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. In addition, as a result of the acquisition of the Mill during the nine months ended June 30, 2005, the Company adopted additional accounting policies as described at Note 2 to the condensed consolidated financial statements.
The Company recognizes revenues when title passes, the earnings process is substantially complete, and the Company is reasonably assured of the collection of the proceeds from the exchange, all of which generally occur either upon shipment of the Company’s products or delivery of the product at the destination specified by the customer.
In order to determine the value of the Company's accounts receivable, the Company records a provision for doubtful accounts to cover estimated credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectibility of outstanding accounts receivable. The Company evaluates the credit risk of its customers utilizing historical data and estimates of future performance.
Inventories consist of raw materials, 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 Company periodically evaluates its non-current assets for potential impairment indicators. The Company's judgments regarding the potential impairment are based on legal factors, market conditions and operational performance indicators, among others. Future events could cause us to conclude that impairment indicators exist and that such assets (primarily investments, notes receivable and fixed assets) are impaired.
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.
The retail segment operations of Beyond the Wall have been presented as a discontinued operation in 2004. Accordingly, for the three months and nine months ended June 30, 2004, the Company did not have any revenues or cost of revenues from continuing operations.
The refurbished Mill restarted operations in late January 2004 and completed its ramp-up phase and reached full operating status in August 2004. The Company acquired the Mill effective
February 28, 2005, and the operations of the Mill have been consolidated commencing March 1, 2005. Sales and cost of sales were generated by the operations of the Mill during 2005. The Company’s results of operations for the three months ended June 30, 2005 include the Mill’s operations for three months (April through June 2005) and the Company’s results of operations for the nine months ended June 30, 2005 include the Mill’s operations for four months (March through June 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 June 30, 2005 and 2004:
Net Sales. Net sales were $29,127,566 for the three months ended June 30, 2005, an average of $9,709,189 per month, as compared to pro forma net sales of $16,085,610 for the three months ended June 30, 2004, an average of $5,361,870 per month. Average monthly net sales for the three months ended June 30, 2005 were $4,347,319 or 81.1% greater than pro forma average monthly net sales for the three months ended June 30, 2004.
Cost of Sales. Cost of sales was $27,194,477 for the three months ended June 30, 2005, resulting in gross profit of $1,933,089 and a gross profit margin of 7.1%. Pro forma gross profit margin for the three months ended March 31, 2005 was 4.6% and for the six months ended March 31, 2005 was 5.5%. The improvement in gross profit margin for the three months ended June 30, 2005 as compared to the prior 2005 periods was a result of various factors, including the utilization of lower cost vendors for raw materials purchases, improved plant operating efficiency and increased steel prices. Due to the restart of Mill operations in late January 2004, a comparison of 2004 cost of sales amounts to 2005 cost of sales amounts is not meaningful.
Selling, General and Administrative Expenses. For the three months ended June 30, 2005, selling, general and administrative expenses were $1,294,537 or 4.4% of net sales. For the three months ended June 30, 2004, selling, general and administrative expenses were $155,202, which reflected corporate general and administrative expenses, including management compensation, legal and accounting fees and insurance costs.
Operating Income (Loss). Operating income was $638,552 for the three months ended June 30, 2005, as compared to an operating loss of $155,202 for the three months ended June 30, 2004.
Interest Income. Interest income was $9,944 for the three months ended June 30, 2005, as compared to $18,615 for the three months ended June 30, 2004.
Interest Expense. For the three months ended June 30, 2005, interest expense was $2,371,888, which included interest expense related to the 8% notes payable of $787,696 and the 13% Series A Preferred Stock of $801,621 issued in conjunction with the acquisition of the Mill, and the 12% notes payable of $209,425. For the three months ended June 30, 2004, interest expense was $10,416.
Transaction Costs Related to KES Acquisition. The Company incurred $280,773 of costs with respect to the acquisition of the Mill (primarily legal and accounting fees), which were charged to operations during the three months ended June 30, 2005.
Other Income (Expense). For the three months ended June 30, 2005, other income was $4,216. There was no other income (expense) for the three months ended June 30, 2004.
Loss before Income Taxes and Minority Interest. The loss before income taxes and minority interest was $1,999,949 for the three months ended June 30, 2005, as compared to $147,003 for the three months ended June 30, 2004.
Income Taxes. For the three months ended June 30, 2004, the Company recorded a benefit from income taxes of $1,570. The Company did not record any provision for or benefit from income taxes for the three months ended June 30, 2005.
Loss before Minority Interest. The loss before minority interest was $1,999,949 for the three months ended June 30, 2005, as compared to $145,433 for the three months ended June 30, 2004.
Minority Interest. For the three months ended June 30, 2005, minority interest was $162,820, reflecting the minority interest’s share in the loss of YouthStream Acquisition Corp., an 80.01%-owned consolidated subsidiary.
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Loss from Continuing Operations. The loss from continuing operations was $1,827,129 for the three months ended June 30, 2005, as compared to $145,433 for the three months ended June 30, 2004.
Loss from Discontinued Operations. For the three months ended June 30, 2004, the Company had a loss from discontinued operations of $5,150, which related to the former operations of Beyond the Wall.
Net Loss. Net loss was $1,837,129 for the three months ended June 30, 2005, as compared $150,583 for the three months ended June 30, 2004.
Nine Months Ended June 30, 2005 and 2004:
Net Sales. Net sales were $38,261,343 for the nine months ended June 30, 2005, an average of $9,565,336 per month. Pro forma net sales were $82,865,839 for the nine months ended June 30, 2005, an average of $9,207,315 per month, as compared to pro forma net sales of $19,645,318 for the nine months ended June 30, 2004, an average of $3,929,064 per month. Pro forma average monthly net sales for the nine months ended June 30, 2005 were $5,278,251 or 134.3% greater than pro forma average monthly net sales for the nine months ended June 30, 2004.
Cost of Sales. Cost of sales was $35,666,705 for the nine months ended June 30, 2005, resulting in gross profit of $2,594,638 and a gross profit margin of 6.8%. Pro forma gross profit margin for the nine months ended June 30, 2005 was 5.9%. Due to the restart of Mill operations in late January 2004, a comparison of 2004 cost of sales amounts to 2005 cost of sales amounts is not meaningful.
Selling, General and Administrative Expenses. For the nine months ended June 30, 2005, selling, general and administrative expenses were $2,005,752 or 5.2% of sales. Selling, general and administrative expenses were higher for the nine months ended June 30, 2005, at 5.2% of net sales, as compared to 4.4% of net sales for the three months ended June 30, 2005, since the Company incurred corporate general and administrative expenses during the entire nine months ended June 30, 2005, but only had operating revenues for the last four months of the nine months ended June 30, 2005. For the nine months ended June 30, 2004, selling, general and administrative expenses were $865,159, which reflected corporate general and administrative expenses, including management compensation, legal and accounting fees and insurance costs.
Operating Income. Operating income was $588,886 for the nine months ended June 30, 2005, as compared to an operating loss of $865,159 for the nine months ended June 30, 2004.
Interest Income. Interest income was $35,478 for the nine months ended June 30, 2005, as compared to $30,063 for the nine months ended June 30, 2004.
Interest Expense. For the nine months ended June 30, 2005, interest expense was $3,208,954, which included interest expense related to the 8% notes payable of $1,056,032 and the 13% Series A Preferred Stock of $1,074,700 issued in conjunction with the acquisition of the Mill, and the 12% notes payable of $280,767. For the nine months ended June 30, 2004, interest expense was $31,014.
Transaction Costs Related to KES Acquisition. The Company incurred $1,073,727 of costs with respect to the acquisition of the Mill (primarily legal and accounting fees), which were charged to operations during the nine months ended June 30, 2005. Included in such costs was $187,702 of transaction costs incurred by KES Acquisition prior to February 28, 2005.
Other Income (Expense). For the nine months ended June 30, 2005, other expense was $26,489. There was no other income (expense) for the nine months ended June 30, 2004.
Loss before Income Taxes and Minority Interest. The loss before income taxes and minority interest was $3,684,806 for the nine months ended June 30, 2005, as compared to $866,110 for the nine months ended June 30, 2004.
Income Taxes. For the nine months ended March 31, 2004, the Company recorded a benefit from income taxes of $13,683. The Company did not record any provision for or benefit from income taxes for the nine months ended June 30, 2005.
Loss before Minority Interest. The loss before minority interest was $3,684,806 for the nine months ended June 30, 2005, as compared to $852,427 for the nine months ended June 30, 2004.
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Minority Interest. For the nine months ended June 30, 2005, minority interest was $430,931, reflecting the minority interest’s share in the loss of YouthStream Acquisition Corp., an 80.01%-owned consolidated subsidiary.
Loss from Continuing Operations. The loss from continuing operations was $3,253,875 for the nine months ended June 30, 2005, as compared to $852,427 for the nine months ended June 30, 2004.
Loss from Discontinued Operations. For the nine months ended June 30, 2004, the Company had a loss from discontinued operations of $1,303,647, which related to the former operations of Beyond the Wall. The loss from discontinued operations of $481,926 for the nine months ended June 30, 2004 consisted of an operating loss of $981,926, offset by a gain of $500,000 resulting from the reduction of a prior accrual with respect to the closing of retail stores as a result of the Company completing settlements with landlords below what had been originally accrued. The Company also had a loss on the disposal of discontinued operations of $821,721 for the nine months ended June 30, 2004, as a result of the sale of the assets and operations of Beyond the Wall in February 2004.
Net Loss. Net loss was $3,253,875 for the nine months ended June 30, 2005, as compared $2,156,074 for the nine months ended June 30, 2004.
Liquidity and Capital Resources – June 30, 2005:
On March 9, 2005, YouthStream completed the acquisition of the Mill. YouthStream owns 80.01% of the common stock, and 100% of the voting stock, of Acquisition Corp, which owns, directly and indirectly, 100% of KES Acquisition, the legal entity that owns and operates the Mill. Accordingly, YouthStream has consolidated the operations of the Mill commencing March 1, 2005. As a result of this transaction, 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.
The Company utilized substantially all of its available cash resources to complete 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 requires additional operating capital to fund corporate general and administrative expenses, which it is attempting to obtain through both internal and external resources. The Mill relies on cash flows from operations to support a line of credit with General Electric Capital Corporation to fund its separate operations. Subsequent to June 30, 2005, the operating performance of the steel mini-mill has improved and the Company has been able to increase borrowing availability under its line of credit with General Electric Capital Corporation.
As of June 30, 2005, the balance outstanding on the line of credit was $17,030,778, which has been presented as a current liability in the consolidated balance sheet at such date due to continuing uncertainty with respect to the Company’s ability to maintain compliance with the minimum fixed charge coverage ratio. At March 31, 2005, KES Acquisition was not in compliance with the fixed charge coverage ratio based on its consolidated financial statements as originally filed, in part relating to changes to its accounting procedures as a result of the review of its financial statements conducted in conjunction with its acquisition by YouthStream, and subsequently received a waiver of default from 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 consolidated financial statements as revised. The Company intends to seek an amended waiver of default from the lender with respect to the restated March 31, 2005 consolidated financial statements and a waiver of default from the lender with respect to the restated June 30, 2005 consolidated financial statements. If no such waivers are received, the lender would have the right to accelerate the maturity of the line of credit.
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.
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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’’. At June 30, 2005, the estimated tax sharing payment due to YouthStream was approximately $77,000.YouthStream has approximately $250,000,000 of federal net operating loss carryovers currently available to offset any federal income tax liability of Acquisition Corp and Atacama KES subsequent to February 28, 2005. 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 240,000 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.
Operating Activities. During the nine months ended June 30, 2005, the Company used $2,629,587 of cash in operating activities, both to fund the corporate overhead of YouthStream for the nine months ended June 30, 2005 and to fund the operations of the Mill for a period of four months from the date of acquisition through June 30, 2005. During the nine months ended June 30, 2004, the Company used $968,122 of cash in operating activities, primarily to fund its loss from continuing operations of $852,427 for the nine months ended June 30, 2004, which consisted of corporate general and administrative expenses.
Investing Activities. During the nine months ended June 30, 2005, net cash provided by investing activities of $247,227 consisted of the October 31, 2004 scheduled principal payment of $197,734, plus accrued interest of $49,493, on the note that the Company received in the February 2004 sale of the assets and operations of Beyond the Wall. During the nine months ended June 30, 2004, net cash provided by investing activities of $1,220,000 consisted of the proceeds received from the sale of the Beyond the Wall assets and operations in February 2004.
Financing Activities. During the nine months ended June 30, 2005, net cash provided by financing activities was $1,279,243, consisting of $1,410,683 from an increase in the line of credit with General Electric Capital Corporation, reduced by payments on long-term debt of $131,440. During the nine months ended June 30, 2004, the Company did not generate or use any cash in financing transactions.
The Company acquired $913,194 of cash in connection with the acquisition of KES Acquisition, LLC.
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Principal Commitments:
At June 30, 2005, the Company's principal commitments consisted of the following obligations:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
| Contractual cash obligations | | Total | | Less than
1 year | | Between 2-3
years | | Between
4-5 years | | After 5
years |
| Notes payable to related parties | | $ | 4,916,162 | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,916,162 | |
| 12% subordinated promissory notes payable | | | 7,000,000 | | | | — | | | | 7,000,000 | | | | — | | | | — | |
| 8% subordinated secured promissory notes payable | | | 39,493,000 | | | | — | | | | 18,493,000 | | | | — | | | | 21,000,000 | |
| Line of credit | | | 17,030,778 | | | | 17,030,778 | | | | — | | | | — | | | | — | |
| Operating leases | | | 1,699,776 | | | | 425,868 | | | | 805,526 | | | | 468,382 | | | | — | |
| Capital lease obligation | | | 1,769,031 | | | | 358,638 | | | | 899,503 | | | | 510,890 | | | | — | |
| Equipment contact payable | | | 267,931 | | | | 75,302 | | | | 192,629 | | | | — | | | | — | |
| Management services agreement | | | 3,033,333 | | | | 700,000 | | | | 1,400,000 | | | | 933,333 | | | | — | |
| 4% Series A Preferred Stock subject to mandatory redemption | | | 5,269,333 | | | | — | | | | — | | | | — | | | | 5,269,333 | |
| 13% Series A Preferred Stock of subsidiary subject to mandatory redemption, excluding accrued dividends | | | 25,807,700 | | | | — | | | | 7,916,000 | | | | 7,916,000 | | | | 9,975,700 | |
| Total | | $ | 106,287,044 | | | $ | 18,590,586 | | | $ | 36,706,658 | | | $ | 9,828,605 | | | $ | 41,161,195 | |
|
At June 30, 2005, the Company does not have any material commitments for capital expenditures.
At June 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 $6,900,000.
Off-Balance Sheet Arrangements:
The Company does not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements at June 30, 2005.
Recent Accounting Pronouncements:
In December 2004, the FASB issued SFAS No. 123(Revised 2004), ‘‘Share-Based Payment’’. SFAS No. 123(R) revises SFAS No. 123, ‘‘Accounting for Stock-Based Compensation’’ and supersedes APB Opinion No. 25, ‘‘Accounting for Stock Issued to Employees’’ and amends SFAS No. 95, ‘‘Statement of Cash Flows’’. SFAS No. 123(R) focuses primarily on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires companies to recognize in the statement of operations the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123(R) is effective as of the Company’s first interim or annual reporting period that begins after December 15, 2005. Accordingly, the Company will adopt SFAS No. 123(R) effective January 1, 2006. The Company is currently evaluating the provisions of SFAS No. 123(R) and has not yet determined the impact, if any, that SFAS No. 123(R) will have on its financial statement presentation or disclosures.
In November 2004, the FASB issued SFAS No. 151, ‘‘Inventory Costs — An Amendment of ARB No. 43, Chapter 4’’ (SFAS No. 151). SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. Further, SFAS No. 151 requires that allocation of fixed and production facilities overhead to conversion costs should be based on normal capacity of the production facilities. The provisions in SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15,
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2005. Accordingly, the Company will adopt SFAS No. 151 effective October 1, 2005. The Company is currently evaluating the provisions of SFAS No. 151 and has not yet determined the impact, if any, that SFAS No. 151 will have on its financial statement presentation or disclosures.
In December 2004, the FASB issued SFAS No. 153, ‘‘Exchanges of Nonmonetary Assets, an amendment to APB Opinion No. 29’’ (‘‘SFAS No. 153’’). SFAS No. 153 amends Accounting Principles Board Opinion No. 29, ‘‘Accounting for Nonmonetary Transactions’’, to require that exchanges of nonmonetary assets be measured and accounted for at fair value, rather than at carryover basis, of the assets exchanged. Nonmonetary exchanges that lack commercial substance are exempt from this requirement. SFAS No. 153 is effective for nonmonetary exchanges entered into in fiscal periods beginning after June 15, 2005. Accordingly, the Company will adopt SFAS No. 153 effective July 1, 2005. The Company is currently evaluating the provisions of SFAS No. 153, and has not yet determined the impact, if any, that it will have on the Company’s financial statement presentation or disclosures.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The certifications of the principal executive officer and the principal financial officer (or persons performing similar functions) required by Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended are filed as exhibits to this report. This section of the report contains the information concerning the evaluation of the Company's disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) and changes to internal controls over financial reporting (as defined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f)) referred to in the certifications and this information should be read in conjunction with the certifications for a more complete understanding of the topics presented herein.
Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted by the Company under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including its principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.
The Company carried out an evaluation, under the supervision and with the participation of its management, including its principal executive and financial officers, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon and as of the date of that evaluation, the Company’s principal executive and financial officers concluded that there were material weaknesses in the accounting and financial systems at the Company’s steel mini-mill, which resulted in deficient disclosure controls and procedures. The steel mini-mill was acquired effective February 28, 2005, and its operations have been included in the consolidated financial statements of the Company commencing March 1, 2005. Accordingly, as a result of this evaluation, the Company’s consolidated financial reporting and disclosure controls were also determined to have material weaknesses.
Specifically, the steel mini-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 steel mini-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 steel mini-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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Effective March 24, 2004, KES Acquisition entered into a loan and security agreement, as amended, with General Electric Capital Corporation. Under the terms of the agreement, KES Acquisition has the ability to borrow up to $23,000,000, subject to limitations under the lender’s borrowing base formula and compliance with a minimum fixed charge coverage ratio. Interest is payable monthly in arrears on the outstanding principal balance at the index rate (defined as the thirty-day dealer commercial paper rate) plus 5.5% per annum. The line of credit matures on March 24, 2007, and is secured by all of the assets of KES Acquisition and a pledge of (i) the membership interests of KES Acquisition owned by Acquisition Corp. and (ii) the capital stock of Atacama KES owned by Acquisition Corp. As of June 30, 2005, the balance outstanding on the line of credit was $17,030,778, which has been presented as a current liability in the consolidated balance sheet at such date due to continuing uncertainty with respect to the Company’s ability to maintain compliance with the minimum fixed charge coverage ratio.
At March 31, 2005, KES Acquisition was not in compliance with the fixed charge coverage ratio based on its consolidated financial statements as originally filed, in part relating to changes to its accounting procedures as a result of the review of its financial statements conducted in conjunction with its acquisition by YouthStream, and subsequently received a waiver of default from 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 consolidated financial statements as revised. The Company intends to seek an amended waiver of default from the lender with respect to the restated March 31, 2005 consolidated financial statements and a waiver of default from the lender with respect to the restated June 30, 2005 consolidated financial statements. If no such waivers are received, the lender would have the right to accelerate the maturity of the line of credit.
As of March 8, 2006, the Company's subsidiary, YouthStream Acquisition Corp., was in default with respect to certain terms and provisions of its previously issued promissory notes as described below:
1. 8.0% Subordinated Secured Promissory Note due February 28, 2015 in favor of KES Holdings, LLC in the principal amount of $19,000,000, as amended July 14, 2005. Accrued interest of approximately $1,520,000 was due and payable on February 28, 2006.
2. 8.0% Subordinated Secured Promissory Note due February 28, 2015 in favor of Atacama Capital Holdings, Ltd. in the principal amount of $21,000,000, as amended July 14, 2005. Accrued interest of approximately $1,680,000 was due and payable on February 28, 2006.
The Company is in discussions with the holders of these Notes in an effort to waive the current default and amend the Notes to revise the interest payment terms. No assurance can be given that such a waiver and amendment will be obtained and that the holders of such Notes will not exercise their rights to accelerate payment under such Notes, which event would have a material adverse affect on the financial condition and operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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ITEM 6. EXHIBITS
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.
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SIGNATURES
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: March 7, 2006 | | By: /s/ JONATHAN V. DIAMOND |
| | | Jonathan V. Diamond
Chief Executive Officer |
| Date: March 7, 2006 | | By: /s/ ROBERT N. WEINGARTEN |
| | | Robert N. Weingarten
Chief Financial Officer |
|
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INDEX TO EXHIBITS
| |
| 10.90 | Form of Promissory Note dated September 27, 2005 in the principal amount of $12,500, previously filed as an exhibit to the Quarterly Report on Form 10-QSB for the Quarterly Period Ended June 30, 2005 |
| |
| 10.91 | Payoff and Settlement Agreement dated September 30, 2005, by and among YouthStream Media Networks, Inc., Beyond the Wall, Inc., 1903 West Main Street Realty Management, LLC and Clive Corporation, Inc., previously filed as an exhibit to the Quarterly Report on Form 10-QSB for the Quarterly Period Ended June 30, 2005 |
| |
| 10.92 | Letter Agreement dated September 23, 2005 regarding 8% Subordinated Secured Promissory Notes, previously filed as an exhibit to the Quarterly Report on Form 10-QSB for the Quarterly Period Ended June 30, 2005 |
| |
| 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| 32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
| 32.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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