UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
[_] TRANSITION REPORT UNDER SECTION 13 OR 15 (d)
OF THE EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 005-79752
AGU Entertainment Corp.
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(Exact name of small business issuer as specified in its charter)
Delaware 84-1557072
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3200 West Oakland Park Blvd.
Lauderdale Lakes, FL 33311
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(Address of principal executive offices)
(954) 714-8100
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the issuer's common stock, no par value,
outstanding as of October 31, 2004 was 22,076,749.
Transitional Small Business Disclosure Format (check one): Yes [ ]; No [X]
AGU ENTERTAINMENT CORP.
(Formerly Lexington Barron Technologies, Inc.)
(A Development Stage Company)
FORM 10-QSB
INDEX
Page
PART I. UNAUDITED FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet as of September 30,
2004 (unaudited) 3
Condensed Consolidated Statements of Operations for the Three
Months Ended September 30, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Operations for the Nine
Months Ended September 30, 2004 and 2003 and Inception
through September 30, 2004 (unaudited) ............................... 5
Condensed Consolidated Statement of Changes in Shareholders'
Deficiency (unaudited) ............................................... 6
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2004 and 2003 and Inception
through September 30, 2004 (unaudited) ............................... 7
Notes to Condensed Consolidated Financial Statements
(unaudited) ..........................................................
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations 14
Item 3. Controls and Procedures .............................................. 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities....................................... 18
Item 4. Submission of Matters to a Vote of Security
Holders............................................................... 18
Item 5. Other Information..................................................... 19
Item 6. Exhibits ............................................................. 19
SIGNATURES..................................................................... 20
FORWARD LOOKING STATEMENTS
This report includes a number of "forward-looking statements" as that term
is defined in Section 27A of the Securities Act of 1933, as amended, (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). These statements reflect management's current
views with respect to future events and financial performance and include
statements regarding the intent, belief or current expectations of us and
members of our management team, as well as the assumptions on which such
statements are based. Prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance, involve
risk and uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements. Readers are urged to carefully
review and consider the various disclosures made by us in this report and in our
other reports filed with the Securities and Exchange Commission. Important
factors currently known to management could cause actual results to differ
materially from those in forward-looking statements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
discussion of such factors. We undertake no obligation to update or revise
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes in the future operating results over time. We
believe that our assumptions are based upon reasonable data derived from and
known about our business and operations. No assurances are made that actual
results of operations or the results of our future activities will not differ
materially from our assumptions.
2
Part 1. Unaudited Financial Information
Item 1. Financial Statements
AGU Entertainment Corp. and Subsidiaries
(Formerly Lexington Barron Technologies, Inc.)
(A Development Stage Company)
Condensed Consolidated Balance Sheet
At September 30, 2004
(unaudited)
Assets
Current Assets:
Cash $ 700
Accounts receivable, net 10,664
Note receivable, related party 15,500
Prepaid expenses 5,037
-----------
Total current assets 31,901
Property and equipment, net of accumulated depreciation of $82,255 281,057
Intangibles, net 942,835
Other assets 126,604
-----------
Total Assets $ 1,382,397
===========
Liabilities and Shareholders' Deficiency
Current Liabilities:
Accounts payable and accrued liabilities $ 1,471,084
Subordinated convertible notes 50,000
Notes payable, related parties 481,584
Equipment note, current 11,938
Notes payable, other 2,599,000
Capital leases payable, current 13,358
Other current liabilities 30,000
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Total current liabilities 4,656,964
Capital leases payable, non current 15,549
Equipment note, non current 39,780
Convertible note payable, net of unamortized discount of $488,356 11,644
Notes payable, related parties - non current 224,632
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Total liabilities 4,948,569
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Commitments and Contingencies --
Shareholders' deficiency:
Preferred stock, no par value; 10,000,000 shares
authorized, 0 shares issued and outstanding --
Common stock, no par value; 100,000,000 shares
authorized, 22,076,749 shares issued and outstanding 1,046,179
Additional paid-in capital 500,000
Deficit accumulated during development stage (5,112,351)
-----------
Total shareholders' deficiency (3,566,172)
-----------
Total liabilities and shareholders' deficiency $ 1,382,397
===========
See accompanying notes to condensed consolidated financial statements
3
AGU Entertainment Corp. and Subsidiaries
(Formerly Lexington Barron Technologies, Inc.)
(A Development Stage Company)
Condensed Consolidated Statements of Operations
For the Three Months Ended September 30, 2004 and 2003
(Unaudited)
2004 2003
------------ ------------
Revenues $ - $ -
------------ ------------
Operating Expenses
Promotion and advertising 575,618 1,690
Depreciation and amortization 56,970 -
Other general and administrative costs 1,168,610 197,030
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Total operating expenses 1,801,198 198,720
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Operating loss (1,801,198) (198,720)
Interest expense 54,752 196
Other income (10,760) -
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Loss before income taxes (1,845,190) (198,916)
Income tax provision - -
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Net loss $ (1,845,190) $ (198,916)
============ ============
Basic and diluted loss per share $ (0.09) $ (0.01)
============ ============
Weighted average common shares outstanding -
Basic and diluted 21,509,819 14,628,324
============ ============
See accompanying notes to condensed consolidated financial statements
4
AGU Entertainment Corp. and Subsidiaries
(Formerly Lexington Barron Technologies, Inc.)
(A Development Stage Company)
Condensed Consolidated Statements of Operations
For the Nine Months Ended September 30, 2004
and 2003, and For the Period May 20, 2003
(Inception) Through September 30, 2004
(Unaudited)
Inception to Inception to
December 31, September 30,
2004 2003 2004
------------ ------------ ------------
Revenues $ 15,000 $ -- $ 108,209
------------ ------------ ------------
Operating Expenses
Promotion and advertising 1,072,849 4,858 1,103,151
Depreciation and amortization 123,958 -- 140,455
Other general and administrative costs 3,030,132 220,104 3,883,845
------------ ------------ ------------
Total operating expenses 4,226,939 224,962 5,127,451
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Operating loss (4,211,939) (224,962) (5,019,242)
Interest expense 99,905 196 103,869
Other income (10,760) -- (10,760)
------------ ------------ ------------
Loss before income taxes (4,301,084) (225,158) (5,112,351)
Income tax provision -- -- --
------------ ------------ ------------
Net loss $ (4,301,084) $ (225,158) $ (5,112,351)
============ ============ ============
Basic and diluted loss per share $ (0.22) $ (0.03) $ (0.30)
============ ============ ============
Weighted average common shares outstanding -
Basic and diluted 19,244,705 7,126,619 17,163,171
============ ============ ============
See accompanying notes to condensed consolidated financial statements
5
AGU Entertainment Corp. and Subsidiaries
(Formerly Lexington Barron Technologies, Inc.)
(A Development Stage Company)
Condensed Consolidated Statement of Changes in Stockholders' Deficiency
For the Period May 20, 2003 (Inception) Through September 30, 2004
(Unaudited)
Accumulated
Common Stock Additional Deficit During
------------------------------- Paid-In Development
Shares Amount Capital Stage Total
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Common stock issued in exchange for cash
on May 20, 2003 (inception) $ 14,628,324 $ 400 $ - $ - $ 400
Common stock issued in exchange for services
on March 22, 2004 2,294,140 28,677 - - 28,677
Recapitalization as a result of merger with
Lexington Barron Technologies, Inc.
on April 1, 2004 4,230,614 - - - -
Debt and accrued interest converted into
common stock on April 18, 2004 203,482 610,445 - - 610,445
Debt and accrued interest converted into
common stock on June 30, 2004 39,231 130,257 - - 130,257
Issuance of common stock and warrants in
connection with issuance of convertible
debt on September 15, 2004 500,000 - 500,000 - 500,000
Common stock issued in exchange for cash
on September 20, 2004 15,000 60,000 - - 60,000
Common stock issued in exchange for services
on September 20, 2004 165,958 216,400 - - 216,400
Net loss - - - (5,112,351) (5,112,351)
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$ 22,076,749 $ 1,046,179 $ 500,000 $ (5,112,351) $ (3,566,172)
====================================================================================
See accompanying notes to condensed consolidated financial statements
6
AGU Entertainment Corp. and Subsidiaries
(Formerly Lexington Barron Technologies, Inc.)
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2004 and 2003, and
For the Period May 20, 2003 (Inception) Through September 30, 2004 (Unaudited)
Inception to Inception to
December 31, September 30,
2004 2003 2004
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(4,301,084) $ (225,158) $(5,112,351)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 123,958 - 140,455
Common stock issued as payment for services 245,077 - 245,077
Amortization of discount on note payable 11,644 - 11,644
Decrease (increase) in accounts receivable 30,007 - (10,664)
Increase in prepaid expenses (5,037) - (5,037)
Increase in other assets (122,219) (2,785) (126,604)
Increase in accounts payable and accrued liabilities 644,575 96,239 981,787
Increase in other liabilities 30,000 - 30,000
----------- ----------- -----------
Net cash used in operating activities (3,343,079) (131,704) (3,845,693)
----------- ----------- -----------
Cash flows from investing activities:
Disbursements for intangibles (151,035) - (151,035)
Increase in note receivable, related party - - (15,500)
Disbursements for property and equipment (206,137) (102,924) (261,868)
----------- ----------- -----------
Net cash used in investing activities (357,172) (102,924) (428,403)
----------- ----------- -----------
Cash flows from financing activities:
Payment of notes payable (8,439) (1,063) (11,161)
Proceeds from notes payable to related parties 281,910 191,516 396,310
Payment on capital leases (8,474) - (9,659)
Payment of notes payable to related parties (40,094) (20,000) (40,094)
Proceeds from the sale of common stock 60,000 400 60,400
Proceeds from other notes payable 3,279,000 63,775 3,879,000
----------- ----------- -----------
Net cash provided by financing activities 3,563,903 234,628 4,274,796
----------- ----------- -----------
Net (decrease) increase in cash (136,348) - 700
Cash, beginning of period 137,048 - -
----------- ----------- -----------
Cash, end of period $ 700 $ - $ 700
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Supplemental disclosure of cash flow information:
Cash paid for income taxes $ - $ - $ -
=========== =========== ===========
Cash paid for interest $ 16,404 $ 196 $ 16,404
=========== =========== ===========
Non-cash financing activities:
Common stock issued as payment for services $ 245,077 $ - $ 245,077
=========== =========== ===========
Conversion of liabilities to common stock $ 740,702 $ - $ 740,702
=========== =========== ===========
Equipment acquired through capital lease obligations $ 14,637 $ 10,885 $ 38,149
=========== =========== ===========
Equipment acquired through notes payable $ - $ 63,775 $ 63,775
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See accompanying notes to condensed consolidated financial statements
7
AGU Entertainment Corp. and Subsidiaries
(Formerly Lexington Barron Technologies, Inc.)
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 (unaudited)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
AGU Entertainment Corp. (formerly Lexington Barron Technologies, Inc.) was
incorporated on August 23, 2000 to engage in financial, operational and systems
consulting to startup and small businesses. Prior to April 1, 2004, AGU
Entertainment Corp. ("AGU") was a development stage, public reporting company
and did not engage in any significant operations or enter into any material
transactions. Prior services have included market research, business plan
development, strategy development, financial modeling and forecasting, and
pre-IPO and IPO consulting.
Effective April 1, 2004, AGU entered into a Share Exchange Agreement with
Pyramid Music Corp. ("PMC"), a Florida corporation having an inception date of
May 20, 2003, whereby AGU acquired 100% of the outstanding common stock of PMC
in exchange for issuing 16,922,464 shares of its common (see note 2). PMC is a
development stage company and was formed for the purpose of developing market
share in the recording and broadcast media industries through the establishment
of a media distribution channel and archived video and music collection
libraries.
PMC has two wholly-owned operating subsidiaries that are or will become
engaged in the following services: (i) the formation and operation of a
television network, The Tube Music Network, Inc., ("The Tube") that airs
traditional music videos and live concerts of contemporary music material that
is derived from archived video and music collection libraries, and (ii) a
production, marketing and distribution record company, Pyramid Records
International, Inc. ("PRI"), that has merged audio, visual and Internet content
into one corporate concept.
On March 26, 2004, in anticipation of the completion of the share exchange,
Lexington Barron Technologies, Inc. changed its name to AGU Entertainment Corp.
On October 20, 2004 the Company's shareholders approved the reincorporation
of the Company in the state of Delaware through a merger of the Company into a
wholly owned subsidiary corporation incorporated in the State of Delaware. The
reincorporation resulted in the Company becoming a Delaware corporation
effective as of October 21, 2004 and did not result in any change in the
Company's name, headquarters, business, jobs, management, location of any of the
Company's offices or facilities, number of employees, taxes payable to the State
of Colorado, assets, liabilities or net worth. A summary of the most significant
differences between the rights of the shareholders of the Company before and
after the reincorporation merger as a result of the differences among the
Colorado (the original state of incorporation) Business Corporation Act and the
Delaware General Corporation Law and the Articles of Incorporation and Bylaws of
the Company prior to the Reincorporation Merger and the Certificate of
Incorporation and the Bylaws of AGU Delaware is contained in the Company's
Definitive Proxy Statement on Schedule 14A filed with the Securities and
Exchange Commission on October 7, 2004.
Basis of Presentation
The unaudited condensed consolidated financial statements of AGU and its
subsidiaries (the "Company") have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial reporting and the regulations of the Securities and Exchange
Commission ("SEC") for quarterly reporting. The interim unaudited condensed
consolidated financial statements should be read in conjunction with the
8
financial statements and notes thereto included in AGU's annual report on Form
10-KSB as filed with the SEC for the year ended December 31, 2003, as amended,
and with the audited consolidated financial statements of PMC and its
subsidiaries included in the Company's Form 8-K/A filed with the SEC on June 15,
2004. Management acknowledges its responsibility for the preparation of the
accompanying interim condensed consolidated financial statements which reflect
all adjustments considered necessary, in the opinion of management, for a fair
statement of the results of interim periods presented. The accompanying
financial statements reflect the results of operations of PMC and its
subsidiaries for all periods presented (see note 2) and the results of AGU
beginning April 1, 2004. Because PMC was not formed until May 20, 2003, the
financial statements for 2004 are not comparable to those of the prior year. In
addition, the results of operations for the interim periods are not necessarily
indicative of the results of operations for the entire year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
AGU Entertainment Corp., and its subsidiaries; the Tube Music Network, Inc.,
Pyramid Records International, Inc. and Pyramid Music Corp. All significant
intercompany transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. SHARE EXCHANGE AGREEMENT
On April 1, 2004, under the terms of the Share Exchange Agreement, AGU (an
inactive public reporting company) acquired 100% of the stock of PMC in exchange
for 16,922,464 newly issued shares of common stock of AGU. The number of shares
of AGU exchanged in this transaction represented approximately 80% of the issued
and outstanding common stock of AGU. As a result of this transaction, the former
shareholders of PMC own, on a fully diluted basis, approximately 80% of the
outstanding common stock of the Company, resulting in a change in control.
The transaction was accounted for as a reverse merger and recapitalization
whereby PMC is deemed to be the acquirer for accounting purposes. Because PMC is
deemed to be the surviving accounting and reporting entity, only PMC's
historical balances and results of operations are reflected in the accompanying
financial statements for all periods presented. At April 1, 2004, AGU had no
identifiable assets or liabilities, therefore the transaction did not have a
material effect on PMC's financial condition or results of operations.
3. PREPAID EXPENSES
On March 25, 2004, PRI committed to a marketing and promotional expenditure
in the amount of $400,000 in connection with a record and DVD distribution
project. Of this amount, $200,000 was deposited into an escrow account with an
independent trustee by one of the Company's promissory note holders, pursuant to
the terms of a trust agreement. As of September 30, 2004 the entire escrowed
amount had been spent in accordance with the trust agreement. The balance in
prepaid expenses as of September 30, 2004 pertains to a payment in advance for
production services in connection with PRI's operations.
9
4. INTANGIBLES
Intangible assets at September 30, 2004 are as follows:
Balance at
Value at Accumulated September 30,
acquisition amortization 2004
---------- ------------- ----------
Distribution agreement
(see note 5) $ 350,000 $ (58,200) $ 291,800
Other intangibles 651,035 - 651,035
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Total intangibles $1,001,035 $ (58,200) $ 942,835
========== ============= ==========
The distribution agreement is being amortized on a straight line basis
over a period of three years. Other intangibles pertain to costs to develop
network logos, graphic templates and on-air intersticials for The Tube (see Note
8), whose national launch is expected to take place in the fourth quarter of
2004. The Company will begin amortizing these assets over their estimated useful
lives upon the national launch of The Tube. Aggregate amortization expense over
the next three years, assuming an estimated useful life of two years for the
other intangibles, is expected to be as follows:
For the year ending December 31:
--------------------------------
Remainder of 2004 $ 29,300
2005 442,184
2006 442,184
2007 29,167
5. DEBT
On March 3, 2004, PRI entered into an Assignment and Assumption Agreement
with Pyramid Media Group, Inc. ("PMG") (of which a related party and a
shareholder of the Company own a controlling interest), whereby PRI agreed to
assume all of the covenants and obligations of a Distribution Agreement between
PMG and ARK 21 Records, LP ("ARK21"). The Distribution Agreement provides that
ARK21 be the manufacturer and distributor of certain recorded music projects for
PRI through normal retail channels throughout the United States. In exchange for
the rights to the Distribution Agreement and certain assets of PMG, PRI assumed
the obligation to repay $350,000 of notes payable to certain principals of PMG.
PMC has guaranteed the payment of these notes, which have an annual interest
rate of 8%, and mature on May 1, 2007. Approximately $25,000 of these notes was
paid in 2004 and the outstanding balance as of September 30, 2004 is
approximately $325,000. The terms of these notes require monthly payments of
principal and interest. The Company has not made the required monthly principal
and interest payments since June of 2004, and is currently negotiating with the
holders to amend the payment terms of the notes, which would include waivers of
default for the required payments that were not made.
At March 31, 2004, the Company had outstanding $650,000 of 5% Convertible
Subordinated Notes due November 30, 2004. On April 18, 2004 $600,000 of these
notes, plus $10,445 of accrued interest, were converted into 203,482 shares of
the Company's common stock at a price of $3.00 per share, and $50,000 of
Convertible Subordinated Notes remained outstanding as of September 30, 2004
(see note 12).
10
On September 15, 2004, the Company issued a $500,000 Convertible
Promissory Note payable to Galt Financial Corporation (the "Galt Note"). The
Galt Note pays interest quarterly at an annual rate of 10%, and matures on
September 13, 2006. In accordance with the terms of the Galt Note, the lender
may convert all or any portion of the outstanding principal into common stock of
the Company at a conversion price of $1.00 per share, subject to certain
adjustments. In connection with this transaction, the Company issued warrants
with a five-year term to purchase a total of 500,000 shares of the Company's
common stock at a price of $1.00 per share, subject to certain adjustments. The
Company also issued 500,000 shares of its common stock to a principal of the
lender as part of this transaction.
The issuance of the stock and warrants, as well as the existence of an
embedded beneficial conversion feature of the Galt Note resulted in the Company
recording a discount on the Galt Note of $500,000 as of the date of issuance.
This discount is being accreted as interest expense from the date of issuance to
the Galt Note's maturity date. In the event of early conversion or default, the
remaining discount would be recognized as interest expense during the period in
which such early conversion or default occurs.
The carrying value of the Galt Note at September 30, 2004 was $11,644.
Notwithstanding the financial statement presentation required under accounting
principles generally accepted in the United States of America, the Company
remains legally obligated to repay the $500,000 principal amount on the maturity
date of the Galt Note, plus all accrued interest thereon in accordance with the
terms of the note.
In addition to the aforementioned convertible notes, the Company has
issued, since its inception, 5% promissory notes in the aggregate amount of
$3,125,000 to fund its operations. On June 30, 2004 $130,000 of these notes were
converted into 39,231 shares of the Company's common stock. In July of 2004
$15,000 of these notes were repaid. The outstanding balance on these notes,
including those payable to related parties, was approximately $2,980,310 at
September 30, 2004. On October 30, 2004, the Company and the holder of
$2,599,000 of these notes agreed to convert the notes, plus accrued interest,
into common stock of the Company at a conversion price of $3.00 per share (see
note 12).
6. STOCKHOLDERS' EQUITY
On April 18, 2004 $600,000 of the Company's Convertible Subordinated
Notes, plus $10,445 of accrued interest, were converted into 203,482 shares of
the Company's common stock at a price of $3.00 per share. On June 30, 2004
$130,000 of notes payable and $257 of accrued interest were converted into
39,231 shares of the Company's common stock at an average price of $3.30 per
share.
During the nine months ended September 30, 2004, the Company recognized
expense of $245,077 based on the estimated fair value of shares issued in
connection with services rendered to the Company. In addition, on August 19,
2004 the Company issued 15,000 shares of common stock in exchange for cash of
$60,000.
7. EARNINGS PER SHARE
Basic income or loss per share is computed by dividing net income or loss
attributable to common shareholders by the weighted average number of shares
outstanding during the year. Diluted income or loss per share attributable to
common shareholders further considers the impact of dilutive common stock
equivalents. Diluted loss per share has not been presented separately for the
three and nine months ended September 30, 2004 and 2003 because the effect of
the additional shares which would be issued, assuming conversion of the
convertible note and debentures, are anti-dilutive for the aforementioned
periods.
8. COMMITMENTS AND CONTINGENCIES
In June of 2004 the Company entered into an agreement with Radical Media
Inc. ("Radical") whereby Radical will design and develop network logos, graphic
templates, and on-air intersticials for The Tube. In accordance with the terms
of the agreement, the Company is required to pay $200,000 and is required to
issue 112,500 shares of its common stock, which the contract values at $450,000,
to Radical prior to August 31, 2004. The Company recorded the entire $650,000
commitment as an intangible asset. The remaining $50,000 of cash and 84,375
shares of stock consideration that has yet to be paid as of September 30, 2004
are reflected in Other Current Liabilities on the Company's balance sheet. The
Company expects to settle this liability with Radical prior to December 31,
2004.
11
On September 14, 2004 the Company entered into an agreement, subsequently
amended on October 25, 2004, to purchase certain real property in Lauderdale
Lakes, Florida (the "Lauderdale Property"). The Company anticipates that a
significant portion of its future operations, as well as its principal executive
offices, will be located at the Lauderdale Property. Under the terms of the
agreement, as amended, the Company issued 275,000 shares its common stock and
paid $150,000 cash to the seller during October and November of 2004 as a
non-refundable deposit. The purchase price of the Lauderdale Property will be
comprised of (i) 275,000 shares of the Company's common stock (ii) $822,500 in
cash and (iii) a 6.5% promissory note in the principal amount of $7,000,000 made
by the Company in favor of the seller, paying interest monthly and maturing upon
the first anniversary of the date of closing. A $250,000 principal payment will
be due on this promissory note on the six month anniversary of the date of
closing. The seller will be able to convert all or any portion of this
promissory note into shares of the Company's common stock at any time at a
conversion price of $3.50 per share, subject to certain adjustments. The
transaction is expected to close on November 30, 2004.
In accordance with the terms of the purchase agreement, the Company will
also obtain a right of first offer to purchase from the seller certain real
property located directly adjacent to the property being purchased. The Company
also issued 25,000 shares of common stock as a commission to an entity which
facilitated the transaction between the buyer and seller.
Although the Company, as of September 30, 2004, had no legal proceedings,
on October 13, 2004, the Company's subsidiary, the Tube Music Network, Inc.,
received notification from a television channel featuring music related
programming that the circle logo used by The Tube is "confusingly similar" to
the circle logo used by that television channel, supporting claims of trademark
infringement and unfair competition. On November 3, 2004, the Company responded
to the October 13 letter stating that it does not believe the logos are
confusingly similar or that any trademark infringement has occurred. The Company
intends to vigorously defend any challenge to its use of its logo. From time to
time, the Company may be involved as plaintiff or defendant in various legal
proceedings arising in the usual course of business.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation Number 46, "Consolidation
of Variable Interest Entities" ("FIN No. 46"). This Interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," provides
guidance for identifying a controlling interest in a variable interest entity
("VIE") established by means other than voting interests. FIN No. 46 also
requires consolidation of a VIE by an enterprise that holds such a controlling
interest. In December 2003, FASB completed its deliberations regarding the
proposed modification to FIN No. 46 and issued Interpretation Numbers 46 (R)
"Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51"
("FIN No. 46 (R)"). The decisions reached included a deferral of the effective
date and provisions for additional scope exceptions for certain types of
variable interests. Application of FIN No. 46 (R) is required in financial
statements of public entities that have interests in VIEs or potential VIEs
commonly referred to as special purpose entities for periods ending after
December 15, 2004. The adoption of FIN No. 46 (R) is not expected to have an
impact on the Company's consolidated financial position, results of operations
or cash flows.
In March 2004, the U.S. Securities and Exchange Commission's Office of the
Chief Accountant and the Division of Corporate Finance released Staff Accounting
bulletin ("SAB") No. 105, "Loan Commitments Accounted for as Derivative
Instruments". This bulletin contains specific guidance on the inputs to a
valuation-recognition model to measure loan commitments accounted for at fair
value, and requires that fair-value measurement include only differences between
the guaranteed interest rate in the loan commitment and market interest rate,
excluding any expected future cash flows related to the customer relationship or
loan servicing. In addition, SAB105 requires the disclosure of the accounting
policy for loan commitments, including methods and assumptions used to estimate
the fair value of loan commitments, and any associated hedging strategies. SAB
105 is effective for derivative instruments entered into subsequent to March 31,
2004 and should also be applied to existing instruments as appropriate.
The Company has not yet completed its evaluation of SAB 105, but does not
anticipate a material impact on the financial statements.
12
10. GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company's
financial condition and operating results, specifically a working capital
deficiency of approximately $4.6 million, a shareholders' deficiency of
approximately $3.6 million, a net loss from operations since inception of
approximately $5.1 million and net cash used in operations since inception of
approximately $3.8 million, raise substantial doubt about its ability to
continue as a going concern. The Company's existence is dependent on
Management's ability to develop profitable operations and resolve the Company's
liquidity problems. Management anticipates that the Company will attain
profitable status and improve its liquidity through the continued development of
market share in the recording and broadcast media industries through the
development of a media distribution channel and archived video and music
collection libraries.
The Company is attempting to complete a substantial equity offering prior
to December 31, 2004 in order to provide for working capital, capital
expenditures and business expansion. There can be no assurances that the Company
will be successful in completing such an offering. If the Company is not
successful in raising additional capital, its financial condition and business
operations will be adversely affected. Moreover, if the Company is successful in
implementing its initial business plan, it will need to raise additional funds
in order to finance more rapid expansion, develop new and enhanced services and
products, and respond to competitive pressures.
These financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
11. RELATED PARTY TRANSACTIONS
On July 25, 2003 the Company executed three promissory notes with three
shareholders, totaling $114,400. The notes are due November 30, 2004 and bear
interest at 5% annually. During June 2004, the Company received loans from two
shareholders totaling $235,000 and executed 5% promissory notes, which are due
June 30, 2005. In July and August of 2004 the Company received loans from two
shareholders totaling $46,910 and executed 5% promissory notes which are due
October 30, 2004, and repaid $15,000 to a shareholder (see note 12 of extension
of related party note due dates).
On March 3, 2004, in connection with the Distribution Agreement and
assignment of certain assets of PMG (see Note 5), the Company assumed the
obligation to repay $350,000 of notes payable to two shareholders of the
Company. The notes have an annual interest rate of 8%. Payments commenced in
March of 2004, and the balance due as of September 30, 2004 was approximately
$325,000. The terms of these notes require monthly payments of principal and
interest. The Company has not made the required monthly principal and interest
payments since June of 2004, and is currently negotiating with the holders to
amend the payment terms of the notes, which would include waivers of default for
the required payments that were not made.
Accounts payable to related parties at September 30, 2004 totaled
approximately $158,000. Included in this amount was $28,000 in consulting
services and expenses provided by another shareholder, and $13,000 in consulting
services provided by a director.
An officer, shareholder and director of the Company agreed to defer a
portion of salary, payable under an employment agreement, until such time as
adequate funds become available. The amount deferred at September 30, 2004 was
$89,000. Additionally, there was also a note receivable from this officer at
September 30, 2004 of $15,500.
13
12. SUBSEQUENT EVENTS
On October 1, 2004, the maturity dates of promissory notes due to related
parties in the amount of $256,810 were extended from October 30, and November 1,
2004 to June 30, 2005.
In October of 2004, the Company issued additional 5% promissory notes in
the aggregate principal amount of $225,000 due November 15, 2004, and
convertible subordinated debentures in the principal amount of $228,000 with a
conversion price of $3.00 per share, subject to certain adjustments. The
debentures become due at various dates in October and November of 2006.
On October 30, 2004, $2,599,000 of the Company's 5% promissory notes, plus
accrued interest of $70,480, was converted into 889,827 shares of the Company's
common stock. On November 3, 2004, the $50,000 convertible subordinated that had
been outstanding as of September 30, 2004 was converted into 41,000 shares of
the Company's common stock.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Overview
AGU Entertainment Corp. (formerly Lexington Barron Technologies, Inc.) was
incorporated on August 23, 2000 to engage in financial, operational and systems
consulting to startup and small businesses. Prior to April 1, 2004, AGU
Entertainment Corp. ("AGU") was a development stage, public reporting company
and did not engage in any significant operations or enter into any material
transactions. Prior services have included market research, business plan
development, strategy development, financial modeling and forecasting, and
pre-IPO and IPO consulting.
Effective April 1, 2004, AGU entered into a Share Exchange Agreement with
Pyramid Music Corp. ("PMC"), a corporation having an inception date of May 20,
2003, whereby AGU acquired 100% of the outstanding common stock of PMC in
exchange for issuing 16,922,464 shares of its common (see Note 2 to the
consolidated financial statements). PMC is a development stage company and was
formed for the purpose of developing market share in the recording and broadcast
media industries through the establishment of a media distribution channel and
archived video and music collection libraries. On March 26, 2004, in
anticipation of the completion of the share exchange, Lexington Barron
Technologies, Inc. changed its name to AGU Entertainment Corp.
As a result of the share exchange, AGU is the parent company of PMC. PMC
has two wholly-owned operating subsidiaries that are or will become engaged in
the following services: (i) the formation and operation of a television network,
The Tube Music Network, Inc., ("The Tube") that airs traditional music videos
and live concerts of contemporary music material that is derived from archived
video and music collection libraries, and (ii) a production, marketing and
distribution record company, Pyramid Records International, Inc. ("PRI"), that
has merged audio, visual and Internet content into one corporate concept.
The Tube is a 24-hour per day broadcast digital television network that
will deliver high quality music video, audio, pay-per-view options and commerce
to digital viewers nationally. Its national launch is expected to take place in
the fourth quarter of 2004 or early in the first quarter of 2005. The Tube can
currently be seen in a limited number of households in various parts of the
United States.
In the late 1990's, broadcasters throughout the country were granted
portions of the airwaves at no cost with the understanding that they would
provide free digital signals as part of the U.S. government's desire for high
definition television. However due to improvements in digital signal
compression, the bandwidth required to broadcast digital television was
substantially reduced, leaving broadcasters with excess bandwidth to use at
their discretion. As a result, there are currently a number of media companies
that have the ability to offer a digital quality picture over the air directly
14
to consumers and indirectly through the cable and satellite operators' digital
box using surplus bandwidth from local broadcasters. These media outlets can
offer additional channels to broadcast local news, sports, weather or other
specialty services like The Tube. We expect to gain significant distribution for
the Tube by reaching agreements with these service providers to air the Tube's
digital signal. We are currently in negotiations with several of these service
providers, and expect to eventually leverage this market penetration into
households served by larger cable and satellite systems.
PRI will produce both studio albums and DVD concerts, and has recently
entered into several agreements for distribution.
The growth and development of our business will require a significant
amount of additional working capital. We currently have limited financial
resources and based on our current operating plan, we will need to raise
additional capital in order to continue as a going concern. We currently do not
have adequate cash to meet our short or long term objectives. In the event
additional capital is raised, it may have a dilutive effect on the existing
shareholders of the Company.
On October 20, 2004 the Company's shareholders approved the
reincorporation of the Company in the state of Delaware through a merger of the
Company into a wholly owned subsidiary corporation incorporated in the State of
Delaware. The reincorporation resulted in the Company becoming a Delaware
corporation effective as of October 21, 2004 and did not result in any change in
the Company's name, headquarters, business, jobs, management, location of any of
the Company's offices or facilities, number of employees, taxes payable to the
State of Colorado, assets, liabilities or net worth. A summary of the most
significant differences between the rights of the shareholders of the Company
before and after the reincorporation merger as a result of the differences among
the Colorado Business Corporation Act and the Delaware General Corporation Law
and the Articles of Incorporation and Bylaws of the Company prior to the
Reincorporation Merger and the Certificate of Incorporation and the Bylaws of
AGU Delaware is contained in the Company's Definitive Proxy Statement on
Schedule 14A filed with the Securities and Exchange Commission on October 7,
2004.
Liquidity and Capital Resources
As a development stage company with no operating history, we are subject
to all the substantial risks inherent in the development of a new business
enterprise within an extremely competitive industry. We cannot assure you that
the business will continue as a going concern or ever achieve profitability. Due
to the absence of an operating history and the emerging nature of the market in
which we compete, we anticipate operating losses until such time as we can
develop a substantial and stable revenue base. From our inception on May 20,
2003 through September 30, 2004, we had revenues of $108,000 and incurred a net
loss of $5.1 million. Our financial condition and operating results,
specifically a working capital deficiency of approximately $4.6 million, a
shareholders' deficit of approximately $3.6 million, and net cash used in
operations of approximately $3.3 million in the first nine months of 2004, raise
substantial doubt about our ability to continue as a going concern.
Since our inception, we have financed our operations through numerous debt
issuances. We issued $650,000 of 5% Convertible Subordinated Notes, $600,000 of
which were subsequently converted into 203,482 shares of common stock of the
Company at a price of $3.00 per share. We also issued approximately $3,125,000,
of 5% promissory notes since our inception, $130,000 of which were converted
into common stock on June 30, 2004 and $2,599,000 of which were converted into
common stock on October 30, 2004. Our remaining outstanding promissory notes
mature on November 15, 2004 and June 30, 2005.
On September 15, 2004, we issued a $500,000 Convertible Promissory Note
payable to Galt Financial Corporation (the "Galt Note"). The Galt Note pays
interest quarterly at an annual rate of 10%, and matures on September 13, 2006.
In accordance with the terms of the Galt Note, the lender may convert all or any
portion of the outstanding principal into common stock of the Company at a
conversion price of $1.00 per share. In connection with this transaction, we
issued warrants to the lender with a five-year term to purchase a total of
500,000 shares of the Company's common stock at a price of $1.00 per share,
subject to certain adjustments. We also issued 500,000 shares of our common
stock to a principal of the lender as part of this transaction.
On March 3, 2004 PRI entered into an Assignment and Assumption Agreement
with Pyramid Media Group, Inc. ("PMG") whereby PRI agreed to assume all of the
covenants and obligations of a Distribution Agreement between PMG and ARK 21
15
Records, LP ("ARK21"). In exchange for the rights to the Distribution Agreement
and certain assets of PMG, PRI assumed the obligation to repay $350,000 of notes
payable to certain principals of PMG. PMC has guaranteed the payment of these
notes, which have an annual interest rate of 8% and mature on May 1, 2007. Alan
Jacobi, President of PRI, is an owner and controlling shareholder of PMG.
Approximately $25,000 of these notes was paid in 2004 and the outstanding
balance as of June 30, 2004 is approximately $325,000. The terms of these notes
require monthly payments of principal and interest. We have not made the
required monthly principal and interest payments since June of 2004, and are
currently negotiating with the holders to amend the payment terms of the notes,
which would include waivers of default for the required payments that were not
made.
In June of 2004 we entered into an agreement with Radical Media Inc.
("Radical") whereby Radical will design and develop network logos, graphic
templates, and on-air intersticials for The Tube. In accordance with the terms
of the agreement, we are required to pay $200,000 and are required to issue
112,500 shares of our common stock. The remaining $50,000 of cash and 84,375
shares of stock consideration that has yet to be paid as of September 30, 2004
are reflected in Other Current Liabilities on the our balance sheet. We expect
to settle this liability with Radical prior to December 31, 2004.
On September 14, 2004 we entered into an agreement, subsequently amended
on October 25, 2004, to purchase certain real property in Lauderdale Lakes,
Florida (the "Lauderdale Property"). We anticipate that a significant portion of
our future operations, as well as our principal executive offices, will be
located at the Lauderdale Property. Under the terms of the agreement, as
amended, we issued 275,000 shares our common stock and paid $150,000 cash to the
seller in October and November of 2004 as a non-refundable deposit. The purchase
price of the Lauderdale Property will be comprised of (i) 275,000 shares of our
common stock (ii) $822,500 in cash and (iii) a 6.5% promissory note in the
principal amount of $7,000,000 made by the Company in favor of the seller,
paying interest monthly and maturing upon the first anniversary of the date of
closing. A $250,000 principal payment will be due on this promissory note on the
six month anniversary of the date of closing. The seller will be able to convert
all or any portion of this promissory note into shares of our common stock at
any time at a conversion price of $3.50 per share, subject to certain
adjustments. The transaction is expected to close on November 30, 2004.
On October 30, 2004, $2,599,000 of our 5% promissory notes, plus accrued
interest of $70,480, was converted into 889,827 shares of our common stock. On
November 3, 2004 the $50,000 convertible subordinated that had been outstanding
as of September 30, 2004 was converted into 41,000 shares of our common stock.
The growth and development of our business will require a significant
amount of additional working capital. We currently have limited financial
resources and based on our current operating plan, we will need to raise
additional capital in order to continue as a going concern. We currently do not
have adequate cash to meet our short or long term objectives. In the event
additional capital is raised, it may have a dilutive effect on the existing
shareholders of the Company.
We are attempting to complete a substantial debt or equity offering prior
to December 31, 2004 in order to provide for working capital, capital
expenditures and business expansion. We cannot assure you that we will be
successful in completing such an offering, in executing the business plan or
achieving profitability. If we are not successful in raising additional capital,
our financial condition and business operations will be adversely affected.
Moreover, if we are successful in implementing our initial business plan, we
will need to raise additional funds in order to finance more rapid expansion,
develop new and enhanced services and products, and respond to competitive
pressures.
Cash used in operations for the nine months ended September 30, 2004 was
$3,343,000, as we did not generate any significant revenues to offset our cash
operating expenses, which consisted primarily of payroll, promotion and
advertising expenses and fees for professional services. We expect this trend to
continue until such time as we can complete a substantial equity offering,
launch The Tube nationally and emerge from the development stage.
16
Cash used in investing activities amounted to $357,000, as we spent
$150,000 in cash under the agreement with Radical and $206,000 on property,
plant and equipment. We received cash from financing activities in the amount of
$3,564,000 as a result of the issuance of notes payable, including $282,000 from
two of our shareholders, and the issuance of common stock. Additionally, in
October we received, from an existing noteholder an additional $225,000 in
exchange for promissory notes due November 15, 2004, and we issued $228,000 in
convertible subordinated debentures which become due on various dates in October
and November of 2006.
Results of Operations
For the three months ended September 30, 2004 we incurred operating
expenses of $1,801,000 and a net loss of $1,845,000. Our business activities to
date have been primarily to develop the infrastructure necessary to market and
launch The Tube, and to explore potential musical projects as we build our
recorded music distribution business.
For the nine months ended September 30, 2004 we had revenues of $15,000,
operating expenses of $4,227,000 and a net loss of $4,301,000. We expect
revenues and direct expenses to increase in the fourth quarter as record and DVD
shipments pertaining to several of our recorded music projects have commenced.
Quantitative and Qualitative Disclosures About Market Risk
We do not have any major market risk exposure to changing interest rates. We
currently do not engage in any hedging activities to manage this risk. At
September 30, 2004, we had no outstanding indebtedness that was subject to
changes in interest rates.
Recently Issued Accounting Pronouncements
In January 2003, the FASB issued Interpretation Number 46, "Consolidation
of Variable Interest Entities" ("FIN No. 46"). This Interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," provides
guidance for identifying a controlling interest in a variable interest entity
("VIE") established by means other than voting interests. FIN No. 46 also
requires consolidation of a VIE by an enterprise that holds such a controlling
interest. In December 2003, FASB completed its deliberations regarding the
proposed modification to FIN No. 46 and issued Interpretation Numbers 46 (R)
"Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51"
("FIN No. 46 (R)"). The decisions reached included a deferral of the effective
date and provisions for additional scope exceptions for certain types of
variable interests. Application of FIN No. 46 (R) is required in financial
statements of public entities that have interests in VIEs or potential VIEs
commonly referred to as special purpose entities for periods ending after
December 15, 2004. The adoption of FIN No. 46 (R) is not expected to have an
impact on the Company's consolidated financial position, results of operations
or cash flows.
In March 2004, the U.S. Securities and Exchange Commission's Office of the
Chief Accountant and the Division of Corporate Finance released Staff Accounting
Bulletin ("SAB") No. 105, "Loan Commitments Accounted for as Derivative
Instruments." This bulletin contains specific guidance on the inputs to a
valuation-recognition model to measure loan commitments accounted for at fair
value, and requires that fair-value measurement include only differences between
the guaranteed interest rate in the loan commitment and market interest rate,
excluding any expected future cash flows related to the customer relationship or
loan servicing. In addition, SAB 105 requires the disclosure of the accounting
policy for loan commitments, including methods and assumptions used to estimate
the fair value of loan commitments, and any associated hedging strategies. SAB
105 is effective for derivative instruments entered into subsequent to March 31,
2004 and should also be applied to existing instruments as appropriate. The
Company has not yet completed its evaluation of SAB 105, but does not anticipate
a material impact on the financial statements.
Item 3. CONTROLS AND PROCEDURES
As of September 30, 2004, the Company performed an evaluation, under the
supervision of its chief executive officer and chief financial officer, of the
effectiveness of the company's disclosure controls and procedures (as defined in
Exchange Act Rule 13a-15(e). Based upon that evaluation, the chief executive
officer and chief financial officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company and its consolidated subsidiaries required
to be included in the Company's reports filed or submitted under the Exchange
Act. Due to the inherent limitations of the effectiveness of any established
disclosure controls and procedures, management cannot provide absolute assurance
that the objectives of its disclosure controls and procedures will be met.
17
There were no significant changes in the Company's internal controls
during the quarter covered by this report that have materially affected, or
which are reasonably likely to affect materially, the Company's internal
controls.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Although the Company, as of September 30, 2004, had no legal proceedings,
on October 13, 2004, the Company's subsidiary, the Tube Music Network, Inc.,
received notification from a television channel featuring music related
programming that the circle logo used by The Tube is "confusingly similar" to
the circle logo used by that television channel, supporting claims of trademark
infringement and unfair competition. On November 3, 2004, the Company responded
to the October 13 letter stating that it does not believe the logos are
confusingly similar or that any trademark infringement has occurred. The Company
intends to vigorously defend any challenge to its use of its logo. From time to
time, the Company may be involved as plaintiff or defendant in various legal
proceedings arising in the usual course of business.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2004, the Company issued (i)
an aggregate of 165,958 shares of common stock to certain individuals and
entities in consideration for the performance of services for the Company, (ii)
an aggregate of 15,000 shares of common stock to certain individuals in
consideration for cash in the aggregate amount of $60,000, (iii) a convertible
promissory note in the principal amount of $500,000, payable to Galt Financial
Corporation ("Galt"), which note accrues interest at an annual rate of 10.0%,
matures on September 13, 2006 and is convertible into shares of common stock at
a conversion price of $1.00 per share, subject to certain adjustments, (iv) a
warrant to Galt to purchase up to 500,000 shares of common stock at an exercise
price of $1.00 per share in connection with the above-referenced convertible
promissory note, and (v) 500,000 shares of common stock to a principal of Galt
in connection with the above-referenced convertible promissory note.
In October and November of 2004, the Company issued (i) convertible
promissory notes in aggregate principal amount of $228,000 to certain
individuals, which notes accrue interest at an annual rate of 5%, mature in
October or November of 2006, and are convertible into shares of common stock at
a conversion price of $3.00 per share, subject to certain adjustments, (ii) an
aggregate of 889,827 shares of common stock to an individual upon conversion of
certain promissory notes in aggregate principal amount of $2,599,000, plus
accrued interest of $70,480, at a conversion price of $3.00 per share, (iii)
275,000 shares of common stock to the seller of the Lauderdale Property in
partial satisfaction of the purchase price for Lauderdale Property, (iv) 25,000
shares of common stock to an entity that assisted the Company in the purchase of
the Lauderdale Property, and (v) 41,000 shares of common stock to an individual
upon conversion of a convertible promissory note in aggregate principal amount
of $50,000 plus accrued interest.
The Company maintains that the above issuances of securities were exempt
from registration under the Securities Act in reliance upon Section 4(2) of the
Securities Act and/or Regulation D promulgated hereunder as transactions by an
issuer not involving a public offering. No underwriters were employed in the
transactions. The securities will be deemed restricted securities for purposes
of the Securities Act.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
18
Item 3. DEFAULTS UPON SENIOR SECURITIES
In March of 2004 the Company assumed the obligation to repay $350,000 in
notes payable in exchange for the rights under a distribution agreement. The
Company has not made the required monthly principal and interest payments since
June of 2004, and is currently negotiating with the holders to amend the payment
terms of the notes, which would include waivers for the required payments that
were not made.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 20, 2004, the Company held its Annual Meeting of Shareholders
at which the following proposals were approved by the shareholders necessary to
approve such matters in accordance with the Colorado Business Corporation Act
and its charter documents: (i) the reincorporation of the Company in the state
of Delaware through a merger of the Company into a wholly owned subsidiary
corporation incorporated in the State of Delaware, (ii) the adoption of its 2004
Stock Option and Stock Incentive Plan, and (iii) the re-election of Messrs.
Garland, Poling, Solomon, Catinella and Levy to the Board of Directors.
At the Annual Meeting of Shareholders, the following matters were
submitted to a vote of shareholders:
1. Election of the following persons to serve as directors of AGU
Entertainment, Inc. for a term of one year and until their successor
are duly elected and qualified:
Total Vote for Each Total Vote Withheld
Director From Each Director
---------------------- ---------------------
Les Garland 24,242,876 0
John W. Poling 11,685,966 0
Michael Jay Solomon 15,685,966 0
Gregory R. Catinella 11,685,966 0
David C. Levy 11,685,966 0
2. Approval of AGU Entertainment, Inc.'s 2004 Stock Option and Stock
Incentive Plan:
For Against Abstain Broker Non-Votes
- ------------------ ------------------- --------------- ------------------
11,685,966 0 3,311,382 0
See the Company's Definitive Proxy Statement on Schedule 14A
for the 2004 Annual Meeting, including Appendix C thereto,
filed with the Securities and Exchange Commission on October
7, 2004 for a description and copy of the 2004 Stock Option
and Stock Incentive Plan.
3. Approval of the reincorporation of the Company in the state of Delaware
through a merger of the Company into a wholly owned subsidiary
corporation incorporated in the State of Delaware.
For Against Abstain Broker Non-Votes
- --------------------- --------------------------------- ------------------
11,685,966 0 3,311,382 0
See the Company's Definitive Proxy Statement on Schedule 14A
for the 2004 Annual Meeting, including Appendix D thereto,
filed with the Securities and Exchange Commission on October
7, 2004 for a description of the reincorporation merger and a
copy of the merger agreement.
The reincorporation resulted in the Company becoming a Delaware
corporation effective as of October 21, 2004 and did not result in any change in
the Company's name, headquarters, business, jobs, management, location of any of
the Company's offices or facilities, number of employees, taxes payable to the
State of Colorado, assets, liabilities or net worth. A summary of the most
significant differences between the rights of the shareholders of the Company
before and after the reincorporation merger as a result of the differences among
the Colorado Business Corporation Act and the Delaware General Corporation Law
and the Articles of Incorporation and Bylaws of the Company prior to the
Reincorporation Merger and the Certificate of Incorporation and the Bylaws of
AGU Delaware is contained in the Company's Definitive Proxy Statement on
Schedule 14A filed with the Securities and Exchange Commission on October 7,
2004.
19
Item 5. OTHER INFORMATION.
On November 3, 2004, the Company appointed John W. Poling as its Executive
Vice President and Chief Financial Officer, to serve in accordance with an
employment agreement, dated as of November 1, 2004, between the Company and Mr.
Poling. In connection with his appointment as Executive Vice President and Chief
Financial Officer, John W. Poling resigned as Chairperson of the Audit Committee
of the Board of Directors and, as of such date, no longer serves as a member of
the Audit Committee. Mr. Poling was first elected to the Board of Directors in
April 2004 and was appointed Chairperson of the Audit Committee in July 2004.
See the Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on November 9, 2004 for a description of the material terms
of the employment agreement with Mr. Poling.
On November 3, 2004, in connection with Mr. Poling's resignation from the
Audit Committee, the majority of the directors then in office, in accordance
with Article FIFTH, paragraph (d) of the Company's Articles of Incorporation and
Section 2.04 of the Bylaws and upon the recommendation of the Nominating and
Corporate Governance Committee, increased the size of the Company's Board of
Directors to six (6) directors and appointed Marc Gelberg as a director and as
Chairperson of the Audit Committee, to hold office until the 2005 Annual Meeting
of Shareholders and until his successor shall have been duly elected and
qualified.
Item 6. EXHIBITS
The following exhibits are attached to this report:
2.1(1) Agreement and Plan of Merger, dated as of September
30, 2004, by and between AGU Entertainment Corp., a
Colorado corporation, and AGU Entertainment Corp.,
a Delaware corporation.
3.1(1) Articles of Incorporation of AGU Entertainment
Corp., a Delaware corporation
3.2(1) Bylaws of AGU Entertainment Corp., a Delaware
corporation
10.1(2) Convertible Promissory Note, dated September 13,
2004, made by AGU Entertainment Corp. in favor of
Galt Financial Corporation
10.2(2) Warrant to Subscribe for 500,000 Shares of Common
Stock of AGU Entertainment Corp. issued to Galt
Financial Corporation
10.3(2) Agreement for Purchase and Sale, dated as of
September 10, 2004, by and between AGU Entertainment
Corp. and Charley Zeches, in her capacity as
Trustee of Lakes Holding Trust U/A dated July 27, 2001
10.4(2)+ Consulting Agreement, dated as of September 13, 2004,
by and between AGU Entertainment Corp. and Kevin
Waltzer
10.5 Stock Purchase Agree ment by and between AGU
Entertainment Corp. and Charley Zeches, in her
capacity as Trustee of Lakes Holding Trust U/A
dated July 27, 2001
10.6 Stock Purchase Agreement between AGU Entertainment
Corp. and AUW, Inc.
10.7(1)+ 2004 Stock Option and Stock Incentive Plan
20
10.8 Amendment to Agreement for Purchase and Sale, dated
as of October 25, 2004, by and between AGU
Entertainment Corp. and Charley Zeches, in her
capacity as Trustee of Lakes Holding Trust U/A dated
July 27, 2001
10.9(3)+ Employment Agreement, dated as of November 1, 2004,
between AGU Entertainment Corp. and John W. Poling
31.1 Certification of David C. Levy, Chief Executive
Officer of the Company, dated November 15, 2004,
pursuant to Rule 13a - 14(a)/15d - 14(a) of the
Securities Exchange Act of 1934, as amended, as
adopted pursuant to Sections 302 and 404 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of John W. Poling, Chief Financial
Officer of the Company, dated November 15, 2004,
pursuant to Rule 13a - 14(a)/15d - 14(a) of the
Securities Exchange Act of 1934, as amended, as
adopted pursuant to Sections 302 and 404 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of David C. Levy, Chief Executive
Officer of the Company, and John W. Poling, Chief
Financial Officer of the Company, dated November 15,
2004 pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
+ Management contract or compensation plan.
(1) Incorporated by reference to AGU Entertainment Corp.'s
Definitive Proxy Statement on Schedule 14A for the 2004
Annual Meeting filed with the Securities and Exchange
Commission on October 7, 2004.
(2) Incorporated by reference to AGU Entertainment Corp.'s
Current Report on Form 8-K filed with the Securities and
Exchange Commission on September 20, 2004.
(3) Incorporated by reference to AGU Entertainment Corp.'s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on November 9, 2004.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 12, 2004 /s/ David C. Levy
-----------------------
David C. Levy
Chief Executive Officer
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