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, 1999
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 N.E. 33rd Pl., 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 12 months (or for such shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirement for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Title of Class Number of Shares
Common Stock Outstanding
(par value $.01 per share) 11,864,495
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AMERICAN UNITED GLOBAL, INC.
INDEX
PART I. FINANCIAL INFORMATION Page Number
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Item 1. Financial Statements
Consolidated Balance Sheets
January 31, 1999 (Unaudited) and July 31, 1998..................................... 1-2
Consolidated Statements of Operations
Three months ended January 31, 1999
and January 31, 1998 (Unaudited)................................................... 3
Consolidated Statements of Operations
Six months ended January 31, 1999
and January 31, 1998 (Unaudited)................................................... 4
Consolidated Statement of Shareholders'
Equity (Unaudited)................................................................. 5
Consolidated Statements of Cash Flows
Six months ended January 31, 1999
and January 31, 1998 (Unaudited)................................................... 6
Notes to Consolidated Financial
Statements (Unaudited).............................................................. 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................. 11-15
Item 3. Quantitative and Qualitative Disclosure
about Market Risk............................................................. N/A
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 16
Item 2. Changes In Securities......................................................... N/A
Item 3. Defaults Upon Senior Securities............................................... 16
Item 4. Submission Of Matters To A Vote Of Security
Holders....................................................................... N/A
Item 5. Other Information............................................................. 16
Item 6. Exhibits and Reports on Form 8-K.............................................. 17
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AMERICAN UNITED GLOBAL, INC.
ITEM 1. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
January 31, July 31,
1999 1998
----------- --------
[Unaudited]
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Current Assets:
Cash and cash equivalents $ 2,999,000 $ 3,362,000
Investment in marketable debt securities 2,067,000 4,449,000
Trade accounts receivable, less allowance
for doubtful accounts of $868,000 and
$726,000, respectively 15,955,000 23,708,000
Inventories 63,715,000 73,491,000
Prepaid expenses and other receivables 280,000 287,000
Deferred tax asset 1,298,000 1,298,000
Notes receivable 685,000 1,200,000
------------ ------------
Total Current Assets 86,999,000 107,795,000
--------------------
Property and equipment, net 9,703,000 8,695,000
Rental equipment, net 21,243,000 23,080,000
Lease equipment, net 5,385,000 2,760,000
Intangibles and other assets, net of accumulated
amortization of $1,406,000 and $1,262,000,
respectively 3,469,000 3,613,000
Investment in unconsolidated subsidiary 606,000 961,000
Notes receivable 463,000 -
------------ ------------
Total Assets $127,868,000 $146,904,000
------------ ============ ============
See accompanying notes to consolidated financial statements.
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AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
January 31, July 31,
1999 1998
---------- -----------
[Unaudited]
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Current Liabilities:
Borrowings under floor financing lines $ 11,580,000 $ 11,038,000
Short-term borrowings 64,806,000 76,769,000
Current portion of capital lease obligations 12,000 67,000
Accounts payable 13,909,000 18,027,000
Accrued liabilities 6,358,000 5,336,000
Income taxes payable 305,000 1,050,000
Net liabilities of discontinued operations - 1,480,000
------------ ------------
Total Current Liabilities 96,970,000 113,767,000
-------------------------
Long term borrowings 1,158,000 1,156,000
Capital lease obligations, net of current portion 2,528,000 2,827,000
Deferred taxes 690,000 690,000
Deferred lease income 6,320,000 3,474,000
------------ ------------
Total Liabilities 107,666,000 121,914,000
-----------------
Minority Interest 8,750,000 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; 476,653 and 723,862 shares issued and outstanding,
respectively 5,000 7,000
Common stock, $.01 par value; 40,000,000 shares
authorized; 11,864,495 and 11,617,286 shares issued
and outstanding, respectively 118,000 116,000
Common stock, Class B non-voting, 25,000,000 shares
authorized; none issued and outstanding
Additional contributed capital 49,954,000 49,954,000
Retained (deficit) ( 38,625,000) ( 34,215,000)
------------ ------------
Total Shareholders' Equity 11,452,000 15,862,000
-------------------------- ------------ ------------
Total Liabilities & Shareholders' Equity $127,868,000 $146,904,000
---------------------------------------- ============ ============
See accompanying notes to consolidated financial statements.
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AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
January 31,
1999 1998
-------- --------
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Net revenues $41,279,000 $39,658,000
Cost of revenues 36,787,000 34,669,000
----------- -----------
Gross profit 4,492,000 4,989,000
Selling, general and administrative expenses 3,198,000 3,455,000
----------- -----------
Operating income 1,294,000 1,534,000
Interest expense, net 1,007,000 842,000
----------- -----------
Income from continuing operations before
income taxes, equity in loss of unconsolidated
subsidiary and minority interest 287,000 692,000
Provision for income taxes 306,000 332,000
Equity in loss of unconsolidated subsidiary 215,000 134,000
Minority interest in loss (earnings) of
consolidated subsidiary ( 134,000) ( 266,000)
----------- -----------
Loss from continuing operations ( 368,000) ( 40,000)
Loss from discontinued operations ( 1,925,000) ( 1,708,000)
----------- -----------
Net loss available for common shareholders ($ 2,293,000) ($ 1,748,000)
=========== ===========
Basic and diluted loss per share
Loss from continuing operations ($ .03) ($ .00)
Loss from discontinued operations ( .17) ( .16)
----- -----
Basic and diluted loss per share ($ .20) ($ .16)
===== =====
Weighted average number of shares 11,728,000 11,149,000
========== ==========
See accompanying notes to consolidated financial statements.
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AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended
January 31,
1999 1998
-------- --------
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Net revenues $81,644,000 $76,616,000
Cost of revenues 74,677,000 67,292,000
----------- -----------
Gross profit 6,967,000 9,324,000
Selling, general and administrative expenses 6,571,000 6,858,000
----------- -----------
Operating income 396,000 2,466,000
Interest expense, net 2,747,000 1,477,000
----------- -----------
Income (loss) from continuing operations before
income taxes, equity in loss of unconsolidated
subsidiary and minority interest ( 2,351,000) 989,000
(Benefit) provision for income taxes ( 574,000) 665,000
Equity in loss (income) of unconsolidated subsidiary 355,000 ( 56,000)
Gain on sale of subsidiary - ( 220,000)
Minority interest in loss (earnings) of consolidated
subsidiary 378,000 ( 490,000)
----------- -----------
(Loss) Income from continuing operations ( 1,754,000) 110,000
Loss from discontinued operations ( 2,656,000) ( 2,657,000)
----------- -----------
Net loss ( 4,410,000) ( 2,547,000)
Dividends on preferred stock - 24,000
----------- -----------
Net loss available for common shareholders ($ 4,410,000) ($ 2,571,000)
=========== ===========
Basic and diluted earnings (loss) per share
(Loss) Income from continuing operations ($ .15) $ .01
Loss from discontinued operations ( .23) ( .24)
----- -----
Basic and diluted loss per share ($ .38) ($ .23)
===== =====
Weighted average number of shares 11,673,000 11,037,000
========== ==========
See accompanying notes to consolidated financial statements.
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AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Preferred Stock Common Stock Additional Total
Number of Number of Contributed Retained Shareholders'
Shares Amount Shares Amount Capital [Deficit] Equity
-------- -------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
July 31, 1998 724,000 $7,000 11,617,000 $116,000 $49,954,000 ($34,215,000) $15,862,000
Net loss - - - - - ( 4,410,000) ( 4,410,000)
Conversion of
preferred stock
to common (247,000) ( 2,000) 247,000 2,000 - - -
------- ------ ---------- -------- ----------- ----------- -----------
Balance at
January 31, 1999 477,000 $5,000 11,864,000 $118,000 $49,954,000 ($38,625,000) ($11,452,000)
======= ====== ========== ======== =========== =========== ===========
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See accompanying notes to consolidated financial statements.
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AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
January 31,
1999 1998
-------- --------
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Cash Flows From Operating Activities:
- -------------------------------------
Net (loss) income from continuing operations ( $1,754,000) $ 110,000
Net loss from discontinued operations ( 2,656,000) ( 2,657,000)
Adjustment to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 2,524,000 1,255,000
(Loss) income applicable to minority interest ( 378,000) 490,000
Undistributed loss (income) of affiliate 355,000 ( 56,000)
Gain on partial sale of subsidiary - ( 220,000)
Changes in assets and liabilities, net of
effects of acquisition and dispositions:
Accounts receivable 7,753,000 ( 2,747,000)
Inventories 9,776,00 377,000
Leased equipment, net ( 2,625,000) -
Inventory floor plan financing 542,000 -
Short-term borrowings ( 11,863,000) -
Prepaid expenses and other receivables 7,000 ( 302,000)
Notes receivable - 3,503,000
Accounts payable ( 4,100,000) ( 6,840,000)
Other accrued liabilities 1,022,000 ( 8,236,000)
Income taxes payable ( 745,000) 487,000
Deferred revenue 2,846,000 ( 950,000)
Net liabilities of discontinued operations ( 1,480,000) -
Deferred taxes - 38,000
Other assets - 86,000
----------- -----------
Net Cash Used by Operating Activities ( 776,000) ( 15,662,000)
------------------------------------- ----------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment ( 1,484,000) ( 517,000)
Purchase of rental equipment, net ( 354,000) -
Sale of marketable securities 2,382,000 4,008,000
----------- -----------
Net Cash Provided by Investing Activities 544,000 3,491,000
----------------------------------------- ----------- -----------
Cash Flows From Financing Activities:
Issuance of common stock - 476,000
Principal payments on capital lease ( 33,000) ( 48,000)
Payment of loans and credit lines ( 98,000) 59,000
Note receivable from shareholder - 38,000
Proceeds from issuance of debt - 2,607,000
Exercise of stock options and warrants - 578,000
----------- -----------
Net Cash (Used) Provided by Financing Activities ( 131,000) 3,710,000
------------------------------------------------ ----------- -----------
Net decrease in cash and cash equivalents ( 363,000) ( 8,461,000)
Cash and cash equivalents, beginning 3,362,000 12,284,000
----------- -----------
Cash and cash equivalents, ending $ 2,999,000 $ 3,823,000
=========== ===========
See accompanying notes to consolidated financial statements.
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AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, 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 January 31, 1999
and July 31, 1998.
NOTE 2 - STATEMENT OF CASH FLOWS
- --------------------------------
Supplemental disclosure of cash paid during the periods:
Six Months Ended
January 31,
1999 1998
-------- --------
Interest $2,725,000 $2,265,000
Income taxes $ 365,000 $ 712,000
NOTE 3 - INVENTORIES
Inventories consist of the following: January 31, July 31,
1999 1998
----- -----
Parts $ 9,554,000 $ 8,535,000
Equipment new and used 54,161,000 64,956,000
----------- -----------
$63,715,000 $73,491,000
=========== ===========
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.
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AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - CONTINGENCIES (CONTINUED)
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.
NOTE 5 - INTANGIBLE ASSETS
Intangibles and other assets consist of the following:
January 31, July 31,
1999 1998
----- ----
Goodwill $2,912,000 $3,044,000
Non-compete agreement 30,000 42,000
Other assets 527,000 527,000
---------- ----------
$3,469,000 $3,613,000
========== ==========
Goodwill is amortized over lives ranging from 25 to 40 years, and the
non-compete agreement is being amortized over 2 years.
NOTE 6 - SERIES B-1 CONVERTIBLE PREFERRED STOCK
A total of 247,209 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, 1999 at the applicable ratio of one for one leaving 476,653 shares
outstanding at January 31, 1999.
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AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 at January 31, 1999 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, 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. Management anticipates that a disposal
transaction relative to CCC will close by March 31, 1999. The CCC transaction
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 March 31, 1999 now
total approximately $6,432,000. Of this amount, $3,776,000 has been offset
against the gain on sale of $3,776,000 and $2,656,000 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. formally know as Executive TeleCard, Ltd. ("eGlobe").
This asset sale agreement expired on December 31, 1998. Since that date, AUGI
and eGlobe have provided the working capital requirements of CCC and have been
negotiating the structure and terms of a new agreement. It is anticipated that
the new agreement will be signed on or before March 26, 1999 and that it shall
take full effect no later than March 31, 1999.
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AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - SUBSEQUENT EVENTS
On February 16, 1999 the Company and its IDF minority owned subsidiary amended
the terms of a financing agreement whereby the Company agreed to increase its
funding amount from $400,000 to $500,000 and simultaneously provided the
additional $100,000. The funds were used for working capital purposes by
Hayden-Wegman and Techstar, the two operating subsidiaries of IDF.
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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. Except for historical information contained herein, certain
statements herein are forward-looking statements that are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecasted results. Those risks include, among others, the
receipt and timing of future customer orders, price pressures and other
competitive factors leading to a decrease in anticipated revenues and gross
profit margins.
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
consulting 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. In the second fiscal quarter, Western closed its
Juneau, Alaska facility leaving Western with 25 operating facilities at January
31, 1999. 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 which 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 and Six Months ended January 31, 1999 compared to the Three
- ----------------------------------------------------------------------------
Months and Six Months ended January 31, 1998.
- ---------------------------------------------
Revenues for the three-month period ended January 31, 1999 increased 4% to $41.3
million compared with $39.7 million for the three-month period ended January 31,
1998. Western's same store revenues increased less than 1% for the three-month
period ended January 31, 1999, as compared to the prior year period. Sales were
up from the prior year's second quarter in all departments other than new
equipment sales which have been negatively affected by grey market machine
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inventory in Western's geographic markets, increased competitive pressures, a
slowdown in the northwest economy, and some especially inclement weather in the
northwest.
Revenues for the six-month period ended January 31, 1999 increased $5,028,000 or
approximately 7% over the six-month period ended January 31, 1998. The increase
was due primarily to the contribution of the stores acquired or opened in the
last year. For the six-month period ended January 31, 1999, sales in all
departments were up from the same period in the prior year.
Western's gross profit margin of 10.9% for the three-month period ended January
31, 1999 was down from the prior year comparative period margin of 12.6%. The
decrease in gross profit margins was the result of a decrease in new and used
equipment margins due to competitive pressures and some ongoing wholesale
inventory liquidation. For the six-month period ended January 31, 1999,
Western's gross margin was 8.5% down from the 12.2% gross margin for the
six-month period ended January 31, 1998.
For the three-month period ended January 31, 1999, selling, general, and
administrative ("SG&A") expenses, as a percentage of sales, were 7.7% down from
8.7% for the prior year's quarter. SG&A expenses for the six-month period ended
January 31, 1999 were 8.0% of sales compared to 8.9% of sales for the prior year
six-month period. The decrease in SG&A expenses is primarily attributable to
reductions in the overhead associated with the Company's corporate headquarters.
Western's executive management has put in place a plan to reduce SG&A expenses
as a percentage of sales for the balance of the fiscal year.
Net interest expense for the three months ended January 31, 1999 of $1,007,000
increased $165,000 from $842,000 in the prior year comparative period. This
increase was a result of a decrease in the Company's interest income partially
offset by a decrease of Western's lower average borrowing rate on the Deutsche
Financial Services facility and some one-time rebates used to offset interest
expense in the period. Interest expense for the six-month period ended January
31, 1999 was $2,747,000 compared to $1,477,000 for the six-month period ended
January 31, 1998, due to the increased inventory carried by Western and a
decrease in the Company's interest income.
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 provision recognized for the current quarter is based upon
income generated by the Company's Western subsidiary.
Western's net income for the quarter ended January 31, 1999 was $331,000 with
$615,000 for the prior year's second quarter. For the six-month period ended
January 31, 1999, Western reported a loss of $957,000 compared with net income
of $1,130,000 for the six-month period ended January 31, 1998.
A major contributing factor to the net loss of Western during the six-months
ended January 31, 1999 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.
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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 or 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 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 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 January 31,
1999, Western was indebted under manufacturer provided floor planning
arrangements in the aggregate amount of $11,580,000.
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 of its acquisition related debt at a lower
interest rate. As of January 31, 1999, approximately $63,702,000 was outstanding
under the DFS credit facility. At January 31, 1999, Western was in technical
default of the leverage covenant in the Deutsche Financial Services Loan
Agreement. Western obtained a waiver for the period through March 12, 1999.
There is no guarantee that Deutsche Financial Services will not call this debt
at any time after March 12, 1999. Western and DFS have reached preliminary
agreement on amending this credit facility revising several covenants, including
an increase in the debt leverage covenant. Finalization of this amendment is
expected by March 31, 1999. 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 six months ended January 31, 1999, cash and cash equivalents and
marketable debt securities decreased by $2,745,000 primarily due to the
Company's continued funding of the discontinued operations of Connectsoft
Communications.
The Company's cash and cash equivalents and marketable debt securities of
$5,066,000 and available credit facilities as of January 31, 1999 are considered
sufficient to support current levels of operations for the next twelve months.
- 13 -
<PAGE>
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 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.
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.
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.
- 14 -
<PAGE>
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.
- 15 -
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
In May 1998, a lawsuit was filed on behalf of the Company in 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At January 31, 1999, Western was in technical default of the leverage covenant
in the Deutsche Financial Services ("DFS") Loan Agreement. As of January 31,
1999, the outstanding balance owed to DFS was approximately $63,702,000. Western
obtained a waiver of the default for the period through March 12, 1999. There is
no guarantee that DFS will not call this debt at any time after March 12, 1999.
See Item 1, "Liquidity and Capital Resources."
ITEM 5. OTHER INFORMATION
Western has received notice from Nasdaq that Western has failed to maintain a
market value of publicly held shares greater than or equal to $5 million in
accordance with Nasdaq Marketplace Rule 4450(a)(2) under Maintenance Standard 1
for continued listing on the National Market System (NMS). Western has requested
a hearing with Nasdaq regarding this issue. The hearing is scheduled for April
8, 1999. The result of this hearing will determine whether Western can continue
its NMS listing. In the event that Western does not meet the NMS maintenance
requirement on the hearing date, Western will request that listing of its shares
be transferred to the Nasdaq SmallCap Market. There can be no assurance that
Nasdaq will approve continued listing of Western's shares on the NMS or that the
listing will be transferred to the Nasdaq SmallCap Market.
- 16 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
None
(B) REPORTS ON FORM 8-K
None
- 17 -
<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 22, 1999
By: /s/ Robert M. Rubin
-----------------------
Robert M. Rubin
Chief Executive Officer
By: /s/ David M. Barnes
------------------------
David M. Barnes
Chief Financial Officer
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