<PAGE>
FORM 10-Q/A
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 October 31, 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)
11130 NE 33RD PL., SUITE 250
----------------------------
BELLEVUE, WASHINGTON 98004
-------------------- -----
(Address of principal executive offices) Zip Code
Registrant's telephone no.: 206-803-5400
------------
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) 7,166,382
<PAGE>
AMERICAN UNITED GLOBAL, INC.
INDEX
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Consolidated Balance Sheets
October 31, 1996 (Unaudited) and July 31, 1996 1-2
Consolidated Statement of Operations
Three months ended October 31, 1996
and October 31, 1995 (Unaudited) 3
Consolidated Statement of Shareholders'
Equity (Unaudited) 4
Consolidated Statements of Cash Flows
Three months ended October 31, 1996
and October 31, 1995 (Unaudited) 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-15
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 16
<PAGE>
AMERICAN UNITED GLOBAL, INC.
ITEM 1. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
October 31, July 31,
1996 1996
----------- ---------
[Unaudited]
Restated
(Note 2)
CURRENT ASSETS:
- ---------------
Cash and cash equivalents $ 16,281,000 $ 17,086,000
Marketable securities 6,637,000 6,268,000
Trade accounts receivable (less allowance
for doubtful accounts of $676,000 and
$652,000 respectively) 10,907,000 6,628,000
Other receivables 404,000 116,000
Note receivable from shareholder 1,200,000 838,000
Inventories 64,443,000 65,697,000
Prepaid expenses 541,000 360,000
Deferred tax asset 1,528,000 1,528,000
------------ ------------
TOTAL CURRENT ASSETS 101,941,000 98,521,000
--------------------
Note receivable 3,274,000 3,198,000
Property and equipment, net 8,908,000 8,878,000
Intangibles and other assets 9,261,000 6,628,000
Deferred tax asset 1,830,000 1,830,000
------------ ------------
TOTAL ASSETS $125,214,000 $119,055,000
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
- 1 -
<PAGE>
AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
October 31, July 31,
1996 1996
----------- ---------
[Unaudited]
Restated
(Note 2)
CURRENT LIABILITIES:
- --------------------
Borrowings under floor financing lines $55,138,000 $54,364,000
Short-term borrowings 8,460,000 4,660,000
Accounts Payable 4,577,000 4,252,000
Accrued liabilities 4,477,000 5,387,000
Deferred revenue 234,000 -
Income taxes payable 4,729,000 5,253,000
Current portion of capital lease obligations 1,146,000 1,119,000
------------ ------------
TOTAL CURRENT LIABILITIES 78,761,000 75,035,000
-------------------------
Long-term borrowings 2,968,000 2,968,000
Capital lease obligations, net of current portion 2,288,000 2,083,000
Purchased business obligations 452,000 6,929,000
Minority interest 9,683,000 9,459,000
------------ ------------
TOTAL LIABILITIES 94,152,000 96,474,000
-----------------
Commitments and contingencies (Note 6)
SHAREHOLDERS' EQUITY:
- ---------------------
Preferred stock, 12.5% cumulative, $1.00 per share
liquidation value, $.01 par value, 1,200,000
shares authorized; none issued and outstanding; - -
Series B preferred stock, 1,500,000 shares
authorized; 976,539 shares of Series B-1
convertible preferred stock, convertible to
common, $3.50 per share liquidation value, $.01
par value, issued and outstanding 10,000 -
Common stock, $.01 par value; 20,000,000 shares
authorized; 7,166,382 and 6,266,382 issued and
outstanding, respectively 72,000 63,000
Additional contributed capital 30,267,000 20,654,000
Deferred compensation ( 753,000) ( 793,000)
Retained earnings 1,466,000 2,657,000
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 31,062,000 22,581,000
-------------------------- ------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $125,214,000 $119,055,000
---------------------------------------- ------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
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<PAGE>
AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended
October 31,
1996 1995
-------- --------
Restated
(Note 2)
Net Sales $31,879,000 $23,153,000
Cost of goods sold 27,637,000 20,449,000
----------- -----------
GROSS PROFIT 4,242,000 2,704,000
Selling, general and administrative expenses 4,227,000 1,820,000
Research and development expenses 945,000 -
----------- -----------
OPERATING (LOSS) INCOME ( 930,000) 884,000
OTHER (INCOME) EXPENSE
Other income - ( 98,000)
Interest expense, net 413,000 240,000
----------- -----------
(Loss) Income from continuing operations before
income taxes and minority interest ( 1,343,000) 742,000
Provision (credit) for income taxes ( 376,000) 320,000
Minority interest in net earnings of
consolidated subsidiary 224,000 226,000
----------- -----------
(Loss) Income from continuing operations ( 1,191,000) 196,000
Discontinued Operations - Income from operations
of subsidiaries sold (less applicable income
taxes of $315,000) - 529,000
----------- -----------
Net (loss) income ($ 1,191,000) $ 725,000
----------- -----------
----------- -----------
(Loss) Earnings per common and common
equivalent shares:
Continuing operations ($ .18) $ .03
Discontinued operations - .09
----- -----
Net (loss) income ($ .18) $ .12
----- -----
----- -----
Weighted average number of shares 6,746,000 5,901,000
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
- 3 -
<PAGE>
AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Restated-Note 2)
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- --------------------
Additional Total
Number of Number of Contributed Deferred Retained Shareholders'
shares Amount shares Amount Capital Compensation Earnings Equity
-------- -------- ---------- ------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1996 - - 6,267,000 $63,000 $20,654,000 ($793,000) $2,657,000 $22,581,000
Net loss - - - - - - ( 1,191,000) ( 1,191,000)
Amortization of deferred
Compensation - - - - - 40,000 - 40,000
Exercise of stock options - - - - 379,000 - - 379,000
Issuance of Preferred
Stock 977,000 $10,000 - - 6,217,000 - - 6,227,000
Issuance of common shares - - 900,000 9,000 3,017,000 - - 3,026,000
--------- ------- ----------- -------- ----------- ----------- ----------- -----------
Balance at October 31,
1996 977,000 $10,000 7,167,000 $72,000 $30,267,000 $(753,000) $1,466,000 $31,062,000
--------- ------- ----------- -------- ----------- ----------- ----------- -----------
--------- ------- ----------- -------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE>
AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
1996 1995
-------- --------
Restated
(Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
<S> <C> <C>
Net (loss) income ($ 1,191,000) $ 725,000
Adjustment to reconcile net (loss) income
to net cash provided by operating
activities:
Discontinued operations - (598,000)
Depreciation and amortization 781,000 200,000
Amortization of deferred compensation 40,000 -
Loss on sale of fixed assets - ( 1,000)
Stock in lieu of compensation - 15,000
Income applicable to minority interest 224,000 226,000
Change in assets and liabilities, net of
effects of acquisition & dispositions:
Accounts receivable ( 4,037,000) 658,000
Other receivables ( 288,000) 1,102,000
Inventories 1,254,000 ( 4,158,000)
Inventory floor plan financing 774,000 3,615,000
Prepaid expenses ( 274,000) ( 38,000)
Note receivable ( 76,000) -
Accounts payable 191,000 175,000
Other accrued liabilities ( 910,000) ( 430,000)
Income taxes payable ( 524,000) 98,000
Deferred revenue 234,000 -
Other assets ( 39,000) 5,000
----------- ----------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES ( 3,841,000) 1,594,000
------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Purchases of property and equipment ( 228,000) ( 86,000)
Acquisition of businesses, net of cash acquired ( 123,000) -
Proceeds from sale of fixed assets - 1,000
Purchase of marketable securities ( 369,000) -
----------- ----------
NET CASH USED BY INVESTING ACTIVITIES ( 720,000) ( 85,000)
-------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Principal payments on capital lease ( 61,000) ( 14,000)
Short term borrowings 3,800,000 ( 2,466,000)
Note receivable from shareholder ( 362,000) 19,000
Exercise of stock options and warrants 379,000 90,000
----------- ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 3,756,000 ( 2,371,000)
------------------------------------------------ ----------- ----------
Net decrease in cash and cash equivalents ( 805,000) ( 862,000)
Cash and cash equivalents at beginning of period 17,086,000 4,144,000
----------- ----------
Cash and cash equivalents at end of period $16,281,000 $3,282,000
----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
- 5 -
<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 for the preceding year included in the annual
report on Form 10-K for the year ended July 31, 1996 filed with the Securities
and Exchange Commission. 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 financial statements included in the annual
report on Form 10-K for the year ended July 31, 1996 filed with the Securities
and Exchange Commission.
The consolidated financial statements include the accounts of the Company and
its wholly-owned and majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. Minority
interest represents the minority shareholders' proportionate share of the equity
of Western Power and Equipment Corp. ("Western") which was 43% at October 31,
1996. There is also a 20% minority interest held in eXodus Technologies, Inc.
("eXodus") but no minority interest is presented due to accumulated losses.
NOTE 2 - RESTATEMENT
The accompanying consolidated financial information as of and for the three
months ended October 31, 1996 has been restated to reflect the acquisition of
ConnectSoft, Inc. by the Company as of July 31, 1996. The effects of this
restatement on the consolidated financial statements are summarized below:
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE
MONTHS ENDED
OCTOBER 31, 1996
----------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET
Intangibles and other assets............................ $ 7,300,000 $ 9,261,000
Deferred tax asset, noncurrent.......................... 1,830,000
Income taxes payable.................................... 4,822,000 4,729,000
Purchased business obligations.......................... 4,314,000 452,000
Preferred Stock......................................... 10,000
Additional contributed capital.......................... 24,050,000 30,267,000
Deferred Compensation................................... (293,000) (753,000)
Accumulated (deficit) earnings.......................... (513,000) 1,466,000
CONSOLIDATED STATEMENT OF OPERATIONS
Selling, general and administrative expense............. 3,999,000 4,227,000
Research and development expenses....................... 1,045,000 945,000
Benefit for income taxes................................ (134,000) (376,000)
Net loss................................................ (1,305,000) (1,191,000)
Net loss per share...................................... (.19) (.18)
</TABLE>
NOTE 3 - STATEMENT OF CASH FLOWS
Supplemental disclosure of cash paid during the periods:
Three Months Ended
October 31,
1996 1995
-------- -------
Interest $1,169,000 $376,000
Income taxes $148,000 $500,000
Supplemental disclosure of non-cash investing and financing activities:
1. A capital lease obligation of $293,000 was incurred during the quarter
ended October 31, 1996 when the Company entered into a lease for
computer equipment and software.
2. In September 1996, the Company acquired Interglobe by issuing shares
of its common stock valued at $2,775,000, cash of $400,000 and
incurring $40,000 in acquisition costs.
- 6 -
<PAGE>
NOTE 4 - INVENTORIES
Inventories consist of the following: October 31, July 31,
1996 1996
-------- --------
Parts $ 6,761,000 $ 6,320,000
Equipment new and used 57,682,000 59,377,000
----------- -----------
$64,443,000 $65,697,000
----------- -----------
----------- -----------
NOTE 5 - ACQUISITIONS
Effective September 20, 1996, the Company acquired all of the outstanding stock
of Interglobe Networks, Inc. ("Interglobe"), a private company providing
engineering, design and consulting services for users and providers of
telecommunications facilities on the Internet and other media. The shareholders
of Interglobe exchanged their shares for $400,000 and 800,000 unregistered
shares of the Company's common stock. The acquisition was accounted for by the
purchase method. Accordingly, the results of operations of Interglobe have been
included with the results of operations of the Company for periods subsequent to
the date of acquisition. The Company has preliminarily recorded this
acquisition as described below and will finalize its purchase accounting during
fiscal 1997.
A summary of assets acquired, liabilities assumed and purchase price paid is as
follows:
Cash paid $ 400,000
Value of common stock 2,775,000
Costs of acquisition 40,000
Liabilities assumed 134,000
----------
COST OF ASSETS ACQUIRED $3,349,000
----------------------- ----------
----------
The cost initially allocated to each of Interglobe's assets and liabilities at
the date of the acquisition, as determined in accordance with the purchase
method of accounting, is presented in the table below:
Cash $ 277,000
Accounts receivable 242,000
Prepaid and other current assets 7,000
Intangible assets 2,743,000
Property and equipment 80,000
Accounts payable and accrued liabilities ( 134,000)
----------
NET ASSETS ACQUIRED $3,215,000
------------------- ----------
----------
Additionally, options were granted to certain employees to purchase up to an
additional 800,000 shares of the Company's common stock upon the achievement of
certain anticipated profits as part of their employment agreements. Pro forma
financial information has not been provided relating to the acquisition because
the effect is immaterial.
- 7 -
<PAGE>
NOTE 6 - CONTINGENCIES
Except for ordinary, routine proceedings incidental to its businesses, 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, results of
operations or cash flows of the Company and its subsidiaries.
NOTE 7 - SUBSEQUENT EVENTS
In November 1996, the Company completed the acquisition of the assets of Seattle
On-Line, a company engaged in the production of regional websites that showcase
metropolitan areas and sale of advertising on these websites. The purchase
price of Seattle On-Line consisted of $300,000 cash and up to 25,000
unregistered shares of the Company's common stock. Additionally, the Company
issued warrants to purchase 333,333 shares of the Company's common stock at
specified prices for a period of three years commencing with the effective date
of the acquisition. The warrants carry certain provisions that affect the
warrants' exercise price based on future profitability of Seattle On-Line. Pro
forma financial information has not been provided relating to this acquisition
because the effect is immaterial.
Effective December 11, 1996, the Company acquired Broadcast Tower Sites, Inc.
("BTS"), pursuant to a merger transaction (the "BTS Merger"). BTS is engaged in
providing site acquisition, zoning, architectural and engineering services, as
well as consulting services, to the wireless telecommunications industry. It is
contemplated that the name of BTS will be changed. However, such new name has
not yet been determined.
Pursuant to the terms of the BTS acquisition, the BTS shareholders received an
aggregate of 507,246 shares of Company Common Stock, $780,000 in cash and three
promissory notes aggregating $600,000, bearing interest at the Citibank, N.A.
prime rate, and payable in installments of $100,000, $200,000 and $300,000 on
each of November 30, 1997, 1998 and 1999, respectively.
In a related transaction, the Company also entered into an agreement to acquire
100% of the capital stock of Arcadia Consulting, Inc. ("Arcadia"), a company
recently formed for the purpose of providing consulting services to clients in
the wireless telecommunications industry. The Company has agreed to pay a
purchase price of $220,000 in cash and 192,754 shares of Company Common Stock.
The closing of the Arcadia acquisition is subject to certain conditions and is
expected to be consummated in or about January 1997. Following the Arcadia
acquisition, Arcadia will be merged with and into BTS.
The former stockholders of BTS received, and the stockholder of Arcadia will
receive, four-year employment agreements with BTS and the Company pursuant to
which such persons shall receive, in addition to their base salaries and annual
bonuses based upon performance of BTS, options exercisable over a five year
period entitling the holder to purchase an additional aggregate 780,000 shares
of Company Common Stock (the "BTS Options"). The BTS Options shall vest and be
exercisable (i) 195,000 options on November 30, 1997 in the event that BTS
achieves at least $2,000,000 of Pre-Tax Income (as defined) in the 12 months
ending November 30, 1997, (ii) 195,000 options on November 30, 1998 in the event
that BTS achieves at least $2,500,000 of Pre-Tax Income (as defined) in the 12
months ending November 30, 1998, (iii) 195,000 options on November 30, 1999 in
- 8 -
<PAGE>
NOTE 7 - SUBSEQUENT EVENTS (CONTINUED)
the event that BTS achieves at least $3,000,000 of Pre-Tax Income in the 12
months ending November 30, 1999, and (iv) 195,000 options on November 30, 2000
in the event that BTS achieves at least $3,500,000 of Pre-Tax Income in the 12
months ending November 30, 2000. Alternatively, all 780,000 BTS Options shall
vest if, during the period commencing upon closing the BTS Merger and
terminating on November 30, 2000, the accumulated Pre-Tax Income of BTS has
equalled or exceeded $11,000,000. In the event that a change in control of the
Company occurs, or the Company effects a sale of all or substantially all of the
assets of BTS, prior to November 30, 2000, all of the BTS Options shall
immediately vest upon such occurrence. In addition, the BTS acquisition
agreement provides that if the Company effects a public offering of BTS or a
sale of BTS prior to November 30, 2000, the former BTS and Arcadia stockholders
may elect (but shall not be required) to exchange all Company securities
received by them in the BTS acquisition (the "Exchange Option") for an aggregate
of 25% of the common stock of BTS then owned by the Company prior to such
transaction.
In addition to the 780,000 BTS Options issued to the former BTS and Arcadia
stockholders, the Company also agreed to issue an additional 120,000 BTS
Options, on identical terms as those offered to the former BTS and Arcadia
stockholders, to certain other key employees of BTS designated by the former BTS
and Arcadia stockholders.
Upon completion of the Arcadia acquisition, Solon L. Kandel, the President and
sole stockholder of Arcadia, will be employed by BTS as its President and Chief
Executive Officer under a four-year employment agreement containing terms which
are substantially identical to those provided to each of the former stockholders
of BTS, including 260,000 BTS Options. In addition, Mr. Kandel has been
nominated to serve as a member of the Board of Directors of the Company.
Pending completion of the Arcadia acquisition, the Company engaged Arcadia as a
consultant for a monthly fee of $15,000.
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 and
Chief Executive Officer, and a principal stockholder of the Company is also the
Chairman, Chief Executive Officer, a director and a principal stockholder of
ERD, owning approximately 25.1% of the outstanding ERD Common Stock.
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 certain 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 paid by the Company
on drawings under the Letter of Credit prior to their repayment by ERD and (ii)
to issue to the Company an aggregate of 25,000 shares of ERD common stock for
each consecutive period of 90 days or any portion thereof, commencing August 1,
1996 that the Letter of Credit remains outstanding. ERD Common Stock trades on
the NASDAQ National Market and, at the time of closing of the transaction with
- 9 -
<PAGE>
NOTE 7 - SUBSEQUENT EVENTS (CONTINUED)
ERD, its the closing price of ERD Common Stock, as traded on Nasdaq was $9.25
per share.
In August 1996, a subsidiary of ERD which operates a waste facility in Nassau
County, New York was cited by the New York State Department of Environmental
Conservation ("DEC") for violating certain DEC regulations. Such waste facility
currently accounts for approximately 13% of ERD's consolidated revenues. As a
result of the uncertainties surrounding ERD's waste facility operations, the per
share price of ERD Common Stock closed at $2.875 per share on November 8, 1996.
Although the Company has been advised by ERD that it and the DEC have reached
agreement in principle to settle on acceptable terms such violations and pending
charges alleged against ERD and one of the employees of the ERD subsidiary, to
date, no such settlement has been finalized. If an acceptable settlement is not
reached, the business of ERD could be materially and adversely affected.
On November 8, 1996, the Company and ERD amended and restated their agreements
to provide that if and to the extent that the Letter of Credit provided by the
Company is called for payment, ERD will issue to the Company its convertible
note bearing interest at 12% per annum, payable monthly, and payable as to
principal on the earliest to occur of: (i) May 30, 1999, (ii) ERD's receipt of
the initial proceeds from any public or private placement of debt or equity
securities of ERD, or (iii) completion of any bank refinancing by ERD, to the
extent of all proceeds available after payment of other secured indebtedness.
In addition, the ERD notes, if issued, will be convertible, at any time at the
option of the Company, into ERD Common Stock at a conversion price equal to
$4.40 per share, or a maximum of 1,000,000 ERD shares if the entire $4.4 million
note is issued and converted into ERD Common Stock. In addition to the
collateral provided under the May 30, 1996 agreement, ERD also provided the
Company with a junior mortgage on the waste facility owned by ERD's subsidiary,
subordinated to existing indebtedness encumbering such facility.
Under the terms of an indemnity agreement,dated May 30, 1996, Robert M. Rubin
agreed to indemnify the Company for all losses, if any, incurred by the Company
as a result of issuance of the Letter of Credit for the benefit of ERD. In
consideration of his negotiating the modification of the ERD agreement, on
November 8, 1996, the Company's Board of Directors (Mr. Rubin abstaining) agreed
to amend the indemnity agreement with Mr. Rubin to limit his contingent
liability thereunder to the extent of 23% (Mr. Rubin's approximate percentage
beneficial ownership in the outstanding Company Common Stock as of May 30, 1996)
of all losses that the Company may incur in connection with its having provided
the Letter of Credit financial accommodation on behalf of ERD. Mr. Rubin's
reimbursement obligations are also subject to pro rata reduction to the extent
of any repayments made directly by ERD or from proceeds received by AUGI from
the sale of ERD capital stock described above.
NOTE 8 - SUBSIDIARY PREFERRED STOCK
Western 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 October 31, 1996 none were
issued and outstanding.
NOTE 9 - ADVERTISING EXPENSE
The Company and its subsidiaries expense all advertising costs as incurred.
- 10 -
<PAGE>
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.
This management discussion and analysis of financial conditions and results of
operations contains certain "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. Such statements relating to
future events and financial performance are forward-looking statements that
involve risks and uncertainties, detailed from time to time in the Company's
various Securities and Exchange Commission filings.
The consolidated financial information for the quarter ended October 31, 1996
has been restated to reflect the acquisition of ConnectSoft, Inc. as if it
had occurred on July 31, 1996, as it has been determined that effective
control was not transferred under a written agreement until that date.
Previously, this acquisition was accounted for as of May 1, 1996 based on the
fact that the Company had assumed operational and financial control on that
date. Additionally, the determination of the purchase price and the
allocation of the purchase price to the assets acquired were based on an
independent appraisal obtained by the Company as of July 31, 1996 which has
been updated based on new information that has been obtained regarding the
fair value of assets acquired and Company equity securities issued as
consideration.
Management of the Company carefully considered, both prior and immediately
subsequent to consummation of the January 1996 sale of the Company's
manufacturing divisions to Hutchinson Corporation ("Hutchinson"), the best
utilization of the cash resources that would result therefrom. It was
determined that stockholder value would best be enhanced by directing the
Company's future into the computing and telecommunications industries, by
acquiring proprietary technologies, unique niche software products and selective
expertise that could be marketed on a national scale.
ConnectSoft provides electronic mail communications management software
products and through the eXodus division (now a separate corporation - eXodus
Technologies) provides a remote access connectivity software protocol
(NTerprise)-TM- which allows users to run Microsoft Windows-TM- applications
such as Word-TM-, Excel-TM- and Power Point-TM- on existing UNIX
workstations, X-Terminals and other X-Compatible devices. The Company has
treated ConnectSoft as having been acquired as of May 1, 1996.
Effective September 20, 1996, the Company acquired Interglobe Networks, Inc.
Interglobe provides engineering, design and consulting services for users and
providers of telecommunications facilities on the Internet and other media.
Effective November 8, 1996, the Company acquired the assets of Seattle OnLine,
Inc. which engages in providing a local Internet service in the Pacific
Northwest.
Effective December 11, 1996, the Company acquired the assets of Broadcast Tower
Sites, Inc. ("BTS") pursuant to a merger transaction. BTS is engaged in
providing site acquisition, zoning, architectural and engineering services, as
well as consulting services to the wireless telecommunications industry.
As a result of the acquisitions of ConnectSoft, eXodus, Interglobe, Seattle
OnLine and BTS, the Company is now able to provide:
(a) a remote access connectivity software protocol which allows users to
run Microsoft Windows-TM- applications, such as Word-TM-, Excel-TM- and
PowerPoint-TM-, on existing UNIX workstations, X-terminals and other
X-compatible devices;
- 11 -
<PAGE>
(b) an electronic mail communications management software product, marketed
as EMail Connection-Registered Trademark-, and an e-mail product and
Internet browser designed for children, marketed as E Mail for Kids-TM- and
Kids Web-TM-;
(c) engineering, design and consultation services to users and providers of
telecommunications facilities on the Internet and other media;
(d) local Internet telecommunication service in the Pacific Northwest; and
(e) site acquisition, zoning, architectural and engineering services to the
wireless communications industry.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED OCTOBER 31, 1996 COMPARED TO THE THREE MONTHS ENDED
OCTOBER 31, 1995.
Western's revenues for the three month period ended October 31, 1996 increased
$8,060,000 or approximately 35% over the three month period ended October 31,
1995, due mainly to the contribution of the Sacramento and Stockton, California
and Elko, Nevada stores which accounted for $6,008,000 of this increase in
sales. Same store revenues increased $2,052,000 or 8.9% for the three month
period ended October 31, 1996, as compared to the prior year period. The
increase in same store revenues resulted from higher sales across all
departments. ConnectSoft, Interglobe Networks, Inc. and eXodus Technologies
(The "Technology Group") reported revenue of $666,000 during the three months
ended October 31, 1996.
Western's gross profit margin of 12.1% for the three month period ended October
31, 1996 was up from the prior year comparative period margin of 11.7%. The
increase in gross profit margins was a result of Western's ability to capitalize
on the cash discounts offered by Case on the purchase of new equipment. Also,
while sales were up across all departments for the quarter ended October 31,
1996, higher-margin parts and service sales made up a higher percentage of sales
than in the prior year bringing the consolidated margin up. These gross margin
improvements offset the impact of a gross margin sharing provision of the
purchase agreement with GCS, Inc., which called for the split of gross margin
between GCS and Western for backlogged sales made prior to the closing of this
acquisition in June 1996. Now that nearly all of the backlogged GCS sales have
been delivered, Western will retain the full gross margin on future sales of
GCS-related equipment.
Selling, general and administrative expenses totaled $4,227,000 or 13.3% of
sales for fiscal 1996 compared to $1,820,000 or 7.9% of sales for fiscal 1995.
The increase in selling, general and administrative expenses of $2,407,000 is
attributable to an increase at Western of $532,000 incurred to support the
increase in sales as well as the opening of new outlets. The $1,875,000 balance
of the increase is attributable to the acquired Technology Group.
During the three month period ended October 31, 1996 the Technology Group
continued development activities related to its NTerprise software product and
to a lesser extent its e-mail software products for the retail and OEM market.
Research and development expense for the three months ended October 31, 1996
amounted to $945,000.
- 12 -
<PAGE>
Net interest expense for the three months ended October 31, 1996 of $413,000
was up significantly from the $240,000 in the prior year comparative period.
This increase is the result of a build up in inventory levels to support
Western's higher equipment sales level including a significant investment in
equipment dedicated to the rental fleet. In addition, Western also
experienced an imbalance in its equipment inventory mix when the paper pulp
market in the Pacific Northwest, which utilizes Western's log loaders,
experienced a tightening this past year.
The effective tax rate for the three months ended October 31, 1996 of 28% was
less than the prior year provision rate at 38%. In the current period, state
income taxes attributable to the profitable distribution business have offset
the federal tax benefit of the technology group losses. In the prior year
state taxes were attributable to all operations. The effective tax rate will
not vary significantly from statutory rates for the foreseeable future.
Although Western's sales increased, the increase in Western's operating and
interest expenses offset Western's sales increase such that Western's net income
for the quarter ended October 31, 1996 was approximately the same as the prior
year.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the Hutchinson Transaction the Company significantly increased
its liquidity and capital resources. The Company has used, and intends to use
in the future, the proceeds of the Hutchinson Transaction, to acquire and fund
the working capital needs of additional businesses. The Company has been
granted a $13,000,000 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 October 31, 1996 approximately
$7,100,000 was outstanding under such line of credit, the principal of which
bears interest at the bank's 90 day LIBOR rate (currently 5.25%) plus 1%.
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 the manufacturers of the products Western sells and Seattle-First
National Bank ("SeaFirst Bank"). 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 were utilized to repay amounts due
to the Company and to Western's major supplier Case Corporation ("Case"), the
acquisition and opening of additional outlets, as well as to reduce floor plan
debt.
Under inventory floor planning arrangements the manufacturers of products sold
by Western provide interest free credit terms on new equipment purchases for
periods ranging from four to twelve months, after which interest commences to
accrue monthly at rates ranging from 2% to 3% over the prime rate of interest.
Principal payments are typically made under these agreements at scheduled
intervals and/or as the equipment is rented with the balance due at the earlier
of a specified date or sale of the equipment. At October 31, 1996, Western was
indebted under manufacturer provided floor plan arrangements in the aggregate
amount of approximately $38,934,000.
In order to take advantage of a 4% cash discount offered by Case to provide
financing beyond the term of applicable manufacturer provided floor plan
- 13 -
<PAGE>
financing or as alternatives to manufacturer provided floor plan financing
arrangements, Western has entered into a separate secured floor planning line of
credit with SeaFirst Bank. The SeaFirst line of credit was entered into in June
1994 and provides a $17,500,000 line of credit which can be used to finance new
and used equipment or equipment to be held for rental purposes. On October 31,
1996, approximately $16,204,000 was outstanding under such line of credit, the
principal of which bears interest at .25% over the bank's prime rate and is
subject to annual review and renewal on June 1, 1997.
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.
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.
Effective July 31, 1996 the Company acquired ConnectSoft, Inc., a business
involved with providing software products and services. ConnectSoft had three
products for e-mail user, in production for the retail and OEM marketplace
and eXodus in late August 1996 had begun marketing its connectivity software
protocol known as NTerprise Version 1.1 to businesses using UNIX
workstations, X-Terminals and other X-Compatible devices. Fiscal 1997
revenues from the retail products appear to be slower then expected. Sales
of NTerprise to businesses typically involved extensive evaluation by
customers. The Company is in the process of demonstrating its NTerprise
solution to a number of potential end-users and distributors, including
Motorola. Although eXodus has received initial orders from several
customers, no significant firm orders have been obtained. However,
management believes that larger orders will be received during 1997.
Under the terms of the Company's acquisition of Interglobe, the Interglobe
shareholders received the aggregate sum of $400,000 plus an aggregate of 800,000
shares of the Company's Common Stock. Following consummation of the Interglobe
acquisition, the Company became obligated to fund Interglobe's operations and
working capital needs in the form of intercompany loans and advances based upon
annual budgets and forecasts provided to and approved by the Company.
During the quarter ended October 31, 1996, cash and cash equivalents decreased
by $805,000 primarily due to an increase in Western's accounts receivable. The
Company had negative cash flow from operating activities during the quarter of
$3,841,000 reflecting this increase in receivables. Purchases of fixed assets
during the period were related mainly to Western's opening of new distribution
outlets and the technology businesses purchases of computer equipment.
- 14 -
<PAGE>
The Company's cash and cash equivalents of $16,281,000 as of October 31, 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.
-15 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
1. Report on Form 8-K dated October 1, 1996.
2. Report on From 8-KA dated October 21, 1996.
- 16 -
<PAGE>
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.
February 14, 1997
By: /s/ Robert M. Rubin
-----------------------------------
Robert M. Rubin
Chairman
By: /s/ David M. Barnes
-----------------------------------
David M. Barnes
Chief Financial Officer
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<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 16,281,000
<SECURITIES> 6,637,000
<RECEIVABLES> 11,583,000
<ALLOWANCES> 676,000
<INVENTORY> 64,443,000
<CURRENT-ASSETS> 101,941,000
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<COMMON> 72,000
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