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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(UNAUDITED)
----------------
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended October 31, 1997
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 PLACE, SUITE 250
BELLEVUE, WASHINGTON 98004
(Address of principal executive offices) Zip code
Registrant's telephone no.: 425-803-5400
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 twelve months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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.
NUMBER OF SHARES
TITLE OF CLASS OUTSTANDING
Common Stock
(par value $.01 per share) 11,117,389
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AMERICAN UNITED GLOBAL, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets October 31, 1997 (unaudited )and July 31, 1997.......................... 1-2
Consolidated Statements of Operations Three Months Ended October 31, 1997 and October 31, 1996
(unaudited)........................................................................................ 3
Consolidated Statement of Shareholders' Equity (unaudited).......................................... 4
Consolidated Statements of Cash Flows Three Months Ended October 31, 1997 and October 31, 1996
(unaudited)........................................................................................ 5
Notes to the Consolidated Financial Statements (unaudited).......................................... 6-10
Items 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............................................................................. 15
Item 6. Exhibits and Reports on Form 8-K.............................................................. 15
</TABLE>
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
1997 JULY 31,
(UNAUDITED) 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 4,964,000 $12,284,000
Investment in marketable debt securities............................ 6,090,000 10,018,000
Trade accounts receivable, less allowance for doubtful accounts of
$1,396,000 and $807,000, respectively............................. 18,481,000 12,473,000
Notes receivable from shareholder................................... 1,200,000 1,238,000
Inventories......................................................... 82,820,000 83,370,000
Prepaid expenses and other receivables.............................. 503,000 357,000
Deferred tax asset.................................................. 936,000 936,000
Notes receivable.................................................... 3,580,000 3,503,000
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TOTAL CURRENT ASSETS............................................ 118,574,000 124,179,000
Property and equipment, net......................................... 9,458,000 9,530,000
Intangibles and other assets, net of accumulated amortization of
$2,084,000 and $1,460,000, respectively........................... 13,548,000 8,582,000
Deferred tax asset.................................................. 2,414,000 2,432,000
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TOTAL ASSETS.................................................... $ 143,994,000 $ 144,723,000
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</TABLE>
See accompanying notes to consolidated financial statements.
1
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AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 31,
1997 JULY 31,
(UNAUDITED) 1997
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<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under floor financing lines......................................... $ 35,083,000 $ 55,490,000
Short-term borrowings.......................................................... 31,693,000 11,751,000
Current portion of capital lease obligations................................... 528,000 412,000
Accounts payable............................................................... 18,144,000 20,150,000
Accrued liabilities............................................................ 8,968,000 12,583,000
Income taxes payable........................................................... 2,682,000 1,924,000
Deferred revenue............................................................... -- 950,000
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TOTAL CURRENT LIABILITIES.................................................. 97,098,000 103,260,000
Long-term borrowings............................................................. 6,637,000 3,456,000
Capital lease obligations, net of current portion................................ 3,979,000 4,026,000
-------------- --------------
TOTAL LIABILITIES.......................................................... 107,714,000 110,742,000
Minority interest................................................................ 12,232,000 9,880,000
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Commitments and contingencies
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-1 convertible preferred stock, convertible to common, $3.50 per share
liquidation value, $.01 par value; 1,000,000 shares authorized; 973,757 and
976,539 shares issued and outstanding, respectively.......................... 10,000 10,000
Series B-2 convertible preferred stock; 7% convertible preferred stock,
convertible into common, $25 per share liquidation value, 500,000 shares
authorized, 0 and 120,000 shares issued and outstanding, respectively........ -- 1,000
Common stock, $.01 par value; 20,000,000 shares authorized; 11,117,389 and
10,427,208 shares issued and outstanding, respectively....................... 111,000 104,000
Additional contributed capital................................................. 49,500,000 48,782,000
Deferred compensation.......................................................... (150,000) (196,000)
Retained (deficit)............................................................. (25,423,000) (24,600,000)
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TOTAL SHAREHOLDERS' EQUITY................................................. 24,048,000 24,101,000
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................. $ 143,994,000 $ 144,723,000
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</TABLE>
See accompanying notes to consolidated financial statements.
2
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AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
----------------------------
<S> <C> <C>
1997 1996
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Net sales.......................................................................... $ 42,820,000 $ 31,879,000
Cost of goods sold................................................................. 34,957,000 27,637,000
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GROSS PROFIT....................................................................... 7,863,000 4,242,000
Selling, general and administrative expenses....................................... 6,349,000 4,227,000
Research and development expenses.................................................. 744,000 945,000
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OPERATING INCOME (LOSS)............................................................ 770,000 (930,000)
Interest expense, net.............................................................. 980,000 413,000
Gain on partial sale of subsidiary................................................. (220,000)
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Income (loss) before income taxes and minority interest............................ 10,000 (1,343,000)
Provision (credit) for income taxes................................................ 488,000 (376,000)
Minority interests in net earnings of consolidated subsidiaries.................... 321,000 224,000
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Net loss........................................................................... (799,000) (1,191,000)
Dividends on preferred stock....................................................... 24,000
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Net loss available for common shareholders......................................... $ (823,000) $ (1,191,000)
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Loss per common and common equivalent shares:
Net loss........................................................................... $ (.08) $ (.18)
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Weighted average number of shares.................................................. 10,721,573 6,746,000
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</TABLE>
See accompanying notes to consolidated financial statements.
3
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AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------------------- -------------------------
<S> <C> <C> <C> <C>
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
-------------- ------------ ------------- ----------
Balance at July 31, 1997........................... 1,097,000 $ 11,000 10,427,000 $ 104,000
Net loss...........................................
Dividend on preferred stock........................
Amortization of deferred compensation..............
Exercise of stock options.......................... 102,000 1,000
Conversion of preferred stock to common............ (123,000) (1,000) 588,000 6,000
------------- ------------ ------------- ----------
Balance at October 31, 1997........................ 974,000 $ 10,000 11,117,000 $ 111,000
------------- ------------ ------------- ----------
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</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
CONTRIBUTED RETAINED SHAREHOLDERS'
CAPITAL OTHER (DEFICIT) EQUITY
--------------- ------------ -------------- -----------------
<S> <C> <C> <C> <C>
Balance at July 31, 1997......... $ 48,782,000 $ (196,000) $ (24,600,000) $ 24,101,000
Net loss......................... (799,000) (799,000)
Dividend on preferred stock...... 146,000 (24,000) 122,000
Amortization of deferred
compensation................... 46,000 46,000
Exercise of stock options........ 577,000 578,000
Conversion of preferred stock to
common......................... (5,000)
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Balance at October 31, 1997...... $ 49,500,000 $ (150,000) $ (25,423,000) $ 24,048,000
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</TABLE>
See accompanying notes to consolidated financial statements.
4
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AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
---------------------------
<S> <C> <C>
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................................ $ (799,000) $(1,191,000)
Adjustments to reconcile net loss to net cash provided by operating
activities
Depreciation and amortization......................................... 662,000 781,000
Amortization of deferred compensation................................. 46,000 40,000
Income applicable to minority interest................................ 321,000 224,000
Gain on partial sale of subsidiary.................................... (220,000)
Imputed interest...................................................... 76,000
Changes in assets and liabilities, net of effects of acquisition and
dispositions:
Accounts receivable................................................. (1,708,000) (4,037,000)
Inventories......................................................... 550,000 1,254,000
Inventory floor plan financing...................................... (20,407,000) 774,000
Prepaid expenses and other receivables.............................. (126,000) (562,000)
Note receivable..................................................... (76,000)
Accounts payable.................................................... (2,736,000) 191,000
Other accrued liabilities........................................... (7,203,000) (910,000)
Income taxes payable................................................ 758,000 (524,000)
Deferred revenue.................................................... (950,000) 234,000
Deferred taxes...................................................... 17,000
Other assets........................................................ (210,000) (39,000)
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NET CASH (USED) BY OPERATING ACTIVITIES................................... (31,929,000) (3,841,000)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment...................................... (207,000) (228,000)
Acquisition of businesses, net of cash acquired......................... (123,000)
Sale (Purchase) of marketable securities................................ 3,928,000 (369,000)
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NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES.......................... 3,721,000 (720,000)
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CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease..................................... (28,000) (61,000)
Payment of line of credit............................................... (5,191,000)
Short-term borrowings................................................... 23,067,000 3,800,000
Note receivable from shareholder........................................ 38,000 (362,000)
Proceeds from issuance of debt.......................................... 2,438,000
Exercise of stock options and warrants.................................. 564,000 379,000
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NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES.......................... 20,888,000 3,756,000
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Net decrease in cash and cash equivalents................................. (7,320,000) (805,000)
Cash and cash equivalents, beginning...................................... 12,284,000 17,086,000
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Cash and cash equivalents, ending......................................... $ 4,964,000 $16,281,000
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</TABLE>
See accompanying notes to consolidated financial statements.
5
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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 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, 1997 filed with the
Securities and Exchange Commission except for the change in accounting
estimate described in the following paragraph. 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, 1997
filed with the Securities and Exchange Commission.
Effective August 1, 1997, Western changed its estimate of depreciation
for its rental equipment inventory from 80% of billings to 70% of billings.
This change in accounting estimate resulted in an increase in rental
equipment inventory and a decrease in cost of goods sold of approximately
$440,000 for the quarter ended October 31, 1997.
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") and IDF
International, Inc. ("IDF") which were 43.4% and 37.0%, respectively at October
31, 1997. There is also 19.6% minority interest held in eXodus Technologies,
Inc. ("eXodus"), but no minority interest is presented for eXodus due to
accumulated losses.
NOTE 2 -- STATEMENT OF CASH FLOWS
Supplemental disclosure of cash paid during the periods:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
--------------------------
<S> <C> <C>
1997 1996
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Interest.................................................................... $ 1,189,000 $1,169,000
Income taxes................................................................ $ -- $ 148,000
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
1. A capital lease obligation of $98,000 was incurred during the quarter
ended October 31, 1997 when the Company entered into a lease for computer
equipment and software.
2. In August, 1997 the Company acquired a 63% ownership share in IDF in
exchange for 100% of the shares of TechStar Communications, Inc.
("TechStar") The value assigned to the IDF shares received was $2,243,000
and the Company incurred acquisition costs of $75,000.
6
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AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1997 1997
-------------- -------------
<S> <C> <C>
Parts.............................................................................. $ 8,186,000 $ 8,159,000
Equipment, new and used............................................................ 74,634,000 75,211,000
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$ 82,820,000 $ 83,370,000
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</TABLE>
NOTE 4 -- ACQUISITIONS
During August, 1997 the Company merged TechStar into IDF, pursuant to an
agreement and plan of merger dated July 31, 1997 among the Company, IDF and
an acquisition subsidiary of IDF (the "IDF Merger Agreement"). Upon
Consummation of the transaction, the Company received 6,171,553 shares of IDF
common stock, representing approximately 63% of the outstanding shares and
approximately 58% of the fully diluted outstanding IDF common stock, as a
result of which, the Company was deemed to have acquired IDF. Solon Kandel,
Sergio Luciani and Simontov Moskona, the senior executives of TechStar,
received three year options to purchase an aggregate of 856,550 shares of IDF
common stock (the "IDF Options") representing an additional 8% of such fully
diluted outstanding IDF common stock. In connection with the transaction,(i)
all options granted by the Company under employment agreements entitling
Messrs. Kandel, Luciani and Moskona to purchase an aggregate of 780,000
shares of the Company's common stock, and all additional authorized but
ungranted employee stock options for 120,000 shares were cancelled, (ii)
Messrs. Kandel and Luciani tendered their resignations as directors of the
Company, (iii) each of Messrs. Kandel, Luciani and Moskona publicly sold all
but 174,900 of their remaining shares of Company stock and utilized $600,000
of the net proceeds to invest in convertible securities of IDF.
The results have been included in the accompanying statement of operations
commencing August 1, 1997. The following unaudited pro forma summary combines
the consolidated results of operations as if IDF had been acquired at the
beginning of the quarter ended October 31, 1996:
<TABLE>
<S> <C>
Revenue........................................................................ $34,929,000
Net loss....................................................................... $(1,027,000)
Net loss per share............................................................. $ (0.15)
</TABLE>
7
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Messrs. Kandel, Luciani and Moskona are currently the senior executives and
officers of IDF and have each entered into employment agreements with IDF
expiring November 30, 2000. Pursuant to such agreements, Messrs. Kandel,
Luciani and Moskona are entitled to receive, in addition to their base
salaries and annual bonuses, options to acquire IDF shares which vest based
upon IDF and its consolidating subsidiaries, including TechStar and Heyden
Wegman, achieving all or certain pro-rated portions of annual pre-tax income
targets in each of fiscal years ending July 31, 1998, 1999 and 2000. In the
event that any or all of such IDF Options do not vest, the number of shares
of IDF common stock that would have been issued upon the exercise of such IDF
Options shall be issued to the Company as additional merger consideration.
Messrs. Robert M. Rubin and Lawrence Kaplan, the Chief Executive Officer and
Chairman of the Board and a Director of the Company, respectively, are also
principal stockholders and members of the board of directors of IDF and were
such prior to the consummation of the IDF merger. Pursuant to the terms of
the IDF Merger Agreement, (i) Mr. Rubin will convert an $800,000 loan
previously made to IDF into preferred stock convertible into 400,000 shares
of common stock. The preferred shares are unissued as of October 31, 1997,
and thus the amounts are classified as long term debt. In addition, through
GV Capital Inc., an affiliate of Mr. Kaplan, IDF offered $3,000,000 of five
year, 8.0% notes convertible into IDF Series A Convertible Preferred Stock at
1.25 per share. $600,000 of such notes have been purchased by Messrs. Kandel,
Luciani and Moskona. Mr. Kaplan's affiliate received separate compensation
for acting as placement agent in connection with such private offering of IDF
securities. As of October 31, 1997 IDF had sold approximately $2,438,000 of
said notes.
The Company has preliminarily recorded this acquisition using the purchase
method of accounting as an acquisition of 63% of IDF as described below and
will finalize its purchase accounting during fiscal 1998.
A summary of assets acquired, liabilities assumed and purchase price paid is
as follows:
<TABLE>
<S> <C>
Value of common stock........................................................... $2,243,000
Costs of acquisition............................................................ 75,000
Liabilities assumed............................................................. 7,048,000
----------
COSTS OF ASSETS ACQUIRED........................................................ $9,366,000
----------
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</TABLE>
8
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AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The cost initially allocated to each of IDF's assets and liabilities at the
date of the acquisition, determined in accordance with the purchase method of
accounting, is presented in the table below:
<TABLE>
<S> <C>
Cash............................................................................ $ 5,000
Accounts receivable............................................................. 4,300,000
Prepaid and other current assets................................................ 20,000
Intangible assets............................................................... 4,858,000
Other assets.................................................................... 84,000
Property and equipment, net..................................................... 99,000
Accounts payable................................................................ ( 731,000)
Accrued liabilities............................................................. (3,581,000)
Short and long term borrowings.................................................. (2,728,000)
Minority interest............................................................... ( 8,000)
----------
NET ASSETS ACQUIRED............................................................. $2,318,000
----------
----------
</TABLE>
Additionally, the Company has recorded a gain of $220,000 relating to its
exchange of a 37% interest of TechStar.
NOTE 5 -- 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 effect on the financial condition results of operations
or cash flows of the Company and its subsidiaries.
NOTE 6 -- INTANGIBLE ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1997 1997
------------- ------------
<S> <C> <C>
Goodwill............................................................................. $ 12,823,000 $ 8,104,000
Non-compete agreement................................................................ 117,000 175,000
Other assets......................................................................... 608,000 303,000
------------- ------------
$ 13,548,000 $ 8,582,000
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</TABLE>
Goodwill is being amortized over lives ranging from 10 to 40 years, and the
non-compete agreement is being amortized over 2 years.
9
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AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 --BORROWINGS
On October 31, 1997, Company paid off the existing $10,000,000 advised line
of credit and established a new advised line of credit for $2,000,000 on
identical terms. In December, 1997 the Company increased the line to
$3,400,000 and pledged the proceeds from the Hutchinson Notes Receivable as
collateral.
NOTE 8 -- SERIES B-1 AND B-2 CONVERTIBLE PREFERRED STOCK
A total of 2,782 shares of the Series B-1 Convertible Preferred Stock issued
in September 1996 were converted to common shares during the quarter at the
applicable ratio of one for one leaving 973,757 shares outstanding at October
31, 1997.
The remaining 120,000 shares of Series B-2 Convertible Preferred Shares were
converted into 585,199 common shares at a price of $5.13 per share leaving
none outstanding as of October 31, 1997.
NOTE 9 -- 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 of November 30,
1997, none were issued and outstanding.
NOTE 10 -- SUBSEQUENT EVENTS
On December 11, 1997 the Company acquired substantially all of the operating
assets used by Case in connection with its business of servicing and
distributing Case agricultural equipment at a facility located in Yuba City,
California. The acquisition was consummated for approximately $112,000 in
cash, $628,000 in installment notes payable to Case and the assumption of
$1,176,000 in inventory floor plan debt with Case and its affiliates. The
acquisition will be accounted for as a purchase.
The real property and improvements upon which the Yuba City, California
facility acquired from Case is located, was purchased by McLain-Rubin Realty
Company III, LLC ("MRR III"), a Delaware limited liability company, the
owners of which are Messrs. C. Dean McLain, the President and a director of
the Company, and Robert M. Rubin, the Chairman and a director of the Company.
MRR III is leasing such real property and improvements to the Company under
the terms of a Commercial Lease Agreement dated as of December 11, 1997. Such
lease terms are considered to be at fair market value. 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.
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. No assurance can be given that any such matters will be realized
The Companies and their respective goods and services offered are
described below.
Western Power & Equipment Company provides light, medium and heavy
construction equipment through a chain of 23 dealerships located primarily in
the Western part of the United States. The primary manufacturer of equipment
sold is Case Equipment, Inc. Western intends to open and acquire additional
distribution outlets for Case products, as well as for products which may be
manufactured by other companies.
Connectsoft Communications Corp. ("Connectsoft") is developing its
FreeAgent(TM) software designed to integrate e-mail, voice mail, facsimile,
page massaging, content on the World Wide Web (the "Web") and potentially any
other network-based digital data found on the Internet, corporate intranets,
private branch exchange ("PBX") telephone systems and the public switched
telephone network ("PSTN"). With this network-based application, FreeAgent is
currently capable of applying advanced media transformation processes and
user interface technologies for speech recognition, text-to-speech and
natural language understanding so that a person can send or receive a message
between any two media, using any two communication devices, whether a
telephone on PBX or PSTN systems, a personal computer on Internet or intranet
systems or almost any other communication device connected to these systems.
TechStar Communications Inc. is engaged in providing site acquisition,
zoning, architectural and engineering services, as well as consulting
services to the wireless telecommunications industry. In August 1997, the
Company merged TechStar into IDF in exchange for approximately 63% of the IDF
outstanding common stock. IDF, through its Heyden Wegman subsidiary provides
general engineering services to municipalities and private companies as well
as infrastructure design, environmental and construction management and
refurbishment services on structures and development projects.
Exodus Technologies, Inc. ("Exodus") became a separate 80.4% owned
subsidiary of the Company immediately following the ConnectSoft Inc. ("Old
Connectsoft")
11
<PAGE>
Merger. Exodus has developed a proprietary application server software,
marketed as NTERPRISE(TM). In September 1997, Microsoft Corporation announced
that it would incorporate its own multi-user software in future versions of
Windows NT(TM) and that only its Windows T.share client/server protocol and
Citrix Systems, Inc. ICA application remoting software protocol will be
supported in the initial releases of Windows NT 4.0 and 5.0 "Hydra"
multi-user operating system products. In addition, Microsoft advised the
Company that alternate multi-user and application server software protocols
such as NTERPRISE(TM) would not be presently considered. As a result of these
material adverse developments, the Company has significantly reduced its
Exodus operations and is currently considering whether the Exodus protocols
can be redesigned to support client computers that are alternatives to
WindowsNT, such as Unix(TM) workstations, X-terminals and Java(TM) enabled
computers. In the event that the Company is unable to develop an alternate
non-Windows supported solution within the next three to six months, the
Company will probably cease such efforts and sustain a total loss of its
investment in the NTERPRISE(TM) products and system. Exodus is also
leveraging its remoting technology to develop remote server capability and
remote monitoring products for possible release during the third or fourth
quarter of fiscal 1998.
InterGlobe Networks, Inc. provides engineering, design and consulting
services for users and providers of telecommunications facilities on the
Internet and other media.
On December 11, 1997 Brigadoon.Com, Inc. ("Brigadoon"), the prospective
purchaser of InterGlobe, informed the Company that it had not, as yet, been
able to arrange financing for the cash portion of the purchase price.
Brigadoon and the Company are both continuing to pursue financing sources
and are discussing a possible restructuring of the transaction.
RESULTS OF OPERATIONS
The Three Months Ended October 31, 1997 Compared to the Three Months Ended
October 31, 1996
Western's revenues for the three-month period ended October 31, 1997
increased $5,745,000 or approximately 18% over the three-month period ended
October 31, 1996, due mainly to the contribution of stores opened or acquired
within the last 12 months ended October 31, 1997 which accounted for
$4,708,000 of this increase in sales. Same store revenues increased
$1,037,000 or 3.3% for the three-month period ended October 31, 1997, as
compared to the prior year period.
IDF, Heyden Wegman, TechStar, Connectsoft, InterGlobe and Exodus (the
"Technology Group") reported revenue of $5,862,000 for the three months ended
October 31, 1997 versus $666,000 during the three months ended October 31,
1996 which included only Old Connectsoft, InterGlobe and Exodus.
Approximately $4,260,000 of this increase is due to IDF and TechStar with the
balance being primarily the recognition of contract revenue by Connectsoft.
Western's gross profit margin of 11.7% for the three-month period ended
October 31, 1997 was down from the prior year comparative period margin of
12.1%. The decrease in gross profit margins was a result of a small decrease
in gross margins on equipment sales.
Selling, general and administrative expenses totaled $6,349,000 or 14.8%
of sales for the three months ended October 31, 1997 compared to $4,227,000
or 13.3% of sales for the three months ended October 31, 1996. The increase
in selling, general and administrative expenses of $2,122,000 is attributable
to an increase at Western of $652,000 incurred to support the increase in
sales as well as the
12
<PAGE>
acquisition and opening of new outlets. The $1,470,000 balance of
the increase is primarily attributable to IDF, Heyden Wegman and TechStar
for which no comparable expense exists in the period ended October 31, 1996.
During the three-month period ended October 31, 1997, the Technology
Group continued development activities related to its FreeAgent-TM- software
product. Research and development expense for the three months ended October
31, 1997 amounted to $744,000, a decrease of $201,000. This decrease is
attributable to the reduction of development efforts at Exodus.
Net interest expense for the three months ended October 31, 1997 of
$980,000 was up significantly from the $413,000 in the prior year comparative
period. This increase is a 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, the cash
requirements of the Technology Group had increased the average debt level
during the quarter ended October 31, 1997 and the related interest expense.
The Company has recorded a valuation allowance against the deferred tax
benefit for net operating losses generated by the Technology Group, since in
management's opinion the net operating losses do not meet the more likely
than not criteria for future realization. The tax provision recognized for
the current quarter is based upon profits generated by the Company's Western
and IDF, Heyden Wegman and TechStar subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Western's primary source of internal liquidity has been its profitable
operations since its inception in November 1992. As more fully described
below, the Company's primary sources of external liquidity were contributions
to the Company by its parent, American United Global, Inc. ("AUGI"), and
equipment inventory floor plan financing arrangements provided to the Company
by the manufacturers of the products the Company sells and Seattle-First
National Bank ("Seafirst Bank"). In addition, in fiscal 1995, the Company
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 AUGI and to 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 the Company provide interest free credit terms on new equipment
purchases for periods ranging from one to twelve months, after which interest
commences to accrue monthly at rates ranging from zero percent to two percent
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 July 31, 1997, the Company was indebted under manufacturer
provided floor planning arrangements in the aggregate amount of $55,490,000.
As of October 31, 1997, approximately $35,083,000 was outstanding under these
manufacturer provided floor plan arrangements.
13
<PAGE>
In order to take advantage of the three percent cash discount offered by
Case, to provide financing beyond the term of applicable manufacturer
provided floor plan financing or as alternatives to manufacturer provided
floor plan financing arrangements, the Company 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 renewed on September 1, 1997.
This is a $22,000,000 line of credit which can be used to finance new and
used equipment or equipment to be held for rental purposes. On October 31,
1997, approximately $12,882,000 was outstanding under such line of credit,
the principal of which bears interest at approximately .50 percent below the
bank's prime rate and is subject to annual review and renewal on July 1, 1998.
In June 1997, the Company obtained a $75 million inventory flooring and
operating line on credit through Deutsche Financial Services (DFS). The DFS
credit facility is a three-year, floating rate facility based on prime with
rates between 0.50% under prime to 1.00% over prime depending on the amount
of total borrowing under the facility. Amounts are advanced against the
Company's assets, including accounts receivable, parts, new equipment, rental
fleet, and used equipment. The Company expects to use this borrowing facility
to lower flooring related interest expense by using advances under such line
to finance inventory purchases in lieu of financing provided by suppliers, to
take advantage of cash purchase discounts from its suppliers, to provide
operating capital for further growth, and to refinance some its acquisition
related debt at a lower interest rate. As of October 31, 1997, approximately
$28,424,000 was outstanding under this facility at an interest rate of 8.50%.
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.
During August, 1997 the Company merged TechStar into IDF, pursuant to an
agreement and plan of merger dated July 31, 1997 among the Company, IDF and
an acquisition subsidiary of IDF (the "IDF Merger Agreement"). Upon
Consummation of the transaction, the Company received 6,171,553 shares of IDF
common stock, representing approximately 63% of the outstanding shares and
approximately 58% of the fully diluted outstanding IDF common stock, as a
result of which, the Company was deemed to have acquired IDF.
During the quarter ended October 31, 1997, IDF sold, through GV Capital
Inc. a total of $2,438,000 and intends to sell up to $3,000,000 in total of
IDF's five year, 8.0% notes convertible into IDF Series A Preferred Stock at
$1.25 per share, including $600,000 of such notes sold to Messrs. Kandel,
Luciani and Moskona.
14
<PAGE>
Mr. Rubin will convert an $800,000 loan previously made to IDF into
preferred stock convertible into 400,000 shares of common stock. The
preferred shares are unissued as of October 31, 1997, and thus the amount is
classified as long term debt.
During the quarter ended October 31, 1996, cash and cash equivalents and
marketable debt securities decreased by $11,248,000 primarily due to the
repayments to North Fork Bank of $9,999,000 under the advised line of credit
and the repayment of $4,411,000 under the ERD Standby Letter of Credit. After
adjusting for advances made under the line of credit with Deutsche Financial
Services, the proceeds of which were used to reduce inventory floor
plan financing, the cash flow from operations was negative $7,542,000 largely
due to decreases in accounts payable and accrued liabilities, as well as
increases in accounts receivable.
The Company's cash and cash equivalents and marketable debt securities of
$11,054,000 as of October 31, 1997, as well as available credit facilities
and the proceeds of the Hutchinson notes in January 1998 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 other financing institutions to expand the credit available to the
Company. There can be no assurances that the Company will be successful in
these negotiations.
ITEM 5 OTHER INFORMATION
In September 1997 ERD filed for protection from creditors under Chapter
11 of federal bankruptcy laws. In October 1997 Chemical bank drew the $4.4
million available on the standby letter of credit. As a result, the Company
recorded a loss of approximately $5.0 million in its consolidated financial
statements for the year ended July 31, 1997. Mr. Rubin has personally
guaranteed approximately $1.6 million of the ERD loss.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
To be included in amended 10Q.
(B) REPORTS ON FORM 8-K
1. Report on Form 8-K dated August 15, 1997
2. Report on Form 8-K dated October 1, 1997
15
<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.
December 16, 1997
By: /s/ Robert M. Rubin
----------------------------
Robert M. Rubin
Chief Executive Officer
By: /s/ David M. Barnes
----------------------------
David M. Barnes
Chief Financial Officer
16
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