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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2004
Commission File Number 0-19404
AMERICAN UNITED GLOBAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4359228
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11108 N.E. 106TH PLACE
KIRKLAND, WASHINGTON 98033
(Address of principal executive offices) (Zip code)
Registrant's telephone number: 425-869-7410
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated Filer (as
defined in Rule 12-b-2 of the Exchange Act).
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practical date.
Title of Class Number of Shares
Common Stock Outstanding
(par value $.01 per share) 3,824,799 as of August 23, 2004
AMERICAN UNITED GLOBAL, INC.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2004 (Unaudited) and December 31, 2003........... 1
Consolidated Statements of Operations
Three Months Ended June 30, 2004
and June 30, 2003 (Unaudited)............................. 2
Consolidated Statements of Operations
Six Months Ended June 30, 2004
and June 30, 2003 (Unaudited)............................. 3
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2004
and June 30, 2003 (Unaudited)............................. 4
Notes to the Consolidated Financial
Statements (Unaudited)..................................... 5-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Plan of Operations................. 11-14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.......................................... 15
Item 4. Controls and procedures............................ 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................. 16
Item 2. Changes in Securities.............................. 16
Item 3. Defaults Upon Senior Securities.................... 16
Item 4. Submission of Matters to a Vote of Security
Security Holders................................... 16
Item 5. Other Information ................................. 16
Item 6. Exhibits and Reports on Form 8-K................... 16
Signatures................................ 17
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003
---------- ----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 71,000 $ 379,000
Investment in marketable securities, at market value.................. 4,000 5,000
Notes receivable from New York Medical, Inc., net of reserve.......... - -
Investment in Informedix.............................................. 40,000 100,000
Note receivable, InforMedix........................................... 20,000 20,000
Note receivable, SpongeTech........................................... 50,000 50,000
Note receivable, ScanTek.............................................. 25,000 25,000
Interest receivable................................................... 8,000 5,000
---------- ----------
TOTAL CURRENT ASSETS.................................................. 218,000 584,000
---------- ----------
TOTAL ASSETS.......................................................... $ 218,000 $ 584,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings in default including accrued interest
of $1,135,000 and $1,060,000....................................... $ 2,635,000 $ 2,560,000
Accounts payable...................................................... 17,000 14,000
Accrued liabilities................................................... 625,000 478,000
Notes payable......................................................... - 7,000
Bridge Notes payable.................................................. 1,500,000 1,083,000
Distribution payable to Series B-3 Preferred shareholders............. 40,000 100,000
----------- -----------
TOTAL CURRENT LIABILITIES............................................. 4,817,000 4,242,000
----------- -----------
Commitments and contingencies
SHAREHOLDERS' DEFICIT:
Preferred stock, 12.5% cumulative, $1.00 per share liquidation value,
$.01 par value; 1,200,000 shares authorized;
none issued and outstanding........................................... - -
Series B-1 preferred stock, convertible at a ratio of 25 for 1 to common,
$3.50 per share liquidation value, $.01 par value; 1,000,000 shares
authorized; 407,094 issued outstanding................................ 4,000 4,000
Series B-3 preferred stock, each share convertible into 20 shares of
common stock, $20.00 per share liquidation value, $.01 par value,
231,395 and 232,500 shares issued and outstanding..................... 2,000 2,000
Common stock, $.01 par value; 40,000,000 shares authorized; 3,824,799
and 2,532,699 shares issued and outstanding respectively.............. 38,000 25,000
Additional paid-in capital............................................ 53,589,000 53,126,000
Accumulated deficit................................................... (58,077,000) (56,661,000)
Accumulated unrealized loss, net...................................... (75,000) (74,000)
---------- -----------
(4,519,000) (3,578,000)
Less: cost of treasury shares......................................... (80,000) (80,000)
----------- -----------
Total shareholder's deficit........................................... (4,599,000) (3,658,000)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 218,000 $ 584,000
=========== ===========
See accompanying notes to consolidated financial statements.
-1-
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED JUNE 30,
---------------------------
2004 2003
---- ----
General and administrative expenses.................... $ 643,000 $ 554,000
--------- ---------
Operating loss......................................... (643,000) (554,000)
Other Income........................................... - 280,000
Interest expense, net.................................. (125,000) (103,000)
----------- ---------
Loss from operations................................... (768,000) (377,000)
------------ ------------
Net loss .............................................. $ (768,000) $ (377,000)
============= =============
Basic and diluted loss per share....................... $ (0.10) $ (0.14)
========= ===========
Weighted average number of shares...................... 7,571,161 2,720,957
========== ==========
See accompanying notes to consolidated financial statements.
-2-
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------
2004 2003
---- ----
General and administrative expenses.................... $ 802,000 $ 820,000
--------- ---------
Operating loss......................................... (802,000) (820,000)
Other Income........................................... - 280,000
Interest expense, net.................................. (614,000) (136,000)
---------- --------
Loss from operations................................... (1,416,000) (676,000)
----------- ------------
Net loss .............................................. $ (1,416,000) $ (676,000)
============ ============
Basic and diluted loss per share....................... $ (0.19) $ (0.29)
========== ==========
Weighted average number of shares...................... 7,425,579 2,369,809
========== ==========
See accompanying notes to consolidated financial statements.
-3-
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.............................................. $ (1,416,000) $ (676,000)
Adjustments to reconcile net loss to net
cash used by operating activities
Beneficial conversion feature....................... 417,000 74,000
Stock option compensation........................... - 120,000
Stock award compensation............................ 476,000 -
Legal fees paid with common stock................... -
175,000
Changes in assets and liabilities:
Prepaid expenses and other receivables............ (3,000) (100,000)
Accounts payable and accrued liabilities.......... 225,000 (220,000)
---------- --------
NET CASH USED BY OPERATING ACTIVITIES.................... (301,000) (627,000)
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan to Spongetech................................... - (25,000)
Loans to New York Medical, Inc....................... - (1,500,000)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES.................... - (1,525,000)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of Bridge Notes............. - 1,350,000
Payment of note payable............................ (7,000) (33,000)
--------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES..... (7,000) 1,317,000
--------- ---------
Net decrease in cash and cash equivalents.............. (308,000) (835,000)
Cash and cash equivalents, beginning................... 379,000 1,862,000
--------- ----------
Cash and cash equivalents, ending...................... $ 71,000 $ 1,027,000
========= ==========
See accompanying notes to consolidated financial statements.
-4-
AMERICAN UNITED GLOBAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial information included in this report has been
prepared in conformity with the accounting principles generally accepted in the
United States of America reflected in the consolidated financial statements of
American United Global, Inc. and subsidiaries (the "Company" or "AUGI") for the
preceding year included in the annual report on Form 10-K for the year ended
December 31, 2003 filed with the Securities and Exchange Commission. All
adjustments are of a normal recurring nature and are, in the opinion of
management, necessary for a fair statement of the consolidated results for the
interim periods. This report should be read in conjunction with the Company's
financial statements included in the annual report on Form 10-K for the year
ended December 31, 2003 filed with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The results of operations
for the three months and six months ended June 30, 2004 and June 30, 2003 are
not necessarily indicative of the results to be expected for the full year.
The accounting policies followed by the Company are set forth in Note 1 to
the Company's consolidated financial statements included in its Annual Report on
Form 10-K for the year ended December 31, 2003.
The Company is in default on certain existing indebtedness in the principle
amount of $1,500,000 plus accrued interest of approximately $1,135,000. The
holder of such indebtedness has not sought to collect such amounts due; however,
were the Company required to pay such certain indebtedness it would be necessary
to secure additional financing.
GOING CONCERN
The Company had a working capital deficit for each of the two fiscal years
ended July 31, 2001 and 2002 and for the periods ended June 16, 2003 and
December 31, 2003. At June 30, 2004, the Company had a working capital
deficiency of $4,599,000, an accumulated deficit of $58,077,000, and had
incurred a loss of $1,416,000 for the six months ended June 30, 2004, 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 $75,000 at June 30, 2004 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. On August 9, 2004, the
Company's board of directors approved the signing of a non-binding Memorandum of
Understanding with Southern Gas Company, a Moscow based organization involved in
the development of natural gas wells and the extraction and distribution of
natural gas (see Note 10). There can be no assurance that the Company will be
successful in consummating this transaction or that it will locate any other
such acquisition candidates or that if such other operations are located that a
merger or acquisition agreement can be negotiated or that financing can be
raised to consummate a transaction.
-5-
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - 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 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.
The value allocated to the warrants resulted in a debt discount of
$1,500,000 that has been recognized as interest expense over the nine month term
of the Bridge Notes ended March 30, 2004. Additionally, by allocating value to
the warrants, the debt holders received a beneficial conversion feature of
$813,000 in additional debt discount which has been 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 had all been expensed as of 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 $1,135,000 at June 30, 2004. 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 3 - 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. Such shares will be distributed as a dividend to the holders of the
Preferred B-3 stock with a record date of June 10, 2003. 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.
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.
-6-
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - 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.
NOTE 5. - CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at two financial institutions. These
balances are insured for up to $100,000 per account by the Federal Deposit
Insurance Corporation. The cash balances at June 30, 2004 did not exceed the
insurance limit.
NOTE 6 - PURCHASE OF TREASURY STOCK
In connection with the resignation of Seymour Kessler (Kessler) from the
Board of Directors in January 2003, the Company agreed to repurchase common
shares of the Company that he and certain affiliates had acquired in a private
placement in 2000. The purchase price of $80,000 was equal to the amount paid by
Kessler and the Kessler affiliates and was paid in 12 equal monthly installments
through January 2004.
NOTE 7 - ACQUISITION AND SUBSEQUENT RECSISSION AB INITIO OF LIFETIME HEALTHCARE
SERVICES AND NEW YORK MEDICAL, INC.
On June 17, 2003, the Company and its newly formed wholly-owned subsidiary,
a Delaware corporation ("Merger Sub"), consummated the transactions contemplated
by the Amended and Restated Agreement and Plan of Merger (the "Merger
Agreement") entered into with Lifetime Healthcare Services, Inc. ("Lifetime"), a
Delaware corporation. Pursuant to the Merger Agreement, Merger Sub was merged
with and into Lifetime (the "Merger"), with Lifetime continuing as the surviving
entity and wholly-owned subsidiary of the Company. The Merger Agreement was
effective as of June 17, 2003. Lifetime was a holding company whose only assets
consisted of the ownership of 55% of the capital stock of NYMI which had been
acquired by Lifetime immediately prior to the Merger pursuant to the terms of
the NYMI Stock Purchase Agreement. The Merger Agreement was rendered null and
void pursuant to the Rescission Agreement (see below).
In consideration for the acquisition of Lifetime, the Company issued
467,500 shares of its Series B-2 Convertible Preferred Stock (the "B-2
Preferred"), and each share of B-2 Preferred was convertible into twenty (20)
shares of the Company's Common Stock. The B-2 Preferred paid no dividend and
voted on an "as converted" basis with the Company Common Stock. Such issuance
became null and void pursuant to the Rescission Agreement effective December 9,
2003 (see below).
-7-
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In connection with the Merger, the Company also agreed to issue 232,500
shares of its Series B-3 Convertible Preferred Stock (the "B-3 Preferred") to
the holders of record of its outstanding shares of Common Stock as of June 10,
2003. The B-3 Preferred are convertible on a 20-for-1 basis, into an aggregate
of 4,650,000 shares of Common Stock. The B-3 Preferred pays no dividend and
votes on an "as converted" basis, with the Company Common Stock.
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.
Mr. Rubin initially objected to the December 8, 2003 Board meeting but 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:
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; and
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
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.
As a result of the consummation of the transactions pursuant to the Rescission
Agreement:
55% of the capital stock of NY Medical was returned to the previous
shareholder and the proposed Share Exchange with the ESOP was cancelled;
the Lifetime Merger was cancelled and rescinded, and all shares of Company
Series B-2 Preferred Stock issued to the former stockholders of Lifetime
were rendered null and void, without any further value or rights, and
returned to the treasury of the Company for cancellation;
all stock options issued to Dr. Landow, Joseph Ciavarella, directors
designated by Dr. Landow and other employees of NY Medical were cancelled;
and
effective as of December 9, 2003 each of Dr. Landow, Stuart Fause and John
Good were deemed to have resigned as members 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.
-8-
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
the Company cancelled options to purchase an aggregate of approximately
3,250,000 shares of Company Common Stock;
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 $5,500,000 Landow
Note was cancelled.
NOTE 8 - RECEIVABLE FROM NYMI
The obligations of NYMI to the Company in respect of the loans and advances
made between February and June 2003, aggregating $1,500,000, are evidenced by
NYMI's 6% note which was payable in full as to principal and interest on January
31, 2004. 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. Such note was not paid on January 31, 2004, nor has
it been paid as of the filing date of this Form 10-Q. 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 recorded a 100% reserve against the amount due for principal
and accrued interest from NYMI as at December 31, 2003.
NOTE 9 - ISSUANCE OF COMMON SHARES
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 an expense of $476,000
was charged to operations during the quarter ended June 30, 2004.
NOTE 10 - SUBSEQUENT EVENT
On August 9, 2004, the board of directors of the Company approved a
non-binding Memorandum of Understanding (the "MOU") with Southern Gas Company
("Southern Gas"), a limited liability company incorporated in Russia and based
in Moscow.
Southern Gas owns 100% of a company that operates a 3.5 mile gas pipeline
between Rostov, Russia and the Ukraine, 100% of a well extraction equipment
supply company, and a minority interest in an extraction company in Russia.
-9-
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The MOU contemplates a reverse acquisition under the terms of which AUGI
will issue approximately 33.0 million shares of its common stock (to represent
not less than 70% of the fully-diluted AUGI common stock) to the equity owners
of Southern Gas in consideration for 100% of the equity in Southern Gas and
subsidiaries. Assuming the issuance of 33.0 million AUGI shares to the Southern
Gas equity owners, the holders of AUGI securities prior to the transaction will
effectively retain on the closing date not more than 14.0 million common shares
on a fully diluted basis.
It is the intention of the parties to enter into a definitive purchase
agreement and consummate the transaction by December 31, 2004. Consummation of
the transaction is subject to a number of conditions, including:
Southern Gas acquiring the balance of the ownership of the extraction
company so that it will be the sole shareholder of that entity at the
closing;
completion of a satisfactory due diligence investigation by both parties;
delivery of audited consolidated financial statements of Southern Gas for
the two years ended December 31, 2003 and the nine months ended September
30, 2004;
total debt and contingent liabilities of AUGI, excluding any liabilities
that may be indemnified against in a manner satisfactory to Southern Gas,
shall not exceed $100,000; and
approval by the AUGI stockholders.
In a related transaction, AUGI established a special purpose joint venture
acquisition company with Vertex Capital Corporation to acquire the equity of
Southern Gas. AUGI owns 78.6% and Vertex owns 21.4% of the equity of the new
joint venture entity, with either party having the right to cause the Vertex
equity to be exchanged for 3.5 million AUGI shares upon completion of the
Southern Gas acquisition. Principals of Vertex made the introductions and are
facilitating the Southern Gas transaction, including payment of certain
transaction expenses.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Form 10-Q.
This management's discussion and analysis of financial conditions and
results of operations contains certain "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995. Such statements
relating to future events and financial performance are forward-looking
statements that involve risks and uncertainties, detailed from time to time in
the Company's various SEC filings. No assurance can be given that any such
matters will be realized.
RESULTS OF OPERATIONS
The Three Months Ended June 30, 2004 Compared to the Three Months Ended June 30,
2003
General and administrative expenses totaled $643,000 for the three months
ended June 30, 2004 as compared to $554,000 for the three months ended June 30,
2003, a net increase of $89,000. The net increase is primarily due to costs of
approximately $400,000 in the prior year three month period that related to the
Lifetime/NYMI acquisition which was subsequently rescinded and for which there
is no comparable figure in the 2004 three month period. There was also a charge
of $476,000 for stock awards in the current three-month period for which there
was no comparable figure in the prior year.
Net interest expense for the three months ended June 30, 2004 was $125,000
as compared to $103,000 during the three months ended June 30, 2003. The
increase in net interest expense of $22,000 is primarily due to the interest
expense burden on the Bridge Notes of $90,000 for the 2004 quarter due to a
default interest rate of 24% per annum effective April 1, 2004 as compared to
interest and amortization of the beneficial conversion feature aggregating
$74,000 for the three month period ending June 30, 2003. In addition, interest
income was somewhat higher in the 2003 period.
Other income of $280,000 in the 2003 three-month period resulted from an
adjustment to record a decrease in estimated amounts for contingencies.
The Company has recorded a full valuation allowance against the deferred
tax benefit for net operating losses generated, since in management's opinion
the net operating losses do not meet the more likely than not criteria for
future realization.
The Six Months Ended June 30, 2004 Compared to the Six Months Ended June 30,
2003
General and administrative expenses totaled $802,000 for the six months
ended June 30, 2004 as compared to $820,000 for the six months ended June 30,
2003, a decrease of $18,000. The decrease is primarily due to a decrease of
approximately $195,000 in legal and other professional fees as well as a
decrease of approximately $400,000 in costs related to the rescinded acquisition
of NYMI and stock option compensation. Such decreases were offset by a charge of
$476,000 for stock awards in the 2004 period for which there was no comparable
expense in the 2003 period.
Net interest expense for the six months ended June 30, 2004 was $614,000 as
compared to $136,000 during the six months ended June 30, 2003. The increase in
net interest expense of $478,000 is primarily due to amortization of $417,000 of
beneficial conversion feature in the 2004 six month period as compared to
$68,000 in the 2003 six month period as well as the interest expense burden on
the Bridge Notes of $37,500 in the three months ended March 31, 2004 and $90,000
for the quarter ended June 30, 2004 due to a default interest rate of 24% per
annum effective April 1, 2004 as compared to interest and amortization of the
beneficial conversion feature aggregating $74,000 for the six month period
ending June 30, 2003. In addition, interest income was somewhat higher in the
2003 period.
Other income of $280,000 in the 2003 six-month period resulted from an
adjustment to record a decrease in estimated amounts for contingencies.
-11-
Liquidity and Capital Resources
The Company's primary needs for liquidity and capital resources are the
funding of salaries and other administrative expenses related to the management
of the Company.
During the six months ended June 30, 2004, cash, cash equivalents and
marketable securities decreased by $309,000.
The Company's cash, cash equivalents and marketable securities of $75,000
as of June 30, 2004 are not sufficient to support current levels of operations
for the next twelve months and it will be necessary for the Company to seek
additional financing.
In addition, the Company is in default on certain existing indebtedness in
the amount of $1,500,000, plus accrued interest of approximately $1,135,000.
Although the holder of such indebtedness has not sought to collect the same,
were the Company required to pay such indebtedness it would be necessary to
secure additional financing.
AUGI remains contingently liable for certain capital lease obligations
assumed by eGlobe, Inc. as part of the Connectsoft Communications Corp. asset
sale which was consummated in June 1999 (see Note 4).
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon AUGI's financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the use of
estimates that affect the reported amounts of assets, liabilities and expenses.
AUGI evaluates its estimates on an ongoing basis, including estimates for income
tax assets and liabilities and the impairment of the value of investments. The
Company bases its estimates on historical experience and on actual information
and assumptions that are believed to be reasonable under the circumstances at
that time. Actual results may differ from these estimates under different
assumptions or conditions. AUGI believes that the following critical accounting
policies affect its more significant estimates used in the preparation of its
financial statements.
Accounting for Income Taxes.
AUGI currently records a full valuation allowance against the deferred tax
benefit for net operating losses generated, since in management's opinion the
net operating losses do not meet the more likely than not criteria for future
realization.
Impairment of Investments.
AUGI reviews estimates of the value of its investments each reporting
period and records an impairment loss to the extent that management believes
that there has been an impairment to the carrying value.
-12-
Recent Accounting Pronouncements
FASB Interpretation No. 45 Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission of
FASB Interpretation No. 34.
This Interpretation elaborates on the disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. This Interpretation
does not prescribe a specific approach for subsequently measuring the
guarantor's recognized liability over the term of the related guarantee. This
Interpretation also incorporates, without change, the guidance in FASB
Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of
Others, which is being superseded.
The initial recognition and initial measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The disclosure requirements in this Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The interpretive guidance incorporated without change from Interpretation
34 continues to be required for financial statements for fiscal years ending
after June 15, 1981 the effective date of Interpretation 34. The Company has
made the appropriate disclosures related to guarantees.
In April 2002, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 145, Rescission of SFAS Nos. 4, 44 and 64, amendment of SFAS No. 13 and
Technical Corrections as of April 2002. This Statement rescinds SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an amendment to that
Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement also rescinds SFAS No. 44, Accounting for
Intangible Assets of Motor Carriers. This Statement amends SFAS No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The Company
has reviewed this pronouncement and will consider its impact if any relevant
transaction(s) occur.
In July 2002, the FASB issued SFAS No.146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No.94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This Statement applies to
costs associated with an exit activity that does not involve an entity newly
acquired in a business combination or with a disposal activity covered by SFAS
No. 144, Accounting for the Impairment or disposal of Long-Lived Assets. These
costs include, but are not limited to; termination benefits provided to current
employees that are involuntarily terminated under the terms of a benefit
arrangement that, in substance, is not an ongoing benefit arrangement or an
individual deferred compensation contract, costs to terminate a contract that is
not a capital lease and costs to consolidate facilities or relocate employees.
This Statement does not apply to costs associated with the retirement of a long-
lived asset covered by SFAS No. 143, Accounting for Asset Retirement
Obligations. The Company does not believe that these pronouncements apply but
will continue to review for possible relevancy in the future.
-13-
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.
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.
-14-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains cash balances at two financial institutions. These
balances are insured for up to $100,000 per account by the Federal Deposit
Insurance Corporation. The cash balances at June 30, 2004 did not exceed the
insurance limit.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Our chief executive officer and our chief financial officer, after
evaluating our "disclosure controls and procedures" (as defined in the
Securities Exchange Act of 1934 (the "Exchange Act") Rules 13a-14(c) and
15d-14(c) have concluded that as of a date within 90 days of the filing date of
this report (the "Evaluation Date") our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports that
we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
Changes in internal controls
Subsequent to the Evaluation Date, there were no significant changes in our
internal controls or in other factors that could significantly affect our
disclosure controls and procedures, nor were there any significant deficiencies
or material weaknesses in our internal controls. As a result, no corrective
actions were required or undertaken.
-15-
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
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.
REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on March 22, 2004 regarding
the approval of a Rescission Agreement by the Company's Board of Directors
whereby the acquisition of Lifetime Healthcare Services, Inc. and New York
Medical Inc. was rescinded ab initio.
The Company filed a Current Report on Form 8-K on June 7, 2004 regarding
the Company's change in the certifying accountant.
- 16 -
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN UNITED GLOBAL, INC.
August 23, 2004
By: /s/ Robert M. Rubin
-------------------
Robert M. Rubin
Chief Executive Officer
By: /s/ David M. Barnes
-------------------
David M. Barnes
Chief Financial Officer
- 17 -