<PAGE>
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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 JANUARY 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) 11,367,389
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<PAGE>
AMERICAN UNITED GLOBAL, INC.
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
January 31, 1998 (unaudited )and July 31, 1997. . . . . . . 1-2
Consolidated Statements of Operations
Three months Ended January 31, 1998
and January 31, 1997 (unaudited). . . . . . . . . . . . . . 3
Consolidated Statements of Operations
Six months Ended January 31, 1998
and January 31, 1997 (unaudited). . . . . . . . . . . . . . 4
Consolidated Statement of Shareholders'
Equity (unaudited) . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows
Six months Ended January 31, 1998
and January 31, 1997 (unaudited). . . . . . . . . . . . . . 6
Notes to the Consolidated Financial
Statements (unaudited) . . . . . . . . . . . . . . . . . . . . 7-9
Items 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . 10-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 15
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 . . . . . . . . . . . . N/A
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1998 1997
----------- ---------
(unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents. . . . . . . . . . . . . . $ 3,823,000 $12,284,000
Investment in marketable debt securities . . . . . . 6,011,000 10,018,000
Trade accounts receivable, less allowance for
doubtful accounts of $ 1,310,000 and
$807,000, respectively. . . . . . . . . . . . . . 19,520,000 12,473,000
Notes receivable from shareholder. . . . . . . . . . 1,200,000 1,238,000
Inventories. . . . . . . . . . . . . . . . . . . . . 82,993,000 83,370,000
Prepaid expenses and other receivables . . . . . . . 679,000 357,000
Deferred tax asset . . . . . . . . . . . . . . . . . 991,000 936,000
Notes receivable . . . . . . . . . . . . . . . . . . - 3,503,000
-------------- -------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . 115,217,000 124,179,000
Property and equipment, net . . . . . . . . . . . . 9,604,000 9,530,000
Intangibles and other assets, net of accumulated
amortization of $2,012,000 and $1,460,000,
respectively . . . . . . . . . . . . . . . . . . 13,203,000 8,582,000
Deferred tax asset . . . . . . . . . . . . . . . . . 2,414,000 2,432,000
-------------- -------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . $ 140,438,000 $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>
JANUARY 31, JULY 31,
1998 1997
------------- -----------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Borrowings under floor financing lines . . . . . . . $ 16,723,000 $55,490,000
Short-term borrowings. . . . . . . . . . . . . . . . 52,754,000 11,751,000
Current portion of capital lease obligations . . . . 879,000 412,000
Accounts payable . . . . . . . . . . . . . . . . . . 14,013,000 20,150,000
Accrued liabilities. . . . . . . . . . . . . . . . . 7,571,000 12,583,000
Income taxes payable . . . . . . . . . . . . . . . . 2,411,000 1,924,000
Deferred revenue . . . . . . . . . . . . . . . . . . - 950,000
------------- -----------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . 94,351,000 103,260,000
Long-term borrowings . . . . . . . . . . . . . . . . . 3,287,000 3,456,000
Capital lease obligations, net of current portion. . . 3,897,000 4,026,000
------------- -----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . 101,535,000 110,742,000
Minority interest. . . . . . . . . . . . . . . . . . . 16,080,000 9,880,000
------------- -----------
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; 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; 11,367,389 and 10,427,208 shares
issued and outstanding, respectively. . . . . . . 114,000 104,000
Additional contributed capital . . . . . . . . . . . 49,973,000 48,782,000
Deferred compensation. . . . . . . . . . . . . . . . (103,000) (196,000)
Retained (deficit) . . . . . . . . . . . . . . . . . (27,171,000) (24,600,000)
------------- -----------
TOTAL SHAREHOLDERS' EQUITY. . . . . . . . . . . 22,823,000 24,101,000
------------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY. . . $ 140,438,000 $144,723,000
------------- ------------
------------- ------------
</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
JANUARY 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . $ 43,567,000 $36,254,000
Cost of goods sold . . . . . . . . . . . . . . . . . . 36,667,000 31,750,000
------------- -----------
GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . 6,900,000 4,504,000
Selling, general and administrative expenses . . . . . 5,987,000 5,173,000
Research and development expenses. . . . . . . . . . . 849,000 622,000
Impairment of intangible assets. . . . . . . . . . . . - 930,000
------------- -----------
OPERATING INCOME (LOSS). . . . . . . . . . . . . . . . 64,000 (2,221,000)
Interest expense, net. . . . . . . . . . . . . . . . . 1,440,000 982,000
------------- -----------
Loss before income taxes and minority interest . . . . (1,376,000) (3,203,000)
Provision (benefit) for income taxes . . . . . . . . . 232,000 (1,106,000)
Minority interests in net earnings of consolidated
subsidiaries . . . . . . . . . . . . . . . . . . . . 140,000 146,000
------------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . . . (1,748,000) (2,243,000)
Dividends on preferred stock . . . . . . . . . . . . . 634,000
------------- -----------
Net loss available for common shareholders . . . . . . $ (1,748,000) $(2,877,000)
------------- -----------
------------- -----------
Loss per common and common equivalent shares:
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (.16) $ (.38)
------------- -------------
------------- -------------
Weighted average number of shares. . . . . . . . . . . 11,149,000 7,599,000
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31,
-----------------------------
1998 1997
------------- ------------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . $ 86,387,000 $68,133,000
Cost of goods sold . . . . . . . . . . . . . . . . . . 71,624,000 59,387,000
------------- ------------
GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . 14,763,000 8,746,000
Selling, general and administrative expenses . . . . . 12,336,000 9,220,000
Research and development expenses. . . . . . . . . . . 1,593,000 1,567,000
Impairment of intangible assets. . . . . . . . . . . . - 930,000
------------- ------------
OPERATING INCOME (LOSS). . . . . . . . . . . . . . . . 834,000 (2,971,000)
Interest expense, net. . . . . . . . . . . . . . . . . 2,420,000 1,575,000
Gain on partial sale of subsidiary . . . . . . . . . . (220,000)
------------- ------------
Loss before income taxes and minority interest . . . . (1,366,000) (4,546,000)
Provision (benefit) for income taxes . . . . . . . . . 720,000 (1,482,000)
Minority interests in net earnings of consolidated
subsidiaries . . . . . . . . . . . . . . . . . . . . 461,000 370,000
------------- ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . (2,547,000) (3,434,000)
Dividends on preferred stock . . . . . . . . . . . . . 24,000 634,000
------------- ------------
Net loss available for common shareholders . . . . . . $ (2,571,000) $(4,068,000)
------------- ------------
------------- ------------
Loss per common and common equivalent shares:
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (.23) $ (.57)
------------- ------------
------------- ------------
Weighted average number of shares. . . . . . . . . . . 11,037,000 7,172,000
------------- ------------
------------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS 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. . . . . . . . (123,000) (1,000) 588,000 6,000
---------- ---------- ---------- ----------
Balance at January 31, 1998. . . . . . . . . . . . . . 974,000 $ 10,000 11,367,000 $ 114,000
--------- --------- ---------- ----------
--------- --------- ---------- ----------
<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 . . . . . . . . . . . . . . . . . . . . . . (2,547,000) (2,547,000)
Dividend on preferred stock. . . . . . . . . . . . . . 146,000 (24,000) 122,000
Amortization of deferred compensation. . . . . . . . . 93,000 93,000
Exercise of stock options. . . . . . . . . . . . . . . 577,000 578,000
Issuance of Common Shares. . . . . . . . . . . . . . . 473,000 476,000
Conversion of preferred stock to common. . . . . . . . (5,000)
----------- --------- ----------- ---------
Balance at January 31, 1998. . . . . . . . . . . . . . $49,973,000 $ (103,000) $(27,171,000) $22,823,000
----------- -------- ----------- ----------
----------- -------- ----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31,
--------------------------------
1998 1997
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (2,547,000) $(3,434,000)
Adjustments to reconcile net loss to
net cash used by operating activities
Depreciation and amortization . . . . . . . . . . 1,162,000 1,752,000
Amortization of deferred compensation . . . . . . 93,000 109,000
Income applicable to minority interest. . . . . . 461,000 370,000
Impairment of intangible asset. . . . . . . . . . 930,000
Gain on partial sale of subsidiary. . . . . . . . (220,000)
Imputed interest. . . . . . . . . . . . . . . . . (153,000)
Stock options issued . . . . . . . . . . . . . . 190,000
Changes in assets and liabilities, net of
effects of acquisitions:
Accounts receivable . . . . . . . . . . . . . . (2,747,000) (2,752,000)
Inventories . . . . . . . . . . . . . . . . . . 377,000 3,325,000
Prepaid expenses and other receivables. . . . . (302,000) (226,000)
Notes receivable. . . . . . . . . . . . . . . . 3,503,000
Accounts payable. . . . . . . . . . . . . . . . (6,867,000) [941,000]
Other accrued liabilities . . . . . . . . . . . (8,236,000) [242,000]
Income taxes payable. . . . . . . . . . . . . . 487,000 (2,213,000)
Deferred revenue. . . . . . . . . . . . . . . . (950,000)
Deferred taxes. . . . . . . . . . . . . . . . . 38,000
Intangibles and other assets. . . . . . . . . . 86,000 (598,000)
------------- -----------
NET CASH (USED) BY OPERATING ACTIVITIES. . . . . . . . (15,662,000) (2,001,000)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment . . . . . . . . . (517,000) (1,449,000)
Acquisition of businesses, net of cash acquired. . . (1,171,000)
Net sales (purchases) of marketable securities . . . 4,008,000 (369,000)
------------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES . . . 3,491,000 (2,989,000)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease. . . . . . . . . (48,000) 179,000
Inventory floor plan financing . . . . . . . . . . . (38,767,000) (9,511,000)
Long and short-term borrowings . . . . . . . . . . . 38,826,000 3,138,000
Note receivable from shareholder . . . . . . . . . . 38,000 (362,000)
Issuance of common stock . . . . . . . . . . . . . . 476,000 224,000
Net proceeds from private placements . . . . . . . . 2,607,000 9,000,000
Exercise of stock options and warrants . . . . . . . 578,000 423,000
------------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . 3,710,000 3,091,000
------------- -----------
Net decrease in cash and cash equivalents. . . . . . . (8,461,000) (1,899,000)
Cash and cash equivalents, beginning . . . . . . . . . 12,284,000 17,086,000
------------- -----------
Cash and cash equivalents, ending. . . . . . . . . . . $ 3,823,000 $15,187,000
------------- -----------
------------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
<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 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 $190,000 and
$630,000 for the quarter and six months ended January 31, 1998, respectively.
The consolidated financial statements include the accounts of the
Company and its wholly owned and majority-owned or effectively controlled
subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation. Minority interest represents the minority
shareholders' proportionate share of the equity of Western Power and
Equipment Corp. ("Western") and IDF International, Inc. ("IDF") which were
43.4% and 51.9%, respectively at January 31, 1998. (See Note 8) There is
also 19.6% minority interest held in eXodus Technologies, Inc. ("eXodus"),
but no minority interest is presented for eXodus due to accumulated losses.
NOTE 2 - STATEMENT OF CASH FLOWS
Supplemental disclosure of cash paid during the periods:
SIX MONTHS ENDED
JANUARY 31,
---------------------------
1998 1997
------------ ------------
Interest. . . . . . . . . . . . . . . . . . .$ 2,265,000 $ 2,243,000
Income taxes. . . . . . . . . . . . . . . . .$ 712,000 $ 703,000
Supplemental disclosure of non-cash investing and financing activities:
1. A capital lease obligation of $385,000 was incurred during the six months
ended January 31, 1998 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") (See Note 8)
7
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. During the quarter ending January 31, 1998 the Company issued 250,000
shares of its Common Stock, satisfying a note in the amount of $500,000
in full.
NOTE 3 - INVENTORIES
Inventories consist of the following:
JANUARY 31, JULY 31,
1998 1997
------------ -----------
Parts . . . . . . . . . . . . . . . . . . . .$ 9,709,000 $ 8,159,000
Equipment, new and used . . . . . . . . . . . 73,284,000 75,211,000
------------ -----------
$ 82,993,000 $83,370,000
------------ -----------
------------ -----------
NOTE 4 - CONTINGENCIES
A former employee of the Hayden Wegman subsidiary commenced an action in
1996 that is pending before the Supreme court of the State of New York in
which he is seeking compensatory damages of $1,000,000 and punitive damages
of $1,000,000 for allowing a long term disability policy to lapse thereby
depriving him of disability benefits which he would otherwise have been
eligible to receive and which, he claims, he was contractually entitled to
receive. Hayden Wegman has filed an answer denying the claim. Management
believes the suit is without merit and intends to vigorously defend its
position.
Except for ordinary, routine proceedings incidental to its businesses,
there are no other pending legal proceedings, to which the Company or any of its
property is subject. In the opinion of management, the outcome of these legal
proceedings will not have a material effect on the financial condition results
of operations or cash flows of the Company and its subsidiaries.
NOTE 5 - INTANGIBLE ASSETS
Intangible and other assets consist of the following:
JANUARY 31, JULY 31,
1998 1997
------------- ------------
Goodwill. . . . . . . . . . . . . . . . . . .$ 12,416,000 $ 8,104,000
Non-compete agreement . . . . . . . . . . . . 150,000 175,000
Other assets. . . . . . . . . . . . . . . . . 637,000 303,000
------------- ------------
$ 13,203,000 $ 8,582,000
------------- ------------
------------- ------------
8
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill is being amortized over lives ranging from 10 to 40 years, and
the non-compete agreement is being amortized over 2 years.
NOTE 6 -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 used to repay the outstanding balance of the advised line of
credit in full.
NOTE 7 - SERIES B-1 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 six
months ended January 31, 1998 at the applicable ratio of one for one leaving
973,757 shares outstanding at January 31, 1998.
Note 8 - Subsidiary Stock Transactions
During the six months ended January 31, 1998, IDF sold, through GV
Capital Inc., a total of $3,000,000 if IDF's five year Convertible Notes
convertible into IDF Series A and C Preferred Stock at $1.25 per share.
During the quarter ending January 31, 1998 all of the outstanding notes and
$100,000 of accrued interest thereon were converted into 1,400,000 shares of
IDF Series A Preferred Stock and 1,080,000 shares of IDF Convertible Series C
Preferred stock. Mr. Rubin, Chairman and Chief Executive of the Company and
Chairman of IDF, converted an $800,000 loan previously made to IDF into
400,000 shares of Preferred Series B stock.
The Series A, B and C Convertible Preferred Stock of IDF have voting
rights that are the same as the IDF Common Stock, thus subsequent to the
conversion of said Notes, the Company owns 62.2% of the outstanding common
stock which represents 48.1% of the voting capital stock as of January 31,
1998.
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'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, 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's subsidiaries 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"), a wholly owned
subsidiary, is developing its FreeAgent(TM) software designed to integrate
e-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.
IDF International, Inc. does business through 2 wholly owned subsidiaries.
TechStar Communications Inc. is engaged in providing site acquisition, zoning,
architectural and engineering services, as well as consulting services to the
wireless telecommunications industry. Hayden Wegman, Inc. 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"), an 80.4% owned subsidiary of the
Company, had 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 would be supported
in the initial releases of Windows NT 4.0 and 5.0 "Hydra" multi-user
operating system products. The Company significantly reduced its Exodus
operations and explored whether the Exodus protocols could be redesigned to
support client computers that are alternatives to WindowsNT, such as Unix(TM)
workstations, X-terminals and Java(TM) enabled computers. The Company has
determined that such redesign is not economically feasible.
Exodus has also leveraged its remoting technology to develop certain
sophisticated remote server capability and remote monitoring products which
management believes could be marketed to corporations with large
computerized back offices. However, due to the additional significant
investment to fund final development and a successful marketing campaign, the
Company is currently pursuing a joint venture partner or a purchaser for the
assets and potential business of Exodus.
10
<PAGE>
InterGlobe Networks, Inc., a wholly owned subsidiary, provides
engineering, design and consulting services for users and providers of
telecommunications facilities on the Internet and other media.
The potential purchaser of Interglobe, Brigadoon.com, Inc., has been
unable to obtain financing for the acquisition of Interglobe on terms
acceptable to the Company. As a result, the sale agreement has been
cancelled. The Company is continuing to seek a buyer for the Interglobe
assets and business and is in active discussions with a qualified purchaser.
It is anticipated that the sales price will approximate the book value.
RESULTS OF OPERATIONS
THE THREE MONTHS AND SIX MONTHS ENDED JANUARY 31, 1998 COMPARED TO THE THREE
MONTHS AND SIX MONTHS ENDED JANUARY 31, 1997
Western's revenues for the three month period ended January 31, 1998
increased $4,670,000 or approximately 13% over the three month period ended
January 31, 1997, due to the contribution of the stores acquired or opened by
Western in the last year. Same store revenues decreased $1,045,000 or 3% for
the three month period ended January 31, 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 a slight slowdown in construction
activity in those states. Sales were up from the prior year's second quarter
in all departments.
Western's revenues for the six month period ended January 31, 1998
increased $10,415,000 or approximately 16% over the six month period ended
January 31, 1997. The increase was due primarily to the contribution of the
stores acquired or opened by Western in the last year, accounting for
$9,714,000 (93%) of the increase in sales. Same store revenues increased
$701,000 or 1% for the six month period ended January 31, 1998, as compared
to the six month period ended January 31, 1997. For the six month period
ended January 31, 1998, sales in all departments were up from the same period
in the prior year.
IDF, Hayden Wegman, TechStar, Connectsoft, InterGlobe and Exodus (the
"Technology Group") reported revenue of $3,909,000 for the three months ended
January 31, 1998 versus $1,266,000 during the three months ended January 31,
1997 which included $428,000 of revenue from the December 1996 acquisition of
Tech Star. The increase is primarily due to growth at TechStar and because
Hayden Wegman and IDF were not included in prior year results.
11
<PAGE>
The Technology Group reported revenue of $9,771,000 for the six months
ended January 31, 1998 versus $1,932,000 during the six months ended January 31,
1997. The increase is primarily due to growth at TechStar and the inclusion of
Hayden Wegman, for which no comparable revenues exist from the prior year.
Western's gross profit margin of 12.6% for the three month period ended
January 31, 1998 was up from the prior year comparative period margin of 10.3%.
The increase in gross profit margins was the result of a slight increase in
higher margin rental, parts, and service revenues as a percentage of sales and
also the effect of buying inventory at lower costs due to cash payment and
marketing incentives taken. For the six month period ended January 31, 1998,
Western's gross margin was 12.2%, up from the 11.1% gross margin for the six
month period ended January 31, 1997 for essentially the same reasons.
Selling, general and administrative expenses totaled $5,987,000 (13.7%
of sales) and $12,336,000 (14.2% of sales) for the three months and six
months ended January 31, 1998 compared to $5,173,000 (14.2% of sales) and
$9,220,000 (13.5% of sales) for the three months and six months ended January
31, 1997. The increases in selling, general and administrative expenses of
$814,000 and $3,116,000 for the three and six months ended January 31, 1998
are attributable to an increase at Western of $736,000 and $1,204,000
incurred to support the acquisition and opening of new outlets and their
related revenues. For the three months ended January 31, 1998 the $255,000
balance of the increase is attributable to an increase of $1,106,000 for IDF,
Hayden Wegman and TechStar, for which no significant comparable expense
exists for the three months ended January 31, 1997. These increases are
offset by decreases of $1,361,000 related primarily to lower activity levels
at Exodus, InterGlobe and Old Connectsoft. The $1,912,000 balance of the
increase for the six months ended January 31, 1998 is attributable to an
increase of $2,680,000 for IDF, Hayden Wegman and TechStar, for which no
comparable expense exists in the six months ended January 31, 1997. This is
offset by decreases of $768,000 primarily due to reductions in activity
levels at Exodus, InterGlobe and Old Connectsoft.
Research and development expense for the three months and six months
ended January 31, 1998 amounted to $849,000 and $1,593,000, an increase of
$227,000 and $26,000, respectively. The increase for the three months ended
January 31, 1998 is attributable to increases in the development activities
related to its FreeAgent software product at the Connectsoft subsidiary
offset by the reduction of development efforts at Exodus.
Net interest expense for the three months and six months ended January
31, 1998 of $1,440,000 and $2,420,000 was up significantly from the $982,000
and $1,575,000 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. In addition, interest expense for IDF, Hayden
Wegman and Tech Star of $345,000 and $543,000 for the three and six months
ended January 31, 1998 had no comparable expense in the prior year periods.
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
12
<PAGE>
criteria for future realization. The tax provisions recognized for the
quarter and six months ended January 31, 1998 are based upon profits
generated by the Company's Western, IDF, Hayden Wegman and TechStar
subsidiaries which are not consolidated in the Company's federal tax return.
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, 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, Seattle-First National Bank
("Seafirst Bank") and Deutsche Financial Services.
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. As
of January 31, 1998, approximately $16,723,000 was outstanding under these
manufacturer provided floor plan arrangements.
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 January 31, 1998, approximately
$8,409,000 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, 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 January 31, 1998, approximately $49,396,000 was outstanding under
this facility at an interest rate of 8.0%.
13
<PAGE>
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.
Effective August 1, 1997 the Company merged TechStar into IDF, pursuant to
an agreement and plan of merger 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 six months ended January 31, 1998, IDF sold, through GV
Capital Inc., a total of $3,000,000 of IDF's five year Convertible Notes
convertible into IDF Series A and C Preferred Stock at $1.25 per share.
During the quarter ending January 31, 1998 all of the outstanding notes were
converted into 1,400,000 shares of IDF Series A Preferred Stock and 1,080,000
shares of IDF Convertible Series C Preferred stock.
Mr. Rubin, Chairman and CEO of the Company and Chairman of IDF,
converted an $800,000 loan previously made to IDF into 400,000 shares of
Preferred Series B stock.
During the six months ended January 31, 1998, cash and cash equivalents
and marketable debt securities decreased by $8,461,000 primarily due to the
repayments of debt by the Company to North Fork Bank. Cash flow from
operations was negative $15,662,000 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
$9,834,000 as of January 31, 1998, as well as available credit facilities are
considered sufficient to support current or higher levels of operations for at
least the next twelve months.
ITEM 1. LEGAL PROCEEDINGS
A former employee of the Hayden Wegman subsidiary commenced an action that
is pending before the Supreme court of the State of New York in which he is
seeking compensatory damages of $1,000,000 and punitive damages of $1,000,000
for allowing
14
<PAGE>
a long term disability policy to lapse thereby depriving him of disability
benefits which he would otherwise have been eligible to receive and which, he
claims, he was contractually entitled to receive. Hayden Wegman has filed an
answer denying the claim and intends to vigorously defend it.
ITEM 5. OTHER INFORMATION
On February 4, 1998, the Company was notified by the NASDAQ Listing
Qualifications 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
None
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.
March 23, 1998
--
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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