UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
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For
the fiscal year ended September 30, 2005
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period from ________ to ________
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Commission
file number: 0-27556
YOUTHSTREAM
MEDIA NETWORKS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of
incorporation
or organization)
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13-4082185
(I.R.S.
Employer
Identification
Number)
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244
Madison Avenue, PMB #358
New
York, New York
(Address
of Principal Executive Offices)
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10016
(Zip
Code)
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(212)
883-0083
(Registrant’s
telephone number, including Area Code)
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Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $0.01 per share
Check
whether the issuer in not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act YES o
NO
x
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant as required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
YES o
NO
x
Check
if
there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B contained herein, and no disclosure will 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-KSB or any amendment
to
this Form 10-KSB. o
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule
12b-2
of the Act). YES o
NO
x
The
issuer’s revenues for the fiscal year ended September 30, 2005 were
$69,182,475.
As
of May
31, 2006, the aggregate market value of voting and non-voting stock held by
non-affiliates of the registrant was $3,754,325 (based on the closing price
of
the registrant's common stock on such date of $0.12 per share).
As
of May
31, 2006, there were 39,242,251 shares
of
the registrant's common stock issued and outstanding.
Transitional
Small Business Disclosure Format (check one): YES o NO
x
Documents
incorporated by reference: None.
YOUTHSTREAM
MEDIA NETWORKS, INC.
ANNUAL
REPORT ON FORM 10-KSB
TABLE
OF CONTENTS
Part
I
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1.
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Description
of Business
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1
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1A.
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Risk
Factors
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13
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2.
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Description
of Property
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24
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3.
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Legal
Proceedings
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24
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4.
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Submission
of Matters to a Vote of Security Holders
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24
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Part
II
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5.
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Market
for Common Equity, Related Stockholder Matters and Small Business
Issuer
Purchases of Equity Securities
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25
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6.
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Management's
Discussion and Analysis or Plan of Operation
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26
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7.
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Financial
Statements
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42
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8.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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42
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8A.
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Controls
and Procedures
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42
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8B.
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Other
Information
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43
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Part
III
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9.
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Directors,
Executive Officers, Promoters and Control Persons; Compliance with
Section
16(a) of the Exchange Act
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44
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10.
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Executive
Compensation
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47
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11.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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50
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12.
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Certain
Relationships and Related Transactions
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51
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13.
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Exhibits
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52
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14.
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Principal
Accountant Fees and Services
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58
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Index
to Consolidated Financial Statements
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F-1
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Signatures
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S-1
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INTRODUCTION
The
statements included in this Annual Report on Form 10-KSB for the fiscal year
ended September 30, 2005 (the “Report”) regarding future financial performance
and results and other statements that are not historical facts constitute
forward-looking statements. The words "believes," "intends," "expects,"
"anticipates," "projects," "estimates," "predicts," and similar expressions
are
also intended to identify forward-looking statements. These forward-looking
statements are based on current expectations and are subject to risks and
uncertainties. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, YouthStream Media Networks, Inc.
("YouthStream" or the "Company"), cautions the reader that actual results or
events could differ materially from those set forth or implied by such
forward-looking statements and related assumptions due to certain important
factors, including, without limitation, the following: (i)
cyclical changes in market supply and demand for steel, (ii) general economic
conditions affecting steel consumption, (iii) U.S. or foreign trade policy
affecting the price of imported steel, (iv) governmental monetary or fiscal
policy in the U.S. and other major international economies, (v) increased price
competition brought about by excess domestic and global steelmaking capacity
and
imports of low priced steel, (vi) continued consolidation in the domestic and
global steel industry, resulting in larger producers with much greater market
power to affect price and/or supply, (vii) changes in the availability or cost
of steel scrap, which has risen dramatically over the past few years, (viii)
periodic fluctuations in the availability and cost of electricity, natural
gas
or other utilities, (ix) the occurrence of unanticipated equipment failures
and
plant outages or the occurrences of extraordinary operating expenses, (x)
competitive actions by the Company’s domestic and foreign competitors, (xi)
margin squeeze or compression resulting from the Company’s inability to pass
through to its customers, through price increases or surcharges, the increased
cost of raw materials and supplies, (xii) loss of business from one or more
major customers or end-users, (xiii) labor unrest, work stoppages and/or strikes
involving the Company’s workforce, those of its important suppliers or
customers, or those affecting the steel industry in general, (xiv) the effect
of
the elements upon the Company’s production or upon the production or needs of
its important suppliers or customers, (xv) the impact of, or changes in,
environmental laws or in the application of other legal or regulatory
requirements upon the Company’s production processes or costs of production or
upon those of its suppliers or customers, including actions by government
agencies, such as the U.S. Environmental Protection Agency or the Kentucky
Department for Environmental Protection, (xvi) private or governmental liability
claims or litigation, or the impact of any adverse outcome of any litigation
on
the adequacy of the Company’s reserves, the availability or adequacy of its
insurance coverage, its financial well-being or its business and assets, (xvii)
changes in interest rates or other borrowing costs, or the effect of existing
loan covenants or restrictions upon the cost or availability of credit to fund
operations or take advantage of other business opportunities, (xviii) changes
in
the Company’s business strategies or development plans which it may adopt or
which may be brought about in response to actions by its suppliers or customers,
and any difficulty or inability to successfully consummate or implement as
planned any planned or potential projects, acquisitions, joint ventures or
strategic alliances; and (xix) the impact of regulatory or other governmental
permits or approvals, litigation, construction delays, cost overruns, technology
risk or operational complications upon the Company’s ability to complete,
start-up or continue to profitably operate a project or a new business, or
to
complete, integrate and operate any potential acquisitions as anticipated.
The
Company is also subject to general business risks, including management's
success in continuing to settle the Company's outstanding
obligations
from its
prior business activities, results of tax audits, adverse state, federal or
foreign legislation and regulation, changes in general economic factors, the
Company's ability to retain and attract key employees, acts
of
war or global terrorism, and unexpected natural disasters.
Any
forward-looking statements included in this Report are made as of the date
hereof, based on information available to the Company as of the date hereof,
and, subject to applicable law, the Company assumes no obligation to update
any
forward-looking statements.
OVERVIEW
In
January 2003, the Company completed a restructuring pursuant to which it
canceled an aggregate of $18,000,000 principal amount of outstanding notes
and
underwent a change in officers and directors (see “Debt Restructuring”
below).
On
February 25, 2004, the Company sold the assets and operations of its Beyond
the
Wall subsidiary. Beyond the Wall had been engaged in the sale of decorative
wall
posters through on-campus sales events, retail stores and internet sales,
primarily to teenagers and young adults. During the period from October 1,
2003
through February 25, 2004, Beyond the Wall operated 17 stores in 12 states,
plus
Washington, D.C., throughout the East and mid-West, as well as a warehouse
and
distribution center in Stroudsburg, Pennsylvania, and was the Company’s only
revenue-generating business operation. The Company’s consolidated financial
statements for the year ended September 30, 2004 present Beyond the Wall’s
operations as a discontinued operation as a result of the disposal of its assets
and operations on February 25, 2004.
In
July
2004, the Company entered into a letter of intent to acquire a steel mini-mill
located in Ashland, Kentucky (the “Mill”) (see “Acquisition of Steel Mini-Mill”
below). The Company consummated the acquisition of the Mill effective March
1,
2005, and since that date the Company has included the operations of the Mill,
which represents the only business segment in which the Company currently
operates, in its consolidated financial statements.
DEBT
RESTRUCTURING
In
January 2003, the Company reached an agreement with the holders of all of
its and its Network Event Theater subsidiary's outstanding notes in the
aggregate principal amount of $18,000,000, to cancel those notes. In exchange
for cancellation of all of the principal due on these old notes, including
accrued interest of $2,062,000, the note holders received in aggregate
$4,500,000 in cash, redeemable preferred stock with a face value of $4,000,000,
and 3,985,000 shares of common stock, valued at $255,000, and $4,000,000
aggregate principal amount of promissory notes due December 31, 2010 issued
by
the Company's retail subsidiary, Beyond the Wall, Inc., secured by the
Company's pledge of all of its stock in Beyond the Wall.
At
the
closing of the January 2003 debt restructuring, all of the Company's
previous directors and officers resigned, and three new directors were
appointed. Jonathan V. Diamond, who previously had been a director and interim
Chief Executive Officer of the Company, was appointed as Chairman of the Board
of Directors, and Hal G. Byer and Robert Scott Fritz were appointed as directors
of the Company. Mr. Diamond was appointed as Chief Executive Officer and
Robert N. Weingarten was appointed as Chief Financial Officer.
In
May 2003, the Company issued options to the three new directors to purchase
an aggregate of 700,000 shares of common stock exercisable at the fair market
value of $0.04 per share for a period of seven years. In addition, each of
the
three new directors paid $2,500 ($0.04 per share) in cash to acquire options
from the holder of the shares of preferred stock that were issued in the
January 2003 restructuring to purchase 62,500 shares of such holder's
preferred stock, exercisable at $0.36 per share. In July 2004, Mr. Diamond
irrevocably waived any and all rights related to this option.
The
terms
and conditions of the January 2003 debt restructuring agreement qualified
as a troubled debt restructuring for accounting purposes in accordance with
SFAS
No. 15 "Accounting by Debtors and Creditors for Troubled Debt
Restructurings". The Company recognized a gain from the troubled debt
restructuring of approximately $2,800,000. The gain was classified as part
of
continuing operations in accordance with SFAS No. 145, "Rescission of SFAS
Nos. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections as
of April 2000".
During
June 2003, the Company amended the original provisions of the $4,000,000 of
promissory notes issued in conjunction with the January 2003 restructuring
to provide for the following:
a. |
Beyond the Wall was replaced by the Company as the
issuer
of the notes, and was released from any liability with respect to the
notes. |
b. |
The note holders agreed to convert the notes from
secured
to unsecured, and to release their security interest in all of the
outstanding common stock of Beyond the
Wall. |
c. |
The note holders agreed to delete all provisions
in the
notes requiring the issuer of the notes to make mandatory prepayments
based on the occurrence of certain
events. |
d. |
The
note holders agreed to delete provisions in the notes prohibiting
the
issuer from: (i) incurring any indebtedness for borrowed money;
(ii) selling, or entering into any agreement to sell, all or
substantially all of the assets or all or substantially all of the
capital
stock of the issuer; or (iii) entering into any transaction with an
affiliate, other than transactions with the Company, Network Event
Theater, Inc. and/or their successors, that have fair and reasonable
terms which are no less favorable to the issuer than would be obtained
in
a comparable arms-length transaction with a person or entity that
is not
an affiliate.
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ACQUISITION
OF STEEL MINI-MILL
In
September 2003, YouthStream invested $125,000 to acquire a 1.00% membership
interest in KES Holdings, LLC, a Delaware limited liability company ("KES
Holdings"), which was formed to acquire certain assets of Kentucky Electric
Steel, Inc., a Delaware corporation ("KES"), consisting of a steel
mini-mill located in Ashland, Kentucky (the “Mill”). On September 2, 2003,
KES Holdings, through its subsidiary, KES Acquisition Company, LLC, a Delaware
limited liability company ("KES Acquisition"), completed the acquisition of
the
Mill pursuant to Section 363 of the United States Bankruptcy Code for cash
consideration of $2,650,000, which was funded through the capital contributions
of the members of KES Holdings. Members’ capital contributions were also used
for start-up costs, working capital purposes and payment of deferred maintenance
of the Mill. KES had ceased production on or about December 16, 2002 and
filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code on February 5, 2003.
The
Mill
had been in operation for approximately forty years and was refurbished by
KES
Acquisition subsequent to its acquisition. The refurbished Mill has been
generating revenues since late January 2004. The current production capacity
of
the Mill for finished products, based on the current operating structure and
hours worked, is approximately 200,000 short-tons per year, and the Mill is
currently operating at approximately 94% of such annualized capacity.
Management is focusing on developing the business and improving operating
efficiencies.
On
March
9, 2005, YouthStream completed the acquisition of KES Acquisition (the
"Acquisition"), which was deemed effective March 1, 2005. Pursuant to definitive
agreements executed with KES Holdings and Atacama Capital Holdings, Ltd., a
British Virgin Islands company ("Atacama", and together with KES Holdings,
collectively, the "Sellers"), YouthStream, through its newly-formed subsidiary,
YouthStream Acquisition Corp., a Delaware corporation ("Acquisition Corp."),
acquired 100% of the membership interests of KES Acquisition by acquiring (i)
a
37.45% membership interest from KES Holdings and (ii) all of the capital stock
of Atacama KES Holding Corporation, a wholly-owned subsidiary of Atacama
(“Atacama KES”) and the owner of the remaining 62.55% membership interest
in KES Acquisition. As consideration for the Acquisition, Acquisition Corp.
issued to the Sellers (i) $40 million in promissory notes (the “Notes”), (ii)
25,000 shares of Series A Non-Convertible Preferred Stock with an aggregate
liquidation value of $25 million (the “13% Series A Preferred Stock”) and (iii)
100% of its authorized shares of Series B Non-Voting Common Stock. With respect
to the $65,000,000 of purchase consideration, $19,000,000 of the Notes and
$10,000,000 of the 13% Series A Preferred Stock were issued to KES Holdings
and
$21,000,000 of the Notes and $15,000,000 of the 13% Series A Preferred Stock
were issued to Atacama. YouthStream also contributed an aggregate of $500,000
of
cash to Acquisition Corp. as consideration for the issuance by Acquisition
Corp.
of 100% of its Series A Voting Common Stock. In addition, YouthStream will
periodically be required to purchase shares of Series B Preferred Stock of
Acquisition Corp. in amounts equal to distributions it receives on its KES
Holdings membership interest. In December 2005, KES Holdings transferred all
10,000 shares of its 13% Series A Preferred Stock to two charities.
As
a
result of these transactions, YouthStream owns 80.01% of the common stock,
and
100% of the voting stock, of Acquisition Corp. The remaining 19.99% common
stock
interest in Acquisition Corp. is owned 62.55% by Atacama and 37.45% by KES
Holdings. YouthStream currently has a 2.67% equity interest in KES Holdings
(this percentage has increased from 1.00% as a result of the redemption of
another member’s interest), as a result of which the Company has eliminated its
$507,000 interest in the Notes and $267,000 interest in the 13% Series A
Preferred Stock in the condensed consolidated balance sheet at September 30,
2005. YouthStream has consolidated the operations of the Mill through its
ownership of KES Acquisition commencing March 1, 2005. As a result of the
Acquisition, the Company’s financial statements for periods ending after March
1, 2005 are materially different from and are not comparable to its financial
statements prior to that date.
Subsequent
to this transaction, the management of the Mill continued unchanged. This
transaction did not result in any change in the Mill’s business operations or
financial condition, and, other than as set forth herein, the working capital,
operating cash flow, debt service obligations and credit profile of the Mill
were not affected in any way by this transaction.
As
described herein, the Notes and 13% Series A Preferred Stock were issued by
Acquisition Corp., the parent company of KES Acquisition. KES Acquisition is
a
separate legal entity that owns and operates the Mill. The Notes are legal
obligations solely of Acquisition Corp., and are not obligations of KES
Acquisition, nor are they secured by the assets or cash flows of the Mill.
In
the future, Acquisition Corp. may grant liens to secure repayment of the Notes,
upon the consent of any senior lender to KES Acquisition at that time. In
addition, the Notes are non-recourse to the assets of YouthStream, except for
the shares of capital stock of Acquisition Corp. that have been pledged by
YouthStream to the holders of the Notes. Pursuant to the terms of the
transaction documentation in connection with the Acquisition and the loan
facility with General Electric Capital Corporation (“GECC”), YouthStream and
Acquisition Corp. are currently limited in their ability to receive cash
distributions from KES Acquisition, but are permitted to receive tax sharing
payments as described below. Any change in control of Acquisition Corp. in
the
future as a result of the holders of the Notes exercising their legal rights
would not reasonably be expected to have a material impact on the operations
or
financial position of the Mill.
The
Notes
are structurally subordinate in right and payment of up to $40,000,000 of senior
debt, including existing debt obligations in favor of GECC. Scheduled principal
payments commence in (i) February 2007 with respect to the $19,000,000 principal
amount of Notes issued in favor of KES Holdings and (ii) February 2011 with
respect to the $21,000,000 principal amount of Notes issued in favor of Atacama.
In addition, the Notes require additional quarterly principal payments out
of
"free cash" as that term is defined in the Note Purchase Agreement. The Notes
bear interest at the rate of 8% per annum, payable annually during the first
two
years of the Note, as provided for in a letter agreement dated as of July 14,
2005 and effective as of February 28, 2005 by and among Acquisition Corp. and
the Note holders, (or earlier if consented to by GECC or any other senior
lender) and quarterly thereafter. The obligations of Acquisition Corp. under
the
Notes are secured by a limited guaranty by YouthStream, which guaranty is
secured by and limited in recourse solely to a pledge by YouthStream of all
of
its interest in Acquisition Corp. As of September 30, 2005, the balance
outstanding on the Notes was $39,493,000, and related accrued interest payable
was $1,852,384.
Pursuant
to a further letter agreement dated April 11, 2006 and effective as of February
27, 2006 by and among Acquisition Corp. and the Note holders, the interest
payment of $3,200,000 due on February 27, 2006 was paid by the delivery of
short-term notes due February 27, 2007 in the principal amount of $3,200,000,
with interest at 8% per annum.
For
the
nine months ending September 30, 2005, Acquisition Corp., KES Acquisition and
Atacama KES are collectively required to have, on a consolidated basis, in
excess of $4,000,000 of earnings before interest, taxes, depreciation and
amortization, calculated in accordance with generally accepted accounting
principles ("EBITDA"). For each of the fiscal years ending on and
after September 30, 2006, Acquisition Corp., KES Acquisition and Atacama KES
are
collectively required to have, on a consolidated basis, in excess of $7,200,000
of EBITDA. At March 31 of each fiscal year following the fiscal year
ending September 30, 2005 in which the obligations under the Notes remain
outstanding, Acquisition Corp., KES Acquisition and Atacama KES are collectively
required to have, on a consolidated basis, in excess of $3,000,000 of EBITDA
for
the six months then ended. Effective September 23, 2005, the holders of the
Notes executed an agreement to amend the Notes to eliminate the EBITDA
requirement for the nine months ending September 30, 2005.
The
holders of each share of 13% Series A Preferred Stock are entitled to receive
a
cumulative dividend at an annual rate of 13% of the sum of $1,000 and all
accrued but unpaid dividends. The 13% Series A Preferred Stock contains a
liquidation preference equal to $1,000 per share, plus accrued but unpaid
dividends, and is redeemable out of, and to the extent of, legally available
funds, at a redemption price equal to the sum of $1,000 and all accrued but
unpaid dividends on the earlier to occur of (i) any liquidation of Acquisition
Corp. (ii) the occurrence of an event of default under the Note Purchase
Agreement pursuant to which the Notes are being issued or (iii) the first
anniversary of Acquisition Corp.’s full and complete repayment of the
Notes.
Since
the
acquisition of the Mill by the Sellers, the Mill has been operating under a
Management Services Agreement with Pinnacle Steel, LLC (the "Pinnacle
Agreement"), which agreement remained in effect following the closing. The
principals of Pinnacle Steel LLC that manage the Mill have significant
experience and expertise in the steel industry. The Pinnacle Agreement will
remain in effect through October 31, 2009, subject to earlier termination or
extension based on the financial performance of the Mill. Pinnacle is entitled
to a monthly management fee and a management incentive fee as provided in the
Pinnacle Agreement and as described in “Current Business Activities”
below.
Subsequent
to the acquisition of the Mill by the Sellers, KES Acquisition issued an
aggregate of $7,000,000 of subordinated promissory notes to the Sellers and
certain of their respective affiliates (the “Subordinated Promissory Notes”).
Cash proceeds from the Subordinated Promissory Notes were used to accelerate
and
expand the operations of the Mill. The Subordinated Promissory Notes bear
interest at the rate of 12% per annum, with interest payable monthly, subject
to
compliance with various agreements and covenants, are secured by a subordinated
security interest in all of the assets of KES Acquisition, and are subject
to an
Intercreditor and Subordination Agreement dated March 24, 2004 with GECC. When
originally issued, principal and interest were due and payable upon the earlier
to occur of (i) an event of default under the Loan and Security Agreement with
GECC or (ii) each note’s respective due date, which ranged from March 31, 2005
to December 31, 2005. As of September 30, 2005, the due dates of the notes
had
all been extended to December 31, 2006, if not repaid earlier. At September
30,
2005, accrued interest payable with respect to the Subordinated Promissory
Notes
was $1,085,753, almost all of
which
was paid subsequent
to fiscal year end.
Related
parties with respect to this transaction are summarized as follows: Robert
Scott
Fritz, a director of YouthStream, is an investor in KES Holdings. Hal G.
Byer,
another director of YouthStream, is an employee of affiliates of Libra/KES
Investment I, LLC ("Libra/KES"), the Manager of KES Holdings, and has an
economic interest in KES Holdings through his relationship with Libra
Securities, LLC ("Libra Securities"). Jess M. Ravich, a director of YouthStream
effective June 26, 2006, is a principal of Libra/KES. In addition, affiliates
of
Mr. Ravich, including a trust for the benefit of Mr. Ravich and certain of
his
family members (the “Ravich Trust”) are investors in KES Holdings. Mr. Ravich,
either directly or through the Ravich Trust, holds 1,860,000 shares of
YouthStream's common stock, warrants to purchase 500,000 shares of YouthStream's
common stock exercisable through August 31, 2008, 1,000,000 shares of
YouthStream's redeemable preferred stock and an option to purchase 200,000
shares of YouthStream’s common stock exercisable through June 26, 2013, which
was issued to Mr. Ravich under YouthStream’s 2000 Stock Option Incentive Plan in
connection with his election to the Board. Through his positions at Libra/KES,
Mr. Ravich managed the business of KES Acquisition through February 28, 2005.
Subordinated Promissory Notes with a principal amount of $1,650,000 and $450,000
are payable to the Ravich Trust and Libra Securities
Holdings, LLC,
the
parent of Libra Securities, respectively. Mr. Fritz and Mr. Byer have each
previously acquired an option from the Ravich Trust for $2,500 ($0.04 per
share)
to purchase 62,500 shares of YouthStream's redeemable preferred stock issued
to
the Ravich Trust in January 2003, exercisable at $0.36 per share until December
31, 2006 or earlier upon the occurrence of certain events.
The
Acquisition was accounted for as a purchase in accordance with SFAS No. 141,
“Business Combinations”, and in accordance with Emerging Issues Task Force
(EITF) No. 88-16, “Basis in Leveraged Buyout Transactions”. As a result of the
substantial and continuing relationships between YouthStream and the Sellers,
and the provisions of EITF No. 88-16 that must be considered when determining
the extent of fair value/predecessor basis to be used in recording the
transaction, the Acquisition has been recorded at predecessor basis. Since
the
debt and equity held by the Sellers represented almost the entire amount of
capital at risk both before and after the Acquisition, the application of the
“monetary test” specified in Section 3 of EITF No. 88-16, which limits the
portion of the purchase consideration that can be valued at fair value to the
percentage of the total consideration that is monetary, was utilized by the
Company in determining to record the transaction at predecessor basis. The
excess of the purchase price over predecessor basis of the net assets acquired
has been reflected as a deemed distribution of $63,104,423 to the Sellers at
the
date of acquisition in the consolidated financial statements.
For
taxable periods beginning after February 28, 2005, Acquisition Corp. and Atacama
KES will be includible in the consolidated federal income tax return to be
filed
by YouthStream as the common parent. Acquisition Corp. and Atacama KES
have entered into a Tax Sharing Agreement with YouthStream, pursuant to which
they have agreed to pay YouthStream an amount equal to 50% of their respective
"separate company tax liability" ,
subject
to compliance with the GECC secured line of credit.. The term "separate
company tax liability" is defined as the amount, if any, of the federal income
tax liability (including, without limitation, liability for any penalty, fine,
additions to tax, interest, minimum tax and other items applicable to such
subsidiary in connection with the determination of the subsidiary's tax
liability), which such subsidiary would have incurred if its federal income
tax liability for the periods during which it is includible in a consolidated
federal income tax return with YouthStream were determined generally in the
same manner in which its separate return liability would have been calculated
under Section 1552(a)(2) of the Internal Revenue Code of 1986, as amended.
YouthStream has approximately $250,000,000 of federal net operating loss
carryovers currently available to offset the consolidated federal taxable income
of the affiliated group in the future.
The
total
purchase price of $65,000,000, as well as the terms and conditions of the Notes
and 13% Series A Preferred Stock issued to the Sellers, was determined to be
at
fair value based on reports prepared by an independent valuation firm. The
following table summarizes the assets acquired and liabilities assumed at
predecessor basis at February 28, 2005.
Assets
Acquired:
|
|
|
|
Cash
|
|
$
|
913,194
|
|
Accounts
receivable, net
|
|
|
10,453,485
|
|
Inventories
|
|
|
18,762,218
|
|
Prepaid
expenses and other current assets
|
|
|
904,271
|
|
Property,
plant and equipment, net
|
|
|
5,990,758
|
|
Due
from YouthStream Acquisition Corp.
|
|
|
187,702
|
|
Other
non-current assets
|
|
|
721,393
|
|
|
|
|
|
|
Total
assets acquired
|
|
|
37,933,021
|
|
|
|
|
|
|
Liabilities
Assumed:
|
|
|
|
|
Accounts
payable
|
|
|
9,566,327
|
|
Accrued
expenses
|
|
|
1,267,016
|
|
Accrued
interest payable
|
|
|
593,260
|
|
Deferred
rent
|
|
|
165,413
|
|
Subordinated
promissory notes payable
|
|
|
7,000,000
|
|
Line
of credit
|
|
|
15,495,095
|
|
Equipment
contract payable
|
|
|
291,223
|
|
Capital
lease obligation
|
|
|
1,877,179
|
|
|
|
|
|
|
Total
liabilities assumed
|
|
|
36,255,513
|
|
|
|
|
|
|
Net
assets acquired
|
|
|
1,677,508
|
|
Adjustment
to recognize minority interest
|
|
|
(331,981
|
)
|
|
|
$
|
1,345,527
|
|
|
|
|
|
|
Total
purchase consideration:
|
|
|
|
|
Subordinated
secured promissory notes payable, net
of elimination
|
|
$
|
39,493,000
|
|
13%
Series A preferred stock, net of elimination
|
|
|
24,733,000
|
|
|
|
|
64,226,000
|
|
|
|
|
|
|
Minority
interests in equity
|
|
|
223,950
|
|
|
|
|
|
|
Adjustment
to record deemed distribution to Sellers
|
|
|
(63,104,423
|
)
|
|
|
|
|
|
|
|
$
|
1,345,527
|
|
The
amount due from Acquisition Corp. of $187,702 represents costs incurred by
KES Acquisition with respect to the Acquisition, which were included in the
$1,171,406 of transaction costs related to the Acquisition charged to operations
during the year ended September 30, 2005.
As
of
September 30, 2004, the Company had incurred $175,144 of costs with respect
to
the Acquisition, which were presented as deferred costs in the Company’s
consolidated balance sheet at such date. These costs were included in the
$1,171,406 of transaction costs related to the Acquisition charged to operations
during the year ended September 30, 2005.
The
following pro forma operating data presents the results of operations for the
years ended September 30, 2005 and 2004, as if the Acquisition had occurred
on
the last day of the immediately preceding fiscal year. Accordingly, transaction
costs of $1,171,406 related to the Acquisition for the year ended September
30,
2005 are not included in the net loss from continuing operations shown below.
In
addition, discontinued operations for the year ended September 30, 2004 are
not
included. The Mill commenced generating revenues in late January 2004. The
pro
forma results are not necessarily indicative of the financial results that
might
have occurred had the Acquisition actually taken place on the respective dates,
or of future results of operations. The
Company’s unaudited pro forma information for the years ended September 30 2005
and 2004 is summarized as follows:
|
|
2005
|
|
2004
|
|
Net
sales
|
|
$
|
113,786,971
|
|
$
|
48,944,338
|
|
Cost
of sales
|
|
|
105,265,441
|
|
|
51,158,622
|
|
Gross
margin (deficit)
|
|
|
8,521,530
|
|
|
(2,214,284
|
)
|
Operating
income (loss)
|
|
|
3,169,836
|
|
|
(7,469,548
|
)
|
Interest
expense
|
|
|
(9,469,875
|
)
|
|
(7,243,971
|
)
|
Minority
interest
|
|
|
199,109
|
|
|
199,109
|
|
Net
loss from continuing operations
|
|
$
|
(5,786,987
|
)
|
$
|
(14,134,628
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
$
|
(0.15
|
)
|
$
|
(0.36
|
)
|
Weighted
average common shares outstanding
|
|
|
39,242,251
|
|
|
39,242,251
|
|
During
September 2005, the Company borrowed $50,000 from certain directors under
short-term unsecured notes due December 31, 2005, with interest at 4% per annum,
to fund corporate general and administrative expenses. The notes were subject
to
mandatory prepayment based on any proceeds received by the Company from, among
other sources, the note that the Company received from the sale of the assets
and operations of Beyond the Wall in February 2004 and any tax sharing payments
under the Tax Sharing Agreement, as described above. The Notes were repaid
in
October 2005 from the proceeds from the settlement of the Beyond the Wall note
receivable, which were received on September 30, 2005, as described below.
On
September 30, 2005, the Company received a cash payment of $258,922 as
settlement in full of the outstanding note receivable that had a balance,
including accrued interest, of $271,686 at June 30, 2005 that the Company had
previously received from the sale of the assets and operations of Beyond the
Wall in February 2004.
Current
Business Activities
The
Company’s business is conducted through its majority-owned subsidiary, KES
Acquisition, which owns and operates a steel mini-mill near Ashland, Kentucky
(the “Mill”). See “Recent Events - Acquisition of Steel Mini-Mill.” As a
mini-mill producer of bar flats, the Company recycles steel from scrap, a
process designed to result in lower production costs than those of integrated
steel mills, which produce steel by processing iron ore and other raw materials
in blast furnaces. Bar flats are produced to a variety of specifications and
fall primarily into two general quality levels - merchant bar quality steel
bar
flats ("MBQ Bar Flats") for generic types of applications, and special bar
quality steel bar flats ("SBQ Bar Flats"), where more precise customer
specifications require the use of various alloys, customized equipment and
special production procedures to insure that the finished product meets critical
end-use performance characteristics.
The
Mill
manufactures over 2,600 different bar flat items which are sold to a variety
of
relatively small volume niche markets, including original equipment
manufacturers (“OEMs”), cold drawn bar converters, steel service centers and the
leaf-spring suspension market for light and heavy-duty trucks, mini-vans and
utility vehicles. The Mill was specifically designed to manufacture wider and
thicker bar flats up to three inches in thickness and twelve inches in width
that are required by these markets. In addition, the Mill employs a variety
of
specially designed equipment which is necessary to manufacture SBQ Bar Flats
to
the specifications demanded by its customers, including OEMs. Although the
Mill
specializes in SBQ Bar Flats, it also, to a lesser extent, competes in the
MBQ
Bar Flat market, particularly with respect to thicker and wider bar
flats.
The
Company’s business strategy is to increase its share of the SBQ Bar Flat market
and to expand into related niche market applications where it can supply
products for special customer needs. The Company plans to expand its business
primarily by increasing the number of products it sells to existing customers
and the development of new customers.
The
Mill
operates pursuant to a Management Services Agreement (the "Management Services
Agreement") with Pinnacle Steel, LLC (“Pinnacle”) pursuant
to which Pinnacle provides, at its expense, employees to serve as
the general manager of the Mill and provide oversight and general management
of
the operations of the Mill. Pursuant to the Management Services
Agreement Pinnacle receives an annual fee of $700,000, payable monthly, and
bonus payments based on 16.6% of defined earnings before interest, taxes,
depreciation and amortization (“EBITDA”) in excess of $4,500,000 for the nine
months ending September 30, 2005 and $6,000,000 for the fiscal years ending
September 30, 2006 and thereafter. The
Management Services Agreement is effective through October 31, 2009, subject
to
earlier termination or extension based on the financial performance of the
Mill.
The principals of Pinnacle that manage the Mill have significant experience
and
expertise in the steel industry.
Industry
Conditions
The
U.S.
steel industry has historically been and continues to be highly cyclical in
nature, influenced by many factors, including periods of economic growth or
recession, strength or weakness of the U.S. dollar, worldwide production
capacity, worldwide steel demand, and levels of steel imports. The steel
industry has also been affected by various company-specific factors, such as
a
company’s ability or inability to adapt to and deal with technological change,
plant inefficiency and high labor costs. The U.S. has traditionally been a
net
importer of steel.
During
the second half of 2000 and throughout 2001, the U.S. steel industry experienced
a severe downward cycle, largely as a result of increased imports of steel
at
depressed prices, the effect of a strong dollar, weak economic conditions and
excess global steel production capacity. During the first half of 2002,
domestic flat-rolled steel prices increased dramatically from historical
cyclical lows in 2001. This increase resulted from a number of factors,
including (1) a temporary reduction in domestic steel production capacity as
a
result of certain bankruptcies and shutdowns of other U.S. steel producers,
(2)
a reduction in imports, driven in part by certain favorable rulings and
executive actions with respect to tariffs and quotas on foreign steel, and
(3) a
brief strengthening of the overall U.S. economy and the need for end-users
of
steel products to replenish their depleted inventories. The cycle began to
turn
downward again toward the end of 2002 and into early 2003, however, largely
as a
result of softening product demand brought about by a still weak economy and
war
concerns. The shortness of the previous up cycle, poor cost controls and high
fixed costs and legacy costs for many steel producers, an absence of any supply
or pricing discipline by individual producers, and the strength of the U.S.
dollar that brought exports streaming into the country created the conditions
for more than 40 bankruptcies among U.S. steel producers, mainly integrated
producers, between 2001 and 2003.
Economic
dislocations, rationalization of production capacity and supply due to steel
industry consolidation, a weakened U.S. dollar, Section 201 tariffs, high ocean
freight rates and strong foreign, mainly Chinese and Asian, steel demand and
scrap demand, combined during 2003 to substantially reduce steel imports into
the U.S., thus constraining
the supply of new steel for domestic consumption. Moreover, by rendering exports
of steel abroad more attractive, these factors also acted to constrain
the U.S. supply of scrap for domestic consumption. The result has not only
been
a dramatic increase in U.S. steel pricing in late 2003 and throughout 2005,
but also unprecedented increases in the cost of steel scrap.
The
U.S.
steel industry experienced many changes during 2003 through 2005 as a result
of
consolidation. Consolidations and similar developments caused formerly idled
or
inefficient production facilities to come back into the market with
substantially lower capital costs, with renegotiated labor agreements containing
fewer work rules and reduced labor costs, and shorn of many previously
burdensome health care and retirement legacy costs and other liabilities. The
result of this restructuring and consolidation, which we expect to continue,
is
a less competitive U.S. steel market, with a narrowing of production cost
differentials between mini-mills and some of the integrated producers. Moreover,
with the integrated mills’ lesser dependence on scrap as a percentage of their
metallics melt mix than the mini-mills, the traditional mini-mill cost advantage
over integrated mill steel making may be reduced or eliminated when scrap prices
are at high levels.
Manufacturing
Operations
The
Mill
recycles steel by melting steel scrap in one 50-ton electric arc furnace. The
molten steel is then taken to the ladle metallurgy facility where a variety
of
alloys are added to make different grades of steel in accordance with customer
specifications. The refined molten steel is then poured into a continuous caster
to produce continuous strands of steel with cross-sectional dimensions ranging
from approximately 16 to 72 square inches. The Mill can utilize up to four
continuous strands in producing certain sizes. The strands are cut to produce
billets of specified length which are reheated to approximately 2,300 degrees
Fahrenheit and fed through a series of roll stands to reduce their size and
form
them into steel bar sections. These sections emerge from the rolling mill,
are
uniformly cooled on a cooling bed, and are cut to lengths specified by the
customer. The cut bar flats are stacked into bundles ready for shipment.
The
current production capacity of the Mill for finished products, based on the
current configuration of the mini-mill and hours worked, is approximately
200,000 short-tons per year. From March 1, 2005 (the effective date of the
Acquisition) through December 31, 2005, the Mill had production capacity of
168,000 tons and sold 158,619 tons of finished goods, or 94% of its rolling
capacity.
The
Company transports its products by common carrier, generally shipping by truck
and by rail. The Mill has railroad sidings at its facilities.
Capital
Improvements and Expansion
The
Company has made no capital expenditures since March 1, 2005 and does not
anticipate making any in fiscal 2006.
Primary
Markets and Products
OEM
Markets.
The
Company supplies bar flats to OEMs in the following markets: metal building,
grader blades, agricultural equipment, construction/fabricating, railroad cars,
industrial chain manufacturers and trailer support beam flange manufacturers.
The products furnished to these markets are primarily SBQ Bar Flats along with
a
mixture of MBQ Bar Flats.
One
of
the key characteristics of the OEM Markets relate to lot order size, which
tend
to be larger than the orders received from other markets, such as steel service
centers. These larger orders typically result in improved operating efficiencies
and longer term relationships with customers.
Cold
Drawn Bar Converters Market.
The
Company sells its expanded range of SBQ hot rolled bar products to cold drawn
bar manufacturers. The Company’s product range, 1/4" through 3" in thickness and
2" through 12" in width, enables it to supply practically all the sizes needed
by the converters. The converters remove the scale from the hot rolled bar
and
draw it through a die. The drawing reduces the cross section, improves surface,
and produces a more exacting tolerance bar. The end product is sold either
through distributors or directly to OEMs.
Steel
Service Center Market.
A
significant percentage of all steel shipments to the end-user are distributed
through steel service centers, making this the largest single market for steel
manufacturers. The steel service center market encompasses all warehouses and
distributors who buy steel to stock for their end use customers who buy in
smaller volume than that of OEMs. The Company sells both MBQ and SBQ Bar Flats
into this market.
Leaf-Spring
Suspension Market.
High
tensile SBQ spring steel is produced to customer and industry specifications
for
use in leaf- spring assemblies. These assemblies are utilized in light, medium
and heavy duty trucks, trailers, mini-vans and four-wheel drive vehicles with
off-road capability. The trend toward tapered leaf-spring products and air-ride
suspension continues. These products use somewhat less steel but they are
manufactured from larger cross section bar flats that match the Company’s
manufacturing strengths.
Customers
The
Company sells to over 200 customers, none of whom accounted for more than 10%
of
sales for fiscal 2005.
During
2005, the Company’s ten largest customers accounted for approximately 48% of it
net sales, of which $9,294,175 was included in accounts receivable at September
30, 2005. The Company's largest customer accounted for 8.5% of its consolidated
net sales during fiscal 2005.
The
Company’s foreign sales as a percentage of total sales were 5% for the period
March 1, 2005 through December 31, 2005. These sales consisted primarily of
shipments to Canada and Mexico.
Marketing
Company
employees are directly involved in sales to new and existing customers. Sales
are nationwide and in certain foreign markets. Sales efforts are primarily
performed by in-house sales personnel and augmented with manufacturers’
representative companies.
Competition
and Other Market Factors
The
domestic and foreign steel industries are characterized by intense competition.
The Company competes with steel-producing mills of similar size operative within
its market region and also larger mills producing similar products, such as
Nucor Corporation, Gerdau Americsteel, Gautier Steel, Steel Dynamics and Bayou
Steel. The Company believes that the principal competitive factors affecting
its
business are quality, service, price and geographic location.
Raw
Materials
Scrap
The
principal raw material used in the Mill is ferrous scrap. Ferrous scrap is
derived from, among other sources, discarded automobiles, appliances, structural
steel, railroad cars and machinery. The purchase price of scrap is subject
to
market conditions largely beyond the control of the Company. Starting during
the
latter part of 2002, however, and continuing through 2005, the price of scrap
has risen sharply upward to historic highs, largely as a result of foreign
scrap
demand, particularly from China, a weak U.S. dollar that makes U.S. scrap
exports more attractive, and relatively static if not limited scrap availability
in the U.S. These factors have driven scrap prices to their highest levels
in
decades.
For
the
twelve months ended September 30, 2005, KES Acquisition obtained all of its
scrap through a broker that purchases scrap from a multitude of scrap suppliers.
In the event the Company’s relationship with this broker ended, the Company
believes it could readily arrange for scrap purchases through other brokers
or
directly from scrap suppliers. During 2005, the Company had two suppliers that
accounted for approximately 65% of raw materials purchases, one providing
approximately 37% and the other providing approximately 28%, of which $2,634,161
was included in accounts payable at September 30, 2005.
Energy
Resources
Electricity
With
respect to the Mill, the Company has an electric service contract with Kentucky
Power Company d/b/a American Electric Power, or AEP, which is terminable upon
12
months prior written notice.
Gas
The
Mill
uses approximately 1.5 decatherms of natural gas per day. A decatherm is
equivalent to 1 million BTUs or 1,000 cubic feet of natural gas. The Company
has
a pipeline delivery contract with Columbia Gas of Kentucky which delivers
natural gas to the Mill from providers located on the Gulf Coast.
Other
The
Mill
uses oxygen, nitrogen and argon for production purposes, which the Company
purchases from Air Products & Chemicals, Inc.
Employees
As
of
September 30, 2005, the Company had three persons, including its Chief Executive
Officer and its Chief Financial Officer, performing services dedicated primarily
to general corporate matters, including management of the Company,
maintenance of the corporate entity, review of strategic options and settlement
of debts and obligations from its prior business activities. As
of
September 30, 2005, the Mill employed 140 individuals approximately 76% of
whom
are members of the United Steelworkers of America. The Mill’s current five-year
collective bargaining agreement expires in December 2008. We believe that the
wage rates and benefits at the Mill are competitive with other
mini-mills.
Environmental
and Regulatory Matters
The
operations of the Mill are subject to substantial and evolving local, state
and
federal environmental, health and safety laws and regulations concerning, among
other things, emissions to the air, discharges to surface and ground water
and
to sewer systems, and the generation, handling, storage, transportation,
treatment and disposal of toxic and hazardous substances. In particular, the
Mill is dependent upon both state and federal permits regulating discharges
into
the air or into the water in order to be permitted to operate its facilities.
The Company believes that in all current respects the Mill facilities are in
material compliance with all provisions of federal and state laws concerning
the
environment and the Company does not currently believe that future compliance
with such provisions will have a material adverse effect on its results of
operations, cash flows or financial condition.
Since
the
level of enforcement of environmental laws and regulations, or the nature of
those laws that may be enacted from time to time are sometimes subject to
changing social or political pressures, our environmental capital expenditures
and costs for environmental compliance may increase in the future. In addition,
due to the possibility of unanticipated regulatory or other developments, the
amount and timing of future environmental expenditures may vary substantially
from those currently anticipated. The cost of current and future environmental
compliance may also place U.S. steel producers at a competitive disadvantage
with respect to foreign steel producers, which may not be required to undertake
equivalent costs in their operations.
Pursuant
to the Resource Conservation and Recovery Act, or RCRA, which governs the
treatment, handling and disposal of solid and hazardous wastes, the United
States Environmental Protection Agency, or U.S. EPA, and authorized state
environmental agencies conduct inspections of RCRA regulated facilities to
identify areas where there may have been releases of solid or hazardous
constituents into the environment and require the facilities
to take corrective action to remediate any such releases. RCRA also allows
citizens to bring certain suits against regulated facilities for potential
damages and clean up. The Mill’s steelmaking facilities are subject to RCRA. The
manufacturing operations produce various by-products, some of which, for
example, electric arc furnace or EAF dust, are categorized as industrial or
hazardous waste, requiring special handling for disposal or for the recovery
of
metallics. The Mill collects such co-products in an approved baghouse facility.
While the Company cannot predict the future actions of the regulators or other
interested parties, the potential exists for required corrective action at
these
facilities, the costs of which could be substantial.
Under
the
Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
the U.S. EPA and, in some instances, private parties have the authority to
impose joint and several liability for the remediation of contaminated
properties upon generators of waste, current and former site owners and
operators, transporters and other potentially responsible parties, regardless
of
fault or the legality of the original disposal activity. Many states, including
Kentucky, have statutes and regulatory authorities similar to CERCLA and to
the
U.S. EPA. The Company has a waste handling agreement with a contractor to
properly dispose of our electric arc furnace dust and certain other waste
products of steelmaking. However, no assurances can be given that, even if
there
has been no fault by the Company, the Company may not still be cited as a waste
generator by reason of an environmental clean up at a site to which its waste
products were transported.
In
addition to RCRA and CERCLA, there are a number of other environmental, health
and safety laws and regulations that apply to the Mill facilities and may affect
its operations. By way of example and not of limitation, certain portions of
the
federal Clean Air Act, Clean Water Act, Oil Pollution Act, Safe Drinking Water
Act and Emergency Planning and Community Right-to-Know Act, as well as state
and
local laws and regulations implemented by the regulatory agencies, apply to
the
Mill’s operations. Many of these laws allow both the governments and citizens to
bring certain suits against regulated facilities for alleged environmental
violations. Finally, any steelmaking company could be subject to certain toxic
tort suits brought by citizens or other third parties alleging causes of action
such as nuisance, negligence, trespass, infliction of emotional distress, or
other claims alleging personal injury or property damage.
Except
as
otherwise indicated, the Company believes that the Mill is in substantial
compliance with applicable environmental laws and regulations. Notwithstanding
such compliance, if damage to persons or property or contamination of the
environment has been or is caused by the conduct of the Company’s business or by
hazardous substances or wastes used, generated or disposed of by the Company
(or
possibly by prior operators of the Mill or by third parties), the Company may
be
held liable for such damages and be required to pay the cost of investigation
and remediation of such contamination. The amount of such liability to the
Company could be material. Changes in federal or state laws, regulations or
requirements or discovery of unknown conditions could require additional
expenditures by the Company.
ITEM
1A. RISK FACTORS
The
following risk factors and other information included in this Report should
be
carefully considered. The risks and uncertainties described below are not the
only ones we face. Additional risks and uncertainties not presently known to
us
or that we currently deem immaterial also may impair our business operations.
If
any of the following risks actually occur, our business, financial condition
and
operating results could be significantly harmed.
Risks
Related to Our Business
We
have
incurred recurring operating losses since inception. We incurred a net loss
of
$3,430,562 and a negative cash flow from operating activities of $4,300,395
for
the year ended September 30, 2005, and had an accumulated deficit of
$347,265,398 and a stockholders' deficiency of $79,600,350 at September 30,
2005. We cannot assure you that we can achieve or sustain profitability on
a
quarterly or annual basis in the future. We may not achieve our business
objectives and the failure to achieve such goals would have an adverse impact
on
us.
Our
independent auditors have expressed substantial doubt about our ability to
continue as a going concern.
In
their
report dated May 18, 2006, our independent registered public accounting firm
stated that our financial statements for the year ended September 30, 2005
were
prepared assuming that we would continue as a going concern. Our ability to
continue as a going concern is an issue raised as a result of our history of
recurring losses from operations and a working capital deficiency. Depending
on
various factors, we may continue to experience operating losses. Our ability
to
continue as a going concern on a consolidated basis is dependent on the
continued improved operating performance of the Mill. Furthermore, our ability
to fund corporate overhead is subject to our receipt of periodic tax sharing
payments from Acquisition Corp. and Atacama KES, which in turn is dependent
on
the continued improved operating performance of the Mill. There can be no
assurances that such improved operating performance will continue.
Payments
under our Tax Sharing Agreement are uncertain.
For
taxable periods beginning after February 28, 2005, Acquisition Corp. and Atacama
KES are included in the consolidated federal income tax return filed by
YouthStream as the common parent. Acquisition Corp. and Atacama KES have
entered into a Tax Sharing Agreement with YouthStream, pursuant to which they
have agreed to pay YouthStream an amount equal to 50% of their respective
"separate company tax liability”, subject
to compliance with the GECC secured line of credit.
Periodic
tax sharing payments from Acquisition Corp. and Atacama KES are currently the
sole source of funds distributed to YouthStream from the operations of the
Mill.
The tax sharing payments are necessary to fund corporate overhead at the
YouthStream level and the receipt of such payments is dependent upon the
availability of sufficient cash resources from Mill operations. There can be
no
assurance that there will be sufficient levels of cash resources generated
from
Mill operations to support tax sharing payments.
Because
of our recent divestiture of our prior businesses and our recent acquisition
of
the Mill, we believe that historical information regarding our prior business
results is of limited relevance in understanding our business as currently
conducted and our prospects for the future.
We
have a
limited operating history in our current line of business. We had no operating
business for the period February 2004 through February 2005 until we consummated
our acquisition of the Mill effective March 1, 2005. As a result, we believe
the
historical financial results of the Company prior to the acquisition of the
Mill
are of limited relevance in understanding our business as currently conducted.
Furthermore,
under its previous ownership, after several years of financial difficulties,
the
Mill ceased production in December 2002 and the Mill’s owners at such time filed
a voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code in February 2003. Under new management that acquired the assets of KES
Acquisition in a bankruptcy proceeding in September 2003, the Mill restarted
operations in late January 2004 and completed its ramp-up phase and reached
full
operating status in August 2004.
Our
level of production and our sales and earnings are subject to significant
fluctuations.
The
price
of steel and steel products may fluctuate significantly due to many factors
beyond our control. This fluctuation would directly affect our levels of
production and sales and earnings. The domestic steel industry has been highly
cyclical in nature, influenced by a combination of factors, including periods
of
economic growth or recession, strength or weakness of the U.S. dollar, worldwide
production capacity, levels of steel imports and applicable tariffs. The demand
for steel products is generally affected by macroeconomic fluctuations in the
United States and the global economies in which steel companies sell their
products. For example, future economic downturns, stagnant economies or currency
fluctuations in the United States or globally could decrease the demand for
products or increase the amount of imports of steel into the United States,
which could negatively impact our sales, margins and profitability. In addition,
prolonged weakness in any industries in which we sell our products could
materially adversely affect our results of operations and cash flows.
Our
business requires maintenance expenditures and may require capital investment
which we may be unable to provide.
We
require capital for, among other purposes, maintaining the condition of our
existing equipment and maintaining compliance with environmental laws and
regulations. From time to time, we may also require capital to acquire new
equipment. To the extent that cash generated internally and cash available
under
our senior credit facilities is not sufficient to fund capital requirements,
we
will require additional debt and/or equity financing. However, this type of
financing may not be available or, if available, may not be on satisfactory
terms. Future debt financings, if available, will require the approval of our
existing lenders and may result in increased interest and amortization expense,
increased leverage. In addition, future debt financings may limit our ability
to
withstand competitive pressures and render us more vulnerable to economic
downturns. If we fail to generate or obtain sufficient additional capital in
the
future, we could be forced to reduce or delay capital expenditures, sell assets
or restructure or refinance our indebtedness.
Unexpected
equipment failures or unanticipated events may lead to production curtailments
or shutdowns and we do not maintain any business interruption insurance to
offset resulting lost revenues.
Interruptions
in production capabilities will inevitably increase production costs and reduce
our sales and earnings. Our manufacturing processes depend on critical pieces
of
steelmaking equipment, such as furnaces, continuous casters and rolling
equipment, as well as electrical equipment, such as transformers, and this
equipment may, on occasion, be out of service as a result of unanticipated
failures. In the future, we may experience material plant shutdowns or periods
of reduced production as a result of any equipment failures. Furthermore, any
interruption in production capability may require us to make large capital
expenditures to remedy the situation, which could have a negative effect on
our
profitability and cash flows. In addition to equipment failures, our facilities
are also subject to the risk of catastrophic loss due to unanticipated events
such as fires, explosions, adverse weather conditions or transportation
interruptions. We do not maintain any business interruption insurance and thus
there will be no recovery under such a policy to offset the lost revenues or
increased costs that we experience during the disruption of our operations.
In
addition to the revenue losses, longer-term business disruption could result
in
a loss of customers. If this were to occur, our future sales levels, and
therefore our profitability and cash flows, could be adversely affected.
Competition
from other materials may materially adversely affect our business.
In
many
applications, steel competes with other materials, such as aluminum, cement,
composites, glass, plastic and wood. Increased use of these materials in
substitution for steel products could materially adversely affect prices and
demand for our steel products.
Environmental
regulations impose substantial costs and limitations on operations.
We
have
environmental liability risks and limitations on operations brought about by
the
requirements of environmental laws and regulations. We are subject to various
federal, state and local environmental, health and safety laws and regulations,
and are required to maintain numerous permits and governmental approvals
required for operation, concerning issues such as air emissions, wastewater
discharges, solid and hazardous waste management and disposal and the
investigation and remediation of contamination. These laws and regulations
are
becoming increasingly stringent. While we believe that our facilities are in
material compliance with all permits, governmental approvals, applicable
environmental laws and regulations, the risks of substantial unanticipated
costs
and liabilities related to compliance with these permits, governmental
approvals, laws and regulations are an inherent part of our business. It is
possible that future conditions may develop, arise or be discovered that create
new environmental compliance or remediation liabilities and costs. While we
believe that we can comply with environmental legislation and regulatory
requirements and that the costs of compliance have been included within budgeted
cost estimates, compliance may prove to be more limiting and costly than
anticipated. There can also be no assurance that the facilities will continue
to
operate in accordance with the conditions and restrictions established by the
permits or approvals. Similarly, we cannot assure you that the requirements
contained in such permits will not change or that the facilities will be able
to
renew or to maintain all permits and approvals required for continued operation
of the facilities.
If
any
substances are found at the facilities that are classified by applicable
environmental laws, ordinances or regulations as hazardous materials, we could
become liable for the investigation and removal of those substances, regardless
of their source. Failure to comply with these laws, ordinances or regulations,
or any change in the requirements of these laws, ordinances or regulations
could
result in liabilities, imposition of cleanup liens and fines and large
expenditures to bring the facilities into compliance. We may also be subject
from time to time to legal proceedings brought by private parties or
governmental agencies with respect to environmental matters, including matters
involving alleged property damage or personal injury. We may also be subject
to
future claims with respect to historic asbestos exposure relating to our
acquired assets.
The
potential presence of radioactive materials in the scrap that we melt in our
electric arc furnaces presents a significant economic exposure.
The
potential presence of radioactive materials in our scrap supply presents a
significant economic exposure. The cost to clean up the contaminated material
and the loss of revenue resulting from the loss in production time can be
material to our business, results of operations and financial condition. While
we have three detection devices at the Mill, radioactive scrap could go
undetected. If we fail to detect radioactive material in the scrap we receive,
we may incur significant costs to clean up the contamination of our facilities
and to dispose of the contaminated material that could have a material adverse
effect on our results of operation and financial condition. In addition,
there can be no assurance that we will have sufficient financial resources
to
fund the clean up costs in such event resulting in a potential suspension or
curtailment of operations at the Mill.
The
results of our operations are sensitive to volatility in steel prices and
changes in the cost of raw materials, particularly scrap steel.
We
rely
to a substantial extent on outside vendors to supply us with raw materials
that
are critical to the manufacture of our products. We acquire our primary raw
material, steel scrap, from numerous sources. Although we believe that the
supply of scrap is adequate to operate our facilities, purchase prices of these
critical raw materials are subject to volatility. At any given time, we may
be
unable to obtain an adequate supply of these critical raw materials with price
and other terms acceptable to us.
If
our
suppliers increase the price of our critical raw materials, we may not be able
to locate alternative sources of supply. If we are unable to obtain adequate
and
timely deliveries of our required raw materials, we may be unable to timely
manufacture sufficient quantities of our products. This could cause us to lose
sales, incur additional costs and suffer harm to our reputation.
Changes
in the availability and cost of electricity and natural gas are subject to
volatile market conditions that could adversely affect our business.
Our
Mill
is a large consumer of electricity and natural gas. We rely upon third parties
for our supply of energy resources consumed in the manufacture of our products.
The prices for and availability of electricity, natural gas, oil and other
energy resources are subject to volatile market conditions. These market
conditions often are affected by weather, political and economic factors beyond
our control. Disruptions in the supply of our energy resources could temporarily
impair our ability to manufacture our products for our customers. Increases
in
our energy costs could materially adversely affect our business, results of
operations, financial condition and cash flows.
Mill
management may be difficult to replace if they leave.
Management
of the Mill is currently conducted by employees of Pinnacle Steel, LLC pursuant
to a Management Services Agreement which expires October 31, 2009. The loss
of
the services of one or more members of our Mill management team or the inability
to attract, retain and maintain additional Mill management personnel could
harm
our business, financial condition, results of operations and future prospects.
Our operations and prospects depend in large part on the performance of our
Mill
management team. We may not be able to find qualified replacements for any
members of the Mill management team if their services are no longer available.
Our
Chief Executive Officer and Chief Financial Officer have recently tendered
their
resignations and there can be no assurance that suitable replacements will
be
timely retained to fill these positions.
Messrs.
Diamond and Weingarten have each tendered their resignations as officers
of the
Company and each of its subsidiaries, effective as of August 31, 2006 or
earlier if requested by the Company’s Board of Directors. Mr. Diamond will
continue to serve as the Company’s Chairman of the Board of Directors. The
Board
of
Directors anticipates filling these executive positions concurrent with
their vacancy and in any event on or before August 31, 2006. There can be
no assurance that qualified replacements for Messrs. Diamond and Weingarten
will
be timely retained to fill these executive positions.
Our
level of indebtedness and other demands on our cash resources could materially
adversely affect our ability to execute our business strategy.
As
of
September 30, 2005, we had a substantial amount of total
consolidated debt, including current maturities and capital lease obligations.
Subject to the limits contained in our senior credit facility, we may also
incur
additional debt in the future. In addition to interest and principal payments
on
our outstanding debt and dividends and repurchase obligations with respect
to
our preferred stock, we have other demands on our cash resources, including,
among others, capital expenditures that may arise from time to time and
operating expenses.
Indebtedness
levels could have a material effect on our operations and our ability to execute
our business strategy. Currently, our level of indebtedness requires us to
dedicate a substantial portion of our cash flow from operations to payments
on
our debt, thereby reducing the amount of our cash flow available for working
capital, capital expenditures, payment of dividends and other general corporate
purposes. Acquisition Corp. was unable to make a cash interest payment of
$3,200,000 due on February 27, 2006 to the holders of its $40,000,000 of 8%
subordinated secured promissory notes and issued 8% promissory notes due
February 27, 2007 in the principal amount of $3,200,000 to pay such interest.
There can be no assurance that these note holders will continue to accept this
form of interest payment in the future. In addition, Acquisition Corp. has
substantial scheduled principal obligations beginning in fiscal 2007 with
respect to the promissory notes issued in connection with its operation of
the
Mill. See “ITEM
6.
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - Principal
Commitments”.
Our
levels of indebtedness could:
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require
us to raise additional capital through the issuance of equity, which
may
have a dilutive impact to existing
stockholders;
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• |
limit
our flexibility in planning for, or reacting to, changes in the industries
in which we compete;
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• |
place
us at a competitive disadvantage compared to our competitors, some
of
which have less debt service obligations and greater financial resources
than we do;
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• |
limit
our ability to borrow additional
funds;
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• |
increase
our vulnerability to general adverse economic and industry conditions;
and
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result
in our failure to satisfy the financial covenants contained in our
senior
credit facilities or in other agreements governing our indebtedness,
which
could result in an event of default that, if not cured or waived,
could
result in the lenders calling a default under the terms of the
indebtedness or otherwise restrict or eliminate our ability to finance
the
cash requirements of our business.
|
Based
on
our current level operations, we believe that our current internal and external
cash resources will be adequate to fund our operations through September 30,
2006. However, to the extent our estimates and assumptions are inaccurate,
we
may not have sufficient cash resources to fund our operations. In such event,
we
may have to consider a formal or informal restructuring or reorganization,
including a sale or other disposition of its assets.
We
are required to meet certain minimum operating
thresholds.
For
the
nine months ending September 30, 2005, Acquisition Corp., KES Acquisition and
Atacama KES were collectively required to have, on a consolidated basis, in
excess of $4,000,000 of earnings before interest, taxes, depreciation and
amortization, calculated in accordance with generally accepted accounting
principles ("EBITDA"). For each of the fiscal years ending on and
after September 30, 2006, Acquisition Corp., KES Acquisition and Atacama KES
are
collectively required to have, on a consolidated basis, in excess of $7,200,000
of EBITDA. At March 31 of each fiscal year following the fiscal year
ending September 30, 2005 in which the obligations under the Notes remain
outstanding, Acquisition Corp., KES Acquisition and Atacama KES are collectively
required to have, on a consolidated basis, in excess of $3,000,000 of EBITDA
for
the six months then ended.
Effective
September 23, 2005, the holders of the Notes executed an agreement to amend
the
Notes to eliminate the EBITDA requirement for the nine months ending September
30, 2005. There can be no assurances that we will be able to comply with future
EBITDA requirements in the future. To the extent that we are not able to comply
with such requirements, we intend to seek a further amendment of the Notes,
although no assurance can be given that we will be able to obtain amendments
or
waivers if necessary.
To
service our indebtedness, we will require a significant amount of cash, and
our
ability to generate cash depends on many factors beyond our control.
Our
ability to make payments on our indebtedness and to fund any future capital
expenditures will depend on our ability to generate cash in the future. This,
to
a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control.
We
cannot
assure you that our business will generate sufficient cash flow from operations
or that future borrowings will be available to us under our credit facilities
in
an amount sufficient to enable us to pay our indebtedness, or to fund our other
liquidity needs. We may need to refinance all or a portion of our indebtedness,
on or before maturity. We cannot assure you that we will be able to refinance
any of our indebtedness, including our senior credit facilities, on commercially
reasonable terms or at all.
We
may incur variable rate indebtedness that subjects us to interest rate risk,
which could cause our annual debt service obligations to increase significantly.
A
portion
of our current borrowings, namely KES Acquisition’s senior credit facility
(approximately $19,000,000 at September 30, 2005), and possibly future
borrowings, are and may continue to be at variable rates of interest, thus
exposing us to interest rate risk. If interest rates increase, our debt service
obligations on our variable rate indebtedness would increase even if the amount
borrowed remained the same, resulting in a decrease in our net income.
Our
ability and the ability of some of our subsidiaries to engage in some business
transactions may be limited by the terms of our debt.
The
Notes
issued by Acquisition Corp. in connection with the acquisition of the Mill
and
KES Acquisition’s senior credit facility contain a number of financial covenants
requiring them to meet financial ratios and financial condition tests, as well
as covenants restricting their ability to:
•
incur additional debt;
•
make certain capital expenditures;
•
incur or permit to exist liens;
•
enter into transactions with affiliates;
•
guarantee the debt of other entities, including joint ventures;
•
merge or consolidate or otherwise combine with another company; and
•
transfer or sell our assets.
KES
Acquisition’s ability to borrow under its senior credit facility will depend
upon its ability to comply with certain covenants and our borrowing base
requirements. Its ability to meet these covenants and requirements may be
affected by events beyond its control and it may not meet these obligations.
The
failure of KES Acquisition to comply with these covenants and requirements
could
result in an event of default under its senior credit facility that, if not
cured or waived, could terminate its ability to borrow further, permit
acceleration of the relevant debt (and other indebtedness based on cross default
provisions) and permit foreclosure on any collateral granted as security under
its credit facility. There have been certain past covenant violations pursuant
to the senior credit facility which have been waived by the senior lender and
there can be no assurance that future covenant violations will not occur. There
can be no assurance that KES Acquisition’s senior lender will continue to grant
waivers on any future covenant violations.
We
have a significant amount of debt, which, in the event of a default, could
have
material adverse consequences upon us.
Our
total
debt obligations (including preferred stock considered as debt obligations
in
the Company’s consolidated financial statements) is approximately $107,000,000
on a consolidated basis as of September 30, 2005. The degree to which we are
leveraged could have important consequences to us, including the following:
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Except
for periodic tax sharing payments, all of
our cash flows must be used to fund our operations and service our
debt
obligations, including interest, dividends, required principal payments,
and required preferred stock repurchase obligations, and therefore
is not
available for use in our business;
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Our
ability to obtain additional financing for working capital, capital
expenditures, general corporate purposes or other purposes could
be
impaired;
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Our
failure to comply with restrictions contained in the terms of our
borrowings, in particular KES Acquisition’s senior credit facility, could
lead to a default which could cause all or a significant portion
of our
debt to become immediately payable;
and
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• |
If
we default, the loans will become due and we may not have the funds
to
repay the loans, and we could discontinue our business and investors
could
lose all their money.
|
We
rely upon a small number of major customers for a substantial percentage of
our
sales.
A
loss of
any large customer or group of customers could materially reduce our sales
and
earnings. We have substantial business relationships with a few large customers.
In fiscal 2005, our top ten customers accounted for approximately 48% of our
consolidated net sales. During this period, our largest customer accounted
for
approximately 8.5% of our consolidated net sales. We expect to continue to
depend upon a small number of customers for a significant percentage of our
net
sales, and cannot assure you that any of them will continue to purchase steel
from us.
We
could face adverse consequences as a result of our late
SEC filings.
We
failed
to timely file this Form 10-KSB Annual Report, as well as other reports with
the
SEC. As a result, we will not be eligible to use a "short form" registration
statement on Form S-3 for a period of 12 months after becoming current in our
filings. Our inability to use a short form registration statement for a period
of 12 months after becoming current in our SEC reporting obligations may impair
our ability or increase the costs and complexity of our efforts, to raise funds
in the public markets or use our stock as consideration in acquisitions should
we desire to do so. In addition, we may face additional adverse consequences,
including an inability to have a registration statement under the Securities
Act
of 1933 covering a public offering of securities declared effective by the
SEC,
an inability to make offerings pursuant to existing registration statements
(including registration statements on Form S-8 covering employee stock plans)
and limitations on the ability of our affiliates to sell our securities pursuant
to Rule 144 under the Securities Act. These restrictions and adverse
consequences may negatively affect our ability to attract and retain key
employees and may further impair our ability to raise funds in the public
markets should we desire to do so or use our stock as consideration in
acquisitions.
In
addition, our future success depends largely upon the support of our customers,
suppliers and investors. The late
SEC
filings
have
resulted in negative publicity and may have a negative impact on the market
price of our common stock. The effects of the late
SEC
filings
could
cause some of our customers or potential customers to refrain from purchasing
or
defer decisions to purchase our products. Additionally, current or potential
suppliers and other parties may re-examine their willingness to do business
with
us. Any of these developments could have a material adverse effect on our
financial and business prospects.
Recently
enacted and proposed changes in securities laws and regulations may increase
our
costs.
The
Sarbanes-Oxley Act of 2002 that became law in July 2002, as well as rules
subsequently implemented by the Securities and Exchange Commission and the
Nasdaq Stock Market, have required (or will require) changes to some of our
accounting and corporate governance practices, including a report on our
internal controls as required by Section 404 of the Sarbanes-Oxley Act of
2002, which we will be
required to file with our Annual Report on Form 10-KSB for the year ending
September 30, 2007.
In
order
to comply, the Company is required to increase the amount of documentation
surrounding its internal control system and provide evidence that the system
has
been properly tested to support management’s conclusions. The Company has
reported previous issues relating to the adequacy of its internal control system
and there can be no assurance that these deficiencies are rectified or that
other material weaknesses requiring disclosure do not exist. See “ITEM
8A. CONTROLS
AND PROCEDURES” and below.
We
expect
these rules and regulations to continue to create additional costs and overhead
absent the requirement. These rules and regulations have made, and we expect
will continue to make, it more difficult and more expensive for us to obtain
director and officer liability insurance, and we may be required to accept
reduced coverage or incur substantially higher costs to obtain coverage. These
additional expenses have and may continue to reduce our profits or increase
our
losses. These rules and regulations could also make it more difficult for us
to
attract and retain qualified executive officers and qualified members of our
board of directors, particularly to serve on our audit committee.
Our
internal controls and procedures have been materially deficient, and we are
in
the process of correcting internal control deficiencies.
In
the
second quarter of fiscal 2005 following our acquisition of the Mill, the Company
and its independent registered public accounting firm recognized that internal
controls at the Mill had material weaknesses. We are still in the process of
examining and remedying the weaknesses. If we cannot rectify these material
weaknesses through remedial measures and improvements to our systems and
procedures, management may encounter difficulties in timely assessing business
performance and identifying incipient strategic and oversight issues. Management
is currently focused on remedying internal control deficiencies, and this focus
will require management from time to time to devote its attention away from
other planning, oversight and performance functions.
We
cannot
provide assurances as to the timing of the completion of these efforts. We
cannot be certain that the measures we take will ensure that we implement and
maintain adequate internal controls in the future. Any failure to implement
required new or improved controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to fail to meet
our
reporting obligations.
We
may encounter difficulties in effectuating future
acquisitions.
We
acquired the Mill effective March 1, 2005 and may in the future effectuate
further acquisitions. If we identify suitable candidates, we may not be able
to
make investments or acquisitions on commercially acceptable terms. Acquisitions
may cause a disruption in our ongoing business, distract management, require
other resources and make it difficult to maintain our standards, controls and
procedures. We may not be able to retain key employees of the acquired companies
or maintain good relations with their clients or suppliers. It may be required
to incur additional debt and to issue equity securities, which may be dilutive
to existing stockholders, to effect and/or fund acquisitions.
We
cannot assure you that any acquisitions we make will enhance our
business.
We
cannot
assure you that any completed acquisition will enhance our business. Since
we
anticipate that acquisitions could be made with both cash and our common stock,
if we consummate one or more significant acquisitions, the potential impacts
are:
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• |
a
substantial portion of our available cash could be used to
consummate the
acquisitions and/or we could incur or assume significant amounts
of
indebtedness; and
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•
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our
stockholders could suffer significant dilution of their
interest in our
common
stock.
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Also,
we
are required to account for acquisitions under the purchase method, which would
likely result in our recording significant amounts of goodwill or other tangible
and intangible assets. The inability of a subsidiary to sustain profitability
may result in an impairment loss in the value of long-lived assets, principally
goodwill and other tangible and intangible assets, which would adversely affect
our financial statements.
Risks
Related to the Steel Industry
We
may face significant price and other forms of competition from other steel
producers, which could have a material adverse effect on our business, financial
condition, results of operation or prospects.
The
global markets in which steel companies conduct business are highly competitive.
Increased competition could cause us to lose market share or reduce pricing,
either one of which could have a material adverse effect on our business,
financial condition, results of operations or prospects. We compete primarily
on
the basis of price, quality and the ability to meet our customers’ product needs
and delivery schedules. Some of our competitors may have advantages due to
greater capital resources, different technologies, lower raw material costs,
lower energy costs or favorable exchange rates.
In
recent years, imports of steel into the United States have adversely affected,
and may yet again adversely affect, U.S. steel prices, which would impact our
sales, margins and profitability.
Excessive
imports of steel into the United States as a result of excess world supply,
have
in recent years exerted, and may again in the future exert downward pressure
on
U.S. steel prices and significantly reduce our sales, margins and profitability.
U.S. steel producers compete with many foreign producers. Competition from
foreign producers is typically strong, is periodically exacerbated by weakening
of the economies of certain foreign steelmaking countries, and is further
intensified during periods when the U.S. dollar is strong relative to foreign
currencies. Greater steel exports to the United States tend to occur at
depressed prices when steel producing countries experience periods of economic
difficulty, decreased demand for steel products or excess capacity.
Increases
in prices and limited availability of raw materials and energy may constrain
operation levels and reduce profit margins.
Steel
producers require large amounts of raw materials such as scrap. Steel producers
also consume large amounts of energy. Over the last several years, prices for
raw materials and energy have increased significantly. Depending upon applicable
raw material and energy prices, over which we may have little control, we and
other steel producers may be faced in the future with difficulty in obtaining
sufficient raw materials and energy in a timely manner or for reasonable costs,
resulting in potential production curtailments.
Risks
Related to our Common Stock
Regulation
of penny stocks.
The
Company's securities are subject to a Securities and Exchange Commission rule
that imposes special sales practice requirements upon broker-dealers who sell
such securities to persons other than established customers or accredited
investors. For purposes of the rule, the phrase "accredited investors" means,
in
general terms, institutions with assets in excess of $5,000,000, or individuals
having a net worth in excess of $1,000,000 or having an annual income that
exceeds $200,000 (or that, when combined with a spouse's income, exceeds
$300,000). For transactions covered by the rule, the broker-dealer must make
a
special suitability determination for the purchaser and receive the purchaser's
written agreement to the transaction prior to the sale. Consequently, the rule
may affect the ability of broker-dealers to sell the Company's securities.
In
addition, the Securities and Exchange Commission has adopted a number of rules
to regulate "penny stocks." Such rules include Rules 3a51-1, 15g-1, 15g-2,
15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities Exchange
Act
of 1934, as amended. Because the securities of the Company may constitute "penny
stocks" within the meaning of the rules, the rules would apply to the Company
and to its securities. The rules may further affect the ability of owners of
shares to sell the securities of the Company in any market that might develop
for them.
Shareholders
should be aware that, according to Securities and Exchange Commission, the
market for penny stocks has suffered in recent years from patterns of fraud
and
abuse. Such patterns include (i) control of the market for the security by
one
or a few broker-dealers that are often related to the promoter or issuer; (ii)
manipulation of prices through prearranged matching of purchases and sales
and
false and misleading press releases; (iii) "boiler room" practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (iv) excessive and undisclosed bid-ask differentials and markups
by selling broker-dealers; and (v) the wholesale dumping of the same securities
by promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. The Company's management is aware of the abuses
that
have occurred historically in the penny stock market. Although the Company
does
not expect to be in a position to dictate the behavior of the market or of
broker-dealers who participate in the market, management will strive within
the
confines of practical limitations to prevent the described patterns from being
established with respect to the Company's securities.
Holders
may find it difficult to effect transactions in our common stock.
Our
common stock is currently trading on the ‘‘pink sheets’’ under the symbol
‘‘YSTM.PK.’’ Since our common stock is not listed on Nasdaq, Amex or the New
York Stock Exchange, holders of our common stock may find that the liquidity
of
our common stock is impaired—not only in the number of securities that can be
bought and sold, but also through delays in the timing of transactions, lack
of
security analysts’ and the news media’s coverage of us, and lower prices for our
securities than might otherwise be attained.
Securities
that are not listed on a stock exchange, the Nasdaq National Market or the
Nasdaq SmallCap Market are subject to an SEC rule that imposes special
requirements on broker-dealers who sell those securities to persons other than
their established customers and accredited investors. The broker-dealer must
determine that the security is suitable for the purchaser and must obtain the
purchaser’s written consent prior to the sale. These requirements may make it
more difficult for stockholders to sell our stock than the stock of some other
companies. It may also affect our ability to raise more capital if and when
necessary.
Volatility
in the market price of our common stock.
The
market price of our common stock could fluctuate substantially in the future
in
response to a number of factors, including the following:
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our
quarterly operating results or the operating results of other companies
in
the steel industry;
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•
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changes
in general conditions in the economy, the financial markets or
the steel
industry;
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•
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announcements
by us or our competitors of significant acquisitions;
and
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•
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increases
in raw materials and other
costs.
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In
addition, in recent years the stock market has experienced extreme price and
volume fluctuations. This volatility has had a significant effect on the market
prices of securities issued by many companies for reasons unrelated to their
operating performance. These broad market fluctuations may materially adversely
affect our stock price, regardless of our operating results.
The
Company does not currently plan to pay dividends to holders of its common
stock.
The
Company does not currently anticipate paying cash dividends to the holders
of its common stock. Accordingly, holders of the Company’s common stock
must rely upon subsequent price appreciation as the sole method to realize
a
gain on their investment. There can be no assurances that the price of the
Company’s common stock will ever appreciate in value.
The
Company maintains corporate offices at 244 Madison Avenue, PMB #358, New
York, New York 10016.
The
Mill’s operations are located on approximately 126 acres of land near Ashland,
Kentucky, next to an interstate highway and a rail line. All of the Mill’s
facilities are secured by a mortgage in favor of GECC under KES Acquisition’s
existing senior credit facility.
The
Company believes that its facilities are well maintained, in good condition
and
adequate and suitable for its operating needs.
The
Company and/or its subsidiary that owned its former operating business, Beyond
the Wall, have periodically been defendants in various lawsuits and claims
from
various trade creditors and former landlords. Based on the Company’s contract
relating to the sale of the Beyond the Wall assets, certain of these claims
are
the responsibility of the buyer of the Beyond the Wall business. The Company
evaluates its response in each situation based on the particular facts and
circumstances of a claim. Accordingly, the ultimate outcome of these matters
cannot be determined at this time and may ultimately result in judgments and
liens against the Company or its assets. The Company has made sufficient
accruals for the exposure related to such matters that have been deemed probable
and reasonably estimable at September 30, 2005 and 2004.
KES
Acquisition has been named in a wrongful death lawsuit pending before the
Circuit Court of Cabell County, West Virginia, which was filed in December
2004.
The action was brought by Stephanie Harshbarger, individually and as
Administratrix of the Estate of Chad Harshbarger against Aero-Fab, Inc. and
KES
Acquisition. Mr. Harshbarger was an employee of Aero-Fab, Inc., an
unaffiliated contractor, who died while working at the Mill in April 2004.
KES
Acquisition is being defended by its insurance carrier. The Company does not
believe that the resolution of this litigation will have a material adverse
effect on its financial condition or results of operations.
The
Company did not submit any matters to a vote of its security holders during
the
fourth quarter of the fiscal year ended September 30, 2005.
PART
II
Since
June 24, 2005, the Company's common stock has traded on the “Pink Sheets” under
the symbol "YSTM.PK". Prior to such date, the Company’s common stock traded on
the OTC Bulletin Board under the symbol “YSTM”. The following table sets forth
the high and low closing bid prices for the common stock as provided by
Scotrade.com. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
|
|
High
|
|
Low
|
|
Fiscal
2005
|
|
|
|
|
|
|
First
Quarter 12/31/04
|
|
0.48
|
|
0.15
|
|
|
Second
Quarter 3/31/05
|
|
0.54
|
|
0.18
|
|
|
Third
Quarter 6/30/05
|
|
0.30
|
|
0.11
|
|
|
Fourth
Quarter 9/30/05
|
|
0.16
|
|
0.06
|
|
Fiscal
2004
|
|
|
|
|
|
|
First
Quarter 12/31/03
|
|
0.32
|
|
0.12
|
|
|
Second
Quarter 3/31/04
|
|
0.27
|
|
0.16
|
|
|
Third
Quarter 6/30/04
|
|
0.17
|
|
0.11
|
|
|
Fourth
Quarter 9/30/04
|
|
0.27
|
|
0.14
|
|
As
of
June 27, 2006, there were 224 holders of record of the Company's common
stock. To date, the Company has not declared or paid any dividends on its common
stock. The payment by the Company of dividends, if any, is within the discretion
of the board of directors and will depend on the Company's earnings, if any,
its
capital requirements and financial condition, as well as other relevant factors.
The Board of Directors does not intend to declare any dividends in the
foreseeable future but instead intends to retain earnings for use in the
Company's business operations.
Equity
Compensation Plan Information
PLAN
CATEGORY
|
|
NUMBER
OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS,
WARRANTS
AND RIGHTS
|
WEIGHTED-AVERAGE
EXERCISE PRICE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS
|
|
NUMBER
OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER EQUITY
COMPENSATION PLANS
(excluding
securities reflected in column(a) )
|
|
|
|
(a)
|
(b)
|
|
(c)
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
|
1,405,404
|
$0.18
|
|
3,594,596
|
|
Equity
compensation plans not approved by security holders
|
|
-
|
-
|
|
-
|
|
Total
|
|
1,405,404
|
$0.18
|
|
3,594,596
|
|
As
of
June 27, 2006, 5,000,000 options were authorized for issuance under the 2000
Plan, of which options to purchase 1,605,404
shares
were outstanding and options to purchase 3,394,596 shares were available
for future grants.
RECENT
SALES OF UNREGISTERED SECURITIES
None.
ISSUER
PURCHASE OF EQUITY SECURITIES
None.
ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION
General
Overview:
On
February 25, 2004, the Company sold the assets and operations of its Beyond
the
Wall subsidiary (see “Sale of Assets and Operations of Beyond the Wall, Inc.”
below). Beyond the Wall had been engaged in the sale of decorative wall posters
through on-campus sales events, retail stores and internet sales, primarily
to
teenagers and young adults. During the period from October 1, 2003 through
February 25, 2004, Beyond the Wall operated 17 stores in 12 states, plus
Washington, D.C., throughout the East and mid-West, as well as a warehouse
and
distribution center in Stroudsburg, Pennsylvania, and was the Company’s only
revenue-generating business operation. The consolidated financial statements
for
the year ended September 30, 2004 present Beyond the Wall’s operations as a
discontinued operation as a result of the disposal of its assets and operations
on February 25, 2004.
Commencing
March 1, 2005, the Company has included the operations of a steel mini-mill
located in Ashland, Kentucky, which represents the only business segment in
which the Company currently operates, in its consolidated financial statements.
The Company completed the acquisition of this steel mini-mill on March 9, 2005
(see “Acquisition of Steel Mini-Mill” below).
Going
Concern:
The
Company has incurred recurring operating losses since its inception. The
Company
incurred
a net loss of $3,430,562 and a negative cash flow from operating activities
of
$4,300,395 for the year ended September 30, 2005, and had an accumulated deficit
of $347,265,398 and a stockholders' deficiency of $79,600,350 at September
30,
2005. As
of
September 30, 2005, the Company had insufficient capital to fund all of its
obligations on a consolidated basis. These factors raise substantial doubt
about
the Company’s ability to continue as a going concern. The consolidated financial
statements do not include any adjustments to reflect the possible future effect
of the recoverability and classification of assets or the amounts and
classifications of liabilities that may result from the outcome of this
uncertainty. The Company’s independent registered public accounting firm, in its
report dated May 18, 2006, included an explanatory paragraph stating that the
Company’s recurring losses and negative cash flow, accumulated deficit,
stockholders’ deficiency and working capital deficiency, among other factors,
raise substantial doubt about the Company’s ability to continue as a going
concern.
On
March
9, 2005, the Company completed the acquisition of a steel mini-mill located
in
Ashland, Kentucky. The Company utilized substantially all of its available
cash
resources to fund such acquisition and will require additional operating capital
to fund corporate general and administrative expenses, which the Company expects
to obtain primarily through periodic tax sharing payments from Acquisition
Corp.
and Atacama KES. In addition, the steel mini-mill restarted operations in late
January 2004 after being acquired by the previous owners, and until recently
has
incurred losses. For the year ended September 30, 2005, operating income was
$2,691,955 (which included the operations of the steel mini-mill for the seven
month period March through September 2005), exclusive of interest expense.
The
steel mini-mill relies on cash flows from operations to support a secured line
of credit with General Electric Capital Corporation to fund its separate
operations. As a result of improved operating performance of the steel mini-mill
beginning in late 2005, the Company has been able to increase borrowing
availability under this line of credit.
Based
on
its current level of operations, the Company believes that its current cash
resources provided by operations and the secured line of credit will be adequate
to fund its operations through September 30, 2006. However, to the extent the
Company’s estimates are inaccurate or its assumptions are incorrect, the Company
may not have sufficient cash resources to fund its operations. In such event,
the Company may have to consider a formal or informal restructuring or
reorganization, including a sale or other disposition of its
assets.
The
Company’s management may also consider various strategic alternatives in the
future, including the acquisition of new business opportunities, which may
be
from related or unrelated parties. However, there can be no assurances
that such efforts will ultimately be successful. The Company may finance
any acquisitions through a combination of debt and/or equity
securities.
Recent
Developments:
During
September 2005, the Company borrowed $50,000 from certain directors under
short-term unsecured notes due December 31, 2005, with interest at 4% per annum,
to fund corporate general and administrative expenses. The Company repaid the
notes payable to directors subsequent to September 30, 2005 from the proceeds
from the settlement of the Beyond the Wall note receivable, which proceeds
were
received on September 30, 2005, as described below.
Sale
of Assets and Operations of Beyond the Wall, Inc.:
Effective
February 25, 2004, the Company’s wholly-owned subsidiary, Beyond the Wall, Inc.
(“BTW”), sold substantially all of its assets and operations to a group
unaffiliated with the Company (which included certain former management of
BTW),
for $1,920,000, consisting of a cash payment of $820,000 and a subordinated
secured promissory note (the “Note”) for $1,100,000, with interest at 10% per
annum, due October 31, 2006. The buyer had the right to make certain
optional principal pre-payments on the Note by June 30, 2004, which would result
in the principal balance of the Note being adjusted downward, in excess of
such
principal pre-payments, based on an agreed-upon sliding scale as set forth
in
the Note.
On
April
30, 2004, the buyer made an optional principal pre-payment on the Note of
$400,000. Accordingly, under the provisions of the sale agreement, the
buyer received a credit of $106,800 against the $1,100,000 note (in excess
of
the $400,000 payment), as well as an additional $150,000 back-end credit on
the
Note. On October 31, 2004, the buyer made its scheduled principal payment on
the
Note of $197,734, plus accrued interest of $49,493.
On
September 30, 2005, the Company received a cash payment of $258,922 as
settlement in full of the outstanding note receivable with a balance, including
accrued interest, of $281,654, and recognized a loss in connection therewith
of
$22,732.
The
Company initially recognized a loss of $564,921 with respect to the BTW sale
before taking into consideration the effect of the $400,000 principal
pre-payment made on April 30, 2004. Inclusive of such payment, the effect
of the accelerated payment credit and the back-end credit resulted in an
additional loss of $256,800, which decreased the carrying value of the note
receivable from $1,100,000 to $843,200 and increased the loss on the BTW sale
from $564,921 to $821,721. The loss on the BTW sale was reported as a loss
on the disposal of discontinued operations for the year ended September 30,
2004. As a result of the sale, the retail segment operations have been
presented as a discontinued operation for the year ended September 30, 2004.
Acquisition
of Steel Mini-Mill:
In
September 2003, YouthStream invested $125,000 to acquire a 1.00% membership
interest in KES Holdings, LLC, a Delaware limited liability company ("KES
Holdings"), which was formed to acquire certain assets of Kentucky Electric
Steel, Inc., a Delaware corporation ("KES"), consisting of a steel
mini-mill located in Ashland, Kentucky (the “Mill”). On September 2, 2003,
KES Holdings, through its subsidiary, KES Acquisition Company, LLC, a Delaware
limited liability company ("KES Acquisition"), completed the acquisition of
the
Mill pursuant to Section 363 of the United States Bankruptcy Code for cash
consideration of $2,650,000, which was funded through the capital contributions
of the members of KES Holdings. Members’ capital contributions were also used
for start-up costs, working capital purposes and payment of deferred maintenance
of the Mill. KES had ceased production on or about December 16, 2002 and
filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code on February 5, 2003.
The
Mill
had been in operation for approximately forty years and was refurbished by
KES
Acquisition subsequent to its acquisition. The refurbished Mill has been
generating revenues since late January 2004. The current production capacity
of
the Mill for finished products, based on the current operating structure and
hours worked, is approximately 200,000 short-tons per year, and the Mill is
currently operating at approximately 94% of such annualized capacity. Management
is focusing on developing the business and improving operating
efficiencies.
The
Mill
produces bar flats that are produced to a variety of specifications and fall
primarily into two general quality levels - merchant bar quality steel bar
flats
(“MBQ Bar Flats”) for generic types of applications, and special bar quality
steel bar flats (“SBQ Bar Flats”), where more precise customer specifications
require the use of alloys, customized equipment and special production
procedures to insure that the finished product meets critical end-use
performance characteristics.
The
Mill
manufactures over 2,600 different Bar Flat items which are sold to volume niche
markets, including the original equipment manufacturers (“OEMs”), cold drawn bar
converters, steel service centers and the leaf-spring suspension market for
light- and heavy-duty trucks, mini-vans and utility vehicles. The Mill was
specifically designed to manufacture wider and thicker bar flats up to three
inches in thickness and twelve inches in width that are required by these
markets. In addition, the Mill employs a variety of specially designed equipment
which is necessary to manufacture SBQ Bar Flats to the specifications of the
Mill’s customers.
On
March
9, 2005, YouthStream completed the acquisition of KES Acquisition (the
"Acquisition"), which was deemed effective March 1, 2005. Pursuant to definitive
agreements executed with KES Holdings and Atacama Capital Holdings, Ltd., a
British Virgin Islands company ("Atacama", and together with KES Holdings,
collectively, the "Sellers"), YouthStream, through its newly-formed subsidiary,
YouthStream Acquisition Corp., a Delaware corporation ("Acquisition Corp."),
acquired 100% of the membership interests of KES Acquisition by acquiring (i)
a
37.45% membership interest from KES Holdings and (ii) all of the capital stock
of Atacama KES Holding Corporation, a wholly-owned subsidiary of Atacama
(“Atacama KES”) and the owner of the remaining 62.55% membership interest
in KES Acquisition. As consideration for the Acquisition, Acquisition Corp.
issued to the Sellers (i) $40,000,000 in promissory notes (the “Notes”), (ii)
25,000 shares of 13% Series A Non-Convertible Preferred Stock with an aggregate
liquidation value of $25,000,000 (the “13% Series A Preferred Stock”) and (iii)
100% of its authorized shares of Series B Non-Voting Common Stock. With respect
to the $65,000,000 of purchase consideration, $19,000,000 of the Notes and
$10,000,000 of the 13% Series A Preferred Stock were issued to KES Holdings,
and
$21,000,000 of the Notes and $15,000,000 of the 13% Series A Preferred Stock
were issued to Atacama. YouthStream also contributed an aggregate of $500,000
of
cash to Acquisition Corp. as consideration for the issuance by Acquisition
Corp.
of 100% of its Series A Voting Common Stock. In addition, YouthStream will
periodically be required to purchase shares of Series B Preferred Stock of
Acquisition Corp. in amounts equal to distributions it receives on its KES
Holdings membership interest.
As
a
result of these transactions, YouthStream owns 80.01% of the common stock,
and
100% of the voting stock, of Acquisition Corp. The remaining 19.99% common
stock
interest in Acquisition Corp. is owned 62.55% by Atacama and 37.45% by KES
Holdings. YouthStream currently has a 2.67% equity interest in KES Holdings
(this percentage has increased from 1.00% as a result of the redemption of
another member’s interest), as a result of which the Company has eliminated its
$507,000 interest in the Notes and $267,000 interest in the 13% Series A
Preferred Stock in the consolidated balance sheet at September 30, 2005.
YouthStream has consolidated the operations of the Mill through its ownership
of
KES Acquisition commencing March 1, 2005. As a result of the Acquisition, the
Company’s financial statements for periods ending after March 1, 2005 are
materially different from and are not comparable to its financial statements
prior to that date.
Subsequent
to this transaction, the management of the Mill continued unchanged. This
transaction did not result in any change in the Mill’s business operations or
financial condition, and, other than as set forth herein, the working capital,
operating cash flow, debt service obligations and credit profile of the Mill
were not affected in any way by this transaction.
As
described herein, the Notes and 13% Series A Preferred Stock were issued by
Acquisition Corp., the parent company of KES Acquisition. KES Acquisition is
a
separate legal entity that owns and operates the Mill. The Notes are legal
obligations solely of Acquisition Corp., and are not obligations of KES
Acquisition, nor are they secured by the assets or cash flows of the Mill.
In
the future, Acquisition Corp. may grant liens to secure repayment of the Notes,
upon the consent of any senior lender to KES Acquisition at that time. In
addition, the Notes are non-recourse to the assets of YouthStream, except for
the shares of capital stock of Acquisition Corp. that have been pledged by
YouthStream to the holders of the Notes. Pursuant to the terms of the
transaction documentation in connection with the Acquisition and the loan
facility with General Electric Capital Corporation (“GECC”), YouthStream and
Acquisition Corp. are currently limited in their ability to receive cash
distributions from KES Acquisition, but are permitted to receive tax sharing
payments as described below. Any change in control of Acquisition Corp. in
the
future as a result of the holders of the Notes exercising their legal rights
would not reasonably be expected to have a material impact on the operations
or
financial position of the Mill.
The
Notes
are structurally subordinate in right and payment of up to $40,000,000 of senior
debt, including existing debt obligations in favor of GECC. Scheduled principal
payments commence in (i) February 2007 with respect to the $19,000,000 principal
amount of Notes issued in favor of KES Holdings and (ii) February 2011 with
respect to the $21,000,000 principal amount of Notes issued in favor of Atacama.
In addition, the Notes require additional quarterly principal payments out
of
"free cash", as that term is defined in the Note Purchase Agreement. The Notes
bear interest at the rate of 8% per annum, payable annually during the first
two
years of the Note, as provided for in a letter agreement dated as of July 14,
2005 and effective as of February 28, 2005 by and among Acquisition Corp. and
the Note holders, and quarterly thereafter. The obligations of Acquisition
Corp.
under the Notes are secured by a limited guaranty by YouthStream, which guaranty
is secured by and limited in recourse solely to a pledge by YouthStream of
all
of its interest in Acquisition Corp. As of September 30, 2005, the balance
outstanding on the Notes was $39,493,000, and related accrued interest payable
was $1,852,384.
Future
scheduled principal payments on the Notes are summarized as
follows:
Years
Ending September 30,
|
|
KES
Holdings -
$19,000,000
Note
|
|
Atacama
-
$21,000,000
Note
|
|
|
|
|
|
|
|
|
|
2006 |
|
$
|
---
|
|
$
|
---
|
|
2007
|
|
|
1,900,000
|
|
|
---
|
|
2008
|
|
|
950,000
|
|
|
---
|
|
2009
|
|
|
950,000
|
|
|
---
|
|
2010
|
|
|
950,000
|
|
|
---
|
|
2011
|
|
|
2,850,000
|
|
|
4,200,000
|
|
2012
|
|
|
2,850,000
|
|
|
4,200,000
|
|
2013
|
|
|
2,850,000
|
|
|
4,200,000
|
|
2014
|
|
|
---
|
|
|
1,264,000
|
|
2015
|
|
|
5,700,000
|
|
|
7,136,000
|
|
Total
|
|
$
|
19,000,000
|
|
|
21,000,000
|
|
Pursuant
to a further letter agreement dated April 11, 2006 and effective as of February
27, 2006 by and among Acquisition Corp. and the Note holders, the interest
payment of $3,200,000 due on February 27, 2006 was paid by the delivery of
short-term notes due February 27, 2007 in the principal amount of $3,200,000,
with interest at 8% per annum.
For
the
nine months ending September 30, 2005, Acquisition Corp., KES Acquisition and
Atacama KES are collectively required to have, on a consolidated basis, in
excess of $4,000,000 of earnings before interest, taxes, depreciation and
amortization, calculated in accordance with generally accepted accounting
principles ("EBITDA"). For each of the fiscal years ending on and
after September 30, 2006, Acquisition Corp., KES Acquisition and Atacama KES
are
collectively required to have, on a consolidated basis, in excess of $7,200,000
of EBITDA. At March 31 of each fiscal year following the fiscal year
ending September 30, 2005 in which the obligations under the Notes remain
outstanding, Acquisition Corp., KES Acquisition and Atacama KES are collectively
required to have, on a consolidated basis, in excess of $3,000,000 of EBITDA
for
the six months then ended. Effective September 23, 2005, the holders of the
Notes executed an agreement to amend the Notes to eliminate the requirement
that
Acquisition Corp., KES Acquisition and Atacama KES collectively have, on a
consolidated basis, in excess of $4,000,000 of EBITDA for the nine months ending
September 30, 2005.
The
holders of each share of 13% Series A Preferred Stock are entitled to receive
a
cumulative dividend at an annual rate of 13% of the sum of $1,000 and all
accrued but unpaid dividends. The 13% Series A Preferred Stock contains a
liquidation preference equal to $1,000 per share, plus accrued but unpaid
dividends, and is redeemable out of, and to the extent of, legally available
funds, at a redemption price equal to the sum of $1,000 and all accrued but
unpaid dividends on the earlier to occur of (i) any liquidation of Acquisition
Corp., (ii) the occurrence of an event of default under the Note Purchase
Agreement pursuant to which the Notes were issued or (iii) the first anniversary
of Acquisition Corp.’s full and complete repayment of the Notes. In addition,
beginning with the second anniversary of the initial issuance of the 13% Series
A Preferred Stock, Acquisition Corp. will be required to use "free cash", as
that term is defined in the Securities Purchase Agreement, to commence redeeming
shares of 13% Series A Preferred Stock in increments of at least $4,000,000,
with limited exceptions. As of September 30, 2005, the balance outstanding
on
the 13% Series A Preferred Stock was $24,733,000, and related accrued dividends
payable were $1,885,129.
Since
the
acquisition of the Mill by the Sellers, the Mill has been operating under a
Management Services Agreement with Pinnacle Steel, LLC (the "Pinnacle
Agreement"), which agreement remained in effect following the closing. The
principals of Pinnacle Steel LLC that manage the Mill have significant
experience and expertise in the steel industry. The Pinnacle Agreement will
remain in effect through January 31, 2009, subject to earlier termination or
extension based on the financial performance of the Mill. Pinnacle is entitled
to a monthly management fee and a management incentive fee as provided in the
Pinnacle Agreement.
Subsequent
to the acquisition of the Mill by the Sellers, KES Acquisition issued an
aggregate of $7,000,000 of subordinated promissory notes to the Sellers and
certain of their respective affiliates (the “Subordinated Promissory Notes”).
The proceeds from the Subordinated Promissory Notes were used to accelerate
the
development and expansion of the Mill’s operations. The Subordinated Promissory
Notes bear interest at the rate of 12% per annum, with interest payable monthly,
subject to compliance with various agreements and covenants, are secured by
a
subordinated security interest in all of the assets of KES Acquisition, and
are
subject to an Intercreditor and Subordination Agreement dated March 24, 2004
with GECC. When originally issued, principal and interest were due and payable
upon the earlier to occur of (i) an event of default under the Loan and Security
Agreement with GECC or (ii) each note’s respective due date, which ranged from
March 31, 2005 to December 31, 2005. As of September 30, 2005, the due dates
of
the notes had all been extended to December 31, 2006, if not repaid earlier.
At
September 30, 2005, accrued interest payable with respect to the Subordinated
Promissory Notes was $1,085,753, almost all of which was paid subsequent to
fiscal year end.
Related
parties with respect to this transaction are summarized as follows: Robert
Scott
Fritz, a director of YouthStream, is an investor in KES Holdings. Hal G.
Byer,
another director of YouthStream, is an employee of affiliates of Libra/KES
Investment I, LLC ("Libra/KES"), the Manager of KES Holdings, and has an
economic interest in KES Holdings through his relationship with Libra
Securities, LLC ("Libra Securities"). Jess M. Ravich, a director of YouthStream
effective June 26, 2006, is a principal of Libra/KES. In addition, affiliates
of
Mr. Ravich, including a trust for the benefit of Mr. Ravich and certain of
his
family members (the “Ravich Trust”) are investors in KES Holdings. Mr. Ravich,
either directly or through the Ravich Trust, holds 1,860,000 shares of
YouthStream's common stock, warrants to purchase 500,000 shares of YouthStream's
common stock exercisable through August 31, 2008, 1,000,000 shares of
YouthStream's redeemable preferred stock and an option to purchase 200,000
shares of YouthStream’s common stock exercisable through June 26, 2013, which
was issued to Mr. Ravich under YouthStream’s 2000 Stock Option Incentive Plan in
connection with his election to the Board. Through his positions at Libra/KES,
Mr. Ravich managed the business of KES Acquisition through February 28, 2005.
Subordinated Promissory Notes with a principal amount of $1,650,000 and $450,000
are payable to the Ravich Trust and Libra Securities
Holdings, LLC,
the
parent of Libra Securities, respectively. Mr. Fritz and Mr. Byer have each
previously acquired an option from the Ravich Trust for $2,500 ($0.04 per
share)
to purchase 62,500 shares of YouthStream's redeemable preferred stock issued
to
the Ravich Trust in January 2003, exercisable at $0.36 per share until December
31, 2006 or earlier upon the occurrence of certain events.
The
Acquisition was accounted for as a purchase in accordance with SFAS No. 141,
“Business Combinations”, and in accordance with Emerging Issues Task Force
(EITF) No. 88-16, “Basis in Leveraged Buyout Transactions”. As a result of the
substantial and continuing relationships between YouthStream and the Sellers,
and the provisions of EITF 88-16 that are required to be considered when
determining the extent of fair value/predecessor basis to be used in recording
the transaction, the Acquisition has been recorded at predecessor basis. Since
the debt and equity held by the Sellers represented almost the entire amount
of
capital at risk both before and after the Acquisition, the application of the
“monetary test” specified in Section 3 of EITF 88-16, which limits the portion
of the purchase consideration that can be valued at fair value to the percentage
of the total consideration that is monetary, was utilized by the Company in
determining to record the transaction at predecessor basis. The excess of the
purchase price over predecessor basis of the net assets acquired has been
reflected as a deemed distribution of $63,104,423 to the Sellers at the date
of
acquisition in the consolidated financial statements.
For
taxable periods beginning after February 28, 2005, Acquisition Corp. and Atacama
KES are included in the consolidated federal income tax return filed by
YouthStream as the common parent. Acquisition Corp. and Atacama KES have
entered into a Tax Sharing Agreement with YouthStream, pursuant to which they
have agreed to pay YouthStream an amount equal to 50% of their respective
“separate company tax liability”, subject to compliance with the GECC secured
line of credit. The term “separate company tax liability” is defined as
the amount, if any, of the federal income tax liability (including, without
limitation, liability for any penalty, fine, additions to tax, interest, minimum
tax and other items applicable to such subsidiary in connection with the
determination of the subsidiary’s tax liability), which such subsidiary
would have incurred if its federal income tax liability for the periods during
which it is includible in a consolidated federal income tax return with
YouthStream were determined generally in the same manner in which its
separate return liability would have been calculated under Section 1552(a)(2)
of
the Internal Revenue Code of 1986, as amended. YouthStream has
approximately $255,000,000 of federal net operating loss carryovers currently
available to offset the consolidated federal taxable income of the affiliated
group in the future.
The
total
purchase price of $65,000,000, as well as the terms and conditions of the Notes
and 13% Series A Preferred Stock issued to the Sellers, were determined to
be at fair value based on reports prepared by an independent valuation firm.
The
following table summarizes the assets acquired and liabilities assumed at
predecessor basis at February 28, 2005.
Assets
Acquired:
|
|
|
|
Cash
|
|
$
|
913,194
|
|
Accounts
receivable
|
|
|
10,781,836
|
|
Allowance
for doubtful accounts
|
|
|
(328,351
|
)
|
Inventories
|
|
|
18,762,218
|
|
Prepaid
expenses and other current assets
|
|
|
904,271
|
|
Property,
plant and equipment
|
|
|
6,630,012
|
|
Accumulated
depreciation and amortization
|
|
|
(639,254
|
)
|
Due
from YouthStream Acquisition Corp.
|
|
|
187,702
|
|
Other
non-current assets
|
|
|
721,393
|
|
|
|
|
|
|
Total
assets acquired
|
|
|
37,933,021
|
|
|
|
|
|
|
Liabilities
Assumed:
|
|
|
|
|
Accounts
payable
|
|
|
9,566,327
|
|
Accrued
expenses
|
|
|
1,267,016
|
|
Accrued
interest payable
|
|
|
593,260
|
|
Deferred
rent
|
|
|
165,413
|
|
Subordinated
promissory notes payable
|
|
|
7,000,000
|
|
Line
of credit
|
|
|
15,495,095
|
|
Equipment
contract payable
|
|
|
291,223
|
|
Capital
lease obligation
|
|
|
1,877,179
|
|
|
|
|
|
|
Total
liabilities assumed
|
|
|
36,255,513
|
|
|
|
|
|
|
Net
assets acquired
|
|
|
1,677,508
|
|
|
|
|
|
|
Adjustment
to recognize minority interest
|
|
|
(331,981
|
)
|
|
|
|
|
|
|
|
$
|
1,345,527
|
|
|
|
|
|
|
Total
purchase consideration, net of intercompany eliminations of 2.67%
interest
held by KES Holdings:
|
|
|
|
|
8%
Subordinated secured promissory notes payable
|
|
$
|
39,493,000
|
|
13%
Series A preferred stock
|
|
|
24,733,000
|
|
|
|
|
|
|
Net
purchase consideration
|
|
|
64,226,000
|
|
|
|
|
|
|
Minority
interests in equity
|
|
|
223,950
|
|
|
|
|
|
|
Adjustment
to record deemed distribution to Sellers
|
|
|
(63,104,423
|
)
|
|
|
|
|
|
|
|
$
|
1,345,527
|
|
The
amount due from Acquisition Corp. of $187,702 represents costs incurred by
KES Acquisition with respect to the Acquisition, which were included in the
$1,171,406 of transaction costs related to the Acquisition charged to operations
during the year ended September 30, 2005.
As
of
September 30, 2004, the Company had incurred $175,144 of costs with respect
to
the Acquisition, which were presented as deferred costs in the Company’s
consolidated balance sheet at such date. These costs were included in the
$1,171,406 of transaction costs related to the Acquisition charged to operations
during the year ended September 30, 2005.
Minority
interest - related parties was $430,931 on February 28, 2005. For the year
ended
September 30, 2005, the net loss of Acquisition Corp. allocable to the 19.99%
minority shareholders was $681,698, but the reduction to minority interest
-
related parties was limited to the balance at February 28, 2005 of $430,931.
Accordingly, the remainder of the net loss of Acquisition Corp. allocable to
the
19.99% minority shareholders for the year ended September 30, 2005 of $250,767
was included in the Company’s consolidated statement of operations for the year
ended September 30, 2005, and will be recovered to the extent that Acquisition
Corp. generates net income in future periods.
Pro
Forma Information
The
following pro forma operating data presents the results of operations for the
years ended September 30, 2005 and 2004, as if the Acquisition had occurred
on
the last day of the immediately preceding fiscal year. Accordingly, transaction
costs of $1,171,406 related to the Acquisition for the year ended September
30,
2005 are not included in the net loss from continuing operations shown below.
In
addition, discontinued operations for the year ended September 30, 2004 are
not
included. The Mill commenced generating revenues in late January 2004. The
pro
forma results are not necessarily indicative of the financial results that
might
have occurred had the Acquisition actually taken place on the respective dates,
or of future results of operations. Pro
forma
information for the years ended September 30, 2005 and 2004 is summarized as
follows:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
113,786,971
|
|
$
|
48,944,338
|
|
Cost
of sales
|
|
|
105,265,441
|
|
|
51,158,622
|
|
Gross
margin (deficit)
|
|
|
8,521,530
|
|
|
(2,214,284
|
)
|
Operating
income (loss)
|
|
|
3,169,836
|
|
|
(7,469,548
|
)
|
Interest
expense
|
|
|
(9,469,875 |
) |
|
(7,243,971 |
) |
Minority
interest
|
|
|
199,109 |
|
|
199,109 |
|
Net
loss from continuing operations
|
|
$
|
(5,786,987
|
)
|
$
|
(14,134,628
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
$
|
(0.15
|
)
|
$
|
(0.36
|
)
|
Weighted
average common shares outstanding
|
|
|
39,242,251
|
|
|
39,242,251 |
|
Critical
Accounting Policies and Estimates:
The
Company prepared its financial statements in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires the use of estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amount of revenues and expenses during the reporting period. Management
periodically evaluates the estimates and judgments made. Management bases its
estimates and judgments on historical experience and on various factors that
are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates as a result of different assumptions or
conditions.
The
following critical accounting policies affect the more significant judgments
and
estimates used in the preparation of the Company’s financial statements.
Revenue
Recognition:
The
Company recognizes revenue when there is persuasive evidence that an arrangement
exists, delivery of the product has occurred and title has passed, the selling
price is both fixed and determinable, and collectibility is reasonably assured,
all of which generally occur either upon shipment of the Company’s product or
delivery of the product to the destination specified by the
customer.
Accounts
Receivable:
The
Company grants credit to its customers generally in the form of short-term
trade
accounts receivable. Management evaluates the credit risk of its customers
utilizing historical data and estimates of future performance. Accounts
receivable are stated at the amount management expects to collect from
outstanding balances. When appropriate, management provides for probable
uncollectible amounts through a provision for doubtful accounts and an
adjustment to a valuation allowance. Management reviews and adjusts this
allowance periodically based on the aging of accounts receivable balances,
historical write-off experience, customer concentrations, customer
creditworthiness, and current industry and economic trends. Balances that are
still outstanding after management has used reasonable collection efforts are
written off through a charge to the valuation allowance and a credit to accounts
receivable.
Inventories:
Inventories
are comprised of raw materials (consisting of billets and scrap metal),
semi-finished goods and finished goods. Inventory costs include material, labor
and manufacturing overhead. Inventories are valued at the lower of average
cost
or market. The average cost of the billets and scrap metal is adjusted
quarterly.
Impairment
of Assets:
Long-lived
assets are evaluated for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable in
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”. An asset is considered impaired if its carrying amount
exceeds the future net cash flow the asset is expected to generate. If an asset
is considered to be impaired, the impairment to be recognized is measured by
the
amount by which the carrying amount of the asset exceeds its fair market value.
The recoverability of long-lived assets is assessed by determining whether
the
unamortized balances can be recovered through undiscounted future net cash
flows
of the related assets. The amount of impairment, if any, is measured based
on
projected discounted future net cash flows using a discount rate reflecting
the
Company’s average cost of capital.
Income
Taxes:
The
Company accounts for income taxes in accordance with SFAS No. 109,
“Accounting for Income Taxes”. Under this method, deferred income taxes are
provided for differences between the carrying amounts of the Company’s assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes using expected tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. KES Acquisition
Company is a limited liability company and as such does not provide for federal
and state income taxes. Rather, its income is taxed to its members.
The
Company records a valuation allowance to reduce its deferred tax assets to
the
amount that is more likely than not to be realized. In the event the Company
was
to determine that it would be able to realize its deferred tax assets in the
future in excess of its recorded amount, an adjustment to the deferred tax
assets would be credited to operations in the period such determination was
made. Likewise, should the Company determine that it would not be able to
realize all or part of its deferred tax assets in the future, an adjustment
to
the deferred tax assets would be charged to operations in the period such
determination was made.
Recent
Accounting Pronouncements and Developments:
In
December 2004, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 123 (revised 2004), “Share Based Payment”
(“SFAS No. 123R”), a revision to SFAS No. 123, “Accounting for
Stock-Based Compensation”. SFAS No. 123R supersedes Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and
amends SFAS No. 95, “Statement of Cash Flows”. SFAS No. 123R requires
that the Company measure the cost of employee services received in exchange
for
equity awards based on the grant date fair value of the awards. The cost will
be
recognized as compensation expense over the vesting period of the awards. The
Company was required to adopt SFAS No. 123R effective January 1,
2006. Under this method, the Company will begin recognizing compensation cost
for equity-based compensation for all new or modified grants after the date
of
adoption. The pro forma disclosures previously permitted under SFAS No. 123
will no longer be an alternative to financial statement recognition. In
addition, the Company will recognize the unvested portion of the grant date
fair
value of awards issued prior to adoption based on the fair values previously
calculated for disclosure purposes over the remaining vesting period of the
outstanding options and warrants.
Public
companies are permitted to adopt the requirements of SFAS No. 123R using
one of two methods:
(1) A
“modified prospective” method in which compensation cost is recognized beginning
with the effective date (a) based on the requirements of SFAS No. 123R
for all share-based payments granted after the effective date and (b) based
on the requirements of SFAS No. 123R for all awards granted to employees
prior to the effective date of SFAS No. 123R that remain unvested on the
effective date.
(2) A
“modified retrospective” method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based
on the amounts previously recognized under SFAS No. 123 for purposes of pro
forma disclosures for either (a) all prior periods presented or
(b) prior interim periods of the year of adoption.
The
Company will adopt SFAS No. 123R effective January 1, 2006 and will
use the modified prospective method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS
No. 123R for all share-based payments granted after the effective date and
(b) based on the requirements of SFAS No. 123R for all awards granted
to employees prior to the effective date of SFAS No. 123R that remain
unvested on the effective date. Although the expense for stock options that
may be vested or granted in future periods cannot be determined at this
time due to the uncertainty of the vesting or timing of future grants, the
Company’s future stock price, and the related fair value calculation, the
adoption of SFAS No. 123R could have a material effect on the Company’s
future financial statements.
In
November 2004, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 151, “Inventory Costs — An Amendment of ARB No. 43,
Chapter 4” (SFAS No. 151). SFAS No. 151 clarifies that abnormal
amounts of idle facility expense, freight, handling costs and spoilage should
be
expensed as incurred and not included in overhead. Further, SFAS No. 151
requires that allocation of fixed and production facilities overhead to
conversion costs should be based on normal capacity of the production
facilities. The provisions in SFAS No. 151 are effective for inventory
costs incurred during fiscal years beginning after June 15, 2005.
Accordingly, the Company adopted SFAS No. 151 effective October 1, 2005. The
adoption of SFAS No. 151 did not have any impact on the Company’s financial
statement presentation or disclosures.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
Assets, an amendment to APB Opinion No. 29” (“SFAS No. 153”). SFAS No.
153 amends Accounting Principles Board Opinion No. 29, “Accounting for
Nonmonetary Transactions”, to require that exchanges of nonmonetary assets be
measured and accounted for at fair value, rather than at carryover basis, of
the
assets exchanged. Nonmonetary exchanges that lack commercial substance are
exempt from this requirement. SFAS No. 153 is effective for nonmonetary
exchanges entered into in fiscal periods beginning after June 15, 2005.
Accordingly, the Company adopted SFAS No. 153 effective July 1, 2005. The
adoption of SFAS No. 153 did not have any impact on the Company’s financial
statement presentation or disclosures.
In
May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections” (“SFAS No. 154”). SFAS No. 154 is a replacement of APB
Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting
Accounting Changes in Interim Financial Statements - (an Amendment of APB
Opinion No. 28)” and provides guidance on the accounting for and reporting
of accounting changes and error corrections. SFAS No. 154 establishes
retrospective application as the required method for reporting a change in
accounting principle, and provides guidance for determining whether
retrospective application of a change in accounting principle is impracticable
and for reporting a change when retrospective application is impracticable.
Retrospective application is the application of a different accounting principle
to a prior accounting period as if that principle had always been used or as
the
adjustment of previously issued financial statements to reflect a change in
the
reporting entity. SFAS No. 154 also addresses the reporting of the
correction of an error by restating previously issued financial statements.
SFAS
No. 154 is effective for accounting changes and error corrections occurring
in fiscal years beginning after December 15, 2005. Accordingly, the Company
will adopt the provisions of SFAS No. 154 effective October 1, 2006. The
adoption of SFAS No. 154 is not expected to have any impact on the Company’s
financial statement presentation or disclosures.
On
September 22, 2005, the Securities and Exchange Commission (“SEC”) issued
rules to delay by one-year the required reporting by management on internal
controls over financial reporting for non-accelerated filers. The new SEC
rule extends the compliance date for such registrants to fiscal years
ending on or after July 15, 2007. Accordingly, the Company qualifies for
the deferral until its year ending September 30, 2007 to comply with the
internal control reporting requirements.
Results
of Operations:
The
operations of Beyond the Wall have been presented as a discontinued operation
in
2004. Accordingly, for the year ended September 30, 2004, the Company did not
have any revenues or cost of revenues from continuing operations.
The
refurbished Mill restarted operations in late January 2004 and completed its
ramp-up phase and reached full operating status in August 2004. The Company
acquired the Mill effective February 28, 2005, and the operations of the Mill
have been consolidated commencing March 1, 2005. Sales and cost of sales were
generated by the operations of the Mill during 2005. The Company’s results of
operations for the year ended September 30, 2005 include the Mill’s operations
for seven months (March through September 2005). As a result of the acquisition
of the Mill, the Company’s financial statements for periods ending after March
1, 2005 are materially different from and are not comparable to its financial
statements prior to that date.
Years
Ended September 30, 2005 and 2004:
Net
Sales. Net sales were $69,182,475 for the year ended September 30, 2005, an
average of $9,883,211 per month for the seven months that the Company owned
the
Mill. If the Company had owned the Mill for the full years ended September
30,
2005 and 2004, pro forma net sales would have been $113,786,971 for 2005 (an
average of $9,482,248 per month), as compared to pro forma net sales of
$48,944,338 for 2004 (an average of $4,078,695 per month), since the Mill
restarted operations in late January 2004 and did not reach full operating
status until August 2004.
Cost
of
Sales. Cost of sales was $62,939,014 for the year ended September 30, 2005,
resulting in gross profit of $6,243,461 and a gross profit margin of 9.0%.
If
the Company had owned the Mill for the full year ended September 30, 2005,
pro
forma gross profit margin would have been 7.5%. Due to the restart of Mill
operations in late January 2004, a comparison of 2004 cost of sales amounts
(assuming that the Company had owned the Mill for the full year ended September
30, 2004) to 2005 cost of sales amounts would not be meaningful, since pro
forma
gross profit and gross margin were negative in 2004.
Selling
Expenses. For the year ended September 30, 2005, selling expenses were $735,381
or 1.1% of sales. The Company did not have any selling expenses for the year
ended September 30, 2004. Selling expenses consist primarily of sales
commissions and personnel-related costs.
Selling,
General
and Administrative Expenses. For the year ended September 30, 2005, general
and
administrative expenses were $2,816,125 or 4.1% of sales.
The
Company incurred corporate general and administrative expenses during the entire
year ended September 30, 2005, but only had operating revenues for the last
seven months of the year ended September 30, 2005. For the year ended September
30, 2004, general and administrative expenses were $1,090,256, which reflected
corporate general and administrative expenses, including management
compensation, legal and accounting fees and insurance costs.
Operating
Income. Operating income was $2,691,955 for the year ended September 30, 2005,
as compared to an operating loss of $1,090,256 for the year ended September
30,
2004.
Interest
Income. Interest income was $45,542 for the year ended September 30, 2005,
as
compared to $49,566 for the year ended September 30, 2004.
Interest
Expense. For the year ended September 30, 2005, interest expense was $5,607,454,
which included interest expense related to the 8% notes payable of $1,852,384
and the 13% Series A Preferred Stock of $1,885,129 issued in conjunction with
the acquisition of the Mill, the 12% notes payable of $492,493 and the 4% notes
payable of $42,758. For the year ended September 30, 2004, interest expense
was
$41,509.
Transaction
Costs Related to KES Acquisition. The
Company incurred $1,171,406 of costs with respect to the acquisition of the
Mill
(primarily legal and accounting fees), which were charged to operations during
the year ended September 30, 2005. Included in such costs was $187,702 of
transaction costs incurred by KES Acquisition prior to February 28, 2005.
Gain
on
Settlement of Compensation Obligations. During the year ended September 30,
2005, the Company recognized a gain on settlement of compensation obligations
of
$225,948 as a result of the settlement of various contractual compensation
obligations at less than amounts that had been previously accrued.
Other
Income (Expense). For the year ended September 30, 2005, other expense was
$46,078. There was no other income (expense) for the year ended September 30,
2004.
Loss
before Income Taxes and Minority Interest. The loss before income taxes and
minority interest was $3,861,493 for the year ended September 30, 2005, as
compared to $1,082,199 for the year ended September 30, 2004.
Income
Taxes. For the year ended September 30, 2004, the Company recorded a benefit
from income taxes of $88,372. The Company did not record any provision for
or
benefit from income taxes for the year ended September 30, 2005.
Loss
before Minority Interest. The loss before minority interest was $3,861,493
for
the year ended September 30, 2005, as compared to $993,827 for the year ended
September 30, 2004.
Minority
Interest - Related Parties. For the year ended September 30, 2005, minority
interest was $430,931, reflecting the minority interest’s share in the loss of
YouthStream Acquisition Corp., an 80.01%-owned consolidated
subsidiary.
Loss
from
Continuing Operations. The loss from continuing operations was $3,430,562 for
the year ended September 30, 2005, as compared to $993,827 for the year ended
September 30, 2004.
Loss
from
Discontinued Operations. For the year ended September 30, 2004, the Company
had
a loss from discontinued operations of $1,371,793, which related to the former
operations of Beyond the Wall. The loss from discontinued operations of $550,072
for the year ended September 30, 2004 consisted of an operating loss of
$1,050,072, offset by a gain of $500,000 resulting from the reduction of a
prior
accrual with respect to the closing of retail stores as a result of the Company
completing settlements with landlords below what had been originally accrued.
The Company also had a loss on the disposal of discontinued operations of
$821,721 for the year ended September 30, 2004, as a result of the sale of
the
assets and operations of Beyond the Wall in February 2004.
Net
Loss.
Net loss was $3,430,562 for the year ended September 30, 2005, as compared
$2,365,620 for the year ended September 30, 2004.
Liquidity
and Capital Resources - September 30, 2005:
On
March
9, 2005, YouthStream completed the acquisition of the Mill. In connection with
the Company’s acquisition and consolidation of the Mill, the Company also
acquired
$913,194 of cash. The
Company used substantially all of its available cash resources to fund the
acquisition of the Mill, including its contribution of an aggregate of $500,000
of cash to Acquisition Corp. and the payment of the costs related to the
transaction. Accordingly, the Company will require additional operating capital
to fund corporate general and administrative expenses, which the Company expects
to obtain primarily through periodic tax sharing payments from Acquisition
Corp.
and Atacama KES. The Mill relies on cash flows from operations to support a
secured line of credit with GECC to fund its separate operations. As a result
of
improved operating performance of the Mill beginning in late 2005, the Company
has been able to increase borrowing availability under this
line of
credit.
As
of
September 30, 2005, the balance outstanding on the line of credit was
$19,009,379, which has been presented as a current liability in the consolidated
balance sheet at such date due to the collateral securing such line of credit
consisting primarily of current assets and the continuing uncertainty with
respect to the Company’s ability to maintain compliance under the terms and
conditions of the line of credit.
At
March
31, 2005, KES Acquisition was not in compliance with the fixed charge coverage
ratio based on its consolidated financial statements as originally filed,
in
part relating to changes to its accounting procedures as a result of the
review
of its financial statements conducted in conjunction with its acquisition
by
YouthStream, and subsequently received a waiver of default from GECC. At
June
30, 2005, KES Acquisition was in compliance with the fixed charge coverage
ratio
based on its consolidated financial statements as originally filed. However,
KES
Acquisition was not in compliance with the fixed charge coverage ratio at
June
30, 2005 based on its revised consolidated financial statements, as a result
of
a determination by management to re-characterize a lease for certain equipment
used by KES Acquisition as a capital lease rather than an operating lease.
In
addition, KES Acquisition was not in compliance with its obligation to deliver
audited financial statements in the form and time period as set forth in
the
loan agreement. On June 26, 2006, the Company received a waiver of
default from GECC with respect to the fixed charge coverage ratio for the
restated March 31, 2005 and June 30, 2005 interim financial statements, as
well
as with respect to the form and timeliness of the September 30, 2005 annual
audited financial statements being provided to GECC.
At
September 30, 2005, KES Acquisition was in compliance with the fixed charge
coverage ratio based on its consolidated financial statements.
In
the
event that KES Acquisition is not in compliance with the fixed charge coverage
ratio in any future period, the Company intends to seek a further waiver of
any
default from GECC, and if no such waiver is received, GECC would have the right
to accelerate the maturity of the line of credit at that time.
To
the
extent that the Mill generates taxable income in the future, the Tax Sharing
Agreement with Acquisition Corp. and Atacama KES will generate cash payments
to
YouthStream equal to 50% of their respective “separate company tax liability”,
subject to compliance with the GECC secured line of credit. At September 30,
2005, the estimated tax sharing payment due to YouthStream was approximately
$342,000, which was received in early 2006. YouthStream has approximately
$255,000,000 of federal net operating loss carryovers currently available to
offset any federal income tax liability of Acquisition Corp and Atacama KES
in
subsequent periods. YouthStream expects that its federal net operating loss
carryovers will be sufficient to absorb most of any future federal income tax
liability of Acquisition Corp. and Atacama KES.
The
Mill
restarted operations in January 2004 after being acquired by the previous
owners, and has incurred losses until recently. The long-term economic viability
of the Mill and its ability to fund its operations and debt service
requirements, including maintaining compliance with various debt covenants
and
servicing the interest and principal obligations on the Notes and the dividends
and redemption features on the 13% Series A Preferred Stock issued in connection
with the acquisition of the Mill, is dependent on various internal and external
factors, including the Mill’s ability to operate on a sustained basis at 80% or
more of its annual capacity of 200,000 tons per year, as currently configured.
To the extent that the Mill is not able to maintain this operating threshold,
the ability of the Mill to generate sufficient cash flows to fund its operations
and debt service requirements and maintain compliance with various debt
covenants may be impaired. In such event, the Company may have to consider
a
formal or informal restructuring or reorganization, including a sale or other
disposition of its assets.
Almost
all of the Company’s net assets are owned by KES Acquisition, a consolidated
subsidiary. As a result of various contractual restrictions contained in
various financing agreements (as previously described) and documents relating
to
the Acquisition, there are limits on the Company’s ability to transfer assets
from KES Acquisition to Youthstream, whether in the form of loans and advances,
cash dividends, tax-sharing payments, or otherwise, without notice to and/or
consent of one or more third parties. A summary of the Company’s
restricted and unrestricted assets, liabilities and equity at September 30,
2005
is presented below.
|
|
Unrestricted
|
|
Restricted
|
|
As
Reported
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
261,740
|
|
$
|
35,453,821
|
|
$
|
35,715,561
|
|
Property,
plant and equipment, net
|
|
|
-
|
|
|
5,567,745
|
|
|
5,567,745
|
|
Other
assets
|
|
|
-
|
|
|
638,948
|
|
|
638,948
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
261,740
|
|
$
|
41,660,514
|
|
$
|
41,922,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
4,224,995
|
|
$
|
30,411,237
|
|
$
|
34,636,232
|
|
Non-current
liabilities
|
|
|
78,257,234
|
|
|
8,629,138
|
|
|
86,886,372
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings (accumulated deficit)
|
|
|
(348,435,183
|
)
|
|
1,169,785
|
|
|
(347,265,398
|
)
|
Other
|
|
|
266,214,694
|
|
|
1,450,354
|
|
|
267,665,048
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$
|
261,740
|
|
$
|
41,660,514
|
|
$
|
41,922,254
|
|
Operating
Activities. During the year ended September 30, 2005, the Company used
$4,300,395 of cash in operating activities, both to fund the corporate overhead
of YouthStream for the year ended September 30, 2005 and to fund the operations
of the Mill for a period of seven months from the date of acquisition through
September 30, 2005. During the year ended September 30, 2004, the Company used
$901,442 of cash in operating activities, primarily to fund its loss from
continuing operations of $993,827 for the year ended September 30, 2004, which
consisted of corporate general and administrative expenses.
Investing
Activities. During the year ended September 30, 2005, net cash provided by
investing activities of $506,149 consisted of principal and interest payments
on
the Beyond the Wall note receivable that the Company received in the February
2004 sale of the assets and operations of Beyond the Wall. During the year
ended
September 30, 2004, net cash provided by investing activities of $1,044,856
consisted of the proceeds received from the sale of the Beyond the Wall assets
and operations in February 2004 of $820,000 and principal payments on the Beyond
the Wall note receivable of $400,000, reduced by deferred costs related to
the
KES transaction of $175,144.
Financing
Activities. During the year ended September 30, 2005, net cash provided by
financing activities was $3,205,007, consisting of $3,389,284 from increased
borrowings under the secured line of credit with GECC and $50,000 from the
proceeds from short-term notes payable issued to certain directors, reduced
by
payments on an equipment contract payable and capital lease obligation of
$234,277. During the year ended September 30, 2004, the Company did not generate
or use any cash in financing transactions.
Principal
Commitments:
At
September 30, 2005, the Company’s principal commitments consisted of the
following obligations:
|
|
|
|
Payments
Due by Years Ending September
30,
|
|
|
|
Contractual
cash obligations (in thousands)
|
|
Total
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
There-after
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4%
notes payable
|
|
$
|
4,917
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,917
|
|
Notes
payable to directors
|
|
|
50
|
|
|
50
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
12%
subordinated promissory notes payable
|
|
|
7,000
|
|
|
-
|
|
|
7,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
8%
subordinated secured promissory notes payable
|
|
|
39,493
|
|
|
-
|
|
|
1,849
|
|
|
925
|
|
|
925
|
|
|
925
|
|
|
34,869
|
|
Secured
line of credit
|
|
|
19,009
|
|
|
-
|
|
|
19,009
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Operating
leases
|
|
|
1,593
|
|
|
426
|
|
|
406
|
|
|
390
|
|
|
371
|
|
|
-
|
|
|
-
|
|
Capital
lease obligation
|
|
|
1,684
|
|
|
372
|
|
|
432
|
|
|
502
|
|
|
378
|
|
|
-
|
|
|
-
|
|
Equipment
contact payable
|
|
|
250
|
|
|
77
|
|
|
85
|
|
|
88
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Management
services agreement
|
|
|
2,858
|
|
|
700
|
|
|
700
|
|
|
700
|
|
|
700
|
|
|
58
|
|
|
-
|
|
4%
Series A Preferred Stock subject to mandatory redemption
|
|
|
5,269
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,269
|
|
13%
Series A Preferred Stock of subsidiary subject to mandatory redemption,
excluding accrued dividends (assumes adequate defined “free cash flow” to
fund payments)
|
|
|
26,618
|
|
|
-
|
|
|
3,958
|
|
|
3,958
|
|
|
3,958
|
|
|
3,958
|
|
|
10,786
|
|
Total
contractual cash obligations
|
|
$
|
108,741
|
|
$
|
1,625
|
|
$
|
33,439
|
|
$
|
6,563
|
|
$
|
6,332
|
|
$
|
4,941
|
|
$
|
55,841
|
|
At
September 30, 2005, the Company does not have any material commitments for
capital expenditures.
At
September 30, 2005, the Company has various short-term commitments for the
purchase of materials, supplies and energy arising in the ordinary course of
business which aggregated approximately $7,962,000.
Off-Balance
Sheet Arrangements:
The
Company does not have any transactions, obligations or relationships that could
be considered off-balance sheet arrangements at September 30, 2005.
Recent
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123(Revised 2004), "Share-Based
Payment". SFAS No. 123(R) revises SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to
Employees" and amends SFAS No. 95, "Statement of Cash Flows". SFAS No. 123(R)
focuses primarily on the accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No. 123(R) requires
companies to recognize in the statement of operations the cost of employee
services received in exchange for awards of equity instruments based on the
grant-date fair value of those awards (with limited exceptions). SFAS No. 123(R)
is effective as of the Company's first interim or annual reporting period that
begins after December 15, 2005. Accordingly, the Company will adopt SFAS No.
123(R) effective January 1, 2006. The Company is currently evaluating the
provisions of SFAS No. 123(R) and has not yet determined the impact, if any,
that SFAS No. 123(R) will have on its financial statement presentation or
disclosures.
In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs — An Amendment of
ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 clarifies that abnormal
amounts of idle facility expense, freight, handling costs and spoilage should
be
expensed as incurred and not included in overhead. Further, SFAS No. 151
requires that allocation of fixed and production facilities overhead to
conversion costs should be based on normal capacity of the production
facilities. The provisions in SFAS No. 151 are effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Accordingly, the
Company will adopt SFAS No. 151 effective October 1, 2005. The Company is
currently evaluating the provisions of SFAS No. 151 and has not yet determined
the impact, if any, that SFAS No. 151 will have on its financial statement
presentation or disclosures.
In
December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets,
an amendment to APB Opinion No. 29" ("SFAS 153"). SFAS No. 153 amends Accounting
Principles Board Opinion No. 29, "Accounting for Nonmonetary Transactions",
to
require that exchanges of nonmonetary assets be measured and accounted for
at
fair value, rather than at carryover basis, of the assets exchanged. Nonmonetary
exchanges that lack commercial substance are exempt from this requirement.
SFAS
No. 153 is effective for nonmonetary exchanges entered into in fiscal periods
beginning after June 15, 2005. Accordingly, the Company will adopt SFAS No.
153
effective July 1, 2005. The Company is currently evaluating the provisions
of
SFAS No. 153, and has not yet determined the impact, if any, that it will have
on the Company's financial statement presentation or disclosures.
Information
with respect to this item appears as a separate section of this document
following “ITEM
13. EXHIBITS”.
Such
information is incorporated herein by reference.
(a)
Evaluation of Disclosure Controls and Procedures
The
certifications of the principal executive officer and the principal financial
officer (or persons performing similar functions) required by Rules 13a-14
and
15d-14 of the Securities Exchange Act of 1934, as amended are filed as exhibits
to this report. This section of the report contains the information concerning
the evaluation of the Company's disclosure controls and procedures (as defined
in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) and changes to
internal controls over financial reporting (as defined in Securities Exchange
Act Rules 13a-15(f) and 15d-15(f)) referred to in the certifications and this
information should be read in conjunction with the certifications for a more
complete understanding of the topics presented herein.
Disclosure
controls and procedures are designed to ensure that information required to
be
disclosed in the reports filed or submitted by the Company under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported, within
the
time periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in the reports filed under the Securities Exchange Act of 1934 is
accumulated and communicated to management, including its principal executive
and financial officers, as appropriate, to allow timely decisions regarding
required disclosure.
The
Company carried out an evaluation, under the supervision and with the
participation of its management, including its principal executive and financial
officers, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the period covered by this
report. Based upon and as of the date of that evaluation, the Company's
principal executive and financial officers concluded that there were material
weaknesses in the accounting and financial systems at the Company's Mill, which
resulted in deficient disclosure controls and procedures. The Mill was acquired
effective March 1, 2005, and its operations have been included in the
consolidated financial statements of the Company from that date forward. In
addition, as a result of this evaluation, the Company's consolidated financial
reporting and disclosure controls were also determined to have material
weaknesses.
Specifically,
the Mill lacks adequate accounting systems and controls and procedures to
process information for inclusion in the Company's reports filed with the
Securities and Exchange Commission. Furthermore, the Mill also lacks adequate
accounting personnel in general and adequately trained accounting personnel
in
particular in order to be able to process and generate the required financial
information to be included in the Company's consolidated financial statements
on
a timely basis. The Company has begun to address these issues by reviewing
and
revising its internal accounting policies and procedures, as necessary. The
Company also intends to increase the resources and personnel allocated to the
Mill's accounting department. The Company expects that the resolution of these
issues will take several months.
(b)
Changes in Internal Controls
There
were no changes in the Company’s internal controls or in other factors that
could have significantly affected those controls subsequent to the date of
the
Company’s most recent evaluation.
ITEM
8B. OTHER INFORMATION
The
Company did not have any reportable events during the fourth quarter of the
fiscal year ended September 30, 2005 that were required to be filed on
Form 8-K, but were not so reported.
PART
III
COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The
following table sets forth certain information regarding the Company's directors
and executive officers.
Name
|
|
Age
|
|
Position
|
|
Jonathan
V. Diamond
|
|
47
|
|
Chairman
of the Board of Directors (Class III Director) and Chief Executive
Officer
|
|
Robert
N. Weingarten
|
|
52
|
|
Chief
Financial Officer and Secretary
|
|
Hal
G. Byer
|
|
48
|
|
Class
II Director
|
|
Robert
Scott Fritz
|
|
49
|
|
Class
I Director
|
|
Patrick
J. Panzarella
|
|
40
|
|
Class
II Director
|
|
James
N. Lane
|
|
55
|
|
Class
I Director
|
|
Jess M.
Ravich |
|
|
|
Class
III Director
|
|
The
Company's Board of Directors is divided into three classes, with one class
being
elected each year and members of each class holding office for a three-year
term. All of the directors serve until their terms expire and until their
successors are elected and qualified, or until their earlier death, retirement,
resignation or removal.
In
connection with the January 2003 debt restructuring transactions, all of the
Company's previous directors and officers resigned, and three directors were
appointed. Jonathan V. Diamond, who had previously served as a director and
interim Chief Executive Officer of the Company, was appointed as Chairman of
the
Board of Directors, and Hal G. Byer and Robert Scott Fritz were appointed as
directors. Mr. Fritz has been designated as a Class I director and Mr. Byer
has
been designated as a Class II director. Mr. Diamond had been previously
designated as a Class III director. Mr. Panzarella was appointed to the Board
of
Directors in June 2004 as a Class II director, Mr. Lane was appointed to the
Board of Director in February 2005 as a Class I director and Mr. Ravich was
appointed to the Board of Directors in June 2006 as a Class III
director.
The
Class
I directors’ terms will expire at the annual meeting to be held subsequent to
the fiscal year ended September 30, 2006. The Class II directors’ terms were set
to expire at the annual meeting to be held subsequent to the fiscal year ended
September 30, 2004. However, no annual meeting was held subsequent to the fiscal
year ended September 30, 2004. The Class III director's term will expire at
the
annual meeting to be held subsequent to the fiscal year ended September 30,
2005.
Messrs.
Diamond and Weingarten have each tendered their resignations as officers
of the
Company and each of its subsidiaries, effective as of August 31, 2006 or
earlier if requested by the Company’s Board of Directors. Mr. Diamond will
continue to serve as the Company’s Chairman of the Board of Directors. The
Board
of
Directors anticipates filling these executive positions concurrent with
their vacancy and in any event on or before August 31, 2006.
The
Board
of Directors has established Audit, Compensation and Stock Option Committees.
Messrs. Byer and Fritz currently serve on the Audit, Compensation and Stock
Option Committees. The Board of Directors is currently contemplating
reconfiguring its committee membership to more fully comply with various
regulatory requirements.
Due
to
the delay in finalizing the Company's audited financial statements for
the fiscal year ended September 30, 2005, the Company has not been
able to acquire an audit committee financial expert to serve on its Audit
Committee. The Company intends to attempt to add a qualified board member to
serve as an audit committee financial expert in the future.
The
following is a brief summary of the background of the Company's directors and
executive officers.
Directors
Jonathan
V. Diamond. Mr. Diamond has served as Chairman of the Board and Chief Executive
Officer of the Company since January 30, 2003. Mr. Diamond previously served
as
a director from April 4, 2001 to December 2, 2002, and as interim Chief
Executive Officer from August 17, 2002 to December 2, 2002. From September
2003
to the present, he has served as the Chief Executive Officer and a director
of
ARTISTdirect, Inc., a publicly traded digital media entertainment company.
He
was the co-founder of N2K, Inc. and served as its Vice Chairman and Chief
Executive Officer through its 1999 merger with CDnow, Inc., an e-commerce
company. He continued to serve as Chairman of the combined company until its
sale to Bertelsmann Music Group in August 2000. Mr. Diamond was a founder of
GRP
Records, an independent music label acquired by MCA in 1990. Mr.
Diamond
holds an
M.B.A. from the Columbia University Graduate School of Business and a B.A.
in
Economics and Music from the University of Michigan Honors College. Mr. Diamond
has resigned from all executive positions that he holds in the Company and
its
subsidiaries, effective as of August 31, 2006, or earlier if requested by the
Board of Directors. Mr. Diamond will continue to serve as the Company's
Chairman of the Board.
Hal
G.
Byer. Mr. Byer has served as a director of the Company since January 30, 2003.
Mr. Byer joined Libra Securities, LLC ("Libra Securities"), a broker-dealer
registered with the Securities and Exchange Commission and an NASD member,
in
May 2001, and has been a Senior Vice President since January 2002. From 1995
to
2003, Mr. Byer was Chief Executive Officer of Byer Distributing Co., a snack
food distribution company. From 2000 to 2003, Mr. Byer was also the Chief
Operating Officer of eGreatcause.com, an internet start-up involved in
fundraising for charitable and non-profit organizations that is no longer
active.
Robert
Scott Fritz. Mr. Fritz has served as a director of the Company since January
30,
2003. Mr. Fritz is the president and owner of Robert Fritz and Sons Sales
Company, a food broker and paper distributor located in New Jersey, and has
operated in that capacity since 1976.
Patrick
J. Panzarella. Mr. Panzarella has served as a director of the Company since
June
3, 2004. Mr. Panzarella has served as the Chief Executive Officer of Pacific
Entertainment Group, a global entertainment corporation with interests in artist
management, marketing, promotion, publishing, and production, since May 2001.
Prior to joining Pacific Entertainment Group, Mr. Panzarella served as Partner
and Co-Chairman of the Board of Sheridan Square Entertainment, a global music
company, from April 1999 to May 2002. Mr. Panzarella also served as Partner,
President and Chief Executive Officer of C&P Investment Properties, a
private investment fund focused on the entertainment industry, from November
1991 to December 2002. This fund participated in numerous acquisitions and
start
ups over an eleven year period. Mr. Panzarella received a B.A. in Business
from
University of Southern California in 1988.
James
N.
Lane. Mr. Lane has served as a director of the Company since February 15,
2005. He has also been a director of ARTISTdirect, Inc., a publicly traded
digital media entertainment company, since May 2005. Mr. Lane has been
Managing Partner of Devonwood Capital Partners LLC, a private equity firm,
since
2002, a Senior Advisor to Ripplewood Holdings LLC, a private equity firm, since
September 2005 and also Chairman of NanoHoldings, LLC, a nanotechnology venture
fund, since July 2005. From 1997 to 2002, Mr. Lane served as Chairman and
CEO of SG Capital Partners, a private equity firm affiliated with Societe
General and SG Cowen Securities. Prior to establishing SG Capital
Partners, Mr. Lane’s career spanned approximately twenty years at Goldman Sachs
& Co. where he was a General Partner and a founding member of the firm’s
private equity business. Mr. Lane received a B.A. degree from Wheaton
College and a M.B.A. from Columbia University.
Jess
M.
Ravich. Mr. Ravich has served as a director of the Company since June 26,
2006. Mr. Ravich
is the Chairman and Chief Executive Officer of Libra Securities, a Los Angeles
based investment banking firm that focuses on capital raising and financial
advisory services for middle market corporate clients and the sales and trading
of debt and equity securities for institutional investors. Prior to founding
Libra Securities in 1991, Mr. Ravich was an Executive Vice President at
Jefferies & Co., Inc. and a Senior Vice President at Drexel
Burnham Lambert. Mr. Ravich serves on the board of directors of Cherokee
Inc. and Continental AFA Dispensing Company and on the board of managers of
OpBiz, LLC. In addition to his professional responsibilities, Mr. Ravich is
also on the Undergraduate Executive Board of the Wharton School and the Board
of
Trustees of the Archer School for Girls.
Other
Executive Officer
Robert
N.
Weingarten. Mr. Weingarten was appointed Chief Financial Officer of the Company
on February 6, 2003. From July 1992 to present, Mr. Weingarten has been the
sole
shareholder of Resource One Group, Inc., a financial consulting and advisory
company. From January 2004 to present, he has served as the Chief Financial
Officer and Secretary of ARTISTdirect, Inc., a publicly traded digital media
entertainment company. Since 1979, Mr. Weingarten has served as a consultant
to
numerous public companies in various stages of development, operation or
reorganization. Mr. Weingarten received an M.B.A. Degree in Finance from the
University of Southern California in 1975 and a B.A. Degree in Accounting from
the University of Washington in 1974. Mr. Weingarten currently serves as a
director of Resource Ventures, Inc., a non-trading public
company. Mr.
Weingarten has resigned as Chief Financial Officer and Secretary of the Company
and its subsidiaries, effective as of August 31, 2006, or earlier if requested
by the Board of Directors.
Compliance
with Section 16(a) of the Exchange Act
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires a company's
directors and executive officers, and beneficial owners of more than 10% of
the
common stock of such company to file with the Securities and Exchange Commission
initial reports of ownership and periodic reports of changes in ownership of
the
company's securities. Based upon a review of the copies of such forms furnished
to the Company and written representations from the Company's executive officers
and directors, the Company believes that during the fiscal year ended September
30, 2005, all Forms 3, 4 and 5 were filed on a timely basis for the Company's
executive officers and directors. To the knowledge of the Company, Joseph Corso,
Jr., a beneficial owner of more than 10% of the Company’s common stock who
reports his stock ownership on Schedule 13g, has never filed a Form 3, 4 or
5 in
connection with his stock holdings in the Company.
Family
Relationships among Directors and Executive Officers
There
were no family relationships among directors and executive officers during
the
fiscal year ended September 30, 2005.
Code
of Ethics
Changes
in Procedures to Nominate Directors
Since
the
date of the Company’s last disclosures pursuant to Item 7(d)(2)(ii)(G) of
Schedule 14A of the Securities Exchange Act of 1934, as amended, there have
been
no material changes to the procedures by which security holders may recommend
nominees to the Company’s Board of Directors.
The
following table sets forth the total compensation paid or accrued by the Company
to the named executive officers for services rendered during the last three
fiscal years. No other executive officers received total annual compensation
exceeding $100,000 during such fiscal years.
|
|
Annual
Compensation
|
|
Long-Term
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
Securities
Underlying
Options/SARs
|
|
All
Other
Compensation
|
|
|
|
|
Year
|
|
Salary
|
|
Bonus
|
|
|
|
|
|
|
|
Jonathan
V. Diamond
Chairman
of the Board and
Chief
Executive Officer (1)
|
|
2005
2004
2003
|
|
$
$
$
|
120,000
120,000
98,000
|
|
0
0
0
|
|
0
50,000
300,000
|
|
$
|
0
0
11,000
|
|
|
Robert
N. Weingarten
Chief
Financial Officer and Secretary (3)
|
|
2005
2004
2003
|
|
$
$
$
|
60,000
85,000
90,000
|
(6)
(6)
(6)
|
0
0
0
|
|
0
0
175,000
|
|
|
0
0
0
|
|
|
Harlan
Peltz
Former
Chief Corporate Strategist and Chairman (4)
|
|
2003
|
|
$
|
135,417
|
(2)
|
0
|
|
0
|
|
|
0
|
|
|
(1)
Mr.
Diamond served as interim Chief Executive Officer from August 17, 2002 to
December 2, 2002, and was named Chief Executive Officer on January 30, 2003.
(2)
Mr.
Peltz's compensation is calculated for the period July 1, 2002 through January
24, 2003.
(3)
Mr.
Weingarten has served as Chief Financial Officer since February 6, 2003.
(4)
Mr.
Peltz's employment with the Company terminated on January 24, 2003.
(5)
Pursuant to Mr. Diamond's agreement with the Company, the Company recorded
a
liability for $11,000 at September 30, 2003, to be used as a credit against
the
exercise price of any of Mr. Diamond's stock options in the future.
(6)
Mr.
Weingarten was compensated at an effective rate of $120,000 per annum during
the
fiscal year ended September 30, 2003. Mr. Weingarten's compensation decreased
to
an effective rate of $60,000 per annum effective March 1, 2004, as a result
of
the sale of the assets and operations of the Company's Beyond the Wall, Inc.
subsidiary in February 2004. Mr. Weingarten’s annual salary was adjusted to
$102,000 effective November 1, 2005.
Aggregated
Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
The
following table sets forth information concerning
the exercise of stock options during the fiscal year ended September 30, 2005
with respect to the Company's executive officers and the fiscal year-end value
of unexercised options. No options were granted to, or exercised by any of
the
Company's executive officers during the fiscal year ended September 30,
2005.
|
|
Number
of
Securities
Underlying
Unexercised
Options
at
September 30, 2005
|
|
Value
of Unexercised
In-The-Money
Options
at
September 30, 2005 (1)
|
|
|
|
|
|
|
|
|
|
|
|
Name |
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
Jonathan
V. Diamond |
|
|
430,404 |
|
|
— |
|
$ |
18,000 |
|
|
— |
|
Robert
N. Weingarten |
|
|
175,000 |
|
|
— |
|
$ |
10,500 |
|
|
— |
|
(1)
Based
on September 30, 2005 closing stock price of $0.10 per share.
STOCK
OPTION PLAN
As
of
June
27, 2006,
the
Company was authorized to issue options to purchase 5,000,000 shares of
common stock under the 2000 Plan, of which options to purchase 1,605,404
shares
were outstanding and options to purchase 3,394,596
shares of common stock were
available for future grants.
Director
Compensation
The
Company has no standard arrangements for compensation of directors. Directors
are reimbursed for reasonable out-of-pocket expenses incurred in attending
board
meetings.
In
February 2005, the Company issued options to purchase an aggregate of 200,000
shares of common stock to Mr. Lane, exercisable at the fair market value of
$0.30 per share for a period of seven years. The option fully vested in February
2006.
In
June
2006, the Company issued options to purchase an aggregate of 200,000 shares
of
common stock to Mr. Ravich, exercisable at the fair market value of $0.12 per
share for a period of seven years. The option vests over twelve months in
equal monthly installments.
Employment
Contracts, Termination of Employment and Change in Control Arrangements
The
Company does not have any employment contracts, termination of employment or
change in control arrangements with its current officers.
Long-Term
Incentive Plans
The
Company does not have any long-term incentive plans.
Meetings
and Committees of the Board of Directors
The
Board
of Directors held 6 meetings and took 7 actions
by written consent during the fiscal year ended September 30, 2005. The Board
has an Audit Committee, a Compensation Committee and a Stock Option Committee.
Each Director attended or participated in 75% or more of the aggregate of (i)
the total number of meetings of the Board and (ii) the total number of meetings
held by all committees of the Board on which such Director served during the
fiscal year ended September 30, 2005.
The
Audit
Committee was created to review, act on and report to the Board of Directors
with respect to various auditing and accounting matters, including the selection
of the Company's independent auditors, the scope of the annual audits, fees
to
be paid to the auditors, the performance of the independent auditors and the
Company's accounting practices. The members of the Audit Committee are Messrs.
Byer and Fritz, each non-employee directors of the Company. During the fiscal
year ended September 30, 2005, the Audit Committee did not meet as a separate
entity, rather all auditing and accounting matters were discussed and acted
upon
by the full Board of Directors.
The
Company does not currently have an "audit committee financial expert" as defined
in Item 401(e) of Regulation S-B under the Securities Exchange Act of 1934,
as
amended, serving on its Audit Committee. The Company intends to attempt to
add a
qualified board member to serve as an "audit committee financial expert" in
the
future.
The
Compensation Committee reviews and approves the compensation and benefits of
its
key executive officers, administers its employee benefit plans and makes
recommendations to the Board regarding such matters. The members of the
Compensation Committee are Messrs. Byer and Fritz. The Compensation Committee
did not hold any meetings during the fiscal year ended September 30,
2005.
The
Stock
Option Committee reviews and approves the options that are issued pursuant
to
the 2000 Stock Option Plan, unless such stock options are approved by the Board
of Directors. The members of the Compensation Committee are Messrs. Byer and
Fritz. The Stock Option Committee did not hold any meetings during the fiscal
year ended September 30, 2005.
Nominating
Committee
The
Company does not currently have a Nominating Committee. Board of Director
nominations are recommended by a majority of directors. In making its
nominations, the Board of Director identifies candidates who meet the current
challenges and needs of the Board of Directors. In determining whether it is
appropriate to add or remove individuals, the Board of Directors will consider
issues of judgment, diversity, age, skills, background and experience. In making
such decisions, the Board of Directors considers, among other things, an
individual's business experience, industry experience, financial background
and
experiences.
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth, as of June 27, 2006, the beneficial ownership
of common stock with respect to (i) each person who was known by the Company
to
own beneficially more than 5% of the outstanding shares of common stock,
(ii)
each director, (iii) each of the Company's current executive officers, and
(iv)
all directors and executive officers as a group. As of June 27, 2006, the
Company had 39,242,251 shares of common stock issued and outstanding, which
was
the only class of voting securities authorized or outstanding. Unless otherwise
indicated, the address of each beneficial owner
is
c/o YouthStream Media Networks, Inc., 244 Madison Avenue, PMB #358, New York,
New York 10016.
Name
and Address
of
Beneficial Owner
|
Amount
and Nature of
Beneficial
Ownership (1)
|
|
Percent
of
Class
|
|
|
|
|
|
|
Executive
Officers and Directors:
|
|
|
|
|
|
|
|
|
|
Jonathan
V. Diamond
|
1,560,404(2
|
)
|
3.88
|
%
|
|
|
|
|
|
Robert
N. Weingarten
|
175,000(3
|
)
|
0.44
|
%
|
|
|
|
|
|
Robert
Scott Fritz
711
Sycamore Avenue
Red
Bank, NJ 07701
|
200,000(4
|
)
|
0.51
|
%
|
|
|
|
|
|
Hal
G. Byer
c/o
Libra Securities, LLC
11766
Wilshire Boulevard, Suite 870
Los
Angeles, CA 90025
|
200,000(5
|
)
|
0.51
|
%
|
|
|
|
|
|
Patrick
J. Panzarella
820
Manhattan Avenue, Suite 104
Manhattan
Beach, CA 90266
|
200,000(6)
|
|
0.51
|
%
|
|
|
|
|
|
James
N. Lane
c/o
Ripplewood Holdings LLC
One
Rockefeller Plaza, 32nd Floor
New
York, NY 10020
|
200,000(7)
|
|
0.51
|
%
|
|
|
|
|
|
Jess M. Ravich
c/o
Libra Securities, LLC
11766
Wilshire Boulevard, Suite 870
Los
Angeles, CA 90025
|
2,393,332(8
|
) |
6.02
|
% |
|
|
|
|
|
All
executive officers and directors as a group (6 persons)
|
4,928,736(9)
|
|
11.82
|
%
|
|
|
|
|
|
5%
Stockholders:
|
|
|
|
|
|
|
|
|
|
Joseph
Corso Jr.
167
Zock Road
Cuddlebackville,
NY 12729
|
5,466,213(10
|
)
|
13.93
|
%
|
(2)
Includes 930,404 shares issuable upon exercise of options and warrants.
(3)
Consists of 175,000 shares issuable upon exercise of options.
(4)
Consists of 200,000 shares issuable upon exercise of options.
(5)
Consists of 200,000 shares issuable upon exercise of options.
(6)
Consists of 200,000 shares issuable upon exercise of options.
(7)
Consists of 200,000 shares issuable upon exercise of options.
(8)
Includes 1,860,000 shares held by the Ravich Revocable Trust of 1989 (the
“Ravich Trust"), 500,000 shares issuable upon exercise of warrants issued
to the
Ravich Trust and 33,332 shares issuable to Mr. Ravich within 60 days upon
exercise of an option.
(9)
Includes 2,438,736 shares issuable upon exercise of options and
warrants.
(10)
Reflects amount derived from this person's Schedule 13G as filed with the
Securities and Exchange Commission on May 9, 2006.
Securities
Authorized for Issuance under Equity Compensation Plans
The
information required herein is contained in “ITEM 5. MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS”.
Changes
in Control
The
Company is unaware of any contract or other arrangement, the operation of which
may at a subsequent date result in a change in control of the Company.
During
September 2005, the Company borrowed $50,000 from certain directors under
short-term unsecured notes due December 31, 2005, with interest at 4% per annum,
to fund corporate general and administrative expenses. The notes were subject
to
mandatory prepayment based on any proceeds received by the Company from, among
other sources, the note that the Company received from the sale of the assets
and operations of Beyond the Wall in February 2004 and any tax sharing payments
under the Tax Sharing Agreement, as described below. The Company repaid the
notes payable to directors for the proceeds of the settlement of the Beyond
the
Wall note receivable, which were received on September 30, 2005.
Investment
in KES Holdings and Acquisition of Steel Mini-Mill
In
September 2003, YouthStream invested $125,000 to acquire a 1.00% membership
interest in KES Holdings, LLC, a Delaware limited liability company ("KES
Holdings"), which was formed to acquire certain assets of Kentucky Electric
Steel, Inc., a Delaware corporation ("KES"), consisting of a steel
mini-mill located in Ashland, Kentucky (the “Mill”). On September 2, 2003,
KES Holdings, through its subsidiary, KES Acquisition Company, LLC, a Delaware
limited liability company ("KES Acquisition"), completed the acquisition of
the
Mill pursuant to Section 363 of the United States Bankruptcy Code for cash
consideration of $2,650,000, which was funded through the capital contributions
of the members of KES Holdings. Members’ capital contributions were also used
for start-up costs, working capital purposes and payment of deferred maintenance
of the Mill. KES had ceased production on or about December 16, 2002 and
filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code on February 5, 2003.
On
March
9, 2005, YouthStream completed the acquisition of KES Acquisition (the
"Acquisition"), which was deemed effective March 1, 2005. Pursuant to definitive
agreements executed with KES Holdings and Atacama Capital Holdings, Ltd., a
British Virgin Islands company ("Atacama", and together with KES Holdings,
collectively, the "Sellers"), YouthStream, through its newly-formed subsidiary,
YouthStream Acquisition Corp., a Delaware corporation ("Acquisition Corp."),
acquired 100% of the membership interests of KES Acquisition by acquiring (i)
a
37.45% membership interest from KES Holdings and (ii) all of the capital stock
of Atacama KES Holding Corporation, a wholly-owned subsidiary of Atacama
(“Atacama KES”) and the owner of the remaining 62.55% membership interest
in KES Acquisition. As consideration for the Acquisition, Acquisition Corp.
issued to the Sellers (i) $40,000,000 in promissory notes (the “Notes”), (ii)
25,000 shares of 13% Series A Non-Convertible Preferred Stock with an aggregate
liquidation value of $25,000,000 (the “13% Series A Preferred Stock”) and (iii)
100% of its authorized shares of Series B Non-Voting Common Stock. With respect
to the $65,000,000 of purchase consideration, $19,000,000 of the Notes and
$10,000,000 of the 13% Series A Preferred Stock were issued to KES Holdings,
and
$21,000,000 of the Notes and $15,000,000 of the 13% Series A Preferred Stock
were issued to Atacama. YouthStream also contributed an aggregate of $500,000
of
cash to Acquisition Corp. as consideration for the issuance by Acquisition
Corp.
of 100% of its Series A Voting Common Stock. In addition, YouthStream will
periodically be required to purchase shares of Series B Preferred Stock of
Acquisition Corp. in amounts equal to distributions it receives on its KES
Holdings membership interest.
Related
parties with respect to this transaction are summarized as follows: Robert
Scott
Fritz, a director of YouthStream, is an investor in KES Holdings. Hal G.
Byer,
another director of YouthStream, is an employee of affiliates of Libra/KES
Investment I, LLC ("Libra/KES"), the Manager of KES Holdings, and has an
economic interest in KES Holdings through his relationship with Libra
Securities. Jess M. Ravich, a director of YouthStream effective June 26,
2006,
is a principal of Libra/KES. In addition, affiliates of Mr. Ravich, including
a
trust for the benefit of Mr. Ravich and certain of his family members (the
“Ravich Trust”) are investors in KES Holdings. Mr. Ravich, either directly or
through the Ravich Trust, holds 1,860,000 shares of YouthStream's common
stock,
warrants to purchase 500,000 shares of YouthStream's common stock exercisable
through August 31, 2008, 1,000,000 shares of YouthStream's redeemable preferred
stock and an option to purchase 200,000 shares of YouthStream’s common stock
exercisable through June 26, 2013, which was issued to Mr. Ravich under
YouthStream’s 2000 Stock Option Incentive Plan in connection with his election
to the Board. Through his positions at Libra/KES, Mr. Ravich managed the
business of KES Acquisition through February 28, 2005. Subordinated Promissory
Notes with a principal amount of $1,650,000 and $450,000 are payable to the
Ravich Trust and Libra Securities
Holdings, LLC,
the
parent of Libra Securities, respectively. Mr. Fritz and Mr. Byer have each
previously acquired an option from the Ravich Trust for $2,500 ($0.04 per
share)
to purchase 62,500 shares of YouthStream's redeemable preferred stock issued
to
the Ravich Trust in January 2003, exercisable at $0.36 per share until December
31, 2006 or earlier upon the occurrence of certain events.
This
transaction is more fully described at “ITEM 1. DESCRIPTION OF BUSINESS - Acquisition
of Steel Mini-Mill”.
Exhibit
No. |
|
Description |
3.1
|
|
Certificate
of Incorporation (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form SB-2, Registration No.
33-80935,
filed on March 6, 1996).
|
3.2
|
|
Certificate
of Amendment of Certificate of Incorporation (incorporated by reference
to
Exhibit 3.2 to the Company's Registration Statement on Form SB-2,
Registration No. 33-80935, filed on March 6, 1996).
|
3.3
|
|
Certificate
of Amendment of Certificate of Incorporation (incorporated by reference
to
Exhibit 3.3 to the Company's Form 10-KSB for the fiscal year ended
June
30, 1998, filed May 27, 1998).
|
3.4
|
|
Certificate
of Designation for Preferred Stock of YouthStream Media Networks,
Inc.
(incorporated by reference to Exhibit 99.3 to the Company's Form
8K filed
February 7, 2003).
|
Exhibit
No. |
|
Description |
3.5
|
|
Certificate
of Correction to the Certificate of Designation of Series A Preferred
Stock of YouthStream Media Networks, Inc. (incorporated by reference
to
Exhibit 3.5 to the Company’s Amended Form 10-K/A, filed March 5,
2004).
|
3.6
|
|
Bylaws
(incorporated by reference to Exhibit 3.3 to the Company's Registration
Statement on Form SB-2, Registration No. 33-80935, filed on March
6,
1996).
|
3.7
|
|
Bylaws
(incorporated by reference to Exhibit 4.2 to YouthStream's Registration
Statement on Form S-8, Registration No. 333-32022, filed on March
9,
2000).
|
3.8
|
|
Amendment
to Bylaws (incorporated by reference to Exhibit 3.8 to the Company’s Form
10-Q for the quarter ended June 30, 2004, filed August 13,
2004).
|
4.1
|
|
Warrant
Agreement (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form SB-2, Registration No. 33-80935,
filed on
March 6, 1996).
|
4.2
|
|
Underwriter's
Warrant (incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form SB-2, Registration No. 33-80935,
filed on
March 6, 1996).
|
10.1
|
|
Employment
Stock Option Plan of the Company (incorporated by reference to
Exhibit
10.1 to the Company's Registration Statement on Form SB-2, Registration
No. 33-80935, filed on March 6, 1996).
|
10.2
|
|
Employment
Agreement between the Company and Harlan D. Peltz (incorporated
by
reference to Exhibit 10.2 to the Company's Registration Statement
on Form
SB-2, Registration No. 33-80935, filed on March 6,
1996).
|
10.3
|
|
Employment
Agreement between the Company and Don Leeds (incorporated by reference
to
Exhibit 1 to the Company's Form 10-QSB for the quarterly period
ended June
30, 1996).
|
|
|
Non-Incentive
Stock Option Agreement dated June 17, 1996 between the Company
and Don
Leeds incorporated by reference to Exhibit 10.3 to the Company's
Form
10-QSB for the quarterly period ended June 30, 1996).
|
10.5
|
|
Employment
Agreement between the Company and Bruce L. Resnik (incorporated
by
reference to Exhibit 2 to the Company's Form 10-QSB for the quarterly
period ended September 30, 1996).
|
10.6
|
|
NET
Portfolio Investors Agreement dated December 21, 1995 between the
Company
and NET Portfolio Investors, L.P. (incorporated by reference to
Exhibit
10.5 to the Company's Registration Statement on Form SB-2, Registration
No. 33-80935, filed on March 6, 1996).
|
10.7
|
|
Standard
Form of School Contract (incorporated by reference to Exhibit 10.8
to the
Company's Registration Statement on Form SB-2, Registration No.
33-80935,
filed on March 6, 1996).
|
10.8
|
|
Asset
Purchase Agreement dated September 13, 1996 among American Passage
Media
Corporation, Gilbert Scherer, the Company and American Passage
Media, Inc.
(incorporated by reference to Exhibit 2 to the Company's Form 8-K,
filed
on September 28, 1996).
|
10.9
|
|
Option
Agreement between the Company and American Passage Media corporation
(incorporated by reference to Exhibit 5 to the Company's Form 8-K,
filed
on September 28, 1996).
|
10.10
|
|
Bill
of Sale and Agreement dated January 31, 1997 among SCCGS, Inc.,
Sirrom
Capital Corporation, Campus Voice, L.L.C. and the Company (incorporated
by
reference to Exhibit 10.23 to the Company's Form 10-KSB for the
fiscal
year ended June 30, 1997).
|
10.11
|
|
Asset
Purchase Agreement dated April 11, 1997 among Posters Preferred,
Inc.,
Dennis Roche, Brian Gordon and the Company (incorporated by reference
to
Exhibit 10.30 to the Company's Form 10-KSB for the fiscal year
ended June
30, 1997).
|
10.12
|
|
Asset
Purchase Agreement dated April 30, 1997 among the Company, Pik:Nik
Media,
LLC, Pik:Nik, LLC and Garth Holsinger, Annett Schaefer-Sell and
Sunny
Smith (incorporated by reference to Exhibit 10.31 to the Company's
Form
10-KSB for the fiscal year ended June 30, 1997).
|
10.13
|
|
Stock
Purchase Agreement dated June 24, 1997 among Warburg, Pincus Emerging
Growth Fund, Inc., Small Company Growth Portfolio of Warburg, Pincus
Institutional Fund, Inc. and the Company (incorporated by reference
to
Exhibit 10.32 to the Company's Form 10-KSB for the fiscal year
ended June
30, 1997).
|
10.14
|
|
Registration
Rights Agreement dated June 24, 1997 among Warburg, Pincus Emerging
Growth
Fund, Inc., Small Company Growth Portfolio of Warburg, Pincus Institution
Fund, Inc., and the Company (incorporated by reference to Exhibit
10.33 to
the Company's Form 10-KSB for the fiscal year ended June 30, 1997).
|
10.15
|
|
Stock
Purchase Agreement dated December 23, 1997 between the Company
and Dirrom
Investments, Inc. (incorporated by reference to Exhibit 10.15 to
the
Company's Form 10-KSB for the fiscal year ended June 30, 1998).
|
10.16
|
|
Placement
Manager Agreement (incorporated by reference to Exhibit 10.17 to
the
Company's Form 10-KSB for the fiscal year ended June 30, 1998).
|
10.17
|
|
Form
of Stock Purchase Agreement (incorporated by reference to Exhibit
10.1 to
the Company's Form 10-KSB for the fiscal year ended June 30, 1998).
|
Exhibit
No. |
|
Description |
10.18 |
|
Loan
Agreement dated December 30, 1997 between First Union National Bank,
American Passage Media, Inc., Beyond the Wall, Inc. and Campus Voice,
Inc.
(incorporated by reference to Exhibit 10.18 to the Company's Form
10-KSB
for the fiscal year ended June 30, 1998).
|
10.19
|
|
Unconditional
Guaranty dated December 30, 1997 by the Company and National Campus
Media,
Inc. in favor of First Union National Bank (incorporated by reference
to
Exhibit 10.19 to the Company's Form 10-KSB for the fiscal year ended
June
30, 1998).
|
10.20
|
|
Merger
Agreement dated June 9, 1999 among the Company, Trent Acquisition
Co.,
Inc., Trent Graphics, Inc. and Charles Sirolly, Thomas Sirolly, Daniel
Sirolly and William Sirolly (incorporated by reference to Exhibit
2 to the
Company's Form 8-K filed June 24, 1999).
|
10.21
|
|
Asset
Purchase Agreement dated June 10, 1999 among the Company, Pik:Nik
Media,
Inc., HelloXpress USA, Inc., and Dalia Smith and Ron Smith (incorporated
by reference to Exhibit 2 to the Company's Form 8-K filed June 24,
1999).
|
10.22
|
|
Option
Agreement dated August 3, 1999 among the Company, New CW, Inc.,
CollegeWeb.com, Inc. and J. Alexander Chriss and Todd M. Ragaza
(incorporated by reference to Exhibit 10.22 to the Company's Form
10-KSB
for the fiscal year ended June 30, 1999).
|
10.23
|
|
Agreement
and Plan of Merger dated August 3 1999 among the Company, New CW,
Inc.,
CollegeWeb.com, Inc. and J. Alexander Chriss and Todd M. Ragaza
(incorporated by reference to Exhibit 10.23 to the Company's Form
10-KSB
for the fiscal year ended June 30, 1999).
|
10.24
|
|
Operating
Agreement of Common Places, LLC (incorporated by reference to Exhibit
10.1
to the Company's quarterly report on Form 10-QSB for the quarter
ended
December 31, 1998).
|
10.25
|
|
Agreement
and Plan of Merger dated June 28, 1999 among the Company, Common
Places,
LLC, YouthStream Media Networks, Inc., Nunet, Inc., Nucommon, Inc.,
a
wholly owned subsidiary of New Parent, Harlan Peltz, Benjamin Bassi,
William Townsend and Mark Palmer (incorporated by reference to Exhibit
10.25 to the Company's Form 10-KSB for the fiscal year ended June
30,
1999).
|
10.26
|
|
Restated
Certificate of Incorporation of YouthStream Media Networks, Inc.
(incorporated by reference to Exhibit 10.26 to the Company's Form
10-KSB
for the fiscal year ended June 30, 1999).
|
10.27
|
|
Rights
Agreement between YouthStream Media Networks, Inc. and the Rights
Agent
(unsigned and undated) (incorporated by reference to Exhibit 10.27
to the
Company's Form 10-KSB for the fiscal year ended June 30, 1999).
|
10.28
|
|
YouthStream
Media Networks, Inc. 2000 Stock Incentive Plan (incorporated by reference
to Exhibit 10.28 to the Company's Form 10-KSB for the fiscal year
ended
June 30, 1999).
|
10.29
|
|
Voting
Trust Agreement among YouthStream Media Networks, Inc., Benjamin
Bassi,
William Townsend, Mark Palmer, Harlan Peltz and the Voting Trustee
(incorporated by reference to Exhibit 10.29 to the Company's Form
10-KSB
for the fiscal year ended June 30, 1999).
|
10.30
|
|
Stockholders
Agreement among YouthStream Media Networks, Inc., Benjamin Bassi,
William
Townsend, Mark Palmer, Harlan Peltz individually, Harlan Peltz as
voting
trustee (incorporated by reference to Exhibit 10.30 to the Company's
Form
10-KSB for the fiscal year ended June 30, 1999).
|
10.31
|
|
Employment
Agreement between YouthStream Media Networks, Inc. And Benjamin Bassi
(incorporated by reference to Exhibit 10.31 to the Company's Form
10-KSB
for the fiscal year ended June 30, 1999).
|
|
|
Employment
Agreement between YouthStream Media Networks, Inc. And Harlan Peltz
(incorporated by reference to Exhibit 10.32 to the Company's Form
10-KSB
for the fiscal year ended June 30, 1999).
|
10.33
|
|
Merger
Agreement dated December 14, 1999 among the Company, Sixdegrees
Acquisition Corp. and sixdegrees, inc. (incorporated by reference
to
Exhibit 10.33 to the Company's Form 8-K filed January 20, 2000).
|
10.34
|
|
Certificate
of Designation of Series A Convertible Preferred Stock of the Company
(incorporated by reference to Exhibit 10.34 to the Company's Form
8-K
filed January 20, 2000).
|
10.35
|
|
1999
Stock Option Plan of the Company (incorporated by reference to Exhibit
10.35 to the Company's Form 8-K filed January 20, 2000).
|
10.36
|
|
1999
Special Stock Option Plan of the Company (incorporated by reference
to
Exhibit 10.36 to the Company's Form 8-K filed January 20, 2000).
|
10.37
|
|
1999
Special Incentive Stock Plan of the Company (incorporated by reference
to
Exhibit 10.37 to the Company's Form 8-K filed January 20, 2000).
|
10.38
|
|
Employment
Agreement dated June 20, 2000 between YouthStream Media Networks,
Inc. and
James G. Lucchesi (incorporated by reference to Exhibit 10.38 to
the
Company's Form 10-KSB filed September 27, 2000).
|
Exhibit
No. |
|
Description |
10.39
|
|
Non-Qualified
Stock Option Agreement of James G. Lucchesi dated June 20, 2000
(incorporated by reference to Exhibit 10.39 to the Company's Form
10-KSB
filed September 27, 2000).
|
10.40
|
|
Amendment
to Employment Agreement as of June 20, 2000 between YouthStream Media
Networks, Inc. and Harlan D. Peltz (incorporated by reference to
Exhibit
10.40 to the Company's Form 10-KSB filed September 27, 2000).
|
10.41
|
|
Employment
Agreement dated July 1, 2000 between YouthStream Media Networks,
Inc. and
Thea A. Winarsky (incorporated by reference to Exhibit 10.41 to the
Company's Form 10-KSB filed September 27, 2000).
|
10.42
|
|
Merger
Agreement dated July 13, 2000 among YouthStream Media Networks, Inc.,
W3T
Acquisition, Inc., a wholly-owned subsidiary of YouthStream, W3T.com,
Inc., Gerald Croteau, Eugene Bellotti, Donald Dion, Richard King,
James
Westra, Mark Fusco, Suzanne W. Bookstein and John Genest (incorporated
by
reference to Exhibit 10.42 to the Company's Form 10-KSB filed September
27, 2000).
|
10.43
|
|
Consulting
and Non-Competition Agreement dated July 25, 2000 between YouthStream
Media Networks, Inc. and Andrew P. Weinreich (incorporated by reference
to
Exhibit 10.43 to the Company's Form 10-KSB filed September 27, 2000).
|
10.44
|
|
Amendment
No. 1 dated July 28, 2000 to Stockholders Agreement dated February
28,
2000 among YouthStream Media Networks, Inc., Benjamin Bassi, William
Townsend, Mark Palmer, Harlan D. Peltz, individually, and Harlan
D. Peltz,
as voting trustee (incorporated by reference to Exhibit 10.44 to
the
Company's Form 10-KSB filed September 27, 2000).
|
10.45
|
|
Non-Qualified
Stock Option Agreement of Thea A. Winarsky dated August 16, 2000
(incorporated by reference to Exhibit 10.45 to the Company's Form
10-KSB
filed September 27, 2000).
|
10.46
|
|
Non-Qualified
Stock Option Agreement of James G. Lucchesi dated September 26, 2000
(incorporated by reference to Exhibit 10.46 to the Company's Form
10-KSB
filed September 27, 2000).
|
|
|
Non-Qualified
Stock Option Agreement of James G. Lucchesi dated July 2, 2001.
|
10.48
|
|
Non-Qualified
Stock Option Agreement of James G. Lucchesi dated July 2, 2001.
|
10.49
|
|
Amendment
to the Employment Agreement (dated June 20, 2000) dated June 29,
2001 for
James G. Lucchesi.
|
10.50
|
|
Amendment
to Non-Qualified Stock Option Agreement (dated July 31, 2000) dated
June
29, 2001 for James G. Lucchesi.
|
10.51
|
|
Amendment
to Non-Qualified Stock Option Agreement (dated June 20, 2000) dated
June
29, 2001 for James G. Lucchesi.
|
10.52
|
|
Asset
Purchase Agreement by and between Alloy, Inc., Cass Communications,
Inc.,
YouthStream Media Networks, Inc., American Passage Media, Inc. and
Network
Event Theater, Inc., dated August 5, 2002 (incorporated by reference
to
Exhibit 10-1 to the Company's Form 8K filed August 20, 2002).
|
10.53
|
|
Restructuring
Agreement dated as of January 20, 2003 by and among YouthStream Media
Networks, Inc., and its subsidiary, Network Event Theater, Inc.,
the
United States Small Business Administration as Receiver for Interequity
Capital Partners, LP, TCW Shared Opportunity Fund II, L.P., Shared
Opportunity Fund IIB, LLC, The Charles and Adele Thurnher Living
Trust
Dated December 7, 1989, The Morrish Community Property Trust Dated
April
15, 1998, and Jean Smith, Stanley J. Schrager, Richard Coppersmith,
Rand
Ravich and Jess M. Ravich, individually (incorporated by reference
to
Exhibit 99.2 to the Company's Form 8K filed February 7, 2003).
|
10.54
|
|
Promissory
Note Issued from Beyond the Wall, Inc. to The Ravich Revocable Trust
of
1989 (incorporated by reference to Exhibit 99.4 to the Company's
Form 8K
filed February 7, 2003).
|
10.55
|
|
Promissory
Note Issued from Beyond the Wall, Inc. to Interequity Capital Partners,
LP. incorporated by reference to Exhibit 99.5 to the Company's Form
8K
filed February 7, 2003.
|
10.56
|
|
Mutual
Release by and between each of Ravich Revocable Trust of 1989, Libra
Securities, LLC, the United States Small Business Administration
as
Receiver for Interequity Capital Partners, LP, TCW Shared Opportunity
Fund
II, L.P., Shared Opportunity Fund IIB, LLC, The Charles and Adele
Thurnher
Living Trust Dated December 7, 1989, The Morrish Community Property
Trust
Dated April 15, 1998, and Jean Smith, Stanley J. Schrager, Richard
Coppersmith, Rand Ravich and Jess M. Ravich, individually, YouthStream
Media Networks, Inc. and Network Event Theater, Inc. (incorporated
by
reference to Exhibit 99.6 to the Company's Form 8K filed February
7, 2003.
|
10.57
|
|
Letter
by Libra Securities, LLC. (incorporated by reference to Exhibit 99.7
to
the Company's Form 8K filed February 7, 2003)
|
10.58
|
|
Existing
Director Release to YouthStream Media Networks, Inc. (incorporated
by
reference to Exhibit 99.8 to the Company's Form 8K filed February
7,
2003).
|
Exhibit
No. |
|
Description |
10.59
|
|
Ravich
Security Agreement by and among YouthStream Media Networks, Inc.,
and The
Ravich Revocable Trust of 1989 and the United States Small Business
Administration, as Receiver for Interequity Capital Partners, LP.
(incorporated by reference to Exhibit 99.9 to the Company's Form
8K filed
February 7, 2003).
|
10.60
|
|
Amendment
No. 1 to Restructuring Agreement dated as of January 23, 2003 by
and among
YouthStream Media Networks, Inc., and its subsidiary, Network Event
Theater Inc., each of which is a Delaware corporation, and the Ravich
Revocable Trust of 1989. (incorporated by reference to Exhibit 99.10
to
the Company's Form 8K filed February 7, 2003).
|
|
|
Amendment
No. 2 to Restructuring Agreement dated as of January 24, 2003 by
and
between YouthStream Media Networks, Inc., its subsidiary, Network
Event
Theater Inc., each of which is a Delaware corporation, the Ravich
Revocable Trust of 1989 and the United States Small Business
Administration as Receiver for Interequity Capital Partners, LP.
(incorporated by reference to Exhibit 99.11 to the Company's Form
8K filed
February 7, 2003).
|
10.62
|
|
Agreement
dated June 9, 2003 by and among YouthStream Media Networks, Inc.,
Network
Event Theater, Inc., Beyond the Wall, Inc., the Ravich Revocable
Trust of
1989 and the United States Small Business Administration as Receiver
for
Interequity Capital Partners, LP. (incorporated by reference to Exhibit
99.1 to the Company's Form 8K filed June 16, 2003).
|
10.63
|
|
Amendment
No. 1 to Promissory Note dated January 24, 2003 issued to the Ravich
Revocable Trust of 1989. (incorporated by reference to Exhibit 99.2
to the
Company's Form 8K filed June 16, 2003).
|
10.64
|
|
Amendment
No. 1 to Promissory Note dated January 24, 2003 issued to Interequity
Capital Partners, LP. (incorporated by reference to Exhibit 99.3
to the
Company's Form 8K filed June 16, 2003).
|
10.65
|
|
Inter-Creditor
Agreement between the Ravich Revocable Trust of 1989 and Jonathan
V.
Diamond, dated August 13, 2003 (incorporated by reference to Exhibit
10.1
to the Company's Form 8K filed September 11, 2003).
|
10.66
|
|
Promissory
Note for $100,000 from Beyond the Wall, Inc., to Jonathan V. Diamond,
dated August 13, 2003 (incorporated by reference to Exhibit 10.2
to the
Company's Form 8K filed September 11, 2003).
|
10.67
|
|
Promissory
Note for $100,000 from Beyond the Wall, Inc. to the Ravich Revocable
Trust
of 1989, dated August 13, 2003 (incorporated by reference to Exhibit
10.3
to the Company's Form 8K filed September 11, 2003).
|
10.68
|
|
Mortgage
from Beyond the Wall, Inc. to Jonathan V. Diamond, dated August 13,
2003
(incorporated by reference to Exhibit 10.4 to the Company's Form
8K filed
September 11, 2003).
|
10.69
|
|
Mortgage
from Beyond the Wall, Inc. to the Ravich Revocable Trust of 1989,
dated
August 13, 2003 (incorporated by reference to Exhibit 10.5 to the
Company's Form 8K filed September 11, 2003).
|
10.70
|
|
Warrant
Certificate to acquire 400,000 shares of common stock, dated August
13,
2003, issued by the Company to Jonathan V. Diamond (incorporated
by
reference to Exhibit 10.6 to the Company's Form 8K filed September
11,
2003).
|
10.71
|
|
Warrant
Certificate to acquire 400,000 shares of common stock, dated August
13,
2003, issued by the Company to the Ravich Revocable Trust of 1989
(incorporated by reference to Exhibit 10.7 to the Company's Form
8K filed
September 11, 2003).
|
10.72
|
|
Warrant
Holder Rights Agreement with respect to 400,000 shares of common
stock,
between the Company and Jonathan V. Diamond, dated August 13, 2003
(incorporated by reference to Exhibit 10.8 to the Company's Form
8K filed
September 11, 2003).
|
10.73
|
|
Warrant
Holder Rights Agreement with respect to 400,000 shares of common
stock,
between the Company and the Ravich Revocable Trust of 1989, dated
August
13, 2003 (incorporated by reference to Exhibit 10.9 to the Company's
Form
8K filed September 11, 2003).
|
|
|
Promissory
Note for $25,000 from the Company to Jonathan V. Diamond, dated August
28,
2003 (incorporated by reference to Exhibit 10.10 to the Company's
Form 8K
filed September 11, 2003).
|
10.75
|
|
Promissory
Note for $25,000 from the Company to the Ravich Revocable Trust of
1989,
dated August 28, 2003 (incorporated by reference to Exhibit 10.11
to the
Company's Form 8K filed September 11, 2003).
|
10.76
|
|
Warrant
Certificate to acquire 100,000 shares of common stock, dated August
28,
2003, issued by the Company to Jonathan V. Diamond (incorporated
by
reference to Exhibit 10.12 to the Company's Form 8K filed September
11,
2003).
|
10.77
|
|
Warrant
Certificate to acquire 100,000 shares of common stock, dated August
28,
2003, issued by the Company to the Ravich Revocable Trust of 1989
(incorporated by reference to Exhibit 10.13 to the Company's Form
8K filed
September 11, 2003).
|
10.78
|
|
Asset
Purchase Agreement, by and among Beyond the Wall, Inc., Clive Corporation,
Inc. and the Company (incorporated by reference to Exhibit 10.1 to
the
Company’s Form 8-K, filed March 11,
2004).
|
Exhibit
No. |
|
Description |
10.79
|
|
Agreement
of Sale between Beyond the Wall, Inc. and 1903 West Main Street Realty
Management, LLC (incorporated by reference to Exhibit 10.2 to the
Company’s Form 8-K, filed March 11, 2004).
|
10.80
|
|
Secured
Promissory Note (incorporated by reference to Exhibit 10.3 to the
Company’s Form 8-K, filed March 11, 2004).
|
10.81
|
|
Securities
Purchase Agreement, dated as of February 25, 2005, by and among
YouthStream Media Networks, Inc., YouthStream Acquisition Corp.,
KES
Holdings, LLC and Atacama Capital Holdings, Ltd. (incorporated
by reference to Exhibit 10.81 to the Company’s Form 8-K, filed March 14,
2005).
|
10.82
|
|
Note
Purchase Agreement, dated as of February 25, 2005, and among YouthStream
Media Networks, Inc., YouthStream Acquisition Corp., KES Holdings,
LLC and
Atacama Capital Holdings, Ltd. (incorporated
by reference to Exhibit 10.82 to the Company’s Form 8-K, filed March 14,
2005).
|
10.83
|
|
Amended
and Restated Management Services Agreement, February 28, 2005, by
and
between KES Acquisition Company, LLC and Pinnacle Steel, LLC. (incorporated
by reference to Exhibit 10.83 to the Company’s Form 8-K, filed March 14,
2005).
|
10.84
|
|
Form
of YouthStream Acquisition Corp. 8.0% Subordinated Secured Note Due
February 28, 2015 in favor of KES Holdings, LLC (incorporated
by reference to Exhibit 10.84 to the Company’s Form 8-K, filed March 14,
2005).
|
10.85
|
|
Form
of YouthStream Acquisition Corp. 8.0% Subordinated Secured Note Due
February 28, 2015 in favor of Atacama Capital Holdings, Ltd. (incorporated
by reference to Exhibit 10.85 to the Company’s Form 8-K, filed March 14,
2005).
|
10.86
|
|
Form
of YouthStream Media Networks, Inc. Limited Guaranty and Pledge Agreement
in favor of Atacama Capital Holdings, Ltd.
(incorporated by reference to Exhibit 10.86 to the Company’s Form 8-K,
filed March 14, 2005).
|
10.87
|
|
Form
of YouthStream Media Networks, Inc. Limited Guaranty and Pledge Agreement
in favor of KES Holdings, LLC (incorporated
by reference to Exhibit 10.87 to the Company’s Form 8-K, filed March 14,
2005).
|
10.88
|
|
Loan
and Security Agreement dated as of March 24, 2004, as amended, between
General Electric Capital Corporation and KES Acquisition Company,
LLC
(incorporated
by reference to Exhibit 10.88 to the Company’s Form 10-QSB, filed July 18,
2005).
|
10.89
|
|
Letter
Agreement, dated July 14, 2005, regarding 8% subordinated secured
promissory notes (incorporated
by reference to Exhibit 10.88 to the Company’s Form 10-QSB, filed July 18,
2005).
|
10.90
|
|
Form
of Promissory Note dated September 27, 2005 in the principal amount
of
$12,500 (incorporated
by reference to Exhibit 10.90 to the Company’s Form 10-QSB, filed October
4, 2005).
|
10.91
|
|
Payoff
and Settlement Agreement, dated September 30, 2005, by and among
YouthStream Media Networks, Inc., Beyond the Wall, Inc., 1903 West
Main
Street Realty Management, LLC and Clive Corporation, Inc. (incorporated
by reference to Exhibit 10.91 to the Company’s Form 10-QSB, filed October
4, 2005).
|
10.92
|
|
Letter
Agreement dated September 23, 2005 regarding 8% Subordinated Secured
Promissory Notes (incorporated
by reference to Exhibit 10.92 to the Company’s Form 10-QSB, filed October
4, 2005).
|
10.93*
|
|
Letter
Agreement dated April 11, 2006 regarding 8% Subordinated Secured
Promissory Notes.
|
10.94*
|
|
Form
of YouthStream Acquisition Corp. 8.0% Promissory Note Due February
27,
2007 in favor of KES Holdings, LLC.
|
10.95*
|
|
Form
of YouthStream Acquisition Corp. 8.0% Promissory Note Due February
27,
2007 in favor of Atacama Capital Holdings, Ltd.
|
10.96*
|
|
Amendment
No.
11 to Loan and Security Agreement, dated October 31, 2005, among General
Electric Capital Corporation, KES Acquisition Company, LLC, Atacam
KES
Holdings Corporation and Youthstream Acquisition Corp. |
14.1
|
|
Code
of Ethics—CEO (incorporated by reference to Exhibit 14.1 to the Company’s
Amended Form 10-K/A, filed March 5, 2004).
|
14.2
|
|
Code
of Ethics—CFO (incorporated by reference to Exhibit 14.2 to the Company’s
Amended Form 10-K/A, filed March 5, 2004).
|
21*
|
|
Subsidiaries
of the Company
|
23.1*
|
|
Consent
of Independent Registered Public Accounting Firm
|
31.1* |
|
Certification
of CEO
|
31.2* |
|
Certification
of CFO
|
32*
|
|
Certification
of CEO and CFO
|
* Filed
herewith
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit
and Audit Related Fees
Weinberg
& Company, P.A. ("Weinberg") was the Company's independent registered public
accounting firm for the fiscal years ended September 30, 2005 and 2004. Services
provided to the Company by Weinberg with respect to the fiscal year ended
September 30, 2005 consisted of the audit of the Company's consolidated
financial statements and limited reviews of the condensed consolidated financial
statements included in Form 10-QSB Quarterly Reports; total fees and expenses
with respect thereto aggregated approximately $174,000. Services provided to
the
Company by Weinberg with respect to the fiscal year ended September 30, 2004
consisted of the audit of the Company’s consolidated financial statements and
limited reviews of the condensed consolidated financial statements included
in
Form 10-Q Quarterly Reports; total fees and expenses with respect thereto
aggregated approximately $114,000. During the fiscal years ended September
30,
2005 and 2004, Weinberg also provided certain services with respect to the
audits of KES Acquisition, LLC and predecessor entities aggregating
approximately $192,000 and $13,000, respectively.
Tax
Fees
Weinberg
did not provide any services to the Company with respect to the preparation
of
corporate income tax returns or tax planning matters.
All
Other Fees
Weinberg
did not provide any services with respect to any matters other than those
related to audit and audit-related matters.
Pre-Approval
Policies and Procedures
The
Audit
Committee meets periodically to review and approve the scope of the services
to
be provided to the Company by its independent accountant, as well to review
and
discuss any issues that may arise during an engagement. The Audit Committee
considers various issues with respect to the services to be provided by its
independent accountant, including the complexity of any engagement, its expected
cost, the knowledge and expertise of the independent accountant's staff, any
complex accounting or disclosure issues, new accounting pronouncements, and
the
capability of the Company's financial staff.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
Number
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm -
Weinberg
& Company, P.A.
|
F-2
|
|
|
Consolidated
Balance Sheets —
September
30, 2005 and 2004
|
F-3
|
|
|
Consolidated
Statements of Operations —
Years
Ended September 30, 2005 and 2004
|
F-5
|
|
|
Consolidated
Statement of Stockholders’ Deficiency —
Years
Ended September 30, 2005 and 2004
|
F-6
|
|
|
Consolidated
Statements of Cash Flows —
Years
Ended September 30, 2005 and 2004
|
F-7
|
|
|
Notes
to Consolidated Financial Statements —
Years
Ended September 30, 2005 and 2004
|
F-8
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors
YouthStream
Media Networks, Inc.
We
have
audited the accompanying consolidated balance sheets of YouthStream Media
Networks, Inc. and subsidiaries as of September 30, 2005 and 2004, and the
related consolidated statements of operations, stockholders' deficiency and
cash
flows for the years ended September 30, 2005 and 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of YouthStream
Media Networks, Inc. and subsidiaries as of September 30, 2005 and 2004, and
the
results of their consolidated operations and their consolidated cash flows
for
the years ended September 30, 2005 and 2004, in conformity with accounting
principles generally accepted in the United States.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company incurred a net loss of $3,430,562
and a negative cash flow from operating activities of $4,300,395 for the year
ended September 30, 2005, and had an accumulated deficit of $347,265,398 and
a
stockholders' deficiency of $79,600,350 at September 30, 2005. As
of
September 30, 2005, the Company had insufficient capital to fund all of its
obligations on a consolidated basis. These
factors raise substantial doubt about the Company's ability to continue as
a
going concern. Management's plans concerning this matter are also described
in
Note 1. The accompanying consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/
WEINBERG & COMPANY, P.A.
Certified
Public Accountants
Los
Angeles, California
May
18,
2006, except for Note 8, as to which the date is June 26, 2006
YOUTHSTREAM
MEDIA NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
SEPTEMBER
30, 2005 AND 2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
998,835
|
|
$
|
674,880
|
|
Current
portion of note receivable, including accrued interest
|
|
|
---
|
|
|
242,189
|
|
Accounts
receivable, less allowance for doubtful accounts of
$747,399
|
|
|
14,668,539
|
|
|
---
|
|
Inventories
|
|
|
17,880,805
|
|
|
---
|
|
Prepaid
expenses and other current assets
|
|
|
2,167,382
|
|
|
16,624
|
|
Total
current assets
|
|
|
35,715,561
|
|
|
933,693
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
6,630,012
|
|
|
140,068
|
|
Less
accumulated depreciation and amortization
|
|
|
(1,062,267
|
)
|
|
(114,658
|
)
|
Property,
plant and equipment, net
|
|
|
5,567,745
|
|
|
25,410
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
Note
receivable, including accrued interest, less current
portion
|
|
|
---
|
|
|
245,465
|
|
Deferred
loan costs, net of amortization of $438,913
|
|
|
422,913
|
|
|
---
|
|
Deposits
|
|
|
216,035
|
|
|
---
|
|
Deferred
costs related to KES acquisition
|
|
|
---
|
|
|
175,144
|
|
Investment
in KES Holdings
|
|
|
---
|
|
|
125,000
|
|
Total
other assets
|
|
|
638,948
|
|
|
545,609
|
|
Total
assets
|
|
$
|
41,922,254
|
|
$
|
1,504,712
|
|
(continued)
YOUTHSTREAM
MEDIA NETWORKS, INC. AND SUBSIDIARIES
SEPTEMBER
30, 2005 AND 2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts
payable
|
|
$
|
9,008,612
|
|
$
|
910,074
|
|
Accrued
expenses
|
|
|
2,048,481
|
|
|
396,654
|
|
Accrued
interest payable:
|
|
|
|
|
|
|
|
12%
subordinated promissory notes payable to related parties
|
|
|
1,085,753
|
|
|
---
|
|
Notes
payable to directors
|
|
|
50,000
|
|
|
---
|
|
Secured
line of credit
|
|
|
19,009,379
|
|
|
---
|
|
Current
portion of equipment contract payable
|
|
|
77,091
|
|
|
---
|
|
Current
portion of capital lease obligation
|
|
|
372,256
|
|
|
---
|
|
Liabilities
related to discontinued operations
|
|
|
2,984,660
|
|
|
3,012,386
|
|
Total
current liabilities
|
|
|
34,636,232
|
|
|
4,319,114
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities:
|
|
|
|
|
|
|
|
Accrued
interest payable:
|
|
|
---
|
|
|
67,419
|
|
4%
note payable to investor
|
|
|
107,419
|
|
|
---
|
|
8%
subordinated promissory notes payable to related parties
|
|
|
1,852,384
|
|
|
---
|
|
4%
note payable to related party, plus cumulative interest of
$952,775
|
|
|
3,952,775
|
|
|
3,952,775
|
|
4%
note payable to investor, net of unamortized discount
|
|
|
964,194
|
|
|
961,436
|
|
8%
subordinated secured promissory notes payable to related
parties
|
|
|
39,493,000
|
|
|
---
|
|
12%
subordinated promissory notes payable to related parties
|
|
|
7,000,000
|
|
|
---
|
|
Equipment
contract payable, less current portion
|
|
|
172,714
|
|
|
---
|
|
Capital
lease obligation, less current portion
|
|
|
1,312,064
|
|
|
---
|
|
Deferred
rent
|
|
|
144,360
|
|
|
---
|
|
|
|
|
|
|
|
|
|
Preferred
stock of subsidiary subject to mandatory redemption; issued and
outstanding at September
30,
2005 - 24,733 shares of Series A 13% cumulative, non-convertible,
redeemable preferred stock,
mandatory
redemption and liquidation value of $1,000.00 per share, plus cumulative
dividends of
$1,885,129
|
|
|
26,618,129
|
|
|
---
|
|
Preferred
stock subject to mandatory redemption; issued and outstanding at
September
30, 2005 and
2004
- 1,000,000 shares of Series A 4% cumulative, non-convertible, redeemable
preferred stock,
mandatory
redemption and liquidation value of $4.00 per share, plus cumulative
dividends of $1,269,333
|
|
|
5,269,333
|
|
|
5,269,333
|
|
|
|
|
|
|
|
|
|
Minority
interest - related parties
|
|
|
---
|
|
|
---
|
|
Total
liabilities
|
|
|
121,522,604
|
|
|
14,570,077
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficiency:
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; authorized - 5,000,000 shares; issued and
outstanding at September 30, 2005
and
2004 - 1,000,000 shares of Series A preferred stock (classified in
long-term liabilities
as preferred stock
subject
to mandatory redemption)
|
|
|
---
|
|
|
---
|
|
Common
stock, $0.01 par value; authorized - 100,000,000 shares; issued -
39,849,751 shares;
outstanding
- 39,242,251 shares at September 30, 2005 and 2004
|
|
|
398,486
|
|
|
398,486
|
|
Additional
paid-in capital
|
|
|
268,096,138
|
|
|
331,200,561
|
|
Accumulated
deficit
|
|
|
(347,265,398
|
)
|
|
(343,834,836
|
)
|
Treasury
stock - 607,500 shares, at cost
|
|
|
(829,576
|
)
|
|
(829,576
|
)
|
Total
stockholders’ deficiency
|
|
|
(79,600,350
|
)
|
|
(13,065,365
|
)
|
Total
liabilities and stockholders’ deficiency
|
|
$
|
41,922,254
|
|
$
|
1,504,712
|
|
See
accompanying notes to consolidated financial statements.
YOUTHSTREAM
MEDIA NETWORKS, INC. AND SUBSIDIARIES
YEARS
ENDED SEPTEMBER 30,
2005 AND 2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
NET
SALES
|
|
$
|
69,182,475
|
|
$
|
---
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
62,939,014
|
|
|
---
|
|
Selling
|
|
|
735,381
|
|
|
---
|
|
General
and administrative
|
|
|
2,816,125
|
|
|
1,090,256
|
|
|
|
|
66,490,520
|
|
|
1,090,256
|
|
Income
(loss) from operations
|
|
|
2,691,955
|
|
|
(1,090,256
|
)
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
Interest
income
|
|
|
45,542
|
|
|
49,566
|
|
Interest
expense:
13%
Series A Preferred Stock
|
|
|
(1,885,129
|
)
|
|
---
|
|
Notes
payable to related parties
|
|
|
(2,344,877
|
)
|
|
---
|
|
Other
|
|
|
(1,377,448
|
)
|
|
(41,509
|
)
|
Transaction
costs related to KES acquisition
|
|
|
(1,171,406
|
)
|
|
---
|
|
Gain
on settlement of compensation obligations
|
|
|
225,948
|
|
|
---
|
|
Other
income (expense), net
|
|
|
(46,078
|
)
|
|
---
|
|
Other
income (expense), net
|
|
|
(6,553,448
|
)
|
|
8,057
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAXES AND MINORITY INTEREST
|
|
|
(3,861,493
|
)
|
|
(1,082,199
|
)
|
Income
tax benefit
|
|
|
---
|
|
|
88,372
|
|
LOSS
BEFORE MINORITY INTEREST
|
|
|
(3,861,493
|
)
|
|
(993,827
|
)
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST - related parties
|
|
|
430,931
|
|
|
---
|
|
LOSS
FROM CONTINUING OPERATIONS
|
|
|
(3,430,562
|
)
|
|
(993,827
|
)
|
|
|
|
|
|
|
|
|
LOSS
FROM DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
---
|
|
|
(550,072
|
)
|
Disposal
of discontinued operations
|
|
|
---
|
|
|
(821,721
|
)
|
LOSS
FROM DISCONTINUED OPERATIONS
|
|
|
---
|
|
|
(1,371,793
|
)
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(3,430,562
|
)
|
$
|
(2,365,620
|
)
|
|
|
|
|
|
|
|
|
NET
LOSS PER COMMON SHARE -
BASIC
AND DILUTED
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(0.09
|
)
|
$
|
(0.03
|
)
|
Loss
from discontinued operations
|
|
|
---
|
|
|
(0.01
|
)
|
Loss
on disposal of discontinued operations
|
|
|
---
|
|
|
(0.02
|
)
|
NET
LOSS PER COMMON SHARE -
BASIC
AND DILUTED
|
|
$
|
(0.09
|
)
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON
SHARES
OUTSTANDING - BASIC AND DILUTED
|
|
|
39,242,251
|
|
|
39,242,251
|
|
See
accompanying notes to consolidated financial statements.
YOUTHSTREAM
MEDIA NETWORKS, INC. AND SUBSIDIARIES
YEARS
ENDED SEPTEMBER 30, 2005 AND 2004
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid-in Capital
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at September 30, 2003
|
|
|
39,849,751
|
|
$
|
398,486
|
|
$
|
331,200,561
|
|
$
|
(341,469,216
|
)
|
$
|
(829,576
|
)
|
$
|
(10,699,745
|
)
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(2,365,620
|
)
|
|
--
|
|
|
(2,365,620
|
)
|
Balances
at September 30, 2004
|
|
|
39,849,751
|
|
|
398,486
|
|
|
331,200,561
|
|
|
(343,834,836
|
)
|
|
(829,576
|
)
|
|
(13,065,365
|
)
|
Deemed
distribution to sellers of KES
Acquisition
Company, LLC in
excess
of predecessor company’s basis
|
|
|
--
|
|
|
--
|
|
|
(63,104,423
|
)
|
|
--
|
|
|
--
|
|
|
(63,104,423
|
)
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(3,430,562
|
)
|
|
--
|
|
|
(3,430,562
|
)
|
Balances
at September 30, 2005
|
|
|
39,849,751
|
|
$
|
398,486
|
|
$
|
268,096,138
|
|
$
|
(347,265,398
|
)
|
$
|
(829,576
|
)
|
$
|
(79,600,350
|
)
|
See
accompanying notes to consolidated financial statements.
YOUTHSTREAM
MEDIA NETWORKS, INC. AND SUBSIDIARIES
YEARS
ENDED SEPTEMBER 30, 2005 AND 2004
|
|
|
2005
|
|
|
2004
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,430,562
|
)
|
$
|
(2,365,620
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
---
|
|
|
550,072
|
|
Loss
on disposal of discontinued operations
|
|
|
---
|
|
|
821,721
|
|
Net
change in liabilities related to discontinued operations
|
|
|
(27,726
|
)
|
|
(206,619
|
)
|
Depreciation
and amortization
|
|
|
427,993
|
|
|
19,921
|
|
Amortization
of original issue discount on subordinated notes payable
|
|
|
2,758
|
|
|
1,509
|
|
Amortization
of deferred loan costs
|
|
|
207,445
|
|
|
---
|
|
Write-off
of fixed assets
|
|
|
20,430
|
|
|
---
|
|
Write-off
of costs related to KES acquisition
|
|
|
362,846
|
|
|
---
|
|
Gain
on settlement of compensation obligations
|
|
|
(225,948
|
)
|
|
---
|
|
Loss
on settlement of BTW note
|
|
|
22,732
|
|
|
---
|
|
Minority
interest - related parties
|
|
|
(430,931
|
)
|
|
---
|
|
Changes
in operating assets and liabilities, net of effect of KES
acquisition:
|
|
|
|
|
|
|
|
(Increase)
decrease in -
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(4,215,054
|
)
|
|
---
|
|
Inventories
|
|
|
881,413
|
|
|
---
|
|
Accrued
interest receivable
|
|
|
(41,227
|
)
|
|
(44,454
|
)
|
Prepaid
expenses
|
|
|
(1,246,487
|
)
|
|
170,998
|
|
Increase
(decrease) in -
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(1,467,789
|
)
|
|
51,831
|
|
Accrued
interest payable
|
|
|
4,270,006
|
|
|
40,000
|
|
Accrued
expenses
|
|
|
610,759
|
|
|
59,199
|
|
Deferred
rent
|
|
|
(21,053
|
)
|
|
---
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(4,300,395
|
)
|
|
(901,442
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds
from sale of BTW assets
|
|
|
---
|
|
|
820,000
|
|
Principal
and interest payments on BTW note receivable
|
|
|
506,149
|
|
|
400,000
|
|
Deferred
costs related to KES transaction
|
|
|
---
|
|
|
(175,144
|
)
|
NET
CASH PROVIDED BY INVESTING ACTIVITIES
|
|
|
506,149
|
|
|
1,044,856
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Net
borrowings under secured line of credit
|
|
|
3,389,284
|
|
|
---
|
|
Proceeds
from notes payable
|
|
|
50,000
|
|
|
---
|
|
Principal
payments on equipment contract payable and capital lease
obligation
|
|
|
(234,277
|
)
|
|
---
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
3,205,007
|
|
|
---
|
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED BY (USED IN) OPERATING, INVESTING AND FINANCING
ACTIVITIES
|
|
|
(589,239
|
)
|
|
143,414
|
|
|
|
|
|
|
|
|
|
CASH
ACQUIRED IN CONNECTION WITH KES ACQUISITION
|
|
|
913,194
|
|
|
---
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
Net
increase
|
|
|
323,955
|
|
|
143,414
|
|
Balance
at beginning of year
|
|
|
674,880
|
|
|
531,466
|
|
Balance
at end of year
|
|
$
|
998,835
|
|
$
|
674,880
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
|
|
|
|
|
Cash
paid for -
|
|
|
|
|
|
Interest
|
|
$
|
1,334,690
|
|
$
|
---
|
|
Income
taxes
|
|
$
|
---
|
|
$
|
---
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Preferred
stock issued in connection with acquisition of KES Acquisition Company,
LLC
|
|
$
|
24,733,000
|
|
$
|
---
|
|
Notes
payable issued in connection with acquisition of KES Acquisition
Company,
LLC
|
|
$
|
39,493,000
|
|
$
|
---
|
|
Non-cash
assets acquired in connection with acquisition of KES Acquisition
Company,
LLC
|
|
$
|
37,019,827
|
|
$
|
---
|
|
Liabilities
assumed in connection with acquisition of KES Acquisition Company,
LLC
|
|
$
|
36,255,513
|
|
$
|
---
|
|
Deemed
distribution to sellers of KES Acquisition Company, LLC in excess
of
predecessor’s basis
|
|
$
|
63,104,423
|
|
$
|
---
|
|
Loan
fees capitalized and added to secured line of credit
|
|
$
|
125,000
|
|
$
|
---
|
|
See
accompanying notes to consolidated financial statements.
YOUTHSTREAM
MEDIA NETWORKS, INC. AND SUBSIDIARIES
YEARS
ENDED SEPTEMBER 30, 2005 AND 2004
1.
Organization and Basis of Presentation
Basis
of Presentation
The
accompanying consolidated financial statements include the accounts of
YouthStream Media Networks, Inc. (“YouthStream”), and its direct and
indirect wholly and majority-owned subsidiaries: Network Event
Theater, Inc. (“NET”), American Passage Media, Inc. (“American
Passage”), Beyond the Wall, Inc. (“Beyond the Wall” or “BTW”), and
W3T.com, Inc. (“Teen.com”) (all inactive); and, commencing March 1, 2005,
YouthStream Acquisition Corp. (“Acquisition Corp.”), Atacama KES Holding
Corporation (“Atacama KES”) and KES Acquisition Company, LLC (“KES Acquisition”)
(see Note 3) (collectively, the “Company”).
The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of
America.
All
intercompany items and transactions have been eliminated in
consolidation.
On
February 25, 2004, the Company sold the assets and operations of its Beyond
the
Wall subsidiary. Beyond the Wall had been engaged in the sale of decorative
wall
posters through on-campus sales events, retail stores and internet sales,
primarily to teenagers and young adults. During the period from October 1,
2003
through February 25, 2004, Beyond the Wall operated 17 stores in 12 states,
plus
Washington, D.C., throughout the East and mid-West, as well as a warehouse
and
distribution center in Stroudsburg, Pennsylvania, and was the Company’s only
revenue-generating business operation. The consolidated financial statements
for
the year ended September 30, 2004 present Beyond the Wall’s operations as a
discontinued operation as a result of the disposal of its assets and operations
on February 25, 2004 (see Note 4).
Commencing
March 1, 2005, the Company has included the operations of a steel mini-mill
located in Ashland, Kentucky, which represents the only business segment in
which the Company currently operates, in its consolidated financial statements
(see Note 3).
Going
Concern
The
Company has incurred recurring operating losses since its inception. The
Company
incurred
a net loss of $3,430,562 and a negative cash flow from operating activities
of
$4,300,395 for the year ended September 30, 2005, and had an accumulated deficit
of $347,265,398 and a stockholders' deficiency of $79,600,350 at September
30,
2005. As
of
September 30, 2005, the Company had insufficient capital to fund all of its
obligations on a consolidated basis. These factors raise substantial doubt
about
the Company’s ability to continue as a going concern. The consolidated financial
statements do not include any adjustments to reflect the possible future effect
of the recoverability and classification of assets or the amounts and
classifications of liabilities that may result from the outcome of this
uncertainty.
On
March
9, 2005, the Company completed the acquisition of a steel mini-mill located
in
Ashland, Kentucky (see Note 3). The Company utilized substantially all of its
available cash resources to fund such acquisition and will require additional
operating capital to fund corporate general and administrative expenses, which
the Company expects to obtain primarily through periodic tax sharing payments
from Acquisition Corp. and Atacama KES (see Note 3). In addition, the steel
mini-mill restarted operations in late January 2004 after being acquired by
the
previous owners, and until recently has incurred losses. For the year ended
September 30, 2005, operating income was $2,691,955 (which included the
operations of the steel mini-mill for the seven month period March through
September 2005), exclusive of interest expense. The steel mini-mill relies
on
cash flows from operations to support a secured line of credit with General
Electric Capital Corporation to fund its separate operations. As a result of
improved operating performance of the steel mini-mill beginning in late 2005,
the Company has been able to increase borrowing availability under this line
of
credit.
Based
on
its current level of operations, the Company believes that its current cash
resources provided by operations and the secured line of credit will be adequate
to fund its operations through September 30, 2006. However, to the extent the
Company’s estimates are inaccurate or its assumptions are incorrect, the Company
may not have sufficient cash resources to fund its operations. In such event,
the Company may have to consider a formal or informal restructuring or
reorganization, including a sale or other disposition of its
assets.
The
Company’s management may also consider various strategic alternatives in the
future, including the acquisition of new business opportunities, which may
be
from related or unrelated parties. However, there can be no assurances
that such efforts will ultimately be successful. The Company may finance
any acquisitions through a combination of debt and/or equity
securities.
2.
Significant Accounting Policies
Cash
and Cash Equivalents
Cash
and
equivalents include all cash, demand deposits and money market accounts with
original maturities of three months or less.
Accounts
Receivable
The
Company grants credit to its customers generally in the form of short-term
trade
accounts receivable. Management evaluates the credit risk of its customers
utilizing historical data and estimates of future performance.
Accounts
receivable are stated at the amount management expects to collect from
outstanding balances. When appropriate, management provides for probable
uncollectible amounts through a provision for doubtful accounts and an
adjustment to a valuation allowance. Management reviews and adjusts this
allowance periodically based on the aging of accounts receivable balances,
historical write-off experience, customer concentrations, customer
creditworthiness, and current industry and economic trends. Balances that are
still outstanding after management has used reasonable collection efforts are
written off through a charge to the valuation allowance and a credit to accounts
receivable.
Inventories
Inventories
are comprised of raw materials (consisting of billets and scrap metal),
semi-finished goods and finished goods. Inventory costs include material, labor
and manufacturing overhead. Inventories are valued at the lower of average
cost
or market. The average cost of the billets and scrap metal is adjusted
periodically to reflect current changes in cost inputs.
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost. Expenditures for routine maintenance
and repairs are charged to expense as incurred. Expenditures for equipment
renewals and improvements, which extend the useful life of an asset, are
capitalized. Certain equipment held under capital lease is classified as
property, plant and equipment, and the related obligation is recorded as a
liability. Lease amortization is included in depreciation expense.
Depreciation
is provided on the straight-line method over the estimated useful lives of
the
assets, generally 3 to 20 years for machinery and equipment, and 20 to 40 years
for buildings and improvements. Equipment under capital lease is amortized
using
the straight-line method over the primary lease term.
Impairment
of Long-Lived Assets
Long-lived
assets are evaluated for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". An asset is considered impaired if its carrying amount
exceeds the future net cash flow the asset is expected to generate. If an asset
is considered to be impaired, the impairment to be recognized is measured by
the
amount by which the carrying amount of the asset exceeds its fair market value.
The recoverability of long-lived assets is assessed by determining whether
the
unamortized balances can be recovered through undiscounted future net cash
flows
of the related assets. The amount of impairment, if any, is measured based
on
projected discounted future net cash flows using a discount rate reflecting
the
Company's average cost of capital.
Loan
Costs
Direct
costs and fees associated with the establishment of debt financing are
capitalized and amortized on a straight-line basis over the term of the
underlying debt.
Deferred
Acquisition Costs
Deferred
acquisition costs related to pending transactions are accounted for as part
of
the purchase consideration if and when the transaction is completed.
If
the
Company does not complete the transaction, those costs are charged to operations
in the period that the Company’s efforts to complete the transaction are
terminated.
Revenue
Recognition
The
Company recognizes revenue when there is persuasive evidence that an arrangement
exists, delivery of the product has occurred and title has passed, the selling
price is both fixed and determinable, and collectibility is reasonably assured,
all of which generally occur either upon shipment of the Company’s product or
delivery of the product to the destination specified by the
customer.
Shipping
and Handling Fees and Costs
In
accordance with EITF No. 00-10, “Accounting for Shipping and Handling Fees and
Costs”, shipping and handling fees and costs billed to customers are included in
net sales, and the actual costs incurred by the Company are included in cost
of
sales.
Operating
Leases
Leases
where substantially all the risks and rewards of ownership of the assets remain
with the leasing company are accounted for as operating leases. Rent payable
under operating leases is recorded as an operating cost in the statement of
operations on a straight-line basis over the lease terms.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under this method, deferred income taxes are
provided for differences between the carrying amounts of the Company's assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes using expected tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled.
The
Company records a valuation allowance to reduce its deferred tax assets to
the
amount that is more likely than not to be realized. In the event the Company
was
to determine that it would be able to realize its deferred tax assets in the
future in excess of its recorded amount, an adjustment to the deferred tax
assets would be credited to operations in the period such determination was
made. Likewise, should the Company determine that it would not be able to
realize all or part of its deferred tax assets in the future, an adjustment
to
the deferred tax assets would be charged to operations in the period such
determination was made.
Discontinued
Operations
The
Company has accounted for the operations of its Beyond the Wall subsidiary
as
discontinued operations for all periods presented in accordance with SFAS
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
(see Note 4).
Asset
Retirement Obligations
The
Company accounts for its asset retirement obligations in accordance with SFAS
No. 143, “Accounting for Asset Retirement Obligations”, which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and associated costs. SFAS No. 143
requires that the discounted fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of the fair value can be made. The associated asset retirement costs
are capitalized as part of the carrying amount of the long-lived asset.
All
material environmental remediation liabilities for non-capital expenditures,
which are probable and estimable, are recorded in the financial statements
based
on current technologies and current environmental standards at the time of
evaluation. Adjustments are made when additional information is available that
suggests different remediation methods or periods may be required which affect
the total cost.
Self-Insurance
KES
Acquisition is self-insured for health care costs up to $25,000 per subscriber
annually. Insurance coverage is carried for risks in excess of this amount.
During 2005, KES Acquisition recognized self-insured health care expense of
approximately $1,063,000. At September 30, 2005, estimated claims incurred
but
not reported were approximately $321,000, which are included in accrued
liabilities in the consolidated balance sheet at such date.
Fair
Value of Financial Instruments
The
carrying amounts of financial instruments, which includes cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities, notes
payable to directors, and secured line of credit as of September 30, 2005
approximates their respective fair values due to the demand or short-term nature
of those instruments and their underlying liquidity. The
carrying value of long-term obligations approximates the fair value based on
the
effective interest rates compared to current market rates.
All
long-term debt and preferred stock classified as long-term debt are presented
at
face value plus accrued interest and dividends through the due
date.
Concentrations
The
Company’s cash balances exceeded federally-insured levels at September 30, 2005.
The Company minimizes its credit risk by investing its cash and cash equivalents
with major banks and financial institutions located in the United States, as
a
result of which the Company believes that it had nominal risk with respect
to
its concentration of balances in cash and cash equivalents at such date.
During
2005, the Company had two suppliers that accounted for approximately 65% of
raw
materials purchases, one providing approximately 37% and the other providing
approximately 28%, of which $2,634,161 was included in accounts payable at
September 30, 2005. During 2005, the Company had two customers that each
accounted for 4% or more of net sales (aggregate 9%), of which $4,352,730 was
included in accounts receivable at September 30, 2005.
Information
with respect to the year ended September 30, 2005 relating to KES
Acquisition reflects only the seven-month period in which KES Acquisition has
been included in the Company’s consolidated results of operations.
Net
Loss Per Share
The
Company calculates net loss per share as required by SFAS No. 128, "Earnings
per
Share". Basic income (loss) per share excludes any dilution for common stock
equivalents and is computed by dividing net loss by the weighted average number
of common shares outstanding during the relevant period. Diluted income (loss)
per share reflects the potential dilution that could occur if options or other
securities or contracts entitling the holder to acquire shares of common stock
were exercised or converted, resulting in the issuance of additional shares
of
common stock that would then share in earnings. However, diluted income (loss)
per share does not consider such dilution if its effect would be anti-dilutive
(i.e., to increase income per share or decrease loss per share). Accordingly,
basic and diluted loss per share is the same for all periods presented.
Securities
entitling the holder thereof to acquire shares of common stock that have been
excluded from the calculation of diluted loss per share due to their
anti-dilutive effect are as follows at September 30, 2005 and 2004:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Stock
options
|
|
|
1,405,404
|
|
|
1,205,404
|
|
Common
stock purchase warrants
|
|
|
1,000,000
|
|
|
1,000,000
|
|
Stock-Based
Compensation
The
Company accounts for stock-based employee compensation in accordance with the
provisions of Accounting Principles Board (“APB”) Opinion No. 25 and FASB
Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions
Involving Stock Compensation”, and complies with the disclosure requirements of
SFAS No. 123 (as modified by SFAS No. 148), “Accounting for Stock-Based
Compensation”. Under APB No. 25, compensation expense is recorded based on
the difference, if any, between the fair value of the Company’s stock and the
exercise price on the measurement date. The Company accounts for stock issued
to
non-employees in accordance with SFAS No. 123, which requires entities to
recognize as expense over the service period the fair value of all stock-based
awards on the date of grant and EITF No. 96-18, “Accounting for Equity
Investments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services”, which addresses the measurement
date and recognition approach for such transactions.
The
Company recognizes compensation expense related to variable awards in accordance
with FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights
and Other Variable Stock Option or Award Plans” (“FIN 28”). For fixed awards,
the Company recognizes expense over the vesting period or the period of
service.
In
December 2004, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 123 (revised 2004), “Share Based Payment”
(“SFAS No. 123R”), a revision to SFAS No. 123, “Accounting for
Stock-Based Compensation”. SFAS No. 123R supersedes Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and
amends SFAS No. 95, “Statement of Cash Flows”. SFAS No. 123R requires
that the Company measure the cost of employee services received in exchange
for
equity awards based on the grant date fair value of the awards. The cost will
be
recognized as compensation expense over the vesting period of the awards. The
Company was required to adopt SFAS No. 123R effective January 1,
2006. Under this method, the Company will begin recognizing compensation cost
for equity-based compensation for all new or modified grants after the date
of
adoption. The pro forma disclosures previously permitted under SFAS No. 123
will no longer be an alternative to financial statement recognition. In
addition, the Company will recognize the unvested portion of the grant date
fair
value of awards issued prior to adoption based on the fair values previously
calculated for disclosure purposes over the remaining vesting period of the
outstanding options and warrants.
Public
companies are permitted to adopt the requirements of SFAS No. 123R using
one of two methods:
(1) A
“modified prospective” method in which compensation cost is recognized beginning
with the effective date (a) based on the requirements of SFAS No. 123R
for all share-based payments granted after the effective date and (b) based
on the requirements of SFAS No. 123R for all awards granted to employees
prior to the effective date of SFAS No. 123R that remain unvested on the
effective date.
(2) A
“modified retrospective” method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based
on the amounts previously recognized under SFAS No. 123 for purposes of pro
forma disclosures for either (a) all prior periods presented or
(b) prior interim periods of the year of adoption.
The
Company will adopt SFAS No. 123R effective January 1, 2006 and will
use the modified prospective method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS
No. 123R for all share-based payments granted after the effective date and
(b) based on the requirements of SFAS No. 123R for all awards granted
to employees prior to the effective date of SFAS No. 123R that remain
unvested on the effective date. Although the expense for stock options that
may be vested or granted in future periods cannot be determined at this
time due to the uncertainty of the vesting or timing of future grants, the
Company’s future stock price, and the related fair value calculation, the
adoption of SFAS No. 123R could have a material effect on the Company’s
future financial statements.
Pro
forma
information regarding net loss per share is required by SFAS No. 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of such statement. The fair value for these options
was estimated at the grant date using the Black-Scholes option-pricing model.
The assumptions used in the model and the weighted-average
assumptions for the years
ended September 30, 2005 and 2004 are as follows:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
4.50
|
%
|
|
4.00
|
%
|
Dividend
yield
|
|
|
0
|
%
|
|
0
|
%
|
Volatility
factor
|
|
|
118.5
|
%
|
|
100.2
|
%
|
Average
life (years)
|
|
|
7.0
|
|
|
7.0
|
|
Weighted
average fair value of options
|
|
$
|
0.1225
|
|
$
|
0.156
|
|
For
the
purpose of pro forma disclosures, the estimated fair value of the options is
amortized to operations over the vesting period of the options or the expected
period of benefit. The Company’s pro forma information for the years ended
September 30 2005 and 2004 is summarized as follows:
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
Net
loss - as reported
|
|
$
|
(3,430,562
|
)
|
$
|
(2,365,620
|
)
|
Add:
Total stock-based compensation expense included in reported net
loss
|
|
|
---
|
|
|
---
|
|
Less:
Total stock-based compensation expense determined under fair
value method for all awards not charged to operations
|
|
|
(24,500 |
)
|
|
(39,000 |
)
|
Net
loss - pro forma
|
|
$
|
(3,455,062
|
)
|
$
|
(2,404,620
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.09
|
)
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
Pro
forma
|
|
$
|
(0.09
|
)
|
$
|
(0.06
|
)
|
Comprehensive
Income (Loss)
The
Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, “Reporting Comprehensive Income” (“SFAS No. 130”).
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income, its components and accumulated balances in a full set
of
general purpose financial statements. SFAS No. 130 defines comprehensive
income (loss) to include all changes in equity except those resulting from
investments by owners and distributions to owners, including adjustments to
minimum pension liabilities, accumulated foreign currency translation, and
unrealized gains or losses on marketable securities. The Company did not have
any items of comprehensive income (loss) for the years ended September 30,
2005
and 2004.
Use
of Estimates
The
preparation of the financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those
estimates.
Reclassification
Certain
2004 amounts have been reclassified to conform to the presentation in 2005.
Recent
Accounting Pronouncements and Developments
In
November 2004, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 151, “Inventory Costs — An Amendment of ARB No. 43,
Chapter 4” (SFAS No. 151). SFAS No. 151 clarifies that abnormal
amounts of idle facility expense, freight, handling costs and spoilage should
be
expensed as incurred and not included in overhead. Further, SFAS No. 151
requires that allocation of fixed and production facilities overhead to
conversion costs should be based on normal capacity of the production
facilities. The provisions in SFAS No. 151 are effective for inventory
costs incurred during fiscal years beginning after June 15, 2005.
Accordingly, the Company adopted SFAS No. 151 effective October 1, 2005. The
adoption of SFAS No. 151 did not have any impact on the Company’s financial
statement presentation or disclosures.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
Assets, an amendment to APB Opinion No. 29” (“SFAS No. 153”). SFAS No.
153 amends Accounting Principles Board Opinion No. 29, “Accounting for
Nonmonetary Transactions”, to require that exchanges of nonmonetary assets be
measured and accounted for at fair value, rather than at carryover basis, of
the
assets exchanged. Nonmonetary exchanges that lack commercial substance are
exempt from this requirement. SFAS No. 153 is effective for nonmonetary
exchanges entered into in fiscal periods beginning after June 15, 2005.
Accordingly, the Company adopted SFAS No. 153 effective July 1, 2005. The
adoption of SFAS No. 153 did not have any impact on the Company’s financial
statement presentation or disclosures.
In
May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections” (“SFAS No. 154”). SFAS No. 154 is a replacement of APB
Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting
Accounting Changes in Interim Financial Statements - (an Amendment of APB
Opinion No. 28)” and provides guidance on the accounting for and reporting
of accounting changes and error corrections. SFAS No. 154 establishes
retrospective application as the required method for reporting a change in
accounting principle, and provides guidance for determining whether
retrospective application of a change in accounting principle is impracticable
and for reporting a change when retrospective application is impracticable.
Retrospective application is the application of a different accounting principle
to a prior accounting period as if that principle had always been used or as
the
adjustment of previously issued financial statements to reflect a change in
the
reporting entity. SFAS No. 154 also addresses the reporting of the
correction of an error by restating previously issued financial statements.
SFAS
No. 154 is effective for accounting changes and error corrections occurring
in fiscal years beginning after December 15, 2005. Accordingly, the Company
will adopt the provisions of SFAS No. 154 effective October 1, 2006. The
adoption of SFAS No. 154 is not expected to have any impact on the Company’s
financial statement presentation or disclosures.
On
September 22, 2005, the Securities and Exchange Commission (“SEC”) issued
rules to delay by one-year the required reporting by management on internal
controls over financial reporting for non-accelerated filers. The new SEC
rule extends the compliance date for such registrants to fiscal years
ending on or after July 15, 2007. Accordingly, the Company qualifies for
the deferral until its year ending September 30, 2007 to comply with the
internal control reporting requirements.
3.
Acquisition of Steel Mini-Mill
In
September 2003, YouthStream invested $125,000 to acquire a 1.00% membership
interest in KES Holdings, LLC, a Delaware limited liability company ("KES
Holdings"), which was formed to acquire certain assets of Kentucky Electric
Steel, Inc., a Delaware corporation ("KES"), consisting of a steel
mini-mill located in Ashland, Kentucky (the “Mill”). On September 2, 2003,
KES Holdings, through its subsidiary, KES Acquisition Company, LLC, a Delaware
limited liability company ("KES Acquisition"), completed the acquisition of
the
Mill pursuant to Section 363 of the United States Bankruptcy Code for cash
consideration of $2,650,000, which was funded through the capital contributions
of the members of KES Holdings. Members’ capital contributions were also used
for start-up costs, working capital purposes and payment of deferred maintenance
of the Mill. KES had ceased production on or about December 16, 2002 and
filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code on February 5, 2003.
The
Mill
had been in operation for approximately forty years and was refurbished by
KES
Acquisition subsequent to its acquisition. The refurbished Mill has been
generating revenues since late January 2004. The current production capacity
of
the Mill for finished products, based on the current operating structure and
hours worked, is approximately 200,000 short-tons per year, and the Mill is
currently operating at approximately 94% of such annualized
capacity. Management
is focusing on developing the business and improving operating
efficiencies.
The
Mill
produces bar flats that are produced to a variety of specifications and fall
primarily into two general quality levels - merchant bar quality steel bar
flats
(“MBQ Bar Flats”) for generic types of applications, and special bar quality
steel bar flats (“SBQ Bar Flats”), where more precise customer specifications
require the use of alloys, customized equipment and special production
procedures to insure that the finished product meets critical end-use
performance characteristics.
The
Mill
manufactures over 2,600 different Bar Flat items which are sold to volume niche
markets, including original equipment manufacturers (“OEMs”), cold drawn bar
converters, steel service centers and the leaf-spring suspension market for
light- and heavy-duty trucks, mini-vans and utility vehicles. The Mill was
specifically designed to manufacture wider and thicker bar flats up to three
inches in thickness and twelve inches in width that are required by these
markets. In addition, the Mill employs a variety of specially designed equipment
which is necessary to manufacture SBQ Bar Flats to the specifications of the
Mill’s customers.
On
March
9, 2005, YouthStream completed the acquisition of KES Acquisition (the
"Acquisition"), which was deemed effective March 1, 2005. Pursuant to definitive
agreements executed with KES Holdings and Atacama Capital Holdings, Ltd., a
British Virgin Islands company ("Atacama", and together with KES Holdings,
collectively, the "Sellers"), YouthStream, through its newly-formed subsidiary,
YouthStream Acquisition Corp., a Delaware corporation ("Acquisition Corp."),
acquired 100% of the membership interests of KES Acquisition by acquiring (i)
a
37.45% membership interest from KES Holdings and (ii) all of the capital stock
of Atacama KES Holding Corporation, a wholly-owned subsidiary of Atacama
(“Atacama KES”) and the owner of the remaining 62.55% membership interest
in KES Acquisition. As consideration for the Acquisition, Acquisition Corp.
issued to the Sellers (i) $40,000,000 in promissory notes (the “Notes”), (ii)
25,000 shares of 13% Series A Non-Convertible Preferred Stock with an aggregate
liquidation value of $25,000,000 (the “13% Series A Preferred Stock”) and (iii)
100% of its authorized shares of Series B Non-Voting Common Stock. With respect
to the $65,000,000 of purchase consideration, $19,000,000 of the Notes and
$10,000,000 of the 13% Series A Preferred Stock were issued to KES Holdings,
and
$21,000,000 of the Notes and $15,000,000 of the 13% Series A Preferred Stock
were issued to Atacama. YouthStream also contributed an aggregate of $500,000
of
cash to Acquisition Corp. as consideration for the issuance by Acquisition
Corp.
of 100% of its Series A Voting Common Stock. In addition, YouthStream will
periodically be required to purchase shares of Series B Preferred Stock of
Acquisition Corp. in amounts equal to distributions it receives on its KES
Holdings membership interest.
As
a
result of these transactions, YouthStream owns 80.01% of the common stock,
and
100% of the voting stock, of Acquisition Corp. The remaining 19.99% common
stock
interest in Acquisition Corp. is owned 62.55% by Atacama and 37.45% by KES
Holdings. YouthStream currently has a 2.67% equity interest in KES Holdings
(this percentage has increased from 1.00% as a result of the redemption of
another member’s interest), as a result of which the Company has eliminated its
$507,000 interest in the Notes and $267,000 interest in the 13% Series A
Preferred Stock in the consolidated balance sheet at September 30, 2005.
YouthStream has consolidated the operations of the Mill through its ownership
of
KES Acquisition commencing March 1, 2005. As a result of the Acquisition, the
Company’s financial statements for periods ending after March 1, 2005 are
materially different from and are not comparable to its financial statements
prior to that date.
Subsequent
to this transaction, the management of the Mill continued unchanged. This
transaction did not result in any change in the Mill’s business operations or
financial condition, and, other than as set forth herein, the working capital,
operating cash flow, debt service obligations and credit profile of the Mill
were not affected in any way by this transaction.
As
described herein, the Notes and 13% Series A Preferred Stock were issued by
Acquisition Corp., the parent company of KES Acquisition. KES Acquisition is
a
separate legal entity that owns and operates the Mill. The Notes are legal
obligations solely of Acquisition Corp., and are not obligations of KES
Acquisition, nor are they secured by the assets or cash flows of the Mill.
In
the future, Acquisition Corp. may grant liens to secure repayment of the Notes,
upon the consent of any senior lender to KES Acquisition at that time. In
addition, the Notes are non-recourse to the assets of YouthStream, except for
the shares of capital stock of Acquisition Corp. that have been pledged by
YouthStream to the holders of the Notes. Pursuant to the terms of the
transaction documentation in connection with the Acquisition and the loan
facility with General Electric Capital Corporation (“GECC”), YouthStream and
Acquisition Corp. are currently limited in their ability to receive cash
distributions from KES Acquisition, but are permitted to receive tax sharing
payments as described below. Any change in control of Acquisition Corp. in
the
future as a result of the holders of the Notes exercising their legal rights
would not reasonably be expected to have a material impact on the operations
or
financial position of the Mill.
The
Notes
are structurally subordinate in right and payment of up to $40,000,000 of senior
debt, including existing debt obligations in favor of GECC. Scheduled principal
payments commence in (i) February 2007 with respect to the $19,000,000 principal
amount of Notes issued in favor of KES Holdings and (ii) February 2011 with
respect to the $21,000,000 principal amount of Notes issued in favor of Atacama.
In addition, the Notes require additional quarterly principal payments out
of
"free cash", as that term is defined in the Note Purchase Agreement. The Notes
bear interest at the rate of 8% per annum, payable annually during the first
two
years of the Note, as provided for in a letter agreement dated as of July 14,
2005 and effective as of February 28, 2005 by and among Acquisition Corp. and
the Note holders, and quarterly thereafter. The obligations of Acquisition
Corp.
under the Notes are secured by a limited guaranty by YouthStream, which guaranty
is secured by and limited in recourse solely to a pledge by YouthStream of
all
of its interest in Acquisition Corp. As of September 30, 2005, the balance
outstanding on the Notes was $39,493,000, and related accrued interest payable
was $1,852,384.
Future
scheduled principal payments on the Notes are summarized as
follows:
Years
Ending September 30,
|
|
KES
Holdings -
$19,000,000
Note
|
|
Atacama
-
$21,000,000
Note
|
|
|
|
|
|
|
|
2006
|
|
$
|
---
|
|
$
|
---
|
|
2007
|
|
|
1,900,000
|
|
|
---
|
|
2008
|
|
|
950,000
|
|
|
---
|
|
2009
|
|
|
950,000
|
|
|
---
|
|
2010
|
|
|
950,000
|
|
|
---
|
|
2011
|
|
|
2,850,000
|
|
|
4,200,000
|
|
2012
|
|
|
2,850,000
|
|
|
4,200,000
|
|
2013
|
|
|
2,850,000
|
|
|
4,200,000
|
|
2014
|
|
|
---
|
|
|
1,264,000
|
|
2015
|
|
|
5,700,000
|
|
|
7,136,000
|
|
Total
|
|
$
|
19,000,000
|
|
$
|
21,000,000
|
|
Pursuant
to a further letter agreement dated April 11, 2006 and effective as of February
27, 2006 by and among Acquisition Corp. and the Note holders, the interest
payment of $3,200,000 due on February 27, 2006 was paid by the delivery of
short-term notes due February 27, 2007 in the principal amount of $3,200,000,
with interest at 8% per annum.
For
the
nine months ending September 30, 2005, Acquisition Corp., KES Acquisition and
Atacama KES are collectively required to have, on a consolidated basis, in
excess of $4,000,000 of earnings before interest, taxes, depreciation and
amortization, calculated in accordance with generally accepted accounting
principles ("EBITDA"). For each of the fiscal years ending on and
after September 30, 2006, Acquisition Corp., KES Acquisition and Atacama KES
are
collectively required to have, on a consolidated basis, in excess of $7,200,000
of EBITDA. At March 31 of each fiscal year following the fiscal year
ending September 30, 2005 in which the obligations under the Notes remain
outstanding, Acquisition Corp., KES Acquisition and Atacama KES are collectively
required to have, on a consolidated basis, in excess of $3,000,000 of EBITDA
for
the six months then ended. Effective September 23, 2005, the holders of the
Notes executed an agreement to amend the Notes to eliminate the requirement
that
Acquisition Corp., KES Acquisition and Atacama KES collectively have, on a
consolidated basis, in excess of $4,000,000 of EBITDA for the nine months ending
September 30, 2005.
The
holders of each share of 13% Series A Preferred Stock are entitled to receive
a
cumulative dividend at an annual rate of 13% of the sum of $1,000 and all
accrued but unpaid dividends. The 13% Series A Preferred Stock contains a
liquidation preference equal to $1,000 per share, plus accrued but unpaid
dividends, and is redeemable out of, and to the extent of, legally available
funds, at a redemption price equal to the sum of $1,000 and all accrued but
unpaid dividends on the earlier to occur of (i) any liquidation of Acquisition
Corp., (ii) the occurrence of an event of default under the Note Purchase
Agreement pursuant to which the Notes were issued or (iii) the first anniversary
of Acquisition Corp.’s full and complete repayment of the Notes. In addition,
beginning with the second anniversary of the initial issuance of the 13% Series
A Preferred Stock, Acquisition Corp. will be required to use "free cash", as
that term is defined in the Securities Purchase Agreement, to commence redeeming
shares of 13% Series A Preferred Stock in increments of at least $4,000,000,
with limited exceptions. As of September 30, 2005, the balance outstanding
on
the 13% Series A Preferred Stock was $24,733,000, and related accrued dividends
payable was $1,885,129.
Since
the
acquisition of the Mill by the Sellers, the Mill has been operating under a
Management Services Agreement with Pinnacle Steel, LLC (the "Pinnacle
Agreement"), which agreement remained in effect following the closing. The
principals of Pinnacle Steel LLC that manage the Mill have significant
experience and expertise in the steel industry. The Pinnacle Agreement will
remain in effect through October 31, 2009, subject to earlier termination or
extension based on the financial performance of the Mill. Pinnacle is entitled
to a monthly management fee and a management incentive fee as provided in the
Pinnacle Agreement.
Subsequent
to the acquisition of the Mill by the Sellers, KES Acquisition issued an
aggregate of $7,000,000 of subordinated promissory notes to the Sellers and
certain of their respective affiliates (the “Subordinated Promissory Notes”).
The proceeds from the Subordinated Promissory Notes were used to accelerate
the
development and expansion of the Mill’s operations. The Subordinated Promissory
Notes bear interest at the rate of 12% per annum, with interest payable monthly,
subject to compliance with various agreements and covenants, are secured by
a
subordinated security interest in all of the assets of KES Acquisition, and
are
subject to an Intercreditor and Subordination Agreement dated March 24, 2004
with GECC. When originally issued, principal and interest were due and payable
upon the earlier to occur of (i) an event of default under the Loan and Security
Agreement with GECC or (ii) each note’s respective due date, which ranged from
March 31, 2005 to December 31, 2005. As of September 30, 2005, the due dates
of
the notes had all been extended to December 31, 2006, if not repaid earlier.
At
September 30, 2005, accrued interest payable with respect to the Subordinated
Promissory Notes was $1,085,753, almost all of which was paid subsequent to
fiscal year end.
Related
parties with respect to this transaction are summarized as follows: Robert
Scott
Fritz, a director of YouthStream, is an investor in KES Holdings. Hal G.
Byer,
another director of YouthStream, is an employee of affiliates of Libra/KES
Investment I, LLC ("Libra/KES"), the Manager of KES Holdings, and has an
economic interest in KES Holdings through his relationship with Libra
Securities, LLC ("Libra Securities"). Jess M. Ravich, a director of YouthStream
effective June 26, 2006, is a principal of Libra/KES. In addition, affiliates
of
Mr. Ravich, including a trust for the benefit of Mr. Ravich and certain of
his
family members (the “Ravich Trust”) are investors in KES Holdings. Mr. Ravich,
either directly or through the Ravich Trust, holds 1,860,000 shares of
YouthStream's common stock, warrants to purchase 500,000 shares of YouthStream's
common stock exercisable through August 31, 2008, 1,000,000 shares of
YouthStream's redeemable preferred stock and an option to purchase 200,000
shares of YouthStream’s common stock exercisable through June 26, 2013, which
was issued to Mr. Ravich under YouthStream’s 2000 Stock Option Incentive Plan in
connection with his election to the Board. Through his positions at Libra/KES,
Mr. Ravich managed the business of KES Acquisition through February 28, 2005.
Subordinated Promissory Notes with a principal amount of $1,650,000 and $450,000
are payable to the Ravich Trust and Libra Securities
Holdings, LLC,
the
parent of Libra Securities, respectively. Mr. Fritz and Mr. Byer have each
previously acquired an option from the Ravich Trust for $2,500 ($0.04 per
share)
to purchase 62,500 shares of YouthStream's redeemable preferred stock issued
to
the Ravich Trust in January 2003, exercisable at $0.36 per share until December
31, 2006 or earlier upon the occurrence of certain
events.
The
Acquisition was accounted for as a purchase in accordance with SFAS No. 141,
“Business Combinations”, and in accordance with Emerging Issues Task Force
(EITF) No. 88-16, “Basis in Leveraged Buyout Transactions”. As a result of the
substantial and continuing relationships between YouthStream and the Sellers,
and the provisions of EITF 88-16 that are required to be considered when
determining the extent of fair value/predecessor basis to be used in recording
the transaction, the Acquisition has been recorded at predecessor basis. Since
the debt and equity held by the Sellers represented almost the entire amount
of
capital at risk both before and after the Acquisition, the application of the
“monetary test” specified in Section 3 of EITF 88-16, which limits the portion
of the purchase consideration that can be valued at fair value to the percentage
of the total consideration that is monetary, was utilized by the Company in
determining to record the transaction at predecessor basis. The excess of the
purchase price over predecessor basis of the net assets acquired has been
reflected as a deemed distribution of $63,104,423 to the Sellers at the date
of
acquisition in the consolidated financial statements.
For
taxable periods beginning after February 28, 2005, Acquisition Corp. and Atacama
KES are included in the consolidated federal income tax return filed by
YouthStream as the common parent. Acquisition Corp. and Atacama KES have
entered into a Tax Sharing Agreement with YouthStream, pursuant to which they
have agreed to pay YouthStream an amount equal to 50% of their respective
"separate company tax liability", subject to compliance with the GECC secured
line of credit. The term "separate company tax liability" is defined as
the amount, if any, of the federal income tax liability (including, without
limitation, liability for any penalty, fine, additions to tax, interest, minimum
tax and other items applicable to such subsidiary in connection with the
determination of the subsidiary's tax liability), which such subsidiary
would have incurred if its federal income tax liability for the periods during
which it is includible in a consolidated federal income tax return with
YouthStream were determined generally in the same manner in which its
separate return liability would have been calculated under Section 1552(a)(2)
of
the Internal Revenue Code of 1986, as amended. YouthStream has
approximately $255,000,000 of federal net operating loss carryovers currently
available to offset the consolidated federal taxable income of the affiliated
group in the future.
The
total
purchase price of $65,000,000, as well as the terms and conditions of the Notes
and 13% Series A Preferred Stock issued to the Sellers, was determined to be
at
fair value based on reports prepared by an independent valuation firm. The
following table summarizes the assets acquired and liabilities assumed at
predecessor basis at February 28, 2005.
Assets
Acquired:
|
|
|
|
Cash
|
|
$
|
913,194
|
|
Accounts
receivable
|
|
|
10,781,836
|
|
Allowance
for doubtful accounts
|
|
|
(328,351
|
)
|
Inventories
|
|
|
18,762,218
|
|
Prepaid
expenses and other current assets
|
|
|
904,271
|
|
Property,
plant and equipment
|
|
|
6,630,012
|
|
Accumulated
depreciation and amortization
|
|
|
(639,254
|
)
|
Due
from YouthStream Acquisition Corp.
|
|
|
187,702
|
|
Other
non-current assets
|
|
|
721,393
|
|
|
|
|
|
|
Total
assets acquired
|
|
|
37,933,021
|
|
Liabilities
Assumed:
|
|
|
|
Accounts
payable
|
|
|
9,566,327
|
|
Accrued
expenses
|
|
|
1,267,016
|
|
Accrued
interest payable
|
|
|
593,260
|
|
Deferred
rent
|
|
|
165,413
|
|
Subordinated
promissory notes payable
|
|
|
7,000,000
|
|
Line
of credit
|
|
|
15,495,095
|
|
Equipment
contract payable
|
|
|
291,223
|
|
Capital
lease obligation
|
|
|
1,877,179
|
|
|
|
|
|
|
Total
liabilities assumed
|
|
|
36,255,513
|
|
|
|
|
|
|
Net
assets acquired
|
|
|
1,677,508
|
|
|
|
|
|
|
Adjustment
to recognize minority interest
|
|
|
(331,981
|
)
|
|
|
|
|
|
Total
purchase consideration, net of intercompany eliminations of 2.67%
interest
held by KES Holdings:
|
|
|
8%
Subordinated secured promissory notes payable
|
|
$
|
39,493,000
|
|
13%
Series A preferred stock
|
|
|
24,733,000
|
|
|
|
|
|
|
Net
purchase consideration
|
|
|
64,226,000
|
|
|
|
|
|
|
Minority
interests in equity
|
|
|
223,950
|
|
|
|
|
|
|
Adjustment
to record deemed distribution to Sellers
|
|
|
(63,104,423
|
)
|
The
amount due from Acquisition Corp. of $187,702 represents costs incurred by
KES Acquisition with respect to the Acquisition, which were included in the
$1,171,406 of transaction costs related to the Acquisition charged to operations
during the year ended September 30, 2005.
As
of
September 30, 2004, the Company had incurred $175,144 of costs with respect
to
the Acquisition, which were presented as deferred costs in the Company’s
consolidated balance sheet at such date. These costs were included in the
$1,171,406 of transaction costs related to the Acquisition charged to operations
during the year ended September 30, 2005.
Minority
interest - related parties was $430,931 on February 28, 2005. For the year
ended
September 30, 2005, the net loss of Acquisition Corp. allocable to the 19.99%
minority shareholders was $747,961, but the reduction to minority interest
-
related parties was limited to the balance at February 28, 2005 of $430,931.
Accordingly, the remainder of the net loss of Acquisition Corp. allocable to
the
19.99% minority shareholders for the year ended September 30, 2005 of $317,030
was included in the Company’s consolidated statement of operations for the year
ended September 30, 2005, and will be recovered to the extent that Acquisition
Corp. generates net income in future periods.
The
following pro forma operating data presents the results of operations for the
years ended September 30, 2005 and 2004, as if the Acquisition had occurred
on
the last day of the immediately preceding fiscal year. Accordingly, transaction
costs of $1,171,406 related to the Acquisition for the year ended September
30,
2005 are not included in the net loss from continuing operations shown below.
In
addition, discontinued operations for the year ended September 30, 2004 are
not
included. The Mill commenced generating revenues in late January 2004. The
pro
forma results are not necessarily indicative of the financial results that
might
have occurred had the Acquisition actually taken place on the respective dates,
or of future results of operations. Pro
forma
information for the years ended September 30, 2005 and 2004 is summarized as
follows:
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
113,786,971
|
|
$
|
48,944,338
|
|
Cost
of sales
|
|
|
105,265,441
|
|
|
51,158,622
|
|
Gross
margin (deficit)
|
|
|
8,521,530
|
|
|
(2,214,284
|
)
|
Operating
income (loss)
|
|
|
3,169,836
|
|
|
(7,469,548
|
)
|
Interest
expense
|
|
|
(9,469,875 |
) |
|
(7,243,971 |
) |
Minority
interest
|
|
|
199,109 |
|
|
199,109 |
|
Net
loss from continuing operations
|
|
$
|
(5,786,987
|
)
|
$
|
(14,134,628
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
$
|
(0.15
|
)
|
$
|
(0.36
|
)
|
Weighted
average common shares outstanding
|
|
|
39,242,251
|
|
|
39,242,251 |
|
Almost
all of the Company's net assets are owned by KES Acquisition, a consolidated
subsidiary. As a result of various contractual restrictions contained in
various financing agreements (as previously described) and documents relating
to
the Acquisition, there are limits on the Company’s ability to transfer assets
from KES Acquisition to Youthstream, whether in the form of loans and advances,
cash dividends, tax-sharing payments, or otherwise, without notice to and/or
consent of one or more third parties. A summary of the Company's
restricted and unrestricted assets, liabilities and equity at September 30,
2005
is presented below.
|
|
Unrestricted
|
|
Restricted
|
|
As
Reported
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
261,740
|
|
$
|
35,453,821
|
|
$
|
35,715,561
|
|
Property,
plant and equipment, net
|
|
|
-
|
|
|
5,567,745
|
|
|
5,567,745
|
|
Other
assets
|
|
|
-
|
|
|
638,948
|
|
|
638,948
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
261,740
|
|
$
|
41,660,514
|
|
$
|
41,922,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
4,224,995
|
|
$
|
30,411,237
|
|
$
|
34,636,232
|
|
Non-current
liabilities
|
|
|
78,257,234
|
|
|
8,629,138
|
|
|
86,886,372
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings (accumulated deficit)
|
|
|
(348,435,183
|
)
|
|
1,169,785
|
|
|
(347,265,398
|
)
|
Other
|
|
|
266,214,694
|
|
|
1,450,354
|
|
|
267,665,048
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$
|
261,740
|
|
$
|
41,660,514
|
|
$
|
41,922,254
|
|
4.
Discontinued Operations
Effective
February 25, 2004, the Company’s wholly-owned subsidiary, Beyond the Wall, Inc.
(“BTW”), sold substantially all of its assets and operations to a group
unaffiliated with the Company (which included certain former management of
BTW),
for $1,920,000, consisting of a cash payment of $820,000 and a subordinated
secured promissory note (the “Note”) for $1,100,000, with interest at 10% per
annum, due October 31, 2006. The buyer had the right to make certain
optional principal pre-payments on the Note by June 30, 2004, which would result
in the principal balance of the Note being adjusted downward, in excess of
such
principal pre-payments, based on an agreed-upon sliding scale as set forth
in
the Note.
On
April
30, 2004, the buyer made an optional principal pre-payment on the Note of
$400,000. Accordingly, under the provisions of the sale agreement, the
buyer received a credit of $106,800 against the $1,100,000 note (in excess
of
the $400,000 payment), as well as an additional $150,000 back-end credit on
the
Note. On October 31, 2004, the buyer made its scheduled principal payment on
the
Note of $197,734, plus accrued interest of $49,493. On
September 30, 2005, the Company received a cash payment of $258,922 as
settlement in full of the outstanding note receivable with a balance, including
accrued interest, of $281,654, and recognized a loss in connection therewith
of
$22,732.
The
Company initially recognized a loss of $564,921 with respect to the BTW sale
before taking into consideration the effect of the $400,000 principal
pre-payment made on April 30, 2004. Inclusive of such payment, the effect
of the accelerated payment credit and the back-end credit resulted in an
additional loss of $256,800, which decreased the carrying value of the note
receivable from $1,100,000 to $843,200 and increased the loss on the BTW sale
from $564,921 to $821,721. The loss on the BTW sale was reported as a loss
on the disposal of discontinued operations for the year ended September 30,
2004. As a result of the sale, the retail segment operations have been
presented as a discontinued operation for the year ended September 30, 2004.
The
Company’s net revenues and loss from discontinued operations for the year ended
September 30, 2004 are summarized as follows:
Net
revenues
|
|
$
|
2,513,000
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
$
|
(550,072
|
)
|
Loss
on disposal of discontinued operations
|
|
|
(821,721
|
)
|
Loss
from discontinued operations
|
|
$
|
(1,371,793
|
)
|
As
of
September 30, 2005 and 2004, the Company has accrued liabilities of $2,984,660
and $3,012,386, respectively, remaining from its discontinued businesses. The
accrued liabilities consist primarily of severance, lease payments and other
costs related to the operations of the discontinued businesses.
5.
Accounts Receivable
The
Company’s accounts receivable are summarized as follows at September 30, 2005
and 2004:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
15,415,938
|
|
$
|
---
|
|
Less:
Allowance for doubtful accounts
|
|
|
(747,399
|
)
|
|
---
|
|
Accounts
receivable, net
|
|
$
|
14,668,539
|
|
$
|
---
|
|
Activity
in the Company’s allowance for doubtful accounts during the years ended
September 30, 2005 and 2004 is summarized as follows:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
---
|
|
$
|
|
|
Add:
Balance acquired in Acquisition transaction
|
|
|
328,351
|
|
|
---
|
|
Add:
Amounts provided during year
|
|
|
419,048
|
|
|
---
|
|
Less:
Amounts written off during year
|
|
|
---
|
|
|
---
|
|
Balance
at end of year
|
|
$
|
747,399
|
|
$
|
--
|
|
6.
Inventories
Inventories
are comprised of the following at September 30, 2005:
Raw
materials and scrap
|
|
$
|
2,954,405
|
|
Semi-finished
goods
|
|
|
6,556,006
|
|
Finished
goods
|
|
|
8,370,394
|
|
|
|
|
|
|
Total
|
|
$
|
17,880,805
|
|
7.
Property, Plant and Equipment
Property,
plant and equipment consisted of the following at September 30, 2005 and 2004:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Land
|
|
$
|
142,498
|
|
$
|
---
|
|
Buildings
and improvements
|
|
|
672,529
|
|
|
---
|
|
Machinery
and equipment
|
|
|
5,814,985
|
|
|
---
|
|
Office
equipment
|
|
|
---
|
|
|
140,068
|
|
Total
|
|
|
6,630,012
|
|
|
140,068
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(1,062,267
|
)
|
|
(114,658
|
)
|
Property,
plant and equipment, net
|
|
$
|
5,567,745
|
|
$
|
25,410
|
|
Assets
recorded under capitalized lease arrangements at September 30, 2005 and 2004
that are included above in property, plant and equipment consist of the
following:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
$
|
2,101,730
|
|
$
|
---
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(560,461 |
) |
|
--- |
|
Property,
plant and equipment, net
|
|
$
|
1,541,269
|
|
$
|
---
|
|
Depreciation
expense for the years ended September 30, 2005 and 2004 was $427,993 and
$19,921, respectively.
At
December 31, 2004, in conjunction with the restructuring of its corporate and
administrative offices, the Company wrote off the remaining balance of its
office equipment of $20,429.
8.
Notes Payable and Long-Term Debt
Notes
Payable to Related Parties
During
September 2005, the Company borrowed $50,000 from certain directors under
short-term unsecured notes due December 31, 2005, with interest at 4% per annum,
to fund corporate general and administrative expenses. The notes were subject
to
mandatory prepayment based on any proceeds received by the Company from, among
other sources, the note that the Company received from the sale of the assets
and operations of Beyond the Wall in February 2004 and any tax sharing payments
received under the Tax Sharing Agreement with Acquisition Corp. and Atacama
KES
(see Note 3). The Company repaid the notes payable to directors subsequent
to
September 30, 2005 from the proceeds from the settlement of the Beyond the
Wall
note receivable, which were received on September 30, 2005 (see Note
4).
Subordinated
Secured Promissory Notes Payable to Related Parties
Subordinated
secured promissory notes payable consist of seven notes payable aggregating
$7,000,000 issued by KES Acquisition to three related parties. The proceeds
from
these notes were used to accelerate the development and expansion of the steel
mini-mill’s operations. The notes bear interest at 12% per annum, with interest
payable monthly, subject to compliance with various agreements and covenants,
are secured by a subordinated security interest in all of the assets of KES
Acquisition, and are subject to an Intercreditor and Subordination Agreement
dated March 24, 2004 with General Electric Capital Corporation. When originally
issued, principal and interest were due and payable upon the earlier to occur
of
(i) an event of default under the Loan and Security Agreement with General
Electric Capital Corporation or (ii) each note’s respective due date, which
ranged from March 31, 2005 to December 31, 2005. As of September 30, 2005,
the
due dates of the notes had all been extended to December 31, 2006, if not repaid
earlier. At September 30, 2005, accrued interest payable with respect to the
subordinated secured promissory notes payable was $1,085,753.
Secured
Line of Credit
Effective
March 24, 2004, KES Acquisition entered into a loan and security agreement,
as
amended, with General Electric Capital Corporation. Under the terms of the
agreement, KES Acquisition has the ability to borrow up to $23,000,000, subject
to limitations under the lender’s borrowing base formula and compliance with a
minimum fixed charge coverage ratio. Interest is payable monthly in arrears
on
the outstanding principal balance at the index rate (defined as the thirty-day
dealer commercial paper rate) plus 5.5% per annum. The line of credit matures
on
March 24, 2007, and is secured by all of the assets of KES Acquisition and
a
pledge of (i) the membership interests of KES Acquisition owned by Acquisition
Corp. and (ii) the capital stock of Atacama KES owned by Acquisition Corp.
As of
September 30, 2005, the balance outstanding on the line of credit was
$19,009,379, which has been presented as a current liability in the consolidated
balance sheet at such date due to the collateral securing such line of credit
consisting primarily of current assets and the continuing uncertainty with
respect to the Company’s ability to maintain compliance under the terms and
conditions of the line of credit.
At
March
31, 2005, KES Acquisition was not in compliance with the fixed charge coverage
ratio based on its consolidated financial statements as originally filed, in
part relating to changes to its accounting procedures as a result of the review
of its financial statements conducted in conjunction with its acquisition by
YouthStream (see Note 3), and subsequently received a waiver of default from
the
lender. At June 30, 2005, KES Acquisition was in compliance with the fixed
charge coverage ratio based on its consolidated financial statements as
originally filed. However, KES Acquisition was not in compliance with the fixed
charge coverage ratio at June 30, 2005 based on its revised consolidated
financial statements, as a result of a determination by management to
re-characterize a lease for certain equipment used by KES Acquisition as a
capital lease rather than an operating lease. In addition, KES Acquisition
was
not in compliance with its obligation to deliver audited financial statements
in
the form and time period as set forth in the loan agreement. On June 26,
2006, the Company received a waiver of default from the lender with respect
to
the fixed charge coverage ratio for the restated March 31, 2005 and June 30,
2005 interim financial statements, as well as with respect to the form and
timeliness of the September 30, 2005 annual audited financial statements being
provided to GECC.
At
September 30, 2005, KES Acquisition was in compliance with the fixed charge
coverage ratio based on its consolidated financial statements.
In
the
event that KES Acquisition is not in compliance with the fixed charge coverage
ratio in any future period, the Company intends to seek a further waiver of
any
default from the lender, and if no such waiver is received, the lender would
have the right to accelerate the maturity of the line of credit at that time.
Equipment
Contract Payable
The
equipment contract payable is due in 47 equal monthly installments of $8,099,
including interest at 9.35% per annum, with a balloon payment of $35,252 due
on
May 8, 2008. The equipment contract payable is secured by the related equipment.
As of September 30, 2005, the balance outstanding on the equipment contract
payable was $249,805. Future scheduled principal payments on the equipment
contract payable are summarized as follows:
Years
Ending September 30,
|
|
|
|
|
|
|
|
2006
|
|
$
|
77,091
|
|
2007
|
|
|
84,616
|
|
2008
|
|
|
88,098
|
|
Total
principal payments
|
|
|
249,805
|
|
Less
current portion
|
|
|
(77,091
|
)
|
Non-current
portion
|
|
$
|
172,714
|
|
Capital
Lease Obligation
The
Company leases a ladle metallurgy furnace facility under a capital lease
arrangement requiring monthly payments of $50,000 per month for a term of 5
years commencing June 1, 2004, reflecting a total obligation of $3,000,000.
The
Company has the option to renew the lease for an additional 5 years. The Company
determined that the fair value of this asset at the date of acquisition,
calculated utilizing an effective interest rate of 15% per annum, was
$2,101,730. At September 30, 2005, future minimum annual lease payments under
this capital lease arrangement are summarized as follows:
Years
Ending September 30,
|
|
|
|
|
|
|
|
2006
|
|
$
|
600,000
|
|
2007
|
|
|
600,000
|
|
2008
|
|
|
600,000
|
|
2009
|
|
|
350,000
|
|
Total
minimum payments
|
|
|
2,150,000 |
|
Amount
representing interest
|
|
|
(465,680
|
)
|
Obligations
under capital lease
|
|
|
1,684,320
|
|
Less
current portion
|
|
|
(372,256
|
)
|
Non-current
portion
|
|
$
|
1,312,064
|
|
Restructured
Debt Obligations
In
July 1998, the Company issued subordinated notes to accredited investors in
the aggregate amount of $5,000,000 less an original discount of $188,000 (the
"NET Notes"). These notes bore interest at 11% per annum and were due in
July 2003. On September 8, 2002, NET failed to make the interest
payment due on the NET Notes, constituting an event of default under the terms
of the NET Notes, and as a result, the holder of a majority of the NET Notes
declared these notes due and payable under the terms of the NET Notes. In
January 2003, the Company reached a debt restructuring agreement with the
holders of the NET Notes to cancel all the principal of and interest on the
NET
Notes in exchange for aggregate cash payments of $3,000,000. The settlement
of
the NET Notes resulted in a gain totaling $2,448,000.
In
June 2000, the Company issued subordinated notes to an accredited investor
in the amount of $12,000,000, less an original issue discount of $420,000 (the
"YSTM Notes"). The notes bore interest at 11% per annum and were due in
June 2005. On August 31, 2002, the Company failed to make interest
payments due on the YSTM Notes, constituting an event of default under the
terms
of the YSTM Notes. On September 9, 2002, the holders of the YSTM Notes
declared this note due and payable under the terms of the YSTM Notes. In
January 2003, as part of the debt restructuring, the Company reached an
agreement with the holders of the YSTM Notes to cancel all of the principal
and
interest on the YSTM Notes in exchange for: (a) cash of $1,500,000;
(b) 1,000,000 shares of redeemable preferred stock of the Company;
(c) 3,486,875 shares of common stock of the Company; and (d) a
$3,000,000 promissory note issued by Beyond the Wall and secured by a pledge
of
the Company's stock in Beyond the Wall. The promissory note with a face value
of
$3,000,000 and total future interest payments of $952,775 is due December 31,
2010, with interest at 4% per annum. The transaction was accounted for as a
troubled debt restructuring involving a combination of a partial debt settlement
and a continuation of debt with modified terms. As the total undiscounted future
cash payments from the promissory note were less than the adjusted carrying
value of the YSTM Notes, the promissory note was recorded at the undiscounted
future cash value of $3,952,775, with no interest expense to be recognized
over
the remaining life of the new note. The restructuring of the YSTM Notes resulted
in a gain of approximately $306,000, which was recognized in the fiscal year
ended September 30, 2003. As of September 30, 2005 and 2004, the restructured
promissory note is reflected in the consolidated balance sheets at its carrying
value of $3,952,775.
In
July 2000, the Company issued a subordinated note to an accredited investor
in the amount of $1,000,000, less an original issue discount of $35,000 (the
"YSTM 2 Note"). The note bore interest at 11% per annum and was due in
July 2005. On August 31, 2002, the Company failed to make an interest
payment due on the YSTM 2 Note, constituting an event of default under the
terms
of the YSTM 2 Note, and the holder of the note had the right to declare this
note immediately due and payable. In January 2003 the Company reached an
agreement with the holder of the YSTM 2 Note to cancel all of the principal
and
interest on the YSTM 2 Note in exchange for: (a) a $1,000,000 promissory
note issued by Beyond the Wall and secured by a pledge of the Company's stock
in
Beyond the Wall; and (b) 498,125 shares of the Company's common stock. The
promissory note with a face value of $1,000,000 and total future interest
payments of $318,000 is due December 31, 2010, with interest at 4% per annum.
The transaction was accounted for as a troubled debt restructuring involving
a
combination of a partial debt settlement and a continuation of debt with
modified terms. As the total undiscounted future cash payments from the
promissory note, including principal and accrued interest, were greater than
the
adjusted carrying value of the YSTM 2 Note, the promissory note issued was
recorded at the adjusted carrying value of the YSTM 2 Note surrendered,
resulting in an imputed discount of $40,386. No gain or loss was recognized
on
the settlement. As of September 30, 2005 and 2004, the restructured promissory
note is reflected in the consolidated balance sheets at its carrying value,
net
of unamortized original issue discount, of $964,194 and $961,436,
respectively
In
summary, the Company’s January 2003 debt restructuring involved the holders
of all of its and its Network Event Theater subsidiary's outstanding notes
(NET
Notes, YSTM Notes and YSTM 2 Note), in the aggregate principal amount of
$18,000,000. In exchange for cancellation of all of the principal due on these
old notes, including accrued interest of $2,062,000, the note holders received
in aggregate $4,500,000 in cash, redeemable preferred stock with a face value
of
$4,000,000 (see Note 9), and 3,985,000 shares of common stock valued at
$255,000, and $4,000,000 aggregate principal amount of promissory notes due
December 31, 2010 issued by the Company's retail subsidiary, Beyond the
Wall, Inc., secured by the Company's pledge of all of its stock in Beyond
the Wall. Additionally, the Company recognized a gain from the troubled debt
restructuring of approximately $2,808,000. The gain was classified as part
of
continuing operations in accordance with SFAS No. 145, "Rescission of SFAS
Nos. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections as
of April 2000” for the year ended September 30, 2003.
The
terms
and conditions of the January 2003 debt restructuring agreement qualified
as a troubled debt restructuring for accounting purposes in accordance with
SFAS
No. 15 "Accounting by Debtors and Creditors for Troubled Debt
Restructurings". In determining the proper accounting treatment, the Company
evaluated the nature of the economic consequences of each of the three separate
transactions for purposes of determining the gain, if any, in connection with
the extinguishment of the NET Notes, YSTM Notes and YSTM 2 Note in accordance
with SFAS No. 15.
At
the
closing of the January 2003 debt restructuring, all of the Company's
previous directors and officers resigned, and three new directors were
appointed. Jonathan V. Diamond, who previously had been a director and interim
Chief Executive Officer of the Company, was appointed as Chairman of the Board
of Directors, and Hal G. Byer and Robert Scott Fritz were appointed as directors
of the Company. Mr. Diamond was appointed as Chief Executive Officer and
Robert N. Weingarten was appointed as Chief Financial Officer.
During
June 2003, the Company amended the original provisions of the $4,000,000 of
promissory notes issued in conjunction with the January 2003 restructuring
to provide for the following:
a.
Beyond
the Wall was replaced by the Company as the issuer of the notes, and was
released from any liability with respect to the notes.
b.
The
note holders agreed to convert the notes from secured to unsecured, and to
release their security interest in all of the outstanding common stock of Beyond
the Wall.
c.
The
note holders agreed to delete all provisions in the notes requiring the issuer
of the notes to make mandatory prepayments based on the occurrence of certain
events.
d.
The
note holders agreed to delete provisions in the notes prohibiting the issuer
from: (i) incurring any indebtedness for borrowed money; (ii) selling,
or entering into any agreement to sell, all or substantially all of the assets
or all or substantially all of the capital stock of the issuer; or
(iii) entering into any transaction with an affiliate, other than
transactions with the Company, Network Event Theater, Inc. and/or their
successors, that have fair and reasonable terms which are no less favorable
to
the issuer than would be obtained in a comparable arms-length transaction with
a
person or entity that is not an affiliate.
9.
Redeemable Preferred Stock
4%
Series A Preferred Stock
In
connection with the January 2003 debt restructuring agreement with the
holders of the YSTM Notes (see Note 8), and pursuant to the Company's amended
articles of incorporation, authorizing the issuance of up to 5,000,000 shares
of
preferred stock, the Company issued 1,000,000 shares of 4% Series A
Preferred Stock with the following characteristics:
a.
Dividend Rights. The holders of the shares of 4% Series A Preferred Stock are
entitled to receive, when and as declared by the Company's board of directors,
out of funds legally available for that purpose, cumulative preferential
dividends in cash at the rate of 4% per year on the face amount of $4 per share
payable quarterly.
b.
Redemption. The Company shall redeem all of the outstanding shares of 4% Series
A Preferred Stock as of December 31, 2010 at $4.00 per share, plus all
accrued and unpaid dividends thereon. As of September 30, 2005 and 2004,
the redemption value of the issued and outstanding shares of 4% Series A
Preferred Stock recorded on the Company’s consolidated balance sheet was
$5,269,333.
c.
Convertibility and Voting Rights. The 4% Series A Preferred Stock is not
convertible into any other security of the Company, and the holders thereof
have
no voting rights except with respect to any proposed changes in the
preferences and special rights of such stock or except as granted to holders
by
law.
Pursuant
to SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity”, because the 4% Series A
Preferred Stock provides for mandatory redemption in cash, it is classified
as a
long-term liability at the future redemption value of $5,269,333, including
cumulative dividends of $1,269,333, with no future accretion adjustments to
the
balance to be taken against stockholders' equity (deficit) in subsequent
periods.
13%
Series A Preferred Stock
In
connection with the acquisition of the steel mini-mill (see Note 3), and
pursuant to its articles of incorporation, authorizing the issuance of up to
50,000 shares of preferred stock, YouthStream Acquisition Corp., a subsidiary
of
the Company, issued 25,000 shares of its 13% Series A Preferred Stock with
the following characteristics:
a.
Dividend Rights. The holders of the shares of 13% Series A Preferred Stock
are
entitled to receive, when and as declared by the Company's board of directors,
out of funds legally available for that purpose, cumulative preferential
dividends in cash at the rate of 13% per year on the face amount of $1,000
per
share payable concurrent with the redemption of the 13% Series A Preferred
Stock.
b.
Redemption. The Company shall redeem the outstanding shares of 13% Series A
Preferred stock at $1,000 per share, beginning annually on February 22, 2007,
in
lots of at least $4,000,000, plus all related accrued and unpaid dividends
thereon, out of assets legally available for redemption. As of
September 30, 2005, the redemption value of the total issued and
outstanding shares of 13% Series A Preferred Stock, including cumulative
dividends, was $26,618,129.
c.
Convertibility and Voting Rights. The 13%
Series A Preferred Stock is
not
convertible into any other security of the Company, and the holders thereof
have
no voting rights except with respect to any proposed changes in the
preferences and special rights of such stock or except as granted to holders
by
law.
Pursuant
to SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity”, because the 13% Series A
Preferred Stock provides for mandatory redemption in cash, it is classified
as a
long-term liability at the redemption value at September 30, 2005 of
$26,618,129, including cumulative dividends of $1,885,129.
10.
Income Taxes
At
September 30, 2005, the Company had a net operating loss carryforward for
federal income tax purposes of approximately $291,060,000 that expires from
2012
through 2025. The use of approximately $36,000,000 of this net operating loss
in
future years may be restricted under Section 382 of the Internal Revenue
Code.
Due
to
the uncertainty surrounding the realization of the benefits of the Company’s tax
attributes (primarily net operating loss carryforwards), as of September 30,
2005 and 2004, the Company recorded a 100% valuation allowance against its
net
deferred tax assets for financial reporting purposes.
The
valuation allowance increased by approximately $3,214,000 and $3,082,000 for
the
years ended September 30, 2005 and 2004, respectively.
In
assessing the potential realization of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the Company attaining future taxable income during the periods
in
which those temporary differences become deductible. As of September 30, 2005,
management was unable to determine if it is more likely than not that the
deferred tax assets will be realized.
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets as of September 30, 2005 and 2004 are as
follows:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
116,134,000
|
|
$
|
113,646,000
|
|
Depreciation
|
|
|
(66,000
|
)
|
|
(10,000
|
)
|
Allowance
for bad debts
|
|
|
242,000
|
|
|
---
|
|
Acquisition
costs
|
|
|
427,000
|
|
|
---
|
|
Accrued
dividends
|
|
|
433,000
|
|
|
---
|
|
Amortization
|
|
|
85,000
|
|
|
---
|
|
Investment
in partnership
|
|
|
(401,000
|
)
|
|
---
|
|
Accrued
compensation
|
|
|
134,000
|
|
|
224,000
|
|
Accrued
interest
|
|
|
48,000
|
|
|
48,000
|
|
Other
|
|
|
86,000
|
|
|
---
|
|
Total
deferred tax assets
|
|
|
117,122,000
|
|
|
113,908,000
|
|
Valuation
allowance
|
|
|
(117,122,000
|
)
|
|
(113,908,000
|
)
|
Net
deferred tax asset
|
|
$
|
---
|
|
$
|
---
|
|
No
federal tax provision has been provided for the periods ended September 30,
2005 and 2004 due to the significant losses incurred to date.
The
Company is subject to periodic audits by federal, state and local tax
authorities for various tax liabilities incurred in prior periods from the
parent entity and its subsidiaries, including any discontinued businesses.
The
amount of any tax assessments and penalties may be material and may negatively
impact the Company’s operations. Given the uncertainty in the amount and the
difficulty in estimating the probability of the assessments arising from future
tax audits, the Company has not made any accruals for such tax
contingencies.
For
taxable periods beginning after February 28, 2005, Acquisition Corp. and Atacama
KES (see Note 3) are included in the consolidated federal income tax return
filed by YouthStream as the common parent. Acquisition Corp. and Atacama
KES have entered into a Tax Sharing Agreement with YouthStream, pursuant to
which they have agreed to pay YouthStream an amount equal to 50% of their
respective "separate company tax liability", subject to compliance with the
GECC
secured line of credit. The term "separate company tax liability" is
defined as the amount, if any, of the federal income tax liability (including,
without limitation, liability for any penalty, fine, additions to tax, interest,
minimum tax and other items applicable to such subsidiary in connection
with the determination of the subsidiary's tax liability), which such
subsidiary would have incurred if its federal income tax liability for the
periods during which it is includible in a consolidated federal income tax
return with YouthStream were determined generally in the same manner in
which its separate return liability would have been calculated under Section
1552(a)(2) of the Internal Revenue Code of 1986, as amended. YouthStream
has approximately $255,000,000 of federal net operating loss carryovers
currently available to offset the consolidated federal taxable income of the
affiliated group in the future.
11.
Common Stock
In
May 2001, the Board of Directors authorized the Company to make open market
purchases of the Company’s common stock aggregating up to $2,000,000. As of
September 30, 2005, the Company held in treasury 607,500 shares purchased
on the open market at a cost of $829,576.
In
January 2003, the Company completed a debt restructuring transaction
whereby a total of 3,985,000 shares of common stock valued at $255,000 were
issued to the holders of the YSTM Notes and YSTM 2 Note, in accordance with
the
terms of the debt restructuring to extinguish the YSTM Notes and YSTM 2 Note
(see Note 8). The additional common shares were valued using the three-day
average trading price one day before and one day after the effective date of
the
debt restructuring.
12.
Stock Options
In
February 2000, the Company adopted the YouthStream 2000 Stock Option Plan
(the “2000 Plan”) in order to grant employees providing services to the Company
incentive stock options. The 2000 Plan allows for the granting of options to
purchase up to 5,000,000 shares of the Company’s common stock. All option plans
of the Company in existence at the formation of the 2000 Plan were merged into
the 2000 Plan. The terms of the options were not changed upon merging the plans.
The exercise price of the options granted was at fair market value on the date
of the grant. Options generally vest over three years.
On
October 15, 2003, the Company issued an option to purchase 50,000 shares of
common stock to its Chief Executive Officer, exercisable through October 2010
at
$0.26 per share, which was the fair market value on the date of issuance.
The
option was fully vested upon issuance.
On
June
3, 2004, the Company
issued an option to purchase 200,000 shares of common stock to a
new
director, exercisable through June 3, 2011 at $0.14 per share, which was the
fair market value on the date of issuance. The option was fully vested upon
issuance.
On
February 15, 2005, the Company issued an option to purchase 200,000 shares
of
common stock to a new director, exercisable through February 15, 2012 at $0.30
per share, which was the fair market value on the date of issuance. The option
vests in equal monthly installments over the 12 months beginning March 1, 2005.
The
following table summarizes stock option activity under the 2000 Plan for the
years ended September 30, 2004 and 2005:
|
|
Number
of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
|
|
Options
outstanding at September 30, 2003
|
|
|
1,086,544
|
|
$
|
0.25
|
|
Options
granted
|
|
|
250,000
|
|
$
|
0.16
|
|
Options
canceled
|
|
|
(131,140
|
)
|
$
|
0.92
|
|
Options
exercised
|
|
|
---
|
|
|
---
|
|
Options
outstanding at September 30, 2004
|
|
|
1,205,404
|
|
$
|
0.16
|
|
Options
granted
|
|
|
200,000
|
|
$
|
0.30
|
|
Options
canceled
|
|
|
---
|
|
|
---
|
|
Options
exercised
|
|
|
---
|
|
|
---
|
|
Options
outstanding at September 30, 2005
|
|
|
1,405,404
|
|
$
|
0.18
|
|
As
of
September 30, 2005 and 2004, all stock options outstanding were exercisable
and
options to acquire 3,594,596 shares of common stock were available for future
grant. Additional information regarding options outstanding under the 2000
Plan
at September 30, 2005 is as follows:
Options
Outstanding
|
|
Options
Exercisable
|
Exercise
Price
|
|
Number
of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Life
(in years)
|
|
Number
of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
$0.04
|
|
875,000
|
|
$0.04
|
|
4.6
|
|
875,000
|
|
$0.04
|
$0.14
|
|
200,000
|
|
$0.14
|
|
5.7
|
|
200,000
|
|
$0.14
|
$0.26
|
|
50,000
|
|
$0.26
|
|
5.0
|
|
50,000
|
|
$0.26
|
$0.30
|
|
200,000
|
|
$0.30
|
|
6.3
|
|
116,667
|
|
$0.30
|
$1.17
|
|
40,000
|
|
$1.17
|
|
6.3
|
|
40,000
|
|
$1.17
|
$1.63
|
|
40,404
|
|
$1.63
|
|
5.6
|
|
40,404
|
|
$1.63
|
|
|
1,405,404
|
|
$0.177
|
|
5.1
|
|
1,322,071
|
|
$0.169
|
The
weighted average fair value of options granted during the years ended
September 30, 2005 and 2004 was $0.30 and $0.16, respectively.
13.
Common Stock Warrants
The
following table summarizes common stock warrant activity for the years ended
September 30, 2005 and 2004:
|
|
Number
of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
|
|
Warrants
outstanding at September 30, 2003
|
|
|
1,000,000
|
|
$
|
0.12
|
|
Warrants
granted
|
|
|
---
|
|
|
---
|
|
Warrants
canceled
|
|
|
---
|
|
|
---
|
|
Warrants
exercised
|
|
|
---
|
|
|
---
|
|
Warrants
outstanding at September 30, 2004
|
|
|
1,000,000
|
|
$
|
0.12
|
|
Warrants
granted
|
|
|
---
|
|
|
---
|
|
Warrants
canceled
|
|
|
---
|
|
|
---
|
|
Warrants
exercised
|
|
|
---
|
|
|
---
|
|
Warrants
outstanding at September 30, 2005
|
|
|
1,000,000
|
|
$
|
0.12
|
|
As
of
September 30, 2005 and 2004, all common stock warrants outstanding were
exercisable. Additional information regarding the common stock warrants
outstanding at September 30, 2005 is as follows:
Warrants
Outstanding
|
|
Warrants
Exercisable
|
Exercise
Price
|
|
Number
of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Contractual
Life
(in years)
|
|
Number
of
Shares
|
|
Weighted-Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
$0.11
|
|
800,000
|
|
$0.11
|
|
2.9
|
|
800,000
|
|
$0.11
|
$0.16
|
|
200,000
|
|
$0.16
|
|
2.9
|
|
200,000
|
|
$0.16
|
|
|
1,000,000
|
|
$0.12
|
|
2.9
|
|
1,000,000
|
|
$0.12
|
14.
Commitments and Contingencies
Operating
Leases
Future
minimum rental payments required under operating leases that have initial or
remaining non-cancelable lease terms in excess of one year are as follows at
September 30, 2005:
|
|
|
|
Years
Ending September 30,
|
|
|
|
|
|
|
|
2006
|
|
$
|
425,868
|
|
2007
|
|
|
406,287
|
|
2008
|
|
|
390,363
|
|
2009
|
|
|
370,791
|
|
Total
minimum payments
|
|
|
1,593,309
|
|
Less
current portion
|
|
|
(425,868
|
)
|
Non-current
portion
|
|
$
|
1,167,441
|
|
Rent
expense was approximately $374,625 and $168,000 for the years ended
September 30, 2005 and 2004, respectively.
Operating
Commitments
The
Mill
has been operating under a Management Services Agreement with a management
company effective through October 31, 2009 pursuant to which the
management company provides, at its expense, employees to serve as the
general manager of the Mill and provide oversight and general management of
the
operations of the Mill. Pursuant to the Management Services
Agreement, the management company receives an annual fee of $700,000,
payable monthly, and bonus payments based on 16.6% of defined earnings before
interest, taxes, depreciation and amortization (“EBITDA”) in excess of
$6,000,000 for the fiscal years ending September 30, 2006 and thereafter.
The
Company has various short-term commitments for the purchase of materials,
supplies and energy arising in the ordinary course of business which aggregated
approximately $7,962,000 at September 30, 2005.
Legal
Proceedings
The
Company and/or its subsidiary that owned its former operating business, Beyond
the Wall, have periodically been defendants in various lawsuits and claims
from
various trade creditors and former landlords. Based on the Company’s contract
relating to the sale of the Beyond the Wall assets, certain of these claims
are
the responsibility of the buyer of the Beyond the Wall business. The Company
evaluates its response in each situation based on the particular facts and
circumstances of a claim. Accordingly, the ultimate outcome of these matters
cannot be determined at this time and may ultimately result in judgments and
liens against the Company or its assets. The Company has made sufficient
accruals for the exposure related to such matters that have been deemed probable
and reasonably estimable at September 30, 2005 and 2004.
KES
Acquisition has been named in a wrongful death lawsuit in West Virginia with
respect to an employee of a contractor who died while working at the Mill in
April 2004. KES Acquisition is being defended by its insurance carrier. The
Company does not believe that the resolution of this litigation will have a
material adverse effect on its financial condition or results of operations.
15.
Subsequent Events (Unaudited)
During
December 2005, 10,000 shares of 13% Series A Preferred Stock with a face amount
of $10,000,000 originally issued by Acquisition Corp. to KES Holdings in
February 2005 (see Note 3) were transferred to two charities.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
|
|
|
YOUTHSTREAM
MEDIA
NETWORKS, INC.
(Registrant)
|
|
|
|
Date: June 30, 2006 |
By: |
/s/ JONATHAN
V. DIAMOND |
|
Jonathan
V. Diamond |
|
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 and in the
capacity and on the dates indicated.
Signature
|
Title
|
Date
|
|
|
|
/s/
JONATHAN V. DIAMOND
|
|
|
Jonathan
V. Diamond
|
Chief
Executive Officer and Chairman of the Board
|
June
30, 2006
|
|
|
|
/s/
ROBERT N. WEINGARTEN
|
|
|
Robert
N. Weingarten
|
Chief
Financial Officer
|
June
30, 2006
|
|
|
|
/s/
HAL BYER
|
|
|
Hal
Byer
|
Director
|
June
30, 2006
|
|
|
|
/s/
ROBERT SCOTT FRITZ
|
|
|
Robert
Scott Fritz
|
Director
|
June
30, 2006
|
|
|
|
/s/
PATRICK J. PANZARELLA
|
|
|
Patrick
J. Panzarella
|
Director
|
June
30, 2006
|
|
|
|
/s/
JAMES N. LANE
|
|
|
James
N. Lane
|
Director
|
June
30, 2006
|
|
|
|
/s/
JESS M. RAVICH
|
|
|
Jess
M. Ravich
|
Director
|
June
30, 2006
|