UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-QSB
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
For
the Quarterly Period Ended December 31, 2005
|
|
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
For
the transition period from ___________ to
___________
|
|
Commission
file number: 0-27556
|
YOUTHSTREAM
MEDIA NETWORKS, INC.
(Exact
name of small business issuer as specified in its charter)
Delaware
|
|
13-4082185
|
(State
or other jurisdiction of
incorporation
of organization)
|
|
(I.R.S.
Employer
Identification
Number)
|
|
|
|
244
Madison Avenue, PMB #358, New York, New York
|
|
10016
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
|
|
(212)
883-0083
|
(Issuer’s
telephone number, including area
code)
|
Not
applicable
---------------------------------------------------------------------------------------------------------
Former
name, former address and former fiscal year, if changed since last
report
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 such shorter period
that
the issuer was required to file such reports), and (2) has been subject to
such
filing requirements for the past 90 days. Yes o No x
As
of
August 18, 2006, the issuer had 39,242,251 shares of common stock, $0.01 par
value, issued and outstanding.
Transitional
Small Business Disclosure Format. Yes o No x
Documents
incorporated by reference: None.
YOUTHSTREAM
MEDIA NETWORKS, INC. AND SUBSIDIARIES
The
Company has elected to file a Quarterly Report on Form 10-QSB for the quarterly
period ended December 31, 2005, as the Company qualifies as a Small Business
Issuer in accordance with Regulation S-B. The Company intends to file subsequent
periodic reports under Regulation S-B.
The
statements included in this Quarterly Report on Form 10-QSB for the quarterly
period ended December 31, 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, 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.
INDEX
PART
I—FINANCIAL INFORMATION
|
|
|
|
ITEM
1.
|
FINANCIAL
STATEMENTS
|
|
|
|
Condensed
Consolidated Balance Sheets —
December
31, 2005 (Unaudited) and September 30, 2005
|
1
|
|
|
Condensed
Consolidated Statements of Operations (Unaudited) —
Three
Months Ended December 31, 2005 and 2004
|
3
|
|
|
Condensed
Consolidated Statement of Stockholders’ Deficiency (Unaudited) —
Three
Months Ended December 31, 2005
|
4
|
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited) —
Three
Months Ended December 31, 2005 and 2004
|
5
|
|
|
Notes
to Condensed Consolidated Financial Statements —
Three
Months Ended December 31, 2005 and 2004 (Unaudited)
|
6
|
|
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
|
19
|
|
|
|
ITEM
3.
|
CONTROLS
AND PROCEDURES
|
26
|
|
|
|
PART
II—OTHER INFORMATION
|
|
|
|
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
33
|
|
|
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
33
|
|
|
|
ITEM
3.
|
DEFAULTS UPON
SENIOR
SECURITIES |
33
|
|
|
|
ITEM
4.
|
SUBMISSION
OF MATTERS
TO A VOTE OF SECURITY HOLDERS |
33
|
|
|
|
ITEM
5.
|
OTHER INFORMATION
|
33
|
|
|
|
ITEM
6.
|
EXHIBITS
|
33
|
|
|
|
SIGNATURES
|
34
|
YOUTHSTREAM
MEDIA NETWORKS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
December
31, 2005
|
|
September
30, 2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
544,653
|
|
$
|
998,835
|
|
Accounts
receivable, less allowance for doubtful accounts of $804,207
at
December
31, 2005 and $747,399 at September 30, 2005
|
|
|
15,455,842
|
|
|
14,668,539
|
|
Inventories
|
|
|
18,258,538
|
|
|
17,880,805
|
|
Prepaid
expenses and other current assets
|
|
|
2,236,484
|
|
|
2,167,382
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
36,495,517
|
|
|
35,715,561
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
6,630,012
|
|
|
6,630,012
|
|
Less
accumulated depreciation and amortization
|
|
|
(1,244,809
|
)
|
|
(1,062,267
|
)
|
Property,
plant and equipment, net
|
|
|
5,385,203
|
|
|
5,567,745
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
Deferred
loan costs, net of amortization of $522,652 at
December
31, 2005 and $438,913 at September 30, 2005
|
|
|
339,174
|
|
|
422,913
|
|
Deposits
|
|
|
216,035
|
|
|
216,035
|
|
Total
other assets
|
|
|
555,209
|
|
|
638,948
|
|
Total
assets
|
|
$
|
42,435,929
|
|
$
|
41,922,254
|
|
(continued)
YOUTHSTREAM
MEDIA NETWORKS, INC. AND SUBSIDIARIES
|
|
December
31, 2005
|
|
September
30, 2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts
payable
|
|
$
|
10,115,861
|
|
$
|
9,008,612
|
|
Accrued
expenses
|
|
|
2,502,059
|
|
|
2,048,481
|
|
Accrued
interest payable:
|
|
|
|
|
|
|
|
12%
subordinated promissory notes payable to related parties
|
|
|
1,297,479
|
|
|
1,085,753
|
|
Notes
payable to directors
|
|
|
---
|
|
|
50,000
|
|
Secured
line of credit
|
|
|
15,878,828
|
|
|
19,009,379
|
|
12%
subordinated promissory notes payable to related parties
|
|
|
7,000,000
|
|
|
---
|
|
Current
portion of equipment contract payable
|
|
|
78,902
|
|
|
77,091
|
|
Current
portion of capital lease obligation
|
|
|
386,391
|
|
|
372,256
|
|
Liabilities
related to discontinued operations
|
|
|
2,984,660
|
|
|
2,984,660
|
|
Total
current liabilities
|
|
|
40,244,180
|
|
|
34,636,232
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities:
|
|
|
|
|
|
|
|
Accrued
interest payable:
|
|
|
|
|
|
|
|
4%
note payable to investor
|
|
|
117,419
|
|
|
107,419
|
|
8%
subordinated promissory notes payable to related parties
|
|
|
2,648,736
|
|
|
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
|
|
|
965,079
|
|
|
964,194
|
|
8%
subordinated secured promissory notes payable to related
parties
|
|
|
39,493,000
|
|
|
39,493,000
|
|
12%
subordinated promissory notes payable to related parties
|
|
|
---
|
|
|
7,000,000
|
|
Equipment
contract payable, less current portion
|
|
|
152,285
|
|
|
172,714
|
|
Capital
lease obligation, less current portion
|
|
|
1,210,001
|
|
|
1,312,064
|
|
Deferred
rent
|
|
|
135,279
|
|
|
144,360
|
|
|
|
|
|
|
|
|
|
Preferred
stock of subsidiary subject to mandatory redemption; issued and
outstanding at December 31, 2005 - 25,000 shares, and 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 $2,724,658 at December
31, 2005 and $1,885,129 at September 30, 2005
|
|
|
27,724,658
|
|
|
26,618,129
|
|
Preferred
stock subject to mandatory redemption; issued and outstanding at
December
31, 2005 and September 30, 2005 - 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
|
|
|
121,912,745
|
|
|
121,522,604
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficiency:
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; authorized - 5,000,000 shares; issued and
outstanding at December 31, 2005 and September 30, 2005 - 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 December 31,
2005 and
September 30, 2005
|
|
|
398,486
|
|
|
398,486
|
|
Additional
paid-in capital
|
|
|
267,829,138
|
|
|
268,096,138
|
|
Accumulated
deficit
|
|
|
(346,874,864
|
)
|
|
(347,265,398
|
)
|
Treasury
stock - 607,500 shares, at cost
|
|
|
(829,576
|
)
|
|
(829,576
|
)
|
Total
stockholders’ deficiency
|
|
|
(79,476,816
|
)
|
|
(79,600,350
|
)
|
Total
liabilities and stockholders’ deficiency
|
|
$
|
42,435,929
|
|
$
|
41,922,254
|
|
See
accompanying notes to condensed consolidated financial statements.
YOUTHSTREAM
MEDIA NETWORKS, INC. AND SUBSIDIARIES
|
|
Three
Months Ended
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
NET
SALES
|
|
$
|
33,482,842
|
|
$
|
---
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
28,875,532
|
|
|
---
|
|
Selling
|
|
|
385,571
|
|
|
---
|
|
General
and administrative
|
|
|
1,341,429
|
|
|
194,671
|
|
|
|
|
30,602,532
|
|
|
194,671
|
|
Income
(loss) from operations
|
|
|
2,880,310
|
|
|
(194,671
|
)
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
Interest
income
|
|
|
99
|
|
|
14,365
|
|
Interest
expense:
13%
Series A Preferred Stock
|
|
|
(839,528
|
)
|
|
---
|
|
Notes
payable to related parties
|
|
|
(1,008,078
|
)
|
|
---
|
|
Other
|
|
|
(585,958
|
)
|
|
(10,572
|
)
|
Other
income (expense), net
|
|
|
6,689
|
|
|
(17,738
|
)
|
Other
income (expense), net
|
|
|
(2,426,776
|
)
|
|
(13,945
|
)
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST
|
|
|
453,534
|
|
|
(208,616
|
)
|
Income
taxes
|
|
|
63,000
|
|
|
---
|
|
INCOME
(LOSS) BEFORE MINORITY INTEREST
|
|
|
390,534
|
|
|
(208,616
|
)
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST - related parties
|
|
|
---
|
|
|
---
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
390,534
|
|
$
|
(208,616
|
)
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER COMMON SHARE -
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
0.01
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON
|
|
|
|
|
|
|
|
SHARES
OUTSTANDING -
Basic
|
|
|
39,242,251
|
|
|
39,242,251
|
|
Diluted
|
|
|
40,110,581
|
|
|
39,242,251
|
|
See
accompanying notes to condensed consolidated financial statements.
YOUTHSTREAM
MEDIA NETWORKS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
(UNAUDITED)
THREE
MONTHS ENDED DECEMBER 31, 2005
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Treasury
Stock
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at October 1, 2005
|
|
|
39,849,751
|
|
$
|
398,486
|
|
$
|
268,096,138
|
|
$
|
(347,265,398
|
)
|
$
|
(829,576
|
)
|
$
|
(79,600,350
|
)
|
Deemed
distribution to sellers of KES Acquisition Company, LLC
|
|
|
--
|
|
|
--
|
|
|
(267,000
|
)
|
|
--
|
|
|
--
|
|
|
(267,000
|
)
|
Net
income
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
390,534
|
|
|
--
|
|
|
390,534
|
|
Balances
at December 31, 2005
|
|
|
39,849,751
|
|
$
|
398,486
|
|
$
|
267,829,138
|
|
$
|
(346,874,864
|
)
|
$
|
(829,576
|
)
|
$
|
(79,476,816
|
)
|
See
accompanying notes to condensed consolidated financial
statements.
YOUTHSTREAM
MEDIA NETWORKS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
Three
Months Ended
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
$390,534
|
|
$
|
(208,616
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating
activities:
|
|
|
|
|
|
|
|
Net
change in liabilities related to discontinued operations
|
|
|
---
|
|
|
(7,475
|
)
|
Depreciation
and amortization
|
|
|
182,542
|
|
|
4,980
|
|
Amortization
of original issue discount on subordinated notes payable
|
|
|
885
|
|
|
572
|
|
Amortization
of deferred loan costs
|
|
|
83,739
|
|
|
---
|
|
Write-off
of fixed assets
|
|
|
---
|
|
|
20,429
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
(Increase) decrease in -
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(787,303
|
)
|
|
---
|
|
Inventories
|
|
|
(377,733
|
)
|
|
---
|
|
Accrued
interest receivable
|
|
|
---
|
|
|
(11,647
|
)
|
Prepaid
expenses
|
|
|
(69,102
|
)
|
|
(11,181
|
)
|
Increase
(decrease) in -
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
1,107,249
|
|
|
39,699
|
|
Accrued
interest and dividends payable
|
|
|
1,857,607
|
|
|
10,000
|
|
Accrued
expenses
|
|
|
453,578
|
|
|
(39,908
|
)
|
Deferred
rent
|
|
|
(9,081
|
)
|
|
---
|
|
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
2,832,915
|
|
|
(203,147
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Principal
and interest payments on BTW note receivable
|
|
|
---
|
|
|
247,227
|
|
Deferred
costs related to KES transaction
|
|
|
---
|
|
|
(160,002
|
)
|
NET
CASH PROVIDED BY INVESTING ACTIVITIES
|
|
|
---
|
|
|
87,225
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Net
repayments under secured line of credit
|
|
|
(3,130,551
|
)
|
|
---
|
|
Repayment
of notes payable to directors
|
|
|
(50,000
|
)
|
|
---
|
|
Principal
payments on equipment contract payable and capital lease
obligation
|
|
|
(106,546
|
)
|
|
---
|
|
NET
CASH USED IN FINANCING ACTIVITIES
|
|
|
(3,287,097
|
)
|
|
---
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
Net
decrease
|
|
|
(454,182
|
)
|
|
(115,922
|
)
|
Balance
at beginning of period
|
|
|
998,835
|
|
|
674,880
|
|
Balance
at end of period |
|
$
|
544,653
|
|
$
|
558,958
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash
paid for -
|
|
|
|
|
|
|
|
Interest
|
|
$
|
575,957
|
|
$
|
--
|
|
Income
taxes
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Deemed
distribution to sellers of KES Acquisition Company, LLC
|
|
$
|
267,000
|
|
$
|
--
|
|
See
accompanying notes to condensed consolidated financial statements.
YOUTHSTREAM
MEDIA NETWORKS, INC. AND SUBSIDIARIES
THREE
MONTHS ENDED DECEMBER 31, 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 2) (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.
Commencing
March 1, 2005, the Company has included the operations of a steel mini-mill
located in Ashland, Kentucky in its consolidated financial statements (see
Note
2), which represents the only business segment in which the Company currently
operates.
The
accompanying condensed consolidated financial statements are unaudited, but
in
the opinion of management of the Company, contain all adjustments, which include
normal recurring accruals, necessary to present fairly the financial position
at
December 31, 2005, the results of operations for the three months ended December
31, 2005 and 2004, and the cash flows for the three months ended December 31,
2005 and 2004. The balance sheet as of September 30, 2005 is derived from the
Company’s audited financial statements included in the Company’s Annual Report
on Form 10-KSB for the fiscal year ended September 30, 2005.
Certain
information and footnote disclosures normally included in financial statements
that have been prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission, although management of the Company
believes that the disclosures contained in these financial statements are
adequate to make the information presented therein not misleading. For further
information, refer to the financial statements and the notes thereto included
in
the Company’s Annual Report on Form 10-KSB for the fiscal year ended September
30, 2005, as filed with the Securities and Exchange Commission.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 period. Actual results could differ from those
estimates.
The
results of operations for the three months ended December 31, 2005 are not
necessarily indicative of the results of operations to be expected for the
full
fiscal year ending September 30, 2006.
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. For the three months ended
December 31, 2005, operating income was $2,880,310, 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.
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. 48), “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.
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 income (loss) per share is required by SFAS No. 123
as
if the Company had accounted for its employee stock options and warrants under
the fair value method of such statement. However, since the Company did not
issue or have outstanding any unvested stock options or warrants to officers,
directors and employees that vested during the three months ended December
31,
2005 and 2004, no pro forma financial disclosure has been presented for such
periods.
Earnings
Per Share
The
Company calculates net income (loss) per share as required by SFAS No. 128,
"Earnings per Share". Basic earnings per share excludes any dilution for common
stock equivalents and is computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the relevant period. Diluted
earnings 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 earnings per share does not consider such dilution if its effect would
be anti-dilutive.
At
December 31, 2005 and 2004, potentially dilutive securities entitling the holder
thereof to acquire shares of common stock are summarized as
follows:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Stock
options
|
|
|
1,405,404
|
|
|
1,205,404
|
|
Common
stock purchase warrants
|
|
|
1,000,000
|
|
|
1,000,000
|
|
Concentrations
The
Company’s cash balances exceeded federally-insured levels at December 31, 2005
and 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
the three months ended December 31, 2005, the Company had two suppliers that
accounted for approximately 48% of raw materials purchases, one supplier
providing approximately 35% and the other supplier providing approximately
13%,
of which $2,204,497 was included in accounts payable at December 31, 2005.
During the three months ended December 31, 2005, the Company had two customers
that accounted for approximately 19% of net sales, one customer providing
approximately 12% and the other customer providing approximately 7%, of which
$3,702,710 was included in accounts receivable at December 31,
2005.
Discontinued
Operations
As
of
December 31, 2005 and September 30, 2005, the Company has accrued liabilities
$2,984,660 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.
Recent
Accounting Pronouncements and Developments
In
May 2005, the Financial Accounting Standards Board (“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. The adoption of SFAS No. 154 is not expected to have any
impact on the Company’s financial statement presentation or
disclosures.
In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
provides criteria for the recognition, measurement, presentation and disclosure
of uncertain tax positions that has an effect on a company’s financial
statements accounted for in accordance with SFAS No. 109, “Accounting for Income
Taxes”, as a result of positions taken or expected to be taken in a company’s
tax return. A tax benefit from an uncertain position may be recognized only
if
it is “more likely than not” that the position is sustainable based on its
technical merits. The provisions of FIN 48 are effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
potential effect that the adoption of FIN 48 will have on the Company's
financial statement presentation and 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 fiscal
year ending September 30, 2007 to comply with the internal control reporting
requirements. On August 9, 2006, the SEC issued two releases that when adopted
are designed to grant smaller public companies further relief from compliance
with Section 404 of the Sarbanes-Oxley Act of 2002.
2.
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
man-hours worked, is approximately 200,000 short-tons per year, and the Mill
is
currently operating at approximately 100% 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”), 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 equity interest in the Notes and $267,000 equity interest in the 13%
Series A Preferred Stock in the consolidated balance sheet at September 30,
2005, and its $507,000 equity interest in the Notes and $0 equity interest
in
the 13% Series A Preferred Stock in the consolidated balance sheet at December
31, 2005 (see Note 6). 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. As of December 31, 2005, the balance outstanding on the notes
was $39,493,000 and the related accrued interest payable was $2,648,736.
Future
scheduled principal payments on the Notes are summarized as
follows:
|
|
KES
Holdings -
$19,000,000
Note
|
|
Atacama
-
$21,000,000
Note
|
|
Years
Ending September 30,
|
|
|
|
|
|
|
|
|
|
|
|
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 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 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. As of December 31, 2005, the balance outstanding on
the
13% Series A Preferred Stock was $25,000,000 and related accrued dividends
payable were $2,724,658.
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. At December 31, 2005, accrued interest payable
with respect to the Subordinated Promissory Notes was $1,297,479.
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 of Directors. 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 is a summary of 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 YouthStream 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. (an 80.01% consolidated
subsidiary) 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. For the three months ended December 31, 2005, net income allocable
to
the 19.99% minority shareholders was $37,526.
The
following pro forma operating data shown below presents the results of
operations for the three months ended December 31, 2004, as if the Acquisition
had occurred on the last day of the immediately preceding fiscal period.
Accordingly, transaction costs related to the Acquisition are not included
in
the net loss from continuing operations shown below. 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 three months ended December 31, 2004 is summarized as
follows:
Net
sales
|
|
$
|
27,487,729
|
|
Cost
of sales
|
|
|
25,760,188
|
|
Gross
margin
|
|
|
1,727,541
|
|
Operating
income
|
|
|
381,860
|
|
Interest
expense
|
|
|
(2,361,442
|
)
|
Minority
interest
|
|
|
199,109
|
|
Net
loss from continuing operations
|
|
$
|
(1,696,846
|
)
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
$
|
(0.04
|
)
|
Weighted
average common shares outstanding
|
|
|
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
December 31, 2005 and at September 30, 2005 is presented below.
December
31, 2005
|
|
|
Unrestricted
|
|
|
Restricted
|
|
|
As
Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
500,540
|
|
$
|
35,994,977
|
|
$
|
36,495,517
|
|
Property,
plant and equipment, net
|
|
|
-
|
|
|
5,385,203
|
|
|
5,385,203
|
|
Other
assets
|
|
|
-
|
|
|
555,209
|
|
|
555,209
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
500,540
|
|
$
|
41,935,389
|
|
$
|
42,435,929
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
3,908,112
|
|
$
|
36,336,068
|
|
$
|
40,244,180
|
|
Non-current
liabilities
|
|
|
80,171,000
|
|
|
1,497,565
|
|
|
81,668,565
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings (accumulated deficit)
|
|
|
(349,937,425
|
)
|
|
3,062,561
|
|
|
(346,874,864
|
)
|
Other
|
|
|
266,358,853
|
|
|
1,039,195
|
|
|
267,398,048
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$
|
500,540
|
|
$
|
41,935,389
|
|
$
|
42,435,929
|
|
September
30, 2005
|
|
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
|
|
3.
Inventories
Inventories
are comprised of the following at December 31, 2005 and September 30,
2005:
|
|
December
31,
2005
|
|
September
30,
2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Raw
materials and scrap
|
|
$
|
2,947,430
|
|
$
|
2,954,405
|
|
Semi-finished
goods
|
|
|
5,611,786
|
|
|
6,556,006
|
|
Finished
goods
|
|
|
9,699,322
|
|
|
8,370,394
|
|
Total
|
|
$
|
18,258,538
|
|
$
|
17,880,805
|
|
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.
4.
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 in February 2004 from the
sale
of the assets and operations of its subsidiary, Beyond the Wall, Inc., and
any
tax sharing payments received under the Tax Sharing Agreement with Acquisition
Corp. and Atacama KES (see Note 2). On
September 30, 2005, the Company received a cash payment of $258,922 as
settlement in full of the outstanding note receivable from the sale of the
assets and operations of Beyond the Wall, Inc., and repaid the notes payable
to
directors in October 2005.
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 prior to its acquisition by the Company. 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 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 December
31,
2005 and September 30, 2005, accrued interest payable with respect to the
subordinated secured promissory notes payable was $1,297,479 and $1,085,753,
respectively.
Secured
Line of Credit
Effective
March 24, 2004, KES Acquisition entered into a loan and security agreement,
as
amended, with GECC. 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 December 31,
2005
and September 30, 2005, the balance outstanding on the line of credit was
$15,878,828 and $19,009,379, respectively, 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 2), 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
December 31, 2005 and 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.
5.
Commitment and Contingencies
Legal
Proceedings
The
Company and/or its subsidiary that owned its former operating business, Beyond
the Wall, Inc., 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, Inc. assets, certain
of
these claims are the responsibility of the buyer of the Beyond the Wall, Inc.
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 December 31, 2005 and
September 30, 2005.
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.
Operating
Commitments
The
Mill
has been operating under a Management Services Agreement with a management
company effective through October 31, 2009 that provides for the management
company to provide, 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, for which 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 $9,200,000 and $7,962,000 at December 31, 2005 and September
30,
2005, respectively.
6.
Redeemable Preferred Stock
On
December 22, 2005, 10,000 shares of 13% Series A Preferred Stock with a face
amount of $10,000,000 that were originally issued by Acquisition Corp. to KES
Holdings in February 2005 (see Note 2) were transferred to two independent
charities. Since the Company owned a 2.67% interest in KES Holdings, the pro
rata portion of the face amount of such 13% Series A Preferred Stock and the
related accrued dividends had previously been eliminated in consolidation.
However, as a result of the transfer of such preferred shares to the two
charities in December 2005, the Company recorded the previously eliminated
portion of the face amount of the 13% Series A Preferred Stock ($267,000) as
a
deemed distribution to the Sellers of KES Acquisition, consistent with the
accounting for the Acquisition as described at Note 2, and the previously
eliminated portion of the preferred stock dividends ($28,243) through December
22, 2005, as interest expense.
7.
Income Taxes
Income
tax expense was $63,000 for the three months ended December 31, 2005, consisting
of a provision for state income taxes. No federal income tax provision was
provided for the three months ended December 31, 2005 as a result of the
utilization of the Company’s net operating loss carryforwards as described
below. No federal or state income tax provision was provided for the three
months ended December 31, 2004 due to the Company reporting a pre-tax operating
loss for such period.
At
September 30, 2005, the Company had net operating loss carryforwards 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.
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 was more likely than not that the
deferred tax assets would be realized. Accordingly, 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, the
Company recorded a 100% valuation allowance against its net deferred tax assets
for financial reporting purposes.
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 previously 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 2) 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.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
Overview:
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).
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 notes were subject
to
mandatory prepayment based on any proceeds received by the Company from, among
other sources, the note that the Company received in February 2004 from the
sale
of the assets and operations of its subsidiary, Beyond the Wall, Inc., and
any
tax sharing payments received under the Tax Sharing Agreement with Acquisition
Corp. and Atacama KES (see “Acquisition of Steel Mini-Mill” below). On
September 30, 2005, the Company received a cash payment of $258,922 as
settlement in full of the outstanding note receivable from the sale of the
assets and operations of Beyond the Wall, Inc., and repaid the notes payable
to
directors in October 2005.
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
man-hours worked, is approximately 200,000 short-tons per year, and the Mill
is
currently operating at approximately 100% 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”), 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 equity interest in the Notes and $267,000 equity interest in the 13%
Series A Preferred Stock in the consolidated balance sheet at September 30,
2005, and its $507,000 equity interest in the Notes and $0 equity interest
in
the 13% Series A Preferred Stock in the consolidated balance sheet at December
31, 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. As of December 31, 2005, the balance outstanding on the notes
was $39,493,000 and the related accrued interest payable was $2,648,736.
Future
scheduled principal payments on the Notes are summarized as
follows:
|
|
KES
Holdings -
$19,000,000
Note
|
|
Atacama
-
$21,000,000
Note
|
|
Years
Ending September 30,
|
|
|
|
|
|
|
|
|
|
|
|
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 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 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. As of December 31, 2005, the balance outstanding on
the
13% Series A Preferred Stock was $25,000,000 and related accrued dividends
payable were $2,724,658.
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. At December 31, 2005, accrued interest payable
with respect to the Subordinated Promissory Notes was $1,297,479.
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 of Directors. 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 is a summary of 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 YouthStream 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. (an 80.01% consolidated
subsidiary) 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. For the three months ended December 31, 2005, net income allocable
to
the 19.99% minority shareholders was $37,526.
Pro
Forma Information
The
following pro forma operating data shown below presents the results of
operations for the three months ended December 31, 2004, as if the Acquisition
had occurred on the last day of the immediately preceding fiscal period.
Accordingly, transaction costs related to the Acquisition are not included
in
the net loss from continuing operations shown below. 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 three months ended December 31, 2004 is summarized as
follows:
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
27,487,729
|
|
Cost
of sales
|
|
|
25,760,188
|
|
Gross
margin
|
|
|
1,727,541
|
|
Operating
income
|
|
|
381,860
|
|
Interest
expense
|
|
|
(2,361,442
|
)
|
Minority
interest
|
|
|
199,109
|
|
Net
loss from continuing operations
|
|
$
|
(1,696,846
|
)
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
$
|
(0.04
|
)
|
Weighted
average common shares outstanding
|
|
|
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.
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
May 2005, the Financial Accounting Standards Board (“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. The adoption of SFAS No. 154 is not expected to have any
impact on the Company’s financial statement presentation or
disclosures.
In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
provides criteria for the recognition, measurement, presentation and disclosure
of uncertain tax positions that has an effect on a company’s financial
statements accounted for in accordance with SFAS No. 109, “Accounting for Income
Taxes”, as a result of positions taken or expected to be taken in a company’s
tax return. A tax benefit from an uncertain position may be recognized only
if
it is “more likely than not” that the position is sustainable based on its
technical merits. The provisions of FIN 48 are effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
potential effect that the adoption of FIN 48 will have on the Company's
financial statement presentation and 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 fiscal
year ending September 30, 2007 to comply with the internal control reporting
requirements. On August 9, 2006, the SEC issued two releases that when adopted
are designed to grant smaller public companies further relief from compliance
with Section 404 of the Sarbanes-Oxley Act of 2002.
Results
of 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 a combination of cash and a note. On September 30, 2005, the Company
received a final cash payment of $258,922 with regard to this transaction.
Accordingly, for the three months ended December 31, 2004, the Company did
not
have any revenue-generating operations.
The
Company acquired the Mill effective February 28, 2005, and the operations of
the
Mill have been consolidated commencing March 1, 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.
Three
Months Ended December 31, 2005 and 2004:
Net
Sales. Net sales were $33,482,842 for the three months ended December 31, 2005,
an average of $11,160,947 per month. If the Company had owned the Mill for
the
three months ended December 31, 2004, pro forma net sales would have been
$27,487,729, an average of $9,162,576 per month.
Cost
of
Sales. Cost of sales was $28,875,532 for the three months ended December 31,
2005, resulting in gross profit of $4,607,310 and a gross profit margin of
13.8%. If the Company had owned the Mill for the three months ended December
31,
2004, pro forma gross profit margin would have been 6.3%.
Selling
Expenses. For the three months ended December 31, 2005, selling expenses were
$385,571 or 1.2% of sales. The Company did not have any selling expenses for
the
three months ended December 31, 2004. Selling expenses consist primarily of
sales commissions and personnel-related costs.
General
and Administrative Expenses. For the three months ended December 31, 2005,
general and administrative expenses were $1,341,429 or 4.0% of sales. For the
three months ended December 31, 2004, the Company incurred corporate general
and
administrative expenses of $194,671. General and administrative expenses consist
primarily of management compensation, legal and accounting fees and insurance
costs.
Income
(Loss) from Operations. Income from operations was $2,880,310 for the three
months ended December 31, 2005, as compared to a loss from operations of
$(194,671) for the three months ended December 31, 2004.
Interest
Income. Interest income was $99 for the three months ended December 31, 2005,
as
compared to $14,365 for the three months ended December 31, 2004.
Interest
Expense. For the three months ended December 31, 2005, interest expense was
$2,433,564, which included interest expense related to the 8% notes payable
of
$796,352 and the 13% Series A Preferred Stock of $839,528 issued in conjunction
with the acquisition of the Mill, the 12% notes payable of $211,727 and the
4%
notes payable of $10,885. For the three months ended December 31, 2004, interest
expense was $10,572.
Other
Income (Expense). For the three months ended December 31, 2005, other income
was
$6,689, as compared to other expense of $17,738 for the three months ended
December 31, 2004.
Income
(Loss) before Income Taxes and Minority Interest. Income before income taxes
and
minority interest was $453,534 for the three months ended December 31, 2005,
as
compared to a loss of $(208,616) for the three months ended December 31, 2004.
Income
Taxes. Income
tax expense was $63,000 for the three months ended December 31, 2005, consisting
of a provision for state income taxes. No federal income tax provision was
provided for the three months ended December 31, 2005 as a result of the
utilization of the Company’s net operating loss carryforwards. No federal or
state income tax provision was provided for the three months ended December
31,
2004 due to the Company reporting a pre-tax operating loss for such
period.
Income
(Loss) before Minority Interest. Income before minority interest was $390,534
for the three months ended December 31, 2005, as compared to a loss before
minority interest of $208,616 for the three months ended December 31,
2004.
Minority
Interest - Related Parties. Minority interest - related parties was $0 for
the
three months ended December 31, 2005 and 2004. Minority
interest - related parties was $430,931 on February 28, 2005. For the year
ended
September 30, 2005, the net loss of Acquisition Corp. (an 80.01% consolidated
subsidiary) 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. For the three months ended December 31, 2005, net income allocable
to
the 19.99% minority shareholders was $37,526.
Net
Income (Loss). Net income was $390,534 for the three months ended December
31,
2005, as compared a loss of $208,616 for the three months ended December 31,
2004.
Liquidity
and Capital Resources - December 31, 2005:
Overview:
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
December 31, 2005 and September 30, 2005, the balance outstanding on the line
of
credit was $15,878,828 and $19,009,379, respectively, 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 2), 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
December 31, 2005 and 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.
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 tax sharing payment due to YouthStream was $342,292, which was
received in December 2005. At December 31, 2005, the tax sharing payment due
to
YouthStream was $444,365, which was received in February 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.
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. 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.
For
the three months ended December 31, 2005, operating income was $2,880,310,
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.
Operating
Activities. During the three months ended December 31, 2005, the Company
generated $2,832,915 of cash in operating activities, both to fund the corporate
overhead of YouthStream and to fund the operations of the Mill. During the
three
months ended December 31, 2004, the Company used $203,147 of cash in operating
activities to fund its corporate general and administrative expenses.
Investing
Activities. During the three months ended December 31, 2004, net cash provided
by investing activities of $87,225 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, reduced by deferred
costs related to the KES transaction of $160,002. During the three months ended
December 31, 2005, the Company did not have any investing activities.
Financing
Activities. During the three months ended December 31, 2005, net cash utilized
in financing activities was $3,287,097, consisting of $3,130,551 to reduce
borrowings under the secured line of credit with GECC, the repayment of $50,000
of short-term notes payable to certain directors, and payments on an equipment
contract payable and capital lease obligation of $106,546. During the three
months ended December 31, 2004, the Company did not have any financing
activities.
Summary
of Restricted and Unrestricted Assets, Liabilities and
Equity:
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
December 31, 2005 and at September 30, 2005 is presented below.
December
31, 2005
|
|
Unrestricted
|
|
Restricted
|
|
As
Reported
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
500,540
|
|
$
|
35,994,977
|
|
$
|
36,495,517
|
|
Property,
plant and equipment, net
|
|
|
-
|
|
|
5,385,203
|
|
|
5,385,203
|
|
Other
assets
|
|
|
-
|
|
|
555,209
|
|
|
555,209
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
500,540
|
|
$
|
41,935,389
|
|
$
|
42,435,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
3,908,112
|
|
$
|
36,336,068
|
|
$
|
40,244,180
|
|
Non-current
liabilities
|
|
|
80,171,000
|
|
|
1,497,565
|
|
|
81,668,565
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings (accumulated deficit)
|
|
|
(349,937,425
|
)
|
|
3,062,561
|
|
|
(346,874,864
|
)
|
Other
|
|
|
266,358,853
|
|
|
1,039,195
|
|
|
267,398,048
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$
|
500,540
|
|
$
|
41,935,389
|
|
$
|
42,435,929
|
|
September
30, 2005
|
|
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
|
|
Principal
Commitments:
At
December 31, 2005, the Company's principal commitments consisted of the
following obligations:
|
|
|
|
Payments
Due by 12 Month Periods
Ending
December 31,
(in
thousands)
|
|
|
|
Contractual
cash obligations
|
|
Total
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
There-after
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4%
notes payable
|
|
$
|
4,917
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,917
|
|
$
|
-
|
|
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
|
|
|
15,879
|
|
|
-
|
|
|
15,879
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Operating
leases
|
|
|
1,487
|
|
|
424
|
|
|
400
|
|
|
390
|
|
|
273
|
|
|
-
|
|
|
-
|
|
Capital
lease obligation
|
|
|
1,596
|
|
|
386
|
|
|
448
|
|
|
521
|
|
|
241
|
|
|
-
|
|
|
-
|
|
Equipment
contact payable
|
|
|
231
|
|
|
79
|
|
|
87
|
|
|
65
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Management
services agreement
|
|
|
2,683
|
|
|
700
|
|
|
700
|
|
|
700
|
|
|
583
|
|
|
-
|
|
|
-
|
|
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
|
|
$
|
105,173
|
|
$
|
8,589
|
|
$
|
23,321
|
|
$
|
6,559
|
|
$
|
5,980
|
|
$
|
15,069
|
|
$
|
45,655
|
|
At
December 31, 2005 and September 30, 2005, the Company did not have any material
commitments for capital expenditures.
At
December 31, 2005 and 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 $9,200,000 and
$7,962,000, respectively.
Off-Balance
Sheet Arrangements:
The
Company does not have any transactions, obligations or relationships that could
be considered off-balance sheet arrangements at December 31, 2005 or September
30, 2005.
(a)
Evaluation of Disclosure Controls and Procedures
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.
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 December 31, 2005 and September 30,
2005.
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.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not
Applicable.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
Not
Applicable.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not
Applicable.
ITEM
5. OTHER INFORMATION
Not
Applicable.
A
list of
exhibits required to be filed as part of this report is set forth in the Index
to Exhibits, which immediately precedes such exhibits, and is incorporated
herein by reference.
Pursuant
to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
YOUTHSTREAM
MEDIA NETWORKS, INC.
|
|
(Registrant)
|
|
|
|
|
DATE:
August 18, 2006
|
By:
/s/ JONATHAN V. DIAMOND
|
|
Jonathan
V. Diamond
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
DATE:
August 18, 2006
|
By:
/s/ ROBERT N. WEINGARTEN
|
|
Robert
N. Weingarten
|
|
Chief
Financial Officer
|
INDEX
TO EXHIBITS
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
32
|
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|