UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(First Amendment)
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2004
0-50742
(Commission file number)
SIGN MEDIA SYSTEMS, INC.
(Name of small business issuer in its charter)
Florida 02-0555904
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2100 19th Street, Sarasota, FL 34234
(Address of principal executive offices) (Zip Code)
Issuer's telephone number is: (941) 330-0336
None
(Former name or former address, if changed since last report)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, No Par Value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this from, and no disclosure will be
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10KSB
or any amendment to this Form 10KSB. [X]
Indicate by check mark whether the issuer is an accelerated filer (as defined in
Exchange Act Rule 12b-2). Yes [ ] No [X]
The issuer's revenues for the most recent fiscal year were $1,361,962.
The aggregate value of the voting stock held by non-affiliates as of April 1,
2005, was $610,500.
The number of shares outstanding of the issuer's common equity as of April 1,
2005 was 8,460,000, No Par Value.
Documents Incorporated by reference: Exhibits 3.1, 3.2, 4.1, 14.1, and 21.1 from
the Issuer's Form 10-SB filed as of May 4, 2004. Exhibits 10.1, 10.2, 10.3, and
10.4 from the Issuer's Form 10-SB/A Third Amendment filed as of February 9,
2005. Exhibits 10,5, 10,6, and 16.3 from the Issuer's Form 10-SB/A Fourth
Amendment filed as of April 1, 2005.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Our History.
We started business as E Signs Plus.com, LLC, a Florida limited liability
company on June 20, 2000. We were engaged in the business of manufacturing and
selling signage of all types. We were also in the business of selling
advertising space on the sides of trucks. We would rent space on the sides of
trucks and sell that space to other businesses that wished to advertise their
products in that manner ("third party advertising"). We also printed the
advertising materials ("graphics"). At that time we were purchasing truck side
mounting systems from third parties to attached to the truck sides in which to
insert the graphics.
It soon became apparent that the third party advertising business would not be
profitable if we had to purchase mounting systems from third parties. In August
of 2001, we began developing our own proprietary truck side mounting systems for
the display of graphics on the sides of trucks. We also determined that there
was another market for our mounting systems and graphics; businesses that wished
to advertise their products on their own fleet of trucks. At that time we
decided to limit our business to developing, manufacturing and marketing mobile
billboard mounting systems which are primarily mounted on trucks, to printing
the graphics that are inserted into the mounting systems and to third party
advertising. On August 27, 2001, we changed E Signs Plus.com's name to GO!
AGENCY, LLC.
On January 28, 2002, we incorporated Sign Media Systems, Inc. in the State of
Florida. GO! AGENCY continued in the business of marketing its proprietary truck
side mounting systems, the sale of third party advertising and the printing and
sale of graphics. Sign Media Systems engaged the business of developing,
manufacturing and marketing the mounting systems.
In December, 2002, we determined that it would be in our best interest to
operate the truck side mounting system, third party advertising and graphics
business through one entity rather than two entities. Therefore, effective
January 1, 2003, GO! AGENCY contributed all of its assets to Sign Media Systems,
in exchange for Sign Media Systems common stock and Sign Media Systems became a
subsidiary of GO! AGENCY. GO! AGENCY owns 97% of our shares of common stock. At
that time, GO! AGENCY ceased conducting the truck side mounting system, third
party advertising and graphics business and all of those business activities are
conducted through Sign Media Systems. Both GO! AGENCY and Sign Media Systems are
"small business issuers" as that term is defined in Section 228.10 of Regulation
S-B promulgated by the Securities and Exchange Commission. Please refer to Note
1 of the Consolidated Financial Statements contained in Part F/S hereof and to
Item 7, Certain Relationships and Related Transactions for more information
concerning our relationship with GO! AGENCY.
Antonio F. Uccello, III, is the manager and the 51% owner, the control person
and promoter of GO! Agency formerly known as E Signs Plus.com and, therefore,
pursuant the terms of GO! Agency's Operating Agreement, has the sole power,
subject to his fiduciary duties to the other GO! Agency members, to vote, or
dispose of or direct the disposition of all the shares of Sign Media System's
common stock beneficially owned by GO! Agency. Antonio F. Uccello, III, has
absolute control of us by virtue of his voting control of 7,960,000 shares of
our common stock.
On November 17, 2003, we entered into a merger agreement with American
Powerhouse, Inc., a Delaware corporation and its wholly owned subsidiary, Sign
Media Systems Acquisition Company, Inc., a Florida corporation. Pursuant to the
merger agreement, we merged with Sign Media Systems Acquisition Company. The
merger was completed on December 8, 2003 with the filing of Articles of Merger
with the State of Florida at which time Sign Media Systems Acquisition ceased to
exist and we became the surviving corporation. Some time prior to the merger,
American Powerhouse had acquired certain technology for the manufacture of a
water machine in the form of a water cooler that manufactures water from ambient
air. American Powerhouse was not engaged in the business of manufacturing and
distributing the water machine but was engaged in the licensing of that right to
others. Prior to the merger, American Powerhouse granted a license to Sign Media
Systems Acquisition to use that technology and to manufacture and sell the water
machines. The acquisition of this license was the business purpose of the
merger. The license agreement is attached hereto as Exhibit 10.5. Material terms
of the license agreement include the following:
o we have right to utilize certain proprietary technology for the
manufacture, design, creation, sale or use of a water cooler ("Water
Machine") which manufactures distilled water from ambient air;
o the term of the license is in perpetuity;
o the territory in which we are allowed to exploit the license is all
countries in the world;
o the license in non-exclusive; and
o we do not have the right to sublicense the technology to others.
As consideration for the merger, we issued 300,000 shares of our common stock to
American Powerhouse. The 300,000 shares of stock were valued at $1.50 per share
based on recent private sales of our stock. There were no other material costs
of the merger. Please refer to Note 1 of the Notes to Consolidated Financial
Statements for December 31, 2003 and 2002 contained elsewhere herein for more
information on the merger. Due to problems with our plans for marketing and
distribution of the water machine subsequent to the merger, the license has no
carrying or book value for the year ended December 31, 2003 in our Consolidated
Financial Statements for December 31, 2004and 2003. There was and is no
relationship between American Powerhouse and either Sign Media Systems or GO!
AGENCY. To the best of our knowledge, the only control person of American
Powerhouse is Denis C. Tseklenis.
Our Business.
We are in the business of developing, manufacturing and marketing mobile
billboard mounting systems which are mounted primarily on truck sides, rear
panels and breaking panel roll up doors. We also produce digitally created
outdoor, full color vinyl images ("graphics") which are inserted into the
mounting systems and displayed primarily on trucks. We have developed mounting
systems which allow graphics to easily slide into an aluminum alloy extrusion
with a cam-lever that snaps closed stretching the image tight as a drum, and
that also easily opens to free the image for fast removals and change outs
without damaging the truck body or the graphics. We are also in the business of
selling third party advertising on truck sides utilizing our mounting systems.
In November, 2003, we acquired a license to certain proprietary technology for
the manufacture, design, creation, sale or use of a water cooler which
manufactures distilled water from ambient air. It was our intent to sell this
product in Central and South America. At that time we were in negotiations with
independent dealers in Central America who sold United States products in
Central and South America who expressed a desire to market this product in that
territory. Ultimately, we were unable to come to a satisfactory agreement with
these dealers for the sale of this product. Accordingly, we are not currently
engaged in the business of manufacturing and sale of this product. We will not
become engaged in the business of manufacturing and selling this product until
we can identify and come to a satisfactory agreement with an independent dealer
or dealers in that territory for the sale of this product. We cannot currently
predict when or if we will identify and come to a satisfactory agreement with an
independent dealer or dealers in this territory for the sale of this product.
Our Products and Services.
We currently have five mounting systems; two for the sides of truck bodies and
trailers of all sizes, one for the rear of side roll up beverage body trailers,
one for the rear garage style roll up doors of trailers and one for the sides of
commercial cargo vans. Our "Profile I" mounting system utilizes our proprietary
Cam Lever technology to evenly tension images across wide surface areas and
allows graphics to be inserted on both sides of truck bodies and trailers of all
sizes. Our "Profile II" mounting system utilizes our proprietary Omega Lock and
Insert technology combined with our grommeted floating rail/zip tie technology
to evenly tension images across wide surface areas and allows graphics to be
inserted on both sides of truck bodies and trailers of all sizes. Our Hotswap
Lite mounting system evenly tensions images across small surface areas and
allows graphics to be inserted on the rear panels of side roll up beverage
trucks and trailers. Our Hotswap Stretch mounting system utilizes our
proprietary stretch technology to evenly tension images across breaking panel
garage type roll up doors, seamlessly allowing images to roll up with those
doors and allows graphics to be changed and reused. Our VanGo mounting system
utilizes our proprietary cap and insert technology to evenly tension images on
curved surfaces such as the sides of commercial cargo van bodies.
With five products to cover key visible surface areas of trucks and trailers, we
offer economical and easy image change-outs for semi and beverage trailers,
urban box trucks, and cargo vans.
We are also in the digital printing and graphic design business, which allows us
not only to market our mounting systems, but also to design and produce the
graphics which are inserted in mounting systems.
Graphics are high-resolution full digital color prints, produced in heavy weight
outdoor vinyl. They are mounted on truck sides, rear panels and roll-up doors
utilizing our mounting systems. Whether a customer's advertising campaign
reaches from coast to coast, or changes seasonally, our mounting systems will
allow the customer to exchange and reuse images over and over again. Images can
be "swapped" for a fraction of what it costs to remove, paint, and apply
pressure sensitive adhesive vinyl to truck sides, with downtime measured in
minutes, rather than days. Downtime for trucks is an extremely important
consideration as the trucks generate no revenue and provide no services when not
on the road.
We are also in the business of selling third party advertising on truck sides
utilizing our mounting systems and graphics.
Our Target Markets and Marketing Strategy.
Currently, we have three primary sources of revenue: (i) the sale and
installation of our mounting systems, (ii) third party advertising; and (iii)
the printing of graphics to be inserted on trucks utilizing our mounting systems
Our Mounting Systems.
According to Fleet Owner magazine, the commercial trucking market consists of
more than 10 million vehicles - trucks, tractors, and trailers - of all types
and sizes, from light to heavy duty, serving all segments of the nation's
economy. Commercial trucking fleets in the U.S. operate more than 7 million
trucks and 3.4 million trailers. Trucking is a large and diverse business. It
hauls roughly 80% of America's freight and serves virtually every sector of the
nation's economy. Truckers fall into two basic categories: for-hire carriers and
private fleets. For-hire truckers haul freight and provide transportation
services for others. Trucking is their primary business. Private fleets, on the
other hand, are the proprietary transport, distribution, or service arms of
companies that are not in the trucking business. A private fleet's primary
function is to haul its own company's goods or perform a service in support of
its company's main business. Private fleets make up over two-thirds of the
trucking market. In the trucking industry, fleets are defined as trucking
operations of five or more vehicles. The "5+" truck-fleet segment is the heart
of the trucking market, accounting for close to 80% of the total commercial
vehicle population. The private fleet one the market where we are initially
focused.
We are focusing on three primary channels for distribution of our mounting
systems to the private fleet market: (i) developing a nation wide dealer base;
(ii) strategic alliances with reselling partners, including truck body and
trailer manufacturers, truck dealers and the traditional retail sign industry;
and (iii) direct sales to existing fleets. We believe these three channels of
distribution offer the opportunity for future growth and expansion.
Third Party Advertising.
Private fleets also offer a third source of revenue; third party advertising. We
identify fleet owners who are willing to lease space on their trucks for
advertising from third parties. We enter into a lease agreement with a fleet
owner for truck side space that provides that so long as there is third party
advertising on that space, we will pay the fleet owner a monthly lease fee. We
identify third parties who wish to advertise their good or services in the area
in which the fleet owners utilize their fleets and sell the third party
advertiser space on the truck sides. We obtain revenue from the graphics we
produce for the advertising and from the advertising fee. In this segment of our
business, we do not sell the mounting systems and therefore derive no revenue
from a sale of the mounting systems.
We are focusing on three primary channels for third party advertising: (i)
developing a nation wide dealer base; (ii) alliances with advertising agencies;
and (iii) direct sales to third parties seeking advertising space using our
sales and marketing staff.
Graphics.
We believe that sales of graphics will be made in conjunction with sales of our
mounting systems and sales of third party advertising.
Competition.
Our market for our products is based on the cost-effective use and re-use of
graphics in conjunction with our mounting systems without damaging either the
graphics or the truck sides to reach large and diverse adult audiences.
The truck side advertising business is fragmented into two segments; pressure
sensitive applied vinyl and mounting systems that allow graphics to be attached
to the sides of trucks.
Our primary competition is pressure sensitive applied vinyl ("PSAV"). PSAV is
vinyl that adheres directly to the truck side. The initial cost of our mounting
systems with graphics is about the same as applying PSAV to truck sides.
However, removal of PSAV is extremely labor and time intensive and destroys the
Fleet Graphic. The benefit of the our mounting systems is that the Fleet Graphic
can be "swapped" for a fraction of what it costs to remove and re-apply PSAV,
with downtime for the truck measured in minutes, rather than days. Our mounting
systems also allow the Fleet Graphic to be reused at a later date.
The major manufacturers and marketers of PSAV are 3M Company and Avery Dennison
Corporation. 3M and Avery Dennison are multi-billion dollar companies with
established and successful sales and marketing organizations. Nevertheless, we
believe that the advantages of our mounting systems will allow us to effectively
compete in this industry.
There are other companies that design and manufacture some type of mounting
system for attaching graphics to vehicles. None of these competitors has a
system that is substantially similar to our mounting systems and we believe that
the functionality and cost-effectiveness of our mounting systems make them
competitive in the market. However, some of our potential competitors may have
larger advertising and marketing budgets than we do and may be better able to
establish a market presence.
Dependence on Major Customers
A material part of our business is currently dependent upon one key customer,
Applied Advertising Network, LLC of Lake Mary, Florida. During the year ended
December 31, 2004, our sales to this customer were approximately $1,223,672 or
90 % of all sales including a provision for bad debt in the amount of $500,000.
See Note 2, Provision for Bad Debt, for more information on the provision for
bad debt. During the year ended December 31, 2003, our sales to this customer
were approximately $624,874 or 80.7% of all sales. We continue to rely on this
customer for the majority of our sales. However, we are moving forward to expand
our dealer base so that we will no longer depend on this one key customer. There
can be no guarantee that we will be able to diversify our distribution base.
Applied Advertising Network, LLC is not a related party. In 2003, we entered
into a Distribution Agreement with Applied Advertising. That agreement provides:
o The term of the agreement is one year and can be renewed by the mutual
agreement of the parties. The agreement was renewed in 2004 and does not
expire until December 2005.
o The agreement grants Applied Advertising the territory of the United
States of America and Central America which means that it can sell our
products in those areas.
o The agreement allows Applied Advertising to appoint one or more dealers
in its territory but only with our consent.
o The agreement obligates Applied Advertising to use its best efforts to
actively promote, market and sell our products in its territory.
o The agreement obligates Applied Advertising to maintain the formal name
of our products, with their appropriate trademark, service mark, logo,
or trade name designations, in all advertising and other printed
materials relating to our products.
o The agreement allows Applied Advertising to purchase our products at
specified prices but also allows us to change the pricing in out sole
discretion upon fifteen days written notice. We considering our pricing
arrangement with Applied Advertising and all of our other customers to
be a trade secret.
A copy of the Distributor Agreement with Applied Advertising is attached hereto
as an exhibit.
Sources and Availability of Raw Materials.
Raw material for the manufacture of the mounting systems consists primarily of
extruded aluminum and fasteners which are readily available throughout the
county. Raw material for the manufacture of the graphics consists primarily of
vinyl billboard banner material which is readily available through the county.
Intellectual Property and Patents.
Our success may depend in large part upon our ability to preserve our trade
secrets, obtain and maintain patent protection for our technologies, products
and processes, and operate without infringing the proprietary rights of other
parties. However, we may rely on certain proprietary technologies, trade
secrets, and know-how that are not patentable. Although we do take action to
protect our trade secrets and our proprietary information, in part, by the use
of confidentiality and non-compete agreements with our employees, consultants
and dealers, we cannot guaranty that:
o these agreements will not be breached;
o we would have adequate remedies for any breach; or
o our proprietary trade secrets and know-how will not otherwise become
known or be independently developed or discovered by competitors.
On January 15, 2002, we filed a United States patent application for our
mounting systems and we therefore own a pending United States patent application
that contains claims covering our mobile sign mounting systems. The patent
application is being prosecuted by the intellectual property law firm of Fish &
Richardson, PC of New York City. The patent application includes claims covering
certain cam lever technology which we developed and believe is unique in the
truck side framing industry. We believe that the patent application claims which
are on file are sufficiently broad to cover not only our specific system, but
also similar systems; and that, if granted, will be infringed by systems that
employ the fundamentals of our system. However, at this time our patent
attorneys cannot advise as to the likelihood of obtaining allowance of the
claims on file or other claims sufficiently broad to provide a competitive
advantage.
We cannot guaranty that our actions will be sufficient to prevent imitation or
duplication of either our products and services by others or prevent others from
claiming violations of their trade secrets and proprietary rights.
On December 16, 2002, we filed a United States application for a trademark for
the words "HOTSWAPROFILE" which we use to describe our mounting system for
trucks of all sizes. We are advised that the final review prior to publication
was completed on July 20, 2004 and that the application will be published for
opposition. We do no as yet know the date of publication. There can be no
guarantee that there will not be public opposition to the issuance of the
trademark or that the trademark will ever be approved.
We intend to file in the near future a United States application for a trademark
for the words "HOTSWAP GRAPHICS."
Research and Development Activities.
In the years ended December 31, 2004, 2003, we did not incur research and
development costs.
Employees.
As of the date of this Report, we have eight full time employees and no part
time employees for a total of eight employees.
ITEM 2. DESCRIPTION OF PROPERTY
On November 1, 2002, we entered into a lease as the lessee with Hawkeye Real
Estate, LLC, a Florida limited liability company, as lessor for 6,300 square
feet of mixed office and warehouse space at 2100 19th Street, Sarasota, FL 34234
for a period of five years beginning December 1, 2002 and continuing until
November 30, 2007 for a fixed monthly rental of $2,500 per month. Effective
January 1, 2005 we amended the lease to obtain access to additional parking for
our vehicles, employee vehicles and customer vehicles. The amended lease now
provides for a fixed monthly rental of $4,195 per month. Our executive offices
and manufacturing facility are located at these premises. We believe the
premises are adequate for our purposes.
ITEM 3. LEGAL PROCEEDINGS
There are no pending or threatened legal proceedings to which we are a party or
of which any of our property is the subject. To our knowledge, there are no
proceedings contemplated by governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
There is no established public market for our common stock. Although we hope to
be quoted on the OTC Bulletin Board, our common stock is not currently listed or
quoted on any quotation service. There can be no assurance that our common stock
will be quoted on any quotation service or that any market for our stock will
ever develop or, if developed, will be sustained.
None of our common stock is subject to outstanding options or warrants to
purchase, or securities convertible into, our common equity.
380,000 shares of our common stock could be sold pursuant to Rule 144 under the
Securities Act.
There is no proposal to publicly offer any of our common stock.
Holders
There are approximately 160 holders of our common stock.
Dividends
We have never paid any cash dividends on our common stock and do not anticipate
paying cash dividends in the foreseeable future. The future payment of dividends
is directly dependent upon our future earnings, our financial requirements and
other factors to be determined by our Board of Directors, in its sole
discretion. For the foreseeable future, it is anticipated that any earnings that
may be generated from our operations will be used to finance our growth, and
that cash dividends will not be paid to common stockholders.
Recent Sales of Unregistered Securities
The following information is furnished with regard to all securities sold by us
within the past three years that were not registered under the Securities Act.
The issuances described hereunder were made in reliance upon the exemptions from
registration set forth in Section 4(2) and Regulation D, Rule 506 of the
Securities Act relating to sales by an issuer not involving any public offering.
All securities sold by us within the past three years were shares of common
stock, no par value. No underwriter was used in any of these transactions and
there were no underwriting discounts or commissions paid.
Date Name Number of Shares Consideration
January 28, 2002 Antonio F. Uccello, III 1,000 $5,000
January 1, 2003 GO! Agency, LLC 7,959,000 (1)
June 1, 2003 Stephen. MacNamara 30,000 $4,500
September 30, 2003 Nelson J. Martin 10,000 Services-$15,000
Abraham Uccello,
Trustee of the
Candlelight Non-
October 8, 2003 Grantor Trust 10,000 $15,000
October 31, 2003 Henry Eldon Sinsel 10,000 $15,000
November 11, 2003 Raimo Vitikainen 20,000(1) $30,000
November 12, 2003 William J. Hone 40,000 $60,000
November 14, 2003 Salvatore Uccello, Jr. 10,000 Services-$15,000
November 17, 2003 Lynda Melnick 20,000 $30,000
American Powerhouse,
November 17, 2003 Inc. 300,000 (2)
November 20, 2003 Roger P. Nelson 20,000 $30,000
November 24, 2003 Christopher Stender 10,000 Services-$15,000
December 8, 2003 Jerry Hanson 10,000 Services-$15.000
December 8, 2003 Marcus Faller 10,000 Services-$15,000
Thomas F. Pepin
April 3, 2004 Limited Partnership 66,667 $100,000
May 5, 2004 Roger P. Nelson 66,667 $100,000
---------------- -----------
Total 8,593,334(3) $404,500
================ ==========
(1) Effective January 1, 2003, GO! Agency, LLC, a Florida limited liability
company, transferred all of its assets which had an original cost basis of
$300,000 and an agreed value of $55,702 to us in exchange for 7,959,000 shares
of our common stock, no par value which was in excess of 80% of our then issued
and outstanding shares of common stock.
(2) Effective November 17, 2003, we merged with Sign Media Systems Acquisition
Company, Inc., a Florida corporation and we were the surviving company in that
merger. In order to acquire Sign Media Systems Acquisition Company by the
merger, we paid its former sole stockholder, American Powerhouse, Inc. 300,000
shares of our common stock.
(3) In the year ended December 31, 2003, Two Hundred Sixteen Thousand shares of
stock reflected in the total were not issued until after the end of the year.
Accordingly, we reported a liability on our balance sheet for the year ended
December 31, 2003 for stock to be issued in the amount of $324,000 for the year
ended December 31, 2003. The Two Hundred Sixteen Thousand shares were
subsequently issued in 2004. In the year ended December 31, 2004, One Hundred
Thirty Three Thousand Three Hundred Thirty Three shares of stock in the total
were not issued until after the end of the year. Accordingly, we reported a
liability on our balance sheet for the year ended December 31, 2004 for stock to
be issued in the amount of $200,000. The One Hundred Thirty Three Thousand Three
Hundred Thirty Three shares were subsequently issued in 2005.
At the time of the sale of shares of stock to Antonio F. Uccello, III, and to
GO! Agency, Antonio F. Uccello and all of the members of GO! Agency were
"Executive Officers and Directors" of Sign Media Systems as those terms are
defined in Section 501 of Regulation D promulgated by the Securities and
Exchange Commission. At the time of the sale of shares of stock to Stephen
MacNamara he was a Director of Sign Media Systems. As Executive Officers and
Directors, each of these purchasers were "Accredited Investors" as that term is
defined in Section 501 of Regulation D promulgated by the Securities and
Exchange Commission. As Executive Officers and Directors, these purchasers had
access to our non-financial statement and financial statement information
described in Section 502(b)(2) of Regulation D promulgated by the Securities and
Exchange Commission. None of the offers or sales to these purchasers involved
any form of general solicitation or general advertising. Prior to each sale,
each of these purchasers was afforded the opportunity to ask questions and
receive answers concerning the terms and conditions of the offering and to
obtain additional information we possessed or could acquire without unreasonable
effort or expense to verify the accuracy of the information provided them
pursuant to Section502 (b)(2). We took reasonable care to insure that the shares
of stock sold to these purchasers could not be resold without registration under
the Securities Act of 1933 (the "Act") or an exemption there from and that these
purchasers were not underwriters under that Act and in connection there with:
(a) made reasonable inquiry to insure that these purchasers were acquiring the
shares of stock for themselves and not for any other persons; (b) provided
written disclosure to each purchaser that the shares of stock had not been
registered under the Act and therefore could not be resold unless registered
under the Act or unless an exemption from registration is available; and (c)
placed a restrictive legend on the shares of stock stating that they had not
been registered under the act and setting forth restrictions on their
transferability and sale. Finally, we made reasonable inquiry to insure that
each of these purchasers had such knowledge and experience in financial and
business matters that each purchaser was capable of evaluating the merits and
risks of investment in the shares of stock and of making an informed investment
decision with respect thereto or had consulted with advisors who possess such
knowledge and experience.
All of the remaining purchasers were Accredited Investors except Raimo
Vitikainen, Salvatore Uccello, Jr., Christopher Stender and Jerry Hanson. At the
time of the sale of shares of stock to the remaining purchasers listed in the
foregoing table, we provided all of the with our non-financial statement and
financial statement information described in Section 502(b)(2) of Regulation D
promulgated by the Securities and Exchange Commission. None of the offers or
sales to these purchasers involved any form of general solicitation or general
advertising. Prior to each sale, each of these purchasers was afforded the
opportunity to ask questions and receive answers concerning the terms and
conditions of the offering and to obtain additional information we possessed or
could acquire without unreasonable effort or expense to verify the accuracy of
the information provided them pursuant to Section502 (b)(2). We took reasonable
care to insure that the shares of stock sold to these purchasers could not be
resold without registration under the Securities Act of 1933 (the "Act") or an
exemption there from and that these purchasers were not underwriters under that
Act and in connection there with: (a) made reasonable inquiry to insure that
these purchasers were acquiring the shares of stock for themselves and not for
any other persons; (b) provided written disclosure to each purchaser that the
shares of stock had not been registered under the Act and therefore could not be
resold unless registered under the Act or unless an exemption from registration
is available; and (c) placed a restrictive legend on the shares of stock stating
that they had not been registered under the act and setting forth restrictions
on their transferability and sale. Finally, we made reasonable inquiry to insure
that each of these purchasers had such knowledge and experience in financial and
business matters that each purchaser was capable of evaluating the merits and
risks of investment in the shares of stock and of making an informed investment
decision with respect thereto or had consulted with advisors who possess such
knowledge and experience.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Management Discussion Snapshot.
The following table sets forth certain of our summary selected operating and
financial data. The following table should be read in conjunction with all other
financial information and analysis presented herein including the Audited
Financial Statements for the Years Ended December 31, 2004 and 2003.
Summary Selected Statements of Profits and Losses and Financial Data
2004 2003
(Audited) (Audited)
Revenue $ 1,361,962 $ 774,349
Cost of Goods Sold $ 186,448 $ 201,850
Gross Profit $ 1,175,514 $ 572,449
Operating Expenses $ 1,101,176 $1,050,307
Net Income (Loss) Before Other (Expense) $ 74,338 $(477,808)
Other (Expense) Interest Expense $ (82,253) $ (76,464)
Net Loss $ (7,915) $(554,272)
Net Loss Per Common Share $ (0.00) $ (0.07)
Weighted Average Shares Outstanding 8,406,000 8,031,000
Assets $ 771,057 $ 815,555
Liabilities $ 656,544 $ 1,017,127
Stockholders' Equity (Deficit) $ 114,513 $ (201,572)
Results of Operations.
Revenue and Expenses.
For the year ended December 31, 2004, we had total revenue of $1,361,962, gross
profit of $1,175,514, a net loss of $(7,915) and a net loss per common share of
$(0.00) based on a weighted average of 8,406,000 common shares outstanding.
For the year ended December 31, 2003, we had revenue of $774,349, a net loss of
$(554,272) and a net loss per common share of $(0.07) based upon a weighted
average of 8,031,000 common shares outstanding.
Our revenue for both periods was generated from three sources; the sale of our
mobile billboard mounting systems, the printing of digital graphics, and truck
side advertising. During the year ended December 31, 2004we generated $776,766
or 87% of our revenue from the sale of our mobile billboard mounting systems,
$1,846 or 2% of our revenue from the printing of digital graphics and $83,350 or
11% of our revenue from truck side advertising. During the year ended December
31, 2003, we generated $696,914 or 90% of our revenue from the sale of our
mobile billboard mounting systems, $77,435 or 10% of our revenue from the
printing of digital graphics and nothing from truck side advertising.
During the years ended December 31, 2004, 2003, a material part of our business
was dependent upon one key customer, Applied Advertising Network, LLC of Lake
Mary, Florida. During the year ended December 31, 2004, our sales to this
customer were approximately $1,223,672 or 90% of revenue before bad expense of
$500,000. During the year ended December 31, 2003, our sales to this customer
were approximately $624,874 or 80.7% of all sales. We continue to rely on this
customer for the majority of our sales. However, we are moving forward to expand
our dealer base so that we will no longer depend on this one key customer. There
can be no guarantee that we will be able to diversify our distribution base.
Our revenue in the year ended December 31, 2004, was $1,361,962 compared to
revenue in the preceding period of $774,349. This is an increase from period to
period of $587,613. This increase in revenue is attributable to increased sales
of mounting systems to one key customer, Applied Advertising Network, LLC of
Lake Mary, Florida and increased sales of third party truck side advertising to
various customers. Applied Advertising Network is not a related party.
In the year ended December 31, 2004, our cost of goods sold was $186,448 which
is 14% of revenue before the provision for bad debt. In the year ended December
31, 2003, our cost of goods sold was $201,850 which is 26% of revenue. The
percentage decrease in cost of goods sold from period to period is primarily
attributable to continued reductions in the cost of manufacturing our mounting
systems.
The decrease of $92,649 in professional fees and administrative payroll for the
year ended December 31, 2004, from the pervious period is primarily due to a
reduction in payments for professional fees. In the year ended December 31,
2003, we incurred higher professional fees related to the filing of our Form
10-SB under the Securities Exchange Act of 1934.
The increase of $-96,647 in general and administrative expenses for the year
ended December 31, 2004, from the previous period is primarily due to increased
costs of soliciting customers through phone solicitation, increased advertising
costs and increased health insurance costs.
The decrease of $450,000 in impairment expense for the year ended December 31,
2004, from the previous period is attributable solely to our merger with Sign
Media Systems Acquisition Company, Inc. then a wholly owned subsidiary of
American Powerhouse, Inc., a Delaware corporation in 2003. In connection with
the merger, we issued 300,000 shares of our common stock to American Powerhouse,
Inc. These shares are valued at $450,000 or $1.50 per share based on recent
sales of our common stock. The purpose of the merger was to acquire certain
proprietary technology relating to the manufacture of a machine that makes water
from ambient air. Please refer to Note 1 of the Notes to Consolidated Financial
Statements for December 31, 2004, and 2003 contained elsewhere herein for more
information on the merger. Due to problems with our plans for marketing and
distribution of the water machine subsequent to the merger, the license has no
carrying or book value for the years ended December 31, 2004 and 2003, in our
Consolidated Financial Statements for December 31, 2004 and 2003, and because of
the impairment, we reported the $450,000 as an expense in the year ended
December 31, 2003.
The increase in depreciation expense for the year ended December 31, 2004, from
the previous period is attributable to purchase of additional equipment.
Working Capital.
The following table sets forth a summary of our working capital.
AT DECEMBER 31: 2004 2003
------------------------------------------------- -------------- --------------
Current assets $ 646,502 $ 712,501
Current liabilities 498,170 500,119
-------------- --------------
Working capital $ 148,334 $ 212,382
============== ==============
Current ratio 1.30 1.42
Our current assets for the year ended December 31, 2004, decreased $65,999 from
the previous period primarily due to utilization of prepaid expenses and cash to
pay interest and principal on related party debt.
Cash Flow.
Our cash flow from operating, investing and financing activities, as reflected
in the Consolidated Statement of Cash Flows are summarized in the table below.
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003: 2004 2003
---------------------------------------------------- ----------- ----------
Net cash provided by/(used in):
Operating activities $ 76,036 $ (474,896)
Investing activities (63,141) (90,886)
Financing activities (53,612) 607,712
------------- -------------
Net increase (decrease) in cash and
cash equivalents $ (40,716) $ 41,930
============== ==============
Net cash used in operating activities for the year ended December 31, 2004,
increased compared to the preceding period. This increase was driven primarily
by two reasons: (1) increased sales resulting in a smaller net loss than in the
previous period, and (2)a decrease in accounts receivable.
Net cash used in investing activities for the year ended December 31, 2004,
decreased compared to the preceding period. This decrease was driven primarily
by the lack of the necessity to purchase additional equipment.
Net cash provided by financing activities for the year ended December 31, 2004,
decreased compared to the preceding period. This decrease was primarily the
result of the reduction of long term debt and debt due to related parties.
Assets and Debt.
Our current assets are summarized in the table below.
AT DECEMBER 31: 2004 2003
-------------------------------------------- -------------- ---------------
Current assets $ 646,502 $ 712,501
Current assets for the year ended December 31, 2004, decreased compared to the
preceding period. Current assets for the year ended December 31, 2004, consists
of $6,352 of cash and cash equivalents, $550,578 of accounts receivable, $85,572
of inventory, and $4,000 of prepaid expenses and other assets. The decrease in
current assets was due primarily to the use of prepaid expense and cash to pay
interest on and reduce principal of long term debt and debt due to related
parties.
Accounts receivable aging for the year ended December 31, 2004 are summarized in
the table below.
AT DECEMBER 31, 2004:
1-30 31-60 61-90 > 90 TOTAL
---------- ---------- --------- ---------- ---------
TOTALS $7,781 $5,046 - $537,751 $550,578
========== ========== ========= ========== ========
All accounts receivable are delinquent after 30 days. Out of the total accounts
receivable, $537,751 are attributable to one key customer and all of that amount
was delinquent at December 31, 2004. No payments on this delinquency have yet
been made in the year ending December 31, 2005. Because of the large amount of
the delinquency, the fact that $537,751 of the delinquency is attributable to
one key customer and because of the long delay in payment, we established a bad
debt expense of $500,000 for the year ended December 31, 2004. This is an
increase of $500,000 from the prior period. We have been in discussions with the
customer and we believe, but cannot guarantee, that the full amount of the
delinquency will be satisfied by cash payment during the quarter ending June 30,
2005.
Accounts receivable aging for the year ended December 31, 2003 are summarized in
the table below.
AT DECEMBER 31, 2003:
1-30 31-60 61-90 > 90 TOTAL
---------- ------------ --------- ---------- -------------
TOTALS $7,727 $561,874 - $2,297 $571,898
========== ============ ========= ========== =============
All accounts receivable are delinquent after 30 days. Out of the total accounts
receivable, $561,874 are attributable to one obligor and all of that amount was
delinquent at December 31, 2003. During the year ended December 31, 2004, the
full amount of the $561,874 delinquency was satisfied in full by cash payments..
During the year ended December 31, 2004, the full amount of the $2,297
delinquency was satisfied in full by cash payments.. None of the accounts
receivable are from a related party.
Our non-current assets and long-term debt are summarized in the table below.
AT DECEMBER 31: 2004 2003
Non-current assets $ 124,555 $ 103,054
Long-term debt $ 51,184 $ 69,604
Non-current assets for the year ended December 31, 2004, increased compared to
the preceding period. The increase in non-current assets was due to our
acquisition of new equipment. Long term debt decreased due to the payment of
long term liabilities.
Our debt owed to related parties is summarized in the table below.
AT DECEMBER 31: 2004 2003
---------------------------------------------- -------------- ---------------
Current debt due to related parties $ 109,761 $ 4,739
Long-term debt due to related parties 107,190 447,404
------------- -------------
Total debt due to related parties $ 216,951 $ 452,143
============= =============
Current debt due to related parties for the year ended December 31, 2004,
increased compared to the preceding period because of a liability for the
payment of principal due to a related party in 2005. Long-term debt due to
related parties for the year ended December 31, 2004, decreased compared to the
preceding period due to the pay down of long term debt. See Item 12, Certain
Relationships and Related Transactions.
Our debt owed to unrelated parties is summarized in the table below.
AT DECEMBER 31: 2004 2003
----------------------------------------------- -------------- ---------------
Current portion of long term debt $ 18,420 $ 18,420
Long-term debt 51,184 69,604
------------- -------------
Total debt due to unrelated parties $ 69,604 $ 88,024
============= =============
Our total debt is summarized in the table below.
AT DECEMBER 31: 2004 2003
--------------------------------------------- -------------- ---------------
Current portion of debt due to related parties $ 109,761 $ 4,739
Long-term debt due to related parties 107,190 447,404
Current portion of long term debt 18,420 18,420
Long-term debt 51,184 69,604
------------- -------------
Total Debt $ 286,555 $ 539,967
============= =============
Our additional paid-in capital is summarized in the table below.
AT DECEMBER 31: 2004 2003
--------------------------------------------- -------------- ---------------
Additional paid-in capital $ 795,139 $ 471,139
============== ===============
Additional paid-in capital increased compared to the preceding period because of
two reasons: (1) we sold 133,334 shares of common stock at $1.50 per share for a
total of $200,000, and (2) in the year ended December 31, 2004, we satisfied the
liability for stock to be issued reported for the year ended December 31, 2003.
Our stockholders' equity (deficit) is summarized in the table below.
AT DECEMBER 31: 2004 2003
------------------------------------------ -------------- ---------------
Stockholders' equity (deficit) $ 114,513 $ (201,572)
Our stockholders' deficit for the year ended December 31, 2004 increased from
the preceding period primarily because of increased revenue, additional paid-in
capital and the satisfaction of the liability for stock to be issued reported
for the year ended December 31, 2003.
Off Balance Sheet Arrangements.
We have not entered into any off-balance sheet arrangements as defined by SEC
Final Rule 67 (FR-67) "Disclosure in Management's Discussion and Analysis about
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations,"
Liquidity and Capital Resources.
For the two reported periods, cash flow from operating activities has not been
sufficient to cover our working capital requirements or to finance expansion of
our sales and marketing activities. We have utilized cash flows from financing
activities to provide working capital and to expand sales and marketing
activities. Financing has been provided primarily by loans from related parties
and from the issuance of common stock. We do not have any institutional
financing in place and do not anticipate being able to arrange any institutional
financing for the foreseeable future.
The following table summarizes our cash flow provided by or used in operating
activities, investing activities and financing activities.
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003: 2004 2003
------------------------------------------------ -------------- --------------
Net cash provided by/(used in):
Operating activities $ 76,037 $ (474,896)
Investing activities (63,141) (90,886)
Financing activities (53,612) 607,712
------------- -------------
Net increase (decrease) in cash and
cash equivalents $ (40,716) $ 41,930
============== ==============
The following table depicts our known contractual obligations for the periods
reflected. These obligations may vary from period to period and provide a view
as to certain unavoidable cash outflows. The term "known contractual
obligations" has the same meaning as is contemplated by its use in Item
303(a)(5) of Regulation S-K. The term "total contractual payment stream" means
the total of all payments due in the periods reflected in the table.
TOTAL PAYMENTS DUE IN:
CONTRACTUAL
PAYMENT
CONTRACTUAL OBLIGATIONS STREAM 2005 2006 2007 2008
---------- ------- --------- --------- -------
Long-term debt obligations $ 73,680 $ 18,420 $ 18,420 $ 18,420 $ 18,420
Long-term debt due to related
parties 260,100 133,616 126,484 - -
Operating lease obligations 142,630 50,340 50,340 41,950 -
-----------------------------------------------
Total $ 476,410 $202,376 $195,244 $ 60,370 $ 18,420
========== ===================================
Long-term debt consists of two installment notes with GMAC Finance for the
purchase of two trucks one in the original amount of $45,761 and the other in
the original amount of $46,860. Both notes are at zero percent interest. The
installment payments continue at the same amounts until the notes are satisfied
in full in 2009. The total of the installment payments for both notes will be
$92,621.
Long-term debt due related parties consists of two loans from related parties
consisting of two promissory notes due to related parties payable interest only,
with one note being due and payable in full in December of 2005 and one note
being due and payable in full in January 2006. See Item 12, Certain
Relationships and Related Transactions contained elsewhere herein.
Operating lease obligations consists of one lease for our corporate offices. The
lease terminates November 30, 2007. See Item 12, Certain Relationships and
Related Transactions contained elsewhere herein.
The following table depicts certain budgeted expenses for the periods reflected
that, in addition to the firm contractual commitments set forth in the table
immediately above, we feel must be expended to insure our viability.
TOTAL BUDGETED EXPENSES:
BUDGETED
EXPENSES 2005 2006 2007 2008
---------- -------- ------- ------- --------
Sales and Marketing $22,434,746 $ 777,679 $ 3,225,540 $ 6,269,227 $12,162,300
Engineering and
Production 3,336,055 199,636 519,383 934,756 1,682,280
Executive 714,108 165,236 174,022 182,809 192,041
Administrative 1,306,812 248,573 329,908 352,242 376,089
------------ ---------- ---------- ----------------------
Total $27,791,721$1,391,124 $ 4,248,853 $ 7,739,034 $14,412,710
=========================================================
We believe, but cannot guarantee, that sales of our products will generate
sufficient cash flow to meet our firm contractual commitments and our budgeted
expenses. If cash flow from sales is insufficient, we will be required to raise
money through financing activities including loans from related parties and
sales of common stock. We cannot guarantee that we will be able to obtain loans
or sell stock in sufficient amounts to meet our firm contractual commitments and
our budgeted expenses.
Critical Accounting Policy And Estimates
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations section discusses our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including those related
to revenue recognition, accrued expenses, financing operations, and
contingencies and litigation. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The most significant
accounting estimates inherent in the preparation of our financial statements
include estimates as to the appropriate carrying value of certain assets and
liabilities which are not readily apparent from other sources. These accounting
policies are described at relevant sections in this discussion and analysis and
in the notes to the consolidated financial statements included in this Annual
Report.
Looking Forward.
Water Machine
For the reasons set forth in Part 1, Item 1 above, we are not currently engaged
in the business of manufacturing and selling the Water Machine. When and if we
become engaged in this business, we believe that the Water Machines can be
manufactured at a cost that will allow their sale to be competitive with bottled
water products. Because we are not currently engaged in this business, we cannot
predict the impact of this product on our results of operation and financial
condition going forward.
Our Truck Side Mounting Systems, Advertising and Digital Printing Business
Our emphasis in the coming months is to increase our dealer network. We are
actively pursuing the securing more qualified dealers. We believe that securing
a larger dealer base will result in additional sales. There can be no guarantee
that we will be successfully in securing additional dealers and if we do secure
additional dealers that they will increase sales.
In addition to securing additional dealers, we are working to improve our truck
side mounting systems to reduce their cost and improve their quality. We have an
in-house engineer working on this project.
There can be no guarantee that we will continue to be profitable or that our
revenue or net income will increase sufficiently to support expansion. Unless
and until our marketing activities succeed and we sell our products on a
wide-scale commercial basis, we may not have enough revenue to cover our
operating expenses and may incur losses. We do not expect to generate
significant revenue until such time, if ever, that sales increase substantially
from their present levels. Accordingly, we cannot assure anyone that we will
generate sufficient revenue to profitably operate in the future.
Our operations have consumed and will continue to consume substantial amounts of
capital, which, up until now, have been largely financed from loans from related
parties and sales of stock to private investors. We expect capital and operating
expenditures to increase. Although we believe that we will be able to attract
additional capital through private investors and as a result thereof our cash
reserves and cash flows from operations will be adequate to fund our operations
through the end of calendar year 2006, there can be no assurance that such
sources will, in fact, be adequate or that additional funds will not be required
either during or after such period. No assurance can be given that any
additional financing will be available or that, if available, it will be
available on terms favorable to us. If adequate funds are not available to
satisfy either short or long-term capital requirements, we may be required to
limit our operations significantly or discontinue our operations. Our capital
requirements are dependent upon many factors including, but not limited to, the
rate at which we develop and introduce our products and services, the market
acceptance and competitive position of such products and services, the level of
promotion and advertising required to market such products and services and
attain a competitive position in the marketplace, and the response of
competitors to our products and services.
We believe that we have assembled an experienced team of senior management. We
believe that it is an essential part of our strategy to continue to aggressively
strengthen the breadth, depth and industry expertise of our executive team. Our
growth depends to a substantial degree on Antonio F. Uccello, III, the Chairman,
President, Chief Executive Officer and Chief Financial Officer as well as other
executive officers and key management personnel. Our loss of the services of any
of these key personnel could have a material adverse effect on our business.
There is currently no "key person" life insurance on the life of any of our
executive officers, and no plans are underway to secure adequate key man
coverage. Our continued growth will also be dependent upon our ability to
attract and retain additional skilled management and sales personnel. We may not
be successful, which could adversely affect our business. Our inability to
retain key personnel or attract new high quality senior management could
materially adversely affect our results of operations.
Our business may be dependent on obtaining patent protection for our mobile sign
mounting systems and on the continued validity of a patent, if obtained. We have
a patent pending on this proprietary technology. However, a patent may never be
issued. There can be no assurance that any steps taken by us to protect its
proprietary technology will be adequate to prevent misappropriation, that any
patent issued to us will not be invalidated, circumvented or challenged, or that
any patent we may obtain will provide a competitive advantage. There can be no
assurance that others will not independently develop a technology superior to
our technology and obtain patents thereon. In such event, we may not be able to
license such technology on reasonable terms, or at all. Although we believe that
our mobile sign mounting system does not infringe upon proprietary rights of
others, there can be no assurance that third parties will not assert
infringement claims in the future. Moreover, litigation might be necessary in
the future to enforce our patent (if obtained), or to defend against claims of
infringement or invalidity. Such litigations, regardless of outcome, could
result in substantial cost and diversion of resources, and could have a material
adverse effect on our business, financial condition and results of operations.
We have not received any notifications from either the United States Patent and
Trademark Office or any third party making any such claims, nor do we have
knowledge of any technology that is substantially similar to its technology that
could lead to such a claim.
Because our technology is attached to vehicles that travel throughout populated
areas, it is possible that faults in the mounting system or in the installation
thereof could cause accidents or injuries to others or their property. If this
were to occur, we could be held liable for damages, including punitive damages
that could materially adversely affect our business. We carry products liability
insurance in the amount of $2,000,000 per incident in order to protect against
such occurrences. In addition, where we have certified installers of our
products, such installers will have entered into contracts with us to indemnify
us for the installers' faulty installations. However, there can be no guarantee
that either the insurance or indemnification would be sufficient to shield us
from large damage claims that could adversely affect our business.
Federal regulations exist that govern outdoor billboard advertising along the
nation's roadways affecting the size, placement and other aspects of such
advertising. Currently, however, regulations have not specifically targeted
mobile vehicle advertising. There can be no guarantee that new regulations will
not be promulgated that affect our business. In addition, certain current
regulations restrict the advertising of alcohol and tobacco products. We do not
anticipate that these regulations will affect our business, as we do not focus
on these types of advertisers, nor do we currently intend to do so in the
future.
We offer several warranties on our products, for five years, covering the
functionality of the mounting systems and the ultraviolet protection of the
graphics where we do the printing of the graphics. There can be no guarantee
that we will be able to afford to process all of the warranted maintenance if
more legitimate repairs are requested than we have forecasted.
We have begun training outside parties to become certified installers of our
products. We anticipate that having more installers will make repairs and
change-outs of graphics convenient and cost effective for our customers.
However, we may not be able to train enough installers to handle the potential
demand for our products. This would result in delays in service, which could
affect customer satisfaction and adversely affect our business. Currently, we
believe that we have sufficient numbers of trained installers to handle the
potential demand and expect to be able to continue to train additional
installers to keep pace with the anticipated growth of our business. However,
there can be no guarantee that this will occur
Once we train outside independent installers to install our products, we will
not be supervising each of them on a continuing basis. Although each certified
independent installer is anticipated to be under contract with us to install our
products only according to our specifications, we cannot guarantee that this
level of installation will occur in every case, and it is possible that we may
face liability for the installers' actions if our products injure or damage
other people or their property. We intend to procure indemnification agreements
from our certified independent installers to avoid this potential problem.
ITEM 7. FINANCIAL STATEMENTS
Our financial statements are attached hereto as Exhibit F-1 and are incorporated
in this Item 7 by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). This term refers to the controls and procedures of a company that are
designed to ensure that information required to be disclosed by a company in the
reports that it files under the Exchange Act is recorded, processed, summarized,
and reported within the required time periods. Our Chief Executive Officer and
our Chief Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this annual
report. They have concluded that, as of that date, our disclosure controls and
procedures were effective at ensuring that required information will be
disclosed on a timely basis in our reports filed under the Exchange Act.
(b) Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company's executive officers, directors and key employees and their business
experience follows:
Name and Age Position Term
Antonio F. Uccello, III Chairman/President/Chief Executive January 28, 2002
Age 36 Officer/Chief Financial Officer to present
Andrei A. Troubeev Vice-President-Engineering March 1, 2004
Age 37 to present
Charles A. Pearson, III Vice-President-Sales July 5, 2004
Age 38 to present
Thomas Bachman Director March 11, 2003
Age 57 to present
Stephen R. MacNamara Director/Secretary March 11, 2003
Age 50 to present
Resumes
Antonio F. Uccello, III
Mr. Uccello is the founder, President, Chief Executive Officer, Chairman of the
Board of Directors and the Chief Financial Officer of the Company. Mr. Uccello
attended college at the University of Connecticut and took graduate courses at
Hunter College in New York City. Mr. Uccello has been in the securities industry
for the last 13 years. Mr. Uccello holds a Series 65, Registered Investment
Advisor license from the National Association of Securities Dealers. From June,
1996, to February, 2001, Mr. Uccello was a branch manager for Brookstreet
Securities. Brookstreet Securities is a registered broker-dealer. Mr. Uccello
left Brookstreet Securities in February, 2001, to establish Chelsea Capital
Management, LLC where he acts a registered investment advisor. Both Chelsea and
Mr. Uccello are registered as investment advisors with The State of Florida,
Department of Banking and Finance and the State of Connecticut Department of
Banking, Division of Securities and Business Investments. Mr. Uccello is the
owner of 99% of the membership interests and the sole manager of Chelsea and as
such is the sole owner and sole control person of Chelsea. Mr. Uccello is a
minority member and the manager of Hawkeye Real Estate, LLC and is the President
of and a minority shareholder in Olympus Leasing Company, both of which are
related parties to us. Hawkeye Real Estate is a real estate developer and
Olympus Leasing is engage in the business of making commercial loans. Mr.
Uccello will devote 80% of his time to us. Mr. Uccello has extensive experience
in finance and is responsible for the over all profitability of the Company.
Andrei A. Troubeev
Mr. Troubeev is the Vice-President, Engineering for the Company. Mr. Troubeev
earned his Bachelor of Science, Mechanical Engineering, from Belarus
Agricultural and Mechanical University in 1997. Mr. Troubeev has experience in
developing new designs, support of production and assembly teams, recommending
changes to improve product designs and production efficiency, and the
development and testing of new product designs. Mr. Troubeev was Distribution
Director for DELO Magazine a monthly business journal published in English,
Russian and German from Belarus from February, 1993 to July, 1999, and was
Production Engineer from Trailmate, Inc. in Sarasota, Florida from July, 1999 to
March, 2004. Trailmate, Inc. is in the business of manufacturing commercial
edgers and mowers and adult and industrial tricycles. Mr. Troubeev participated
in the development of new designs, support of production and assembly teams and
recommendations of changes to improve product designs and production efficiency
for Trailmate.
Charles A. Pearson, III
Mr. Pearson is the Vice-President, Sales and Marketing for the Company. Mr.
Pearson earned a Bachelor of Science, Industrial Technology & Technical Sales,
from East Carolina University at Greenville, NC in 1991 and his Masters of
Business Administration, International Business, from Florida Metropolitan
University at Tampa, Florida in 2002. From October, 1995 to February, 1999, Mr.
Pearson was employed by Pinnacle Broadcasting Co., Inc., first as an Account
Executive for WRNS 95 1 FM, a radio station in Kinston, NC, then Sales Manager
and finally General Manager of WREO 93.3 FM/WDLAX AM, a radio station in
Washington, NC. From February, 1999 to August, 2000, Mr. Pearson was the Sales
Manager for Tropic Petroleum Co., Inc. of Tampa, Florida. Tropic Petroleum is in
the business of petroleum equipment sales. From August, 2000 to December, 2001,
Mr. Pearson was an Account Executive for Freedom Sales & Marketing of Tampa,
Florida. Freedom Sales & Marketing is in the business of electronic component
sales. From December, 2001 to July, 2004, Mr. Pearson was Sales Manager for
Gasoline Equipment Marketers of Tampa, Florida. Gasoline Equipment Marketers is
in the business petroleum equipment sales.
Thomas Bachman
Mr. Bachman is a Director of the Company. Mr. Bachmann has been the Executive
Publisher and Director of Industry Development of Beverage Industry Magazine,
the leading trade publication for the beverage industry since 1994. Prior to
becoming Executive Publisher and Director of Industry Development of Beverage
Industry Magazine in 1994, Mr. Bachmann was the National Sales Manager and
Associate Publisher of Beverage Industry Magazine from 1976 to 1981. From 1982
to 1992 Mr. Bachmann was Publisher of Diary Field, Today's Catholic Teacher and
Early Childhood News. Mr. Bachmann ran his own consulting firm, Bachmann and
Associates from 1992 to 1994. Mr. Bachmann is a member of the National Soft
Drink Association, the Canadian Soft Drink Association, and the International
Bottled Water Association. Mr. Bachmann will bring an industry wide perspective
to the Company.
Stephen R. MacNamara
Mr. MacNamara is a Director and the Secretary of the Company. Mr. MacNamara
holds a Bachelor of Science, Journalism, from the University of Florida and a
Juris Doctor from Florida State University. Mr. MacNamara has been an Associate
Professor, Department of Communication at Florida State University since 1994.
Mr. MacNamara has been the President of The Florida Association of Health Plans
since 2000. Mr. MacNamara served as Chief of Staff, Florida House of
Representatives from July 1999, to May 2000, the Professor-in-Residence, Florida
House of Representatives from January 1999, to May 2000, Visiting Associate,
Department of Communications at Florida State University from 1993, to 1994,
Director of The Collins Center for Public Policy from 1990 to 1992, and
Secretary, Florida Department of Business regulation from 1989, to 1990. Mr.
MacNamara is Associate Vice President for Academic Affairs at Florida State
University. Mr. MacNamara has extensive experience in governmental affairs.
Family Relationships
There are no current family relationships among the Company's officers and
directors. Prior to February 6, 2004 Abraham Uccello was our President and Chief
Executive Officer and Salvatore Uccello was our Vice President of Engineering.
Antonio F. Uccello, the current President and Chief Executive Officer and
Abraham Uccello are brothers and Salvatore Uccello is their father. Abraham
Uccello and Salvatore Uccello resigned on February 2, 2004.
Employment Agreements
There are no employment agreements between us and our executive officers and key
personnel.
Code of Ethics
We have adopted a code of ethics which is a document of conduct we establish for
ourselves to help us and our employees comply with laws and good ethical
practices.
ITEM 10. EXECUTIVE COMPENSATION
Set forth below are the annual cash compensation and restricted stock grants
paid to the Company's executive officers for the period January 28, 2003
(Inception) to December 31, 2003.
Summary Compensation Table
Long Term
Annual Compensation Compensation
------------------------- ------------
Other
Annual
Name and Compen- Stock All Other
Principal Position Year Salary $ Bonus $ sation $ Grants # Compensation(1)
Antonio F. Uccello, III
Chief Financial
Officer 2004 125,000 0 0 0 9,911
Andrei A. Troubeeg
Vice President,
Engineering 2004 40,000 0 0 9,607
Charles A. Pearson, III
Vice President
Sales and Marketing 2004 40,000 0 0 0 2,706
(1) All Other Compensation consists solely of health insurance.
None of the directors has been paid any fees for acting as such and we do not
anticipate paying any directors' fees in the foreseeable future.
Other than as set forth in the foregoing table, with footnotes, there is no
other plan, contract, authorization or arrangement, whether or not set forth in
any formal documents, pursuant to which the following may be received by any or
our officers or directors: cash, stock, restricted stock or restricted stock
units, phantom stock, stock options, stock appreciation rights ("SARs"), stock
options in tandem with SARs, warrants, convertible securities, performance units
and performance shares, and similar instruments.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following tables set forth the security ownership as of April 15, 2005 by:
(i) each person (or group of affiliated persons) who, to our knowledge, is the
beneficial owner of five percent or more of our outstanding common stock, (ii)
each named director and each named executive officer who, to out knowledge, is
the beneficial owner of our outstanding common stock, and each of the foregoing
as a group.
SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS
Name and Address Amount and Nature Percent of
Title of Class Of Beneficial Owner Of Beneficial Owner Class
Antonio F. Uccello, III(1)
Common Stock, No 2100 19th Street
Par Value Sarasota, FL 34234 4,059,600(1) 49%(1)
Abraham Uccello(1)
Common Stock, No 637 Mecca Dr.
Par Value Sarasota, FL 34234 2,388,000(1) 29%(1)
Salvatore Uccello(1)
Common Stock, No 6527 Waterford Circle
Par Value Sarasota, FL 34238 716,400(1) 9%(1)
Roger P. Nelson(1)
Common Stock, No 14 Giovanni Drive
Par Value Waterford, CT 06385 796,000 10%(1)
Totals for Class as a
Whole 7,960,000(1) 97%
(1) Pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of
1934, as amended, beneficial ownership of a security consists of sole or shared
voting power (including the power to vote or direct the voting) and/or sole or
shared investment power (including the power to dispose or direct the
disposition) with respect to a security whether through a contract, arrangement,
understanding, relationship or otherwise. All of the shares described in the
foregoing table are owned by GO! Agency, LLC, a Florida limited liability
company whose address is 4744 Spinnaker Drive Bradenton, FL 34208. The
individuals listed are the members of GO! Agency and the shares of common stock
reflected for each person in the foregoing table reflect each such person's
percentage ownership of GO! Agency. Antonio F. Uccello, III, is the manager and
the 51% owner of GO! Agency and, therefore, pursuant the terms of GO! Agency's
Operating Agreement, has the sole power, subject to his fiduciary duties to the
other GO! Agency members, to vote, or dispose of or direct the disposition of
all the shares of Sign Media System, Inc.'s common stock beneficially owned by
GO! Agency. Antonio F. Uccello, III, has absolute control of us by virtue of his
voting control of 7,960,000 shares of our common stock.
SECURITY OWNERSHIP
OF MANAGEMENT
(1) (2) (3) (4)
Name and Address Amount and Nature Percent of
Title of Class Of Beneficial Owner Of Beneficial Owner Class
Antonio F. Uccello, III(1)
Common Stock, No 2100 19th Street
Par Value Sarasota, FL 34234 4,059,600(1) 49.24%(1)
Stephen R. MacNamara(2)
Common Stock, No 1071 Meyers Park Drive
Par Value Tallahassee, FL 32301 30,000 .364%
Thomas Bachman(3)
Common Stock, No 2960 S. McCall Road, Ste 210
Par Value Inglewood, FL 34224 - -
Andrei A. Troubeev(4)
Common Stock, No 7736 37th Court E.
Par Value Sarasota, FL - -
Charles A. Pearson, III(5)
6138 Turnbury Park Dr.
Common Stock, No Apt. 6301 - -
Par Value Sarasota, FL 34234
Totals for Class as a
Whole 4,089,600 49.60%
(1) Antonio F. Uccello, III is our Chairman, President, Chief Executive Officer,
and Chief Financial Officer. Antonio F. Uccello, III is the 51% owner and
manager of GO! Agency, LLC, a Florida limited liability company. GO! Agency owns
7,960,000 shares of the common stock of Sign Media Systems, Inc. which
represents 94% of the total of the issued and outstanding shares of common
stock. Antonio F. Uccello, III, as the manager and the 51% owner of GO! Agency,
pursuant the terms of GO! Agency's Operating Agreement, has the sole power,
subject to his fiduciary duties to the other GO! Agency members, to vote, or
dispose of or direct the disposition of all the shares of Sign Media System,
Inc.'s common stock beneficially owned by GO! Agency. Antonio F. Uccello, III,
has absolute control of us by virtue of his voting control of 7,960,000 shares
of our common stock.
(2) Stephen R. MacNamara is our Secretary and is also a Director.
(3) Thomas Bachman is a Director.
(4) Andrei A. Troubeev is our Vice-President of Engineering.
(5) Charles A. Pearson, III is our Vice President of Sales and Marketing.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We were formed as a Florida corporation with the name Sign Media Systems, Inc.
on January 28, 2002, but did not begin business operations until April 2002.
Most of the revenue that we earned was contract work with GO! Agency, LLC, a
Florida limited liability company, a related party. We would contract with GO!
Agency to handle and complete jobs. There was no additional revenue or expense
added from one entity to the other. Throughout 2002, we maintained Due To/From
accounts with GO! Agency to properly reflect the related party transactions. As
of December 31, 2003, we had an outstanding liability in the amount of $4,739
due to GO! Agency and this amount is reflected in our consolidated balance sheet
for the year ended December 31, 2003, as current portion of debt-related
parties.. As of December 31, 2004, we had an outstanding liability in the amount
of $12,878 due to GO! Agency and this amount is reflected in our consolidated
balance sheet for the year ended December 31, 2004, as current portion of
debt-related parties. No payment or repayment terms had been established as of
December 31, 2004. The total revenue derived from GO! Agency for the period
January 28, 2002 (Inception) through December 31, 2002 was $143,775.
In January, 2002, Antonio F. Uccello, III, who is considered one of our
promoters, and is a related party, contributed $5,000 to us as our initial
paid-in capital in exchange for 1,000 shares of our common stock. Subsequently,
in January 2003, Antonio F. Uccello, III, transferred his 1,000 shares of our
common stock to GO! AGENCY, LLC.
On September 24, 2002, we entered into a Loan Agreement with GO! AGENCY, LLC, a
related party, and in connection therewith executed a Promissory Note with a
future advance clause (1) in favor of GO! Agency whereby GO! Agency agreed to
loan us up to a maximum of $100,000 for a period of three years, with interest
accruing on the unpaid balance at 18% per annum, payable interest only monthly,
with the entire unpaid balance due and payable in full on September 15, 2005. At
September 24, 2002, Antonio F. Uccello, III, was our sole shareholder, one of
our officers and directors and was the owner of 51% of the economic interest of
GO! Agency. GO! Agency is the owner of 94% of the issued and outstanding shares
of our stock. At December 31, 2004, GO! Agency had loaned us a total of $96,883
pursuant to the Loan Agreement and the Promissory Note and we were indebted to
GO! Agency in such amount as of that date and that amount is reflected in our
consolidated balance sheet for the year ended December 31, 2004, as current
portion of debt-related parties.
On November 1, 2002, we entered into a lease as the lessee with Hawkeye Real
Estate, LLC, a Florida limited liability company, as lessor for 6,300 square
feet of mixed office and warehouse space at 2100 19th Street, Sarasota, FL 34234
for a period of five years beginning December 1, 2002 and continuing until
November 30, 2007 for a fixed monthly rental of $2,500 per month. Effective
January 1, 2005 we amended the lease to obtain access to additional parking for
our vehicles, employee vehicles and customer vehicles. The amended lease now
provides for a fixed monthly rental of $4,195 per month. Antonio F. Uccello,
III, is the manager and a member of Hawkeye Real Estate, LLC and is one of our
officers and directors and an indirect shareholder of Sign Media Systems, Inc.
We believe that we are paying fair market value for the rent on this property.
Hawkeye Real Estate is a real estate developer.
Effective January 1, 2003, GO! AGENCY, LLC, which is considered one of our
promoters, and is a related party, transferred all of its assets which together
had an original cost basis of $300,000, to us in exchange for us issuing it
7,959,000 shares of our common stock. We valued the assets at $55,702 which was
their historical cost. Please refer to Note 1 of our consolidated financial
statements for the years ended December 31, 2003 and 2002 contained elsewhere in
this report. GO! AGENCY, LLC is controlled by Antonio F. Uccello, III which
means Mr. Uccello has absolute control of us by virtue of his voting control of
7,960,000 of our shares of common stock.
On January 3, 2003, we entered into a Loan Agreement with Olympus Leasing
Company, a related party, and in connection therewith executed a Promissory Note
with a future advance clause (1) in favor of Olympus Leasing, whereby Olympus
Leasing agreed to loan us up to a maximum of $1,000,000 for a period of three
years, with interest accruing on the unpaid balance at 18% per annum, payable
interest only monthly, with the entire unpaid balance due and payable in full on
January 3, 2006. At December 31, 2003, Olympus Leasing had loaned us a total of
$350,521 pursuant to the Loan Agreement and the Promissory Note and we were
indebted to Olympus Leasing in such amount as of that date. At December 31, 2004
we were indebted to Olympus Leasing in the amount of $107,190 and that amount is
reflected in our consolidated balance sheet for the year ended December 31,
2004, as long-term debt-related parties. At January 3, 2003, Antonio F. Uccello,
III, was, and is today, the President, Chairman and owner of 45% of the issued
and outstanding shares of stock of Olympus Leasing. Antonio F. Uccello, III, and
was and is one of our officers and directors and an indirect shareholder of Sign
Media Systems, Inc. Olympus Leasing is engaged in the business of providing
commercial financing. Olympus Leasing has outstanding financing agreements with
numerous other unrelated parties.
(1) A future advance clause as used herein is a provision in a promissory note
that allows for an additional advance of funds by the lender to the borrower and
for future advances of funds by the lender to the borrower up to the maximum
amount stated in the promissory note all of which advances of funds are subject
to the terms and conditions of the promissory note.
ITEM 13. EXHIBITS
Exhibit
Number Description of Exhibit
F-1 Consolidated Financial Statements for the years ended December 31,
2004 and 2003.
3.1 Amended Articles of Incorporation of Sign Media Systems,
Inc. Incorporated by reference from our Form 10-SB filed as of
May 4, 2004.
3.2 By-Laws of Sign Media Systems, Inc. Incorporated by reference
from our Form 10-SB filed as of May 4, 2004.
4.1 Specimen Certificate of the Common Stock of Sign Media Systems,
Inc. Incorporated by reference from our Form 10-SB filed as of May
4, 2004.
10.1 Agreement and Plan of Merger Among American Powerhouse, Inc.,
Sign Media Systems Acquisition Company, Inc. and Sign Media
Systems, Inc. Incorporated by reference from our Form 10-SB/A
Third Amendment filed as of February 9, 2005.
10.2 Distribution Agreement between Sign Media Systems, Inc. and
Applied Advertising Network, LLC. Incorporated by reference from
our Form 10-SB/A Third Amendment filed as of February 9, 2005.
10.3 Promissory Note and Loan Agreement between GO! AGENCY, LLC and
Sign Media Systems, Inc. Incorporated by reference from our Form
10-SB/A Third Amendment filed as of February 9, 2005.
10.4 Promissory Note and Loan Agreement between Olympus Leasing
Company and Sign Media Systems, Inc. Incorporated by reference
from our Form 10-SB/A Third Amendment filed as of February 9,
2005.
10.5 License Agreement for the acquisition of technology. Incorporated
by reference from our Form 10-SB/A Fourth amendment filed as of
April 1, 2005.
10.6 Contribution Agreement. Incorporated by reference from our
Form 10-SB/A Fourth amendment filed as of April 1, 2005.
14.1 Code of Ethics. Incorporated by reference from our Form 10-SB
filed as of May 4, 2004.
16.3 Letter on change in certifying accountant. Incorporated by
reference from our Form 10-SB/A Fourth amendment filed as of April
1, 2005.
21. Our Subsidiaries. Incorporated by reference from our Form
10-SB filed as of May 4, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees billed by our independent auditors, Bagell Josephs & Company,
LLC, for the years ended December 31, 2004 and 2003, are as follows:
2004 2003
----------------- -----------------
Audit Fees $ 23,000 $ 7,000
Audit Related Fees $ -0- $ -0-
Tax Fees $ -0- $ -0-
All Other Fees $ -0- $ -0-
SIGNATURES
In accordance with the requirements Section 15 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIGN MEDIA SYSTEMS, INC.
(Registrant)
/s/ Antonio F. Uccello, III
Antonio F. Uccello, III
Chief Executive Officer, President, Chief Financial Officer,
Chairman of the Board of Directors
June 2, 2005
/s/ Thomas Bachman
Thomas Bachman
Director
June 2, 2005
/s/ Stephen R. MacNamara
Stephen R. MacNamara
Director
June 2, 2005
EXHIBIT F-1
SIGN MEDIA SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
SIGN MEDIA SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE(S)
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2004 and 2003 F-3
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the Years Ended December 31, 2004 and 2003 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004 and 2003 F-5
Notes to Consolidated Financial Statements F-6-23
BAGELL, JOSEPHS & COMPANY, L.L.C.
Certified Public Accountants
High Ridge Commons
Suites 400-403
200 Haddonfield Berlin Road
Gibbsboro, New Jersey 08026
(856) 346-2828 Fax (856) 346-2882
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of
Sign Media Systems, Inc.
Sarasota, FL
We have audited the accompanying consolidated balance sheets of Sign Media
Systems, Inc. (the "Company") as of December 31, 2004 and 2003 and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the years then ended. These consolidated financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sign Media Systems,
Inc. as of December 31, 2004 and 2003 and the results of its operations, changes
in stockholders' equity (deficit), and cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
BAGELL, JOSEPHS & COMPANY, LLC
/s/ BAGELL, JOSEPHS & COMPANY, LLC
Certified Public Accountants
Gibbsboro, New Jersey
March 11, 2005
MEMBER OF: AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
NEW JERSEY SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
PENNSYLVANIA INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
NEW YORK STATE SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
F-1
SIGN MEDIA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
ASSETS
2004 2003
-------------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 6,352 $ 47,068
Accounts receivable, net 550,578 571,898
Inventory 85,572 38,391
Prepaid expenses and other assets 4,000 55,144
-------------- --------------
Total current assets 646,502 712,501
PROPERTY AND EQUIPMENT - Net 124,555 103,054
-------------- --------------
TOTAL ASSETS $ 771,057 $ 815,555
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current portion of long-term debt $ 18,420 $ 18,420
Accounts payable and accrued expenses 169,989 152,960
Current portion of debt - related parties 109,761 4,739
Liability for stock to be issued 200,000 324,000
-------------- -------------
Total current liabilties 498,170 500,119
LONG-TERM DEBT - Net of Current Portion 51,184 69,604
LONG-TERM DEBT - RELATED PARTIES - Net of
Current Portion 107,190 447,404
-------------- -------------
TOTAL LIABILTIES 656,544 1,017,127
-------------- --------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value, 100,000,000
shares authorized at December 31, 2004
and 2003 8,460,000 and 8,244,000 issued
and outstanding at December 31, 2004 and 2003 5,000 5,000
Additional paid-in capital 795,139 471,139
Accumulated deficit (685,626) (677,711)
--------------- --------------
Total stockholders' equity (deficit) 114,513 (201,572)
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 771,057 $ 815,555
=============== ==============
The accompanying notes are an integral part of the
consolidated financial statements.
F-1
SIGN MEDIA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------- -------------
REVENUE
Mounting systems - sale and installation $ 776,766 $ 699,612
Printing 1,846 74,737
Advertising 83,350 -
------------ -----------
TOTAL REVENUE 861,962 774,349
COST OF GOODS SOLD
Mounting systems - sale and installation 159,448 103,855
Printing - 34,768
Advertising 27,000 -
------------- ------------
TOTAL COSTS OF GOODS SOLD 186,448 138,623
------------- ------------
OPERATING EXPENSES
Professional fees and administrative payroll 233,664 389,540
General and administrative expenses 325,872 256,225
Impairment - 450,000
Depreciation 41,640 17,769
------------- ------------
Total operating expenses 601,176 1,113,534
------------- -----------
NET INCOME (LOSS) BEFORE OTHER (EXPENSE) 74,338 (477,808)
OTHER (EXPENSE)
Intereset expense (82,253) (76,464)
------------- ------------
Total Other (Expense) (82,253) (76,464)
------------- ------------
NET LOSS BEFORE PROVISION FOR INCOME TAXES (7,915) (554,272)
Provision for income taxes - -
------------- ------------
NET LOSS APPLICABLE TO COMMON SHARES $ (7,915) $ (554,272)
============= ============
NET LOSS PER BASIC AND DILUTED SHARES $ (0.00) $ (0.07)
============ =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 8,406,000 8,031,000
=========== =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
SIGN MEDIA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
------ -------- -------- ---------- --------
Balance, December 31, 2002 1,000 $ 5,000 $ - $ (123,439) $ (118,439)
Contributed Capital, Officer - - 29,937 - 29,937
Issunace of shares in
exchange for net assets
of Go Agency 7,959,000 - 55,702 - 55,702
Issuance of common stock
in exchange for cash 134,000 - 160,500 - 160,500
Issuance of common stock
in connection with the
merger of SMA 100,000 - 150,000 - 150,000
Issuance of common stock
in exchange for services 50,000 - 75,000 - 75,000
Net (loss) for the year - - - (554,272) (554,272)
------------------------------------------------------
Balance, December 31,
2003 8,244,000 # 5,000 $ 471,139 $ (677,711) (201,572)
Issuance of common stock
in connection with the
merger of SMA 200,000 - 300,000 - 300,000
Issuance of common stock
in exchange for cash 16,000 - 24,000 - 24,000
Net (loss) for the year - - - (7,915) (7,915)
-------------------------------------------------------
Balance, December 31,
2004 8,460,000 $ 5,000 $ 795,139 $ (685,626) $ 114,513
========================================================
SIGN MEDIA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
-----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (7,915) $ (554,272)
----------------------------
Adjustments to reconcile net (loss)
to net cash provided by (used in) operating activities:
Depreciation 41,640 17,769
Impairment - 150,000
Common stock issued for services - 75,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 21,320 (570,603)
(Increase) in inventory (47,181) (30,126)
(Increase) decrease in prepaid expenses
and other current assets 51,144 (55,144)
Increase in accounts payable and accrued expenses 17,029 112,778
Net assets received in exchange for stock - 55,702
Increase in liability for stock to be issued - 324,000
---------------------------
Total adjustments 83,952 79,376
---------------------------
Net cash provided by (used in) operating activitie 76,037 (474,896)
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (63,141) (90,886)
----------------------------
Net cash (used in) investing activities (63,141) (90,886)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt, net of payments (18,420) 88,024
Net proceeds from debt - related parties (235,192) 359,188
Common stock issuance 200,000 160,500
----------------------------
Net cash provided by (used in) financing activities (53,612) 607,712
----------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (40,716) 41,930
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 47,068 5,138
----------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 6,352 $ 47,068
============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 82,253 $ 110,081
============================
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Furniture and fixtures contributed by
officer/stockholder $ - $ 29,937
============================
Common stock issued for goodwill $ - $ 150,000
============================
Common stock issued for services $ - $ 75,000
============================
The accompanying notes are
an integral part of the consolidated financial statements.
5
SIGN MEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION
The Company was incorporated on January 28, 2002 as a Florida
corporation. Upon incorporation, an officer of the Company
contributed $5,000 and received 1,000 shares of common stock
of the Company. Effective January 1, 2003, the Company issued
7,959,000 shares of common stock in exchange of $55,702 of net
assets of Go! Agency, LLC, a Florida limited liability company
("Go Agency"), a company formed on June 20, 2000, as E Signs
Plus.com, LLC., a Florida limited liability company. In this
exchange, the Company assumed some debt of Go Agency and the
exchange qualified as a tax free exchange under IRC Section
351. The net assets received were valued at historical cost.
The net assets of Go Agency that were exchanged for the shares
of stock were as follows:
Accounts receivable $30,668
Fixed assets, net of depreciation 112,214
Other assets 85,264
Accounts payable (29,242)
Notes payable (27,338)
Other payables (115,864)
---------
Total $55,702
=======
Go Agency was formed to pursue third party truck side
advertising. The principal of Go Agency invested approximately
$857,000 in Go Agency pursuing this business. It became
apparent that a more advanced truck side mounting system would
be required and that third party truck side advertising alone
would not sustain an ongoing profitable business. Go Agency
determined to develop a technologically advanced mounting
system and focused on a different business plan. Go Agency
pre-exchange transaction was a company under common control of
the major shareholder of SMS. Post-exchange transactions have
not differed. Go Agency still continues to operate and is
still under common control.
Go Agency and the Company developed a new and unique truck
side mounting system which utilizes a proprietary cam lever
technology which allows an advertising image to be stretched
tight as a drum. Following the exchange, the Company had
7,960,000 shares of common stock issued and outstanding. The
Company has developed and filed an application for a patent on
its mounting systems. The cam lever technology is considered
an intangible asset and has not been recorded as an asset on
the Company's consolidated balance sheet. This asset was not
recorded due to the fact that there was no historic recorded
value on the books of Go Agency for this asset.
F-6
SIGN MEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
On November 17, 2003, the Company entered into a merger
agreement by and among American Power House, Inc., a Delaware
corporation and its wholly owned subsidiary, Sign Media
Systems Acquisition Company, Inc., a Florida corporation and
Sign Media Systems, Inc. Pursuant to the merger agreement,
Sign Media Systems merged with Sign Media Systems Acquisition
Company with Sign Media Systems being the surviving
corporation. The merger was completed on December 8, 2003 with
the filing of Articles of Merger with the State of Florida at
which time Sign Media Systems Acquisition ceased to exist and
Sign Media Systems became the surviving corporation. American
Powerhouse was not actively engaged in any business at the
time of the merger. However, sometime prior to the merger,
American Power house had acquired certain technology for the
manufacture of a water machine in the form of a water cooler
that manufactures water from ambient air. Prior to the merger,
American Power House granted a license to Sign Media Systems
Acquisition to use that technology and to manufacture and sell
the water machines. The acquisition of this license was the
business purpose of the merger. As consideration for the
merger, Sign Media Systems issued 300,000 shares of its common
stock to American Power House, 100,000 shares in the year
ending December 31, 2002, and 200,000 shares in the year
ending December 31, 2004. The 300,000 shares of stock were
valued at $1.50 per share based on recent private sales of
Sign Media Systems common stock. There were no other material
costs of the merger. There was and is no relationship between
American Powerhouse and either Sign Media Systems or GO!
AGENCY. The Company recorded this license as an intangible
asset for $150,000 for the 100,000 shares of stock issued in
2003 and subsequently impaired the entire amount. The Company
issued the remaining 200,000 shares in 2004, and recorded a
liability for stock to be issued at $300,000. There is a
$450,000 charge against income reflected in the consolidated
statements of operations for the year ended December 31, 2003.
F-7
SIGN MEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosures 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.
Revenue and Cost Recognition
Currently, the Company has three primary sources of revenue:
(1) The sale and installation of their mounting system
(2) The printing of advertising images to be inserted on
trucks utilizing the company's mounting systems.
(3) Third party advertising
The Company's revenue recognition policy for these sources of
revenue are as follows. The Company relies on Staff Accounting
Bulletin Topic 13, in determining when the recognition of
revenue occurs. There are four criteria that the Company must
meet when determining when revenue is realized or realizable
and earned. The Company has persuasive evidence of an
arrangement existing; delivery has occurred or services
rendered; the price is fixed or determinable; and
collectibility is reasonably assured. Typically, the Company
recognizes revenue when orders are placed and they receive
deposits on those orders. In regard to the revenue recognition
of third party advertising, the Company recognizes the revenue
once they have completed the task for which the consumer paid.
In addition, the Company offers manufacturer's warranties.
These warranties are provided by the Company and not sold.
Therefore, no income is derived from the warranty itself.
Cost is recorded on the accrual basis as well, when the
services are incurred rather than when payment is made.
Costs of goods sold are separated by components consistent
with the revenue categories. Monitoring systems, printing and
advertising costs include purchases made, and payroll costs
attributable to those components. Payroll cost is included for
sales, engineering and warehouse personnel in cost of goods
sold. Cost of overhead is diminimus. The Company's inventory
consists of finished goods, and unassembled parts that
comprise the framework for the mounting systems placed on
trucks for their advertising. All of these costs are included
in costs of goods sold for the years ended December 31, 2004
and 2003.
F-8
SIGN MEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Warranties
The Company offers manufacturers warranties that covers all
manufacturer defects. The Company accrues warranty costs based
on historical experience and management's estimates. The
Company has not experienced any losses in the past two years
with respect to the warranties, therefore has not accrued any
liability as of December 31, 2004 and 2003. The following
table represents the Company's losses in the past two years
with respect to warranties.
Balance Charged Balance
at Beginning to Costs and at End of
of Period Expenses Deductions Period
------------ ----------- ----------- --------
Year ended December 31, 2004 $ - $ - $ - $ -
------------ ----------- ----------- --------
Year ended December 31, 2003 $ - $ - $ - $ -
------------ ----------- ----------- --------
Provision for Bad Debt
Under SOP 01-6 "Accounting for Certain Entities (including
Entities with Trade Receivables), the Company has intent and
belief that all amounts in accounts receivable are
collectible. Additionally, the Company has policies for
non-accrual and past due loans including the policy for
charging off uncollectible trade receivables and determining
past due or delinquency status. The Company has determined
that based on their collections that an allowance for doubtful
accounts of $500,000 and $0 needs to be recorded at December
31, 2004 and 2003, respectively.
Bad debt expense for the years ending December 31, 2004 and
2003 was $500,000 and $0, respectively.
F-9
SIGN MEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments and
other short-term investments with an initial maturity of three
months or less to be cash equivalents.
The Company maintains cash and cash equivalent balances at
several financial institutions that are insured by the Federal
Deposit Insurance Corporation up to $100,000.
Property and Equipment
Property and equipment are stated at cost. Depreciation is
computed primarily using the straight-line method over the
estimated useful life of the assets.
Furniture and fixtures 5 years
Equipment 5 years
Trucks 5 years
Advertising
Costs of advertising and marketing are expensed as incurred.
Advertising and marketing costs were $18,200 and $43,469 for
the years ended December 31, 2004 and 2003, respectively.
Inventory
Inventory at December 31, 2004 and 2003 consisted of raw
materials. Included in these raw materials are top rails, side
rails, floating rails, fixed pivot rails, lever rails and
right and left end caps. Inventory is stated at the lower of
cost or market, utilizing the first-in, first out method
"FIFO" to determine which amounts are removed from inventory.
F-10
SIGN MEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
The carrying amount reported in the consolidated balance
sheets for cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value
because of the immediate or short-term maturity of these
financial instruments.
Stock-Based Compensation
Employee stock awards under the Company's compensation plans
are accounted for in accordance with Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued
to Employees", and related interpretations. The Company
provides the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), and related interpretations.
Stock-based awards to non-employees are accounted for under
the provisions of SFAS 123 and has adopted the enhanced
disclosure provisions of SFAS No. 148 "Accounting for
Stock-Based Compensation- Transition and Disclosure, an
amendment of SFAS No. 123".
The Company measures compensation expense for its employee
stock-based compensation using the intrinsic-value method.
Under the intrinsic-value method of accounting for stock-based
compensation, when the exercise price of options granted to
employees is less than the estimated fair value of the
underlying stock on the date of grant, deferred compensation
is recognized and is amortized to compensation expense over
the applicable vesting period. In each of the periods
presented, the vesting period was the period in which the
options were granted. All options were expensed to
compensation in the period granted rather than the exercise
date.
The Company measures compensation expense for its non-employee
stock-based compensation under the Financial Accounting
Standards Board (FASB) Emerging Issues Task Force (EITF) Issue
No. 96-18, "Accounting for Equity Instruments that are Issued
to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services".
F-11
SIGN MEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Based Compensation (Continued)
The fair value of the option issued is used to measure the
transaction, as this is more reliable than the fair value of
the services received. The fair value is measured at the value
of the Company's common stock on the date that the commitment
for performance by the counterparty has been reached or the
counterparty's performance is complete. The fair value of the
equity instrument is charged directly to compensation expense
and additional paid-in capital.
Earnings (Loss) per Share of Common Stock
Historical net earnings (loss) per common share is computed
using the weighted-average number of common shares
outstanding. Diluted earnings per share (EPS) includes
additional dilution from common stock equivalents, such as
stock issuable pursuant to the exercise of stock options and
warrants.
The following is a reconciliation of the computation for basic
and diluted EPS:
2004 2003
---------- ---------
Net (loss) $ (7,915) $ (554,272)
========== ==========
Weighted-average common shares
outstanding
Bassic 8.406.000 8,031,000
Weighted-average common stock
equivalents
Stock options - -
Warrants - -
----------- ---------
Weighted-average common shares
outstanding
Diluted 8,406,000 8,031,000
========= =========
Reclassifications
Certain amounts in the December 31, 2003 financial statements
have been restated to conform with the December 31, 2004
presentation. There has been no effect on the net loss from
operations for the year ended December 31, 2003 on these
reclassifications.
F-12
SIGN MEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Recent Accounting Pronouncements
In September 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards No. 141,
Business Combinations, and No. 142, Goodwill and Other
Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, the pooling of
interests method of accounting for business combinations are
no longer allowed and goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be
amortized over their useful lives. The Company adopted these
new standards effective January 1, 2002.
On October 3, 2001, the FASB issued Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," and portions of Accounting Principles Board Opinion 30,
"Reporting the Results of Operations." This Standard provides
a single accounting model for long-lived assets to be disposed
of and significantly changes the criteria that would have to
be met to classify an asset as held-for-sale. Classification
as held-for-sale is an important distinction since such assets
are not depreciated and are stated at the lower of fair value
and carrying amount. This Standard also requires expected
future operating losses from discontinued operations to be
displayed in the period(s) in which the losses are incurred,
rather than as of the measurement date as presently required.
The Company has applied the provisions of FASB 144, with
respect to the sale of Zingo Sales.
In April 2002, the FASB issued SFAS No. 145, Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. This statement rescinds
SFAS No. 4, Reporting Gains and Lossees from Extinguishment of
Debt, and an amendment of that statement, SFAS No. 44,
Accounting for Intangible Assets of Motor Carriers, and SFAS
No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This statement amends SFAS No. 13, Accounting
for Leases, to eliminate inconsistencies between the required
accounting for sales-leaseback transactions and the required
accounting for certain lease modifications that have economic
effects that are similar to sales-leaseback transactions.
F-13
SIGN MEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Recent Accounting Pronouncements (Continued)
Also, this statement amends other existing authoritative
pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed
conditions. Provisions of SFAS No. 145 related to the
rescissions of SFAS No. 4 were effective for the Company on
November 1, 2002 and provisions affecting SFAS No. 13 were
effective for transactions occurring after May 15, 2002. The
adoption of SFAS No. 145 did not have a significant impact on
the Company's results of operations or financial position.
In June 2003, the FASB issued SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. This
statement covers restructuring type activities beginning with
plans initiated after December 31, 2002. Activities covered by
this standard that are entered into after that date will be
recorded in accordance with provisions of SFAS No. 146. The
adoption of SFAS No. 146 die not have a significant impact on
the Company's results of operations or financial position.
In December 2002, the FASB issued Statement No. 148,
"Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of FASB Statement No. 123" ("SFAS
148"). SFAS 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of
transition for an entity that voluntarily changes to the fair
value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation. Finally,
this Statement amends Accounting Principles Board ("APB")
Opinion No. 28, "Interim Financial Reporting", to require
disclosure about those effects in interim financial
information. SFAS 148 is effective for financial statements
for fiscal years ending after December 15, 2002. The Company
will continue to account for stock-based employee compensation
using the intrinsic value method of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," but has adopted
the enhanced disclosure requirements of SFAS 148.
F-14
SIGN MEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
In April 2003, the FASB issued SFAS Statement No. 149,
"Amendment of Statement 133 on Derivative Instruments and
Hedging Activities", which amends and clarifies financial
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging
activities under FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities. This Statement
is effective for contracts entered into or modified after June
30, 2003, except for certain hedging relationships designated
after June 30, 2003. Most provisions of this Statement should
be applied prospectively. The adoption of this statement did
not have a significant impact on the Company's results of
operations or financial position.
In May 2003, the FASB issued SFAS Statement No. 150,
"Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". This
Statement establishes standards for how an issuer classifies
and measures 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).
This statement 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, except for mandatorily
redeemable financial instruments of nonpublic entities, if
applicable.
It is to be implemented by reporting the cumulative effect of
a change in an accounting principle for financial instruments
created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption.
The adoption of this statement did not have a significant
impact on the Company's results of operations or financial
position.
In November 2002, the FASB issued Interpretation No. 45 ("FIN
45"), Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires a company, at the time it issues a
guarantee, to recognize an initial liability for the fair
value of obligations assumed under the guarantees and
elaborates on existing disclosure requirements related to
guarantees and warranties. The recognition requirements are
effective for guarantees issued or modified after December 31,
2002 for initial recognition and initial measurement
provisions. The adoption of FIN 45 did not have a significant
impact on the Company's results of operations or financial
position.
F-15
SIGN MEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
In January 2003, the FASB issued FASB Interpretation No. 46
("FIN 46"), Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51. FIN 46 requires certain variable
interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or
acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or
annual period beginning after June 15, 2003. The adoption of
FIN 46 did not have a significant impact on the Company'
results of operations or financial position.
NOTE 3- PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December
31, 2004, and 2003:
2004 2003
---------- --------
Equipment $ 71,461 $ 36,228
Furniture and Fixtures 57,882 29,974
Transportation Equipment 54,621 54,621
--------- ---------
183,964 120,823
Less: accumulated depreciation 59,409 17,769
--------- ---------
Net Book Value $ 124,555 $ 103,054
========= =========
Depreciation expense for the years ended December 31, 2004 and
2003 was $41,640 and $17,769, respectively.
F-16
SIGN MEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 4- COMMITMENTS AND CONTINGENCIES
The Company entered into a lease agreement on November 1, 2002
with Hawkeye Real Estate, LLC, a related entity, to lease
warehouse and office space. The lease expires on December 30,
2007, and provides that SMS pay all applicable sales and use
tax, insurance and maintenance. The total minimum rental
commitments at December 31, 2004 under this lease are as
follows:
2005 $ 30,000
2006 30,000
2007 27,500
--------
$ 87,500
========
Rent expense for the years ended December 31, 2004 and 2003
was $56,186 and $33,460, respectively.
NOTE 5- RELATED PARTY TRANSACTIONS
On January 28, 2002, Sign Media Systems, Inc. was formed as
a Florida Corporation but did not begin business operations
until April 2002. Most of the revenue that Sign Media
Systems, Inc. earned was contract work with Go! Agency, LLC.,
a Florida limited liability company, a related party. Sign
Media Systems, Inc. would contract Go! Agency, LLC. to
handle and complete jobs. There was no additional revenue or
expense added from one entity to the other.
Throughout 2002, Sign Media Systems, Inc. and an officer
maintained Due To/From accounts to properly reflect the
related party transactions. As of December 31, 2004 and 2003,
the Company had an outstanding liability in the amount of
$12,878 and $4,739 due to the officer. No payment or repayment
terms have been established.
Interest expense paid to shareholders for the years ended
December 31, 2004 and 2003 was $-0-.
On September 15, 2004, the Company entered into a loan
agreement with Go! Agency, LLC and in connection therewith
executed a promissory note with a future advance clause in
favor of Go! Agency whereby Go! Agency agreed to loan the
Company up to a maximum of $100,000 for a period of three
years, with interest accruing on the unpaid balance at 18% per
annum, payable interest only monthly, with the entire unpaid
balance due and payable in full on September 24, 2005. At
December 31, 2004 and 2003, the Company was indebted to Go!
Agency in the amount of $96,883 and interest expense on this
note was $17,439 for the years ending December 31, 2004 and
2003.
F-17
SIGN MEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 5- RELATED PARTY TRANSACTIONS (CONTINUED)
On January 3, 2003, the Company entered into a loan agreement
with Olympus Leasing Company, a related party, and in
connection therewith executed a promissory note with a future
advance clause in favor of Olympus Leasing, whereby Olympus
Leasing agreed to loan the Company up to a maximum of
$1,000,000 for a period of three years, with interest accruing
on the unpaid balance at 18% per annum, payable interest only
monthly, with the entire unpaid balance due and payable in
full on January 3, 2006. At December 31, 2004 and 2003, the
Company has a total of $350,521 outstanding pursuant to the
loan agreement and the promissory note. Interest expense on
this note was $41,194 and $61,007 for the years ending
December 31, 2004 and 2003, respectively.
NOTE 6- LONG-TERM DEBT
Long-term debt consists of two installment notes with GMAC
Finance. On June 18, 2003, the Company acquired a truck in the
amount of $32,046 financed by GMAC over a period of 5 years.
Monthly payments are $763. The remaining balance on this loan
is $41,164. The loan carries no interest charges. Additionally
on December 4, 2003, the Company entered into another truck
loan in the amount of $46,860. The payments will be for a
period of 5 years at $772 per month. The loan carries no
interest charges. The remaining balance on this loan is
$37,056.
The following represents maturities over the next five years
and in the aggregate:
For the years ending December 31:
2005 $ 18,420
2006 18,420
2007 18,420
2008 13,842
--------
$ 69,102
========
F-18
SIGN MEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 7- PROVISION FOR INCOME TAXES
The net deferred tax assets in the accompanying consolidated
balance sheets include the following components at December
31, 2004 and 2003:
2004 2003
--------- ---------
Deferred tax assets $ 188,740 $ 186,603
Deferred tax valuation allowance (188,740) (186,603)
--------- ---------
Net deferred tax assets $ - $ -
========= =========
Due to the uncertainty of utilizing the approximate $685,626
and $677,711 net operating losses, respectively, and
recognizing the deferred tax assets, an offsetting valuation
allowance has been established.
Effective January 1, 2003, the Company terminated its election
as an S-corporation that occurred on January 28, 2002.
NOTE 8- CONCENTRATION OF CREDIT RISK
A material part of the Company's business was dependent upon
one key customer during the years ended December 31, 2004 and
2003. Sales to this customer were approximately 89% and 81%,
respectively. Approximately 98% of the Company's accounts
receivable at December 31, 2004 and 2003 is due from this one
customer.
NOTE 9- STOCKHOLDERS' DEFICIT
As of December 31, 2004 and 2003, there were 100,000,000
shares of common stock authorized.
As of December 31, 2004 and 2003, there were 8,460,000 and
8,244,000 shares of common stock issued and outstanding,
respectively.
During 2002, the Company issued 1,000 shares of common stock
in exchange for $5,000 in cash.
During 2003 and 2004 the Company had the following stock
transactions:
F-19
SIGN MEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 9- STOCKHOLDERS' DEFICIT (CONTINUED)
The Company exchanged 7,959,000 shares of common stock for
$55,702 in net assets of Go Agency, LLC on January 1, 2003.
The Company issued 134,000 shares of common stock for
$160,500. The Company pursuant to a board resolution was to
issue another 16,000 shares of common stock. This issuance did
not occur until 2004. The Company recorded a $24,000 liability
for stock to be issued in 2003 which was reclassified to
equity upon the issuance of the shares.
The Company issued 50,000 shares of common stock for services
valued at $75,000. The $1.50 per share value was derived at
based on the Company's recent cash sales of their securities.
There were no other valuations or sales of stock other than
the cash sales. This was determined to be the most accurate
reflection of the value at the time the stock was issued for
services.
The Company issued 100,000 shares of common stock but
authorized 300,000 shares to be issued in connection with the
merger of SMA. The Company valued this at $450,000 with
$300,000 reflected as a liability for stock to be issued for
200,000 shares. These shares were issued in 2004.
The Company received $200,000 in cash in 2004 for stock that
has not been issued as of December 31, 2004. The Company has
recorded this as a liability for stock to be issued as of
December 31, 2004.
There were no options and warrants granted during the period
January 28, 2002 (Inception) through December 31, 2002 and the
years ended December 31, 2004 and 2003.
F-20
SIGN MEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 10- PRIOR PERIOD ADJUSTMENTS
During the year ended December 31, 2003, the Company has
recognized $450,000 of organization expense and $71,000 of
professional fees. Accordingly, the accumulated deficit was
restated as follows:
Accumulated Deficit, December 31, 2003, as
previously reported ($101,009)
Prior Period Adjustments (576,702)
---------
Accumulated Deficit, December 31, 2003,
as restated ($677,711)
===========
NOTE 11- RESTATEMENTS EFFECT ON QUARTERLY REPORTS
The Company as discussed in Note 10, recognized prior period
adjustments in 2003 that effected the accumulated deficit and
additional paid in capital on March 31, 2003, June 30, 2003
and September 30, 2003, as well as the net income (loss) and
earnings (loss) per share for the three months ended March 31,
2003, the six and three months ended June 30, 2003, and the
nine and three months ended September 30, 2003. The following
represents the effect of the restatements on those respective
periods:
March 31, 2003
Accumulated Deficit, March 31, 2003, as
previously reported ($231,767)
Prior Period Adjustments ( 55,702)
----------
Accumulated Deficit, March 31, 2003, as restated ($287,469)
===========
Additional Paid in Capital, March 31, 2003, as
previously reported $ 0
Prior Period Adjustments 55,702
----------
Additional Paid in Capital, March 31, 2003,
as restated $ 55,702
==========
Net Loss, Three Months Ended March 31, 2003, as
previously reported ($108,328)
Prior Period Adjustments (55,702)
-----------
Net Loss, Three Months Ended March 31, 2003,
as restated ($ 164,030)
==========
F-21
SIGN MEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 11- RESTATEMENTS EFFECT ON QUARTERLY REPORTS (CONTINUED)
March 31, 2003 (Continued)
Loss per share, as previously reported ($.014)
Loss per share, as restated ($.021)
June 30, 2003
Accumulated Deficit, June 30, 2003, as
previously reported ($303,052)
Prior Period Adjustments ( 55,702)
----------
Accumulated Deficit, June 30, 2003, as restated ($358,754)
===========
Additional Paid in Capital, June 30, 2003, as
previously reported $ 4,500
Prior Period Adjustments 55,702
----------
Additional Paid in Capital, June 30, 2003,
as restated $ 60,202
==========
Net Loss, Six Months Ended June 30, 2003, as
previously reported ($179,613)
Prior Period Adjustments (55,702)
-----------
Net Loss, Six Months Ended June 30, 2003,
as restated ($ 235,315)
==========
Net Loss, Three Months Ended June 30, 2003, as
previously reported ($ 71,285)
Prior Period Adjustments 0
----------
Net Loss, Three Months Ended June 30, 2003,
as restated ($ 71,285)
=========
Loss per share, as previously reported - six months ($.022)
Loss per share, as restated - six months ($.030)
Loss per share, as previously reported - three months ($.009)
Loss per share, as restated - three months ($.009)
F-22
SIGN MEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 11- RESTATEMENTS EFFECT ON QUARTERLY REPORTS (CONTINUED)
September 30, 2003
Accumulated Deficit, September 30, 2003, as
previously reported ($442,299)
Prior Period Adjustments ( 70,702)
----------
Accumulated Deficit, September 30, 2003,
as restated ($513,001)
==========
Additional Paid in Capital, September 30, 2003, as
previously reported $ 4,500
Prior Period Adjustments 70,702
--------
Additional Paid in Capital, September 30, 2003,
as restated $ 75,202
==========
Net Loss, Nine Months Ended September 30, 2003, as
previously reported ($318,860)
Prior Period Adjustments (70,702)
-----------
Net Loss, Nine Months Ended September 30, 2003,
as restated ($ 389,562)
==========
Net Loss, Three Months Ended September 30, 2003, as
previously reported ($139,247)
Prior Period Adjustments (15,000)
----------
Net Loss, Three Months Ended September 30, 2003,
as restated ($154,247)
=========
Loss per share, as previously reported -
nine months ($.040)
Loss per share, as restated - nine months ($.049)
Loss per share, as previously reported -
three months ($.017)
Loss per share, as restated - three months ($.019)
F-23