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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended April 30, 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) 11,602,005
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<PAGE>
AMERICAN UNITED GLOBAL, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
April 30, 1998 (unaudited) and July 31, 1997 ....................... 1-2
Consolidated Statements of Operations
Three months Ended April 30, 1998
and April 30, 1997 (unaudited) ..................................... 3
Consolidated Statements of Operations
Nine Months Ended April 30, 1998
and April 30, 1997 (unaudited) ..................................... 4
Consolidated Statement of Shareholders'
Equity (unaudited) ................................................. 5
Consolidated Statements of Cash Flows
Nine Months Ended April 30, 1998
and April 30, 1997 (unaudited) ..................................... 6
Notes to the Consolidated Financial
Statements (unaudited) ............................................. 7-11
Items 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ....................... 12-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................ 16
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 ............................................................. 16-18
Item 5. Other Information ............................................ 18
Item 6. Exhibits and Reports on Form 8-K ............................. 18
</TABLE>
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1998 1997
--------- --------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................... $ 2,007,000 $ 12,284,000
Investment in marketable debt securities ....... 4,083,000 10,018,000
Trade accounts receivable, less allowance for
doubtful accounts of $ 931,000 and
$807,000, respectively ........................ 16,706,000 12,473,000
Notes receivable from shareholder .............. 1,200,000 1,238,000
Inventories .................................... 95,952,000 83,370,000
Prepaid expenses and other receivables ......... 379,000 357,000
Deferred tax asset ............................. 936,000 936,000
Income tax refund receivable ................... 2,266,000 --
Notes receivable ............................... -- 3,503,000
------------ ------------
TOTAL CURRENT ASSETS .......................... 123,529,000 124,179,000
Property and equipment, net .................... 9,327,000 9,530,000
Intangibles and other assets, net of accumulated
amortization of $1,203,000 and $1,460,000,
respectively .................................. 3,280,000 8,582,000
Investment in IDF .............................. 5,810,000
Due from IDF ................................... 178,000
Deferred tax asset ............................. -- 2,432,000
------------ ------------
TOTAL ASSETS .................................. $142,124,000 $144,723,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1998 1997
------------- -------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under floor financing lines ................................... $ 12,484,000 $ 55,490,000
Short-term borrowings .................................................... 74,769,000 11,751,000
Current portion of capital lease obligations ............................. 573,000 412,000
Accounts payable ......................................................... 12,041,000 20,150,000
Accrued liabilities ...................................................... 8,373,000 12,583,000
Income taxes payable ..................................................... 402,000 1,924,000
Deferred revenue ......................................................... -- 950,000
------------- -------------
TOTAL CURRENT LIABILITIES ............................................... 108,642,000 103,260,000
Long-term borrowings ...................................................... 1,171,000 3,456,000
Deferred taxes ............................................................ 364,000 --
Capital lease obligations, net of current portion ......................... 4,486,000 4,026,000
------------- -------------
TOTAL LIABILITIES ....................................................... 114,663,000 110,742,000
Minority interest ......................................................... 9,225,000 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; 739,143 and 976,539
shares issued and outstanding, respectively ............................. 7,000 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; 40,000,000 shares
authorized; 11,602,005 and 10,427,208 shares
issued and outstanding, respectively .................................... 116,000 104,000
Common stock, Class B non-voting, 25,000,000 shares
authorized; none issued and outstanding
Additional contributed capital ........................................... 49,954,000 48,782,000
Deferred compensation .................................................... (36,000) (196,000)
Retained (deficit) ....................................................... (31,805,000) (24,600,000)
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TOTAL SHAREHOLDERS' EQUITY .............................................. 18,236,000 24,101,000
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............................. $ 142,124,000 $ 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
APRIL 30,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Net sales ................................................................. $ 40,947,000 $ 42,989,000
Cost of goods sold ........................................................ 36,557,000 37,941,000
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GROSS PROFIT .............................................................. 4,390,000 5,048,000
Selling, general and administrative expenses .............................. 3,743,000 4,366,000
------------- -------------
OPERATING INCOME .......................................................... 647,000 682,000
Interest expense, net ..................................................... 1,186,000 610,000
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(Loss) earnings from continuing operations before
income taxes and minority interest ....................................... (539,000) 72,000
(Benefit) provision for income taxes ...................................... (1,256,000) 313,000
Earnings in unconsolidated subsidiary ..................................... (36,000)
Minority interest in net earnings of consolidated subsidiary .............. 39,000 199,000
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Net income (loss) from continuing operations .............................. 714,000 (440,000)
Discontinued operations:
Loss from operations ..................................................... (3,238,000) (3,107,000)
Provision for operating loss during the phase out period ................. (2,110,000) -
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Net loss .................................................................. (4,634,000) (3,547,000)
Dividends on preferred stock .............................................. - 1,655,000
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Net loss available for common shareholders ................................ $ (4,634,000) $ (5,202,000)
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Basic earnings per share:
Net income (loss) from continuing operations .............................. $ .06 $ (0.27)
Discontinued operations ................................................... (.46) (0.39)
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Net loss ................................................................. $ (.40) $ (0.66)
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Weighted average number of shares ......................................... 11,571,000 7,919,000
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</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Net sales ................................................................. $ 117,563,000 $ 109,619,000
Cost of goods sold ........................................................ 103,849,000 97,007,000
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GROSS PROFIT .............................................................. 13,714,000 12,612,000
Selling, general and administrative expenses .............................. 10,600,000 9,858,000
-------------- --------------
OPERATING INCOME .......................................................... 3,114,000 2,754,000
Interest expense, net ..................................................... 2,665,000 1,791,000
Gain on partial sale of subsidiary ........................................ (220,000)
-------------- --------------
Income from continuing operations before
income taxes and minority interest ....................................... 669,000 963,000
(Benefit) provision for income taxes ...................................... (591,000) 848,000
Earnings in unconsolidated subsidiary ..................................... (92,000)
Minority interest in net earnings of consolidated
subsidiary ............................................................. 529,000 569,000
-------------- --------------
Net income (loss) from continuing operations .............................. 823,000 (454,000)
Discontinued operations, net of taxes:
Loss from operations through April 30,
(net of tax benefit of $0 and $2,017,000) ............................... (5,894,000) (6,527,000)
Provision for operating loss during the
phase out period net of tax of $0 ....................................... (2,110,000) -
-------------- --------------
Net loss .................................................................. (7,181,000) (6,981,000)
Dividends on preferred stock .............................................. 24,000 2,289,000
-------------- --------------
Net loss available for common shareholders ................................ $ (7,205,000) $ (9,270,000)
-------------- --------------
-------------- --------------
Basic earnings per share:
Net income (loss) from continuing operations .............................. $ .07 $ (0.37)
Discontinued operations ................................................... (.71) (0.88)
-------------- --------------
Net loss ................................................................. $ (.64) $ (1.25)
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-------------- --------------
Weighted average number of shares ......................................... 11,210,000 7,416,000
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-------------- --------------
See accompanying notes to consolidated financial statements.
4
</TABLE>
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' 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, 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 and warrants ...... 102,000 1,000
Issuance of common shares ................... 250,000 3,000
Conversion of preferred stock to common stock (358,000) (4,000) 823,000 8,000
---------- ---------- ---------- ----------
Balance at April 30, 1998 ................... 739,000 $ 7,000 11,602,000 $ 116,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
CONTRIBUTED DEFERRED RETAINED SHAREHOLDERS'
CAPITAL COMPENSATION (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 .................................... (7,181,000) (7,181,000)
Dividend on preferred stock ................. 141,000 (24,000) 117,000
Amortization of deferred compensation ....... 160,000 160,000
Exercise of stock options ................... 562,000 563,000
Issuance of common shares ................... 473,000 476,000
Conversion of preferred stock to common stock (4,000)
------------ -------------- ------------ -------------
Balance at April 30, 1998 ................... $ 49,954,000 $ (36,000) $(31,805,000) $ 18,236,000
------------ -------------- ------------ -------------
------------ -------------- ------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30,
-----------------------------
1998 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ...................................... $ (7,181,000) $ (6,981,000)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization ................ 1,382,000 2,775,000
Amortization of deferred compensation ........ 160,000 169,000
Income applicable to minority interest ....... 529,000 569,000
Impairment of intangible asset ............... 1,474,000 930,000
Gain on partial sale of subsidiary ........... (220,000)
Stock options issued ......................... 271,000
Changes in assets and liabilities, net of
effects of acquisitions:
Accounts receivable ......................... (3,582,000) (6,229,000)
Inventories ................................. (6,289,000) (7,383,000)
Prepaid expenses and other receivables ...... (21,000) (1,035,000)
Notes receivable ............................ 3,503,000 (229,000)
Income taxes receivable ..................... (2,266,000)
Accounts payable ............................ (8,108,000) 7,786,000
Other accrued liabilities ................... (2,519,000) 1,357,000
Income taxes payable ........................ (3,590,000) (2,564,000)
Deferred revenue ............................ (950,000)
Intangibles and other assets ................ (10,000) (934,000)
------------- -------------
NET CASH USED BY OPERATING ACTIVITIES .......... (27,688,000) (11,498,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ............ (50,000) (1,827,000)
Acquisition of businesses, net of cash acquired -- (1,171,000)
Net sales (purchases) of marketable securities 5,935,000 (369,000)
------------- -------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 5,885,000 (3,367,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease ........... (87,000) 494,000
Inventory floor plan financing ................ (47,572,000) (3,147,000)
Long and short-term borrowings ................ 59,318,000 7,043,000
Note receivable from shareholder .............. 38,000 (362,000)
Issuance of common stock ...................... 476,000 --
Net proceeds from private placement ........... 9,000,000
Subsidiary purchase of treasury stock ......... (1,210,000)
Exercise of stock options and warrants ........ 563,000 424,000
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NET CASH PROVIDED BY FINANCING ACTIVITIES ...... 11,526,000 13,452,000
------------- -------------
Net decrease in cash and cash equivalents ...... (10,277,000) (1,413,000)
Cash and cash equivalents, beginning ........... 12,284,000 17,086,000
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Cash and cash equivalents, ending .............. $ 2,007,000 $ 15,673,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
AMERICAN UNITED GLOBAL, INC.
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 $314,000 and
$944,000 for the quarter and Nine Months ended April 30, 1998, respectively.
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 39.4% at
April 30, 1998.
As a result of the additional issuance of IDF International, Inc. (IDF)
voting shares, the Company's ownership percentage of IDF has decreased to less
than 50%. Accordingly, effective August 1, 1997 the financial statements of IDF
are no longer consolidated in the accompanying balance sheets and statements of
operations and cash flows. The results of IDF are being accounted for using the
equity method.
NOTE 2 - STATEMENT OF CASH FLOWS
Supplemental disclosure of cash paid during the periods:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30,
----------------------------
1998 1997
------------- ------------
<S> <C> <C>
Interest.............................................. $ 3,633,000 $ 3,104,000
Income taxes.......................................... $ 1,158,000 $ 852,000
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
1. A capital lease obligation of $880,000 was incurred during the Nine Months
ended April 30, 1998 when the Company entered into leases for computer
equipment and software.
7
<PAGE>
AMERICAN UNITED GLOBAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. As described in Note 4, on April 30, 1998 Western purchased certain assets
of Yukon.
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1998 1997
------------- ------------
<S> <C> <C>
Parts................................................. $ 9,486,000 $ 8,159,000
Equipment, new and used............................... 86,466,000 75,211,000
------------- ------------
$ 95,952,000 $ 83,370,000
------------- ------------
------------- ------------
</TABLE>
NOTE 4 - ACQUISITIONS
On April 30, 1998 Western acquired substantially all of the operating assets of
Yukon Equipment, Inc. (Yukon) in connection with Yukon's business of servicing
and distributing construction, industrial, and agricultural equipment in Alaska.
Yukon has facilities in Anchorage, Fairbanks, and Juneau, Alaska. At closing,
Western assumed Yukon's existing lease obligations on the Fairbanks and Juneau
facilities. The real property and improvements used in connection with Yukon's
Anchorage operation and upon which the Anchorage operation is located (Yukon
Anchorage Property), is being leased on a month-to-month basis pending Yukon's
sale of the Yukon Anchorage Property to Western at fair market value subject to
acceptable appraisals and an acceptable environmental report.
The purchase price was an aggregate of $7,710,000 consisting of approximately
$5,680,000 for equipment inventory, $613,000 for parts inventory, $399,000 for
fixed assets, $651,000 for accounts receivable, and $367,000 for other assets.
The majority of the purchase price was floor plan and open account financing
assumed or debt incurred by Western. Yukon also received 50,000 shares of
Western's common stock in partial payment of the purchase price.
NOTE 5 - CONTINGENCIES
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.
8
<PAGE>
AMERICAN UNITED GLOBAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Except for ordinary, routine proceedings incidental to its businesses, there
are no other material 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>
April 30, July 31,
1998 1997
------------ -----------
<S> <C> <C>
Goodwill ....................................... $ 2,875,000 $8,104,000
Non-compete agreement .......................... 67,000 175,000
Other assets ................................... 338,000 303,000
------------ -----------
$ 3,280,000 $8,582,000
------------ -----------
------------ -----------
</TABLE>
Goodwill is being amortized over lives ranging from 20 to 40 years, and the
non-compete agreement is being amortized over 2 years.
NOTE 7 -BORROWINGS
In December, 1997 the Company increased its advised line of credit from
$2,000,000 to $3,400,000 and pledged the proceeds from the Hutchinson Notes
Receivable as collateral. In January 1998, the proceeds of said Note receivable
were received and used to settle the outstanding balance of the advised line of
credit in full.
NOTE 8 - SERIES B-1 CONVERTIBLE PREFERRED STOCK
A total of 237,398 shares of the Series B-1 Convertible Preferred Stock
issued in September 1996 were converted to common shares during the Nine Months
ended April 30, 1998 at the applicable ratio of one for one leaving 739,143
shares outstanding at April 30, 1998.
Note 9 - PROPOSED TRANSACTION WITH CONESE ENTERPRISES, LTD.
On June 2, 1998 the Company agreed to an extension of the due diligence
period from May 31, 1998 to June 28, 1998. In addition, the Board of
Directors is reviewing a request from Conese Enterprises to extend the
outside closing date of June 30, 1998 to September 30, 1998.
NOTE 10 - DISCONTINUED OPERATIONS
During the Quarter ended April 30, 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, Connectsoft, Inc., Connectsoft
Communications Corp. and InterGlobe Networks, Inc. Although the results of these
9
<PAGE>
AMERICAN UNITED GLOBAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
It is anticipated by management that the above mentioned Companies will
either cease doing business or be sold by July 15, 1998. Costs totaling
$2,110,000 associated with the discontinued operations representing the
estimated operating losses and closure costs from the April 30, 1998 measurement
date until the time of the disposition or closure have been included in Accrued
liabilities in the accompanying consolidated balance sheet.
Proposed sale of the assets of Connectsoft Communications Corporation
On April 16, 1998, the Company and its Connectsoft subsidiary executed a
letter of intent with Executive Telecard, Inc. (EXTL), an unaffiliated
corporation whose common stock trades on the NASD OTC Bulletin Board. Under the
terms of the letter of intent, the Company will sell to an acquisition
subsidiary of EXTL, substantially all of the assets and technology of
Connectsoft Communications Corporation (CCC), including all rights to its
FreeAgent system, and the Connectsoft Inc.'s (CSI) Network Operating Center
(NOC) assets. The sole consideration for such sale shall be the buyer's
assumption of up to $4.5 million of direct and contingent obligations of CCC,
CSI and the Company, consisting of certain notes and accounts payable to
creditors of CSI and CCC and EXTL's agreement to indemnify and hold harmless
Connectsoft and the Company in respect of such obligations. Closing of the sale
is subject to certain conditions, including (a) completion of EXTL's due
diligence investigation, (b) negotiation of a mutually acceptable definitive
purchase and sale agreement, (c) the Company's ability to obtain a minimum six
month extension of the April 30, 1999 maturity date of a $1.7 million note
payable to United Parcel Service, Inc., (d) EXTL's obtaining of not less than
$1.0 million of working capital financing on terms reasonably acceptable to
EXTL, and (e) certain third party consents. Should EXTL fail, for any reason, to
timely pay or discharge such assumed obligations, the Company will be
contingently liable to make such payments unless it is able to obtain releases
from its creditors prior thereto. Management believes the transaction will close
before July 15, 1998.
Simultaneous with its execution of the letter of intent, Connectsoft and the
Company entered into a sixty-day management agreement with EXTL, effective as of
April 15, 1998, pursuant to which EXTL agreed to assume responsibility for the
on-going management of the Connectsoft business. Each of the Company and EXTL
have agreed to bear 50% of the monthly operating costs and expenses associated
with the Connectsoft business for the two months ending May 31, 1998 (estimated
at an aggregate of approximately $600,000). In the event that, for any reason,
the sale of the Connectsoft assets shall not occur by reason of a breach by the
Company or Connectsoft of their respective representations and warranties or
their failure to perform their respective covenants and agreements contained in
the proposed purchase agreement, the Company will be obligated to reimburse EXTL
for its share of the monthly operating costs incurred under the management
agreement. Conversely, if the sale of the Connectsoft assets fails to close for
any other reason, no such
10
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AMERICAN UNITED GLOBAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reimbursement will be required to be paid to EXTL. On June 15, 1998 the Company
and EXTL agreed to extend the funding arrangements under the management
agreement to July 15, 1998. EXTL has agreed to reimburse AUGI for its $150,000
share of the funding for the extended time period subsequent to the closing of
the transaction.
NOTE 11 - EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128,("FAS 128"), "Earnings Per
Share" has been adopted by the Company for the Quarter AND Nine Months ended
April 30, 1998. Applying the provisions of the statement had no effect on the
Company's earnings per share computation as including common stock equivalents
would be antidilutive.
NOTE 12 - INCOME TAXES
The net income tax credit of $1,256,000 and $591,000 for the three and nine
months ended April 30, 1998, respectively includes a benefit for income taxes of
$1,423,000. This benefit represents a reduction of previous potential income tax
liabilities recorded in fiscal 1996 to the appropriate amount as of April 30,
1998.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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's 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 as 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.
As discussed in Note 10 to the Consolidated financial statements, the
Company discontinued the operations of the Technology Group.
As a result of the additional issuance of IDF International, Inc. (IDF)
voting shares, the Company's ownership percentage of IDF has decreased to
less than 50%. Accordingly, effective August 1, 1997 the financial statements
of IDF are no longer consolidated in the accompanying balance sheets and
statements of operations and cash flows. See Note 1 to the Consolidated
Financial Statements.
The Company's remaining operations consist of its majority owned subsidiary,
Western Power & Equipment, Inc.(WPEC). WPEC provides light, medium and heavy
construction equipment through a chain of 28 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, and for products manufactured by other
companies.
Results Of Operations
The Three Months and Nine Months Ended April 30, 1998 Compared to the Three
Months and Nine Months Ended April 30, 1997
Western's revenues for the three month period ended April 30, 1998 decreased
$1,096,000 or approximately 3.0% over the three month period ended April 30,
1997 due in part to inclement weather in the Northwest. Same store revenues
decreased 4% for the three-month period ended April 30, 1998, as compared to the
prior year period. The decrease in same store revenues resulted from decreases
in the Washington and Oregon stores due mainly to higher than normal
precipitation levels. Sales were up from the prior year's third quarter in all
departments except machinery sales. Machinery sales were down 5%. The balance of
the decrease in sales is due to TechStar sales of $946,000 included in the three
month period ended April 30, 1997 for which no current period comparable amount
is included due to the Company's ownership of IDF decreasing to less than 50%.
Western's revenues for the nine-month period ended April 30, 1998 increased
$9,319,000 to $117,563,000 or approximately 9% over the nine-month period ended
April 30, 1997. The increase was due solely to the contribution of the stores
acquired or opened in the last year. Same store revenues decreased 1% for the
nine-month period ended April 30, 1998, as compared to the nine-month
12
<PAGE>
period ended April 30, 1997. For the nine-month period ended April 30, 1998,
sales in all departments were up from the same period in the prior year. This is
offset by a decrease of TechStar sales of $1,375,000 for the nine months ended
April 30, 1997 for which no comparable current period amount is included.
Western's gross profit margin of 10.7% for the three-month period ended
April 30, 1998 was down slightly from the prior year comparative period margin
of 10.9%. The decrease in gross profit margins was primarily the result of
increased sales in the governmental sector. Prior year gross profit margin for
the Company was 11.7% overall due to the inclusion of TechStar's results for the
prior year comparable period. For the nine-month period ended April 30, 1998,
Western's gross margin was 11.7% up from the 11.1% gross margin for the
nine-month period ended April 30, 1997. Overall gross margin for the Company for
the nine-month period ended April 30, 1997 was 11.5% due to the inclusion of
TechStar.
For the three-month period ended April 30, 1998, selling, general, and
administrative ("SG&A") expenses, as a percentage of sales, were 9.1%, down from
10.2% for the prior year's quarter due in part to $327,000 of expenses included
in the three months ended April 30, 1997 related to TechStar. SG&A expenses for
the nine-month period ended April 30, 1998 were 9.0% of sales compared to 9.0%
of sales for the prior year nine-month period. The nine months ended April 31,
1997 included $460,000 of expenses related to TechStar, for which no comparable
current period amount exists.
Net interest expense for the three months and nine months ended April 30,
1998 of $1,186,000 and $2,665,000 was up significantly from the $610,000 and
$1,791,000 in the prior year comparative periods. 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
and the increase in inventory carried by Western. Also, interest income
decreased from lowered cash reserves.
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 provisions of $167,000 and $832,000
recognized for the quarter and nine months ended April 30, 1998 are based upon
profits generated by Western, which is not consolidated in the Company's federal
tax return. These are offset by a benefit for income taxes in the amount of
$1,423,000 for both the quarter and nine months ended April 30, 1998.
Liquidity and Capital Resources
Western's primary source of 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 its
parent, American United Global, Inc. ("AUGI"), and equipment inventory floor
plan financing arrangements provided to Western by the manufacturers of the
products Western sells, Seattle-First National Bank ("Seafirst Bank") and
Deutsche Financial Services.
Under inventory floor planning arrangements the manufacturers of products
sold by Western provide interest free credit terms on new equipment purchases
for
13
<PAGE>
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. As of April 30,
1998, approximately $12,484,000 was outstanding under these manufacturer
provided floor plan arrangements.
In order to take advantage of cash discounts 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, 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 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 April 30, 1998, there was no outstanding indebtedness under
such line of credit.
In June 1997, Western 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 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 April 30, 1998, approximately $67,491,000 was outstanding under this
facility at an interest rate of 8.0%.
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 April 30, 1998 Western acquired substantially all of the operating assets
of Yukon Equipment, Inc. (Yukon) in connection with Yukon's business of
servicing and distributing construction, industrial, and agricultural equipment
in Alaska. The purchase price was an aggregate of $7,710,000 consisting of
approximately $4,566,000 in newly obtained financing and the assumption of
approximately $2,786,000 in floor plan and open account obligations. Yukon also
received 50,000 shares of Western's common stock in partial payment of the
purchase price. The acquisition has been accounted for under the purchase method
of accounting.
During the Nine Months ended April 30, 1998, cash and cash equivalents and
marketable debt securities decreased by $16,212,000, primarily due to the
repayments of debt by the Company to North Fork Bank and the Western acquisition
of Yukon. Cash flow from operations was negative $27,688,000 largely due to
decreases in accounts payable, as well as increases in accounts receivable and
inventories.
The Company's cash and cash equivalents and marketable debt securities of
$6,090,000 as of April 30, 1998, as well as available credit facilities are
considered sufficient to support current or somewhat higher levels of operations
for at least the next twelve months.
14
<PAGE>
The Company is in the process of examining the impact of the year 2000 on
its operations and computer applications. It is believed by management that any
costs related to year 2000 issues will not be material to the Company.
15
<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.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 24, 1998 the Company held its fiscal 1997 annual meeting of
Stockholders (the "Annual Meeting"). Messrs. Wesley Charles Fredericks, Jr. and
Glenn A. Norem were elected at the meeting. All other director's terms were
continued after the meeting.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF VOTES
VOTES FOR VOTES AGAINST ABSTAINING
--------- ------------- ---------------
<S> <C> <C> <C>
Robert M. Rubin 9,237,109 0 766,803
Lawrence Kaplan 9,237,184 0 766,728
C. Dean McLain 9,237,184 0 766,728
David M. Barnes 9,237,109 0 766,803
Howard B. Katz 9,237,109 0 766,803
Wesley C. Fredericks Jr 9,237,184 0 766,728
Glenn A. Norem 9,237,184 0 766,728
</TABLE>
Subsequent to April 30, 1998 Messrs. Kaplan, Fredericks and Norem resigned as
Directors of the Company.
Votes were also cast and proposals approved at the annual meeting for the
following:
Ratification of the reappointment of Price Waterhouse LLP as the Company's
independent auditors for the fiscal years ending July 31, 1996, 1997 and 1998;
and that in connection with this resolution, the duly elected officers of the
Company be, and each of them hereby is, authorized and directed to execute and
deliver any and all documents, certificates or instruments they deem necessary
or appropriate in order to accomplish the foregoing resolution. (9,878,232 votes
in favor, 65,426 votes against and 60,254 abstentions.)
16
<PAGE>
The Company authorized an amendment to the Company's Certificate of
Incorporation to increase the authorized capital of the Company by (i)
increasing to 40,000,000 shares the Company's authorized voting Common Stock
which will continue to be designated as Class A Voting Common Stock; and (ii)
creating a new class of Non-Voting Class B Common Stock, of which 25,000,000
shares of Non-Voting Class B Common Stock will be authorized. In connection with
the above mentioned resolution, the duly elected officers of the Company be, and
each of them hereby is, authorized and directed to execute and deliver any and
all documents, certificates or instruments they deem necessary or appropriate in
order to accomplish the foregoing resolution. (9,386,527 votes in favor,
1,402,699 votes against and 62,446 abstentions).
Votes were cast for the following proposals for which sufficient votes have not
been received to either approve or reject:
To ratify the issuance of 976,539 shares of the Company's Series B-1
Convertible Preferred Stock issued in connection with the acquisition of all the
capital stock of ConnectSoft, Inc., a Washington corporation ("Old
ConnectSoft"), effective July 31, 1996 (5,190,694 votes in favor, 288,274 votes
against and 80,139 abstentions).
To ratify the sale of all of the assets of the Company's Manufacturing
Business to subsidiaries of Hutchinson Corporation (the "Hutchinson
Transaction"), effective January 19, 1996 (5,391,434 votes in favor, 92,226
votes against and 75,446 abstentions).
To ratify the issuance of 400,000 shares of the Company's Series B-2
Convertible Preferred Stock issued in connection with a $10,000,000 private
placement completed in January 1997 (5,142,377 votes in favor, 335,641 votes
against and 81,089 abstentions).
To authorize and ratify the Company's 1996 Employee Stock Option Plan, as
amended (the "Stock Option Plan"), which Stock Option Plan contains 2,500,000
shares of Common Stock, $.01 par value (the "Common Stock"), underlying and
available for the granting of options under such plan (4,391,306 votes in favor,
1,109,313 votes against and 58,447 abstentions).
To authorize and ratify an amendment to the Company's Articles of
Incorporation to include provisions which permit stockholders to act by not less
than unanimous written consent and to authorize and ratify an amendment to the
Company's By-Laws that deletes provisions which permit stockholders to act by
less than unanimous written consent(3,549,488 votes in favor, 1,941,497 votes
against and 68,120 abstentions).
To authorize and ratify amendments to the Company's Articles of
Incorporation and By-Laws to classify the Board of Directors into three classes,
as nearly equal in number as possible, each of which, after an interim
arrangement, will serve for three years, with one class being elected each year
(3,609,988 votes in favor, 1,884,397 votes against and 64,720 abstentions). .
To authorize and ratify amendments to the Company's Articles of
Incorporation and By-Laws which provide that directors may be removed only with
cause and the
17
<PAGE>
approval of the holders of at least 66.66% of the voting power of each class or
series of outstanding stock of the Company entitled to vote generally in the
election of directors (3,484,203 votes in favor, 2,011,882 votes against and
63,020 abstentions).
To authorize and ratify amendments to the Company's Articles of
Incorporation and By-Laws that provide that special meetings of stockholders may
not be called by stockholders holding less than 66.66% of the voting power of
each class or series of outstanding stock entitled to vote on the matter(s) to
be considered at the special meeting (3,515,103 votes in favor, 1,977,624 votes
against and 66,378 abstentions).
To authorize and ratify amendments to the Company's Articles of
Incorporation and By-Laws that increase the stockholder vote required to alter,
amend or repeal the amendments to the Company's Articles of Incorporation and
By-Laws identified in Proposals viii, ix, x and xi referred to above and in this
Proposal xii, to at least 66.66% of the voting power of each class or series of
outstanding stock of the Company entitled to vote thereon (3,509,636 votes in
favor, 1,969,449 votes against and 80,020 abstentions).
To ratify the terms of an Amended and Restated Employment Agreement by and
between the Company and Mr. Robert M. Rubin, the President, Chief Executive
Officer, Chairman of the Board and a principal stockholder of the Company
(3,682,651 votes in favor, 1,732,689 votes against and 143,765 abstentions).
ITEM 5 OTHER INFORMATION
On February 4, 1998, the Company was notified by the NASDAQ Listings
Qualification Panel that its Common Stock and Publicly traded warrants had been
delisted from the NASDAQ National Market Exchange. Both securities are presently
trading on the NASD Bulletin Board.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
None
(B) REPORTS ON FORM 8-K
Form 8K filed on April 23, 1998 reporting on the
proposed investment transaction with Conese Enterprises, Ltd.
18
<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.
June 19, 1998
By:
----------------------
Robert M. Rubin
Chief Executive Officer
By:
----------------------
David M. Barnes
Chief Financial Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> APR-30-1998
<CASH> 2,007,000
<SECURITIES> 4,083,000
<RECEIVABLES> 17,637,000
<ALLOWANCES> (931,000)
<INVENTORY> 95,952,000
<CURRENT-ASSETS> 123,529,000
<PP&E> 14,322,000
<DEPRECIATION> (4,995,000)
<TOTAL-ASSETS> 142,124,000
<CURRENT-LIABILITIES> 108,642,000
<BONDS> 5,657,000
0
7,000
<COMMON> 116,000
<OTHER-SE> 18,113,000
<TOTAL-LIABILITY-AND-EQUITY> 142,124,000
<SALES> 117,563,000
<TOTAL-REVENUES> 117,563,000
<CGS> 103,849,000
<TOTAL-COSTS> 103,849
<OTHER-EXPENSES> 10,841,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,655,000
<INCOME-PRETAX> 669,000
<INCOME-TAX> (591,000)
<INCOME-CONTINUING> 823,000
<DISCONTINUED> (8,004,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,205,000)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> 0
</TABLE>
