10-K 1 v016451.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2004 Commission File Number: 000-19404 AMERICAN UNITED GLOBAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-4359228 (State of incorporation) (IRS Employer Identification No.) 108 Village Square, # 327 Somers, NY 10589 (Address of principal executive offices) 425-869-7410 (Registrant's telephone number) Securities registered pursuant to section 12(g) of the Act: Common Stock, par value $.01 per share Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for each shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_X_] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES [ ] NO [X] The aggregate market value of any voting or non-voting common equity held by non-affiliates as of June 30, 2004 was $2,012,217.50. As of April 12, 2005, there were 8,487,399 shares outstanding of the Registrant's common stock. Documents incorporated by reference: None. AMERICAN UNITED GLOBAL, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 Page PART I Item 1. Business 4 Item 2. Properties 4 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 5 PART II Item 5. Market for Registrant's Common Equity and Related 5 Stockholder Matters and Issuer 6 Purchases of Equity Securities Item 6. Selected Financial Data 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 7A. Quantitative And Qualitative Disclosures About Market Risk 13 Item 8. Financial Statements And Supplementary Data 13 Item 9. Changes In and Disagreements With Accountants On Accounting 13 and Financial Disclosure Item 9A. Controls And Procedures 13 Item 9B. Other Information1 13 PART III Item 10. Directors and Executive Officers of the Registrant 13 Item 11. Executive Compensation 16 Item 12. Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters 17 Item 13. Certain Relationships And Related Transactions 18 Item 14. Principal Accounting Fees and Services 21 PART IV Item 15. Exhibits, Financial Statement Schedules 21 Signatures SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS THE FEDERAL SECURITIES LAWS PROVIDE FOR A SAFE HARBOR FOR CERTAIN FORWARD-LOOKING STATEMENTS. THIS SAFE HARBOR PROTECTS US FROM LIABILITY IN A PRIVATE ACTION ARISING UNDER EITHER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, FOR FORWARD-LOOKING STATEMENTS THAT ARE IDENTIFIED AS SUCH AND ACCOMPANIED BY MEANINGFUL CAUTIONARY STATEMENTS OR ARE IMMATERIAL. WHEN USED IN THIS FORM 10-K, THE WORDS OR PHRASES "ESTIMATE", "INTENDS", "MAY", "EVALUATING" OR SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, AS AMENDED. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO, OUR ABILITY TO CONTINUE AS A GOING CONCERN, OUR ABILITY TO MAKE REQUIRED PAYMENTS ON SENIOR SECURED NOTES, OUR NEED FOR ADDITIONAL FINANCING, OUR HISTORY OF LOSSES, THE SUCCESSFUL IDENTIFICATION OF STRATEGIC BUSINESS PARTNERS, THE SUCCESSFUL EXECUTION OF AGREEMENTS WITH STRATEGIC BUSINESS PARTNERS REQUIRED FOR THE IMPLEMENTATION OF BUSINESS PLANS AND THE SUCCESSFUL IDENTIFICATION, ACQUISITION AND INTEGRATION OF ADDITIONAL TARGET BUSINESSES. SUCH FACTORS COULD AFFECT OUR COMPANY'S, INCLUDING THAT OF OUR SUBSIDIARIES', FINANCIAL PERFORMANCE AND COULD CAUSE OUR ACTUAL RESULTS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM ANY OPINION OR STATEMENTS EXPRESSED HEREIN WITH RESPECT TO FUTURE PERIODS. AS A RESULT, WE CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE MADE. THE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE ON WHICH THEY ARE MADE AND, EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENT TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE ON WHICH THE STATEMENT IS MADE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. IN ADDITION, WE CANNOT ASSESS THE IMPACT OF EACH FACTOR ON OUR BUSINESS OR THE EXTENT TO WHICH ANY FACTOR OR COMBINATION OF FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD-LOOKING STATEMENTS. 3 PART I ITEM 1. BUSINESS AUGI was initially organized as a New York corporation on June 22, 1988 under the name Alrom Corp. ("Alrom"), and completed an initial public offering of securities in August 1990. Alrom effected a statutory merger in December 1991, pursuant to which Alrom was reincorporated in the State of Delaware under the name American United Global, Inc. ("AUGI"). We intend to focus our business strategy on acquisitions of operating businesses in various sectors. However, other than as set forth below, we have not as yet identified any definitive acquisition candidates or opportunities. Currently, we own 13% of the common stock of Western Power & Equipment Corp. ("Western"). Western Western commenced operations in November 1992 with the acquisition from Case Corporation of seven retail distribution facilities located in Oregon and Washington. Western became our subsidiary simultaneous with such acquisition. Prior to November 1, 2000, Western was our 59.6% majority owned operating subsidiary. On November 1, 2000, we distributed 777,414 shares of Western common stock owned by us pursuant to the final court approved settlement of the shareholder class action. Due to the distribution of the Western shares and subsequent issuances of shares by Western, Western is no longer a majority owned subsidiary of ours but we continue to own approximately 13% of Western's outstanding common stock. Our 1,222,586 shares of Western are presently held in escrow - see Legal Proceedings. Informedix InforMedix has developed a portable medical device linked to an integrated hardware and software system that its management believes will enable pharmaceutical and biotechnology companies to get new drugs to market faster and at a lower cost than traditional methods. On May 8, 2003, Informedix merged with a public entity whose name was changed to Informedix Holdings, Inc. and 54,000 shares of their common stock were issued to our company pursuant to the automatic conversion feature of the loan and all accrued interest. On July 25, 2003, we loaned $20,000 to Informedix pursuant to the terms of a 12% promissory note originally due January 31, 2004 which due date was extended to April 2, 2004. The note was paid in full on that date. We intend to distribute the 54,000 shares of Informedix that we hold to the holders of our Series B-3 Preferred Stock as of June 10, 2003. NY Medical We acquired 55% of New York Medical, Inc., a New York corporation ("NY Medical"), from Redwood Investment Associates, LLP ("Redwood") pursuant to an amended and restated agreement and plan of merger agreement effective June 17, 2003 (the "Merger Agreement") and had intended to acquire the remaining 45% pursuant to a share exchange agreement with NY Medical's employee stock option plan (the "ESOP"), the holder thereof. However, the acquisition of NY Medical has been rescinded ab initio, effective December 9, 2003, as is more fully set forth under "Item 3. Legal Proceedings" and "Item 13. Certain Relationships and Related Transactions." Employees As of the filing date of this Form 10-K, we employed 2 full-time employees, neither of whom is a member of a union, and no part-time employees. ITEM 2. PROPERTIES Our principal corporate offices are located at 108 Village Square, # 327 Somers, NY 10589. 4 ITEM 3. LEGAL PROCEEDINGS Bridge Investment In April 2004, certain bridge investors commenced an action against our company in the Supreme Court of the State of New York, County of New York, alleging, among other things, that we owe plaintiffs repayment of $700,000 in principal face amount notes issued in connection with our intended acquisition of New York Medical, a New York corporation (Altitude Group, LLC, Birch Associates, LLC and D.C. Capital, LLC v. American United Global, Inc., Index No. 600936/04). Plaintiffs filed a motion seeking summary judgment against us in aggregate amount of $787,546, consisting of the allegedly outstanding principal and interest on the notes as well as attorneys' costs, and we opposed that motion. On September 24, 2004, judgment was rendered in favor of these three investors in the amount of $840,695.79. We are currently attempting to settle this matter with the plaintiffs on an amicable basis. New York Medical, Inc. New York Medical, Inc. and Redwood Investment Associates, L.P. vs American United Global, Inc., et al. (Supreme Court, New York State, New York County). In this suit, filed on December 12, 2003, plaintiffs seek a declaration that a series of transactions by which we allegedly acquired Lifetime Healthcare Services, Inc. ("Lifetime") and Lifetime acquired an interest in NY Medical from Redwood (collectively "Transactions") were properly rescinded or, alternatively, that because the Transactions were induced by fraudulent conduct of our company and others, that the Transactions should be judicially rescinded. In addition to the requests for equitable relief, plaintiffs also seek monitory damages in excess of $5 million and exemplary damages in the amount of $15 million. Currently, the suit has not proceeded past the filing and service of the complaint. We have obtained an open-ended extension of time in which to answer and/or move with regard to the complaint. We are attempting to resolve the matter amicably. However, in the event litigation proceeds, it will be aggressively defended. Howard Katz Howard Katz, a member of our board of directors, is in discussions with us over the terms of a settlement of a debt that he claims we owe him. Mr. Katz' resignation from our board of directors was requested in connection with the intended acquisition of NY Medical, a request that was not affected by the subsequent rescission of all agreements relating to such acquisition. Nonetheless, we have not received such resignation as of the date of this annual report of Form 10-K. We anticipate an expeditious settlement with Mr. Katz regarding the amount of the debt and the payment terms thereof, in connection with which we expect to obtain his letter of resignation from our board of directors. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our shares of common stock are presently quoted on the pink sheets under the symbol AUGB. Listed below are the high and low sale prices for the shares of our common stock during the years ended December 31, 2004 and 2003. These quotations reflect inter-dealer prices, without mark-up, mark-down or commission and may not represent actual transactions. Common Stock ------------ High Low ---- --- Fiscal 2003 ----------- First Quarter $1.25 $0.60 Second Quarter $2.50 $0.75 Third Quarter $2.375 $1.25 Fourth Quarter $2.75 $1.50 Fiscal 2004 ----------- First Quarter $2.75 $1.50 Second Quarter $2.50 $1.50 Third Quarter $4.50 $1.70 Fourth Quarter $2.00 $0.90 Fiscal 2005 ----------- First Quarter $1.65 $0.65 5 On April 12, 2005, there were approximately 147 holders of record of our common stock then issued and outstanding. As of April 13, 2005, the last sale price of the shares of our common stock as reported on the pink sheets was $0.75. Dividend Policy We have never paid cash dividends and have no plans to do so in the foreseeable future. Our future dividend policy will be determined by our board of directors and will depend upon a number of factors, including our financial condition and performance, our cash needs and expansion plans, income tax consequences, and the restrictions that applicable laws and our credit arrangements then impose.
Number of securities to be Weighted-average exercise Number of securities issued upon exercise of price of outstanding remaining available for outstanding options, options, warrants and future issuance under warrants and rights rights equity compensation plans Equity compensation plans approved by security holders 2001 Stock Option Plan 1,194,000 $1.26 806,000 Equity compensation plans not approved by security holders None - - - None Total 1,194,000 $1.26 806,000
ITEM 6. SELECTED FINANCIAL DATA. The Consolidated Statements of Operations set forth below with respect to fiscal years 2001 and 2002 and the periods of August 1, 2002 through June 16, 2003 and June 17, 2003 through December 31, 2003 and the Consolidated Balance Sheet Data at July 31, 2002, June 16, 2003 and December 31, 2003 are derived from, and should be read in conjunction with, the audited Consolidated Financial Statements and Notes thereto of American United Global, Inc. included in this Annual Report on Form 10-K. The Consolidated Statements of Operations Data set forth below with respect to fiscal year 2000 and the Consolidated Balance Sheet Data at July 31, 2000 and 2001 are derived from the audited Consolidated Financial Statements of the Company which are not included in this Annual Report on Form 10-K. The data set forth in the following tables should be read in conjunction with, and are qualified in their entirety by, Management's Discussion and Analysis of Financial Condition and Results of Operations and the Company's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report on Form 10-K. 6
June 17, 2003 August 1, Year Ended Through 2002 Through December 31, December 31, June 16, Year ended July 31, 2004 2003 2003 2002 2001(1) 2000 -------------- ------------- ------------- ----------- -------------- ----------- Net sales $ -- $ -- $ -- $ -- $ -- $ 155,637 Loss from continuing operations (2,296) (4,036) (1,217) (6,400) (7,030) (698) Net Loss (2,296) (4,036) (1,217) (6,400) (7,030) (698) Basic and Diluted Loss Per Share: Loss from continuing operations (0.28) (0.56) (0.35) (1.50) (13.02) (14.71) Net loss (0.28) $ (0.56) $ (0.35) $ (1.50) $ (13.02) (14.71)
Consolidated Balance Sheet Data (in $ thousands) Period Ended Year ended July 31 --------------------------- ------------------------------ December December June 2002 2001 2000 31, 2004 31, 2003 16, 2003 Total $ 128 $ 584 1,424 $ 3,000 $ 1,724 $ 128,549 assets Total (5,316) 4,242 2,700 3,587 2,909 115,413 liabilities Working capital (deficit) (5,188) (3,658) (1.276) (587) (2,137) (17,579) Stockholders' (deficiency) equity $ (5,188) $ (3,656) $ (1,276) $ (587) $ (1,185) $ 7,373
(1) For 2002 and 2001, Western has been accounted for under the equity method whereas in 2000 Western was included in the consolidated financial statements of AUGI. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with the selected historical financial data, financial statements and notes thereto and the other historical financial information of our company contained elsewhere in this Annual Report on Form 10-K. The statements contained in this Annual Report on Form 10-K that are not historical are forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, including statements regarding our company's expectations, intentions, beliefs or strategies regarding the future. Forward-looking statements include, but are not limited to, our statements regarding liquidity, anticipated cash needs and availability and anticipated expense levels. All forward-looking statements included in this annual report of Form 10-K are based on information available to our company on the date hereof, and we assume no obligation to update any such forward-looking statement. Our actual results could differ materially from those in such forward-looking statements. Overview 7 We own approximately 13% of the common stock of Western Power & Equipment Corp. ("Western") which engages in the sale, rental and servicing of light, medium-sized and heavy construction, agricultural and industrial equipment, parts and related products. The major supplier to Western is Case Corporation and the items sold, rented and serviced include backhoes, excavators, crawler dozers, compactors, log loaders, street sweepers and forklifts. Western operates 15 facilities in Nevada, Oregon, Washington, California and Alaska and sells to contractors, governmental agencies and other customers primarily for use in the construction of residential and commercial buildings, roads, levees, dams, underground power projects, forestry projects, municipal construction and other projects. Prior to November 1, 2000, we were the majority shareholder of Western with a 59.6% ownership. The results of operations of Western were therefore consolidated with those of AUGI in all prior fiscal years. On November 1, 2000 we distributed 777,414 shares of Western common stock owned by our company pursuant to the final court approved settlement of the shareholder class action. As a result, our ownership in Western became 36% and our investment in Western has been accounted for under the equity method effective August 1, 2000. As a result of the issuance of shares of Western common stock by Western, we currently own approximately 13% of its outstanding common stock. Results of Operations The fiscal year ended December 31, 2004 compared to the period of June 17 2003 to December 31, 2003 General and administrative expenses for the year ended December 31, 2004 were $1,265,000 compared to $1,281,000 for the six and one half month period ended December 31, 2003. The higher monthly average in the six and one half month period ended December 31, 2003 was primarily attributable to higher legal and other professional fees having to do with the Lifetime merger, the NY Medical acquisition and the rescission thereof as well as costs associated with the abandoned private placement. Net interest expense for the year ended December 31, 2004 was $869,000 compared to $1,247,000 for the six and one half month period ended December 31, 2003. The decrease is primarily due a charge of $1,083,000 in the 2003 period for the beneficial conversion feature and warrants associated with the Bridge Notes for which the comparable charge in 2004 was $417,000. This was somewhat offset by a higher interest rate on the Bridge Notes in 2004 due to the Notes being in default. In addition, the current year reflected $87,000 of interest expense paid with common stock to the Rubin Family Irrevocable Stock Trust on a loan of $218,000 (see Note 6). The Period of June 17, 2003 through December 31, 2003 as compared to the Period of August 1, 2002 through June 16, 2003 8 General and administrative expenses totaled $1,281,000 for the six and one half months ended December 31, 2003 and $871,000 for the ten and one half months ended June 17, 2003. The increase in the December period is primarily due to an increase in legal and other professional fees associated with the Lifetime merger, the New York Medical Inc. acquisition and the costs related to an abandoned private placement and the Rescission Agreement. Net interest expense for the ten and one half months ended June 16, 2003 was $107,000 and was $1,247,000 for the six and one half months ended December 31, 2003. The increase was due to a charge of $1,083,000 for the beneficial conversion feature of the 1,500,000 warrants that accompanied the Bridge Notes, which is recorded as additional interest expense; in addition, as there was a full reserve recorded against the debt due from NYMI, the previously accrued interest income as of December 31, 2003 of approximately $61,000 on such note was reversed. Slightly offsetting the expense increases was an increase in interest income of $3,000 earned on notes receivable that were issued late in the June 16 period and early in the December 31 period. Other income of $280,000 in the period ended June 16, 2003 relates to reductions of estimates of certain potential liabilities. There was no such comparable item in the period ended December 31, 2003. We have recorded a full valuation allowance against the deferred tax benefit for net operating losses generated, since in management's opinion the net operating losses do not meet the more likely than not criteria for future realization. The Period of August 1, 2002 through June 16, 2003 as compared to the fiscal year ended July 31, 2002 General and administrative expenses for the ten and one half month period ended June 16, 2003 were $871,000 as compared to $1,154,000 for the year ended July 31, 2002. The expense for the period ended June 16, 2003 included a charge for stock option compensation of $ 100,000 for which there was no comparable expense in fiscal 2002 and professional fees and other costs of approximately $175,000 relative to the rescinded acquisition of Lifetime/NYMI for which there were no comparable costs in the 2002 fiscal year. In addition, the 2002 fiscal year included a charge for an executive bonus of $ 300,000, rent expense of $97,000 and $65,000 of costs relative to an abandoned registration of a rights offering for which there was no comparable expense in the period ended June 16, 2003. Net of these charges, the average expense per month was $57,000 in the June 16, 2003 period as compared to $ 58,000 for the 2002 fiscal year. Net interest expense was $107,000 or $10,000 per month in the period ended June 16, 2003 as compared to $149,000 or $12,000 per month for the fiscal year 2002 period. The slight decrease in monthly net interest expense in the period ended June 17,, 2003 is primarily attributable to interest income earned on various loans for which there was no comparable item in the 2002 period. Other income of $280,000 in the June 16, 2003 period is comprised of adjustments to estimated accruals for which certain potential liabilities have been reduced. There was no such item in the 2002 period. 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 fiscal year ended December 31, 2004, cash, cash equivalents and marketable securities decreased by $376,000. There were cash receipts of $218,000 from the Rubin Family Irrevocable Stock Trust during the 2004 year in the form of loans represented by Promissory Notes. There was also a sale of marketable securities of $2,000. Cash receipts in 2003 were net proceeds of $1,350,000 from the sale of the Bridge Notes on June 18, 2003. These funds plus the then existing cash balance were expended as follows; $658,000 was used for additional loans to NYMI and $70,000 was used for additional loans to other companies; approximately $585,000 was used for expenses and professional fees related to the rescinded acquisition of Lifetime and NYMI and approximately $117,000 was used to fund day to day operations. The Company's cash of $8,000 as of December 31, 2004 is not sufficient to support current levels of operations for the next twelve months and it will be necessary for the Company to continue to seek additional financing. In addition, the Company is in default on certain unsecured indebtedness due to an unrelated third party and expects to continue non-payment of this indebtedness. The Company is also in default on the Bridge Notes but is exploring a settlement that management hopes can be reached in the near future. Since December 31, 2004, the Company has borrowed an additional $76,000 from the Rubin Family Irrevocable Stock Trust through April 29, 2005. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. Contractual Commitments and Other Obligations We remain contingently liable for certain capital lease obligations assumed by eGlobe, Inc. (eGlobe) as part of the Connectsoft Communications Corp. asset sale that was consummated in June 1999 (see Note 6). Critical Accounting Policies Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). These accounting principles require us to make certain estimates, judgments and assumptions. We 9 believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: Accounting for Income Taxes We currently record a full valuation allowance against the deferred tax benefit for net operating losses generated, since in management's opinion the net operating losses do not meet the more likely than not criteria for future realization. Impairment of Investments We review estimates of the value of our investments each reporting period and record an impairment loss to the extent that our management believes that there has been an impairment to the carrying value. Use of Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on the knowledge of current events and actions we may undertake in the future, they may ultimately differ from actual results. We use estimates, among others, to determine whether any impairment is to be recognized. Intangible Assets and Goodwill We account for intangible assets and goodwill in accordance with Statement of Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible Assets", which was adopted by we on February 1, 2002 in accordance with that statement, goodwill and intangible assets with indefinite lives are no longer amortized, but rather tested for impairment at least annually. Intangible assets with estimable useful lives, consisting of patents, trademarks, and rights, are amortized on a straight-line basis over the estimated useful lives of 5 to 15 years, and are reviewed for impairment in accordance with SFAS 144, "Accounting for the Impairment of long-lived Assets". Goodwill represents the excess of purchase price over the fair value of identifiable assets acquired in a purchase business combination. Goodwill and intangible assets with definite lives are tested annually for impairment in accordance with the provisions of SFAS 142. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit's carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using a combination of the income or discounted cash flows approach and the market approach, which utilizes comparable companies' data. If the carrying amount of the reporting unit exceeds its fair value, then a second step is performed to measure the amount of impairment loss, if any. Any impairment loss would be expensed in the consolidated statements of earnings. The impairment test for intangibles with indefinite useful lives consists of a comparison of the fair value of the intangible assets with its carrying amount. When the carrying amount of the intangible assets exceeds its fair value, an impairment loss would be recognized for the difference. Intangible assets with estimable lives and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset or assets group may not be recoverable in accordance with SFAS 144. Recoverability of intangible assets with estimable lives and other long- lived assets is measured by a comparison of the carrying amount of an assets or asset group to future net undiscounted pretax cash flows expected to be generated by the assets or asset group. If these comparisons indicated that an asset is not recoverable, the impairment loss recognized is the amount by which the carrying amount of the asset or the asset group exceeds the related estimated fair value. 10 Recent accounting pronouncements In June 2002, the Financial Accounting Standards Board (FASB) issued SFASNo. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The company adopted SFAS 146, effective February 1, 2003. The adoption of SFAS 146 did not have a material impact on our company's financial statements. The company has continued to account for employee-related post-employment benefit costs, including severance payments, under the provisions of SFAS No. 112, "Employer's Accounting for Post-Employment Benefits." In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others," was issued. This interpretation requires the initial recognition and initial measurement, on a prospective basis only, of guarantees issued or modified after December 31, 2002. Additionally, certain disclosure requirements were effective for financial statements ending after December 15, 2002. The adoption of this interpretation did not have an impact on our company's financial statements. In January 2003, FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities," (VIE's) was issued, and in December 2003, a revision to FIN 46 was issued. FIN 46 requires identification of our company's participation in VIE's, which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand-alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For entities identified as VIE's, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to a VIE, if any, bears a majority of the risk of the VIE's expected losses, or stands to gain from a majority of the VIE's expected returns. FIN 46 also sets forth certain disclosures regarding interests in VIE's that are deemed significant, even if consolidation is not required. This interpretation is effective for all VIE's created after January 31, 2003. The adoption of this interpretation did not have an impact on our company's financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, amends the definition of an underlying contract, and clarifies when a derivative contains a financing component in order to increase the comparability of accounting practices under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 did not have an impact on our company's financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003. The company adopted this standard on June 1, 2003. Its adoption did not have an impact on our company's financial statements. In May 2003, the consensus on EITF Issue No. 01-08, "Determining Whether an Arrangement Contains a Lease," was issued. The guidance in the consensus applies to the purchase or sale of goods and services under various types of contracts, including outsourcing arrangements. Based on the criteria in the consensus, both parties to an arrangement are required to determine whether the arrangement includes a lease within the scope of SFAS No. 13, "Accounting for Leases." The new requirement applies prospectively to new or modified arrangements for reporting periods beginning after May 28, 2003. Accordingly, as of August 1, 2003, the company accounted for new or modified arrangements based on this guidance. Adoption of this standard did not have an impact on our company's financial statements. In December 2003, the FASB issued SFAS No. 132 (Revised 2003), "Employers' Disclosures about Pensions and Other Post-retirement Benefits," which enhanced the disclosure about pension plans and other post-retirement benefit plans, but did not change the measurement or recognition principles for those plans. The 11 statement requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit post-retirement plans. Its adoption did not have an impact on our company's financial statements. 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. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is an amendment to SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. This new standard eliminates the ability to account for share-based compensation transactions using Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees (APB 25) and requires such transactions to be accounted for using a fair-valued-based method, with the resulting cost recognized in the Company's financial statements. This new standard is effective for annual periods beginning after June 15, 2005. The Company has not awarded or granted any share-based compensation to date and, therefore, the adoption of this standard is not expected to have any effect on the Company's financial position or results of operations until such time as share-based compensation is granted. In December 2004, the FASB issued SFAS No. 153, Exchange of Non-monetary Assets. SFAS No. 153 amends APB Opinion No. 29, Accounting for Non-monetary Transactions, to eliminate the exception for non-monetary exchanges of similar productive assets. The Company will be required to apply this statement to non-monetary exchanges after December 31, 2005. The adoption of this standard is not expected to have a material effect on the Company's financial position or results of operations. Financial Statements and Internal Controls We believe it is critical to provide investors and other users of our financial statements with information that is relevant, objective, understandable and timely, so that they can make informed decisions. As a result, we have established and we maintain accounting systems and practices and internal control processes designed to provide reasonable assurance that transactions are properly executed and recorded and that our policies and procedures are carried out appropriately. Financial Controls and Transparency Our internal controls are designed to ensure that assets are safeguarded, transactions are executed according to management authorization and our financial systems and records can be relied upon for preparing our financial statements and related disclosures. Our system of internal controls includes continuous review of our financial policies and procedures to ensure accounting and regulatory issues have been appropriately addressed, recorded and disclosed. The independent auditors perform audits of our financial statements, in which they examine evidence supporting the amounts and disclosures in our financial statements, and also consider our system of internal controls and procedures in planning and performing their audits. Management Controls Our management team is committed to providing high-quality, relevant and timely information about our businesses. Management performs reviews of each of our businesses throughout the year, addressing issues ranging from financial performance and strategy to personnel and compliance. 12 In addition, see" Item 9A - Controls and Procedures" below. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are exposed to market risk related to fluctuations in interest rates on our debt. An increase in prevailing interest rates could increase our interest payment obligations relating to variable rate debt. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See page F-1 for an index to the Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. ITEM 9A. CONTROLS AND PROCEDURES. We evaluated the effectiveness of the design and operation of our "disclosure controls and procedures" ("Disclosure Controls") pursuant to Rules 13a-14(c) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and our "internal controls and procedures for financial reporting" (Internal Controls) as of the end of the period covered by this Annual Report on Form 10-K. This evaluation (the "Controls Evaluation") was done under the supervision and with the participation of management. Disclosure Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer (CEO) to allow timely decisions regarding required disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles in the United States Of America. Since the date of the Controls Evaluation to the date of this Annual Report, there have been no significant changes in Internal Controls or in other factors that could significantly affect Internal Controls, and no corrective actions were required or taken with regard to significant deficiencies and material weaknesses. ITEM 9B. OTHER INFORMATION Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Our directors serve until the next annual meeting of stockholders or until their successors are elected and qualified. The executive officers serve at the discretion of the Board of Directors in the absence of employment agreements. The following information is submitted with respect to each of our directors and executive officers as of the date of the filing of this annual report of Form 10-K. Name Age Positions presently held Robert M. Rubin 64 Chairman of the Board of Directors and Chief Executive Officer David M. Barnes 62 Chief Financial Officer and Director Michael Metter 53 Director Howard Katz (1) 64 Director 13 (1) Mr. Katz' resignation as a director of our company has been requested but as at the date of this Form 10-K such resignation has not been received. Robert M. Rubin. Mr. Rubin has served as the Chairman of our Board of Directors since May 1991, and was our Chief Executive Officer from May 1991 to January 1, 1994. Between October 1990 and January 1, 1994, Mr. Rubin served as the Chairman of the Board and Chief Executive Officer of our company and its subsidiaries; from January 1, 1994 to January 19, 1996, he served only as Chairman of the Board of our company and its subsidiaries. From January 19, 1996 to the present, Mr. Rubin served as Chairman of the Board, President and Chief Executive Officer. Mr. Rubin was the founder, President, Chief Executive Officer and a Director of Superior Care, Inc. ("SCI") from its inception in 1976 until May 1986, when the business was sold to Olsten Corporation (NYSE). Mr. Rubin continued as a director of SCI until the latter part of 1987. Mr. Rubin is also a Director of Western Power and Equipment Corp. Mr. Rubin was a director of Med-Emerg, Inc., a publicly held Canadian management company for hospital emergency rooms and outpatient facilities until November 2001. Mr. Rubin was also a director of StyleSite Marketing, Inc., which liquidated its assets for the benefit of secured creditors in January 2000. David M. Barnes. Mr. Barnes has served as our Chief Financial Officer since May 15, 1996, and was a director from November 8, 1996 through June 17, 2003. Mr. Barnes resigned as a member of our board of directors effective on June 17, 2003 but was reappointed to our board of directors upon the effectiveness of the rescission agreement with NY Medical. Mr. Barnes is also presently a member of the Advisory Board of Interactive Imagination, Inc., a privately-held video game developer based in Seattle, WA. Mr. Barnes is also a member of the board of directors of each of SearchHelp, Inc. (OTC: SHLP) and In Veritas Medical Diagnostics, Inc. (OTC: IVME). Michael Metter. Mr. Metter has served as a Director since December 14, 2001. Mr. Metter resigned as a member of our board of directors effective on June 17, 2003, but was reappointed to our board of directors upon the effectiveness of the rescission agreement with NY Medical on May 27, 2004. Since March 2001, Mr. Metter has been the President of RME International, Ltd.(RME) Mr. Metter also currently consults to a broad range of businesses, including IT communications and media businesses, on mergers, acquisitions, restructuring, financing and other matters. From October 1998 to February 2001, Mr. Metter was a principal of Security Capital Trading, Inc, and was a principal at Madison Capital from September 1997 to October 1998. Prior thereto, Mr. Metter was the President of First Cambridge Securities from October 1994 to August 1997. Howard Katz. Mr. Katz has been a director since April 15, 1996, and was an Executive Vice President from April 15, 1996 through July 31, 1998. Since August 1998 to the present Mr. Katz has been the Chief Executive Officer of Imagine Networks, LLC., a company based in New York City that engages in advanced technology and software development. Mr. Katz' resignation was requested in connection with the contemplated acquisition of NY Medical, but such resignation was never furnished to us. Family Relationships There is no family relationship between any of the directors and/or executive officers, by blood, marriage or adoption. Involvement in certain legal proceedings Except as set forth herein, no officer or director of our company has, during the last five years: (i) been convicted in or is currently subject to a pending a criminal proceeding; (ii) been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to any federal or state securities or banking laws including, without limitation, in any way limiting involvement in any business activity, or finding any violation with respect to such law, nor (iii) has any bankruptcy petition been filed by or against the business of which such person was an executive officer or a general partner, whether at the time of the bankruptcy of for the two years prior thereto. 14 Compliance with Section 16 of the Exchange Act Section 16(a) of the Securities Exchange Act, as amended (the "Exchange Act") requires our executive officers and directors, and persons who beneficially own more than ten percent of our common stock, to file initial reports of ownership and reports of changes in ownership with the SEC and the National Association of Securities Dealers, Inc. Executive officers, directors and persons who beneficially own more than ten percent of our common stock are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely upon our review of the copies of reporting forms furnished to us, and written representations that no other reports were required, we do not believe that all filing requirements under Section 16(a) of the Securities Exchange Act of 1934 applicable to our directors, officers and any persons holding 10% or more of our common stock with respect to our fiscal year ended December 31, 2003, were satisfied on a timely basis. Code of Ethics Our board of directors adopted a Code of Ethics that covers all executive officers of our company and its subsidiaries. The Code of Ethics requires that senior management avoid conflicts of interest; maintain the confidentiality of information relating to our company; engage in transactions in shares of our common stock only in compliance with applicable laws and regulations and the requirements set forth in the Code of Ethics; and comply with other requirements which are intended to ensure that such officers conduct business in an honest and ethical manner and otherwise act with integrity and in the best interest of our company. All our executive officers are required to affirm in writing that they have reviewed and understand the Code of Ethics. Any amendment of our Code of Ethics or waiver thereof applicable to any of our principal executive officer, principal financial officer and controller, principal accounting officer or persons performing similar functions will be disclosed on our website within 5 days of the date of such amendment or waiver. In the case of a waiver, the nature of the waiver, the name of the person to whom the waiver was granted and the date of the waiver will also be disclosed. A copy of our Code of Ethics was attached as Exhibit 14 to our Form 10-K filed with the SEC on July 16, 2004 and is incorporated herein by reference. Audit Committee Our board of directors has an audit committee comprised of Michael Metter. The audit committee makes recommendations to our board of directors regarding the independent auditors for our company, approves the scope of the annual audit activities of our independent auditors, review audit results and will have general responsibility for all of our auditing related matters. The purpose of the Audit Committee is to assist our board of directors in the oversight of the integrity of the consolidated financial statements of our company, our company's compliance with legal and regulatory matters, the independent auditor's qualifications and independence, and the performance of our company's independent auditors. The primary responsibilities of the Audit Committee are set forth in its charter, and include various matters with respect to the oversight of our company's accounting and financial reporting process and audits of the consolidated financial statements of our company on behalf of our board of directors. The Audit Committee also selects the independent certified public accountants to conduct the annual audit of the consolidated financial statements of our company; reviews the proposed scope of such audit; reviews accounting and financial controls of our company with the independent public accountants and our financial accounting staff; and reviews and approves transactions between us and our directors, officers, and their affiliates. Accordingly, the Audit Committee discusses with our independent auditors, our audited financial statements, including among other things the quality of our accounting principles, the methodologies and accounting principles applied to significant transactions, the underlying processes and estimates used by our management in our financial statements and the basis for the auditor's conclusions regarding the reasonableness of those estimates, in addition to the auditor's independence. 15 Audit Committee Financial Expert We do not have an audit committee financial expert. We have not yet been able to identify and appoint a suitable nominee as of the date of this annual report. Our management is currently diligently pursuing such a candidate. Compensation of the Board of Directors Directors who are also our employees do not receive additional compensation for serving on the Board or its committees. Non-employee directors are not paid any annual cash fee. In addition, directors are entitled to receive options under our Stock Option Plan. All directors are reimbursed for their reasonable expenses incurred in attending Board meetings. We intend to procure directors and officers liability insurance. Limitation on Liability and Indemnification of Directors and Officers Under Delaware General Corporation Law a director or officer is generally not individually liable to the corporation or its shareholders for any damages as a result of any act or failure to act in his capacity as a director or officer, unless it is proven that: 1. his act or failure to act constituted a breach of his fiduciary duties as a director or officer; and 2. his breach of those duties involved intentional misconduct, fraud or a knowing violation of law. This provision is intended to afford directors and officers protection against and to limit their potential liability for monetary damages resulting from suits alleging a breach of the duty of care by a director or officer. As a consequence of this provision, stockholders of ours will be unable to recover monetary damages against directors or officers for action taken by them that may constitute negligence or gross negligence in performance of their duties unless such conduct falls within one of the foregoing exceptions. The provision, however, does not alter the applicable standards governing a director's or officer's fiduciary duty and does not eliminate or limit our right or any stockholder to obtain an injunction or any other type of non-monetary relief in the event of a breach of fiduciary duty. As permitted by Delaware law, our By-Laws include a provision which provides for indemnification of a director or officer by us against expenses, judgments, fines and amounts paid in settlement of claims against the director or officer arising from the fact that he was an officer or director, provided that the director or officer acted in good faith and in a manner he or she believed to be in or not opposed to our best interests. We have purchased insurance under a policy that insures both our company and our officers and directors against exposure and liability normally insured against under such policies, including exposure on the indemnities described above. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. ITEM 11. EXECUTIVE COMPENSATION The following table summarizes the compensation for services rendered to our company during fiscal years 2002, 2003 and 2004 by (i) our Chief Executive Officer, and (ii) each of our other most highly compensated executive officers whose total annual salary and bonus exceeded $100,000 and whose compensation is required to be disclosed under SEC rules.
Annual Compensation ($) Long Term Compensation Awards Payouts Name and Other Annual Securities Underlying LTIP All Other Principal Position Year Salary Bonus Compensation Options/ SARs(#) Payouts Compensation ------------------ ---- ------ ----- ------------ ---------------- ------- ------------ Robert M. Rubin (1) 2004 $265,000 - - - - - - - - - - - - 2003 $274,000 - - - - - - - - - - - - 2002 $253,000 - - - - - - - - - - - - David M. Barnes 2004 $45,000 - - - - - - - - - - - - 2003 $120,000 - - - - - - - - - - - - 2002 $150,000 - - - - - - - - - - - -
(1) (1) Effective in July 1999, Mr. Rubin was entitled to an annual salary of $225,000 plus a minimum increase each year equal to the percentage rise in the New York City wage index (approximately 4% per year). 16 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. As of the most recent practicable date, our authorized capitalization consisted of forty million shares of common stock, par value $0.01 per share. As of April 12, 2005, there were 8,487,399 shares of our common stock issued and outstanding, all of which were fully paid, non-assessable and entitled to vote. Each share of our common stock entitles its holder to one vote on each matter submitted to our stockholders. The following table sets forth, as of such date, the number of shares of our common stock owned by (i) each person who is known by us to own of record or beneficially five percent (5%) or more of our outstanding shares, (ii) each of our directors, (iii) each of our executive officers and (iv) all of our directors and executive officers as a group. Unless otherwise indicated, each of the persons listed below has sole voting and investment power with respect to the shares of our common stock beneficially owned.
Name and Address Amount Owned (1) Percent of Class (2) Rubin Family Irrevocable Stock Trust (3) 5,357,452 63.12% Robert M. Rubin (4) 33,680 * David M. Barnes (5) 749,500 8.58% C. Dean McLain (6) 962,000 11.06% Michael Metter (7) 130,000 1.51% Howard Katz (8) 64,000 * Vertex Capital Corp. 600,000 7.07% All officers and directors as a group (4 persons) 6,334,632 70.82%
* Less than one percent. (1) Beneficial ownership is determined in accordance with the Rule 13d-3(d)(1) of the Exchange Act, as amended and generally includes voting or investment power with respect to securities. Pursuant to the rules and regulations of the Securities and Exchange Commission, shares of common stock that an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purposes of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purposes of computing the percentage ownership of any other person shown in the table. (2) Figures may not add up due to rounding of percentages. (3) The Rubin Family Irrevocable Stock Trust (the "Trust") was created by Robert M. Rubin, our chairman and chief executive officer, for the benefit of his wife Margery Rubin and their children. Mr. Rubin disclaims beneficial interest in all securities of our company held by the Trust. (4) Includes (a) 80 shares of our common stock owned by Mr. Rubin and (b) 33,600 shares of our common stock underlying presently exercisable options. (5) Includes options to purchase 249,500 shares of our common stock. 17 (6) Includes options to purchase 212,000 shares of our common stock. (7) Includes options to purchase 110,000 shares of our common stock. (8) Consists of options to purchase 64,000 shares of our common stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. On June 16, 2003, our company, Lifetime Acquisition Corp., a Delaware corporation and wholly owned subsidiary of our company ("Merger Sub"), and Lifetime Healthcare Services, Inc., a Delaware corporation ("Lifetime"), entered into an Amended and Restated Agreement and Plan of Merger (the "Merger Agreement"). Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub was merged into Lifetime as of June 17, 2003 (the "Merger"). As a result of the Merger, the outstanding shares of capital stock of each of Merger Sub and Lifetime were converted or canceled, the separate corporate existence of Merger Sub ceased, and Lifetime continued as the surviving corporation in the Merger as a wholly owned subsidiary of our company. Immediately prior to the Merger, 55% of the capital stock of NY Medical was acquired by Lifetime pursuant to that certain Stock Purchase Agreement, dated March 21, 2003, as amended (the "NY Medical Stock Purchase Agreement") entered into by and among Lifetime, Redwood, and NY Medical. Prior to the Merger, the Rubin Family Irrevocable Stock Trust (the "Trust") owned approximately 77.6% of the shares of common stock, par value $.01 per share of our company. In connection with the Merger, our company: o issued to the former stockholders of Lifetime, an aggregate of 467,500 shares of our company's Series B-2 Convertible Preferred Stock (the "B-2 Preferred"), convertible into an aggregate of 9,350,000 shares of our common stock, which B-2 Preferred votes on an "as converted" basis with our common stock on all matters as to which holders of our common stock may vote; and o entered into a certain agreement (the "Closing Agreement") which was to govern the constitution of our board of directors and materially impact its decision-making capability. In contemplation of the Merger Agreement, we declared a stock dividend on our common stock with a record date of June 10, 2003. The stock dividend took the form of the issuance of 232,500 shares of our newly authorized and designated Series B-3 Convertible Preferred Stock (the "B-3 Preferred") to the holders of our common stock on the record date on a pro rata basis. Each share of the B-3 Preferred is convertible, on or after December 17, 2003, into 20 shares of our common stock at the discretion of our board of directors. Accordingly, an aggregate of 4,650,000 shares of our common stock would be issued to the record holders of the B-3 Preferred if all shares of B-3 Preferred were converted. The shares of B-3 Preferred vote together with our common stock on an "as converted basis." We attempted to consummate a private placement of our securities beginning in September, 2003 in order to raise approximately $5.7 million to pay $2.0 million principal amount of the Lifetime Note and retire the Landow Note, among other purposes. In October 2003, Dr. Landow, acting on behalf of NY Medical, Tracy Landow and Redwood, extended the due date to satisfy the payment events (the "Payment Events") under the Closing Agreement. The Payment Events were postponed from October 17, 2003 to November 17, 2003 in consideration for our agreement to extend the due date of the $1,500,000 NY Medical Note payable to us to January 2, 2005. We were unable to consummate the requisite financing by the extended date, and in November 2003, Dr. Landow declared a default event. On December 5, 2003, a written notice of a special telephonic meeting of the board of directors to be held on Monday, December 8, 2003 was transmitted by Messrs. Landow, Fause and Good to Messrs. Rubin and McLain; the purpose of the special meeting was, among other things, to consider a possible rescission of the acquisition of 55% of the capital stock of NY Medical by our company and the transactions relating thereto. On December 8, 2003, a telephonic meeting of the board was allegedly convened. As a result of such alleged board meeting, minutes were prepared and executed by Messrs. Landow, Fause and Good, and on December 9, 2003, a rescission agreement among our company, Merger Sub, Lifetime, NY Medical, Redwood and the ESOP, dated as of December 9, 2003 (the "Rescission Agreement") was entered into and delivered to counsel to our company and Messrs. Rubin and McLain. 18 Under the terms of such Rescission Agreement: o the Merger, Merger Agreement and all related documents were cancelled and rescinded and rendered null and void, ab initio, for all purposes, including for tax purposes; o the NY Medical Stock Purchase Agreement, the acquisition of capital stock of NY Medical and all transactions relating thereto were cancelled and rescinded and rendered null and void, ab initio, for all purposes, including for tax purposes; o the share exchange agreement between our company and the ESOP pursuant to which we were to acquire the remaining 45% of NY Medical not acquired through the Merger Agreement (the "Share Exchange Agreement") and all transactions relating thereto were cancelled and rescinded and rendered null and void, ab initio, for all purposes, including for tax purposes; and o in order to enable us to repay the $1.5 million of bridge notes (the "Bridge Notes") owed to certain investors in March 2004, NY Medical agreed under the terms of the Rescission Agreement that "the NY Medical Note shall be modified such that all principal and interest thereunder shall be due from NY Medical to AUGI on March 30, 2004." In consideration of such modification, the Rescission Agreement permits NY Medical or its representatives to communicate directly with the holders of the Bridge Notes for the purpose of, among other things, negotiating an alternative mechanism for the payment of the Bridge Notes. Subsequent to December 9, 2003, Mr. Rubin objected to the December 8, 2003 meeting and the Rescission Agreement for a variety of reasons, including the alleged failure to properly convene such meeting. On December 12, 2003, counsel for NY Medical and Redwood commenced a lawsuit against our company, Lifetime, Robert M. Rubin, Kenneth Orr and Robert DePalo in the New York State Supreme Court seeking, among other things to declare the Rescission Agreement as valid and effective and also seeking monetary damages against the defendants for fraudulent inducement, unjust enrichment and breach of fiduciary duties and breach of contract. Our company and our counsel believe that the suit is totally without merit and that we have a number of valid defenses and counterclaims against Dr. Landow and NY Medical. Since late December 2003, the parties have been holding discussions with a view toward settling the dispute, and the defendants in the above litigation have been granted extensions to answer or otherwise plead. On March 8, 2004, our corporate counsel advised counsel to NY Medical, Redwood and its affiliates that each of our company and Messrs. Rubin and McLain, as members of our board of directors, have reconsidered their position and that they agree with NY Medical, Redwood, Dr. Landow, Tracy Landow and the ESOP that: o effective as of December 9, 2003, the Merger, Lifetime Merger Agreement and all related merger documents are null and void, ab initio, for all purposes, including, without limitation, for tax purposes; o effective as of December 9, 2003, the NY Medical Stock Purchase Agreement, the acquisition of capital stock of NY Medical and all transactions contemplated thereby are null and void, ab initio, for all purposes, including, without limitation, for tax purposes; o effective as of December 9, 2003, the Share Exchange Agreement between our company and the ESOP and all transactions contemplated thereby are null and void, ab initio, for all purposes, including, without limitation, for tax purposes; and o all principal amount of and accrued interest on the NY Medical Note is, in fact, due and payable on March 30, 2004, and NY Medical shall have the right to communicate directly with the holders of the Bridge Notes for the purpose of, among other things, negotiating an alternative mechanism for the payment of the Bridge Notes. 19 Our counsel's letter did not condition acceptance of the above arrangements upon a dismissal or voluntary settlement of the pending litigation, but rather requested that NY Medical or its counsel advise as to mechanisms for NY Medical to (a) communicate with the holders of the Bridge Notes, (b) effect full payment on March 30, 2004 of the NY Medical Note, and (c) return the stock certificates and other documents to effect the transactions contemplated by the Rescission Agreements. To date, neither our company nor its counsel have been formally contacted by NY Medical or its counsel concerning such matters. As a result of the consummation of the transactions contemplated by the Rescission Agreement: o 55% of the capital stock of NY Medical will be returned to Redwood and the proposed Share Exchange with the ESOP will be cancelled; o the Merger is cancelled and rescinded, and all 467,500 shares of our Series B-2 Preferred Stock issued to the former stockholders of Lifetime are rendered null and void, without any further value or rights, and returned to the treasury of our company for cancellation; o all stock options issued to Dr. Landow, Joseph Ciavarella, the directors designated by Dr. Landow and other employees of NY Medical are cancelled, which options were exercisable for an aggregate of 2,100,000 shares of our common stock; o effective as of December 9, 2003 each of Dr. Landow, Stuart Fause and John Good is deemed to have resigned as a member of our board of directors; and o we cancelled the $5,500,000 Landow Note. Effect of the Rescission of the NY Medical and Related Transactions. As at the date of this filing, our company is in default in payment of the $1.5 million of Bridge Notes that were due and payable on March 17, 2004. On March 30, 2004, the $1.5 million of NY Medical Notes became due and payable. The NY Medical Notes and our subordinated security interest in the assets of NY Medical have been assigned to the holders of the Bridge Notes. We expect to negotiate with representatives of NY Medical extensions of such obligations or otherwise enter into compromise arrangements with the holders of the Bridge Notes. Our company has been advised that NY Medical is currently negotiating to refinance its indebtedness owed to DVI Business Credit Corp. ("DVI"), the senior secured lender to NY Medical, that holds a first priority lien and security interest on all of the assets of NY Medical. However, in April 2004, certain holders of the Bridge Notes sued us for repayment thereof and in September 2004, a judgment was rendered against us in the amount of $840,695.79 (see "Item 3. Legal Proceedings"). In the event that NY Medical does not successfully refinance its obligations to DVI, or should either we or the holders of the Bridge Notes demand payment of the NY Medical Note and seek to foreclose on the assets of NY Medical, it may be expected that DVI will foreclose on its priority lien on such NY Medical assets. In such event it is probable that neither we nor the holders of the Bridge Notes will receive significant net proceeds, if any, from the liquidation of the collateral. Our cash position as at the filing date of this report on Form 10-K is less than $100,000. Inasmuch as we no longer own NY Medical or any other operating business, in the event that any of the holders of the Bridge Notes are successful in their suit against us, we will be unable to pay such Bridge Notes. Accordingly, we would not be able to continue as a going concern, and may be required to seek protection from our creditors under Chapter 11 of the Federal Bankruptcy Act. The Trust was issued an aggregate of 180,382 shares of B-3 Preferred, which have since the date of issuance converted into 3,607,620 shares of common stock, but gained no benefit therefrom not shared on a pro rata basis with all other holders of our common stock as of June 10, 2003. 20 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Aggregate fees billed to our company for the periods indicated by our principal accountants, are as follows:
Year ended December June 17, 2003 to August 1, 2002 to Year ended July 31, 31, 2004 December 31, 2003 June 16, 2003 2002 AUDIT FEES PriceWaterhouseCoopers $22,000 Seligson &Giannatassio $20,000 $10,000 $10,000 Eisner, LLP $20,000 $10,000 $10,000 AUDIT RELATED FEES: Seligson &Giannatassio $13,000 Eisner, LLP $10,000 $10,000 Bagell &Joseph $1,000 TAX FEES: Robert Schulman $25,000 ALL OTHER FEES: Bagell &Joseph $7,500 Eisner, LLP $25,000 $35,000 Total $53,000 $55,000 $98,500 $22,000
PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (a) The following documents are being filed as part of this Report: (1) See page F-1 for an index of consolidated financial statements. (2) Not applicable (3) Exhibits: See 15(b) below for a listing of items filed as exhibits to this Form 10-K as required by Item 601 of Regulation S-K. (b) 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. * (c) Financial Statement schedules: Financial Statement Schedules have been either omitted due to inapplicability or because required information is shown in the Consolidated Financial Statements or the Notes thereto. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN UNITED GLOBAL, INC. By: /s/ Robert M. Rubin June 7, 2005 ----------------------------- Robert M. Rubin Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Title Date -------------------- ------------------------------------ ------------ /s/ Robert M. Rubin CEO and Chairman of the Board June 7, 2005 ------------------- Robert M. Rubin /s/ David M. Barnes Chief Financial Officer and Director June 7, 2005 ------------------- David M. Barnes ------------------ Director June 7, 2005 Howard Katz /s/ Michael Metter Director June 7, 2005 ------------------ Michael Metter AMERICAN UNITED GLOBAL, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Number Independent Auditors' Report ........................................... F-1 Consolidated Balance Sheets December 31, 2004, December 31, 2003 and June 16, 2003 ................................. F-2 Consolidated Statements of Operations for the year ended December 31, 2004, the period of June 17, 2003 through December 31, 2003, and the period of August 1, 2002 through June 16, 2003 ............................................... F-3 Consolidated Statements of (Deficit) Equity for each of the Periods ................................................ F-4 Consolidated Statements of Cash Flows for the year ended December 31, 2004, the period of June 17, 2003 through December 31, 2003 and the period of August 1, 2002 through June 16, 2003 ............................................... F-5 Notes to the Consolidated Financial Statements .........................F-6-12 REPORT OF THE INDEPENDENT REGIGISTERED ACCOUNTING FIRM To the Stockholders and Board of Directors American United Global, Inc & Subsidiaries We have audited the accompanying balance sheets of American United Global, Inc & Subsidiaries as of December 31, 2004 and 2003 and the related statements of operations, change in stockholders' equity and cash flow for the year ended December 31, 2004 and for the period August 1, 2002 to June 16, 2003 and for the period June 16, 2003 to December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe the audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American United Global, Inc & Subsidiaries as of December 31, 2004 and 2003, and the result of its operations and its cash flows for the year ended December 31, 2004 and for the period August 1, 2002 to June 16, 2003 and for the period June 16, 2003 to December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The realization of a major portion of its assets is dependent upon its ability to meet its future financing requirements, and the success of future operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from this uncertainty. Seligson & Giannattasio, LLP N. White Plains, NY May 31, 2005 F-1 AMERICAN UNITED GLOBAL, INC. CONSOLIDATED BALANCE SHEETS
ASSETS December 31, December 31, June 16, 2004 2003 2003 ------------ ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 8,000 $ 379,000 $ 353,000 Investment in marketable securities, at market value -- 5,000 9,000 Notes receivable from New York Medical, Inc., net of reserve of $1,508,000, $1,508,000 and $ -0- 0 0 850,000 Investment in Informedix 40,000 100,000 100,000 Investment in, SpongeTech 50,000 50,000 25,000 Note receivable, InforMedix -- 20,000 -- Note receivable, Scantek 25,000 25,000 -- Prepaid expenses -- -- 75,000 Interest receivable 5,000 5,000 12,000 ------------ ------------ ------------ TOTAL CURRENT ASSETS 128,000 584,000 1,424,000 ------------ ------------ ------------ TOTAL ASSETS $ 128,000 $ 584,000 $ 1,424,000 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Short-term borrowings in default, including accrued interest of $1,210,000, $1,060,000 and $979,000, respectively 2,710,000 2,560,000 $ 2,479,000 Accounts payable 14,000 14,000 16,000 Accrued liabilities 663,000 397,000 438,000 Note payable - Rubin Family Trust net of discount of $218,000 -0- Notes payable -- 7,000 47,000 Distribution payable to Series B-3 Preferred shareholders 40,000 100,000 -- Interest payable on Bridge Notes 389,000 81,000 -- ------------ ------------ ------------ Bridge Notes payable, net of unamortized discount of $ -0- and $417,000 respectively 1,500,000 1,083,000 -- ------------ ------------ ------------ TOTAL CURRENT LIABILITIES 5,316,000 4,242,000 2,980,000 ------------ ------------ ------------ TOTAL LIABILITIES 5,316,000 4,242,000 2.980,000 ------------ ------------ ------------ Commitments and contingencies SHAREHOLDERS' DEFICIT: Preferred stock, 12.5% cumulative, $1.00 per share liquidation value, $.01 par value; 1,200,000 shares authorized; none issued and outstanding -- -- -- Series B-1 preferred stock, each 25 shares convertible into 1 common share, $3.50 per share liquidation value, $.01 par value; 1,000,000 shares authorized; 255,094, 407,094 and 407,094 issued and outstanding respectively 3,000 4,000 4,000 Series B-3 preferred stock, each share convertible into 20 common shares, $20.00 per share liquidation value, $.01 par value, 232,500 shares authorized; 48,505 and 232,436 1,000 2,000 -- shares issued and outstanding Common stock, $.01 par value; 40,000,000 shares authorized; 8,487,399, 2,532,699 and 1,997,624 shares issued and outstanding respectively 85,000 25,000 20,000 Additional paid-in capital 53,760,000 53,126,000 51,475,000 Accumulated deficit (58,957,000) (56,661,000) (52,625,000) Accumulated unrealized loss, net -- (74,000) (70,000) ------------ ------------ ------------ (5,108,000) (3,578,000) (1,196,000) ------------ ------------ ------------ Less cost of treasury shares (80,000) (80,000) (80,000) ------------ ------------ ------------ Total shareholders' deficit (5,188,000) (3,658,000) (1,276,000) ------------ ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 128,000 $ 584,000 $ 1,424,000 ============ ============ ============
F-2 AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
AUGUST 1, 2002 YEAR ENDED YEAR ENDED JUNE 17, 2003 TO TO JUNE 16, JULY 31, DECEMBER 31, 2004 DECEMBER 31, 2003 2003 2002 General and administrative expenses $ 1,265,000 $ 1,281,000 $ 871,000 $ 1,154,000 ----------- ----------- ----------- ----------- Operating loss (1,265,000) (1,281,000) (871,000) (1,154,000) Income from litigation settlement 2,875,000 Impairment of Investment in Intertech Capital, Inc. (250,000) Interest paid in common stock (87,000) (1,000,000) Interest expense, net (869,000) (1,247,000) (107,000) (149,000) Loss on sale of marketable securities (75,000) (837,000) Other income 280,000 Reserve for notes due from New York Medical, Inc. (1,508,000) Equity in loss of unconsolidated subsidiary (702,000) Loss before taxes (2,296,000) (4,036,000) (698,000) (1,217,000) Net loss $(2,296,000) $(4,036,000) $ (698,000) $(1,217,000) ----------- ----------- ----------- ----------- Basic and diluted loss per share: Basic and diluted loss per share $ (0.28) $ (0.56) $ (0.35) $ (1.50) Weighted average number of shares 8,090,745 7,181,419 1,997,624 810,124 =========== =========== =========== ===========
F-3 AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 17, 2003 TO AUGUST 1, 2002 DECEMBER 31, DECEMBER 31, 2003 TO JUNE 16, YEAR ENDED JULY 2004 2003 31, 2002 ----------- ----------- ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss from continuing operations $(2,296,000) $(4,036,000) $ (698,000) $(1,217,000) =========== =========== ========== =========== Adjustments to reconcile net loss to net cash used by operating activities: Beneficial conversion feature 417,000 1,083,000 Equity in loss of affiliate 702,000 Interest paid in common stock 87,000 1,000,000 Stock award compensation 476,000 435,000 Stock option compensation 100,000 Loss on sale of marketable securities 77,000 837,000 Impairment of investments 250,000 Reserve for NYMI note receivable 1,508,000 Prepaid expenses and other receivables 20,000 22,000 (87,000) 27,000 Litigation settlement receivable 2,875,000 (2,875,000) Accounts payable (2,000) (10,000) (13,000) Accrued liabilities 626,000 225,000 (526,000) 440,000 NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (571,000) (870,000) 1,374,000 (849,000) CASH FLOWS FROM INVESTING ACTIVITIES (Loan to) Repayment from Informedix, Inc. 20,000 (20,000) (100,000) Loan to Scantek Medical, Inc. (25,000) Loans to Spongetech, Inc. (25,000) (25,000) Loans to New York Medical, Inc. (850,000) (658,000) Purchase of treasury stock (80,000) Sales of marketable securities 2,000 185,000 Net effect on cash from distribution of Western Power shares NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES 2,000 (728,000) (1,055,000) 185,000 ----------- ----------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of Bridge Notes, 1,500,000 Net (payments) / borrowings under term loans (40,000) 47,000 (Repayment) / borrowing under note payable to Rubin Family Trust 218,000 (250,000) 250,000 Increase in short term borrowings 81,000 131,000 Start up costs of Lifetime 83,000 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 218,000 1,624,000 (72,000) 250,000 ----------- ----------- ---------- ----------- Net increase (decrease) in cash and cash equivalents (371,000) 26,000 247,000 (414,000) Cash and cash equivalents, beginning 379,000 353,000 $ 105,000 519,000 ----------- ----------- ---------- ----------- Cash and cash equivalents, ending $ 8,000 $ 379,000 353,000 $ 105,000 ----------- ----------- ---------- -----------
The Company did not make any payments for income taxes or interest during the year ended December 31, 2004. F-4 AMERICAN UNITED GLOBAL, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
PREFERRED STOCK COMMON STOCK --------------- ------------ Number of Number of shares Amount shares Amount -------------------------- -------------------- ----------- --------- B-1 B-2 and B-3 B-1 B-2 and B-3 --- -------------- --- ----------- Balance at July 31, 2002 407,094 $ 4,000 $ 1,997,624 $ 20,000 Net loss Balance at June 16, 2003 407,094 $ 4,000 1,997,624 $ 20,000 Net loss Issuance of B-2 preferred stock 467,500 5,000 Issuance of B-3 preferred stock 232,436 2,000 Cancellation of B-2 preferred stock (467,500) (5,000) --------- ------- Issuance of common shares in payment of legal fees 535,075 5,000 ------- ----- Balance at December 31, 2003 407,094 232,436 $ 4,000 $2,000 2,532,699 $ 25,000 -------- ------- ------- ------ --------- ----------- Net loss Issuance of common stock to officers 1,270,000 13,000 Conversion of B-3 preferred stock (183,931) (1,000) 3,678,620 37,000 Conversion of B-1 preferred stock (152,000) (1,000) 6,080 - --------- -------- Shares issued for services rendered 1,000,000 10,000 --------- ----------- Balance at December 31, 2004 255,094 48,505 $ 3,000 $ 1,000 8,487,399 $ 85,000 -------- --------- ------- --------- --------- -----------
ACCUMULATED ADDITIONAL OTHER COST OF SHAREHOLDERS' CONTRIBUTED COMPREHENSIVE ACCUMULATED TREASURY (DEFICIT) CAPITAL INCOME (LOSS) (DEFICIT) STOCK EQUITY Balance at July 31, 2002 $ 51,375,000 (59,000) $ (51,927,000) $ (587,000) Net loss (698,000) (698,000) Accumulated unrealized loss (11,000) (11,000) Purchase of Treasury Shares (80,000) (80,000) --------- Stock option compensation 100,000 100,000 ------- Balance at June 16, 2003 51,475,000 (70,000) (52,625,000) (80,000) (1,276,000) Net loss (4,036,000) (4,036,000) ----------- Accumulated unrealized loss (4,000) ------- (4,000) Issuance of B-2 preferred stock (5,000) - Issuance of B-3 preferred stock (2,000) - Cancellation of B-2 preferred stock 5,000 - Issuance of common shares in payment of legal fees 170,000 175,000 Bridge Notes - Beneficial conversion feature 1,500,000 1,500,000 Start up costs of Lifetime 83,000 83,000 Distribution of Informedix shares to B-3 preferred shareholders (100,000) (100,000) ------------ Balance at December 31, 2003 $ 53,126,000 (74,000) $ (56,661,000) (80,000) $ (3,658,000) ------------ -------- -------------- --------- ------------- Net loss (2,296,000) (2,296,000) -------------- ------------- Issuance of common stock to officers 463,000 476,000 Conversion of B-3 preferred stock (37,000) (1,000) Rubin Family Trust Note - Beneficial conversion feature 218,000 Conversion of B-1 Preferred Stock (1,000) Shares issued for services rendered (10,000) - Sale of marketable securities 74,000 14,000 ------------- Balance at December 31, 2004 $ 53,760,000 - $ (58,957,000) (80,000) $ (5,188,000) ------------- -------------- --------- -------------
F-5 AMERICAN UNITED GLOBAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION, BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION American United Global, Inc. (the "Company" or "AUGI"), is incorporated in Delaware and has offices in New York. AUGI has had operating subsidiaries in prior years and is currently a non-operating public shell corporation. On June 16, 2003, AUGI, Lifetime Acquisition Corp., a newly formed wholly owned subsidiary of AUGI ("Merger Sub") and Lifetime Healthcare Services, Inc. ("Lifetime") entered into an amended and restated agreement and plan of merger (the "Merger Agreement"). AUGI consummated the acquisition of Lifetime through the merger of Merger Sub with and into Lifetime, effective as of June 17, 2003 (the "Lifetime Merger"). Lifetime was a holding company whose only assets consisted of a note receivable from New York Medical, Inc. ("NYMI") and its ownership of 55% of the capital stock of NYMI acquired by Lifetime immediately prior to the consummation of the Merger. For accounting purposes, the transaction between AUGI and Lifetime was considered, in substance, a capital transaction rather than a business combination. The exchange was accounted for as a reverse acquisition since the former shareholders of Lifetime would have owned a majority of the outstanding common stock of AUGI upon conversion of the preferred shares they received in the merger. However, on December 8, 2003 certain members of the Board of Directors of AUGI, Lifetime, NYMI and Redwood Investment Associates, LLP ("Redwood", the previous majority owner of NYMI) executed a Rescission Agreement effective as of December 9, 2003. The remaining members of the Board of Directors executed the Rescission Agreement on March 8, 2004, effective December 9, 2003 (see Note 2). As a result of the merger with Lifetime, AUGI changed its year end of July 31, to December 31, the year end of Lifetime, and has continued to report on a December 31 year end basis subsequent to the Rescission Agreement. PRINCIPLES OF CONSOLIDATION The consolidated financial information included in this report has been prepared in conformity with the accounting principles generally accepted in the United States of America and has been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. GOING CONCERN At December 31, 2004, the Company had a working capital deficiency of $5,188,000, an accumulated deficit of $58,957,000, and had incurred a loss of $2,296,000 for the year ended December 31, 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 of $8,000 at December 31, 2003 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. F-6 AMERICAN UNITED GLOBAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS USE OF ESTIMATES The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on the knowledge of current events and actions the Company may undertake in the future, they may ultimately differ from actual results. The Company uses estimates, among others, to determine whether any impairment is to be recognized. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. MARKETABLE SECURITIES The Company accounts for marketable securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt, and Equity Securities". Under this standard, certain investments in debt and equity securities are reported at fair value. The Company's marketable securities, which consist of common shares of other public companies, are being reported as securities available for sale. The unrealized loss on these securities is reflected as a separate component of shareholders' deficit and any changes in their value are included in comprehensive loss. The value of these securities are as follows:
December 31, 2004 December 31, 2003 June 16, 2003 July 31, 2002 ----------------- ----------------- ------------- ------------- Cost -0- $79,000 $ 79,000 79,000 Cumulative unrealized loss -0- 74,000 70,000 59,000 ---- ------- -------- ------ -0- $ 5,000 $ 9,000 20,000 ==== ======= ======== ======
Cost used in the computation of realized gains and losses is determined using the first-in-first-out cost method. During fiscal 2001 and 2002, the Company sold $1,275,000 and $185,000 of marketable securities respectively and realized losses of $1,395,000 and $837,000 respectively. There were no sales of marketable securities during the periods ended June 16, 2003 and December 31, 2003. During the year ended December 31, 2004, the Company sold $2,000 of marketable securities and realized a loss of $77,000. F-7 FAIR VALUE OF FINANCIAL INSTRUMENTS Cash balances and the carrying amount of the accrued expenses approximate their fair value based on the nature of those items. Estimated fair values of financial instruments are determined using available market information. In evaluating the fair value information, considerable judgment is required to interpret the market data used to develop the estimates. The use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts. Accordingly, the estimates of fair value presented herein may not be indicative of the amounts that could be realized in a current market exchange. INCOME TAXES The Company's deferred income taxes arise primarily from the differences in the recording of net operating losses, allowances for bad debts, inventory reserves and depreciation expense for financial reporting and income tax purposes. Income taxes are reported under the liability method pursuant to SFAS No. 109 "Accounting for Income Taxes". A valuation allowance is provided when the likelihood of realization of deferred tax assets is not assured. IMPAIRMENT OF INVESTMENTS AUGI reviews estimates of the value of its investments each reporting period and records an impairment loss to the extent that management believes that there has been an impairment to the carrying value. PER SHARE DATA Basic and diluted loss per share is based on the weighted average number of common shares outstanding and common shares issuable upon conversion of the Series B-3 convertible preferred stock which was issued as a dividend to all common shareholders effective as of June 17, 2003. The common shares issuable upon conversion of the Series B-3 preferred stock are included based on the preferred shareholders ability to share in distributions of earnings available to common shareholders, if any, without conversion. F-8 CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of notes receivable. The Company maintains all of its cash balances in two financial institutions. The balances are each insured by the Federal Deposit Insurance Corporation up to $100,000. At July 31, 2002, June 16, 2003, December 31, 2003 and December 31, 2004, the Company's uninsured cash balances totaled approximately $-0-, $250,000, $279,000 and $-0- respectively. STOCK BASED COMPENSATION In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation". The Company currently accounts for its stock-based compensation using the accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". As the Company is not required to adopt the fair value based recognition provisions prescribed under SFAS No. 123, it has elected only to comply with the disclosure requirements set forth in the statement which includes disclosing pro forma net income (loss) and earnings (loss) per share as if the fair value based method of accounting had been applied. The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions for the periods ended December 31, 2003, June 16, 2003 and the years ended July 31, 2002 and 2001, respectively: expected volatility of 146% and 187%, 182% and 154%, respectively; risk free interest rate of 3.00%, 3.00% and 3.58% and 4.50%, respectively; and expected lives of 5 years. If compensation cost for AUGI's stock option plans had been determined based on the fair value at the date of the grant for awards in accordance with the provisions of SFAS No. 123, AUGI's net loss per share would have changed to the pro forma amounts indicated below:
Period from Period from Year ended June 17, 2003 to August 1, 2002 Year ended December 31, 2004 December 31, 2003 to June 16, 2003 July 31, 2002 ----------------- ----------------- ---------------- ------------- Net loss as reported $ (2,209,000) $(4,036,000) $ (698,000) $ (1,217,000) Stock option compensation included in net loss -- -- 100,000 -- Total stock-based employee compensation expense determined under the fair value method (176,000) (176,000) (270,000) (179,000) ------------ ----------- ----------- ----------- Pro forma net loss $ (2,365,000) $(4,212,000) $ (968,000) $(1,396,000) ============ =========== =========== =========== Net loss per share: Basic and diluted loss per share as reported $ (0.28) $ (0.58) $ (0.35) $ (1.50) Pro forma basic and diluted loss per share $ (0.29) $ (0.60) $ (0.48) $ (1.72) Weighted average number of shares 8,090,745 7,181,419 1,997,624 810,124 ============ =========== =========== ===========
No stock options were granted during the fiscal year ended December 31, 2004. F-9 Recent accounting pronouncements In June 2002, the Financial Accounting Standards Board (FASB) issued SFASNo. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The company adopted SFAS 146, effective February 1, 2003. The adoption of SFAS 146 did not have a material impact on our company's financial statements. The company has continued to account for employee-related post-employment benefit costs, including severance payments, under the provisions of SFAS No. 112, "Employer's Accounting for Post-Employment Benefits." In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others," was issued. This interpretation requires the initial recognition and initial measurement, on a prospective basis only, of guarantees issued or modified after December 31, 2002. Additionally, certain disclosure requirements were effective for financial statements ending after December 15, 2002. The adoption of this interpretation did not have an impact on our company's financial statements. In January 2003, FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities," (VIE's) was issued, and in December 2003, a revision to FIN 46 was issued. FIN 46 requires identification of our company's participation in VIE's, which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand-alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For entities identified as VIE's, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to a VIE, if any, bears a majority of the risk of the VIE's expected losses, or stands to gain from a majority of the VIE's expected returns. FIN 46 also sets forth certain disclosures regarding interests in VIE's that are deemed significant, even if consolidation is not required. This interpretation is effective for all VIE's created after January 31, 2003. The adoption of this interpretation did not have an impact on our company's financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, amends the definition of an underlying contract, and clarifies when a derivative contains a financing component in order to increase the comparability of accounting practices under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 did not have an impact on our company's financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003. The company adopted this standard on June 1, 2003. Its adoption did not have an impact on our company's financial statements. In May 2003, the consensus on EITF Issue No. 01-08, "Determining Whether an Arrangement Contains a Lease," was issued. The guidance in the consensus applies to the purchase or sale of goods and services under various types of contracts, including outsourcing arrangements. Based on the criteria in the consensus, both parties to an arrangement are required to determine whether the arrangement includes a lease within the scope of SFAS No. 13, "Accounting for Leases." The new requirement applies prospectively to new or modified arrangements for reporting periods beginning after May 28, 2003. Accordingly, as of August 1, 2003, the company accounted for new or modified arrangements based on this guidance. Adoption of this standard did not have an impact on our company's financial statements. In December 2003, the FASB issued SFAS No. 132 (Revised 2003), "Employers' Disclosures about Pensions and Other Post-retirement Benefits," which enhanced the disclosure about pension plans and other post-retirement benefit plans, but did not change the measurement or recognition principles for those plans. The F-10 statement requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit post-retirement plans. Its adoption did not have an impact on our company's financial statements. 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. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is an amendment to SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. This new standard eliminates the ability to account for share-based compensation transactions using Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees (APB 25) and requires such transactions to be accounted for using a fair-valued-based method, with the resulting cost recognized in the Company's financial statements. This new standard is effective for annual periods beginning after June 15, 2005. The Company has not awarded or granted any share-based compensation to date and, therefore, the adoption of this standard is not expected to have any effect on the Company's financial position or results of operations until such time as share-based compensation is granted. In December 2004, the FASB issued SFAS No. 153, Exchange of Non-monetary Assets. SFAS No. 153 amends APB Opinion No. 29, Accounting for Non-monetary Transactions, to eliminate the exception for non-monetary exchanges of similar productive assets. The Company will be required to apply this statement to non-monetary exchanges after December 31, 2005. The adoption of this standard is not expected to have a material effect on the Company's financial position or results of operations. NOTE 2 - 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). 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. F-11 AMERICAN UNITED GLOBAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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. the Company cancelled options to purchase an aggregate of approximately 3,250,000 shares of Company Common Stock; F-12 AMERICAN UNITED GLOBAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 3 - 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-K. 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 4 - OTHER LOANS AND ADVANCES On September 4, 2002 the Company loaned $100,000 to InforMedix, Inc. ("InforMedix") pursuant to the terms of a 12% convertible secured promissory note. The note was originally due on April 24, 2003 or earlier under certain acceleration provisions and was automatically convertible into 50,000 common shares of InforMedix should InforMedix or any affiliate merge into a public entity or otherwise become publicly traded. On April 24, 2003, the Company agreed to an extension of the maturity date to July 24, 2003. On May 8, 2003, Informedix merged with a public entity whose name was changed to Informedix Holdings, Inc. and 54,000 shares of their common stock were issued to AUGI pursuant to the automatic conversion feature of the loan and all accrued interest. 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. F-13 AMERICAN UNITED GLOBAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS On August 5, 2003, the Company loaned $25,000 to ScanTek Medical, Inc. ("ScanTek") pursuant to the terms of a 12% promissory note which is due October 15, 2004. As consideration to AUGI for providing the loan, ScanTek added interest of $5,000 to the note and both parties agreed that any further interest would only be due, at the 12% rate, if there is a breach of the default and repayment provisions of the note. The note was not paid on October 15, 2004 nor on the extended due date of December 31, 2004. Currently, ScanTek is seeking financing to continue its business and has stated that it will pay the amount due should it be successful in closing on a working capital funding arrangement. Should ScanTek not be able to raise further capital by June 15, 2005, the Company will provide a full reserve against such receivable. NOTE 5 - BRIDGE NOTES PAYABLE AND OTHER SHORT TERM BORROWINGS On June 17, 2003, the Company received aggregate net proceeds of $1,350,000 from the sale of $1,500,000 principal amount of 10% convertible notes due in March 2004. The Bridge Notes are convertible into common stock of the Company at any time at the rate of $1.00 of Notes for one share of common stock and are secured by a second lien on all of the assets of NYMI. In addition, the purchasers of the Bridge Notes received five year warrants to purchase an aggregate of 1,000,000 shares of common stock of the Company at $0.75 per share; provided, that if the Bridge Notes were not prepaid in full by October 17, 2003, the number of shares issuable upon exercise of the warrants would increase to 1,250,000 shares and would increase further to 1,500,000 shares in the event that, for any reason, the Bridge Notes were not paid in full by January 17, 2004. Payment was not made by October 17, 2003, nor by January 17, 2004 and as a result, the number of shares issuable upon exercise of the warrants has increased to 1,500,000 shares. The Company utilized an aggregate of $650,000 of the net proceeds from the sale of the Bridge Notes to increase its outstanding loans to Lifetime and 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. Certain of the Bridge Note holders have obtained a judgment in the full amount of their respective principal and accrued interest due. All such amounts are included in the total amount of principal and accrued interest payable reflected in the financial statements. 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. In April 2004, certain bridge investors commenced an action against our company in the Supreme Court of the State of New York, County of New York, alleging, among other things, that we owe plaintiffs repayment of $700,000 in principal face amount notes issued in connection with our intended acquisition of New York Medical, a New York corporation (Altitude Group, LLC, Birch Associates, LLC and D.C. Capital, LLC v. American United Global, Inc., Index No. 600936/04). Plaintiffs filed a motion seeking summary judgment against us in aggregate amount of $787,546, consisting of the allegedly outstanding principal and interest on the notes as well as attorneys' costs, and we opposed that motion. On September 24, 2004, judgment was rendered in favor of these three investors in the amount of $840,695.79. We are currently attempting to settle this matter with the plaintiffs on an amicable basis. 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 $1,210,000 at December 31, 2004. Originally bearing interest at 8%; the note accrues interest at 10% while in default. Management of the Company is of the opinion that the creditor will not pursue collection; however, were the Company required to pay such certain indebtedness it would be necessary to secure additional financing. F-14 AMERICAN UNITED GLOBAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - LOAN PAYABLE - RUBIN FAMILY TRUST During September through December 2004 the Company borrowed $218,000 from the Rubin Family Trust (the "Trust") for working capital requirements. The loan is evidenced by a Note payable which bears interest at an annual rate of 8% and matures on December 31, 2006. The Trust will also receive 218,000 shares of Company common stock as additional interest. These shares were valued at $0.40 per share for accounting purposes and a charge of $87,000 was recorded. Through March 31, 2005, the Trust advanced an additional $76,000 under the same terms and conditions. The aforementioned loans are convertible at any time into Company common stock at 50% of the fair market value on the date of such conversion. As of December 31, 2004 this beneficial conversion feature of $218,000 has been recorded as discount and will be amortized as interest expense through December 31, 2006. NOTE 7 - INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using the enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets are comprised primarily from net operating losses and total approximately $11,000,000 at December 31, 2004, $10,200,000 at December 31, 2003 and approximately 8,875,000 and $8,640,000 at June 16, 2003 and July 31, 2002 respectively. Because of the questionable ability of the Company to utilize these deferred tax assets, the Company has established a 100% valuation allowance for these assets. The Company files a consolidated income tax return with its wholly-owned subsidiaries and has net operating loss carryforwards of approximately $32,000,000 for federal and state purposes, which expire through 2023. The utilization of this operating loss carryforward may be limited based upon changes in ownership as defined in the Internal Revenue Code. A reconciliation of the difference between the expected income tax rate using the statutory federal tax rate and the Company's effective rate is as follows:
Year Ended Period from Period from December 31, June 17, 2003 to August 1, 2002 Year ended July 31, 2004 December 31, 2003 to June 16, 2003 2002 2001 ------------ ----------------- ---------------- -------- --------- U.S. Federal income tax statutory rate (34)% (34)% (34)% (34)% (34)% Valuation allowance 34% 34% 34% 34% 34% ---- ---- ---- ---- ---- Effective tax rate -0- -0- -0- -0- -0- ==== ==== ==== ---- ====
NOTE 8 - 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 9 - 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 December 31, 2004 were not in excess of the insurance limit and the Company, therefore, was not exposed to any risk. NOTE 10 - PURCHASE OF TREASURY STOCK In connection with the resignation of Seymour Kessler (Kessler) from the Board of Directors in January 2003, the Company agreed to repurchase common shares of the Company that he and certain affiliates had acquired in a private placement in 2000. The purchase price of $80,000 was equal to the amount paid by Kessler and his affiliates and was paid in 12 equal monthly installments through January 2004. NOTE 11 - STOCK OPTION GRANTS UNDER THE 2001 STOCK OPTION PLAN On March 31, 2003, the Company granted five-year stock options to four directors to purchase a total of 450,000 shares of common stock and also granted five-year options to the senior partner at its primary law firm to purchase 50,000 shares of common stock. All such options are exercisable at a price of $0.62 per share, the fair market value on the date of grant, and vested upon grant. On June 13, 2003 the Company granted five-year options to purchase 50,000 shares of common stock at $1.50 per share, the fair market value on the date of grant, to another partner in the law firm all of which vested upon grant. The intrinsic value of options granted to the two law firm partners was charged to earnings as a non-cash compensation charge in the amount of $100,000 in the period from August 1, 2002 to June 16, 2003. On August 8, 2003, five year options to acquire 200,000 shares of common stock were granted to Dean McLain, a director and executive officer of the Company at the closing market price on that date of $1.70, of which options for 50,000 shares each vested on the grant date, with the remaining options vesting at the rate of 50,000 shares each on the three successive grant anniversary dates through 2006. On September 17, 2003 a five-year option to purchase 350,000 common shares was granted to an officer of the Company at the closing market price of $1.25 of which 87,500 shares vested on the date of grant with the remaining options vesting at the rate of 87,500 shares on each of the next three grant anniversary dates. There were no stock options granted during the fiscal year ended December 31, 2004. F-15 AMERICAN UNITED GLOBAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - 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. In September and December of 2004, the Company issued an aggregate of 1,000,000 shares to Vertex Capital Corp. in connection with the entry into the Share Exchange Agreement with Southern Gas Company, a limited liability company incorporated under the laws of the Russian Federation and certain of its equity owners. The Share Exchange Agreement was subsequently terminated as of March 15, 2005. The Company intends to cancel the 1,000,000 shares issued to Vertex, but such cancellation has not yet occurred, nor can there be any assurance that AUGI will be successful in its attempts to cancel these shares. NOTE 13 - LITIGATION Altitude Group, LLC, Birch Associates, LLC and D.C. Capital, LLC v. American United Global, Inc. (Supreme Court, New York State, New York County). AUGI was served in April 2004 with this suit alleging, among other things, that AUGI owes plaintiffs repayment of $700,000 in principal face amount of Bridge Notes issued in connection with the acquisition by AUGI of New York Medical, a New York corporation. Plaintiffs have commenced the suit by way of a New York procedure known as summary judgment in lieu of complaint, claiming an aggregate amount owed of $787,000, consisting of the allegedly outstanding principal and interest on the notes as well as attorneys' costs. New York Medical, Inc. and Redwood Investment Associates, L.P. v. American United Global, Inc., et al. (Supreme Court, New York State, New York County). In this suit, filed on December 12, 2003, plaintiffs seek a declaration that a series of transactions by which AUGI allegedly acquired Lifetime Healthcare Services, Inc. ("Lifetime") and Lifetime acquired an interest in New York Medical, Inc. from Redwood Investment Associates, L.L.P. (collectively "Transactions") were properly rescinded or, alternatively, that because the Transactions were allegedly induced by fraudulent conduct of AUGI, and others, that the Transactions should be judicially rescinded. In addition to the requests for equitable relief, plaintiffs also seek monetary damages in excess of $5 million and exemplary damages in the amount of $15 million. Currently, the suit has not proceeded past the filing and service of the Complaint. AUGI has obtained an open-ended extension of time in which to answer and/or move with regard to the Complaint. The parties are attempting to resolve the matter amicably. However, in the event litigation proceeds, it will be aggressively defended. NOTE 14 - SUBSEQUENT EVENT On March 15, 2005, the Exchange Agreement dated September, 2004 by and between Southern Gas Holdings LLC, a Delaware limited liability company; American United Global, Inc., a Delaware corporation ("AUGI"); Southern Gas Company LLC, a limited liability company incorporated under the laws of the Russian Federation; and the Southern Gas Group Equity Owners was definitively terminated. Under the terms of the Exchange Agreement, the Southern Gas Group Equity Owners were to contribute and exchange the Southern Gas Group Equity (as defined in the Exchange Agreement) to the capital of Southern Gas Holdings, LLC, solely in exchange for the Exchange Shares (as defined in the Exchange Agreement). Because the conditions precedent to Closing set forth in Section 4.2 of the Exchange Agreement were not satisfied or waived on or before the Closing Date, December 31, 2004, and the Closing Date was not extended by the mutual written agreement of the Parties, the Exchange Agreement, including all rights and obligations of the parties thereunder, has terminated and is of no further force and effect. While the parties to the Exchange Agreement attempted to reach a negotiated resolution of the matters precluding the fulfillment of the closing conditions, AUGI abandoned such discussions on March 15, 2005, having concluded that no resolution could be reached. F-16