================================================================================
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 OCTOBER 31, 1998
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.
TITLE OF CLASS NUMBER OF SHARES
Common Stock OUTSTANDING
(par value $.01 per share) 11,618,858
================================================================================
<PAGE>
AMERICAN UNITED GLOBAL, INC.
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
October 31, 1998 (unaudited) and July 31, 1998................. 1-2
Consolidated Statements of Operations
Three Months Ended October 31, 1998
and October 31, 1997 (unaudited)............................... 3
Consolidated Statement of Shareholders'
Equity (unaudited).............................................. 4
Consolidated Statements of Cash Flows
Three Months Ended October 31, 1998
and October 31, 1997 (unaudited)............................... 5
Notes to the Consolidated Financial
Statements (unaudited).......................................... 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 10-13
Item 3. Quantitative and Qualitative Disclosure about
Market Risk...................................................... N/A
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................ 14
Item 2. Changes in Securities..................................... N/A
Item 3. Defaults Upon Senior Securities........................... 14
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.......................... N/A
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1998 1998
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 2,629,000 $ 3,362,000
Investment in marketable debt securities......... 2,468,000 4,449,000
Trade accounts receivable, less allowance for
doubtful accounts of $718,000 and
$726,000, respectively.......................... 18,341,000 23,708,000
Inventories...................................... 65,841,000 73,491,000
Prepaid expenses and other receivables........... 349,000 287,000
Deferred tax asset............................... 1,298,000 1,298,000
Notes receivable ................................ 685,000 1,200,000
------------- -------------
TOTAL CURRENT ASSETS.......................... 91,611,000 107,795,000
Property and equipment, net ..................... 8,827,000 8,695,000
Rental equipment, net ........................... 23,023,000 23,080,000
Leased equipment, net ........................... 5,447,000 2,760,000
Intangibles and other assets, net of accumulated
amortization of $1,358,000 and $1,263,000,
respectively ................................... 3,518,000 3,613,000
Investment in unconsolidated subsidiary.......... 821,000 961,000
Notes receivable................................. 450,000
------------- -------------
TOTAL ASSETS.................................. $ 133,697,000 $ 146,904,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1998 1998
------------- -------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under floor financing lines........... $ 11,853,000 $ 11,038,000
Short-term borrowings............................ 70,169,000 76,769,000
Current portion of capital lease obligations .... 49,000 67,000
Accounts payable................................. 12,214,000 18,027,000
Accrued liabilities.............................. 6,098,000 5,336,000
Income taxes payable............................. - 1,050,000
Net liabilities of discontinued operations....... - 1,480,000
------------- -------------
TOTAL CURRENT LIABILITIES..................... 100,383,000 113,767,000
Long-term borrowings .............................. 1,169,000 1,156,000
Capital lease obligations, net of current portion.. 2,702,000 2,827,000
Deferred taxes..................................... 690,000 690,000
Deferred lease income.............................. 6,392,000 3,474,000
------------- -------------
TOTAL LIABILITIES............................. 111,336,000 121,914,000
Minority interest.................................. 8,616,000 9,128,000
------------- -------------
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; 722,290 and 723,862
shares issued and outstanding, respectively..... 7,000 7,000
Common stock, $.01 par value; 20,000,000 shares
authorized; 11,618,858 and 11,617,286 shares
issued and outstanding, respectively............ 116,000 116,000
Additional contributed capital................... 49,954,000 49,954,000
Retained (deficit)............................... (36,332,000) (34,215,000)
-------------- -------------
TOTAL SHAREHOLDERS' EQUITY.................... 13,745,000 15,862,000
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... $ 133,697,000 $ 146,904,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Net revenues....................................... $ 40,365,000 $ 36,958,000
Cost of revenues................................... 37,890,000 32,623,000
------------- -------------
Gross profit....................................... 2,475,000 4,335,000
Selling, general and administrative expenses....... 3,373,000 3,403,000
------------- -------------
Operating (loss) income............................ (898,000) 932,000
Interest expense, net.............................. 1,740,000 635,000
Loss (income) from continuing operations before
income taxes, equity in loss of unconsolidated
subsidiary and minority interest................ (2,638,000) 297,000
(Benefit) provision for income taxes............... (880,000) 333,000
Equity in loss (income) of unconsolidated
subsidiary........................................ 140,000 (190,000)
Gain on sale of subsidiary......................... - (220,000)
Minority interest in loss (earnings) of
consolidated subsidiary.......................... 512,000 (224,000)
------------- --------------
(Loss) income from continuing operations........... (1,386,000) 150,000
Loss from discontinued operations................. (731,000) (949,000)
-------------- --------------
Net loss........................................... (2,117,000) (799,000)
Dividends on preferred stock....................... - 24,000
------------- -------------
Net loss available for common shareholders......... $ (2,117,000) $ (823,000)
============= =============
Basic and diluted earnings (loss) per share
(Loss) earnings from continuing operations......... $ (0.12) $ 0.01
Loss from discontinued operations.................. (0.06) (0.09)
-------------- --------------
Basic and diluted loss per share................... (0.18) (.08)
============== ==============
Weighted average number of shares.................. 11,617,718 10,721,573
============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------- --------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
-------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Balance at July 31, 1998............... 724,000 $ 7,000 11,617,000 $ 116,000
Net loss...............................
Conversion of preferred stock to common (2,000) - 2,000 -
------- -------- ---------- ---------
Balance at October 31, 1998............ 722,000 $ 7,000 11,619,000 $ 116,000
======= ======== ========== =========
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
CONTRIBUTED RETAINED SHAREHOLDERS'
CAPITAL (DEFICIT) EQUITY
------- --------- ------
<S> <C> <C> <C>
Balance at July 31, 1998............... $49,954,000 $(34,215,000) $15,862,000
Net loss............................... (2,117,000) (2,117,000)
Conversion of preferred stock to common
----------- ------------- ------------
Balance at October 31, 1998............ $49,954,000 $(36,332,000) $13,745,000
=========== ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income from continuing operations..... $ (1,386,000) $ 150,000
Net loss from discontinued operations............ $ (731,000) $ (949,000)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization................... 1,441,000 708,000
(Loss) income applicable to minority interest... (512,000) 321,000
Undistributed loss (income) of affiliate........ 140,000 (190,000)
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........................... 5,367,000 (1,708,000)
Inventories................................... 4,929,000 550,000
Inventory floor plan financing................ 815,000 (20,407,000)
Short-term borrowings......................... (6,500,000) 23,067,000
Prepaid expenses and other receivables........ (62,000) (126,000)
Notes receivable.............................. 65,000 -
Accounts payable.............................. (5,679,000) (2,546,000)
Other accrued liabilities..................... 763,000 (7,203,000)
Income taxes payable............................... (1,050,000) 758,000
Deferred revenue................................... 2,918,000 (950,000)
Net liabilities of discontinued operations......... (1,480,000) -
Deferred taxes................................ - 17,000
Other assets....................................... - (210,000)
------------- --------------
NET CASH USED BY OPERATING ACTIVITIES.............. (962,000) (8,862,000)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment............... (1,522,000) (207,000)
Sale (Purchase) of marketable securities......... 1,981,000 3,928,000
------------- -------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES... 459,000 3,721,000
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease.............. (143,000) (28,000)
Payment of loans & credit lines.................. (87,000) (5,191,000)
Note receivable from shareholder................. - 38,000
Proceeds from issuance of debt................... - 2,438,000
Exercise of stock options and warrants........... - 564,000
------------- -------------
NET CASH USED BY FINANCING ACTIVITIES.............. (230,000) (2,179,000)
-------------- --------------
Net decrease in cash and cash equivalents.......... (733,000) (7,320,000)
Cash and cash equivalents, beginning............... 3,362,000 12,284,000
------------- -------------
Cash and cash equivalents, ending.................. $ 2,629,000 $ 4,964,000
============= =============
</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 reflected in the
consolidated financial stateme1nts for the preceding year included in the annual
report on Form 10-K for the year ended July 31, 1998 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, 1998 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") of 39.5% at October
31, 1998 and July 31, 1998.
NOTE 2 - STATEMENT OF CASH FLOWS
Supplemental disclosure of cash paid during the periods:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Interest..................................... $ 1,768,000 $ 764,000
Income taxes................................. $ 365,000 $ -
NOTE 3 - INVENTORIES
Inventories consist of the following:
OCTOBER 31, JULY 31,
1998 1998
------------- -------------
Parts........................................ $ 9,578,000 $ 8,535,000
Equipment, new and used...................... 56,263,000 64,956,000
------------- -------------
$ 65,841,000 $ 73,491,000
============= =============
</TABLE>
6
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - CONTINGENCIES
Except as set forth below, there are no pending material legal proceeds in
which the Company or any of its subsidiaries is a party, or to which any of
their respective properties are subject, which either individually or in the
aggregate, may have a material adverse effect on the results of operations or
financial position of the Company.
In May 1998, a lawsuit was filed on behalf of the Company in a purported
shareholder derivative action against certain directors of the Company. The
lawsuit alleges that the defendant directors breached their fiduciary
responsibilities of due care and loyalty to the Company and its stockholders in
connection with a letter of credit guarantee by the Company for ERD Waste Corp.,
the sale of certain businesses of the Company to Hutchinson Corporation, and the
delisting of the Company's common stock and publicly traded warrants from the
Nasdaq Stock Market. The complaint did not specify the amount of damages sought.
In June, 1998 a shareholder class action was filed against certain
directors of the Company alleging that the defendant directors breached their
fiduciary responsibilities of due care and loyalty to the Company and its
stockholders in connection with a letter of credit guarantee by the Company for
ERD Waste Corp., the sale of certain businesses of the Company to Hutchinson
Corporation, and the delisting of the Company's common stock and publicly traded
warrants from the Nasdaq Stock Market.
The Company is a named defendant in a matter brought by an individual in
Los Angeles County Superior Court alleging that the Company conspired with her
ex-husband to conceal community property assets from her in connection with her
recent divorce. The plaintiff is requesting damages against the Company and the
other defendants in the approximate amount of $8,000,000 plus punitive damages.
The Company believes the plaintiff's claim is without merit and intends to
defend the lawsuit vigorously.
NOTE 5 - INTANGIBLE ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1998 1998
---------- ----------
<S> <C> <C>
Goodwill.................................................. $2,977,000 $3,044,000
Non-compete agreement..................................... 36,000 42,000
Other assets.............................................. 505,000 527,000
---------- ----------
$3,518,000 $3,613,000
========== ==========
</TABLE>
Goodwill is amortized over lives ranging from 25 to 40 years, and the
non-compete agreement is being amortized over 2 years.
7
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - SERIES B-1 CONVERTIBLE PREFERRED STOCK
A total of 1,572 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 722,290 shares outstanding at October
31, 1998.
NOTE 7 - 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 October 31, 1998, none were
issued and outstanding.
NOTE 8 - DISCONTINUED OPERATIONS
In April, 1998, the Company approved a formal plan to dispose of or close
down the remaining operations of the Technology Group of Companies including
Exodus Technologies, Inc., Connectsoft, Inc., Connectsoft Communications Corp.
("CCC") and InterGlobe Networks, Inc. Although the results of these subsidiaries
have previously been included in the consolidated financial statements, the
subsidiaries were operated as a separate line of business whose products,
activities and customers differed from other operations of the Company. Based
upon this determination, the results of operations of these subsidiaries have
been accounted for as discontinued operations and accordingly, their operating
results are segregated in the accompanying statements of operations.
All of the above mentioned companies, with the exception of CCC ceased
operations prior to July 31, 1998. The CCC asset sale has been delayed and as a
result, additional losses from discontinued operations have been incurred. Total
costs, expenses and closure costs from the April 30, 1998 measurement date
through the estimated closing date of December 31, 1998 now total approximately
4,505,000. Of this amount, $3,776,000 has fully offset the gain on sale and
$731,000 has been reflected as additional loss from discontinued operations.
SALE OF THE ASSETS OF CONNECTSOFT COMMUNICATIONS CORPORATION
On July 10, 1998, the Company entered into an agreement to sell
substantially all of the assets of its Connectsoft subsidiary, including the
network operating center, to eGlobe, Inc., formerly known as Executive TeleCard,
Ltd. ("eGlobe"). As consideration for the assets, eGlobe will assume up to
$4,500,000 of Connectsoft liabilities and leases, most of which have been
guaranteed by the Company. Although eGlobe will be responsible for payment of
those assumed liabilities, the assumption of such liabilities will
8
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DISCONTINUED OPERATIONS (CONTINUED)
not relieve the Company from its guarantees until such liabilities have been
paid. The Company will also receive as additional consideration from eGlobe, on
the earlier of two years from the closing of the sale to eGlobe or the resale of
the Connectsoft business by eGlobe, 7.5% of the increase in value of the
Connectsoft business. The Company anticipates that the transaction will close by
December 31, 1998.
NOTE 9 - SUBSEQUENT EVENTS
In October, 1998 Mr. Rubin, the Company's chairman advanced $250,000 to
IDF and subsequent to October 31, 1998 the Company advanced $400,000 to IDF.
These amounts were for working capital and represent a portion of a total
commitment of up to $1,000,000 to be funded $300,000 by Mr. Rubin; $300,000 by
Stanley Kaplan and Larry Kaplan, two other directors of IDF and $400,000 by the
Company. It is anticipated that the funding will be structured as a purchase of
equity at a price of approximately .625 per common share.
9
<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 Company has operations in the distribution business through its
majority-owned operating subsidiary, Western Power and Equipment Company.
The Company is also involved in the construction and wireless
communications consulting business through a minority owned subsidiary, IDF
International, Inc. ("IDF"). TechStar Communications, Inc. ("TechStar") a wholly
owned subsidiary of IDF provides consulting services to the wireless
communications industry in the form of network hardware acquisition, zoning,
architectural and engineering services.
Western Power & Equipment Company provides light, medium and heavy
construction equipment through a chain of dealerships located primarily in the
Western part of the United States. Western acquired its first seven retail
distribution stores in November 1992. Western expanded to 18 stores in four
states by the end of fiscal 1996, to 23 stores in five states by the end of
fiscal 1997, and to 27 stores in five states by the end of fiscal 1998. In the
first quarter of fiscal 1999, Western consolidated its Milton-Freewater, Oregon
operation into its Pasco, Washington operation leaving 26 operating facilities
at October 31, 1998. Western's growth has been accomplished through a
combination of new store openings, strategic acquisitions, and to a lesser
extent, comparable stores revenue increases.
Western plans to open and acquire additional distribution outlets for Case
products, as well as for products that may be manufactured by other companies.
Western's results can be impacted by the timing of and costs incurred in
connection with new store openings and acquisitions.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THE THREE MONTHS ENDED
OCTOBER 31, 1997
Revenues for the three month period ended October 31, 1998 increased
$3,407,000 or approximately 9% over the three month period ended October 31,
1997, due entirely to the contribution of Western stores opened or acquired
within the 12 months ended October 31, 1998. Same store revenues decreased
$855,000 or 2.3% for
10
<PAGE>
the three month period ended October 31, 1998, as compared to the prior year
period.
Western's first quarter gross profit margin of 8.7% (before the
non-recurring charge described below) was down from the prior year comparative
period margin of 11.7%. Gross profit margins were down in all departments due to
increased competitive pressures throughout Western's markets and some wholesale
liquidation of used equipment inventory.
Selling, general and administrative expenses totaled $3,373,000 or 8.4% of
sales for the three months ended October 31, 1998 compared to $3,403,000 or 8.7%
of sales for the three months ended October 31, 1997. The decrease in selling,
general and administrative expenses of $60,000 consists of reductions of
$374,000 in the overhead associated with the Company's corporate headquarters
offset by increases of $314,000 in expenditures by Western as a result of
increased revenues.
Net interest expense for the three months ended October 31, 1998 of
$1,740,000 was up significantly from the $635,000 in the prior year comparative
period. This increase is largely the result of higher levels of inventory at
Western (for new locations and rental fleet) than the prior year period. During
the three month period ended October 31, 1998, Western's overall inventory was
reduced $4,900,000 and Western's management has initiated steps to further
reduce inventory levels over the next several months.
The Company has recorded a full valuation allowance against the deferred
tax benefit for net operating losses generated, since in management's opinion
the net operating losses do not meet the more likely than not criteria for
future realization. The tax benefit recognized for the current quarter is based
upon losses generated by the Company's Western subsidiary.
A major contributing factor to the net loss of Western during the quarter
ended October 31, 1998 was a non-recurring charge of $1,061,000 for used
equipment inventory reserves. Based upon market prices of used equipment which
are currently significantly lower than both current book values of Western's
used equipment inventory and prior periods' market prices, management took this
charge to allow pricing of its used equipment inventory more in line with
current market prices. This in turn should help Western sell its used inventory
more profitably, reduce inventory levels, and thereby reduce inventory carrying
costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary needs for liquidity and capital resources are
related to Western's inventory for sale and its rental and lease fleet
inventories, store openings, and acquisitions of additional stores. Western's
primary source of internal liquidity has been its profitable operations. As more
fully described below, Western's primary sources of external liquidity are
equipment inventory floor plan financing arrangements provided to Western by the
manufacturers of the products Western sells, and Deutsche Financial Services
("DFS") and, with respect to acquisitions, secured loans from Case.
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 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
11
<PAGE>
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, 1998,
Western was indebted under manufacturer provided floor planning arrangements in
the aggregate amount of $11,853,000.
In June 1997, Western obtained a $75 million inventory flooring and
operating line of 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 Western's
assets, including accounts receivable, parts, new equipment, rental fleet, and
used equipment. Western 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, 1998, approximately $69,145,000 was outstanding under
the DFS credit facility. At October 31, 1998, Western was in technical default
of the leverage covenant in the Deutsche Financial Services Loan Agreement.
Western obtained a waiver for the period through December 15, 1998. There is no
guarantee that Deutsche Financial Services will not call this debt at any time
after December 15, 1998. Western and DFS have reached preliminary agreement on
increasing this credit facility to $100,000,000 and is renegotiating the related
financial covenants. Finalization of this increase is expected by December 31,
1998. Amounts owing under the DFS credit facility are secured by inventory
purchases financed by DFS, as well as all proceeds from their sale or rental,
including accounts receivable thereto.
During the quarter ended October 31, 1998, cash and cash equivalents and
marketable debt securities decreased by $2,714,000 primarily due to decreases at
Western related to their purchase of new equipment for the rental equipment
fleet and the Company's continued funding of the discontinued operations of
Connectsoft Communications.
The Company's cash and cash equivalents and marketable debt securities of
$5,097,000 and available credit facilities as of October 31, 1998 are considered
sufficient to support current levels of operations for the next twelve months.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Western has determined that it will be required to modify or replace
significant portions of its software so that its computer systems will properly
utilize dates beyond December 31, 1999. Western presently believes that with
modifications to existing software and conversions to new software, the Year
2000 issue can be mitigated. However, if such modifications and conversions are
not
12
<PAGE>
made, are not timely completed, or do not work as anticipated, the Year 2000
issue could have a material impact on the operations of Western.
Western has a plan in place to contact all of its significant suppliers to
determine the extent to which Western is vulnerable to those third parties'
failure to remediate their own Year 2000 issues. There can be no guarantees that
the systems of third parties on which Western's systems rely or which influence
the business of Western's customers will be timely remediated, that any
attempted remediation will be successful, or that such conversions would be
compatible with Western's systems. Western has not yet determined the projected
costs of Western's Year 2000 project and cannot yet determine whether Western
has any exposure to contingencies related to the Year 2000 issue for the
products it has previously sold.
Western will utilize both internal and external resources to reprogram, or
replace, and test Western's software for Year 2000 modifications. Western plans
to complete its Year 2000project by July 31, 1999. Funding for the costs of the
program are anticipated to come from operating cash flows. Western's current
plan to complete the Year 2000 modifications are based on management's best
estimates, which were derived using numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans, and the ability to meet projected time lines. There can be
no guarantee that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and other uncertainties.
INVENTORY; EFFECTS OF INFLATION AND INTEREST RATES; GENERAL ECONOMIC CONDITIONS
Controlling inventory is a key ingredient to the success of an equipment
distributor because the equipment industry is characterized by long order
cycles, high ticket prices, and the related exposure to "flooring" interest.
Western's interest expense may increase if inventory is too high or interest
rates rise. Western manages its inventory through company-wide information and
inventory sharing systems wherein all locations have access to Western's entire
inventory. In addition, Western closely monitors inventory turnover by product
categories and places equipment orders based upon targeted turn ratios.
Western took a non-recurring first quarter charge of $1.1 million for used
equipment inventory reserves to bring the prices of its used inventory more in
line with current market prices, which have significantly declined over the last
several months. This action was taken to position Western to substantially
increase its sales of used equipment over the remainder of this fiscal year
thereby significantly reducing Western's used equipment inventory over the next
several quarters and to reduce its inventory carrying costs. This charge and the
wholesale liquidation of some additional inventory at a loss during the quarter
were major contributing factors to the net loss for the quarter.
All of the products and services provided by Western are either capital
equipment or included in capital equipment, which are used in the construction,
agricultural, and industrial sectors. Accordingly, Western's sales are affected
by inflation or increased interest rates which tend to hold down new
construction, and consequently adversely affect demand for the construction and
industrial equipment sold and rented by Western. In addition, although
agricultural equipment sales are less than 5% of Western's total revenues,
factors adversely affecting the farming and commodity markets also can adversely
affect Western's agricultural equipment related business.
Western's business can also be affected by general economic conditions in
its geographic markets as well as general national and global economic
conditions that affect the construction, agricultural, and industrial sectors.
Erosion in North American and/or other countries' economies could adversely
affect Western's business. Market specific factors could also adversely affect
one or more of Western's target markets and/or products.
13
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
In May 1998, a lawsuit was filed on behalf of the Company in a purported
shareholder derivative action against certain directors of the Company. The
lawsuit alleges that the defendant directors breached their fiduciary
responsibilities of due care and loyalty to the Company and its stockholders in
connection with a letter of credit guarantee by the Company for ERD Waste Corp.,
the sale of certain businesses of the Company to Hutchinson Corporation, and the
delisting of the Company's common stock and publicly traded warrants from the
Nasdaq Stock Market. The complaint did not specify the amount of damages sought.
In June, 1998 a shareholder class action was filed against the certain
directors of the Company alleging that the defendant directors breached their
fiduciary responsibilities of due care and loyalty to the Company and its
stockholders in connection with a letter of credit guarantee by the Company for
ERD Waste Corp., the sale of certain businesses of the Company to Hutchinson
Corporation, and the delisting of the Company's common stock and publicly traded
warrants from the Nasdaq Stock Market.
The Company is a named defendant in a matter brought by an individual in
Los Angles County Superior Court alleging that the Company conspired with her
ex-husband to conceal community property assets from her in connection with her
recent divorce. The plaintiff is requesting damages against the Company and the
other defendants in the approximate amount of $8,000,000 plus punitive damages.
The Company believes the plaintiff's claim is without merit and intends to
defend the lawsuit vigorously.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At October 31, 1998, the Company was in technical default of the leverage
covenant in the Deutsche Financial Services ("DFS") Loan Agreement. As of
October 31, 1998, the outstanding balance owed to DFS was approximately
$69,145,000. The Company obtained a waiver letter for the period through
December 15, 1998. There is no guarantee that Deutsche Financial Services will
not call this debt at any time after December 15, 1998. See Item 2, "Liquidity
and Capital Resources."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
None
(B) REPORTS ON FORM 8-K
None
14
<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, 1998
By: /s/ Robert M. Rubin
-----------------------------
Robert M. Rubin
Chief Executive Officer
By: /s/ David M. Barnes
-----------------------------
David M. Barnes
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
American United Global, Inc.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 37,297
<OTHER-PROPERTY-AND-INVEST> 4,789
<TOTAL-CURRENT-ASSETS> 91,611
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 133,697
<COMMON> 116
<CAPITAL-SURPLUS-PAID-IN> 49,954
<RETAINED-EARNINGS> (36,332)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 13,745
0
7
<LONG-TERM-DEBT-NET> 1,169
<SHORT-TERM-NOTES> 82,022
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 2,702
<LEASES-CURRENT> 49
<OTHER-ITEMS-CAPITAL-AND-LIAB> 34,010
<TOT-CAPITALIZATION-AND-LIAB> 133,697
<GROSS-OPERATING-REVENUE> 40,365
<INCOME-TAX-EXPENSE> (880)
<OTHER-OPERATING-EXPENSES> 40,891
<TOTAL-OPERATING-EXPENSES> 40,891
<OPERATING-INCOME-LOSS> 354
<OTHER-INCOME-NET> (731)
<INCOME-BEFORE-INTEREST-EXPEN> 0
<TOTAL-INTEREST-EXPENSE> 1,740
<NET-INCOME> (2,117)
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> (962)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
