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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended April 30, 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) 11,916,642
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AMERICAN UNITED GLOBAL, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets
April 30, 1999 (unaudited) and July 31, 1998.............. 1-2
Consolidated Statements of Operations
Three Months Ended April 30, 1999
and April 30, 1998 (unaudited)............................ 3
Consolidated Statements of Operations
Nine Months Ended April 30, 1999
and April 30, 1998 (unaudited)............................ 4
Consolidated Statement of Shareholders'
Equity (unaudited)............................................. 5
Consolidated Statements of Cash Flows
Nine Months Ended April 30, 1999
and April 30, 1998 (unaudited)............................ 6
Notes to the Consolidated Financial
Statements (unaudited)......................................... 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 12-16
Item 3. Quantitative and Qualitative Disclosure about
Market Risk................................................... N/A
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................... 17
Item 2. Changes in Securities................................... N/A
Item 3. Defaults Upon Senior Securities......................... 17
Item 4. Submission of Matters to a Vote of Security
Holders....................................................... N/A
Item 5. Other Information ...................................... 17
Item 6. Exhibits and Reports on Form 8-K........................ 17
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ITEM 1
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, JULY 31,
1999 1998
(unaudited)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................... $ 3,072,000 $ 3,362,000
Investment in marketable debt securities ....... 1,169,000 4,449,000
Trade accounts receivable, less allowance for
doubtful accounts of $958,000 and
$726,000, respectively ....................... 15,855,000 23,708,000
Inventories .................................... 62,745,000 73,491,000
Prepaid expenses and other receivables ......... 317,000 287,000
Deferred tax asset ............................. 1,298,000 1,298,000
Shares receivable (Note 9)...................... 1,500,000 -
Notes receivable ............................... 730,000 1,200,000
---------- ---------
TOTAL CURRENT ASSETS ....................... 86,686,000 107,795,000
Property and equipment, net .................... 9,927,000 8,695,000
Rental equipment, net .......................... 27,772,000 23,080,000
Leased equipment, net .......................... 5,322,000 2,760,000
Intangibles and other assets, net of accumulated
amortization of $1,428,000 and $1,263,000,
respectively ................................. 3,001,000 3,613,000
Investment in unconsolidated subsidiary(Note 10) 428,000 961,000
Notes receivable ............................... 425,000 -
------------- -----------
TOTAL ASSETS ........................... $133,561,000 $146,904,000
============ ============
See accompanying notes to consolidated financial statements.
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1
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AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
APRIL 30, JULY 31,
1999 1998
(unaudited)
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under floor financing lines ....... $ 17,334,000 $ 11,038,000
Short-term borrowings ........................ 65,989,000 76,769,000
Current portion of capital lease obligations . -- 67,000
Accounts payable ............................. 11,682,000 18,027,000
Accrued liabilities .......................... 4,149,000 5,336,000
Income taxes payable ......................... 349,000 1,050,000
Net liabilities of discontinued
operations (Note 10)......................... 589,000 1,480,000
------- ---------
TOTAL CURRENT LIABILITIES ................ 100,092,000 113,767,000
Long-term borrowings ............................ 19,000 1,156,000
Capital lease obligations, net of current portion 4,790,000 2,827,000
Deferred taxes .................................. 690,000 690,000
Deferred gain ................................... 144,000 --
Deferred lease income ........................... 6,248,000 3,474,000
--------- ---------
TOTAL LIABILITIES ........................ 111,983,000 121,914,000
Minority interest ............................... 8,726,000 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; 430,507 and 723,862
shares issued and outstanding, respectively 4,000 7,000
Common stock, $.01 par value; 20,000,000 shares
authorized; 11,916,642 and 11,617,286 shares
issued and outstanding, respectively ....... 119,000 116,000
Additional contributed capital ............... 49,954,000 49,954,000
Retained (deficit) ........................... (37,225,000) (34,215,000)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ............... 12,852,000 15,862,000
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 133,561,000 $ 146,904,000
============= =============
See accompanying notes to consolidated financial statements.
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2
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AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
APRIL 30,
1999 1998
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Net revenues......................................... $ 40,371,000 $40,947,000
Cost of revenues..................................... 36,277,000 36,557,000
---------- ----------
Gross profit......................................... 4,094,000 4,390,000
Selling, general and administrative expenses......... 3,764,000 3,743,000
--------- ---------
Operating income..................................... 330,000 647,000
Interest expense, net................................ 1,191,000 1,186,000
--------- ---------
Loss from continuing operations before
income taxes, equity in loss of unconsolidated
subsidiary and minority interest................ (861,000) (539,000)
Benefit for income taxes............................. (5,000) (1,256,000)
Equity in loss (earnings) of unconsolidated
subsidiary.......................................... 528,000 (36,000)
Minority interest in (loss) earnings of
consolidated subsidiary........................... (24,000) 39,000
------- ------
(Loss) income from continuing operations............. (1,360,000) 714,000
Discontinued operations:
Income (loss) from operations........................ 2,656,000 (3,238,000)
Provision for operating loss during
the phase out period................................. - (2,110,000)
------------ ----------
Net income (loss).................................... $ 1,296,000 $(4,634,000)
============ ===========
Basic and diluted earnings (loss) per share
(Loss) earnings from continuing operations........... $ (0.11) $ 0.06
Discontinued operations.............................. 0.22 (0.46)
---- -----
Basic and diluted earnings (loss) per share.......... 0.11 (.40)
==== ====
Weighted average number of shares.................... 11,903,000 11,571,000
========== ==========
See accompanying notes to consolidated financial statements.
3
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AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
NINE MONTHS ENDED
APRIL 30,
1999 1998
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Net sales......................................... $122,015,000 $117,563,000
Cost of goods sold................................ 110,954,000 103,849,000
----------- -----------
Gross Profit...................................... 11,061,000 13,714,000
Selling, general and administrative expenses...... 10,335,000 10,600,000
---------- ----------
Operating income ................................. 726,000 3,114,000
Interest expense, net............................. 3,834,000 2,665,000
Gain on partial sale of subsidiary................ - (220,000)
--------- ----------
Loss before income taxes and minority interest.... (3,108,000) 669,000
Benefit for income taxes.......................... (579,000) (591,000)
Loss (earnings) in unconsolidated subsidiary...... 883,000 (92,000)
Minority interests in net (loss) earnings
of consolidated subsidiary..................... (402,000) 529,000
-------- -------
Net (loss) income from continuing operations...... (3,010,000) 823,000
Discontinued operations (Note 9):
Loss from operations.............................. - (5,894,000)
Provision for operating loss during
the phase out period.............................. - (2,110,000)
------------ -----------
Net loss ......................................... (3,010,000) (7,181,000)
Dividends on preferred stock...................... - 24,000
----------- -----------
Net loss available for common shareholders........ $ (3,010,000) $ (7,205,000)
============= ==============
Basic and diluted earnings (loss) per share
(Loss) earnings from continuing operations........ $ (0.26) $ 0.07
Discontinued operations........................... 0.00 (0.71)
---- -----
Basic and diluted loss per share.................. (0.26) (0.64)
===== =====
Weighted average number of shares................. 11,748,000 11,210,000
========== ==========
See accompanying notes to consolidated financial statements.
4
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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
------ ------ ------ ------ ------- --------- ------
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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 ...................... (3,010,000) (3,010,000)
Conversion of preferred
stock to common................(293,000) (3,000) 299,000 3,000
-------- ------ ------- ----- ------------- ------------- ------------
Balance at April 30, 1999...... 431,000 $ 4,000 11,916,000 $ 119,000 $ 49,954,000 $(37,225,000) $ 12,852,000
======= ======== ========== =========== ============= ============ ============
See accompanying notes to consolidated financial statements.
5
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AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
APRIL 30,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income from continuing operations... $ (3,010,000) $ 823,000
Net loss from discontinued operations.......... $ - $ (8,004,000)
Adjustments to reconcile net loss (income) to
net cash provided by operating activities
Depreciation and amortization................ 7,795,000 1,382,000
(Loss) income applicable to minority intere.. (402,000) 529,000
Undistributed loss of unconsolidated
subsidiary.................................. 883,000 92,000
Amortization of deferred compensation........ - 160,000
Gain on sale of fixed assets................. (287,000) -
Impairment of intangible asset............... - 1,474,000
Gain on partial sale of subsidiary........... - (220,000)
Changes in assets and liabilities, net of
effects of acquisition and dispositions:
Accounts receivable........................ 7,853,000 (3,582,000)
Inventories................................ 10,746,000 (6,289,000)
Prepaid expenses and other receivables..... (31,000) (31,000)
Stock receivable........................... (1,500,000) -
Notes receivable........................... - 3,503,000
Leased equipment, net...................... (2,562,000) -
Inventory floor plan financing............. 6,296,000 (47,572,000)
Long and short term borrowings............. (11,772,000) 59,318,000
Accounts payable........................... (6,162,000) (8,200,000)
Other accrued liabilities.................. (1,187,000) (2,519,000)
Income taxes payable/receivable............ (701,000) (5,856,000)
Deferred revenue........................... 2,774,000 (950,000)
Net liabilities of discontinued operations. (891,000) -
---------- ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.. 7,842,000 (15,942,000)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment............. (2,887,000) (50,000)
Purchase of rental equipment................... (10,694,000) -
Proceeds on sale of fixed assets............... 2,212,000 -
Sale of marketable securities.................. 3,280,000 5,935,000
--------- ---------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES.. (8,089,000) 5,885,000
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease............ (43,000) (87,000)
Note receivable from shareholder............... - 38,000
Issuance of common stock....................... - 476,000
Subsidiary purchase of treasury stock.......... - (1,210,000)
Exercise of stock options and warrants......... - 563,000
----------- ------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES.. (43,000) (220,000)
---------- ----------
Net decrease in cash and cash equivalents......... (290,000) (10,277,000)
Cash and cash equivalents, beginning.............. 3,362,000 12,284,000
--------- ----------
Cash and cash equivalents, ending................. $ 3,072,000 $ 2,007,000
============ =============
See accompanying notes to consolidated financial statements.
6
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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, 1998 filed with the Securities
and Exchange Commission. 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 April
30, 1999 and July 31, 1998.
NOTE 2 - STATEMENT OF CASH FLOWS
A capital lease obligation of $1,942,000 was incurred in the third fiscal
quarter when Western entered into a 20 year lease for the Sparks, Nevada
facility.
NOTE 3 - INVENTORIES
Inventories consist of the following:
APRIL 30, JULY 31,
1999 1998
---- ----
Parts....................... $ 9,389,000 $ 8,535,000
Equipment, new and used..... 53,356,000 64,956,000
---------- ----------
$ 62,745,000 $ 73,491,000
========== ==========
7
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AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - CONTINGENCIES
Except as set forth below, there are no pending material legal proceeds in
which the Company or any of its subsidiaries is a party, or to which any of
their respective properties are subject, which either individually or in the
aggregate, may have a material adverse effect on the results of operations or
financial position of the Company.
In May 1998, a lawsuit was filed on behalf of the Company in a purported
shareholder derivative action against certain directors of the Company and in
June, 1998 a shareholder class action was filed against the same directors.
On June 1, 1999, an agreement was entered into by all parties whereby both
actions are to be settled for a total of $5,300,000. The settlement consists of
$600,000 in cash from insurance proceeds, $1,900,000 in Western Power &
Equipment Corp. common stock owned by the Company, $1,100,000 from Mr. Rubin's
assignment of his rights to certain consulting payments from Hutchinson Corp.
and $1,700,000 in marketable securities owned by Mr. Rubin. The settlement is
subject to final approval by the court.
NOTE 5 - INTANGIBLE ASSETS
Intangible and other assets consist of the following:
April 30, July 31,
1999 1998
---- ----
Goodwill ..................................$ 2,920,000 $ 3,044,000
Non-compete agreement....................... - 42,000
Other assets................................ 81,000 527,000
------------- -------------
$ 3,001,000 $ 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.
8
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AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - FIXED ASSETS
Fixed Assets consist of the following:
April 30, July 31,
1999 1998
Operating property, plant
and equipment:
Land $ 420 $ 840
Buildings 5,122 4,078
Machinery and equipment 3,788 3,236
Office furniture and fixtures 2,286 2,263
Computer hardware and software 1,305 1,474
Vehicles 1,751 1,291
Leasehold improvements 340 202
------ ------
15,012 13,384
Less: accumulated depreciation (5,085) (4,689)
------ ------
Property, plant, and equipment (net) 9,927 $8,695
----- ------
Rental equipment fleet (net) 27,772 23,080
------ ------
Leased equipment fleet (net) 5,322 2,760
----- -----
NOTE 7 - SERIES B-1 CONVERTIBLE PREFERRED STOCK
A total of 299,356 shares of the Series B-1 Convertible Preferred Stock
issued in September 1996 were converted to common shares during the nine months
ended April 30, 1999 at the applicable ratio of one for one leaving 430,507
shares outstanding at April 30, 1999.
NOTE 8 - 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 June 15, 1999, none were
issued and outstanding.
NOTE 9 - FISCAL 1999 EVENTS
In February, 1999, the real property and improvements used in connection
with the Western's Sparks, Nevada operation and upon which such operation is
located, were sold to McLain-Rubin Realty, L.L.C. (MRR) under the terms of a
real property purchase and sale agreement. MRR is a Delaware limited liability
company the owners of which are Messrs. C. Dean McLain, the President and
Chairman of the Company, and Robert M. Rubin, a director of the Company.
The sale price was $2,210,000 in cash at closing. Subsequent to the closing
of the sale, Western entered into a 20-year lease agreement with MRR for the
Sparks, Nevada facility at an initial rental rate of $252,000 per year with
increases at 5, 10, and 15 years resulting in a maximum annual rental rate of
$374,000. The lease is a net lease with payment of insurance, property taxes and
maintenance costs by Western. The sale resulted in a gain to Western in the
amount of $287,000 which will be amortized over the life of the lease pursuant
to generally accepted accounting principles.
9
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AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - 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.
Sale of the assets of Connectsoft Communications Corporation and the Network
Operations Center
Subsequent to quarter end the July 10, 1998 agreement to sell substantially
all of the assets of its CCC subsidiary and the network operations center owned
by Connectsoft, Inc. ("NOC") to eGlobe, Inc., formerly known as Executive
TeleCard, Ltd. ("eGlobe") was revised. Effective June 15, 1999, the assets of
CCC and the NOC have been sold. As consideration for the assets, eGlobe assumed
approximately $4,700,000 of CCC liabilities and leases, most of which have been
guaranteed by the Company. Although eGlobe will be responsible for payment of
those assumed liabilities, the assumption of such liabilities will not relieve
the Company from its guarantees until such liabilities have been paid. CCC has
also received from eGlobe approximately $1,850,000 in advances for working
capital. In addition, the Company will receive redeemable, convertible preferred
stock of eGlobe, which it has valued on a preliminary basis at $1,500,000. The
stock is redeemable in five years and becomes convertible at the Company's
option in October of 1999. The stock also carries a minimum conversion price of
$3.00 per share with a higher conversion price possible depending upon market
price at the time of conversion.
Total costs, expenses and closure costs from the April 30, 1998 measurement
date through the closing date of June 15, 1999 are approximately $6,794,000. Of
this amount, $6,794,000 has been offset against the gain on sale of
approximately $7,383,000. The net remaining gain of $589,000 has been reflected
as net liabilities of discontinued operations in the accompanying Consolidated
Balance Sheet and will be recognized in the fourth quarter.
10
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AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - TRANSACTION WITH SUBSIDIARY
On April 21, 1999 the Company and its' IDF minority owned subsidiary
amended the terms of a financing arrangement whereby the Company agreed to
increase its funding amount from $500,000 to $1,000,000. As of June 18, 1999 the
Company had provided $492,000 of the additional $500,000 commitment. The funds
were used for working capital purposes and for the payment of certain past due
taxes and other past due liabilities of Hayden Wegman, the NYC based subsidiary
of IDF. In addition, a small portion of the funds were used to pay the shut-down
costs of Techstar Communications, the Maryland based subsidiary of IDF. The
shut-down of Techstar will result in certain overhead savings and will allow
management to concentrate on revenue growth within Hayden Wegman.
Total advances of $992,000 through June 18, 1999 have been provided as an
interest bearing demand loan under a promissory note while the Company and IDF
are negotiating the final structure and terms of the financing transaction.
Management anticipates that such final structure will consist of a combination
of common share equity and subordinated convertible debt. Due to accumulated
losses somewhat in excess of the Company's investment in IDF and the likely
structure of the financing transaction, the advances have been included in the
caption Investment in unconsolidated subsidiary in the accompanying Consolidated
Balance Sheet.
11
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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.
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 Corp.
Western Power & Equipment Corp. 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 24 stores in five states by the end of
fiscal 1997, and to 27 stores in five states by the end of fiscal 1998. In the
first quarter of fiscal 1999, Western consolidated its Milton-Freewater, Oregon
operation into its Pasco, Washington operation leaving 26 operating facilities
at April 30, 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 that may be manufactured by other companies.
Western's results can be impacted by the timing of and costs incurred in
connection with new store openings and acquisitions.
The Company is also involved in the construction business through a
minority owned subsidiary, IDF International, Inc. ("IDF"). IDF, through its
Hayden Wegman subsidiary provides design, construction management and
engineering services to municipalities and other governmental agencies and
private industry.
RESULTS OF OPERATIONS
---------------------
The Three Months and Nine Months Ended April 30, 1999 Compared to the Three
- ---------------------------------------------------------------------------
Months and Nine Months Ended April 30, 1998
- -------------------------------------------
Revenues for the three-month period ended April 30, 1999 decreased 1% to
$40.4 million compared with $40.9 million for the three-month period ended April
30, 1998. Revenues were up from the prior year's third quarter only in parts and
rentals. Equipment sales have been negatively affected by gray market machine
inventory in Western's geographic markets, increased competitive pressures, a
slowdown in the northwest economy, and some especially inclement weather in the
Northwest.
12
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Revenues for the nine-month period ended April 30, 1999 increased
$4,452,000 or approximately 4% over the nine-month period ended April 30, 1998.
The increase was due primarily to the contribution of the stores acquired or
opened in the last year. For the nine-month period ended April 30, 1999,
revenues were up from the same period in the prior year in rental, parts, and
service.
Western's gross profit margin of 10.1% for the three-month period ended
April 30, 1999 was down from the prior year comparative period margin of 10.7%.
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 nine-month period ended April 30, 1999, Western's
gross margin was 9.1% down from the 11.7% gross margin for the nine-month period
ended April 30, 1998 due to market pricing pressure and the used equipment
reserve taken in the first fiscal quarter.
For the three-month period ended April 30, 1999, selling, general, and
administrative ("SG&A") expenses, as a percentage of sales, were 9.3%, up
slightly from 9.1% for the prior year's quarter. SG&A expenses for the
nine-month period ended April 30, 1999 were 8.4% of sales compared to 9.0% of
sales for the prior year nine-month period. The decrease is attributable to
reductions in the overhead associated with the Company's corporate headquarters.
Interest expense for the three months ended April 30, 1999 of $1,191,000
was up slightly from the $1,186,000 in the prior year comparative period. This
is a result of decreases in the Company's interest income offset by a lower
average borrowing rate on Western's Deutsche Financial Services facility.
Interest expense for the nine-month period ended April 30, 1999 was $3,834,000
compared to $2,665,000 for the nine-month period ended April 30, 1998, due to
the Company's decreased interest income and to increased interest-bearing
inventory carried by Western .
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 benefits recognized for the current quarter and nine
months are based upon losses generated by the Company's Western subsidiary.
Liquidity and Capital Resources
- -------------------------------
The Company's primary needs for liquidity and capital resources are related
to Western's inventory for sale and its rental and lease fleet inventories,
store openings, and acquisitions of additional stores. Western's primary source
of internal liquidity has been its historical profitable operations. As more
fully described below, Western's primary sources of external liquidity are
equipment inventory floor plan financing arrangements provided to Western by the
manufacturers of the products Western sells, and Deutsche Financial Services
("DFS") and, with respect to acquisitions, secured loans from Case.
13
<PAGE>
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 April 30, 1999,
Western was indebted under manufacturer provided floor planning arrangements in
the aggregate amount of $17,334,000.
Western currently has 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. Borrowings are secured by Western's assets, including accounts
receivable, parts, new equipment, rental fleet, and used equipment. Western uses
this borrowing facility to lower flooring-related interest expense by using
advances under such line to finance inventory purchases in lieu of financing
provided by suppliers, to take advantage of cash purchase discounts from its
suppliers, to provide operating capital for further growth, and to refinance
some its acquisition related debt at a lower interest rate. As of April 30,
1999, approximately $64,489,000 was outstanding under the DFS credit facility.
At April 30, 1999, Western was in technical default of the debt leverage
covenant in the Deutsche Financial Services Loan Agreement. Western obtained a
waiver for the period through June 11, 1999. There is no guarantee that Deutsche
Financial Services will not call this debt at any time after June 11, 1999.
Western and DFS have reached preliminary agreement to amend this credit facility
to revise several covenants, including an increase in the debt leverage
covenant. Finalization of this amendment, which was expected to occur during the
third fiscal quarter, is now expected to occur during the fourth fiscal quarter.
During the nine months ended April 30, 1999, cash and cash equivalents and
marketable debt securities decreased by $3,570,000 primarily due to the
Company's continued funding of the discontinued operations of Connectsoft
Communications and the additional funding provided to IDF.
The Company's cash and cash equivalents and marketable debt securities of
$4,241,000 and available credit facilities as of April 30, 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.
14
<PAGE>
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.
During the third fiscal quarter, Western began testing a previously
installed upgrade to its primary enterprise software and to the base operating
system. These upgrades were represented to be Year 2000 compliant by their
respective suppliers. Based upon the testing completed to date, Western has no
reason to believe that the upgrades are not Year 2000 compliant. Western expects
to substantially complete testing for Year 2000 compliance on these upgrades by
July 31, 1999.
Western has begun to implement its plan to contact all of its significant
suppliers to determine the extent to which Western is vulnerable to those third
parties' failure to remediate their own Year 2000 issues. There can be no
guarantees that the systems of third parties on which Western's systems rely or
which influence the business of Western's customers will be timely remediated,
that any attempted remediation will be successful, or that such conversions
would be compatible with Western's systems. Western has not yet determined the
projected costs of Western's Year 2000 project and cannot yet determine whether
Western has any exposure to contingencies related to the Year 2000 issue for the
products it has previously sold.
Western will utilize both internal and external resources to reprogram, or
replace, and test Western's software for Year 2000 modifications. Western plans
to complete its Year 2000 project by October 31, 1999. Funding for the costs of
the program to date have come and in the future are anticipated to come from
operating cash flows.
Western's current plan to complete the Year 2000 modifications are based on
management's best estimates, which were derived using numerous assumptions of
future events including the continued availability of certain resources, third
party modification plans, and the ability to meet projected time lines. There
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and other uncertainties.
Inventory; Effects of Inflation and Interest Rates; General Economic Conditions
- -------------------------------------------------------------------------------
Controlling inventory is a key ingredient to the success of an equipment
distributor because the equipment 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,
industrial, and agricultural 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 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.
15
<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, industrial, and agricultural sectors.
An 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.
16
<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 and in
June, 1998 a shareholder class action was filed against the same directors.
On June 1, 1999, an agreement was entered into by all parties whereby both
actions will be settled for a total of $5,300,000. The settlement consists of
$600,000 in cash from insurance proceeds, $1,900,000 in Western Power &
Equipment Corp. common stock owned by the Company, $1,100,000 from Mr. Rubin's
assignment of his rights to certain consulting payments from Hutchinson Corp.
and $1,700,000 in marketable securities owned by Mr. Rubin. The settlement is
subject to final approval by the court.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At April 30, 1999, Western was in technical default of the leverage
covenant in the Deutsche Financial Services ("DFS") Loan Agreement. As of April
30, 1999, the outstanding balance owed to DFS was approximately $64,489,000.
Western obtained a waiver of the default for the period through June 11, 1999.
There is no guarantee that DFS will not call this debt at any time after June
11, 1999. See Item 1, "Liquidity and Capital Resources."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Western has received notice from Nasdaq that the Western's common stock
would be transferred from the Nasdaq National Market System to the Nasdaq
SmallCap Market effective May 20, 1999 due to the failure 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). The SmallCap Market
listing is temporary pending the Western's submission of the appropriate
application and fees to Nasdaq. Western has submitted the requested application
and resultant fees. However, there can be no assurances that Nasdaq will approve
continued listing of the Western's shares on the SmallCap Market.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 27 Financial Data Schedule
(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.
June 18, 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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