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 September 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) 7,981,319 as of November 19, 2004
AMERICAN UNITED GLOBAL, INC.
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2004 (Unaudited) and December 31, 2003...... 1
Consolidated Statements of Operations
Three Months Ended September 30, 2004
and September 30, 2003 (Unaudited)........................ 2
Consolidated Statements of Operations
Nine Months Ended September 30, 2004
and September 30, 2003 (Unaudited)........................ 3
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2004
and September 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
September 30 December 31,
2004 2003
--------------- ---------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 54,000 $ 379,000
Investment in marketable securities, at market value .................... -- 5,000
Notes receivable from New York Medical, Inc., net of reserve ............ -- --
Investment in Informedix ................................................ 40,000 100,000
Note receivable, InforMedix ............................................. -- 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 ................................................... 177,000 584,000
--------------- ---------------
TOTAL ASSETS ............................................................ $ 177,000 $ 584,000
=============== ===============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings in default including accrued interest
of $1,173,000 and $1,060,000 ......................................... $ 2,673,000 $ 2,560,000
Accounts payable ........................................................ 17,000 14,000
Accrued liabilities ..................................................... 442,000 397,000
Accrued interest expense on Bridge Notes ................................ 299,000 81,000
Notes payable ........................................................... -- 7,000
Bridge Notes payable .................................................... 1,500,000 1,083,000
Note payable - Rubin Family Trust ....................................... 88,000 --
Distribution payable to Series B-3 Preferred shareholders ............... 40,000 100,000
--------------- ---------------
TOTAL CURRENT LIABILITIES ............................................... 5,059,000 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 and 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,
48,507 and 232,500 shares issued and outstanding ........................ 1,000 2,000
Common stock, $.01 par value; 40,000,000 shares authorized; 7,981,279
and 2,532,699 shares issued and outstanding respectively ................ 80,000 25,000
Additional paid-in capital .............................................. 53,547,000 53,126,000
Accumulated deficit ..................................................... (58,434,000) (56,661,000)
Accumulated unrealized loss, net ........................................ -- (74,000)
--------------- ---------------
(4,802,000) (3,578,000)
Less: cost of treasury shares ........................................... (80,000) (80,000)
--------------- ---------------
Total shareholder's deficit ............................................. (4,882,000) (3,658,000)
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT ............................. $ 177,000 $ 584,000
=============== ===============
See accompanying notes to consolidated financial statements.
-1-
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2004 2003
------------- -------------
General and administrative expenses . $ 154,000 $ 301,000
------------- -------------
Operating loss ...................... (154,000) (301,000)
Interest expense, net ............... (127,000) (140,000)
Loss on sale of marketable securities (75,000) --
------------- -------------
Loss from operations ................ (356,000) (441,000)
------------- -------------
Net loss ............................ $ (356,000) $ (441,000)
============= =============
Basic and diluted loss per share .... $ (0.04) $ (0.06)
============= =============
Weighted average number of shares ... 8,619,366 7,182,699
============= =============
See accompanying notes to consolidated financial statements.
-2-
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2004 2003
------------- -------------
General and administrative expenses . $ 956,000 $ 1,045,000
------------- -------------
Operating loss ...................... (956,000) (1,045,000)
Other Income ........................ -- 280,000
Interest expense, net ............... (742,000) (722,000)
Loss on sale of marketable securities (75,000) --
------------- -------------
Loss from operations ................ (1,773,000) (1,487,000)
------------- -------------
Net loss ............................ $ (1,773,000) $ (1,487,000)
============= =============
Basic and diluted loss per share .... $ (0.22) $ (0.37)
============= =============
Weighted average number of shares ... 7,845,060 4,013,990
============= =============
See accompanying notes to consolidated financial statements.
-3-
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ....................................... $ (1,773,000) $ (1,487,000)
Adjustments to reconcile net loss to net
cash used by operating activities
Loss on sale of marketable securities ........ 75,000 --
Beneficial conversion feature ................ 417,000 520,000
Stock option compensation .................... -- 100,000
Stock award compensation ..................... 476,000 --
Legal fees paid with common stock ............ -- 175,000
Changes in assets and liabilities:
Prepaid expenses and other receivables ..... (17,000) (100,000)
Accounts payable and accrued liabilities ... 396,000 (231,000)
------------- -------------
NET CASH USED BY OPERATING ACTIVITIES ............. (426,000) (1,023,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan to ScanTek ............................... -- (25,000)
Loan to Spongetech ............................ -- (25,000)
Loans to New York Medical, Inc. ............... -- (1,508,000)
Repayment of Note by Informedix ............... 20,000 --
------------- -------------
NET CASH PROVIDED BY (USED BY) INVESTING ACTIVITIES 20,000 (1,558,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of Bridge Notes ....... -- 1,350,000
Proceeds from Rubin Family Trust loan ........ 88,000
Payment of note payable ...................... (7,000) (54,000)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ......... 81,000 1,296,000
------------- -------------
Net decrease in cash and cash equivalents ......... (325,000) (1,285,000)
Cash and cash equivalents, beginning .............. 379,000 1,862,000
------------- -------------
Cash and cash equivalents, ending ................. $ 54,000 $ 577,000
============= =============
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 nine months ended September 30, 2004 and 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 $1,173,000. The
holder of such indebtedness has indicated that such debt will be written off in
its entirety in the current calendar year, 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 September 30, 2004, the Company had a working capital
deficiency of $4,882,000, an accumulated deficit of $58,434,000, and had
incurred a loss of $1,773,000 for the nine months ended September 30, 2004 and a
loss of $4,036,000 for the period of June 17, 2003 through December 31, 2003. In
addition, the Company's cash of $54,000 at September 30, 2004 is 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 has been to seek an acquisition candidate with a
viable business that could 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 Share Exchange
Agreement 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. 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 actively negotiating a settlement with the Bridge Note
holders in the approximate amount of $2,225,000 and it is anticipated that the
Bridge Note holders will accept this amount as payment in full for all principal
and interest due as well as the surrender of the 1,500,000 warrants that
accompanied the Bridge Notes. The payment is expected to involve the transfer of
certain shares of Western Power & Equipment owned by the Company and should that
value not equal the settlement amount; sufficient shares of common stock of the
Company to make up the difference. There can be no assurance that the Bridge
Note Holders will accept such proposal.
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 $1,173,000 at September 30, 2004. Originally bearing
interest at 8%; the note accrues interest at 10% while in default. The holder of
such indebtedness has been in contact with the Company and has informally agreed
not to pursue collection currently; 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. Spongetech is in
default on the payments that were due on July 31, 2004 and is unable to repay
any amount at this time. In November 2004, the Company agreed to convert all
principle and interest due under the Notes into 466,667 shares of Spongetech
common stock. Spongetech is actively seeking financing in order to continue in
business.
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. The note
was not paid on October 15, 2004 and the due date has been extended to December
31, 2004 with additional interest at 12% per annum.
-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 September 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, NYMI's
asset based lender, 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 - SHARE EXCHANGE AGREEMENT WITH SOUTHERN GAS COMPANY
On August 9, 2004, the board of directors of the Company approved the
signing of a share exchange agreement 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 Exchange Agreement 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 consummate the transaction by December 31,
2004. Such consummation 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 September 30, 2004 Compared to the Three Months Ended
September 30, 2003
General and administrative expenses totaled $154,000 for the three months ended
September 30, 2004 as compared to $301,000 for the three months ended September
30, 2003, a net decrease of $147,000. The net decrease is primarily due to costs
of approximately $130,000 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.
Net interest expense for the three months ended September 30, 2004 was $127,000
as compared to $140,000 during the three months ended September 30, 2003. The
decrease in net interest expense of $13,000 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
$112,000 for the three month period ending September 30, 2003. In addition,
interest income was somewhat higher in the 2003 period.
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 Nine Months Ended September 30, 2004 Compared to the Nine Months Ended
September 30, 2003
General and administrative expenses totaled $956,000 for nine months ended
September 30, 2004 as compared to $1,045,000 for the nine months ended September
30, 2003, a decrease of $89,000. The decrease is primarily due to a decrease of
approximately $145,000 in legal and other professional fees as well as a
decrease of approximately $500,000 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 nine months ended September 30, 2004 was $742,000
as compared to $276,000 during the nine months ended September 30, 2003. The
increase in net interest expense of $466,000 is primarily due to amortization of
$417,000 of beneficial conversion feature in the 2004 nine month period as
compared to $68,000 in the 2003 nine 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 each of the quarters ended June 30, 2004 and September
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 $131,000 for the nine month period ending September 30,
2003. In addition, interest income was somewhat higher in the 2003 period.
Other income of $280,000 in the 2003 nine-month period resulted from an
adjustment to record a decrease in estimated amounts for contingencies.
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Liquidity and Capital Resources
The Company's primary needs for liquidity and capital resources are the
funding of salaries and other administrative expenses related to the management
of the Company.
During the nine months ended September 30, 2004, cash, cash equivalents and
marketable securities decreased by $330,000.
The Company's cash and cash equivalents of $54,000 as of September 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 $1,173,000.
Although the holder of such indebtedness has stated that they will not seek to
collect such indebtedness currently; 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.
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Recent Accounting Pronouncements
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 Financial Accounting Standards Board (" FASB") issued
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities
which was originally issued in January 2003. FIN 46 or revised provides guidance
on the consolidation of certain entities when control exists through other
entities created after January 31, 2003. The Company does not hold a variable
interest in any enterprise. Accordingly, the Company does not expect the
provisions of FIN 46 to have a material effect on future interim or annual
financial statements.
On December 18, 2003 the SEC issued Staff Accounting Bulletin No. 104, Revenue
Recognition ("SAB 104"), which supersedes SAB 101, Revenue Recognition in
Financial Statements. SAB 104's primary purpose is to rescind accounting
guidance contained in SAB 101 related to multiple element revenue arrangements,
which was superseded as a result of the issuance of EITF 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables. The adoption of SAB 104 did not
have a material impact the Company's financial position or results of operations
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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 September 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.
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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 September 24, 2004
regarding the signing of the Share Exchange Agreement with Southern Gas.
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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.
November 22, 2004
By: /s/ Robert M. Rubin
---------------------------
Robert M. Rubin
Chief Executive Officer
By: /s/ David M. Barnes
---------------------------
David M. Barnes
Chief Financial Officer
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