FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended April 30, 2003
Commission File Number 0-19404
AMERICAN UNITED GLOBAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4359228
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11108 N.E. 106TH PLACE
KIRKLAND, WASHINGTON 98033
(Address of principal executive offices) (Zip code)
Registrant's telephone number: 425-869-7410
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve 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 [ ]
Indicate by check mark whether the registrant is an accelerated Filer (as
defined in Rule 12-b-2 of the Exchange Act).
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practical date.
Title of Class Number of Shares
Common Stock Outstanding
(par value $.01 per share) 1,997,624 as of June 20, 2003
AMERICAN UNITED GLOBAL, INC.
INDEX
HAVE TO FIX PAGINATION Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
April 30, 2003 (unaudited) and July 31, 2002............... 1
Consolidated Statements of Operations
Three Months Ended April 30, 2003
and April 30, 2002 (unaudited)............................. 2
Consolidated Statements of Operations
Nine Months Ended April 30, 2003
and April 30, 2002 (unaudited)............................. 3
Consolidated Statements of Cash Flows
Nine Months Ended April 30, 2003
and April 30, 2002 (unaudited)............................. 4
Notes to the Consolidated Financial
Statements (unaudited)..................................... 5-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 10-13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.......................................... 13
Item 4. Controls and procedures............................ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................. 14
Item 2. Changes in Securities.............................. 14
Item 3. Defaults Upon Senior Securities.................... 14
Item 4. Submission of Matters to a Vote of Security
Security Holders................................... 14
Item 5. Other Information ................................. 14
Item 6. Exhibits and Reports on Form 8-K................... 14
Signatures................................ 15
Certifications............................ 16
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, JULY 31,
2003 2002
---- ----
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 675,000 $ 105,000
Investment in marketable securities, at market value.................. 9,000 20,000
Litigation settlement receivable...................................... - 2,875,000
Notes receivable from New York Medical, Inc........................... 850,000 -
Note receivable from InforMedix....................................... 100,000 -
Note receivable, other................................................ 25,000 -
Prepaid expenses...................................................... 75,000 -
Interest receivable................................................... 7,000 -
----------- -----------
TOTAL CURRENT ASSETS.................................................. 1,741,000 3,000,000
TOTAL ASSETS.......................................................... $ 1,741,000 $ 3,000,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings................................................. $ 1,500,000 $ 1,500,000
Accounts payable...................................................... 17,000 26,000
Accrued liabilities................................................... 1,392,000 1,811,000
Notes payable......................................................... 60,000 250,000
----------- -----------
TOTAL CURRENT LIABILITIES............................................. 2,969,000 3,587,000
Commitments and contingencies
SHAREHOLDERS' DEFICIT:
Preferred stock, 12.5% cumulative, $1.00 per share liquidation value,
$.01 par value; 1,200,000 shares authorized;
none issued and outstanding........................................... - -
Series B-1 preferred stock, convertible at a ratio of 25 for 1 to common,
$3.50 per share liquidation value, $.01 par value; 1,000,000 shares
authorized; 407,094 and 407,843 issued and outstanding............... 4,000 4,000
Common stock, $.01 par value; 40,000,000 shares
authorized; 1,997,624 shares issued and outstanding................... 20,000 20,000
Additional paid-in capital............................................ 51,375,000 51,375,000
Accumulated deficit................................................... (52,477,000) (51,927,000)
Accumulated unrealized loss, net...................................... (70,000) (59,000)
----------- -----------
(1,148,000) (587,000)
Less: cost of treasury shares......................................... 80,000 -
----------- -----------
Total shareholder's deficit........................................... (1,228,000) (587,000)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 1,741,000 $ 3,000,000
=========== ============
See accompanying notes to consolidated financial statements.
1
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
APRIL 30,
2003 2002
---- ----
General and administrative expenses.................... $ 154,000 $ 218,000
--------- ---------
Operating loss......................................... (154,000) (218,000)
Interest expense, net.................................. (26,000) (37,000)
Loss on sale of marketable securities.................. - (398,000)
---------- --------
Loss from operations before equity in
loss of affiliate..................................... (180,000) (653,000)
Equity in loss of affiliate............................ - (259,000)
----------- ------------
Net loss .............................................. $ (180,000) $ (912,000)
============ ============
Basic and diluted loss per share....................... $ (0.09) $ (1.83)
========= ===========
Weighted average number of shares...................... 1,997,624 497,624
========== ==========
See accompanying notes to consolidated financial statements.
2
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
NINE MONTHS ENDED
APRIL 30,
2003 2002
---- ----
General and administrative expenses.................... $ 455,000 $ 610,000
--------- ---------
Operating loss......................................... (455,000) (610,000)
Interest expense, net.................................. (95,000) (107,000)
Loss on sale of marketable securities.................. - (719,000)
Impairment loss........................................ - (175,000)
---------- --------
Loss from operations before equity in
loss of affiliate..................................... (550,000) (1,611,000)
Equity in loss of affiliate............................ - (406,000)
----------- ------------
Net loss .............................................. $ (550,000) $ (2,017,000)
============ ============
Basic and diluted loss per share....................... $ (0.27) $ (4.05)
========= ===========
Weighted average number of shares...................... 1,997,624 497,608
========== ==========
See accompanying notes to consolidated financial statements.
3
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
APRIL 30,
-----------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................ $ (550,000) $ (2,017,000)
Adjustments to reconcile net loss to
net cash used by operating activities
Undistributed loss of affiliate................... - 406,000
Loss on sale of marketable securities............. - 719,000
Impairment loss................................... - 175,000
Changes in assets and liabilities:
Prepaid expenses and other receivables.......... (82,000) (10,000)
Litigation settlement receivable................ 2,875,000 -
Accounts payable and accrued liabilities........ (428,000) 85,000
---------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES....... 1,815,000 (642,000)
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan to Informedix, Inc.............................. (100,000) -
Loan to Spongetech, Inc.............................. (25,000) -
Loans to New York Medical,Inc........................ (850,000) -
Proceeds from sale of marketable securities.......... - 177,000
--------- ---------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES........ (975,000) 177,000
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of note payable.......................... (270,000) -
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES.................. (270,000) -
--------- ---------
Net increase (decrease) in cash and cash equivalents... 570,000 (465,000)
Cash and cash equivalents, beginning................... 105,000 519,000
--------- ----------
Cash and cash equivalents, ending...................... $ 675,000 $ 54,000
========= ==========
See accompanying notes to consolidated financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial information included in this report has been
prepared in conformity with the accounting principles generally accepted in the
United States of America reflected in the consolidated financial statements of
American United Global, Inc. and subsidiaries (the "Company" or "AUGI") for the
preceding year included in the annual report on Form 10-K/A for the year ended
July 31, 2002 filed with the Securities and Exchange Commission. All adjustments
are of a normal recurring nature and are, in the opinion of management,
necessary for a fair statement of the consolidated results for the interim
periods. This report should be read in conjunction with the Company's financial
statements included in the annual report on Form 10-K/A for the year ended July
31, 2002 filed with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of the Company
and its wholly owned and majority owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
The Company has had a working capital deficit for each of the three fiscal
years ended July 31, 2000, 2001 and 2002. In addition, the Company's cash, cash
equivalents and marketable securities of $684,000 as at April 30, 2003 was not
sufficient to fund current levels of operations for the next twelve months and
in May, 2003 the Company engaged Vertical Capital Partners, Inc. to raise up to
$1,500,000 in a private offering on a best efforts basis.
On June 17, 2003, the Company received aggregate net proceeds of $1,350,000
from the sale of 10% convertible notes due in March 2004 (the "Bridge Notes").
The Bridge Notes are convertible into common stock of the Company at any time at
the rate of $1.00 of Notes for one share of common stock and are secured by a
second lien on all of the assets of New York Medical, Inc. ("NYMI"), an indirect
55% owned subsidiary of the Company (see below). In addition, the purchasers of
the Bridge Notes received five year warrants to purchase an aggregate of
1,000,000 shares of common stock of the Company at $0.75 per share; provided,
that if the Bridge Notes have not been prepaid in full by October 17, 2003, the
number of share issuable upon exercise of the warrants will increase to
1,250,000 shares and will increase further to 1,500,000 shares in the event
that, for any reason, the Bridge Notes have not been paid in full by January 17,
2005. The Company utilized an aggregate of $650,000 of the net proceeds from the
sale of the Bridge Notes to increase its outstanding loans to Lifetime and NYMI
from $850,000 to $1,500,000.
The Company is in default on certain existing indebtedness in the principle
amount of $1,500,000 plus accrued interest of approximately $960,000. The holder
of such indebtedness has not sought to collect such amounts due; however, were
the Company required to pay such certain indebtedness it would be necessary to
secure additional financing.
NOTE 2 - LOANS AND ADVANCES
On September 4, 2002 the Company loaned $100,000 to InforMedix, Inc.
("InforMedix") pursuant to the terms of a 12% convertible secured promissory
note. The note was originally due on April 24, 2003 or earlier under certain
acceleration provisions and is automatically convertible into 100,000 common
shares of InforMedix should InforMedix or any affiliate merge into a public
entity or otherwise become publicly traded. On April 24, 2003, the Company
agreed to an extension of the maturity date to July 24, 2003. On May 8, 2003,
InforMedix merged with a public entity whose name was changed to InforMedix
Holdings, Inc. and 108,000 shares of such entity's common stock were issued to
AUGI pursuant to the automatic conversion feature of the loan and accrued
interest.
On January 13, 2003, the Company provided a working capital loan of $25,000
to Spongetech Delivery Systems, Inc. ("Spongetech") pursuant to the terms of a
7% promissory note which was originally due on May 15, 2003 which maturity date
has been extended to July 31, 2003. Spongetech is a distributor of reusable
specialty sponges for commercial and everyday use. Michael Metter, a director of
the company, is a director and executive officer of Spongetech.
During the quarter ended April 30, 2003, AUGI loaned $850,000 to NYMI. The
terms of such loan include an annual interest rate of 6%, a maturity date of
January 2, 2004, and the loan is collateralized by a security interest in
substantially all of the assets of NYMI which is subordinated to the liens of
DVI Business Credit Corporation ("DVI") and the holders of the Bridge Notes.
(See Note 7).
5
NOTE 3. - CONTINGENT OBLIGATIONS
The Company remains contingently liable for certain capital lease
obligations assumed by eGlobe, Inc. ("eGlobe") as part of the Connectsoft
Communications Corp. asset sale which was consummated in June 1999. The lessor
filed for bankruptcy in 2000 and the leases were acquired by another leasing
organization which subsequently also filed for bankruptcy in 2001. In addition,
eGlobe filed for bankruptcy in 2001. The Company has been unable to obtain any
further information about the parties but believes that in the normal course of
the proceedings that the assets and related leases were most likely acquired by
another company and that a mutually acceptable financial arrangement was reached
to accomplish such a transfer. To date, the Company has not been contacted and
has not been notified of any delinquency in payments due under these leases. The
original leases were entered into during early to mid 1997 each of which was for
a five year term. Extensions of an additional 20 months were negotiated with the
original lessor in 1998 and 1999 moving the ending date to approximately mid
2004. The balance due under the leases in June 1999 upon transfer and sale to
eGlobe was approximately $2,800,000 including accrued interest and the monthly
payments were approximately $55,000. The balance that is currently due under the
leases is unknown.
NOTE 4. - CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at two financial institutions. These
balances are insured for up to $100,000 per account by the Federal Deposit
Insurance Corporation. The cash balances at April 30, 2003 exceeded the
insurance limit by approximately $571,000, however, the Company believes it is
not exposed to any significant risk.
NOTE 5. - INFORMATION ABOUT WESTERN POWER & EQUIPMENT CORP. ("Western")
CREDIT FACILITY
Western was a 36% minority owned subsidiary in Fiscal 2001 and most of
Fiscal 2002. In May 2002, Western issued additional shares of its common stock
which resulted in the percentage of shares owned by AUGI to decrease from 36% to
30%. AUGI'S pro-rata share of Western's loss in Fiscal 2002 was limited to
AUGI'S total investment in Western, which was $702,000 at that point in time, as
the investment account can not be less than zero. There was an excess of AUGI's
percentage of Western's loss over the investment balance in the approximate
cumulative amount of $2,350,000 at July 31, 2002 and approximately $2,166,000 at
April 30, 2003. This amount would have to be offset before AUGI could recognize
any percentage of profit from Western. Thus, there will be no recognition of
AUGI'S share of Western's profit for the three or nine months ended April 30,
2003.
As of April 30, 2003, Western was in default of certain financial covenants
contained in a forbearance agreement with GE Commercial Distribution Finance
("GE"). To date, Western has not received a waiver of such defaults from GE and
although GE has not called the loan, there is no guarantee that it will not do
so in the future. GE was formerly known as Deutsch Financial Services ("DFS").
Western currently is in negotiations with GE to obtain a waiver of its
covenant defaults and extend or renew the credit facility beyond its current
December 31, 2002 expiration date under the forbearance agreement. Western
believes that it can reach agreement with GE to extend or renew the agreement on
reasonably acceptable terms. However, in the event that Western cannot reach a
reasonably acceptable agreement to extend or renew the current GE credit
facility, GE is entitled to demand repayment of the entire outstanding balance
at anytime. In such case, Western would be unable to repay the entire GE
outstanding balance. There can be no assurance that Western will be able to
successfully negotiate an acceptable extension or renewal of the existing GE
credit facility or that GE will not call the balance due at anytime.
6
PENDING SALE OF ASSETS
On May 6, 2003, Western entered into an agreement to sell all of the
outstanding shares of its wholly owned subsidiary Western Power & Equipment
Corp., an Oregon corporation ("Western Sub"), to CDKnet.com, Inc. (OTCBB:CDKX)
in exchange for approximately 9,400,000 shares of CDK common stock. Western Sub
is engaged in the business of selling, renting, and servicing light, medium, and
heavy construction equipment and industrial equipment, parts, and related
products manufactured by Case Corporation and several other manufacturers. The
transaction replaces the prior agreement dated January 29, 2003 between the
parties and is intended to be a tax-free exchange of shares. The completion of
the transaction remains subject to several conditions including shareholder
approval, receipt of certain third party approvals, delivery of audited
financial statements of Western Sub, additional due diligence, and compliance
with applicable regulatory requirements. There can be no assurance that the
transaction will be consummated.
NOTE 6. - PURCHASE OF TREASURY STOCK
In connection with the resignation of Seymour Kessler (Kessler) from the
Board of Directors in January 2003, the Company agreed to repurchase common
shares of the Company that he and certain affiliates had acquired in a private
placement in 2000. The purchase price of $80,000 was equal to the amount paid by
Kessler and Kessler affiliates and is being paid in 12 equal monthly
installments of $6,666. As of April 30, 2003, four payments had been made.
NOTE 7. - SUBSEQUENT EVENTS
ACQUISITION OF LIFETIME
On June 17, 2003, the Company and its newly formed wholly-owned subsidiary,
a Delaware corporation ("Merger Sub"), consummated the transactions contemplated
by the Amended and Restated Agreement and Plan of Merger (the "Merger
Agreement") entered into with Lifetime Healthcare Services, Inc. ("Lifetime"), a
Delaware corporation. Pursuant to the Merger Agreement, Merger Sub was merged
with and into Lifetime (the "Merger"), with Lifetime continuing as the surviving
entity and wholly-owned subsidiary of the Company. The Merger Agreement was
effective as of June 17, 2003 pursuant to a Certificate of Merger filed with the
Secretary of State of the State of Delaware. Lifetime is a holding company whose
only assets consist of the ownership of 55% of the capital stock of NYMI.
In consideration for the acquisition of Lifetime in the Merger, the Company
issued 467,500 shares of its newly authorized and designated Series B-2
Convertible Preferred Stock (the "B-2 Preferred"), each of which share of B-2
Preferred is convertible, at any time after December 16, 2003 at the election of
the holder, or, pursuant to a resolution by the board of directors of the
Company, into twenty (20) shares of the Company's Common Stock or an aggregate
of 9,350,000 such shares of Common Stock, if fully converted. The B-2 Preferred
pays no dividend and votes on an "as converted" basis, with the Company Common
Stock.
In connection with the Merger, the Company also agreed to issue 232,500
shares of its newly authorized and designated Series B-3 Convertible Preferred
Stock ("B-3 Preferred") to the holders of record of its issued and outstanding
shares of Common Stock as of June 10, 2003. Each such share of B-3 Preferred is
identical in all material respects to the shares of B-2 Preferred. The B-3
Preferred are also convertible on a 20-for-1 basis and otherwise on the same
terms as the B-2 Preferred, into an aggregate of 4,650,000 shares of Common
Stock. The B-3 Preferred pays no dividend and votes on an "as converted" basis,
with the Company Common Stock.
In connection with its acquisition by the Company under the Merger,
Lifetime consummated the transactions under a March 21, 2003 stock purchase
agreement, as amended, with a stockholder of NYMI (the "NYMI Stock Purchase
Agreement") providing for Lifetime's acquisition of 55% of the capital stock of
NYMI.
7
Post-Merger Obligations
Under the terms of the NYMI Stock Purchase Agreement, Lifetime issued to
the NYMI stockholder (an affiliate of Dr. Jonathan Landow) a $5,500,000 6%
convertible note (the "Lifetime Note"), of which $2,000,000 is due and payable
on or before March 22, 2004. In connection with the Merger, the Company
unconditionally guaranteed the Lifetime Note, The balance of the Lifetime Note
is payable in seven quarterly installments of $500,000 each, commencing July 1,
2004 and is convertible at the option of the holder into shares of Company
Common Stock at a conversion price of $4.00 per share. Each quarterly principal
installment due under the Lifetime Note is also subject to mandatory conversion
at the option of the Company in the event that the closing price of its Common
Stock equals or exceeds $4.80 per share for any 30 consecutive trading days
ending prior to such quarterly installment payment date.
In addition to the Lifetime Note, the Company also guaranteed payment by
NYMI of a separate $4,662,830 12% amended and restated note, dated as of June
16, 2003 and payable to Tracy Landow, as assignee of Dr. Jonathan Landow (the
"Landow Note"). Although originally payable in four annual installments, under
the terms of a closing agreement, dated June 16, 2003, the Company agreed to pay
the entire unpaid balance of the Landow Note in full by October 17, 2003. In the
event that, for any reason, the Company and/or Lifetime is unable to pay the
Landow Note in full by October 17, 2003 and/or pay an aggregate of $2,000,000 in
principal amount of the Lifetime Note by March 22, 2004 (collectively, the
"Payment Events"), a "Default Event" will be deemed to have occurred. In such
event, Dr. Landow has the right to engage the services of an investment banker
to sell NYMI at the highest available price to an unaffiliated third party, and
(subject to the Company's receipt of an opinion from such banker that the terms
of sale are fair to the Company and Lifetime and Company stockholders from a
financial point of view), may compel the Company to consummate such sale.
Pending consummation of the Payment Events or forced sale of NYMI, the
Company, Dr. Jonathan Landow and the holders of the Landow Note and Lifetime
Note have agreed upon certain mutual covenants in respect of the operations of
the NYMI business. In addition, under the closing agreement the parties agreed
that Dr. Landow and a person designated by him would constitute a majority of
the board of directors of each of NYMI and Lifetime, and that the board of
directors of the Company would consist of five persons, being Robert M. Rubin, a
person acceptable to him (C. Dean McLain), Dr. Jonathan Landow and a person
acceptable to him, and a fifth independent director to be mutually acceptable to
each of Messrs. Rubin and Landow.
In the event a forced sale of NYMI were to occur, the proceeds of such sale
would be applied in the following order of priority:
To pay transaction costs (other than the fairness opinion which is to
be paid by the Company);
To pay all indebtedness of NYMI (other than approximately $1,500,000
of NYMI indebtedness owed to the Company);
To pay all obligations under the Landow Note and the Lifetime Note
(less obligations, if then due on the $1,500,000 NYMI Note payable to
the Company, described below);
To pay the costs of the fairness opinion; and
To the Company, to the extent of any remaining net proceeds.
To the extent that all obligations under the Landow Note and the Lifetime
Note (estimated to aggregate approximately $6,500,000 in principal amount by
October 17, 2003) are not paid in full out of the proceeds of the NYMI forced
sale, the Company will be liable for any unpaid balance due within six months
following such sale.
As at the date of filing this Report, the Company is undertaking to effect
a private placement of its Common Stock and/or other securities in the amount of
approximately $9,000,000, primarily to (a) pay off the Landow Note and Lifetime
Note obligations, and (b) repay the $1,500,000 of Bridge Notes. Although the
Company has received a letter of intent from an investment banking firm to act
as placement agent on a best efforts basis in respect of such proposed private
placement, and believes that it will be able to timely complete such financing,
there is no assurance that this will be the case.
8
NYMI's senior secured credit facility with DVI comes due on September 30,
2003, and DVI has requested that NYMI refinance such facility elsewhere, the
current outstanding amount of which is approximately $5,500,000. The Company has
entered into preliminary discussions with DVI to extend the maturity date of the
loan for 12 months from September 30, 2003. While no response to the Company's
proposal has been received by the Company from DVI, the Company believes that
DVI will agree to extend the maturity date of the loan for at least a portion of
such 12 month period, to provide the Company and NYMI with additional time to
seek refinancing of the DVI indebtedness. However, unless the Company is able to
secure financing from other sources, which it is actively seeking, by September
30, 2003, if DVI were not to extend the loan beyond such date, it could elect at
any time after September 30, 2003 to foreclose on substantially all of the
assets and properties of NYMI (the Company's only operating asset), which would
have a material, adverse impact upon the Company's financial condition and
future prospects. There can be no assurance that the Company would be able to
secure such other financing on terms as favorable to those applicable under the
Loan and Security Agreement with DVI, if at all. The unwillingness of DVI to
extend the September 30, 2003 maturity date of its senior credit facility may
also adversely affect the Company's ability to complete its contemplated private
placement of equity. The holders of the Landow Note and the Lifetime Note have
agreed that if DVI does not elect to extend the September 30, 2003 due date of
its loan facility for at least six months, an aggregate of $500,000 due under
the Landow Note on October 17, 2003 would be subject to extension for up to six
months thereafter or sooner if the Company and NYMI are unable to refinance the
DVI indebtedness.
Robert DePalo, an officer of Lifetime, has agreed to guaranty up to
$1,000,000 of the indebtedness owed under the Lifetime Note. An affiliate of Mr.
DePalo has also entered into a maximum three year finders agreement with the
Company under which it shall receive a fee of $8,700 per month until such time
as the Payment Events shall have occurred; at which time such monthly fee shall
increase to $23,700, until an aggregate of $388,800 in finder's fees shall have
been paid by the Company. In the event that NYMI is sold as a result of the
occurrence and continuation of a "Default Event," the monthly fee shall continue
at $8,700 until an aggregate of $328,800 shall have been paid.
Kenneth Orr is an officer of Lifetime. An affiliate of Mr. Orr has entered
into a maximum two year consulting agreement with the Company under which the
affiliate is to provide consulting services to NYMI at the discretion and
direction of the Company. The affiliate will receive a monthly fee of $10,000
for the term of the consulting agreement, which expires on May 31, 2005. In
addition, the affiliate shall receive a success fee equal to 3% of any increase
in annual net sales of NYMI in excess of $20,000,000 for each year during the
term of the consulting agreement, to the extent that such increase shall result
from the efforts of the affiliate and/or Mr. Orr. In no case shall the success
fee payable by the Company to the affiliate be in excess of $150,000 per year.
The obligations of NYMI to the Company in respect of the loans and advances
made between February and June 2003, aggregating $1,500,000, are evidenced by
NYMI's 6% note, payable in full as to principal and interest on January 3, 2004
(the "NYMI Note"). The NYMI Note is secured by a lien on the accounts
receivable, inventories and other assets of NYMI, subordinated to the liens of
DVI and the holders of the Bridge Notes.
The Company, as the parent company of Lifetime, has also entered into
negotiations for the acquisition of the remaining 45% of NYMI from the New York
Medical Employee Stock Ownership Plan and Trust (the "ESOP") and expects to
complete a transaction whereby the Company will acquire such remaining 45% of
NYMI capital stock in exchange for approximately $1,500,000 of the Company's
convertible preferred stock. Although the Company expects to consummate the
transaction with the ESOP within the next 30 days, there is no assurance that
such transaction will be consummated on the terms currently being negotiated, if
at all.
In addition to its acquisition of 55% of the stock of NYMI, Lifetime
entered into a May 4, 2003 agreement to acquire from the sole stockholder of
Premier, 100% of the capital stock of Premier. On June 20, 2003, Lifetime and
Premier mutually agreed to terminate the Premier stock purchase agreement and,
in connection therewith, the $175,000 advance on the purchase price paid upon
the execution of the stock purchase agreement will be returned.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Form 10-Q.
This management's discussion and analysis of financial conditions and
results of operations contains certain "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995. Such statements
relating to future events and financial performance are forward-looking
statements that involve risks and uncertainties, detailed from time to time in
the Company's various SEC filings. No assurance can be given that any such
matters will be realized.
RESULTS OF OPERATIONS
The Three and Nine Months Ended April 30, 2003 Compared to the Three and Nine
Months Ended April 30, 2002
General and administrative expenses totaled $154,000 and $455,000
respectively for the three and nine months ended April 30, 2003. Such expenses
decreased by $64,000 and $155,000 respectively in the current three and nine
month periods as compared to the prior year. The decrease in both periods is
primarily due to a decrease in legal and other professional fees.
Net interest expense for the three and nine months ended April 30, 2003 was
$26,000 and $95,000 respectively as compared to $37,000 and $107,000
respectively in the prior year comparative periods. The decreases in net
interest expense are the result of increased interest income being earned on
higher cash balances of the Company as well as interest on notes receivable in
the current year's periods.
There were no sales of marketable securities during the three and nine
months ended April 30, 2003 whereas there were losses from sales of marketable
securities of $398,000 and $719,000 respectively during the three and nine month
periods ended April 30, 2002. Total proceeds received from sales of marketable
securities for the nine months ended April 30, 2002 were $177,000.
The Company recognized an impairment loss of $175,000 relative to its
investment in Intertech during the nine months ended April 30, 2002 which
reduced the carrying value to $ 0.
The Company has recorded a full valuation allowance against the deferred
tax benefit for net operating losses generated, since in management's opinion
the net operating losses do not meet the more likely than not criteria for
future realization.
Liquidity and Capital Resources
The Company's primary needs for liquidity and capital resources are the
funding of salaries and other administrative expenses related to the management
of the Company.
During the nine months ended April 30, 2003, cash, cash equivalents and
marketable securities increased by $559,000 primarily due to the receipt of net
proceeds of $2,875,000 on September 10, 2002 from the settlement of the
Company's litigation against it's prior corporate counsel. Of the funds
received, $527,000 was used to pay accrued expenses and accounts payable,
$250,000 was used to repay the loan from the Rubin Family Trust, $20,000 was
used for monthly payments on the note payable for the stock repurchase, $975,000
was used for investing activities and $533,000 was used to fund operations.
The Company's cash, cash equivalents and marketable securities of $684,000
as of April 30, 2003 are not sufficient to support current levels of operations
for the next twelve months and it will be necessary for the Company to seek
additional financing. In May, 2003 the Company engaged Vertical Capital
Partners, Inc. to raise up to $1,500,000 in a private offering on a best efforts
basis.
10
On June 17, 2003, the Company received an aggregate of $1,350,000 (net of
selling commissions) in connection with the sale of 10% convertible notes due
March 2004 (the "Bridge Notes"). The Bridge Notes are convertible into Company
Common Stock at any time at $1.00, and are secured by a second lien on all of
the assets of New York Medical, Inc. ("NYMI"), an indirect 55%-owned subsidiary
of the Company. In addition, the purchasers of the Bridge Notes received five
year warrants to purchase an aggregate of 1,000,000 shares of Company Common
Stock; provided, that if the Bridge Notes have not been prepaid in full by
October 17, 2003, the number of shares issuable upon exercise of the warrants
will increase to 1,250,000 shares, and increase further to an aggregate of
1,500,000 shares, in the event that, for any reason, the Bridge Notes have not
been paid in full by January 17, 2005. The Company utilized an aggregate of
approximately $650,000 of the net proceeds from the sale of the Bridge Notes to
increase its outstanding loans to Lifetime and NYMI from $850,000 to $1,500,000.
AUGI lent $100,000 to NYMI on February 14, 2003, an additional $750,000 on
April 4, 2003 and a final $650,000 on June 17, 2003. As of the date of the
filing of this Form 10-Q, the Company has lent NYMI an aggregate of $1,500,000,
which has been used for working capital purposes as well as to repay certain
obligations. NYMI combines third party single practitioner medical offices into
multi-specialty offices and provides these offices with mobile diagnostic
testing capabilities. The $1,500,000 of loans to NYMI are evidenced by its 6%
note to the Company due as to principal and interest on January 2, 2004 and
secured by a lien on the NYMI assets subordinated to DVI and the holders of the
Bridge Notes.
For a description of the current status of NYMI's senior credit facility
with DVI, see "Note 7 Subsequent Event - Post-Merger Obligations."
In addition, the Company is in default on certain existing indebtedness in
the amount of $1,500,000, plus accrued interest of approximately $960,000.
Although the holder of such indebtedness has not sought to collect the same,
were the Company required to pay such indebtedness it would be necessary to
secure additional financing.
AUGI remains contingently liable for certain capital lease obligations
assumed by eGlobe, Inc. as part of the Connectsoft Communications Corp. asset
sale which was consummated in June 1999 (see Note 3).
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon AUGI's financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the use of
estimates that affect the reported amounts of assets, liabilities and expenses.
AUGI evaluates its estimates on an ongoing basis, including estimates for income
tax assets and liabilities and the impairment of the value of investments. The
Company bases its estimates on historical experience and on actual information
and assumptions that are believed to be reasonable under the circumstances at
that time. Actual results may differ from these estimates under different
assumptions or conditions. AUGI believes that the following critical accounting
policies affect its more significant estimates used in the preparation of its
financial statements.
Accounting for Income Taxes.
AUGI currently records a full valuation allowance against the deferred tax
benefit for net operating losses generated, since in management's opinion the
net operating losses do not meet the more likely than not criteria for future
realization.
Impairment of Investments.
AUGI reviews estimates of the value of its investments each reporting
period and records an impairment loss to the extent that management believes
that there has been an impairment to the carrying value.
11
Recent Accounting Pronouncements
FASB Interpretation No. 45 Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission of
FASB Interpretation No. 34.
This Interpretation elaborates on the disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. This Interpretation
does not prescribe a specific approach for subsequently measuring the
guarantor's recognized liability over the term of the related guarantee. This
Interpretation also incorporates, without change, the guidance in FASB
Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of
Others, which is being superseded.
The initial recognition and initial measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The disclosure requirements in this Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The interpretive guidance incorporated without change from Interpretation
34 continues to be required for financial statements for fiscal years ending
after June 15, 1981 the effective date of Interpretation 34. The Company has
made the appropriate disclosures related to guarantees.
In April 2002, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 145, Rescission of SFAS Nos. 4, 44 and 64, amendment of SFAS No. 13 and
Technical Corrections as of April 2002. This Statement rescinds SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an amendment to that
Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement also rescinds SFAS No. 44, Accounting for
Intangible Assets of Motor Carriers. This Statement amends SFAS No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The Company
has reviewed this pronouncement and will consider its impact if any relevant
transaction(s) occur.
In July 2002, the FASB issued SFAS No.146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No.94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This Statement applies to
costs associated with an exit activity that does not involve an entity newly
acquired in a business combination or with a disposal activity covered by SFAS
No. 144, Accounting for the Impairment or disposal of Long-Lived Assets. These
costs include, but are not limited to; termination benefits provided to current
employees that are involuntarily terminated under the terms of a benefit
arrangement that, in substance, is not an ongoing benefit arrangement or an
individual deferred compensation contract, costs to terminate a contract that is
not a capital lease and costs to consolidate facilities or relocate employees.
This Statement does not apply to costs associated with the retirement of a long-
lived asset covered by SFAS No. 143, Accounting for Asset Retirement
Obligations. The Company does not believe that these pronouncements apply but
will continue to review for possible relevancy in the future.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement No.
123." This Statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation and requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
has elected not to adopt the recognition and measurement provisions of SFAS No.
123 and continues to account for its stock-based employee compensation plans
under APB Opinion No. 25 and related interpretations, and therefore the
transition provisions will not have an impact on its operating results or
financial position.
12
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts entered into or modified after June 30,
2003. The guidance should be applied prospectively. The provisions of this
Statement that relate to SFAS 133 Implementation Issues that have been effective
for fiscal quarters that began prior to June 15, 2003, should continue to be
applied in accordance with respective effective dates. In addition, certain
provisions relating to forward purchases or sales of when-issued securities or
other securities that do not yet exist, should be applied to existing contracts
as well as new contracts entered into after June 30, 2003. The adoption of SFAS
No. 149 is not expected to have an impact on the Company's financial statements.
In May 2003, the FASB issued Statement of Accounting Standards No. 150
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" (SFAS No. 150). SFAS No. 150 establishes standards for
classification and measurement in the statement of financial position of certain
financial instruments with characteristics of both liabilities and equity. It
requires classification of a financial instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS No. 150 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. The Company has not yet determined the impact, if any, of the adoption
of SFAS on its financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains cash balances at two financial institutions. These
balances are insured for up to $100,000 per account by the Federal Deposit
Insurance Corporation. The cash balances at April 30, 2003 exceeded the
insurance limit by approximately $571,000, however, the Company believes it is
not exposed to any significant risk.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Our chief executive officer and our chief financial officer, after
evaluating our "disclosure controls and procedures" (as defined in the
Securities Exchange Act of 1934 (the "Exchange Act") Rules 13a-14(c) and
15d-14(c) have concluded that as of a date within 90 days of the filing date of
this report (the "Evaluation Date") our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports that
we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
Changes in internal controls
Subsequent to the Evaluation Date, there were no significant changes in our
internal controls or in other factors that could significantly affect our
disclosure controls and procedures, nor were there any significant deficiencies
or material weaknesses in our internal controls. As a result, no corrective
actions were required or undertaken.
13
PART II
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
10.1 Finders Agreement by and between American United Global, Inc. and
Hughes Holdings, LLC, dated as of June 16, 2003.
10.2 Consulting Agreement by and between American United Global, Inc. and
Doctor's Choice, Inc., dated as of June 16, 2003.
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on February 21, 2003 regarding
the Company's change in the certifying accountant.
14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN UNITED GLOBAL, INC.
June 23, 2003
By: /s/ Robert M. Rubin
-------------------
Robert M. Rubin
Chief Executive Officer
By: /s/ David M. Barnes
-------------------
David M. Barnes
Chief Financial Officer
15
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert M. Rubin, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly
Report of American United Global, Inc. on Form 10-Q for the quarter ended April
30, 2003 fully complies with the requirements of Section 15(d) of the Securities
Exchange Act of 1934 and the information contained in such Quarterly Report on
Form 10-Q fairly presents, in all material respects, the financial condition and
results of operations of American United Global, Inc.
/s/ Robert M. Rubin
Date: June 23, 2003 -------------------------
Robert M. Rubin
Chief Executive Officer
I, David M. Barnes, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly
Report of American United Global, Inc. on Form 10-Q for the quarter ended April
30, 2003 complies with the requirements of Section 15(d) of the Securities
Exchange Act of 1934 and the information contained in such Quarterly Report on
Form 10-Q fairly presents, in all material respects, the financial condition and
results of operations of American United Global, Inc.
/s/ David M. Barnes
Date: June 23, 2003 -------------------------
David M. Barnes
Chief Financial Officer
16