<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended April 30, 1996
Commission File Number 0-19404
AMERICAN UNITED GLOBAL, INC.
----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-4359228
------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. Number)
incorporation or organization)
25 Highland Blvd., Dix Hills, NY 11746
---------------------------------------- --------
(Address of principal executive offices) Zip Code
Registrant's telephone no.: 516-254-2134
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirement for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Title of Class Number of Shares
Common Stock Outstanding
(par value $.01 per share) 5,695,749
<PAGE>
AMERICAN UNITED GLOBAL, INC.
INDEX
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Consolidated Balance Sheets
April 30, 1996 (Unaudited) and July 31, 1995. . . . . . . . . . 1
Consolidated Statements of Income
Three months ended April 30, 1996
and April 30, 1995 (Unaudited). . . . . . . . . . . . . . . . . 2
Consolidated Statements of Income
Nine months ended April 30, 1996
and April 30, 1995 (Unaudited). . . . . . . . . . . . . . . . . 3
Consolidated Statement of Shareholders'
Equity (Unaudited). . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
Nine months ended April 30, 1996
and April 30, 1995 (Unaudited). . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . . . 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 12-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . N/A
Item 2. Changes In Securities . . . . . . . . . . . . . . . . . . N/A
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . N/A
Item 4. Submission Of Matters To A Vote Of Security
Holders . . . . . . . . . . . . . . . . . . . . . . . . . N/A
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . N/A
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 17
<PAGE>
AMERICAN UNITED GLOBAL, INC.
ITEM 1. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, July 31,
1996 1995
[Unaudited]
----------- ----------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 15,965,000 $ 4,144,000
Marketable securities 6,791,000 -
Trade accounts receivable (less allowance
for doubtful accounts of $448,000 and
$370,000 respectively) 6,598,000 6,008,000
Other receivables 580,000 1,102,000
Inventories 62,213,000 46,413,000
Prepaid expenses 102,000 22,000
------------ ------------
TOTAL CURRENT ASSETS 92,249,000 57,689,000
------------ ------------
Note receivable (Note 5) 3,112,000 -
Property and equipment, net 6,936,000 7,062,000
Intangibles and other assets 2,323,000 2,526,000
Assets held for sale - 9,552,000
------------ ------------
TOTAL ASSETS $104,620,000 $ 76,829,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under floor financing lines $ 50,002,000 $ 37,072,000
Short-term borrowings 3,913,000 6,023,000
Accounts Payable 2,656,000 2,171,000
Accrued liabilities 2,397,000 1,505,000
Income taxes payable 5,546,000 896,000
------------ ------------
TOTAL CURRENT LIABILITIES 64,514,000 47,667,000
------------ ------------
Capital lease obligations 1,658,000 -
Other non-current liabilities - 352,000
Minority Interest 9,149,000 8,556,000
------------ ------------
TOTAL LIABILITIES 75,321,000 56,575,000
------------ ------------
Commitments and contingencies (Note 4)
SHAREHOLDERS' EQUITY:
Preferred stock:
Class A - 12.5% cumulative, $1.00 per share
liquidation value, $.01 par value, 1,200,000
shares authorized; none issued and outstanding - -
Class B - $.01 par value; 1,500,000 shares
authorized; none issued and outstanding - -
Common stock-$.01 par value; 20,000,000 shares
authorized; 5,695,749 and 5,654,479
issued and outstanding, respectively 57,000 57,000
Additional contributed capital 15,995,000 15,889,000
Note receivable from shareholder ( 155,000) ( 184,000)
Retained earnings 13,402,000 4,492,000
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 29,299,000 20,254,000
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $104,620,000 $ 76,829,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
- 1 -
<PAGE>
AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
1996 1995
---------- ----------
<S> <C> <C>
Net Sales $ 26,136,000 $ 20,772,000
Cost of goods sold 22,854,000 18,235,000
------------ ------------
GROSS PROFIT 3,282,000 2,537,000
Selling, general and administrative expenses 2,205,000 1,596,000
------------ ------------
OPERATING INCOME 1,077,000 941,000
OTHER (INCOME) EXPENSE
Bridge loan deferred financing costs - 118,000
Other income ( 114,000) ( 25,000)
Interest income ( 351,000) -
Interest expense 453,000 346,000
------------ ------------
Income from continuing operations before income
taxes and minority interest 1,089,000 502,000
Provision for income taxes 419,000 166,000
Minority interest in earnings of consolidated subsidiary 227,000 -
------------ ------------
Income from continuing operations 443,000 336,000
Discontinued Operations - Income from operations
of subsidiaries sold (less applicable income
taxes of $-0- and $322,000 respectively) - 396,000
------------ ------------
Net income $ 443,000 $ 732,000
------------ ------------
------------ ------------
Earnings per common and common equivalent share:
Continuing operations $ .08 $ .06
Discontinued operations - .07
------------ ------------
Net income $ .08 $ .13
------------ ------------
------------ ------------
Weighted average number of shares 5,696,000 5,654,000
------------ ------------
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</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
1996 1995
---------- ----------
<S> <C> <C>
Net Sales $ 75,061,000 $ 59,897,000
Cost of goods sold 66,347,000 52,840,000
------------ ------------
GROSS PROFIT 8,714,000 7,057,000
Selling, general and administrative expenses 5,727,000 4,342,000
------------ ------------
OPERATING INCOME 2,987,000 2,715,000
OTHER (INCOME) EXPENSE
Bridge loan deferred financing costs - 118,000
Interest income ( 351,000) -
Other income ( 289,000) ( 43,000)
Interest expense 1,194,000 879,000
------------ ------------
Income from continuing operations before income
taxes and minority interest 2,433,000 1,761,000
Provision for income taxes 922,000 669,000
Minority interest in earnings of consolidated subsidiary 593,000 -
------------ ------------
Income from continuing operations 918,000 1,092,000
Discontinued Operations - Gain on Sale of wholly owned
subsidiaries (less applicable income taxes of
$5,158,000) (Note 5) 7,738,000 -
Discontinued Operations - Income from operations of
subsidiaries sold (less applicable income taxes
of $169,000 and $413,000 respectively) 254,000 530,000
------------ ------------
Net income $ 8,910,000 $ 1,622,000
------------ ------------
------------ ------------
Earnings per common and common equivalent share:
Continuing operations $ .16 $ .19
Discontinued operations .05 .10
Gain on sale of wholly owned subsidiaries 1.36 -
------------ ------------
Net income $ 1.57 $ .29
------------ ------------
------------ ------------
Weighted average number of shares 5,691,000 5,654,000
------------ ------------
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</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Note
Common Stock Additional Receivable Total Total
Number of Contributed from Retained Shareholders'
Shares Amount Capital Shareholder Earnings Equity
------ ------ ----------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1995 5,655,000 $57,000 $15,889,000 ($184,000) $4,492,000 $20,254,000
Net income - - - - 8,910,000 8,910,00
Issuance of common shares
as compensation 12,000 - 15,000 - - 15,000
Satisfaction of note receivable
from shareholder - - - 29,000 - 29,000
Warrants exercised 28,000 - 90,000 - - 90,000
Options exercised 1,000 - 1,000 - - 1,000
--------- ------- ----------- -------- ---------- -----------
Balance at April 30, 1996 5,696,000 $57,000 $15,995,000 ($155,000) $13,402,000 $29,299,000
--------- ------- ----------- -------- ---------- -----------
--------- ------- ----------- -------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
1996 1995
---------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 8,910,000 $ 1,622,000
Adjustment to reconcile net income
to net cash provided by operating
activities:
Discontinued operations ( 7,992,000) -
Depreciation and amortization 640,000 1,273,000
Loss on sale of fixed assets ( 1,000) 120,000
Stock in lieu of compensation 15,000 32,000
Income applicable to minority interest 593,000 -
Change in assets and liabilities, net of
effects of acquisition & dispositions:
Accounts receivable 810,000 ( 1,914,000)
Other receivables ( 580,000) -
Inventories ( 10,450,000) 3,508,000
Inventory floor plan financing 8,050,000 ( 2,388,000)
Prepaid expenses and other assets ( 79,000) 928,000
Accounts payable ( 150,000) 301,000
Other accrued liabilities 962,000 1,061,000
Income taxes payable ( 38,000) ( 3,000)
Other assets ( 106,000) -
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 584,000 4,540,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ( 538,000) ( 2,345,000)
Purchase of distribution outlets ( 603,000) ( 640,000)
Proceeds from sale of fixed assets 2,078,000 8,000
Proceeds from sale of wholly owned subsidiaries 19,493,000 -
Purchase of marketable securities ( 6,791,000) -
------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 13,639,000 ( 2,977,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease ( 53,000) ( 39,000)
Short term borrowings ( 2,783,000) ( 1,804,000)
Note receivable from shareholder - 50,000
Exercise of stock warrants and options 90,000 -
Bridge loan - 250,000
------------ ------------
NET CASH (USED) BY FINANCING ACTIVITIES ( 2,746,000) ( 1,543,000)
------------ ------------
Net increase in cash and cash equivalents 11,477,000 20,000
Cash and cash equivalents at beginning of period 4,488,000 831,000
------------ ------------
Cash and cash equivalents at end of period $ 15,965,000 $ 851,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial information included in this report has been prepared
in conformity with the accounting principles and practices reflected in the
consolidated financial statements included in the annual report filed with the
Commission for the preceding fiscal year. All adjustments are of a normal
recurring nature and are, in the opinion of management, necessary for a fair
statement of the consolidated results for the interim periods. This report
should be read in conjunction with the Company's 1995 Annual Report.
Certain reclassifications have been made in the accompanying fiscal 1995
consolidated financial statements to conform with financial statement
presentation for fiscal 1996. Such reclassifications had no effect on the
Company's results of operations or retained earnings.
NOTE 2 - STATEMENT OF CASH FLOWS
Supplemental disclosure of cash paid during the periods:
Nine Months Ended
April 30,
1996 1995
-------- -------
Interest $1,440,000 $1,079,000
Income taxes $1,561,000 $ 950,000
Supplemental disclosure of non-cash investing and financing activities:
1. A capital lease obligation of $926,000 was incurred in December 1995
when Western consummated a sale leaseback transaction of the Auburn
facility. In February 1996, a capital lease obligation of $740,000
was incurred related to the lease of the Sacramento facility. In
February 1996 the Company acquired the assets and operations of two
stores in California for approximately $630,000 in cash (including
$27,000 of indirect expenses), $3,090,000 in installment notes payable
and the assumption of $3,965,000 in inventory floor plan debt.
2. A note receivable of $3,037,000 arose due to the Hutchinson
Transaction.
- 6 -
<PAGE>
NOTE 3 - INVENTORIES
Inventories consist of the following: April 30, July 31,
1996 1995
-------- --------
Raw materials $ - $ 1,179,000
Work-in-process - 2,736,000
Finished goods - 3,379,000
------------ -----------
- 7,294,000
LESS: Allowance for obsolete and
excess inventory ( - ) ( 888,000)
------------ -----------
- 6,406,000
Equipment: New equipment 51,088,000 36,461,000
Used equipment 5,196,000 4,662,000
Parts 5,929,000 5,290,000
------------ -----------
$62,213,000 $52,819,000
------------ -----------
------------ -----------
Balance sheet presentation of inventory
Inventories $62,213,000 $46,413,000
Included in assets held for sale - 6,406,000
------------ -----------
$62,213,000 $52,819,000
------------ -----------
------------ -----------
NOTE 4 - CONTINGENCIES
Except for ordinary, routine proceedings incidental to its business, there are
no pending legal proceedings to which the Company or any of its property is
subject. In the opinion of management, the outcome of these legal proceedings
will not have a material adverse effect on the financial condition or results of
operations and cash flows of the Company and its subsidiaries.
Prior to April 30, 1996 the Company agreed to purchase and accept delivery of
certain computer software and related products. It has agreed to the purchase
for $5,000,000 subject to completion of satisfactory testing. The Company has
the right to reject the software and to limit its liability to actual costs and
expenses incurred in ongoing development of the software. In the event of
rejection by the Company, the maximum liability that would be incurred under the
agreement would not exceed $1,000,000.
NOTE 5 - DISPOSITION OF ASSETS
Pursuant to the terms of an Asset Purchase Agreement, dated as of November 22,
1995 (the "Sale Agreement"), by and among Hutchinson Corporation, a Delaware
Corporation ("Hutchinson"), as Buyer, and the Company and each of its AUG-
California, Inc., American United Products, Inc. ("National O-Ring") and
American United Seal, Inc. ("Stillman Seal") subsidiaries, on January 19, 1996
all of the assets of the National O-Ring and Stillman Seal businesses (the
"Manufacturing Business") were sold to, and substantially all of the liabilities
associated with operation of the Manufacturing Business were assumed by,
subsidiaries of Hutchinson newly-formed for the purpose of acquiring the
Manufacturing Business (the "Hutchinson Transaction"). Hutchinson produces a
variety of rubber related products for three market sectors: automotive,
consumer and industrial use.
- 7 -
<PAGE>
The Purchase Price for the Manufacturing Business was $24,500,000, $20,825,000
of which was paid in cash and the aggregate $3,675,000 balance was paid by
delivery of two 24-month non-interest bearing promissory notes (the "Notes")
made by the Hutchinson subsidiaries that purchased the Manufacturing Business.
The Notes, which have been discounted for financial statement presentation by
$638,000, are guaranteed by Total America, Inc., the parent corporation whose
securities are listed on the New York Stock Exchange.
At the closing of the Hutchinson Transaction, (the "Closing"), the Company,
Hutchinson (as guarantor) and Robert Rubin, who is the Chairman and a director
of the Company, entered into a five-year Non-Competition Agreement in favor of
Hutchinson and its affiliates, pursuant to which Mr. Rubin and the Company
agreed not to compete with the businesses acquired in the Hutchinson
Transaction. Under the terms of the Non-Competition Agreement, Mr. Rubin will
receive payments aggregating $200,000 over a seven year period. In addition, at
the Closing Hutchinson engaged Mr. Rubin as a consultant to provide advisory
services relating to the acquired Manufacturing Business over a seven year
period, for which services Mr. Rubin will receive payments aggregating
$1,000,000.
On January 19, 1996, as a result of the Hutchinson Transaction, Mr. John Shahid,
the former President, Chief Executive Officer and director of the Company and
the Company entered into a Termination Agreement whereby Mr. Shahid resigned as
an officer and director of the Company and each of its subsidiaries in
consideration for the payment of an aggregate of $815,833.33, representing
salary payments under his Employment Agreement through December 31, 1998, as
well as a bonus payment for fiscal year 1996 in the amount of $90,000. The
Termination Agreement also provides that the Company shall retain Mr. Shahid as
a consultant for a period of three (3) years, commencing April 1, 1996, for
which consulting services he will be paid quarterly an aggregate of $200,000.
Details of this transaction are as follows:
Sale price $23,862,000
Basis of assets sold 9,634,000
Expenses of sale 1,332,000
-----------
Gain on sale before
income taxes 12,896,000
Income tax provision 5,158,000
-----------
Gain on sale of wholly
owned subsidiaries $ 7,738,000
-----------
-----------
The continuing operation of the Company now consists of the Company's 56.6%
interest in Western Power and Equipment Corp., a publicly traded Delaware
Corporation engaged in the construction equipment distribution business,
principally as a Case Corporation dealer ("WPE").
- 8 -
<PAGE>
NOTE 6 - FISCAL 1996 AND SUBSEQUENT EVENTS
On February 9, 1996, the Company loaned an aggregate of $450,000 to Diplomat
Corporation ("Diplomat") in connection with Diplomat's acquisition of
BioBottoms, Inc. Diplomat is a public company of which Robert Rubin serves as a
director. Before the BioBottoms transaction, Mr. Rubin held approximately 22%
of Diplomat's outstanding capital stock. Such loan (i) bears interest at the
prime rate of CoreStates Bank, N.A. plus 2% and is payable monthly, (ii) is
subordinated to a $2,000,000 revolving credit loan agreement between Diplomat
and Congress Financial Corporation, (iii) is payable in full on or before May 4,
1996 and (iv) is secured by a second priority lien in all of the assets of
Diplomat and its wholly-owned subsidiary, BioBottoms, Inc. The $450,000 loan to
Diplomat was repaid in May 1996.
In connection with the above transaction, Mr. Rubin personally made a secured
loan to Diplomat in the aggregate principal amount of $2,353,100 which matures
in February 1999, and committed to make available a stand-by loan of up to
$300,000 aggregate principal. In consideration for making his loan to Diplomat
and committing to make this stand-by commitment, Mr. Rubin received that number
of shares of Diplomat Convertible Preferred Stock which are convertible into
1,000,000 shares of Diplomat Common Stock. His holdings of Diplomat Preferred
Stock make Mr. Rubin the beneficial owner of approximately 46% of Diplomat
Common Stock.
On March 8, 1996, the Company purchased 25,000 Series A Convertible Preferred
Shares of Chatfield Dean, Inc. for $250,000. Chatfield Dean, Inc. is a broker
dealer and a NASD member firm. If converted, the Company would hold 1.4% of
Chatfield Dean, Inc.'s total outstanding Common Stock.
Pursuant to an Agreement, dated May 30, 1996 (the "ERD Agreement") between the
Company and ERD Waste Corp. ("ERD"), the Company agreed to provide certain
financial accommodations to ERD by making available a $4.4 million standby
letter of credit expiring May 31, 1997 issued by Citibank, N.A. in favor of
Chemical Bank (the "Letter of Credit") on behalf of ERD. Chemical Bank is the
principal lender to ERD and its subsidiaries, and upon issuance of the Letter of
Credit Chemical Bank made available $4.4 million of additional funding to ERD
under ERD's existing lending facility. The funding was used to refinance
certain outstanding indebtedness of Environmental Services of America, Inc.
("ENSA"), a wholly owned subsidiary of ERD. Robert M. Rubin, the Chairman,
Chief Executive Officer, Chief Financial Officer, a director and a principal
stockholder of the Company is also the Chairman, Chief Executive Officer, a
director and a principal stockholder of ERD. Under the terms of a separate
Indemnity Agreement, Mr. Rubin has agreed to indemnify the Company for any
losses or liabilities that it may incur in connection with its having provided
the Letter of Credit financial accommodation on behalf of ERD.
In consideration for making the Letter of Credit available, in addition to
repayment by ERD of all amounts drawn under the Letter of Credit and the grant
of a security interest in all machinery and equipment of ENSA to secure such
repayment, ERD agreed (i) to pay to the Company all of the Company's fees, costs
and expenses payable to Citibank and others in connection with making the Letter
of Credit available, as well as the amount of all interest repayment by ERD and
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<PAGE>
(ii) to issue to the Company an aggregate of 100,000 shares of ERD common stock
(the "ERD Shares"). Shares of ERD Common Stock trade on The NASDAQ National
Market and, at the time of closing of the transaction, the 100,000 ERD Shares
had a market value of $925,000.
Under the terms of the ERD Agreement, the parties agrees to engage Unterberg
Tobin & Co., or another mutually acceptable investment banking firm to advise
the Board of Directors of each of the Company and ERD in writing, as soon as
practicable, as to: (i) whether or not the contemplated issuance of the ERD
Shares represents BOTH (A) fair and adequate consideration to the Company
considering the financial risks being taken by the Company and (B) a reasonable
payment of consideration by ERD for the financial accommodations provided; (ii)
whether a different number of common shares of ERD (whether more or less than
100,000 shares) would be more appropriate under the circumstances to meet both
of the tests described above; or (iii) whether a form of consideration, other
than the ERD common shares would be more appropriate under the circumstances to
meet both of the tests described above. The ERD Agreement further provides that
the opinion and recommendation of the investment banking firm as to the
appropriate number of ERD Shares or other form of compensation in lieu of ERD
Shares shall be final and binding on all parties to the ERD Agreement.
Although there is no assurance that the transaction will be consummated, or if
consummated that the terms of the transaction will be as currently anticipated,
the Company has executed a non-binding letter of intent to acquire all of the
outstanding capital stock of ConnectSoft, Inc. ("ConnectSoft") for a minimum of
1,000,000 and a maximum of 3,000,000 shares of Company Common Stock.
ConnectSoft is a private company that provides communications software
applications and services for persons seeking access to and utilization of
resources and information available on the Internet. The Company has already
commenced financing the operations of ConnectSoft by providing a $1,100,000 Line
of Credit. Outstanding balances under the Line of Credit are convertible into a
majority of the outstanding shares of capital stock of ConnectSoft in the event
of default. Upon completion of its acquisition of ConnectSoft, the Company has
agreed to increase the maximum availability under the Line of Credit to
$5,000,000. Consummation of the acquisition is subject to certain conditions,
including the Company's satisfactory due diligence investigations of ConnectSoft
and its technology, as well as approval of the acquisition by ConnectSoft
stockholders. Although the Company intends to acquire, or invest in, businesses
other than ConnectSoft in the future with the proceeds of the Hutchinson
Transaction, at this time the Company has no other specific business or
businesses which it intends, or is obligated, to purchase.
On October 10, 1995, using proceeds from the WPE's initial public offering,
Western retired the $2,175,000 real estate note given to Case for the purchase
of the Sparks, Nevada real estate in September 1994. Western is in the process
of consummating a transaction with an institutional lender to provide Western
with a conventional mortgage on the property in the amount of $1,330,000 to be
secured by the Sparks, Nevada real estate. The agreement calls for the
principal and interest payments over a seven year term using a fifteen year
amortization period. The note cannot be prepaid during the first two years of
its term.
On October 19, 1995, Western entered into a purchase and sale agreement with an
unrelated party for the Auburn, Washington facility subject to the execution of
a lease. Under the term of this agreement, which closed on December 1, 1995,
Western sold the property and is leasing it back from the purchaser for 20 years
at an initial annual rental of $204,000. Under the lease, such annual rental
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<PAGE>
increases to $228,000 after five years and is subject to fair market adjustments
at the end of ten years. The lease is a net lease with payment of insurance,
property taxes and maintenance costs paid by Western. In accordance with
Statement of Financial Accounting Standards No. 13 (SFAS 13), the building
portion of the lease is being accounted for as a capital lease while the land
portion of the lease qualifies for treatment as an operating lease. The sale
leaseback of the Auburn facility did not result in any material gain or loss to
Western.
Effective February 17, 1996, Western acquired substantially all of the operating
assets used by Case Corporation ("Case") in connection with its business of
servicing and distributing Case construction equipment at a facility located in
Sacramento, California (the "Sacramento Operation"). The acquisition was
consummated for approximately $630,000 in cash, $3,090,000 in installment notes
payable to Case and the assumption of $3,965,000 in inventory floor plan debt
with Case and its affiliates. The acquisition is being accounted for as a
purchase.
The real property and improvements used in connection with the Sacramento
Operation, and upon which the Sacramento Operation is located, were sold by Case
for $1,500,000 to the McLain-Rubin Realty Company, LLC ("MRR"), a Delaware
limited liability company the owners of which are Messrs. C. Dean McLain, the
President and a director of the Company and Western, and Robert M. Rubin, the
Chairman and a director of the Company and Western. Simultaneous with its
acquisition of the Sacramento Operation real property and improvements, MRR
leased such real property and improvements to Western under the terms of a 20
year Commercial Lease Agreement dated as of March 1, 1996 with Western paying an
initial annual rental of $168,000. Under the lease, such annual rental
increases to $192,000 after five years and is subject to fair market adjustments
at the end of ten years. In addition to base rent, Western is responsible for
the payment of all related taxes and other assessments, utilities, insurance and
repairs (both structural and regular maintenance) with respect to the leased
real property during the term of the lease. In accordance with SFAS 13, the
building portion of the lease is being accounted for as a capital lease while
the land portion of the lease qualifies for treatment as an operating lease.
On June 11, 1996, Western acquired the operating assets of GCS, Inc. ("GCS"), a
California-based, closely held distributor of heavy equipment primarily marketed
to municipal and state government agencies responsible for street and highway
maintenance. Western will operate the GCS business from an existing location in
Fullerton, California and from Western's existing facility in Sacramento,
California. The Purchase price for the GCS assets was $1,655,000. This
transaction is being accounted for as a purchase.
NOTE 7 - SUBSIDIARY PREFERRED STOCK
The Company's subsidiary has been authorized to issue 10,000,000 shares of
"blank check" preferred stock, with respect to which all the conditions and
privileges thereof can be determined solely by action of such subsidiary's Board
of Directors without further action of its stockholders. As at April 30, 1996
none were issued and outstanding.
NOTE 8 - ADVERTISING EXPENSE
The Company and its subsidiary expense all advertising costs as incurred.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Form 10-Q.
On January 19, 1996 the Company sold all the assets of its manufacturing
operations (See Note 5 of the Notes to Consolidated Financial Statements for
detailed information.) leaving the Company with ownership of 56.6% of the stock
of Western Power and Equipment Corp. ("WPE"), a public Delaware company that
sells and services construction equipment and related parts principally
manufactured by Case Corporation ("Case"). The operations of the Company now
consist of the Company's 56.6% interest in WPE.
On June 14, 1995, WPE completed an initial public offering of 1,495,000 shares
of common stock. After the offering the Company's interest in Western, through
its ownership interest in WPE, was reduced to 56.6%.
Effective November 1, 1992, the Company through its formerly wholly-owned
subsidiary Western Power and Equipment Corp., an Oregon corporation ("Western"),
completed the acquisition from Case of seven stores located in Washington and
Oregon which sell and service equipment used in the construction industry.
Western's strategic plan was, and continues to be, that of expanding the
operations and improving profitability at each of its existing retail outlets.
Subsequent to 1992 Western opened three additional outlets in Washington and
Oregon. Effective September 10, 1994, Western also purchased from Case
Corporation two additional retail construction equipment distribution outlets
located in Sparks, Nevada and Fremont, California. On December 11, 1994,
Western relocated its Fremont outlet to neighboring Hayward, California. As
part of its agreement with Case, Western was required to open two additional
distribution outlets in northern California. In March and August 1995 Western
opened retail stores in Santa Rosa and Salinas, California, respectively. In
February 1996, the Company announced the opening of a distribution outlet in
Elko, Nevada. Also in February 1996, Western completed the acquisition of the
Sacramento, California outlet from Case as further described in Note 6 to the
Consolidated Financial Statements. The opening of a Stockton, California outlet
was completed in March 1996, bringing the total number of distribution outlets
owned and operated by Western to 17.
In 1995, the Company incorporated WPE as a wholly-owned holding company to own
100% of the outstanding shares of Western.
RESULTS OF OPERATIONS
THE THREE MONTHS AND NINE MONTHS ENDED APRIL 30, 1996 COMPARED TO THE THREE
MONTHS AND NINE MONTHS ENDED APRIL 30, 1995.
Revenues for the three month period ended April 30, 1996 increased $5,364,000 or
26% over the three month period ended April 30, 1995. The increase in revenues
was primarily attributable to increased sales of new units ($3,426,000), rental
revenues ($760,000) and parts sales ($748,000). Revenues from sales of used
units and service work also increased ($324,000 and $106,000 respectively)
during
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the quarter. New stores acquired since last year contributed $3,631,000 or 60%
of the increased sales while same store sales improved 8.3% over the prior year.
The strong gains in sales and rentals of new units are indications of the
continued strength of the economies in the geographic areas in which the Company
operates. The Company has invested significant resources in expanding its fleet
of rental equipment. Management believes that there exists a trend toward
increased rental of equipment. With more equipment to rent, the Company
experienced a 76% increase in rental revenues in the current year third quarter
versus the same period last year. The used equipment market continues to be
strong in most of our geographic areas as reflected in the improved sales of
used units.
Revenues for the nine month period ended April 30, 1996 increased by $15,164,000
or 25% over the revenues for the nine month period ended April 30, 1995. Such
increase reflects strong demand for new equipment and rentals as noted above,
and gives effect to the full impact on revenues of the California and Nevada
locations which were purchased or opened in the first and second quarters of
fiscal 1995.
The Company's gross profit margin of 12.6% for the three month period ended
April 30, 1996 was an improvement over the comparable prior year margin of
12.2%. As noted above, the majority of the increase in the Company's sales came
from the sale of new equipment which, under Case's new Focus 2000 program,
provided the Company with pricing discounts recognized in the third quarter thus
increasing the gross profit margin.
For the nine month period ended April 30, 1996, the Company's gross profit
margin was 11.6%, which is down slightly from the gross profit margin of 11.8%
for the same period during the prior year. The improvement in margin realized
in the third quarter discussed above was not enough to erase the decreased
margin experienced in the first six months of the current fiscal year as
compared to the prior year.
Selling, general and administrative ("SG&A") expenses were $2,205,000 (8.4% of
sales) and $5,727,000 (7.6% of sales) for the three and nine month periods ended
April 30, 1996, respectively, compared to $1,596,000 (7.7% of sales) and
$4,342,000 (7.2% of sales) for the comparative prior year periods. The
significant growth in operations during the past 12 months has had an upward
impact on SG&A expenses, such that the Company has not yet fully realized the
potential benefits of its streamlined organizational structure. While many of
the administrative and moving costs incurred in connection with the acquisition
and opening of these outlets are one-time charges which will not be incurred in
future period, management is also taking steps intended to decrease SG&A
expenses as a percentage of sales over time.
Interest expense of $453,000 and $1,194,000 for the three and nine month periods
ended April 30, 1996, respectively, was up $107,000 and $315,000 from the prior
year comparative periods. Interest expense is tied directly to interest rates
and the Company's equipment inventory levels which have increased as the Company
has acquired and opened additional distribution outlets. In addition, the
Company has made a substantial investment in expanding its rental fleet of
equipment. At April 30, 1996, a total of $13,327,000 in equipment was dedicated
to rental compared to only $3,359,000 at April 30, 1995. Since the related note
balance becomes interest bearing when a unit is placed in the dedicated rental
fleet, the increase in rental equipment has had and will continue to have a
significant upward impact on interest expense (which should be offset by
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increased rental revenues and margin). In addition, as part of Case's Focus
2000 program, a dealer can elect to forego Case's interest free flooring period
and pay cash for new Case equipment. In return for the cash payment, Case
grants the dealer a 4% discount on the cost of such equipment. The Company has
elected to take this discount on selected purchases of new Case equipment and,
if necessary, has financed such purchases on the Company's third party flooring
lines which has also contributed to the increase in interest expense. This
increase should be more than offset by the 4% cash discount which is recognized
in income at the time such units are sold.
The effective income tax rate has remained consistent at approximately 38% for
all periods presented. The Company anticipates the effective tax rate will
remain at basically statutory rates for the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the Hutchinson Transaction the Company significantly increased
its liquidity and capital resources. The Company intends to acquire additional
businesses in the future with the proceeds of the Hutchinson Transaction. See
Note 6 to the accompanying consolidated financial statements for more
information.
The Company has been granted a $10,000,000 secured demand line of credit from
its commercial bank. This line is uncommitted and secured by the Company's
portfolio of cash and marketable securities held by the bank. On April 30, 1996
approximately $1,300,000 was outstanding under such line of credit, the
principal of which bears interest at the banks base rate plus 1% or 90 day LIBOR
plus 1%. The applicable rate is elected upon issuance of the loan.
Western's primary source of internal liquidity has been its profitable
operations since its inception in November 1992. As more fully described below,
Western's primary sources of external liquidity were contributions to Western by
the Company, and equipment inventory floor plan financing arrangements provided
to Western by Case Credit Corporation, Seattle-First National Bank ("SeaFirst
Bank"), Associates Commercial Corporation ("Associates") and Orix Commercial
Credit ("Orix"). In addition, in fiscal 1995, WPE, the immediate parent of
Western, completed an initial public offering of 1,495,000 shares of common
stock at $6.50 per share, generating net proceeds of $7,801,000. The net
proceeds of the offering have been utilized to repay amounts due to the Company
and to Case, the acquisition and opening of additional outlets, as well as to
reduce floor plan debt.
Under its inventory floor plan finance arrangements Case provides Western with
interest free credit terms on new equipment purchases for four to six months,
with the exception of the Model 1818 skid steer loader for which the interest
free credit terms are three months and the Model 90B Series special application
excavator for which the interest free credit terms are eight months, after which
interest commences to accrue monthly at the rate per annum equal to 2% over the
prime rate of interest. At April 30, 1996, Western was indebted to Case in the
aggregate amount of approximately $42,106,000 under such inventory floor plan
finance arrangements.
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In order to take advantage of a 4% cash discount offered by Case under its new
Focus 2000 program, to provide financing beyond the term of applicable Case
floor plan financing or as alternatives to Case floor plan financing
arrangements for inventory purchased other than from Case, Western has entered
into separate secured floor planning lines of credit with SeaFirst, Associates,
Orix, and the CIT Group.
The Associates line of credit was entered into in August 1993, and allows
Western to borrow up to $2,250,000 to finance the purchase of new equipment, to
finance up to $2,000,000 of installment sales of equipment to customers approved
by Associates (without recourse to Western), and to finance up to $1,000,000 of
installments sales of equipment to other customers (with recourse to Western in
the event of default). There are no material obligations outstanding under the
recourse line of credit. On April 30, 1996, approximately $142,000 was
outstanding under these lines, the principal of which bears interest at 2% over
the prime rate announced by the U.S. National Bank of Oregon.
The SeaFirst line of credit was entered into in June 1994 and provides a
$7,500,000 line of credit which can be used to finance new and used equipment or
equipment to be held for rental purposes. On April 30, 1996, approximately
$6,719,000 was outstanding under such line of credit, the principal of which
bears interest at .25% over Seattle-First National Bank's prime rate and is
subject to annual review and renewal on June 1, 1997.
Western also buys a portion of its equipment from Hamm Compactors ("Hamm") under
a floor plan financing agreement with Orix. The Orix floor plan agreement calls
for repayment of principal and interest over periods ranging from thirty to
forty-eight months, with a balloon payment for the remaining outstanding
balance. At April 30, 1996, the aggregate indebtedness owed to Orix was
$1,035,000. The Orix notes bear interest at the highest prevailing prime rates
of certain major United States banks, plus 2% per annum.
Amounts owing under these floor plan financing agreements are secured by
inventory purchases financed by these lenders, as well as all proceeds from
their sale or rental, including accounts receivable thereto.
On October 19, 1995, Western entered into a purchase and sale agreement with an
unrelated party for the Auburn, Washington facility subject to the execution of
a lease. Under the terms of this agreement, which closed on December 1, 1995,
Western sold the property and is leasing it back from the purchaser. In
accordance with Statement of Financial Accounting Standards No. 13 (SFAS 13),
the building portion of the lease is being accounted for as a capital lease
while the land portion of the lease qualifies for treatment as an operating
lease. See Note 6 to the accompanying consolidated financial statements for
more information.
Effective February 17, 1996, Western acquired substantially all of the operating
assets used by Case Corporation ("Case") in connection with its business of
servicing and distributing Case construction equipment at a facility located in
Sacramento, California (the "Sacramento Operation"). The acquisition was
consummated for approximately $630,000 in cash, $3,090,000 in installment notes
payable to Case and the assumption of $3,965,000 in inventory floor plan debt
with Case and its affiliates. The acquisition is being accounted for as a
purchase.
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The real property and improvements used in connection with the Sacramento
Operation, and upon which the Sacramento Operation is located, were sold by Case
for $1,500,000 to the McLain-Rubin Realty Company, LLC ("MRR"), a Delaware
limited liability company the owners of which are Messrs. C. Dean McLain, the
President and a director of the Company and Western, and Robert M. Rubin, the
Chairman and a director of the Company and Western. Simultaneous with its
acquisition of the Sacramento Operation real property and improvements, MRR
leased such real property and improvements to Western under the terms of a 20
year Commercial Lease Agreement dated as of March 1, 1996. In accordance with
SFAS 13, the building portion of the lease is being accounted for as a capital
lease while the land portion of the lease qualifies for treatment as an
operating lease. See Note 6 to the accompanying consolidated financial
statements for more information.
On October 10, 1995, using proceeds from WPE's initial public offering, Western
retired the $2,175,000 real estate note given to Case for the purchase of the
Sparks, Nevada real estate in September 1994. In March 1996 Western consummated
an agreement with an institutional lender for a conventional mortgage on the
property in the amount of $1,330,000 secured by the Sparks, Nevada real estate.
The agreement calls for the principal and interest payments over a seven year
term using a fifteen year amortization period. The note cannot be prepaid
during the first two years of its term.
In May 1996 approximately 530,000 options were exercised with $1,690,574 of net
proceeds received by the Company. The Company has used these funds to reduce its
short term bank borrowings. The dilutive effect of the exercise of these options
on earnings per share has already been reflected in the weighted average
earnings per share stated in this report.
During the nine months ended April 30, 1996, cash and cash equivalents increased
by $11,477,000 primarily due to the Hutchinson Transaction. The Company had
positive cash flow from operations during the period reflecting a decrease in
accounts receivable, an increase in accounts payable, and this, along with net
income for the quarter, was sufficient to more than offset the decline resulting
from the increased cash investment in inventories. The proceeds from the Auburn
facility sale leaseback transaction were sufficient to retire the related note
payable to Case. Purchases of fixed assets during the period were related
mainly to the opening of new distribution outlets. The Company's cash and cash
equivalents of $15,965,000 as of April 30, 1996 and available credit facilities
are considered sufficient to support current or higher levels of operations for
at least the next twelve months. In addition, the Company is currently in
negotiations with several financing institutions to expand the credit available
to the Company.
In consideration for making the Letter of Credit available, in addition to
repayment by ERD of all amounts drawn under the Letter of Credit and the grant
of a security interest in all machinery and equipment of ENSA to secure such
repayment, ERD agreed (i) to pay to the Company all of the Company's fees, costs
and expenses payable to Citibank and others in connection with making the Letter
of Credit available, as well as the amount of all interest repayment by ERD and
(ii) to issue to the Company an aggregate of 100,000 shares of ERD common stock
(the "ERD Shares"). Shares of ERD Common Stock trade on The NASDAQ National
Market and, at the time of closing of the transaction, the 100,000 ERD Shares
had a market value of $925,000.
On June 11, 1996, Western acquired the operating assets of GCS, Inc. ("GCS"), a
California-based, closely held distributor of heavy equipment primarily marketed
to municipal and state government agencies responsible for street and highway
maintenance. Western will operate the GCS business from an existing location in
Fullerton, California and from Western's existing facility in Sacramento,
California. The Purchase price for the GCS assets was $1,655,000. This
transaction is being accounted for as a purchase.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Asset Purchase Agreement, dated as of February 19, 1996, among
Western Power & Equipment Corp., an Oregon Corporation ("Western"),
Case Corporation ("Case") and McLain-Rubin Realty Company, LLC
("MRR"). (1)
10.2 Used Equipment Note from Western to Case. (1)
10.3 Parts Note from Western to Case. (1)
10.4 Accounts Receivable Note from Western to Case. (1)
10.5 $150,000 Goodwill Note from Western to Case. (1)
10.6 $1,500,000 Real Estate Note from MRR to Case. (1)
10.7 Deed to Secure Debt made by MRR in favor of Case, dated February 29,
1996. (1)
10.8 Security Agreement, dated February 29, 1996, made by Western in favor
of Case to secure payment for and collateralized by all assets
acquired by Western from Case (other than new equipment). (1)
10.9 Guarantee of C. Dean McLain in favor of Case, dated February 29,
1996. (1)
10.10 Commercial Lease, dated as of March 1, 1996, by and between Western
and McLain-Rubin Realty Company, L.L.C. for Sacramento, California
facility, including First Amendment to Commercial Lease, dated as of
March 1, 1996. (1)
(b) REPORTS ON FORM 8-K
None
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1. Incorporated by reference, filed as an exhibit to the Current Report on
Form 8-K filed by the Company's subsidiary, Western Power & Equipment
Corp., on March 14, 1996.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN UNITED GLOBAL, INC.
June 14, 1996
By:
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Robert M. Rubin
Chairman
