SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2003 Commission File Number: 000-19404
AMERICAN UNITED GLOBAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4359228
(State of incorporation) (IRS Employer Identification No.)
11108 NE 106th Place, Kirkland, Washington 98033
(Address of principal executive offices)
(425) 869-7410
(Registrant's telephone number)
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.01 per share
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 12 months (or for each 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 [ ] NO [ X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [___]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES [ ] NO [X]
The aggregate market value of any voting or non-voting common equity held by
non-affiliates as of the last business day of June 30, 2004 was $ 2,110,000.
As of July 9, 2004, there were 3,824,799 shares outstanding of the Registrant's
common stock.
Documents incorporated by reference: None.
AMERICAN UNITED GLOBAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
Page
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PART I
Item 1. Business 1
Item 2. Properties 2
Item 3. Legal Proceedings 2
Item 4. Submission of Matters to a Vote of Security Holders 2
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters and Issuer
Purchases of Equity Securities 3
Item 6. Selected Financial Data 3
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 5
Item 7A. Quantitative And Qualitative Disclosures About Market Risk 10
Item 8. Financial Statements And Supplementary Data 10
Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure 10
Item 9A. Controls And Procedures 10
PART III
Item 10. Directors and Executive Officers of the Registrant 10
Item 11. Executive Compensation 15
Item 12. Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder
Matters 16
Item 13. Certain Relationships And Related Transactions 17
Item 14. Principal Accountant Fees and Services 20
PART IV
Item 15. Exhibits, Financial Statement Schedules And Reports On Form 8-K 21
Signatures 22
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
- -------------------------------------------------
THE FEDERAL SECURITIES LAWS PROVIDE FOR A SAFE HARBOR FOR CERTAIN
FORWARD-LOOKING STATEMENTS. THIS SAFE HARBOR PROTECTS US FROM LIABILITY IN A
PRIVATE ACTION ARISING UNDER EITHER THE SECURITIES ACT OF 1933 OR THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, FOR FORWARD-LOOKING STATEMENTS THAT ARE
IDENTIFIED AS SUCH AND ACCOMPANIED BY MEANINGFUL CAUTIONARY STATEMENTS OR ARE
IMMATERIAL.
WHEN USED IN THIS FORM 10-K, THE WORDS OR PHRASES "ESTIMATE", "INTENDS", "MAY",
"EVALUATING" OR SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY "FORWARD LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, AS AMENDED. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO, OUR ABILITY TO CONTINUE AS A GOING
CONCERN, OUR ABILITY TO MAKE REQUIRED PAYMENTS ON SENIOR SECURED NOTES, OUR NEED
FOR ADDITIONAL FINANCING, OUR HISTORY OF LOSSES, THE SUCCESSFUL IDENTIFICATION
OF STRATEGIC BUSINESS PARTNERS, THE SUCCESSFUL EXECUTION OF AGREEMENTS WITH
STRATEGIC BUSINESS PARTNERS REQUIRED FOR THE IMPLEMENTATION OF BUSINESS PLANS
AND THE SUCCESSFUL IDENTIFICATION, ACQUISITION AND INTEGRATION OF ADDITIONAL
TARGET BUSINESSES. SUCH FACTORS COULD AFFECT OUR COMPANY'S, INCLUDING THAT OF
OUR SUBSIDIARIES', FINANCIAL PERFORMANCE AND COULD CAUSE OUR ACTUAL RESULTS FOR
FUTURE PERIODS TO DIFFER MATERIALLY FROM ANY OPINION OR STATEMENTS EXPRESSED
HEREIN WITH RESPECT TO FUTURE PERIODS. AS A RESULT, WE CAUTION READERS NOT TO
PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS
OF THE DATE MADE.
THE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE ON WHICH THEY ARE MADE
AND, EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENT TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE ON
WHICH THE STATEMENT IS MADE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED
EVENTS. IN ADDITION, WE CANNOT ASSESS THE IMPACT OF EACH FACTOR ON OUR BUSINESS
OR THE EXTENT TO WHICH ANY FACTOR OR COMBINATION OF FACTORS MAY CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD-LOOKING
STATEMENTS.
PART I
Item 1. Business
AUGI was initially organized as a New York corporation on June 22, 1988 under
the name Alrom Corp. ("Alrom"), and completed an initial public offering of
securities in August 1990. Alrom effected a statutory merger in December 1991,
pursuant to which Alrom was reincorporated in the State of Delaware under the
name American United Global, Inc. ("AUGI").
We intend to focus our business strategy on acquisitions of operating businesses
in various sectors. However, other than as set forth below, we have not as yet
identified any definitive acquisition candidates or opportunities. Currently, we
own 13% of the common stock of Western Power & Equipment Corp. ("Western").
Western
Western commenced operations in November 1992 with the acquisition from Case
Corporation of seven retail distribution facilities located in Oregon and
Washington. Western became our subsidiary simultaneous with such acquisition.
Prior to November 1, 2000, Western was our 59.6% majority owned operating
subsidiary. On November 1, 2000, we distributed 777,414 shares of Western common
stock owned by us pursuant to the final court approved settlement of the
shareholder class action. Due to the distribution of the Western shares and
subsequent issuances of shares by Western, Western is no longer a majority owned
subsidiary of ours but we continue to own approximately 13% of Western's
outstanding common stock. We intend to distribute the 1,222,586 shares of
Western that we hold to the holders of our Series B-3 Preferred Stock.
Informedix
InforMedix has developed a portable medical device linked to an integrated
hardware and software system that its management believes will enable
pharmaceutical and biotechnology companies to get new drugs to market faster and
at a lower cost than traditional methods.
On May 8, 2003, Informedix merged with a public entity whose name was changed to
Informedix Holdings, Inc. and 54,000 shares of their common stock were issued to
our company pursuant to the automatic conversion feature of the loan and all
accrued interest. On July 25, 2003, we loaned $20,000 to Informedix pursuant to
the terms of a 12% promissory note originally due January 31, 2004 which due
date was extended to April 2, 2004. The note was paid in full on that date. We
intend to distribute the 54,000 shares of Informedix that we hold to the holders
of our Series B-3 Preferred Stock.
1
NY Medical
We acquired 55% of New York Medical, Inc., a New York corporation ("NY
Medical"), from Redwood Investment Associates, LLP ("Redwood") pursuant to an
amended and restated agreement and plan of merger agreement effective June 17,
2003 (the "Merger Agreement") and had intended to acquire the remaining 45%
pursuant to a share exchange agreement with NY Medical's employee stock option
plan (the "ESOP"), the holder thereof. However, the acquisition of NY Medical
has been rescinded ab initio, effective December 9, 2003, as is more fully set
forth under "Item 3. Legal Proceedings" and "Item 13. Certain Relationships and
Related Transactions."
Employees
As of the filing date of this Form 10-K, we employed 2 full-time employees,
neither of whom is a member of a union, and no part-time employees.
Item 2. Properties
Our principal corporate offices are located in at 11108 NE 106th Place,
Kirkland, Washington.
Item 3. Legal Proceedings
Altitude Group, LLC, Birch Associates, LLC and D.C. Capital, LLC v. American
United Global, Inc. (Supreme Court, New York State, New York County). This
action was commenced in April 2004 against AUGI. Plaintiffs allege, among other
things, that AUGI owes plaintiffs repayment of $700,000 in principal face amount
notes issued in connection with the acquisition by AUGI of New York Medical, a
New York corporation. Plaintiffs have filed a motion seeking summary judgment
against AUGI in aggregate amount of $787,546. consisting of the allegedly
outstanding principal and interest on the notes as well as attorneys' costs, and
AUGI has opposed that motion. No decision on the motion for summary judgment has
been issued by the court yet.
New York Medical, Inc. and Redwood Investment Associates, L.P.v. American United
Global, Inc., et al. (Supreme Court, New York State, New York County). In this
suit, filed on December 12, 2003, plaintiffs seek a declaration that a series of
transactions by which we allegedly acquired Lifetime Healthcare Services, Inc.
("Lifetime") and Lifetime acquired an interest in NY Medical from Redwood
(collectively "Transactions") were properly rescinded or, alternatively, that
because the Transactions were induced by fraudulent conduct of our company and
others, that the Transactions should be judicially rescinded. In addition to the
requests for equitable relief, plaintiffs also seek monitory damages in excess
of $5 million and exemplary damages in the amount of $15 million.
Currently, the suit has not proceeded past the filing and service of the
complaint. We have obtained an open-ended extension of time in which to answer
and/or move with regard to the complaint. We are attempting to resolve the
matter amicably. However, in the event litigation proceeds, it will be
aggressively defended.
Settlement Agreement
Howard Katz, a member of our board of directors, is in discussions with us over
the terms of a settlement of a debt that he claims we owe him. Mr. Katz'
resignation from our board of directors was requested in connection with the
intended acquisition of NY Medical, a request that was not affected by the
subsequent rescission of all agreements relating to such acquisition.
Nonetheless, we have not received such resignation as of the date of this annual
report of Form 10-K. We anticipate an expeditious settlement with Mr. Katz
regarding the amount of the debt and the payment terms thereof, in connection
with which we expect to obtain his letter of resignation from our board of
directors.
Item 4. Submission of Matters to a Vote of Security Holders
None.
2
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our shares of common stock are presently quoted on the pink sheets under the
symbol AUGB. Listed below are the high and low sale prices for the shares of our
common stock during the years ended December 31, 2003 and 2002. These quotations
reflect inter-dealer prices, without mark-up, mark-down or commission and may
not represent actual transactions.
Common Stock
------------
High Low
---- ---
Fiscal 2002
- -----------
First Quarter $2.25 $1.50
Second Quarter $2.00 $1.00
Third Quarter $2.00 $1.25
Fourth Quarter $1.50 $0.60
Fiscal 2003
- -----------
First Quarter $1.25 $0.60
Second Quarter $2.50 $0.75
Third Quarter $2.375 $1.25
Fourth Quarter $2.75 $1.50
On July 8, 2004, there were approximately 161 holders of record of our common
stock then issued and outstanding.
As of July 8, 2004, the last sale price of the shares of our common stock as
reported on the Pink Sheets was $ 2.00.
Dividend Policy
We have never paid cash dividends and have no plans to do so in the foreseeable
future. Our future dividend policy will be determined by our board of directors
and will depend upon a number of factors, including our financial condition and
performance, our cash needs and expansion plans, income tax consequences, and
the restrictions that applicable laws and our credit arrangements then impose.
Securities Authorized for Issuance Under Equity Plans
Number of securities
Number of securities to be Weighted-average exercise remaining available for
issued upon exercise of price of outstanding future issuance under
outstanding options options equity compensation plans
------------------- ------- -------------------------
Equity compensation plans
approved by security holders
2001 Stock Option Plan 1,194,000 $1.26 806,000
Equity compensation plans not
approved by security holders None None
Total 1,194,000 $1.26 806,000
Item 6. Selected Financial Data.
The Consolidated Statements of Operations set forth below with respect to fiscal
years 2001 and 2002 and the periods of August 1, 2002 through June 16, 2003 and
June 17, 2003 through December 31, 2003 and the Consolidated Balance Sheet Data
at July 31, 2002, June 16, 2003 and December 31, 2003 are derived from, and
should be read in conjunction with, the audited Consolidated Financial
Statements and Notes thereto of American United Global, Inc. included in this
Annual Report on Form 10-K. The Consolidated Statements of Operations Data set
forth below with respect to fiscal years 1999 and 2000 and the Consolidated
Balance Sheet Data at July 31, 1999, 2000 and 2001 are derived from the audited
Consolidated Financial Statements of the Company which are not included in this
Annual Report on Form 10-K. The data set forth in the following tables should be
read in conjunction with, and are qualified in their entirety by, Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Annual Report on Form 10-K.
3
June 17, 2003 August 1, 2002 Year ended July 31,
through through ----------------------------------------------
December 31, 2003 June 16, 2003 2002 2001(3) 2000 1999(1,2)
----------------- ------------- ---- ------- ---- ---------
Net sales $ - $ - $ - $ - $155,637 $163,650
Loss from
continuing
operations (4,036) (698) (1,217) (6,400) (7,030) (5,054)
Net Loss (4,036) (698) (1,217) (6,400) (7,030) (3,065)
Basic and
Diluted Loss
Per Share:
Loss from
continuing
operations (0.56) (0.35) (1.50) (13.02) (14.71) (10.75)
Net loss $ (0.56) $ (0.35) $ (1.50) $ (13.02) $ (14.71) $ (6.52)
June 17, 2003 August 1, 2002 Year ended July 31,
through through ----------------------------------------------
December 31, 2003 June 16, 2003 2002 2001(3) 2000 1999(1,2)
----------------- ------------- ---- ------- ---- ---------
Total assets $ 584 $ 1,424 $3,000 $1,724 $128,549 $142,409
Total liabilities 4,242 2,700 3,587 2,909 115,413 121,700
Working capital (deficit) (3,658) (1.276) (587) (2,137) (17,579) (18,751)
Stockholders' (deficiency) equity $ (3,656) $ (1,276) $(587) $(1,185) $7,373 $12,797
(1) Includes loss from discontinued operations of the Technology Companies
(2) Includes a gain on sale of the assets of Connectsoft Communications Corp.
of $1,989.
(3) For 2002 and 2001, Western has been accounted for under the equity method
whereas in 1999 and 2000 Western was included in the consolidated financial
statements of AUGI.
4
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with the
selected historical financial data, financial statements and notes thereto and
the other historical financial information of our company contained elsewhere in
this Annual Report on Form 10-K. The statements contained in this Annual Report
on Form 10-K that are not historical are forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Exchange Act of 1934, including statements regarding our company's
expectations, intentions, beliefs or strategies regarding the future.
Forward-looking statements include, but are not limited to, our statements
regarding liquidity, anticipated cash needs and availability and anticipated
expense levels. All forward-looking statements included in this annual report of
Form 10-K are based on information available to our company on the date hereof,
and we assume no obligation to update any such forward-looking statement. Our
actual results could differ materially from those in such forward-looking
statements.
Overview
We own approximately 13% of the common stock of Western Power & Equipment Corp.
("Western") which engages in the sale, rental and servicing of light,
medium-sized and heavy construction, agricultural and industrial equipment,
parts and related products. The major supplier to Western is Case Corporation
and the items sold, rented and serviced include backhoes, excavators, crawler
dozers, compactors, log loaders, street sweepers and forklifts. Western operates
15 facilities in Nevada, Oregon, Washington, California and Alaska and sells to
contractors, governmental agencies and other customers primarily for use in the
construction of residential and commercial buildings, roads, levees, dams,
underground power projects, forestry projects, municipal construction and other
projects.
Prior to November 1, 2000, we were the majority shareholder of Western with a
59.6% ownership. The results of operations of Western were therefore
consolidated with those of AUGI in all prior fiscal years. On November 1, 2000
we distributed 777,414 shares of Western common stock owned by our company
pursuant to the final court approved settlement of the shareholder class action.
As a result, our ownership in Western became 36% and our investment in Western
has been accounted for under the equity method effective August 1, 2000. As a
result of the issuance of shares of Western common stock by Western, we
currently own approximately 13% of its outstanding common stock. We intend to
distribute the 1,222,586 shares of Western that we hold to the holders of our
Series B-3 Preferred Stock.
Results of Operations
The Period of June 17, 2003 through December 31, 2003 as compared to the Period
of August 1, 2002 through June 16, 2003
General and administrative expenses totaled $1,281,000 for the six and one half
months ended December 31, 2003 and $871,000 for the ten and one half months
ended June 17, 2003. The increase in the December period is primarily due to an
increase in legal and other professional fees associated with the Lifetime
merger, the New York Medical Inc. acquisition and the costs related to an
abandoned private placement and the Rescission Agreement.
Net interest expense for the ten and one half months ended June 16, 2003 was
$107,000 and was $1,247,000 for the six and one half months ended December 31,
2003. The increase was due to a charge of $1,083,000 for the beneficial
conversion feature of the 1,500,000 warrants that accompanied the Bridge Notes,
which is recorded as additional interest expense; in addition, as there was a
full reserve recorded against the debt due from NYMI, the previously accrued
interest income as of December 31, 2003 of approximately $61,000 on such note
was reversed . Slightly offsetting the expense increases was an increase in
interest income of $3,000 earned on notes receivable that were issued late in
the June 16 period and early in the December 31 period.
Other income of $280,000 in the period ended June 16, 2003 relates to reductions
of estimates of certain potential liabilities. There was no such comparable item
in the period ended December 31, 2003.
We have 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.
5
The Period of August 1, 2002 through June 16, 2003 as compared to the fiscal
year ended July 31, 2002
General and administrative expenses for the ten and one half month period ended
June 16, 2003 were $871,000 as compared to $1,154,000 for the year ended July
31, 2002. The expense for the period ended June 16, 2003 included a charge for
stock option compensation of $ 100,000 for which there was no comparable expense
in fiscal 2002 and professional fees and other costs of approximately $175,000
relative to the rescinded acquisition of Lifetime/NYMI for which there were no
comparable costs in the 2002 fiscal year. In addition, the 2002 fiscal year
included a charge for an executive bonus of $ 300,000, rent expense of $97,000
and $65,000 of costs relative to an abandoned registration of a rights offering
for which there was no comparable expense in the period ended June 16, 2003. Net
of these charges, the average expense per month was $57,000 in the June 16, 2003
period as compared to $ 58,000 for the 2002 fiscal year.
Net interest expense was $107,000 or $10,000 per month in the period ended June
16, 2003 as compared to $149,000 or $12,000 per month for the fiscal year 2002
period. The slight decrease in monthly net interest expense in the period ended
June 17,, 2003 is primarily attributable to interest income earned on various
loans for which there was no comparable item in the 2002 period.
Other income of $280,000 in the June 16, 2003 period is comprised of adjustments
to estimated accruals for which certain potential liabilities have been reduced.
There was no such item in the 2002 period.
Fiscal Year 2002, as compared to Fiscal Year 2001
In fiscal 2002, our company's pro-rata share of Western's loss was limited to
its remaining equity investment in Western of $702,000 while in fiscal 2001, our
share of Western's loss was $2,823,000.
General & administrative expenses in fiscal 2002 were $1,154,000, a net decrease
of $60,000 from the $1,214,000 recorded in 2001. The net decrease is comprised
primarily of an increase in executive bonus of $300,000; an increase in rent
expense of $97,500 and $65,000 of costs relative to the abandoned registration
of a rights offering in the current year offset by a decrease of $175,000 in bad
debt expense due to the charge taken in 2001 against the note receivable of
$175,000 from Ego Magazine.Com, Inc. for which there is no comparable figure in
the current year; a decrease of $134,000 in legal expense; a decrease of
approximately $165,000 in salaries, benefits and expenses of Intertech employees
pursuant to the sale of Intertech in March 2001 and a general net decrease in
other expenses of approximately $49,000.
Net interest expense in Fiscal 2002, excluding the interest charge for shares
issued in the loan transaction with the Rubin Family Trust on May 17, 2002, was
$149,000 which is comprised of $150,000 accrued on certain short term debt;
interest expense of $4,000 on the $250,000 Note due to the Rubin Family Trust
and interest income of $5,000. This was a decrease of $99,000 from 2001 which is
due primarily to interest of $112,000 paid by Our company in the first quarter
of fiscal 2001 relative to the shareholder settlement payments offset by
interest income in 2001 of approximately $13,000.
In fiscal 2002, we had a loss on sales of marketable securities of $837,000.
This loss was comprised primarily of a loss of $242,000 from the sale of 491,000
shares of Magna Labs, Inc. and a loss of $516,000 from the sale of 72,000 shares
of RezConnect Technologies, Inc. In addition, there was a loss of $26,000 from
the sale of 15,000 shares of Azurel, Ltd. and a loss of $53,000 from the sale of
7,000 shares of Elephant & Castle Group, Inc. Total net proceeds generated from
these sales were $185,000. All of these shares, except those of Elephant &
Castle Group, Inc., were contributed to our company by Mr. Rubin as part of his
payment to our company in Fiscal 1999 and 2000 in settlement of the 1998
shareholder derivative action at which point they had significantly higher
market values.
The loss of $837,000 on sale of marketable securities in Fiscal 2002 compares to
a loss of $1,395,000 in Fiscal 2001 which was primarily comprised of a loss of
$514,000 from the sale of 1,215,000 shares of Magna Labs, Inc. and a loss of
$757,000 from the sale of 1,637,000 shares of eGlobe, Inc. In addition, there
was a loss of $3,000 from the sale of 500 shares of RezConnect Technologies,
Inc. and a loss of $121,000 from the sale of 58,000 shares of Graphon Corp.
Total net proceeds generated from the sales of marketable securities in Fiscal
2001 were $1,275,000. The shares of eGlobe were acquired in June 1999 in the
form of eGlobe preferred convertible shares as part of the sales price of the
assets of Connectsoft Communications Corp. The trading prices of eGlobe and
Graphon shares decreased significantly during our required holding period.
6
Liquidity and Capital Resources
Management assesses liquidity in terms of our company's ability to generate cash
to fund its operating, investing and financing activities. Significant factors
affecting the management of liquidity are: cash flows generated from operating
activities, capital expenditures, financing requirements, investments in
businesses, adequacy of available bank lines of credit and the ability to
attract long-term capital with satisfactory terms.
Our primary needs for liquidity and capital resources are the funding of
salaries and other administrative expenses related to the management of our
company.
During the period of August 1, 2002 through June 16, 2003 and June 17 through
December 31, 2003, our cash, cash equivalents and marketable securities
increased by $237,000 and $18,000 respectively. Cash receipts during these two
periods consisted of net proceeds of $2,875,000 in September 2002 from the
settlement of litigation and net proceeds of $1,350,000 from the sale of the
Bridge Notes on June 18, 2003. Of these monies, $1,508,000 was used for loans to
NY Medical and $195,000 was used for loans to other companies; $250,000 was used
to repay the May 2002 loan from the Rubin Family Irrevocable Stock Trust;
$536,000 was used to pay accrued liabilities; $73,000 was used to purchase
treasury stock ; approximately $585,000 was used for professional fees and other
expenses related to the rescinded acquisition of Lifetime and NYMI and
approximately $804,000 was used to fund day to day operations.
Our cash, cash equivalents and marketable securities of $384,000 as of December
31, 2003 are not sufficient to support current levels of operations for the next
twelve months and it will be necessary for us to seek additional financing. In
addition, we are in default on certain indebtedness and expect to continue
non-payment of this indebtedness.
The Company's cash position as of the filing date of this Form 10-K is less than
$50,000; however, the Company is actively seeking a loan of $250,000 and is
currently in discussions with a financing source. Such loan, if consummated,
when combined with the existing cash amount, will be sufficient to fund the
operating costs and expenses of the Company for approximately 6 months. There is
no assurance that any loan will be obtained, but management is confident of
being able to do so.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Commitments and Other Obligations
We remain contingently liable for certain capital lease obligations assumed by
eGlobe, Inc. (eGlobe) as part of the Connectsoft Communications Corp. asset sale
that was consummated in June 1999. (see Note 6).
7
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States (GAAP). These accounting
principles require us to make certain estimates, judgments and assumptions. We
believe that the estimates, judgments and assumptions upon which we rely are
reasonable based upon information available to us at the time that these
estimates, judgments and assumptions are made. These estimates, judgments and
assumptions can affect the reported amounts of assets and liabilities as of the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the periods presented. To the extent there are material
differences between these estimates, judgments or assumptions and actual
results, our financial statements will be affected. The significant accounting
policies that we believe are the most critical to aid in fully understanding and
evaluating our reported financial results include the following:
Accounting for Income Taxes
We currently record 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
We review estimates of the value of our investments each reporting period and
record an impairment loss to the extent that our management believes that there
has been an impairment to the carrying value.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Although these
estimates are based on the knowledge of current events and actions we may
undertake in the future, they may ultimately differ from actual results. We use
estimates, among others, to determine whether any impairment is to be
recognized.
Intangible Assets and Goodwill
We account for intangible assets and goodwill in accordance with Statement of
Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible
Assets", which was adopted by we on February 1, 2002 in accordance with that
statement, goodwill and intangible assets with indefinite lives are no longer
amortized, but rather tested for impairment at least annually. Intangible assets
with estimable useful lives, consisting of patents, trademarks, and rights, are
amortized on a straight-line basis over the estimated useful lives of 5 to 15
years, and are reviewed for impairment in accordance with SFAS 144, "Accounting
for the Impairment of long-lived Assets".
Goodwill represents the excess of purchase price over the fair value of
identifiable assets acquired in a purchase business combination.
Goodwill and intangible assets with definite lives are tested annually for
impairment in accordance with the provisions of SFAS 142.
Impairment of goodwill is tested at the reporting unit level by comparing the
reporting unit's carrying amount, including goodwill, to the fair value of the
reporting unit. The fair values of the reporting units are estimated using a
combination of the income or discounted cash flows approach and the market
approach, which utilizes comparable companies' data. If the carrying amount of
the reporting unit exceeds its fair value, then a second step is performed to
measure the amount of impairment loss, if any. Any impairment loss would be
expensed in the consolidated statements of earnings. The impairment test for
intangibles with indefinite useful lives consists of a comparison of the fair
value of the intangible assets with its carrying amount. When the carrying
amount of the intangible assets exceeds its fair value, an impairment loss would
be recognized for the difference.
Intangible assets with estimable lives and other long-lived assets are reviewed
for impairment when events or changes in circumstances indicate that the
carrying amount of an asset or assets group may not be recoverable in accordance
with SFAS 144. Recoverability of intangible assets with estimable lives and
other long- lived assets is measured by a comparison of the carrying amount of
an assets or asset group to future net undiscounted pretax cash flows expected
to be generated by the assets or asset group. If these comparisons indicated
that an asset is not recoverable, the impairment loss recognized is the amount
by which the carrying amount of the asset or the asset group exceeds the related
estimated fair value.
8
Recent accounting pronouncements
In July 2001, SFAS No. 142, "Goodwill and Other Intangible Asset" was issued. We
adopted the provisions of SFAS 142 on February 1, 2002.
In June 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations," was
issued. SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. It requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The company adopted SFAS 143
on February 1, 2003. Its adoption did not have an impact on our company's
financial statements.
In June 2002, the Financial Accounting Standards Board (FASB) issued SFASNo.
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)." The company adopted SFAS 146, effective February 1, 2003. The
adoption of SFAS 146 did not have a material impact on our company's financial
statements. The company has continued to account for employee-related
post-employment benefit costs, including severance payments, under the
provisions of SFAS No. 112, "Employer's Accounting for Post-Employment
Benefits."
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees and
Indebtedness of Others," was issued. This interpretation requires the initial
recognition and initial measurement, on a prospective basis only, of guarantees
issued or modified after December 31, 2002. Additionally, certain disclosure
requirements were effective for financial statements ending after December 15,
2002. The adoption of this interpretation did not have an impact on our
company's financial statements.
In January 2003, FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable
Interest Entities," (VIE's) was issued, and in December 2003, a revision to FIN
46 was issued. FIN 46 requires identification of our company's participation in
VIE's, which are defined as entities with a level of invested equity that is not
sufficient to fund future activities to permit them to operate on a stand-alone
basis, or whose equity holders lack certain characteristics of a controlling
financial interest. For entities identified as VIE's, FIN 46 sets forth a model
to evaluate potential consolidation based on an assessment of which party to a
VIE, if any, bears a majority of the risk of the VIE's expected losses, or
stands to gain from a majority of the VIE's expected returns. FIN 46 also sets
forth certain disclosures regarding interests in VIE's that are deemed
significant, even if consolidation is not required. This interpretation is
effective for all VIE's created after January 31, 2003. The adoption of this
interpretation did not have an impact on our company's financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 clarifies under what
circumstances a contract with an initial net investment meets the
characteristics of a derivative, amends the definition of an underlying
contract, and clarifies when a derivative contains a financing component in
order to increase the comparability of accounting practices under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The statement is
effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The adoption of SFAS 149
did not have an impact on our company's financial statements.
In May 2003, the FASB issued SFAS 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). Many of those instruments
were previously classified as equity. The statement is effective for financial
instruments entered into or modified after May 31, 2003. The company adopted
this standard on June 1, 2003. Its adoption did not have an impact on our
company's financial statements.
9
In May 2003, the consensus on EITF Issue No. 01-08, "Determining Whether an
Arrangement Contains a Lease," was issued. The guidance in the consensus applies
to the purchase or sale of goods and services under various types of contracts,
including outsourcing arrangements. Based on the criteria in the consensus, both
parties to an arrangement are required to determine whether the arrangement
includes a lease within the scope of SFAS No. 13, "Accounting for Leases." The
new requirement applies prospectively to new or modified arrangements for
reporting periods beginning after May 28, 2003. Accordingly, as of August 1,
2003, the company accounted for new or modified arrangements based on this
guidance. Adoption of this standard did not have an impact on our company's
financial statements.
In December 2003, the FASB issued SFAS No. 132 (Revised 2003), "Employers'
Disclosures about Pensions and Other Post-retirement Benefits," which enhanced
the disclosure about pension plans and other post-retirement benefit plans, but
did not change the measurement or recognition principles for those plans. The
statement requires additional disclosures about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and other
defined benefit post-retirement plans. Its adoption did not have an impact on
our company's financial statements.
Financial Statements and Internal Controls
We believe it is critical to provide investors and other users of our financial
statements with information that is relevant, objective, understandable and
timely, so that they can make informed decisions. As a result, we have
established and we maintain accounting systems and practices and internal
control processes designed to provide reasonable assurance that transactions are
properly executed and recorded and that our policies and procedures are carried
out appropriately.
Financial Controls and Transparency
Our internal controls are designed to ensure that assets are safeguarded,
transactions are executed according to management authorization and our
financial systems and records can be relied upon for preparing our financial
statements and related disclosures. Our system of internal controls includes
continuous review of our financial policies and procedures to ensure accounting
and regulatory issues have been appropriately addressed, recorded and disclosed.
The independent auditors perform audits of our financial statements, in which
they examine evidence supporting the amounts and disclosures in our financial
statements, and also consider our system of internal controls and procedures in
planning and performing their audits.
Management Controls
Our management team is committed to providing high-quality, relevant and timely
information about our businesses. Management performs reviews of each of our
businesses throughout the year, addressing issues ranging from financial
performance and strategy to personnel and compliance.
In addition, see" Item 9A - Controls and Procedures" below.
Item 7A. Quantitative And Qualitative Disclosures About Market Risk. We are
exposed to market risk related to fluctuations in interest rates on our debt. An
increase in prevailing interest rates could increase our interest payment
obligations relating to variable rate debt.
Item 8. Financial Statements And Supplementary Data.
See page F-1 for an index to the Consolidated Financial Statements.
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure.
On June 1, 2004, we appointed Seligson & Giannattasio, LLP as our independent
auditors.
On June 16, 2003, we changed our fiscal year to December 31 in connection with
the acquisition of NY Medical.
Item 9A. Controls And Procedures.
We evaluated the effectiveness of the design and operation of our "disclosure
controls and procedures" ("Disclosure Controls") pursuant to Rules 13a-14(c) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and our
"internal controls and procedures for financial reporting" (Internal Controls)
as of the end of the period covered by this Annual Report on Form 10-K. This
evaluation (the "Controls Evaluation") was done under the supervision and with
the participation of management.
10
Disclosure Controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. Disclosure Controls are also
designed with the objective of ensuring that such information is accumulated and
communicated to our management, including the Chief Executive Officer (CEO) to
allow timely decisions regarding required disclosure. Internal Controls are
procedures which are designed with the objective of providing reasonable
assurance that (1) our transactions are properly authorized; (2) our assets are
safeguarded against unauthorized or improper use; and (3) our transactions are
properly recorded and reported, all to permit the preparation of our financial
statements in conformity with generally accepted accounting principles in the
United States Of America.
Since the date of the Controls Evaluation to the date of this Annual Report,
there have been no significant changes in Internal Controls or in other factors
that could significantly affect Internal Controls, and no corrective actions
were required or taken with regard to significant deficiencies and material
weaknesses.
11
PART III
Item 10. Directors and Executive Officers of the Registrant.
Our directors serve until the next annual meeting of stockholders or until their
successors are elected and qualified. The executive officers serve at the
discretion of the Board of Directors in the absence of employment agreements.
The following information is submitted with respect to each of our directors and
executive officers as of the date of the filing of this annual report of Form
10-K.
Name Age Positions presently held
- ---- --- ------------------------
Robert M. Rubin 64 Chairman of the Board of Directors and Chief
Executive Officer
David M. Barnes 61 Chief Financial Officer and Director
C. Dean McLain 49 Executive Vice President and Director
Michael Metter 46 Director
Howard Katz (1) 63 Director
(1) Mr. Katz' resignation as a director of our company has been requested but as
at the date of this Form 10-K such resignation has not been received.
Robert M. Rubin. Mr. Rubin has served as the Chairman of our Board of Directors
since May 1991, and was our Chief Executive Officer from May 1991 to January 1,
1994. Between October 1990 and January 1, 1994, Mr. Rubin served as the Chairman
of the Board and Chief Executive Officer of our company and its subsidiaries;
from January 1, 1994 to January 19, 1996, he served only as Chairman of the
Board of our company and its subsidiaries. From January 19, 1996 to the present,
Mr. Rubin served as Chairman of the Board, President and Chief Executive
Officer. Mr. Rubin was the founder, President, Chief Executive Officer and a
Director of Superior Care, Inc. ("SCI") from its inception in 1976 until May
1986, when the business was sold to Olsten Corporation (NYSE). Mr. Rubin
continued as a director of SCI until the latter part of 1987. Mr. Rubin is also
a Director of Western Power and Equipment Corp. Mr. Rubin was a director of
Med-Emerg, Inc., a publicly held Canadian management company for hospital
emergency rooms and outpatient facilities until November 2001. Mr. Rubin was
also a director of StyleSite Marketing, Inc., which liquidated its assets for
the benefit of secured creditors in January 2000.
David M. Barnes. Mr. Barnes has served as our Chief Financial Officer since May
15, 1996, and was a director from November 8, 1996 through June 17, 2003. Mr.
Barnes resigned as a member of our board of directors effective on June 17, 2003
but was reappointed to our board of directors upon the effectiveness of the
rescission agreement with NY Medical. Mr. Barnes is also presently a member of
the Advisory Board of Interactive Imagination, Inc., a privately-held video game
developer based in Seattle, WA.
C. Dean McLain. Mr. McLain has served as our Executive Vice President since
March 1, 1993, as a director since March 7, 1994, and President of Western Power
and Equipment Corp. since June 1, 1993. From 1989 to 1993, Mr. McLain served as
Manager of Privatization of Case Corporation. From 1985 to 1989, Mr. McLain
served as General Manager of Lake State Equipment, a distributor of John Deere
construction equipment. Mr. McLain holds a B.S. degree in Business and
Economics, and a Master's of Business Administration, from West Texas State
University. Mr. McLain devotes his full professional time to Western and
included in such time is time spent on our business.
Michael Metter. Mr. Metter has served as a Director since December 14, 2001. Mr.
Metter resigned as a member of our board of directors effective on June 17,
2003, but was reappointed to our board of directors upon the effectiveness of
the rescission agreement with NY Medical on May 27, 2004. Since March 2001, Mr.
Metter has been the President of RME International, Ltd.(RME) Mr. Metter also
currently consults to a broad range of businesses, including IT communications
and media businesses, on mergers, acquisitions, restructuring, financing and
other matters. From October 1998 to February 2001, Mr. Metter was a principal of
Security Capital Trading, Inc, and was a principal at Madison Capital from
September 1997 to October 1998. Prior thereto, Mr. Metter was the President of
First Cambridge Securities from October 1994 to August 1997.
Howard Katz. Mr. Katz has been a director since April 15, 1996, and was an
Executive Vice President from April 15, 1996 through July 31, 1998. Since August
1998 to the present Mr. Katz has been the Chief Executive Officer of Imagine
Networks, LLC., a company based in New York City that engages in advanced
technology and software development. Mr. Katz' resignation was requested in
connection with the contemplated acquisition of NY Medical, but such resignation
was never furnished to us.
12
Family Relationships
There is no family relationship between any of the directors and/or executive
officers, by blood, marriage or adoption.
Involvement in certain legal proceedings
Except as set forth herein, no officer or director of our company has, during
the last five years: (i) been convicted in or is currently subject to a pending
a criminal proceeding; (ii) been a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
was or is subject to a judgment, decree or final order enjoining future
violations of, or prohibiting or mandating activities subject to any federal or
state securities or banking laws including, without limitation, in any way
limiting involvement in any business activity, or finding any violation with
respect to such law, nor (iii) has any bankruptcy petition been filed by or
against the business of which such person was an executive officer or a general
partner, whether at the time of the bankruptcy of for the two years prior
thereto.
Compliance with Section 16 of the Exchange Act
Section 16(a) of the Securities Exchange Act, as amended (the "Exchange Act")
requires our executive officers and directors, and persons who beneficially own
more than ten percent of our common stock, to file initial reports of ownership
and reports of changes in ownership with the SEC and the National Association of
Securities Dealers, Inc. Executive officers, directors and persons who
beneficially own more than ten percent of our common stock are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file.
Based solely upon our review of the copies of reporting forms furnished to us,
and written representations that no other reports were required, we do not
believe that all filing requirements under Section 16(a) of the Securities
Exchange Act of 1934 applicable to our directors, officers and any persons
holding 10% or more of our common stock with respect to our fiscal year ended
December 31, 2003, were satisfied on a timely basis.
Code of Ethics
Our board of directors adopted a Code of Ethics that covers all executive
officers of our company and its subsidiaries. The Code of Ethics requires that
senior management avoid conflicts of interest; maintain the confidentiality of
information relating to our company; engage in transactions in shares of our
common stock only in compliance with applicable laws and regulations and the
requirements set forth in the Code of Ethics; and comply with other requirements
which are intended to ensure that such officers conduct business in an honest
and ethical manner and otherwise act with integrity and in the best interest of
our company.
All our executive officers are required to affirm in writing that they have
reviewed and understand the Code of Ethics.
Any amendment of our Code of Ethics or waiver thereof applicable to any of our
principal executive officer, principal financial officer and controller,
principal accounting officer or persons performing similar functions will be
disclosed on our website within 5 days of the date of such amendment or waiver.
In the case of a waiver, the nature of the waiver, the name of the person to
whom the waiver was granted and the date of the waiver will also be disclosed. A
copy of our Code of Ethics is attached hereto as Exhibit 14.
Audit Committee
Our board of directors has an audit committee comprised of Michael Metter. The
audit committee makes recommendations to our board of directors regarding the
independent auditors for our company, approves the scope of the annual audit
activities of our independent auditors, review audit results and will have
general responsibility for all of our auditing related matters.
The purpose of the Audit Committee is to assist our board of directors in the
oversight of the integrity of the consolidated financial statements of our
company, our company's compliance with legal and regulatory matters, the
independent auditor's qualifications and independence, and the performance of
our company's independent auditors. The primary responsibilities of the Audit
Committee are set forth in its charter, and include various matters with respect
to the oversight of our company's accounting and financial reporting process and
audits of the consolidated financial statements of our company on behalf of our
board of directors. The Audit Committee also selects the independent certified
public accountants to conduct the annual audit of the consolidated financial
statements of our company; reviews the proposed scope of such audit; reviews
accounting and financial controls of our company with the independent public
accountants and our financial accounting staff; and reviews and approves
transactions between us and our directors, officers, and their affiliates.
13
Accordingly, the Audit Committee discusses with our independent auditors, our
audited financial statements, including among other things the quality of our
accounting principles, the methodologies and accounting principles applied to
significant transactions, the underlying processes and estimates used by our
management in our financial statements and the basis for the auditor's
conclusions regarding the reasonableness of those estimates, in addition to the
auditor's independence.
Audit Committee Financial Expert
We do not have an audit committee financial expert. We have not yet been able to
identify and appoint a suitable nominee as of the date of this annual report.
Our management is currently diligently pursuing such a candidate.
Compensation of the Board of Directors
Directors who are also our employees do not receive additional compensation for
serving on the Board or its committees. Non-employee directors are not paid any
annual cash fee. In addition, directors are entitled to receive options under
our Stock Option Plan. All directors are reimbursed for their reasonable
expenses incurred in attending Board meetings. We intend to procure directors
and officers liability insurance.
Limitation on Liability and Indemnification of Directors and Officers Under
Delaware General Corporation Law a director or officer is generally not
individually liable to the corporation or its shareholders for any damages as a
result of any act or failure to act in his capacity as a director or officer,
unless it is proven that:
1. his act or failure to act constituted a breach of his fiduciary duties as a
director or officer; and
2. his breach of those duties involved intentional misconduct, fraud or a
knowing violation of law.
This provision is intended to afford directors and officers protection against
and to limit their potential liability for monetary damages resulting from suits
alleging a breach of the duty of care by a director or officer. As a consequence
of this provision, stockholders of ours will be unable to recover monetary
damages against directors or officers for action taken by them that may
constitute negligence or gross negligence in performance of their duties unless
such conduct falls within one of the foregoing exceptions. The provision,
however, does not alter the applicable standards governing a director's or
officer's fiduciary duty and does not eliminate or limit our right or any
stockholder to obtain an injunction or any other type of non-monetary relief in
the event of a breach of fiduciary duty.
As permitted by Delaware law, our By-Laws include a provision which provides for
indemnification of a director or officer by us against expenses, judgments,
fines and amounts paid in settlement of claims against the director or officer
arising from the fact that he was an officer or director, provided that the
director or officer acted in good faith and in a manner he or she believed to be
in or not opposed to our best interests. We have purchased insurance under a
policy that insures both our company and our officers and directors against
exposure and liability normally insured against under such policies, including
exposure on the indemnities described above.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
14
Item 11. Executive Compensation
The following table summarizes the compensation for services rendered to our
company during fiscal years 2001, 2002 and 2003 by (i) our Chief Executive
Officer, and (ii) each of our other most highly compensated executive officers
whose total annual salary and bonus exceeded $100,000 and whose compensation is
required to be disclosed under SEC rules.
Annual Compensation ($) Long Term Compensation
Awards Payouts
Name and Other Annual Securities Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation Options/ SARs(#) Payouts Compensation
Robert M. Rubin (1) 2003 $257,000 - $200,000 (2) - - -
2002 $247,000 $300,000 $200,000 - - -
2001 $238,000 - $200,000 - - -
David M. Barnes 2003 $120,000 - - - - -
2002 $150,000 - - - - -
2001 $135,000 - - - - -
(1) Effective in July 1999, Mr. Rubin was entitled to an annual salary of
$225,000 plus a minimum increase each year equal to the percentage rise in
the New York City wage index (approximately 4% per year).
(2) Mr. Rubin is also engaged by Western, pursuant to a consulting agreement
that expires on July 31, 2007. He receives $200,000 annually plus
reimbursement for his business expenses.
15
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
As of the most recent practicable date, our authorized capitalization consisted
of forty million shares of common stock, par value $0.01 per share. As of the
most recent practicable date, there were 3,824,799 shares of our common stock
issued and outstanding, all of which were fully paid, non-assessable and
entitled to vote. Each share of our common stock entitles its holder to one vote
on each matter submitted to our stockholders. The following table sets forth, as
of the most recent practicable date, the number of shares of our common stock
owned by (i) each person who is known by us to own of record or beneficially
five percent (5%) or more of our outstanding shares, (ii) each of our directors,
(iii) each of our executive officers and (iv) all of our directors and executive
officers as a group. Unless otherwise indicated, each of the persons listed
below has sole voting and investment power with respect to the shares of our
common stock beneficially owned.
Name and Address Amount Owned (1) Percent of Class (2)
- ---------------- ---------------- --------------------
Rubin Family Irrevocable Stock Trust (3) 5,157,474 69.39%
Robert M. Rubin (4) 33,680 *
David M. Barnes (5) 749,500 18.39%
C. Dean McLain (6) 962,000 23.83%
Michael Metter (7) 130,000 3.38%
Howard Katz (8) 64,000 1.64%
All officers and directors as a group (5 persons) 7,096,654 87.96%
* Less than one percent
(1) Beneficial ownership is determined in accordance with the Rule 13d-3(d)(1)
of the Exchange Act, as amended and generally includes voting or investment
power with respect to securities. Pursuant to the rules and regulations of
the Securities and Exchange Commission, shares of common stock that an
individual or group has a right to acquire within 60 days pursuant to the
exercise of options or warrants are deemed to be outstanding for the
purposes of computing the percentage ownership of such individual or group,
but are not deemed to be outstanding for the purposes of computing the
percentage ownership of any other person shown in the table.
(2) Figures may not add up due to rounding of percentages.
(3) Consists of (i) 1,549,831 shares of our common stock currently owned by the
Rubin Family Irrevocable Stock Trust (the "Trust"), and (ii) 3,607,643
shares of AUGI common stock issuable to the Trust upon conversion of the
B-3 Preferred. The Trust was created by Robert M. Rubin, our chairman and
chief executive officer, for the benefit of his wife Margery Rubin and
their children. Mr. Rubin disclaims beneficial interest in all securities
of our company held by the Trust.
(4) Includes (a) 80 shares of our common stock owned by Mr. Rubin and (b)
presently exercisable options to acquire an additional 33,600 shares of our
common stock.
(5) Includes options to purchase 249,500 shares of our common stock.
(6) Includes options to purchase 212,000 shares of our common stock.
(7) Includes options to purchase 110,000 shares of our common stock.
(8) Consists of options to purchase 64,000 shares of our common stock.
16
Item 13. Certain Relationships And Related Transactions.
On June 16, 2003, our company, Lifetime Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of our company ("Merger Sub"), and
Lifetime Healthcare Services, Inc., a Delaware corporation ("Lifetime"), entered
into an Amended and Restated Agreement and Plan of Merger (the "Merger
Agreement").
Upon the terms and subject to the conditions set forth in the Merger Agreement,
Merger Sub was merged into Lifetime as of June 17, 2003 (the "Merger"). As a
result of the Merger, the outstanding shares of capital stock of each of Merger
Sub and Lifetime were converted or canceled, the separate corporate existence of
Merger Sub ceased, and Lifetime continued as the surviving corporation in the
Merger as a wholly owned subsidiary of our company.
Immediately prior to the Merger, 55% of the capital stock of NY Medical was
acquired by Lifetime pursuant to that certain Stock Purchase Agreement, dated
March 21, 2003, as amended (the "NY Medical Stock Purchase Agreement") entered
into by and among Lifetime, Redwood, and NY Medical.
Prior to the Merger, the Rubin Family Irrevocable Stock Trust (the "Trust")
owned approximately 77.6% of the shares of common stock, par value $.01 per
share of our company. In connection with the Merger, our company:
- issued to the former stockholders of Lifetime, an aggregate of 467,500
shares of our company's Series B-2 Convertible Preferred Stock (the
"B-2 Preferred"), convertible into an aggregate of 9,350,000 shares of
Our common stock, which B-2 Preferred votes on an "as converted" basis
with our common stock on all matters as to which holders of our common
stock may vote; and
- entered into a certain agreement (the "Closing Agreement") which was
to govern the constitution of our board of directors and materially
impact its decision-making capability.
In contemplation of the Merger Agreement, we declared a stock dividend on our
common stock with a record date of June 10, 2003. The stock dividend took the
form of the issuance of 232,500 shares of our newly authorized and designated
Series B-3 Convertible Preferred Stock (the "B-3 Preferred") to the holders of
our common stock on the record date on a pro rata basis. Each share of the B-3
Preferred is convertible, on or after December 17, 2003, into 20 shares of our
common stock at the discretion of our board of directors. Accordingly, an
aggregate of 4,650,000 shares of our common stock would be issued to the record
holders of the B-3 Preferred if all shares of B-3 Preferred were converted. The
shares of B-3 Preferred vote together with our common stock on an "as converted
basis."
We attempted to consummate a private placement of our securities beginning in
September, 2003 in order to raise approximately $5.7 million to pay $2.0 million
principal amount of the Lifetime Note and retire the Landow Note, among other
purposes. In October 2003, Dr. Landow, acting on behalf of NY Medical, Tracy
Landow and Redwood, extended the due date to satisfy the payment events (the
"Payment Events") under the Closing Agreement. The Payment Events were postponed
from October 17, 2003 to November 17, 2003 in consideration for our agreement to
extend the due date of the $1,500,000 NY Medical Note payable to us to January
2, 2005.
We were unable to consummate the requisite financing by the extended date, and
in November 2003, Dr. Landow declared a default event. On December 5, 2003, a
written notice of a special telephonic meeting of the board of directors to be
held on Monday, December 8, 2003 was transmitted by Messrs. Landow, Fause and
Good to Messrs. Rubin and McLain; the purpose of the special meeting was, among
other things, to consider a possible rescission of the acquisition of 55% of the
capital stock of NY Medical by our company and the transactions relating
thereto.
On December 8, 2003, a telephonic meeting of the board was allegedly convened.
As a result of such alleged board meeting, minutes were prepared and executed by
Messrs. Landow, Fause and Good, and on December 9, 2003, a rescission agreement
among our company, Merger Sub, Lifetime, NY Medical, Redwood and the ESOP, dated
as of December 9, 2003 (the "Rescission Agreement") was entered into and
delivered to counsel to our company and Messrs. Rubin and McLain.
17
Under the terms of such Rescission Agreement:
- the Merger, Merger Agreement and all related documents were
cancelled and rescinded and rendered null and void, ab initio,
for all purposes, including for tax purposes;
- the NY Medical Stock Purchase Agreement, the acquisition of
capital stock of NY Medical and all transactions relating thereto
were cancelled and rescinded and rendered null and void, ab
initio, for all purposes, including for tax purposes;
- the share exchange agreement between our company and the ESOP
pursuant to which we were to acquire the remaining 45% of NY
Medical not acquired through the Merger Agreement (the "Share
Exchange Agreement") and all transactions relating thereto were
cancelled and rescinded and rendered null and void, ab initio,
for all purposes, including for tax purposes; and
- in order to enable us to repay the $1.5 million of bridge notes
(the "Bridge Notes") owed to certain investors in March 2004, NY
Medical agreed under the terms of the Rescission Agreement that
"the NY Medical Note shall be modified such that all principal
and interest thereunder shall be due from NY Medical to AUGI on
March 30, 2004." In consideration of such modification, the
Rescission Agreement permits NY Medical or its representatives to
communicate directly with the holders of the Bridge Notes for the
purpose of, among other things, negotiating an alternative
mechanism for the payment of the Bridge Notes.
Subsequent to December 9, 2003, Mr. Rubin objected to the December 8, 2003
meeting and the Rescission Agreement for a variety of reasons, including the
alleged failure to properly convene such meeting. On December 12, 2003, counsel
for NY Medical and Redwood commenced a lawsuit against our company, Lifetime,
Robert M. Rubin, Kenneth Orr and Robert DePalo in the New York State Supreme
Court seeking, among other things to declare the Rescission Agreement as valid
and effective and also seeking monetary damages against the defendants for
fraudulent inducement, unjust enrichment and breach of fiduciary duties and
breach of contract. Our company and our counsel believe that the suit is totally
without merit and that we have a number of valid defenses and counterclaims
against Dr. Landow and NY Medical.
Since late December 2003, the parties have been holding discussions with a view
toward settling the dispute, and the defendants in the above litigation have
been granted extensions to answer or otherwise plead.
On March 8, 2004, our corporate counsel advised counsel to NY Medical, Redwood
and its affiliates that each of our company and Messrs. Rubin and McLain, as
members of our board of directors, have reconsidered their position and that
they agree with NY Medical, Redwood, Dr. Landow, Tracy Landow and the ESOP that:
- effective as of December 9, 2003, the Merger, Lifetime Merger
Agreement and all related merger documents are null and void, ab
initio, for all purposes, including, without limitation, for tax
purposes;
- effective as of December 9, 2003, the NY Medical Stock Purchase
Agreement, the acquisition of capital stock of NY Medical and all
transactions contemplated thereby are null and void, ab initio,
for all purposes, including, without limitation, for tax
purposes;
- effective as of December 9, 2003, the Share Exchange Agreement
between our company and the ESOP and all transactions
contemplated thereby are null and void, ab initio, for all
purposes, including, without limitation, for tax purposes; and
- all principal amount of and accrued interest on the NY Medical
Note is, in fact, due and payable on March 30, 2004, and NY
Medical shall have the right to communicate directly with the
holders of the Bridge Notes for the purpose of, among other
things, negotiating an alternative mechanism for the payment of
the Bridge Notes.
Our counsel's letter did not condition acceptance of the above arrangements upon
a dismissal or voluntary settlement of the pending litigation, but rather
requested that NY Medical or its counsel advise as to mechanisms for NY Medical
to (a) communicate with the holders of the Bridge Notes, (b) effect full payment
on March 30, 2004 of the NY Medical Note, and (c) return the stock certificates
and other documents to effect the transactions contemplated by the Rescission
Agreements. To date, neither our company nor its counsel have been formally
contacted by NY Medical or its counsel concerning such matters.
18
As a result of the consummation of the transactions contemplated by the
Rescission Agreement:
- 55% of the capital stock of NY Medical will be returned to
Redwood and the proposed Share Exchange with the ESOP will be
cancelled;
- the Merger is cancelled and rescinded, and all 467,500 shares of
our Series B-2 Preferred Stock issued to the former stockholders
of Lifetime are rendered null and void, without any further value
or rights, and returned to the treasury of our company for
cancellation;
- all stock options issued to Dr. Landow, Joseph Ciavarella, the
directors designated by Dr. Landow and other employees of NY
Medical are cancelled, which options were exercisable for an
aggregate of 2,100,000 shares of our common stock;
- effective as of December 9, 2003 each of Dr. Landow, Stuart Fause
and John Good is deemed to have resigned as a member of our board
of directors; and
- we cancelled the $5,500,000 Landow Note.
Effect of the Rescission of the NY Medical and Related Transactions.
As at the date of this filing, our company is in default in payment of the $1.5
million of Bridge Notes that were due and payable on March 17, 2004. On March
30, 2004, the $1.5 million of NY Medical Notes became due and payable. The NY
Medical Notes and our subordinated security interest in the assets of NY Medical
have been assigned to the holders of the Bridge Notes. We expect to negotiate
with representatives of NY Medical extensions of such obligations or otherwise
enter into compromise arrangements with the holders of the Bridge Notes. Our
company has been advised that NY Medical is currently negotiating to refinance
its indebtedness owed to DVI Business Credit Corp. ("DVI"), the senior secured
lender to NY Medical, that holds a first priority lien and security interest on
all of the assets of NY Medical. However, in April 2004, certain holders of the
Bridge Notes sued us for repayment thereof (see "Item 3. Legal Proceedings").
In the event that NY Medical does not successfully refinance its obligations to
DVI, or should either we or the holders of the Bridge Notes demand payment of
the NY Medical Note and seek to foreclose on the assets of NY Medical, it may be
expected that DVI will foreclose on its priority lien on such NY Medical assets.
In such event it is probable that neither we nor the holders of the Bridge Notes
will receive significant net proceeds, if any, from the liquidation of the
collateral.
Our cash position as at the filing date of this report on Form 10-K is less than
$100,000. Inasmuch as we no longer own NY Medical or any other operating
business, in the event that any of the holders of the Bridge Notes are
successful in their suit against us, we will be unable to pay such Bridge Notes.
Accordingly, we would not be able to continue as a going concern, and may be
required to seek protection from our creditors under Chapter 11 of the Federal
Bankruptcy Act.
The Trust was issued an aggregate of 180,382 shares of B-3 Preferred, which
would convert into a maximum of 3,607,643 shares of common stock, but gained no
benefit therefrom not shared on a pro rata basis with all other holders of our
19
common stock as of June 10, 20
Item 14. Principal Accountant Fees and Services
Aggregate fees billed to our company for the periods indicated by our principal
accountants, are as follows:
June 17, 2003 to August 1, 2002 to Year ended July 31,
December 31, 2003 June 16, 2003 2002 2001
----------------- ------------- ------------ ------------
AUDIT FEES:
PriceWaterhouseCoopers $ $ $ 22,000 $ 26,000
Seligson & Giannatassio 10,000 10,000
Eisner, LLP 10,000 10,000
AUDIT RELATED FEES:
Eisner, LLP 10,000 10,000
Bagell & Joseph 1,000
TAX FEES:
Robert Schulman 25,000 25,000
ALL OTHER FEES:
Bagell & Joseph 7,500
Eisner, LLP 25,000 35,000
----------- ----------- ------------ -----------
Total $ 55,000 $ 98,500 $ 22,000 $ 51,000
========== ========== ============ ===========
20
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
Independent Auditors' Reports......................................... F-2-3
Consolidated Balance Sheets
December 31, 2003, June 16, 2003 and July 31, 2002...................... F-4
Consolidated Statements of Operations for the periods
June 17, 2003 through December 31, 2003, August 1, 2002
through June 16, 2003 and the years ended July 31, 2002
and 2001................................................................ F-5
Consolidated Statements of Deficit for the periods
June 17, 2003 through December 31, 2003, August 1, 2002
through June 16, 2003 and the years ended July 31, 2002
and 2001...............................................................F-6-7
Consolidated Statements of Cash Flows for the periods
June 17, 2003 through December 31, 2003, August 1, 2002
through June 16, 2003 and the years ended July 31, 2002
and 2001................................................................ F-8
Notes to the Consolidated Financial Statements........................F-9-24
F-1
To The Board of Directors
American United Global, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of American United
Global, Inc. and subsidiaries as of June 16, 2003 and December 31, 2003 and the
related consolidated statements of operations, changes in shareholders' deficit
and cash flows for the period August 1, 2002 to June 16, 2003 and the period
June 17, 2003 to December 31, 2003. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing 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 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 consolidated financial position of
American United Global, Inc. and subsidiaries as of June 16, 2003 and December
31, 2003 and the consolidated results of their operations and their consolidated
cash flows for the period August 1, 2002 to June 16, 2003 and for the period
June 17, 2003 to December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The realization of a major portion
of its assets is dependent upon its ability to meet its future financing
requirements, and the success of future operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
this uncertainty.
Seligson & Giannattasio, LLP
N. White Plains, New York
June 24, 2004
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of American United Global, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and comprehensive income (loss), of
shareholders' equity (deficit) and of cash flows present fairly, in all material
respects, the financial position of American United Global, Inc. and its
subsidiaries (the "Company") at July 31, 2002, and the results of their
operations and their cash flows for the years ended July 31, 2002 and 2001, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred losses from
operations and has had a working capital deficit for each of the years ending
July 31, 2001 and 2002. Further, as discussed in Note 1 to the financial
statements, the Company may require additional funds to continue its operations.
Such factors raise doubt about the Company's ability to continue as a going
concern. Management's plans in regards to these matters are discussed in Note 1.
The financial statements do not reflect any adjustments that might result from
the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Portland, Oregon
November 8, 2002
F-3
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, 2003 June 16, 2003 July 31, 2002
----------------- ------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 379,000 $ 353,000 $ 105,000
Investment in marketable securities,
at market value 5,000 9,000 20,000
Litigation settlement receivable - - 2,875,000
Notes receivable from New York Medical, Inc.,
net of reserve of $1,508,000 and $ -0- 0 850,000 -
Investment in Informedix 100,000 100,000 -
Note receivable, SpongeTech 50,000 25,000 -
Note receivable, InforMedix 20,000 - -
Note receivable, other 25,000 - -
Prepaid expenses - 75,000 -
Interest receivable 5,000 12,000 -
------------ ------------ -------------
TOTAL CURRENT ASSETS 584,000 1,424,000 3,000,000
------------ ------------ -------------
TOTAL ASSETS $ 584,000 $ 1,424,000 $ 3,000,000
============ ============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings in default, including
accrued interest of $1,060,000, $979,000 and $848,000 2,560,000 $ 2,479,000 $ 2,348,000
Accounts payable 14,000 16,000 26,000
Accrued liabilities 478,000 158,000 963,000
Notes payable 7,000 47,000 250,000
Distribution payable to Series B-3 Preferred shareholders
100,000 - -
Bridge notes payable, net of unamortized
discount of $417,000 1,083,000 - -
------------ ------------- -------------
TOTAL CURRENT LIABILITIES 4,242,000 2,700,000 3,587,000
------------ ------------- -------------
TOTAL LIABILITIES 4,242,000 2,700,000 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, each 25 shares convertible into 1
common share, $3.50 per share
liquidation value, $.01 par value; 1,000,000 shares
authorized; 407,094 issued and outstanding 4,000 4,000 4,000
Series B-3 preferred stock, each share
convertible into 20 common shares, $20.00
per share liquidation value, $.01 par value,
232,500 shares authorized; 232,500 shares
issued and outstanding 2,000 - -
Common stock, $.01 par value; 40,000,000
shares authorized; 2,532,699, 1,997,624 and
1,997,624 shares issued and outstanding 25,000 20,000 20,000
Additional paid-in capital 53,126,000 51,475,000 51,375,000
Accumulated deficit (56,661,000) (52,625,000) (51,927,000)
Accumulated unrealized loss, net (74,000) (70,000) (59,000)
------------ ------------ -------------
(3,578,000) (1,196,000) (587,000)
------------ ------------ -------------
Less cost of treasury shares (80,000) (80,000) -
------------ ------------ -------------
Total shareholders' deficit (3,658,000) (1,276,000) (587,000)
------------ ------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 584,000 $ 1,424,000 $ 3,000,000
============ ============ ============
See notes to consolidated financial statements
F-4
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
JUNE 17, 2003 TO AUGUST 1, YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 TO JULY 31, JULY 31,
2003 JUNE 16,2003 2002 2001
--------------- -------------- ------------- -------------
General and administrative expenses $ 1,281,000 $871,000 $ 1,154,000 $ 1,214,000
Operating loss (1,281,000) (871,000) (1,154,000) (1,214,000)
---------- -------- ---------- ----------
Income from litigation settlement - - 2,875,000 -
Impairment of Investment in Western Power and
Equipment Corp. (1,771,000)
Impairment of Investment in Intertech Capital, Inc. - - (250,000) -
Interest paid in common stock - - (1,000,000) -
Interest expense, net (1,247,000) (107,000) (149,000) (248,000)
Loss on sale of marketable securities - - (837,000) (1,395,000)
Other income - 280,000 - 506,000
Reserve for notes due from
New York Medical, Inc. (1,508,000) - - -
Equity in loss of unconsolidated subsidiary - - (702,000) (2,823,000)
---------- -------- ---------- ----------
Loss before taxes (4,036,000) (698,000) (1,217,000) (6,945,000)
Benefit for income taxes - - - 545,000
---------- -------- ---------- ----------
Net loss $(4,036,000) $ (698,000) $(1,217,000) $(6,400,000)
---------- -------- ---------- ----------
Basic and diluted loss per share:
Basic and diluted loss per share $ (0.56) $ (0.35) $ (1.50) $ (13.02)
---------- -------- ---------- ----------
Weighted average number of shares 7,182,699 1,997,624 810,124 491,413
========= ========= ======= =======
See notes to consolidated financial statements
F-5
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF DEFICIT
PREFERRED STOCK COMMON STOCK
--------------- ------------
Number of
Number of shares Amount shares Amount
---------------- ------ ------ ------
B-1 B-2 and B-3 B-1 B-2 and B-3
--------- ------------ ---------- --------------
Balance at July 31, 2000 416,263 - $ 4,000 - 485,735 $ 5,000
Net loss - - - -
Additional private placement shares - - - - 11,500
Conversion of preferred to common (8,420) - - - 337 -
--------- --------- --------- ---------- ------------ ------------
Balance at July 31, 2001 407,843 - 4,000 $ - 497,572 5,000
Net loss - - - - - -
Conversion of preferred stock to common
(749) - 52 -
Shares issued in connection with
the loan from the Rubin Family Trust - - - - 1,500,000 15,000
--------- --------- --------- ---------- ------------ ------------
Balance at July 31, 2002 407,094 - 4,000 - 1,997,624 20,000
Net loss - - - - - -
--------- --------- --------- ---------- ------------ ------------
Balance at June 16, 2003 407,094 - 4,000 - 1,997,624 20,000
Net loss
Issuance of B-2 preferred stock - 467,500 - 5,000 - -
Issuance of B-3 preferred stock - 232,500 - 2,000 - -
Cancellation of B-2 preferred stock - (467,500) - (5,000) - -
Issuance of common shares in payment of
legal fees - - - - 535,075 5,000
--------- --------- --------- ---------- ------------ ------------
Balance at December 31, 2003 407,094 232,500 $ 4,000 $2,000 2,532,699 $ 25,000
========= ========= ========= ========== ============ ============
See notes to consolidated financial statements
F-6
ACCUMULATED
ADDITIONAL OTHER COST OF SHAREHOLDER'S
CONTRIBUTED COMPREHENSIVE ACCUMULATED TREASURY EQUITY
CAPITAL LOSS DEFICIT STOCK (DEFICIT)
---------- ----------- ------------ ----------- -------------
Balance at July 31, 2000 $ 50,390,000 $ 1,284,000 $ (44,310,000) $ 7,373,000
Net loss - - (6,400,000) - (6,400,000)
Accumulated unrealized loss, net - (2,158,000) - - (2,158,000)
Additional private placement shares - - - - -
Conversion of preferred to common - - - - -
---------- -------- ----------- ---------- ----------
Balance at July 31, 2001 50,390,000 (874,000) (50,710,000) - (1,185,000)
---------- -------- ----------- ---------- ----------
Net loss (1,217,000) - (1,217,000)
Accumulated unrealized loss, net 815,000 - 815,000
Shares issued in connection with the
Loan from the Rubin Family Trust 985,000 - - 1,000,000
---------- -------- ----------- ---------- ----------
Balance at July 31, 2002 51,375,000 (59,000) (51,927,000) - (587,000)
Net loss (698,000) - (698,000)
Accumulated unrealized loss - (11,000) - - (11,000)
Purchase of Treasury Shares - - - (80,000) (80,000)
Stock option compensation 100,000 - - - 100,000
---------- -------- ----------- --------- ----------
Balance at June 16, 2003 51,475,000 (70,000) (52,625,000) (80,000) (1,276,000)
Net loss (4,036,000) - (4,036,000)
Accumulated unrealized loss - (4,000) - - (4,000)
Issuance of B-2 preferred stock (5,000) - - - -
Issuance of B-3 preferred stock (2,000) - - - -
Cancellation of B-2 preferred stock 5,000 - - - -
Issuance of common shares in payment of legal
fees 170,000 - - - 175,000
Bridge Notes - Beneficial conversion feature 1,500,000 - - - 1,500,000
Start up costs of Lifetime 83,000 - - - 83,000
Distribution of Informedix shares to B-3
preferred shareholders (100,000) - - - (100,000)
---------- -------- ----------- --------- -----------
Balance at December 31, 2003 $ 53,126,000 $ (74,000) $ (56,661,000) $(80,000) $ (3,658,000)
========== ======== =========== ========= ===========
See notes to consolidated financial statements
F-7
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<
JUNE 17, 2003 AUGUST 1, 2002
TO DECEMBER 31, TO JUNE 16, YEAR ENDED JULY YEAR ENDED JULY
2003 2003 31, 2002 31, 2001
-------- --------- -------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,036,000) $ (698,000) $(1,217,000) $(6,400,000)
Adjustments to reconcile net loss to net cash used
by operating activities:
Beneficial conversion feature 1,083,000 - - -
Equity in loss of affiliate - - 702,000 2,823,000
Interest paid in common stock - - 1,000,000 -
Legal fees paid in common stock 175,000 - - -
Stock option compensation - 100,000
Loss on sale of marketable securities - 837,000 1,395,000
Impairment of investments - 250,000 1,946,000
Reserve for NYMI note receivable 1,508,000 - - -
Changes in assets and liabilities, net
of effect of distribution:
Prepaid expenses and other receivables 82,000 (87,000) 27,000 240,000
Litigation settlement receivable - 2,875,000 (2,875,000) -
Accounts payable (2,000) (10,000) (13,000) 53,000
Accrued liabilities 320,000 (806,000) 440,000 (1,271,000)
------- -------- ------- ----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
(870,000) 1,374,000 (849,000) (1,214,000)
-------- --------- -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan to Informedix, Inc. (20,000) (100,000) - -
Loan to Scantek Medical, Inc. (25,000) - - -
Loans to Spongetech, Inc. (25,000) (25,000) - -
Loans to New York Medical, Inc. (658,000) (850,000) - -
Purchase of treasury stock - (80,000) - -
Sales of marketable securities - 185,000 1,275,000
Net effect on cash from distribution
of Western Power shares - - - (823,000)
-------- --------- -------- ----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
(728,000) (1,055,000) 185,000 452,000
-------- --------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of Bridge Notes, 1,500,000
Net (payments) / borrowings under
term loans (40,000) 48,000
(Repayment) / borrowing under note payable to Rubin
Family Trust (250,000) 250,000
Increase in short term borrowings 81,000 131,000
Start up costs of Lifetime 83,000 - - -
-------- --------- -------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,624,000 (71,000) 250,000 -
-------- --------- -------- ----------
Net increase (decrease) in cash
and cash equivalents 26,000 248,000 (414,000) (762,000)
Cash and cash equivalents, beginning 353,000 $ 105,000 519,000 1,281,000
-------- --------- -------- ----------
Cash and cash equivalents, ending $ 379,000 $ 353,000 $ 105,000 $ 519,000
=========== =========== ========== ==========
See notes to consolidated financial statements
F-8
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION, BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL
INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
American United Global, Inc. (the "Company" or "AUGI"), is incorporated in
Delaware and its corporate office is in Kirkland, Washington. AUGI has had
operating subsidiaries in prior years and is currently a non-operating public
shell corporation.
On June 16, 2003, AUGI, Lifetime Acquisition Corp., a newly formed wholly owned
subsidiary of AUGI ("Merger Sub") and Lifetime Healthcare Services, Inc.
("Lifetime") entered into an amended and restated agreement and plan of merger
(the "Merger Agreement"). AUGI consummated the acquisition of Lifetime through
the merger of Merger Sub with and into Lifetime, effective as of June 17, 2003
(the "Lifetime Merger"). Lifetime was a holding company whose only assets
consisted of a note receivable from New York Medical, Inc. ("NYMI") and its
ownership of 55% of the capital stock of NYMI acquired by Lifetime immediately
prior to the consummation of the Merger.
For accounting purposes, the transaction between AUGI and Lifetime was
considered, in substance, a capital transaction rather than a business
combination. The exchange was accounted for as a reverse acquisition since the
former shareholders of Lifetime would have owned a majority of the outstanding
common stock of AUGI upon conversion of the preferred shares they received in
the merger. However, on December 8, 2003 certain members of the Board of
Directors of AUGI, Lifetime, NYMI and Redwood Investment Associates, LLP
("Redwood", the previous majority owner of NYMI) executed a Rescission Agreement
effective as of December 9, 2003. The remaining members of the Board of
Directors executed the Rescission Agreement on March 8, 2004, effective December
9, 2003 (see Note 3).
As a result of the merger with Lifetime, AUGI changed its year end of July 31,
to December 31, the year end of Lifetime, and will continue to report on a
December 31 year end basis subsequent to the Rescission Agreement.
GOING CONCERN
At December 31, 2003, the Company had a working capital deficiency of
$3,658,000, an accumulated deficit of $56,661,000, and had incurred a loss of
$4,036,000 for the period of June 17, 2003 through December 31, 2003 and a loss
of $698,000 for the period of August 1, 2002 through June 16, 2003. In addition,
the Company's cash and marketable securities of $384,000 at December 31, 2003
are not sufficient to fund operations for the next twelve months. Such recurring
losses and working capital deficiency raise doubt about the Company's ability to
continue as a going concern. The Company's financial statements do not include
any adjustments relating to the recoverability and reclassification of recorded
asset amounts or to amounts and classification of liabilities that may be
necessary should the Company be unable to continue as a going concern.
The Company's intention is to seek an acquisition candidate with a viable
business that can be financed and expanded both by internal growth and by the
acquisition and consolidation of similar operations. There can be no assurance
that the Company will be successful in locating such acquisition candidates or
that if such operations are found that a merger or acquisition agreement can be
negotiated or that financing can be raised to consummate a transaction.
F-9
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Although these
estimates are based on the knowledge of current events and actions the Company
may undertake in the future, they may ultimately differ from actual results. The
Company uses estimates, among others, to determine whether any impairment is to
be recognized.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
PRINCIPLES OF CONSOLIDATION
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 and has been prepared on the basis that the Company will
continue as a going concern, which contemplates the realization of assets and
the satisfaction of liabilities and commitments in the normal course of
business. The consolidated financial statements include the accounts of the
Company and its' subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
RECLASSIFICATION
Certain amounts presented in the prior years consolidated financial statements
have been reclassified to conform to those used in the ten and one half month
period ended June 16, 2003 and the six and one half month period ended December
31, 2003. Such reclassifications had no impact on the results of operations for
those prior years.
MARKETABLE SECURITIES
The Company accounts for marketable securities in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain
Investments in Debt, and Equity Securities". Under this standard, certain
investments in debt and equity securities are reported at fair value. The
Company's marketable securities, which consist of common shares of other public
companies, are being reported as securities available for sale. The unrealized
loss on these securities is reflected as a separate component of shareholders'
deficit and any changes in their value are included in comprehensive loss. The
value of these securities are as follows:
December 31, 2003 June 16, 2003 July 31, 2002
Cost $ 79,000 $ 79,000 $ 79,000
Cumulative unrealized loss 74,000 70,000 59,000
------ ------ ------
$ 5,000 $ 9,000 $ 20,000
======= ======== ========
F-10
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARKETABLE SECURITIES (continued)
Cost used in the computation of realized gains and losses is determined using
the first-in-first-out cost method. During fiscal 2001 and 2002, the Company
sold $1,275,000 and $185,000 of marketable securities respectively and realized
losses of $1,395,000 and $837,000 respectively. There were no sales of
marketable securities during the periods ended June 16, 2003 and December 31,
2003.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of notes receivable. The Company maintains all
of its cash balances in two financial institutions. The balances are each
insured by the Federal Deposit Insurance Corporation up to $100,000. At July 31,
2002, June 16, 2003 and December 31, 2003, the Company's uninsured cash balances
totaled approximately $-0-, $250,000 and $279,000 respectively.
STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation". The Company currently accounts for its stock-based
compensation plans using the accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". As the Company
is not required to adopt the fair value based recognition provisions prescribed
under SFAS No. 123, it has elected only to comply with the disclosure
requirements set forth in the statement which includes disclosing pro forma net
income (loss) and earnings (loss) per share as if the fair value based method of
accounting had been applied.
The fair value of each option grant was estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions for the periods ended December 31, 2003, June 16, 2003 and the years
ended July 31, 2002 and 2001, respectively: expected volatility of 146% and
187%, 182% and 154%, respectively; risk free interest rate of 3.00%, 3.00% and
3.58% and 4.50%, respectively; and expected lives of 5 years.
The effects of applying SFAS No. 123 in the above pro forma disclosures are not
indicative of future amounts. Additionally, future amounts are likely to be
affected by the number of grants awarded since additional awards are generally
expected to be made at varying amounts.
The pro forma net loss and loss per share consists of the following:
Period from Period from
June 17, 2003 to August 1, 2002 to Year ended July 31,
December 31, 2003 June 16, 2003 2002 2001
----------------- ------------- ------------- -------------
Net loss as reported $ (4,036,000) $ (698,000) $ (1,217,000) $ (6,400,000)
Effect of stock options (176,000) (270,000) (179,000) (760,000)
-------- -------- -------- --------
Proforma net loss $ (4,212,000) $ (968,000) $ (1,396,000) $ (7,160,000)
============== ========== ============ =============
Proforma loss per share $ (0.59) $ (0.48) $ (1.72) $ (14.57)
============== ============== ============ =============
F-11
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash balances and the carrying amount of the accrued expenses approximate their
fair value based on the nature of those items.
Estimated fair values of financial instruments are determined using available
market information. In evaluating the fair value information, considerable
judgment is required to interpret the market data used to develop the estimates.
The use of different market assumptions and/or different valuation techniques
may have a material effect on the estimated fair value amounts. Accordingly, the
estimates of fair value presented herein may not be indicative of the amounts
that could be realized in a current market exchange.
INCOME TAXES
The Company's deferred income taxes arise primarily from the differences in the
recording of net operating losses, allowances for bad debts, inventory reserves
and depreciation expense for financial reporting and income tax purposes. Income
taxes are reported under the liability method pursuant to SFAS No. 109
"Accounting for Income Taxes". A valuation allowance is provided when the
likelihood of realization of deferred tax assets is not assured.
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.
PER SHARE DATA
Basic and diluted loss per share is based on the weighted average number of
common shares outstanding and common shares issuable upon conversion of the
Series B-3 convertible preferred stock which was issued as a dividend to all
common shareholders effective as of June 17, 2003. The 4,650,000 common shares
issuable upon conversion of the Series B-3 preferred stock are included based on
the preferred shareholders ability to share in distributions of earnings
available to common shareholders, if any, without conversion.
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.
F-12
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
F-13
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
In May 2003, the consensus on EITF Issue No. 01-08, "Determining Whether an
Arrangement Contains a Lease," was issued. The guidance in the consensus applies
to the purchase or sale of goods and services under various types of contracts,
including outsourcing arrangements. Based on the criteria in the consensus, both
parties to an arrangement are required to determine whether the arrangement
includes a lease within the scope of SFAS No. 13, "Accounting for Leases." The
new requirement applies prospectively to new or modified arrangements for
reporting periods beginning after May 28, 2003. Accordingly, as of August 1,
2003, the company accounted for new or modified arrangements based on this
guidance. Adoption of this standard did not have an impact on our company's
financial statements.
In December 2003, the FASB issued SFAS No. 132 (Revised 2003), "Employers'
Disclosures about Pensions and Other Post-retirement Benefits," which enhanced
the disclosure about pension plans and other post-retirement benefit plans, but
did not change the measurement or recognition principles for those plans. The
statement requires additional disclosures about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and other
defined benefit post-retirement plans. Its adoption did not have an impact on
our company's financial statements.
F-14
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. - LIFETIME MERGER, ACQUISITION OF NEW YORK MEDICAL, INC. AND RELATED
OBLIGATIONS AND RESCISSION OF TRANSACTIONS
On June 16, 2003, American United Global, Inc., Merger Sub, and Lifetime entered
into an Amended and Restated Agreement and Plan of Merger (the "Merger
Agreement"). The Merger Agreement was approved by the board of directors of each
of the Company, Merger Sub and Lifetime on June 13, 2003 and by the stockholders
of Lifetime and Merger Sub on June 13, 2003.
Prior to the Merger, the Rubin Family Irrevocable Stock Trust owned
approximately 77.6% of the shares of the common stock of the Company (the
"Company Common Stock").
On June 17, 2003, the Company, through Merger Sub, acquired 100% of the capital
stock of Lifetime. Pursuant to the Merger Agreement, Merger Sub was merged with
and into Lifetime, with Lifetime continuing as the surviving corporation of the
Merger and a wholly-owned subsidiary of the Company.
At the time of the Merger, Lifetime was a holding company whose only asset
consisted of its ownership of 55% of the outstanding capital stock of NY
Medical, Inc., a New York corporation ("NY Medical"), acquired by Lifetime
immediately prior to the consummation of the Merger (see below).
In connection with the Merger, the Company issued an aggregate of 467,500 shares
of its newly authorized and designated B-2 Preferred to the former Lifetime
stockholders. Each share of the B-2 Preferred was convertible, on or after
December 17, 2003 (or earlier upon the occurrence of certain specified events),
into 20 shares of Company Common Stock, or an aggregate of 9,350,000 shares of
Company Common Stock if all shares of B-2 Preferred were converted.
In contemplation of the Merger Agreement, the Company declared a stock dividend
on the Company Common Stock with a record date of June 10, 2003. The stock
dividend took the form of the issuance of 232,500 shares of the Company's newly
authorized and designated Series B-3 Convertible Preferred Stock (the "B-3
Preferred") to the holders of the Company Common Stock on the record date on a
pro rata basis. Each share of the B-3 Preferred is convertible, on or after
December 17, 2003 (or earlier upon the occurrence of certain specified events),
into 20 shares of Company Common Stock. The shares of B-3 Preferred are
convertible at the option of the holder of such shares or pursuant to a
resolution in favor thereof by the board of directors of the Company.
Accordingly, an aggregate of 4,650,000 shares of Company Common Stock would be
issued to the Company's record holders of the B-3 Preferred if all shares of B-3
Preferred are converted. Further, the holders of the B-3 Preferred will receive
a dividend of the 1,222,586 shares of Western Power & Equipment Corp. as well as
a dividend of the 54,000 shares of Informedix, Inc. owned by AUGI.
NY Medical provides facilities and management services for various medical
practices which specialize in areas of neurology, orthopedics, psychiatry and
internal medicine. The selling NY Medical stockholder was Redwood Investment
Associates, L.P. ("Redwood"), an affiliate of Dr. Jonathan Landow, the President
and Chief Executive Officer of NY Medical.
Under the terms of the NY Medical Stock Purchase Agreement, Lifetime issued to
Redwood a $5,500,000 principal amount 6% convertible note (the "Lifetime Note").
In connection with the Merger, the Company unconditionally guaranteed the
Lifetime Note and also guaranteed payment by NY Medical of a separate $4,662,830
principal amount 6% Amended and Restated Senior Subordinated Term Loan
Promissory Note of NY Medical, dated as of June 16, 2003 and payable to Tracy
Landow, as assignee of Dr. Jonathan Landow (the "Landow Note").
F-15
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
To the extent that all obligations under the Landow Note and the Lifetime Note
were not paid in full out of the proceeds of the NY Medical forced sale, the
Company was to be liable for any unpaid balance due within six months following
such sale. The Company however, had the right to demand and receive payment from
NY Medical on any unpaid amount due on the Company's loans to NY Medical in the
principal aggregate amount of $1,500,000 (see below).
The Company, as the parent company of Lifetime, also entered into a share
exchange agreement (the "Share Exchange Agreement") to acquire the remaining 45%
of the outstanding capital stock of NY Medical from the New York Medical
Employee Stock Ownership Plan and Trust (the "ESOP") in exchange for
approximately $4,500,000 stated value of the Company's Series B-4 convertible
preferred stock.
During 2003, the Company lent to Lifetime (which, in turn, loaned such funds to
NY Medical) and NY Medical an aggregate of $1,500,000, which NY Medical used
primarily for working capital purposes and to reduce NY Medical's indebtedness
to DVI, its principal banker ("DVI"). The $1,500,000 of Company loans were
consolidated and are now evidenced by NY Medical's 6% note to the Company which
was due as to principal and interest on January 2, 2004 and is secured by a lien
and security interest on all of the assets and properties of NY Medical, which
lien and security interest is secondary only to the liens held by DVI or any
substitute senior secured lender.
On June 17, 2003, the Company received an aggregate of $1,350,000 (net of
selling commissions) in connection with the sale of $1,500,000 in aggregate
principal amount of 10% convertible notes due March 2004 (the "Bridge Notes")
through Vertical Capital Partners, a member of the NASD. Robert DePalo, a former
officer of Lifetime and affiliate of a former Lifetime stockholder, is also
affiliated with Vertical Capital Partners. The principal and interest due under
the Bridge Notes are convertible into Company Common Stock at any time at $1.00
per share. 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 principal and interest due under the Bridge Notes were not
paid in full by October 17, 2003, the number of shares issuable upon exercise of
the warrants would 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 were not been paid in full by January 17, 2004. Payment was not made on
either date and as a result, warrants to purchase 1,500,000 shares are
outstanding and are exercisable at $0.75 per share. 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 NY Medical from
$850,000 to $1,500,000. The Company secured the Bridge Notes by assigning to the
holders its secondary lien and security interest on the assets of NY Medical.
F-16
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Following its June 2003 acquisitions of Lifetime and 55% of the capital stock of
NY Medical, the Company attempted to consummate a private placement of its
securities in order to raise approximately $5.7 million to pay $2.0 million
principal amount of the Lifetime Note and retire the Landow Note in order to
satisfy both of the October 17, 2003 "Payment Events" under the Closing
Agreement with the former principal owner of NY Medical and its affiliates. In
October 2003, Dr. Landow, acting on behalf of NY Medical, Tracy Landow and
Redwood, extended the due date to satisfy the Payment Events to November 17,
2003, in consideration for the Company's agreement to extend the due date of
the $1,500,000 NY Medical Note payable to the Company to January 2, 2005.
Notwithstanding the extension, the Company was unable to consummate the
requisite financing by the extended date, and in November 2003, Dr. Landow
declared a Default Event. On December 5, 2003, written notice of a special
telephonic meeting of the board of directors to be held on Monday, December 8,
2003 was transmitted by Messrs. Landow, Fause and Good to Messrs. Rubin and
McLain; the purpose of which special meeting, among other things, was to
consider a possible rescission of the acquisition of 55% of the capital stock of
NY Medical by the Company and the transactions relating thereto. On December 8,
2003, a telephonic meeting of the board was convened. As a result of such board
meeting, minutes were prepared and executed by Messrs. Landow, Fause and Good,
and on December 9, 2003, a rescission agreement among the Company, Lifetime
Acquisition Corp., Lifetime, NY Medical, Redwood and the ESOP, dated as of
December 9, 2003 (the "Rescission Agreement") was entered into and delivered to
counsel to the Company and Messrs. Rubin and McLain.
Under the terms of such Rescission Agreement:
o the Merger, Lifetime Merger Agreement and all related Merger Documents were
cancelled and rescinded and rendered null and void, ab initio, for all
purposes, including for tax purposes;
o the NY Medical Stock Purchase Agreement, the acquisition of capital stock
of NY Medical and all transactions relating thereto were cancelled and
rescinded and rendered null and void, ab initio, for all purposes,
including for tax purposes;
o the Share Exchange Agreement between the Company and the ESOP and all
transactions relating thereto were cancelled and rescinded and rendered
null and void, ab initio, for all purposes, including for tax purposes; and
in order to enable the Company to repay the $1.5 million of Bridge Notes
owed to certain investors in March 2004, NY Medical agreed under the terms
of the Rescission Agreement that "the NY Medical Note shall be modified
such that all principal and interest thereunder shall be due from NY
Medical to AUGI on March 30, 2004." In consideration of such modification,
the Rescission Agreement permits NY Medical or its representatives to
communicate directly with the holders of the Bridge Notes for the purpose
of, among other things, negotiating an alternative mechanism for the
payment of the Bridge Notes.
Subsequent to December 9, 2003, Mr. Rubin objected to the December 8, 2003
Company board of directors meeting and the Rescission Agreement for a variety of
reasons, including, the alleged failure to properly convene such meeting or have
a valid quorum of directors present. On December 12, 2003, counsel for NY
Medical and Redwood commenced a lawsuit against the Company, Lifetime, Robert M.
Rubin, and former Lifetime affiliates Kenneth Orr and Robert DePalo, in the New
York State Supreme Court seeking, among other things to declare the Rescission
Agreement as valid and effective and also seeking monetary damages against the
defendants for alleged fraudulent inducement, unjust enrichment and breach of
fiduciary duties and breach of contract. The Company and its counsel believe
that the suit is totally without merit and that the Company has a number of
valid defenses and counterclaims against Dr. Landow and NY Medical.
F-17
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Currently, the suit has not proceeded past the filing and service of the
complaint. We have obtained an open-ended extension of time in which to answer
and/or move with regard to the complaint. We are attempting to resolve the
matter amicably. However, in the event litigation proceeds, it will be
aggressively defended.
On March 8, 2004, corporate counsel to the Company advised counsel to NY
Medical, Redwood and its affiliates that each of the Company and Messrs. Rubin
and McLain, as members of the board of directors of the Company had
reconsidered their position and that they agree with NY Medical, Redwood, Dr.
Landow, Tracy Landow and the ESOP that:
o effective as of December 9, 2003, the Merger, Lifetime Merger Agreement and
all related Merger Documents are null and void, ab initio, for all
purposes, including, without limitation, for tax purposes;
o effective as of December 9, 2003, the NY Medical Stock Purchase Agreement,
the acquisition of capital stock of NY Medical and all transactions
contemplated thereby are null and void, ab initio, for all purposes,
including, without limitation, for tax purposes; and
o effective as of December 9, 2003, the Share Exchange Agreement between the
Company and the ESOP and all transactions contemplated thereby are null and
void, ab initio, for all purposes, including, without limitation, for tax
purposes; and
o all principal amount of and accrued interest on the NY Medical Note is, in
fact, due and payable on March 30, 2004, and NY Medical shall have the
right to communicate directly with the holders of the Bridge Notes for the
purpose of, among other things, negotiating an alternative mechanism for
the payment of the Bridge Notes.
The Company's counsel's letter did not condition acceptance of the above
arrangements upon a dismissal or voluntary settlement of the pending litigation,
but rather requested that NY Medical or its counsel advise as to mechanisms for
NY Medical to (a) communicate with the holders of the Bridge Notes, (b) effect
full payment on March 30, 2004 of the NY Medical Note, and (c) return the stock
certificates and other documents to effect the transactions contemplated by the
Rescission Agreements. There was no payment by NYMI on March 30, 2004 nor has
such payment been made through the filing date of this Form 10-K.
As a result of the consummation of the transactions contemplated by the
Rescission Agreement:
o 55% of the capital stock of NY Medical was be returned to Redwood and the
proposed Share Exchange with the ESOP will be cancelled;
o the Lifetime Merger is cancelled and rescinded, and all shares of Company
Series B-2 Preferred Stock issued to the former stockholders of Lifetime
are rendered null and void, without any further value or rights, and
returned to the treasury of the Company for cancellation;
o all stock options issued to Dr. Landow, Joseph Ciavarella, directors
designated by Dr. Landow and other employees of NY Medical are cancelled;
and
o effective as of December 9, 2003 each of Dr. Landow, Stuart Fause and John
Good is deemed to have resigned as a member of the board of directors of
the Company or otherwise removed as a member of such board of directors by
The Rubin Family Irrevocable Stock Trust, as the principal stockholder of
the Company.
o the Company cancelled options to purchase an aggregate of approximately
3,250,000 shares of Company Common Stock;
o the Company cancelled the 467,500 shares of B-2 Preferred Stock convertible
into an aggregate of 9,350,000 shares of Company Common Stock which were
issued to the former stockholders of Lifetime; and the Company cancelled
the $5,500,000 Landow Note.
F-18
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - RECEIVABLE FROM NYMI
The obligations of NYMI to the Company in respect of the loans and advances made
between February and September 2003, aggregating $1,500,000, are evidenced by
NYMI's 6% note, originally payable in full as to principal and interest on
January 3, 2004 (the "NYMI NOTE") The maturity date of the NYMI Note was
extended to March 30, 2004; however, the note was not paid on that date. 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 proceeds of this note, when and if paid, are pledged to the Bridge
Note holders. An additional $8,000 is owed by NYMI to the Company and is
unsecured.
As a result of the financial condition of NYMI and the priority lien of DVI, the
Company has recorded a 100% reserve against the amount due for principal and
accrued interest from NYMI as at December 31, 2003.
NOTE 4 - OTHER 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 was automatically convertible into 50,000 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 54,000 shares of their common stock were issued to AUGI
pursuant to the automatic conversion feature of the loan and all accrued
interest. On July 25, 2003, the Company loaned $20,000 to Informedix pursuant to
the terms of a 12% promissory note originally due January 31, 2004 which due
date was extended to April 2, 2004 and the note was paid in full on that date.
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 an 8%
promissory note originally due May 15, 2003 which was subsequently extended to
July 31, 2004. The Company loaned an additional $25,000 to Spongetech on July 7,
2003 under the same terms and conditions. The Company also received 250,000
shares of Spongetech common stock as additional consideration for the loans and
maturity date extensions. 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.
F-19
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On August 5, 2003, the Company loaned $25,000 to ScanTek Medical, Inc.
("ScanTek") pursuant to the terms of a 12% promissory note which is due October
15, 2004. As consideration to AUGI for providing the loan, ScanTek added
interest of $5,000 to the note and both parties agreed that any further interest
would only be due, at the 12% rate, if there is a breach of the default and
repayment provisions of the note. The interest income of $5,000 is being
recognized over the period of August 5, 2003 through October 15, 2004.
In May 2002 the Company borrowed $250,000 from the Rubin Family Irrevocable
Stock Trust (the "Trust"). The loan was evidenced by a promissory note bearing
interest at the annual rate of 7 1/2 % and was due upon the earlier to occur of
the receipt of funds from any source in excess of $1,000,000 or April 30, 2007.
In October 2002, the company received $2,875,000 of net proceeds from the
settlement of certain litigation and repaid the loan. As additional
consideration for providing the loan, the Company issued 1,500,000 shares of
restricted common stock to the Trust which resulted in the Trust owning
approximately 77.6% of the issued and outstanding shares of common stock of
AUGI. The percentage of common and common equivalent shares outstanding that
were owned by the trust as at December 31, 2003 was 67.5%.
NOTE 5 - BRIDGE NOTES PAYABLE AND OTHER SHORT TERM BORROWINGS
On June 17, 2003, the Company received aggregate net proceeds of $1,350,000 from
the sale of $1,500,000 principal amount of 10% convertible notes due in March
2004. 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 NYMI. 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 were not prepaid in full by October 17, 2003, the
number of shares issuable upon exercise of the warrants would increase to
1,250,000 shares and would increase further to 1,500,000 shares in the event
that, for any reason, the Bridge Notes were not paid in full by January 17,
2004. Payment was not made by October 17, 2003, nor by January 17, 2004 and as a
result, the number of shares issuable upon exercise of the warrants has
increased to 1,500,000 shares. 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 indirectly to NYMI) from $850,000 to $1,500,000 (see Note
2). The Bridge Notes were due and payable on March 30, 2004; however, no
payments have been made as of the date of filing this report and the debt
continues to be in default.
F-20
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The value allocated to the warrants resulted in a debt discount of $1,500,000
that is being recognized as interest expense over the nine month term of the
Bridge Notes. The amount recorded in the period ended December 31, 2003 was
$1,083,000. Additionally, by allocating value to the warrants, the debt holders
received a beneficial conversion feature in the amount of $813,000 that results
in additional debt discount that is being recognized as interest expense over
the nine month term of the bridge notes. However, the maximum amount of
additional interest from amortization of the debt discount and the beneficial
conversion feature is capped at the $1,500,000 principal amount of the borrowing
and the balance of $417,000 will be amortized during the quarter ending March
31, 2004.
The Company is in default on an uncollateralized note payable due to an
unrelated third party in the principal amount of $1,500,000 plus accrued
interest of approximately $1,060,000 at December 31, 2003. Originally bearing
interest at 8%; the note accrues interest at 10% while in default. The holder of
such indebtedness has not sought to collect the amounts due; however, were the
Company required to pay such certain indebtedness it would be necessary to
secure additional financing.
NOTE 6 - 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 another company most likely acquired the assets and related
leases 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 and there would most likely have been negotiated reductions of
amounts due during the proceedings.
F-21
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes using the enacted tax
rates in effect in the years in which the differences are expected to reverse.
Deferred tax assets are comprised primarily from net operating losses and total
approximately $10,200,000 at December 31, 2003 and approximately 8,875,000,
$8,640,000 and $8,225,000 at June 16, 2003, July 31, 2002 and July 31, 2001,
respectively. Because of the questionable ability of the Company to utilize
these deferred tax assets, the Company has established a 100% valuation
allowance for these assets.
The Company files a consolidated income tax return with its wholly-owned
subsidiaries and has net operating loss carryforwards of approximately
$30,000,000 for federal and state purposes, which expire through 2023. The
utilization of this operating loss carryforward may be limited based upon
changes in ownership as defined in the Internal Revenue Code. A reconciliation
of the difference between the expected income tax rate using the statutory
federal tax rate and the Company's effective rate is as follows:
Period from Period from
June 17, 2003 to August 1, 2002 Year ended July 31,
December 31, 2003 to June 16, 2003 2002 2001
----------------- ---------------- -------- ---------
U.S. Federal income tax
statutory rate (34)% (34)% (34)% (34)%
Valuation allowance 34% 34% 34% 34%
---- ---- ---- ----
Effective tax rate -0- -0- -0- -0-
==== ==== ---- ====
NOTE 8 - 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 his affiliates and is being paid in 12 equal monthly installments of
approximately $6,700. At December 31, 2003 the remaining balance due was $6,700.
NOTE 9 - STOCK OPTION PLANS
On October 3, 2000, the Board of Directors cancelled the 2000 Plan and approved
the 2001 Stock Option Plan. All 216,000 options previously granted under the
2000 Plan were cancelled and replaced by the same number of options in the 2001
Plan. AUGI also granted 4,000 options to a each of two special consultants,
2,000 additional options to a law firm, 400 options to a financial consultant
and 20,000 to a management employee. A total of 122,000 of the 2001 grants were
subsequently cancelled.
F-22
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Option grants during the period August 1, 2002 through June 16, 2003
On March 31, 2003, the Company granted five-year stock options to four directors
to purchase a total of 450,000 shares of common stock and also granted five-year
options to the senior partner at its primary law firm to purchase 50,000 shares
of common stock. All such options are exercisable at a price of $0.62 per share,
the fair market value on the date of grant, and vested upon grant. On June 13,
2003 the Company granted five-year options to purchase 50,000 shares of common
stock at $1.50 per share, the fair market value on the date of grant, to another
partner in the law firm all of which vested upon grant. The intrinsic value of
options granted to the two law firm partners was charged to earnings as a
non-cash compensation charge in the amount of $100,000 in the period from August
1, 2002 to June 16, 2003.
Option grants during the period June 17, 2003 through December 31, 2003
On August 8, 2003, five year options to acquire 200,000 shares of common stock
were granted to Dean McLain, a director and executive officer of the Company at
the closing market price on that date of $1.70, of which options for 50,000
shares vested on the grant date, with the remaining options vesting at the rate
of 50,000 shares on each of the three successive grant anniversary dates through
2006. On September 17, 2003 a five-year option to purchase 350,000 common shares
was granted to an officer of the Company at the closing market price of $1.25 of
which 87,500 shares vested on the date of grant with the remaining options
vesting at the rate of 87,500 shares on each of the next three grant anniversary
dates.
Summary Information
The following table includes option information for AUGI's plan:
WEIGHTED
NUMBER AVERAGED
OF EXERCISE
STOCK OPTION ACTIVITY SHARES PRICE
--------------------- ------- --------
July 31, 2000 225,000 $19.00
Options granted 246,000 7.00
Options exercised - -
Options canceled (338,000) 7.50
----------- --------
July 31, 2001 133,000 18.25
Options granted 10,000 1.25
Options exercised -
Options canceled (3,000) 132.23
----------- -------
July 31, 2002 140,000 14.04
----------- -------
Options granted 550,000 .70
Options exercised -
Options canceled (46,000) 7.50
----------- -------
June 16, 2003 644,000 1.12
Options granted 3,800,000 1.46
Options exercised -
Options canceled * 3,250,000 1.60
---------- -------
December 31, 2003 1,194,000 $1.26
---------- -------
* Canceled pursuant to the Rescission Agreement (See Note 2)
The following table summarizes stock options outstanding for AUGI at December
31, 2003:
Total Total
Option Exercisable
Shares Shares Exercise Price
------ -------- --------------
500,000 500,000 $0.62
360,000 97,500 $1.25
50,000 50,000 $1.50
200,000 50,000 $1.70
84,000 84,000 $6.875
-------- --------
1,194,000 781,500
========= =======
F-23
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - LITIGATION
Altitude Group, LLC, Birch Associates, LLC and D.C. Capital, LLC v. American
United Global, Inc. (Supreme Court, New York State, New York County). AUGI was
served in April 2004 with this suit alleging, among other things, that AUGI owes
plaintiffs repayment of $700,000 in principal face amount notes issued in
connection with the acquisition by AUGI of New York Medical, a New York
corporation. Plaintiffs have commenced the suit by way of a New York procedure
known as summary judgment in lieu of complaint, claiming an aggregate amount
owed of $787,000, consisting of the allegedly outstanding principal and interest
on the notes as well as attorneys' costs and AUGI has opposed that motion. No
decision on the motion for summary judgment has been issued by the court yet.
New York Medical, Inc. and Redwood Investment Associates, L.P. v. American
United Global, Inc., et al. (Supreme Court, New York State, New York County). In
this suit, filed on December 12, 2003, plaintiffs seek a declaration that a
series of transactions by which AUGI allegedly acquired Lifetime Healthcare
Services, Inc. ("Lifetime") and Lifetime acquired an interest in New York
Medical, Inc. from Redwood Investment Associates, L.L.P. (collectively
"Transactions") were properly rescinded or, alternatively, that because the
Transactions were allegedly induced by fraudulent conduct of AUGI, and others,
that the Transactions should be judicially rescinded. In addition to the
requests for equitable relief, plaintiffs also seek monetary damages in excess
of $5 million and exemplary damages in the amount of $15 million.
Currently, the suit has not proceeded past the filing and service of the
Complaint. AUGI has obtained an open-ended extension of time in which to answer
and/or move with regard to the Complaint. The parties are attempting to resolve
the matter amicably. However, in the event litigation proceeds, it will be
aggressively defended.
Howard Katz, a member of our board of directors, is in discussions with us over
the terms of a settlement of a debt that he claims we owe him. Mr. Katz'
resignation from our board of directors was requested in connection with the
intended acquisition of NY Medical, a request that was not affected by the
subsequent rescission of all agreements relating to such acquisition.
Nonetheless, we have not received such resignation as of the date of this annual
report on Form 10-K. We anticipate an expeditious settlement with Mr. Katz
regarding the amount of the debt and the payment terms thereof, in connection
with which we expect to obtain his letter of resignation from our board of
directors.
NOTE 11 - PER SHARE DATA
Basic and diluted loss per share is based on the weighted average number of
common shares outstanding and common shares issuable upon conversion of the
Series B-3 convertible preferred stock which was issued as a dividend to all
common shareholders effective as of June 17, 2003. The 4,650,000 common shares
issuable upon conversion of the Series B-3 preferred stock are included based on
the preferred shareholders ability to share in distributions of earnings
available to common shareholders, if any, without conversion.
NOTE 12 - SUBSEQUENT EVENT
In May 2004, the Company's board of directors approved a stock award of 750,000
shares to Dean McLain ("McLain"), a stock award of 500,000 shares to David
Barnes ("Barnes") and a stock award of 20,000 shares to Michael Metter
("Metter"). The shares were issued for services performed and to be performed by
McLain, Barnes and Metter on behalf of the Company and will result in a charge
to operations in the quarter ended June 30, 2004.
F-24
PART IV
Item 15. Exhibits, Financial Statement Schedules And Reports On Form 8-K.
(a) The following documents are being filed as part of this Report:
(1) See page F-1 for an index of consolidated financial statements.
(3) Exhibits:
14 Code of Ethics *
21 Subsidiaries of the Company*
31.1 Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"). *
31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"). *
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
*Filed herewith
(b) Reports on Form 8-K:
During the quarter ended December 31, 2003, the Registrant filed Reports on Form
8-K as follows:
On October 30, 2003, the Registrant filed a Report on Form 8-K under Item 5
regarding the execution of a Standstill Agreement relative to the Payment Events
due date pursuant to the NYMI Merger Agreements. 2. On November 13, 2003, the
Registrant filed a Report on Form 8-K, as amended on Form 8-K/A on November 14,
2003, relative to a further extension of the Payment Events due date pursuant to
the NYMI Merger Agreements.
On November 18, 2003, the Registrant filed a Report on Form 8-K to report under
Item 5 that if the Registrant sells NYMI, it will seek other opportunities to
acquire businesses that are in the medical industry similar to that engaged in
by NYMI and that Registrant is in preliminary discussions with other potential
acquisition candidates and investment bankers to assist our company in financing
any such potential acquisitions.
(c) Exhibits:
See paragraph (a)(3) above for a listing of items filed as exhibits to this Form
10-K as required by Item 601 of Regulation S-K.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN UNITED GLOBAL, INC.
By: /s/ Robert M. Rubin July 16, 2004
-------------------
Robert M. Rubin
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Robert M. Rubin CEO, and Chairman of the Board July 16, 2004
- -------------------
Robert M. Rubin
/s/ David M. Barnes Chief Financial Officer and Director July 16, 2004
- -------------------
David M. Barnes
/s/ C. Dean McLain Executive Vice President and Director July 16, 2004
- -------------------
C. Dean McLain
Director July 16, 2004
- ------------------
Howard Katz
/s/ Michael Metter Director July 16, 2004
- ------------------
Michael Metter