<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended October 31, 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 NE 33RD PLACE, SUITE 250
BELLEVUE, WASHINGTON 98004
(Address of principal executive offices) Zip code
Registrant's telephone no.: 425-803-5432
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) 11,921,529
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<CAPTION>
AMERICAN UNITED GLOBAL, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
October 31, 1999 (unaudited) and July 31, 1999.............. 1
Consolidated Statements of Operations
Three Months Ended October 31, 1999
and October 31, 1998 (unaudited)............................ 2
Consolidated Statement of Shareholders'
Equity (unaudited)........................................... 3
Consolidated Statements of Cash Flows
Three Months Ended October 31, 1999
and October 31, 1998 (unaudited)............................ 4
Notes to the Consolidated Financial
Statements (unaudited)......................................... 5-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 8-10
Item 3. Quantitative and Qualitative Disclosure about
Market Risk................................................... N/A
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................... 11
Item 2. Changes in Securities................................... N/A
Item 3. Defaults Upon Senior Securities......................... 11
Item 4. Submission of Matters to a Vote of Security
Holders....................................................... N/A
Item 5. Other Information ...................................... 11
Item 6. Exhibits and Reports on Form 8-K........................ 11
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<TABLE>
<CAPTION>
ITEM 1
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, JULY 31,
1999 1999
---- ----
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 1,988,000 $ 2,914,000
Investment in marketable and debt securities, at cost................... 1,501,000 371,000
Trade accounts receivable, less allowance for doubtful accounts
of $812,000 and $724,000, respectively................................. 17,276,000 15,500,000
Inventories............................................................. 59,745,000 67,068,000
Prepaid expenses and other receivables.................................. 797,000 885,000
Deferred tax asset...................................................... 1,410,000 1,410,000
Receivable from Chairman................................................ 450,000 1,700,000
Notes receivable ....................................................... 1,140,000 1,140,000
--------- ---------
TOTAL CURRENT ASSETS................................................ 84,307,000 90,988,000
Property and equipment, net ............................................ 9,653,000 9,818,000
Rental equipment, net .................................................. 31,503,000 31,366,000
Leased equipment, net .................................................. 5,137,000 5,264,000
Intangibles and other assets, net of accumulated amortization
of $601,000 and $1,460,000, respectively ............................. 2,920,000 2,952,000
Investment in preferred stock........................................... 2,000,000 2,000,000
Notes receivable........................................................ 521,000 521,000
------- -------
TOTAL ASSETS........................................................ $ 136,041,000 $ 142,909,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under floor financing lines.................................. $ 12,976,000 $ 17,128,000
Short-term borrowings................................................... 72,109,000 72,383,000
Current portion of capital lease obligations ........................... 13,000 17,000
Accounts payable........................................................ 10,817,000 13,038,000
Accrued liabilities..................................................... 4,220,000 4,046,000
Income taxes payable.................................................... 680,000 627,000
Due to shareholders..................................................... 2,500,000 2,500,000
--------- ---------
TOTAL CURRENT LIABILITIES........................................... 103,316,000 109,739,000
Long-term borrowings ...................................................... 43,000 48,000
Capital lease obligations, net of current portion.......................... 4,747,000 4,755,000
Deferred taxes............................................................. 837,000 837,000
Deferred gain.............................................................. 139,000 140,000
Deferred lease income...................................................... 6,034,000 6,181,000
--------- ---------
TOTAL LIABILITIES................................................... 115,116,000 121,700,000
Minority interest.......................................................... 8,461,000 8,412,000
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; 425,620 shares issued and outstanding................... 4,000 4,000
Common stock, $.01 par value; 40,000,000 shares
authorized; 11,921,529 shares issued and outstanding.................. 119,000 119,000
Additional contributed capital.......................................... 49,954,000 49,954,000
Accumulated deficit..................................................... (37,613,000) (37,280,000)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY.......................................... 12,464,000 12,797,000
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................... $ 136,041,000 $ 142,909,000
=========== ===========
See accompanying notes to consolidated financial statements.
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1
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<CAPTION>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
OCTOBER 31,
1999 1998
---- ----
<S> <C> <C>
Net revenues ...................................... $ 42,063,000 $ 40,365,000
Cost of revenues .................................. 37,144,000 37,890,000
------------ ------------
Gross profit ...................................... 4,919,000 2,475,000
Selling, general and administrative expenses ...... 3,432,000 3,373,000
--------- ---------
Operating (loss) income ........................... 1,487,000 (898,000)
Interest expense, net ............................. 1,533,000 1,740,000
--------- ---------
Loss from continuing operations before
income taxes, equity in loss of unconsolidated
subsidiary and minority interest ............. (46,000) (2,638,000)
Provision (benefit) for income taxes .............. 62,000 (880,000)
Equity in loss of unconsolidated subsidiary ....... 176,000 140,000
Minority interest in (earnings) loss of
consolidated subsidiary ........................ (49,000) 512,000
------- -------
Loss from continuing operations ................... (333,000) (1,386,000)
Loss from discontinued operations ................. - (731,000)
-------- --------
Net loss .......................................... $ (333,000) $ (2,117,000)
============= =============
Basic and diluted loss per share:
Loss from continuing operations $ (0.03) $ (0.12)
Loss from discontinued operations -- (0.06)
------------- -------------
Basic and diluted loss per share $ (0.03) $ (0.18)
============= =============
Weighted average number of shares 11,921,529 11,617,718
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
2
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<CAPTION>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF 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, 1999....... 426,000 $ 4,000 11,921,000 $ 119,000 $ 49,954,000 $(37,280,000) $ 12,797,000
Net loss ...................... (333,000) (333,000)
-------- -------- ---------- --------- ------------- ------------- ------------
Balance at October 31, 1999.... 426,000 $ 4,000 11,921,000 $ 119,000 $ 49,954,000 $(37,613,000) $ 12,464,000
======= ======== ========== =========== ============= ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
3
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<TABLE>
<CAPTION>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED
OCTOBER 31,
-----------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations............... $ (333,000) $ (1,386,000)
Net loss from discontinued operations............. - (731,000)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization................... 3,531,000 1,441,000
Income (loss) applicable to minority interest... 49,000 (512,000)
Undistributed loss of affiliate................. 176,000 140,000
Changes in assets and liabilities, net of
effects of acquisition and dispositions:
Accounts receivable........................... (1,776,000) 5,367,000
Inventories................................... 5,407,000 4,929,000
Inventory floor plan financing................ (4,152,000) 815,000
Borrowings under term loans................... (274,000) (6,500,000)
Prepaid expenses and other receivables........ 88,000 (62,000)
Notes receivable.............................. - 65,000
Leased equipment, net......................... 127,000 -
Accounts payable.............................. (2,394,000) (5,679,000)
Other accrued liabilities..................... 173,000 763,000
Income taxes payable.......................... 53,000 (1,050,000)
Deferred revenue.............................. (147,000) 2,918,000
Net liabilities of discontinued operations.... - (1,480,000)
---------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES..... 528,000 (962,000)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment................ (58,000) (1,522,000)
Purchase of rental equipment, net................. (1,498,000) -
Sale of marketable securities..................... 120,000 1,981,000
------- ---------
NET CASH (USED)PROVIDED BY INVESTING ACTIVITIES...... (1,436,000) 459,000
---------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease............... (14,000) (143,000)
Payment of long term borrowings................... (4,000) (87,000)
------ -------
NET CASH USED BY FINANCING ACTIVITIES................ (18,000) (230,000)
------- --------
Net decrease in cash and cash equivalents............ (926,000) (733,000)
Cash and cash equivalents, beginning................. 2,914,000 3,362,000
--------- ---------
Cash and cash equivalents, ending.................... $ 1,988,000 $ 2,629,000
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
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, 1999 filed with the Securities
and Exchange Commission. All adjustments are of a normal recurring nature that
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, 1999 filed with the Securities
and Exchange Commission.
The consolidated financial statements include the accounts of the Company
and its wholly owned and majority owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Minority interest represents the minority shareholders' proportionate share of
the equity of Western Power and Equipment Corp. ("Western") of 39.5% at October
31, 1999 and July 31, 1999.
NOTE 2 - INVENTORIES
Inventories consist of the following:
OCTOBER 31, JULY 31,
1999 1999
---- ----
Parts.......................... $ 10,127,000 $ 10,101,000
Equipment, new and used........ 49,618,000 56,967,000
---------- ----------
$ 59,745,000 $ 67,068,000
=========== ===========
NOTE 3 - FIXED ASSETS
Fixed Assets consist of the following:
October 31, July 31,
1999 1999
---- ----
Operating property, plant and equipment:
Land $420,000 $ 420,000
Buildings 5,128,000 5,126,000
Machinery and equipment 3,951,000 3,869,000
Office furniture and fixtures 2,294,000 2,291,000
Computer hardware and software 1,371,000 1,299,000
Vehicles 1,805,000 1,841,000
Leasehold improvements 411,000 360,000
---------- ----------
15,380,000 15,206,000
Less: accumulated depreciation (5,727,000) (5,388,000)
---------- ----------
Property, plant, and equipment (net) $9,653,000 $9,818,000
========= ==========
Rental equipment fleet $37,381,000 $36,395,000
Less: accumulated depreciation (5,878,000) (5,029,000)
---------- ----------
Rental equipment (net) $31,503,000 $31,366,000
========== ==========
Leased equipment fleet (net) $5,137,000 $5,264,000
========= =========
5
<PAGE>
NOTE 4 - INTANGIBLE ASSETS
Intangible and other assets consist of the following:
October 31, July 31,
1999 1999
---- ----
Goodwill......................$ 2,920,000 $ 2,952,000
Goodwill is amortized over lives ranging from 20 to 40 years.
NOTE 5 - CONTINGENCIES
Legal Proceedings
Except as set forth below, there are no pending material legal proceedings
in which the Company or any of its subsidiaries is a party, or to which any of
their respective properties are subject, which either individually or in the
aggregate, may have a material adverse effect on the results of operations or
financial position of the Company.
In May 1998, a lawsuit was filed on behalf of the Company in a purported
shareholder derivative action against certain directors of the Company. The
lawsuit alleged 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.
and the delisting of the Company's common stock and publicly traded warrants
from the Nasdaq Stock Market.
In June, 1998 a shareholder class action was filed against the same 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. and the delisting of the Company's common stock and publicly
traded warrants from the Nasdaq Stock Market.
On June 1, 1999 an agreement was entered into by all parties whereby the
class action was settled for $2,500,000 which is payable, net of costs, to
approved claimant shareholders. The settlement consists of $600,000 in cash from
insurance proceeds from the Company's directors' and officers' liability
insurance policy and $1,900,000 in shares of Western Power common stock owned by
the Company, which, pursuant to the calculation required by the settlement
agreement, amounted to 777,414 shares. When the Western shares are distributed
to the stockholders, the Company will no longer own greater than 50% of Western,
and will account for Western using the equity method. In addition, on June 1,
1999 the derivative action was also settled for $2,800,000 which amount is
payable by Robert M. Rubin to the Company. This settlement consists of
$1,100,000 from Mr. Rubin's assignment of his rights to certain consulting
payments from Hutchinson Corporation and the transfer by Mr. Rubin to the
Company of $1,700,000 of cash, securities and notes in a brokerage account. Both
settlement agreements were approved by the court on August 23, 1999 and the
settlements were reflected in the financial statements as of July 31, 1999. All
amounts due from Mr. Rubin to the Company pursuant to the derivative action
settlement were received by November 12, 1999, except for the Hutchinson
payments, the receipt of which is conditioned upon shareholder approval of the
Hutchinson Transaction and approximately $450,000 of securities and notes which
were contributed to the Company by Mr. Rubin but which were not approved by
plaintiffs' counsel. Mr. Rubin is obligated to replace these securities and
notes with $450,000 of common stock of a publicly traded company that is
satisfactory to plaintiffs' counsel not later than January 15, 2000.
6
<PAGE>
Contingent Liabilities
The Company remains contingently liable for certain equipment lease
obligations assumed by eGlobe, Inc. as part of the Connectsoft Communications
Corp. asset sale. Such contingency amounts to approximately $2,750,000 and is
currently being paid by eGlobe pursuant to the asset sale agreement.
NOTE 6 - SUBSIDIARY PREFERRED STOCK
Western has been authorized to issue 10,000,000 shares of "blank check"
preferred stock, with respect to which all the conditions and privileges thereof
can be determined solely by action of such subsidiary's Board of Directors
without further action of its stockholders. As of November 30, 1999, none were
issued and outstanding.
NOTE 7 - SUBSEQUENT EVENTS
Effective November 5, 1999, the Company sold all of its rights, title and
interest in and to a certain patent to GraphOn Corporation (OTC Bulletin
Board:GOJO). The patent is entitled "Method and System for Dynamic Translation
Between Different Graphical User Interface Systems" and had been acquired as
part of the "Old Connectsoft" acquisition in fiscal 1996. The sales price
consisted of 58,000 shares of restricted common stock of the purchaser which has
been valued at 60% of the last trading price on the day of closing for a total
of $240,000. The sale will be recorded in the quarter ending January 31, 2000.
7
<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 are various Securities and Exchange Commission filings. No assurance
can be given that any such matters will be realized.
The Company has operations in the distribution business through its
majority-owned operating subsidiary, Western Power and Equipment Company.
The Company is also involved in the construction business through IDF
International, Inc. ("IDF"), a 40% minority owned subsidiary.
RESULTS OF OPERATIONS
The Three Months Ended October 31, 1999 Compared to the Three Months Ended
October 31, 1998
Western's revenues for the three-month period ended October 31, 1999
increased 4% to $42.1 million compared with $40.4 million for the three-month
period ended October 31, 1998. Revenues were up from the prior year's first
quarter in every department other than service. Equipment sales have rebounded
somewhat in Oregon which had been down in prior quarters due to competitive
pressures, a slower northwest economy, and some especially inclement weather.
Equipment sales were also up strongly in Alaska, due in large part to higher
sales to governmental entities.
Western's gross profit margin of 11.7% for the three-month period ended
October 31, 1999 was up from the prior year comparative period margin of 8.7%.
The increase in gross profit margins was partly the result of increased
percentage of overall business coming from the relatively higher margin rental
business.
Selling, general and administrative expenses totaled $3,432,000 or 8.2% of
sales for the three months ended October 31, 1999 compared to $3,373,000 or 8.4%
of sales for the three months ended October 31, 1998. The increase in selling,
general and administrative expenses of $59,000 is primarily attributable to
slight increases in expenditures by Western due to costs associated with the
consolidation of stores that began in the last quarter of fiscal 1999 and the
ongoing expenses still being incurred for those vacated locations offset by
reductions in the overhead associated with the Company's corporate headquarters.
Net interest expense for the three months ended October 31, 1999 of
$1,533,000 was down from the $1,740,000 in the prior year comparative period.
This decrease is primarily the result of lower average borrowings by Western
under the Deutsche Financial Services facility.
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 expense recognized for the current quarter is based
upon income generated by the Company's Western subsidiary.
The Company had a net loss for the quarter ended October 31, 1999 of
$333,000 or $0.03 per (basic and diluted) share compared with a net loss of
$2,117,000 or $0.18 per (basic and diluted) for the prior year's first quarter.
The first quarter of fiscal 1999 included a non-recurring pre-tax charge of
$1,061,000 for used equipment inventory reserves at Western and a loss from
discontinued operations of the Company of $731,000.
8
<PAGE>
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.
Western's primary source of internal liquidity has been its cash flow positive
operations. As more fully described below, Western's primary sources of external
liquidity are equipment inventory floor plan financing arrangements provided to
Western by the manufacturers of the products Western sells, and Deutsche
Financial Services ("DFS") and, with respect to acquisitions, secured loans from
Case Corporation (now CNH Global).
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 October 31,
1999, Western was indebted under manufacturer provided floor planning
arrangements in the aggregate amount of $12,976,000.
Western recently amended its $75 million inventory flooring and operating
line of credit through Deutsche Financial Services ("DFS"). The amended DFS
credit facility is a three-year, floating rate facility based on prime with
rates between 0.75% under prime to prime depending on the amount of total
borrowing under the facility. Borrowings are secured by Western's assets,
including accounts receivable, parts, new equipment, rental fleet, and used
equipment. Western expects to use this borrowing facility to lower flooring
related interest expense by using advances under such line to finance inventory
purchases in lieu of financing provided by suppliers, to take advantage of cash
purchase discounts from its suppliers, to provide operating capital for further
growth, and to refinance some its acquisition related debt at a lower interest
rate. As of October 31, 1999, approximately $70,589,000 was outstanding under
the DFS credit facility. Western is in technical default of the leverage
covenant in the Deutsche Financial Services Loan Agreement. Western requested
but did not obtain a waiver for the period through October 31, 1999. Although
DFS has not called the debt due to such default, there is no guarantee that
Deutsche Financial Services will not call this debt at any time after October
31, 1999.
During the quarter ended October 31, 1999, cash, cash equivalents and
marketable and debt securities increased by $204,000, primarily due to the
contribution of $1,250,000 of marketable securities by Mr. Rubin pursuant to the
derivative action settlement agreement offset by purchases of rental equipment
at Western.
The Company's cash, cash equivalents and marketable and debt securities of
$3,489,000 and available credit facilities as of October 31, 1999 are considered
sufficient to support current levels of operations for the next twelve months.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Western has completed its upgrades of its enterprise application to include
Y2K fixes uncovered during the Western's internal testing of the vendor's
software. The Company presently believes that with this upgrade to the existing
software, the Year 2000 issue can be mitigated. However, if the upgrade does not
work as anticipated, the Year 2000 issue could have a material impact on the
operations of Western and the Company.
Western has contacted 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. Western has received a favorable response
from about half of the suppliers contacted to date. 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 the
Western has any exposure to contingencies related to the Year 2000 issue for the
products it has previously sold.
9
<PAGE>
Western will utilize both internal and external resources to reprogram, or
replace, and test Western's software for Year 2000 modifications. Western plans
to complete its Year 2000 project on or before December 31, 1999. Funding for
the costs of the program are anticipated to come from Western's operating cash
flows.
Western's current plan to complete the Year 2000 modifications are based on
management's best estimates, which were derived using numerous assumptions of
future events including the continued availability of certain resources, third
party modification plans, and the ability to meet projected time lines. There
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and other uncertainties.
Inventory; Effects of Inflation and Interest Rates; General Economic Conditions
Controlling inventory is a key ingredient to the success of an equipment
distributor because the equipment industry is characterized by long order
cycles, high ticket prices, and the related exposure to "flooring" interest.
Western's interest expense may increase if inventory is too high or interest
rates rise. Western manages its inventory through company-wide information and
inventory sharing systems wherein all locations have access to Western's entire
inventory. In addition, Western closely monitors inventory turnover by product
categories and places equipment orders based upon targeted turn ratios.
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 2% of Western's total revenues,
factors adversely affecting the farming and commodity markets also can adversely
affect Western's agricultural equipment related business.
Western's business can also be affected by general economic conditions in
its geographic markets as well as general national and global economic
conditions that affect the construction, agricultural, and industrial sectors.
Erosion in North American and/or other countries' economies could adversely
affect Western's business. Market specific factors could also adversely affect
one or more of Western's target markets and/or products.
10
<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.
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 same 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. and the delisting of the Company's common stock and publicly
traded warrants from the Nasdaq Stock Market.
On June 1, 1999 an agreement was entered into by all parties whereby the
class action was settled for $2,500,000 which is payable, net of costs, to
approved claimant shareholders. The settlement consists of $600,000 in cash from
insurance proceeds from the Company's directors' and officers' liability
insurance policy and $1,900,000 in shares of Western Power common stock owned by
the Company, which, pursuant to the calculation required by the settlement
agreement, amounted to 777,414 shares. When the Western shares are distributed
to the stockholders, the Company will no longer own greater than 50% of Western,
and will account for Western using the equity method. In addition, on June 1,
1999 the derivative action was also settled for $2,800,000 which amount is
payable by Robert M. Rubin to the Company. This settlement consists of
$1,100,000 from Mr. Rubin's assignment of his rights to certain consulting
payments from Hutchinson Corporation and the transfer by Mr. Rubin to the
Company of $1,700,000 of cash, securities and notes in a brokerage account. Both
settlement agreements were approved by the court on August 23, 1999 and the
settlements were reflected in the financial statements as of July 31, 1999. All
amounts due from Mr. Rubin to the Company pursuant to the derivative action
settlement were received by November 12, 1999, except for the Hutchinson
payments, the receipt of which is conditioned upon shareholder approval of the
Hutchinson Transaction and approximately $450,000 of securities and notes which
were contributed to the Company by Mr. Rubin but which were not approved by
plaintiffs' counsel. Mr. Rubin is obligated to replace these securities and
notes with $450,000 of common stock of a publicly traded company that is
satisfactory to plaintiffs' counsel not later than January 15, 2000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At October 31, 1999, Western was in technical default of the minimum
tangible net worth covenant in the DFS Loan Agreement. As of October 31, 1999,
the outstanding balance owed to DFS was approximately $70,589,000. Western
requested but did not obtain a waiver of the default for the period through
October 31, 1999. Although DFS has not called the debt due to such default,
there is no guarantee that DFS will not call this debt at any time after October
31, 1999. See Item 1, "Liquidity and Capital Resources."
ITEM 5. OTHER INFORMATION
The Company has set February 22, 2000 as the date for the 1999
stockholders' meeting. A preliminary proxy will be filed with the Securities and
Exchange Commission on or about December 22, 1999 and a mailing to stockholders
is anticipated on or about January 4, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
11
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN UNITED GLOBAL, INC.
December 20, 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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