Income 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
(see Note 10) 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.
4
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
Common Stock During Other
----------------------- Additional Subscription Development Comprehensive
Shares $ Capital Receivable Stage Income 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.
5
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
Common Stock During Other
----------------------- Additional Subscription Development Comprehensive
Shares $ Capital Receivable Stage Income 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 -- -- -- -- (1,570,250) -- (1,570,250)
Other comprehensive income (loss)
Equity adjustment from
translation -- -- -- -- -- (148,395) (148,395)
-----------
Comprehensive income (loss) -- -- -- -- -- -- (1,718,645)
---------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 21,880,828 $ 21,880 $ 4,732,283 $ (50,575) $(5,409,731) (338,348) $(1,044,491)
========== =========== =========== =========== =========== =========== ===========
Comprehensive income (loss)
Net loss -- -- -- -- (1,713,626) -- (1,713,626)
Other comprehensive income (loss)
Equity adjustment from
translation -- -- -- -- -- -- --
Comprehensive income (loss) -- -- -- -- -- -- (1,713,626)
---------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2002 21,880,828 $ 21,880 $ 4,732,283 $ (50,575) $(7,123,357) $ (338,348) $(2,758,117)
========== =========== =========== =========== =========== =========== ===========
- --------------------------------------------------------------------------------
See accompanying notes and independent auditor's report.
6
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 $(1,713,626) $(1,570,250) $(7,123,357)
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 657,857 (559,722) 2,765,431
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 (693,119) -- (693,119)
Decrease (increase) in other assets 30,739 (42,160) (21,501)
Increase (decrease) in
accounts payable - other 328,472 225,168 703,666
----------- ----------- -----------
Net cash used in operating
activities (1,348,978) (1,929,275) (3,910,104)
----------- ----------- -----------
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 1,398,558 1,189,963 2,588,514
Proceeds from convertible notes -- -- 280,000
----------- ----------- -----------
Net cash provided by financing
activities 1,398,558 1,602,708 4,088,878
----------- ----------- -----------
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.
7
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.
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 approximately $7,123,357 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 (in inventory).
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.
8
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. The equity method was discontinued
in 2002 when the investment was reduced to zero.
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 9,600 set-top boxes in inventory and believes that these
will be sold. No estimate can be made of a range of amounts of loss that
are reasonably possible should the Company not sell its inventory.
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.
9
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
================== ===================
10
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.
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 Media Group terminated in February
2001.
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 recorded an increase of $3,103,764 in their
investment in PCE and a corresponding increase in additional capital.
For the year ended December 31, 2002 and 2001, the Company has recorded
its pro-rata share of PCE's (loss) income amounting to ($339,598) and
$361,419, respectively.
11
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 based on the uncertainty as to the group's future funding,
which is dependent on realizing adequate funds from the sale of certain
assets.
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 $ $ 3,342,770
Total assets $ $ 3,342,770
Non-current assets $ $ --
Current liabilities $ $ 205,190
Total liabilities $ $ 205,190
Equity $ $ 3,137,580
Revenues $ $ --
Net (loss) income $ $ 1,473,839
The 2001 net income included in the above table includes a non recurring
gain of approximately $5.4 million on a settlement from a former
shareholder 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.
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 as described in Note 1.
6. Related Party Transaction
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.
12
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
6. Related Party Transaction (continued)
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. This amount was repaid in
2001.
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. LDDI has not complied
with the terms of the final judgment concerning the Form 10-K and Form
10-Q filings and has commenced making such filings.
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.
Additionally, Long Distance Direct Holdings, Inc. filed for bankruptcy in
January 2002.
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.
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.
13
POWERCHANNEL HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
7. Stockholders' Equity (continued)
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 $2,500,000 and
$2,200,000, respectively, relating to the NOL. 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 year ended December 31, 2002 and 2001 amounted to
approximately $87,500 and $51,470 respectively.
14
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 $165,000 and $323,000 for the years ended December 31, 2002
and 2001, respectively.
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 year ended December 31, 2000,
PCE paid the Company $1,568,456, pursuant to this agreement, of which
$1,558,875 is recorded in the financial statements as license fees.
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.
15
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. Management
is unable to determine the ultimate outcome of the above claims, but they
believe 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.
No options have been issued under this plan through May 18, 2001. This
stock option plan was cancelled during July 2003.
16
(c) Exhibits
Number Exhibit
- ------ -------
10.1 Stock Purchase Agreement and Share Exchange*
10.2 Amendment to Stock Purchase Agreement and Share Exchange*
* Filed with the original 8-K with the SEC on July 28, 2003
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
SEALANT SOLUTIONS, INC.
By: /s/ Steve Lampert
-------------------------------
Steven Lampert
President
September 29, 2003