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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 The Nine Months Ended April 30, 2000
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)
2495 152nd AVENUE N.E.
REDMOND, WASHINGTON 98052
(Address of principal executive offices) Zip code
Registrant's telephone no.: 425-869-7410
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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AMERICAN UNITED GLOBAL, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets
April 30, 2000 (unaudited) and July 31, 1999................ 1
Consolidated Statements of Operations
Three Months Ended April 30, 2000
and April 30, 1999 (unaudited).............................. 2
Consolidated Statements of Operations
Nine Months Ended April 30, 2000
and April 30, 1999 (unaudited).............................. 3
Consolidated Statement of Shareholders'
Equity (unaudited)........................................... 4
Consolidated Statements of Cash Flows
Nine Months Ended April 30, 2000
and April 30, 1999 (unaudited).............................. 5
Notes to the Consolidated Financial
Statements (unaudited)......................................... 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 12-14
Item 3. Quantitative and Qualitative Disclosure about
Market Risk................................................... N/A
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................... 15
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........................ 16
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ITEM 1
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, JULY 31,
2000 1999
---- ----
(unaudited)
ASSETS
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CURRENT ASSETS:
Cash and cash equivalents................................................ $ 965,000 $ 2,914,000
Investment in marketable securities at market value..................... 11,297,000 371,000
Trade accounts receivable, less allowance for doubtful accounts
of $675,000 and $724,000, respectively................................. 13,599,000 15,500,000
Inventories............................................................. 60,482,000 67,068,000
Prepaid expenses and other receivables.................................. 473,000 885,000
Deferred tax asset...................................................... 1,410,000 1,410,000
Income taxes receivable................................................. 267,000 -
Receivable from Chairman................................................ 299,000 1,700,000
Notes receivable ....................................................... 1,161,000 1,140,000
--------- ---------
TOTAL CURRENT ASSETS................................................ 89,953,000 90,988,000
Property and equipment, net ............................................ 9,401,000 9,818,000
Rental equipment, net .................................................. 30,282,000 31,366,000
Leased equipment, net .................................................. 5,029,000 5,264,000
Intangible assets, net of accumulated amortization
of $650,000 and $1,460,000, respectively ............................. 2,871,000 2,952,000
Investment in preferred stock........................................... - 2,000,000
Notes receivable........................................................ 175,000 521,000
------- -------
TOTAL ASSETS........................................................ $ 137,711,000 $ 142,909,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under floor financing lines.................................. $ 11,169,000 $ 17,128,000
Short-term borrowings................................................... 71,818,000 72,383,000
Current portion of capital lease obligations ........................... - 17,000
Accounts payable........................................................ 9,779,000 13,038,000
Accrued liabilities..................................................... 3,784,000 4,046,000
Income taxes payable.................................................... - 627,000
Deferred taxes.......................................................... 7,000 -
Due to shareholders..................................................... 1,900,000 2,500,000
--------- ---------
TOTAL CURRENT LIABILITIES........................................... 98,457,000 109,739,000
Long-term borrowings ...................................................... 34,000 48,000
Capital lease obligations, net of current portion.......................... 4,793,000 4,755,000
Deferred taxes............................................................. 837,000 837,000
Deferred gain.............................................................. - 140,000
Deferred lease income...................................................... 6,045,000 6,181,000
--------- ---------
TOTAL LIABILITIES................................................... 110,166,000 121,700,000
Minority interest.......................................................... 7,975,000 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..................................................... (38,693,000) (37,280,000)
Accumulated unrealized gains, net ...................................... 8,186,000 -
----------- -----------
TOTAL SHAREHOLDERS' EQUITY.......................................... 19,570,000 12,797,000
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................... $ 137,711,000 $ 142,909,000
=========== ===========
See accompanying notes to consolidated financial statements.
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1
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AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
APRIL 30,
2000 1999
---- ----
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Net revenues ...................................... $ 35,340,000 $ 40,371,000
Cost of revenues .................................. 32,104,000 36,277,000
------------ ------------
Gross profit ...................................... 3,236,000 4,094,000
Selling, general and administrative expenses ...... 3,278,000 3,764,000
--------- ---------
Operating (loss) income ........................... (42,000) 330,000
Interest expense, net ............................. 1,659,000 1,191,000
--------- ---------
Loss from continuing operations before
income taxes, equity in loss of unconsolidated
subsidiary and minority interest ............. (1,701,000) (861,000)
(Benefit) for income taxes ........................ (596,000) (5,000)
Equity in loss of unconsolidated subsidiary ....... 68,000 528,000
Minority interest in loss (earnings) of
consolidated subsidiary ........................ 374,000 24,000
------- -------
Loss from continuing operations ................... (799,000) (1,360,000)
Income from discontinued operations ............... - 2,656,000
---------- ----------
Net (loss) income.................................. $ (799,000) $ 1,296,000
============= =============
Basic and diluted (loss) income per share:
Loss from continuing operations $ (0.07) $ (0.11)
Income from discontinued operations -- 0.22
------------- -------------
Basic and diluted (loss) income per share $ (0.07) $ 0.11
============= =============
Weighted average number of shares 11,921,529 11,903,000
============= =============
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)
NINE MONTHS ENDED
APRIL 30,
2000 1999
---- ----
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Net revenues ...................................... $ 111 392,000 $ 122,015,000
Cost of revenues .................................. 99,371,000 110,954,000
------------ ------------
Gross profit ...................................... 12,021,000 11,061,000
Selling, general and administrative expenses ...... 9,918,000 10,335,000
--------- ---------
Operating income .................................. 2,103,000 726,000
Interest expense, net ............................. 4,488,000 3,834,000
--------- ---------
Loss from operations before
income taxes, equity in loss of unconsolidated
subsidiary and minority interest ............. (2,385,000) (3,108,000)
Benefit for income taxes .......................... (659,000) (579,000)
Equity in loss of unconsolidated subsidiary ....... 364,000 883,000
Gain on sale of patent ............................ (240,000) -
Minority interest in loss of
consolidated subsidiary ........................ 437,000 402,000
------------ -------------
Net loss....................... ................... $ (1,413,000) (3,010,000)
============= =============
Basic and diluted loss per share $ (0.12) $ (0.26)
============= =============
Weighted average number of shares 11,921,529 11,748,000
============= =============
See accompanying notes to consolidated financial statements.
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AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
PREFERRED STOCK COMMON STOCK ACCUMULATED
ADDITIONAL UNREALIZED TOTAL
NUMBER OF NUMBER OF CONTRIBUTED RETAINED GAINS, SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) NET EQUITY
------ ------ ------ ------ ------- --------- ------------- --------------
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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 ...................... (1,413,000) (1,413,000)
Other comprehensive income .... 8,186,000 8,186,000
-------- -------- ---------- --------- ------------- ------------- ------------ ------------
Balance at April 30, 2000...... 426,000 $ 4,000 11,921,000 $ 119,000 $ 49,954,000 $(38,693,000) $ 8,186,000 $ 19,570,000
======= ======== ========== =========== ============= ============ ============ ===========
See accompanying notes to consolidated financial statements.
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4
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AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
APRIL 30,
-----------
2000 1999
---- ----
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations............... $ (1,413,000) $ (3,010,000)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization................... 8,451,000 7,795,000
Loss applicable to minority interest............ (437,000) (402,000)
Undistributed loss of affiliate................. 364,000 883,000
Gain on sale of patent ......................... (240,000) -
Changes in assets and liabilities, net of
effects of acquisition and dispositions:
Accounts receivable........................... 1,901,000 7,853,000
Inventories................................... 2,441,000 10,746,000
Inventory floor plan financing................ (5,959,000) 6,296,000
Borrowings under term loans................... (565,000) (11,772,000)
Prepaid expenses and other receivables........ (188,000) (31,000)
Stock receivable.............................. (1,500,000)
Leased equipment, net......................... 235,000 (2,562,000)
Accounts payable.............................. (3,397,000) (6,162,000)
Other accrued liabilities..................... (263,000) (1,187,000)
Income taxes payable/receivable............... (627,000) (701,000)
Deferred revenue.............................. (276,000) 2,774,000
Net liabilities of discontinued operations.... - (891,000)
---------- ----------
NET CASH (USED) BY OPERATING ACTIVITIES.............. (17,000) 7,842,000
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment................ (798,000) (2,887,000)
Purchase of rental equipment, net................. (2,002,000) (10,694,000)
Collection of notes receivable.................... 500,000 -
Issuance of notes receivable...................... (175,000) -
Proceeds from sale of fixed assets................ 120,000 2,212,000
Sale of marketable securities..................... 416,000 3,280,000
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES................ (1,939,000) (8,089,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal borrowings (payments) on capital lease.. 21,000 (43,000)
Payment of long term borrowings................... (14,000) -
------ -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES..... 7,000 (43,000)
------- --------
Net decrease in cash and cash equivalents............ (1,949,000) (290,000)
Cash and cash equivalents, beginning................. 2,914,000 3,362,000
--------- ---------
Cash and cash equivalents, ending.................... $ 965,000 $ 3,072,000
============ ============
See accompanying notes to consolidated financial statements.
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5
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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 April
30, 2000 and July 31, 1999.
NOTE 2 - INVENTORIES
Inventories consist of the following:
APRIL 30, JULY 31,
2000 1999
---- ----
Parts.......................... $ 9,778,000 $ 10,101,000
Equipment, new and used........ 50,704,000 56,967,000
---------- ----------
$ 60,482,000 $ 67,068,000
=========== ===========
NOTE 3 - COMPREHENSIVE INCOME
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NINE MONTHS ENDING
APRIL 30, APRIL 30,
2000 1999
---- ----
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Net loss........................................ $ (1,413,000) $ (3,010,000)
Other comprehensive income:
Increase in fair market value of
investments, net of taxes of $0............ 8,186,000 -
---------- -----------
Total comprehensive income (loss)............... $ 6,773,000 $ (3,010,000)
========== ===========
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The investment in marketable securities is comprised of securities, all of
which are considered to be an "available for sale security" since they can be
sold within one year. Although there are restrictions on the investments in
eGlobe, Inc. and GraphOn Corporation securities, these restrictions are for
periods of time that are now less than one year. Accordingly, as required under
Statement of Financial Accounting Standards No. 115, all unrealized gains and
losses, net of taxes, are included in Accumulated Other Comprehensive Income in
Stockholders' Equity until realized. The Company has net operating loss
carry-forwards of approximately $12.3 million that are assumed to be partially
utilized in computing the taxable amount of the unrealized gains. The Company
can not make an estimate of the value of these shares at the time the
restrictions on these shares expire or at the time of sale.
6
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NOTE 4 - FIXED ASSETS
Fixed Assets consist of the following:
April 30, July 31,
2000 1999
---- ----
Operating property, plant and equipment:
Land $700,000 $ 420,000
Buildings 5,132,000 5,126,000
Machinery and equipment 3,933,000 3,869,000
Office furniture and fixtures 2,309,000 2,291,000
Computer hardware and software 1,403,000 1,299,000
Vehicles 1,812,000 1,841,000
Leasehold improvements 455,000 360,000
---------- ----------
15,744,000 15,206,000
Less: accumulated depreciation (6,343,000) (5,388,000)
---------- ----------
Property, plant, and equipment (net) $9,401,000 $9,818,000
========= ==========
Rental equipment fleet $36,724,000 $36,395,000
Less: accumulated depreciation (6,442,000) (5,029,000)
---------- ----------
Rental equipment (net) $30,282,000 $31,366,000
========== ==========
Leased equipment fleet (net) $5,029,000 $5,264,000
========= =========
NOTE 5 - INTANGIBLE ASSETS
Intangible and other assets consist of the following:
April 30, July 31,
2000 1999
---- ----
Goodwill......................$ 2,871,000 $ 2,952,000
Goodwill is amortized over lives ranging from 20 to 40 years. All goodwill
arose as a result of acquisitions at Western.
7
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NOTE 6 - 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. The settlement consists of $600,000 in
cash which has been paid 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. The Company
and Western have agreed to file a registration statement with the Securities and
Exchange Commission by September 30, 2000 covering these shares. When the
Western shares are distributed to the claimant shareholders, the Company will no
longer own greater than 50% of Western, and will then account for Western using
the equity method. The Company anticipates that these shares will be distributed
in November 2000. 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 (included
in short term notes receivable) and the transfer by Mr. Rubin to the Company of
$1,700,000 of cash and securities. 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 January 31, 2000,
except for the Hutchinson payments of $1,100,000, the receipt of which is
conditioned upon shareholder approval of the Hutchinson Transaction and
approximately $245,000 of securities. The agenda for the shareholders meeting
anticipated to be held in September 2000 includes a proposal to approve the
Hutchinson transaction.
The Company, Mr. Rubin and plaintiff's counsel are negotiating a new
amendment to the settlement agreement. Pursuant to this proposed amendment, Mr.
Rubin is obligated to pay the $1,100,000 in cash to the Company, if not
previously paid by Hutchinson, no later that September 30, 2000 instead of July
15, 2000. In addition, Mr. Rubin is obligated to contribute $245,000 of certain
publicly traded securities to the Company no later than September 30, 2000
instead of July 15, 2000. The entire amount of $1,345,000 has been
collateralized by other specific assets owned by Mr. Rubin and Mr. Rubin agreed
to pay interest of $55,000.
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 $2,650,000 and is
currently being paid by eGlobe pursuant to the asset sale agreement.
8
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NOTE 7 - STOCK OPTION PLAN ACTIVITY
As of December 7, 1999 the Company cancelled options for 1,383,500
representing all outstanding options issued under the 1996 Plan and 1991 Plan
and adopted a new stock option plan (the "2000 Plan") substantially similar to
its 1996 plan. The Company has granted new incentive stock options under the
2000 Plan for an identical number of shares of Common Stock as were issuable
upon exercise of all such cancelled options. These new options are exercisable
for five years after the date of issuance at an exercise price of $0.21 per
share, or approximately 110% of the closing sale price of the Company's Common
Stock on December 7, 1999. The Company also made a one-time grant of 250,000
incentive stock options under the 2000 Plan to Mr. Rubin exercisable for five
years after issuance at $0.21 per share. The Company also issued an additional
56,500 incentive stock options and 100,000 incentive stock options to Messrs.
McLain and Barnes, respectively, all of which options are exercisable at $0.21
per share for five years after issuance. The Company also granted 250,000
non-qualified options to each of Dr. Seymour Kessler and Mr. Allen Perres,
nominees for election as directors, all of which options are exercisable at
$0.21 per share for five years subsequent to their election to the Board of
Directors. All of the above options were granted on December 7, 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 May 31, 2000, none were issued
and outstanding.
NOTE 9 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
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NINE MONTHS ENDED APRIL 30,
2000 1999
---- ----
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Interest paid............ $ 4,356,000 $ 4,057,000
Income taxes paid........ $ 204,000 $ 372,000
</TABLE>
NOTE 10 - SALE OF PATENT
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 was
originally valued at 60% of the last trading price on the day of closing for a
total of $240,000 and these shares are now included in marketable securities at
fair market value.
9
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NOTE 11 - IMPAIRMENT OF ASSETS
In the first quarter of fiscal 1999, Western recognized a non-recurring
charge of approximately $1,100,000 for used equipment reserves. Western's used
equipment was determined to have a fair market value (as determined by equipment
auction prices) lower than its book value at that time. Long lived assets are
reviewed periodically to determine if the fair value is less than the carrying
value.
NOTE 12 - SUBSIDIARY SEGMENT INFORMATION
In fiscal 1999, the Company's Western subsidiary adopted Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information," which requires the reporting of
certain financial information by business segment. For the purpose of providing
segment information, Western's management believes that all of the Western's
operations consist of one segment. However, Western evaluates performance based
on revenue and gross margin of three distinct business components. Revenue and
gross margin by component are summarized as follows:
Business Component Three Months Ended Nine Months Ended
April 30, April 30,
Net Revenues 2000 1999 2000 1999
------------ ---- ---- ---- ----
Equipment Sales $ 21,989 $ 23,539 $ 65,755 $ 72,171
Equipment Rental 4,538 6,938 18,153 20,298
Product Support 8,813 9,894 27,484 29,546
----- ----- ------ ------
Totals $ 35,340 $ 40,371 $111,392 $122,015
======== ======== ======== ========
Business Component Three Months Ended Nine Months Ended
April 30, April 30,
Gross Margins 2000 1999 2000 1999
------------- ---- ---- ---- ----
Equipment Sales $ 789 $ 1,109 $ 2,683 $ 1,859
Equipment Rental 543 939 4,301 3,978
Product Support 1,904 2,046 5,037 5,224
----- ----- ----- -----
Totals $ 3,236 $ 4,094 $12,021 $ 11,061
====== ====== ======= =======
10
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NOTE 13 - INVESTMENT IN EGOMAGAZINE.COM, INC.
During the quarter ending April 30, 2000, the Company loaned $175,000 to
EgoMagazine.com, Inc., ("Ego") a privately held company which operates a start
up diversified media business including a web site and a bimonthly sophisticated
lifestyle oriented magazine. The loan principal and accrued interest at the rate
of 10% per annum are due in April 2001 and there are acceleration provisions in
the event that Ego receives gross proceeds from any financing exceeding
$2,000,000. Due to the uncertainty of such a financing, the note receivable is
reflected as long term notes receivable. In addition, 700,000 shares of
EgoMagazine.com, Inc. common stock were issued to the Company, which
approximates 13% of their current total outstanding common shares.
NOTE 14 - SUBSEQUENT EVENT
Between May 22 and June 14, 2000 the Company sold 250,000 shares of its
common stock for total proceeds of $100,000 pursuant to the terms of a private
offering dated May 22, 2000 and terminating July 15, 2000. A maximum of
1,000,000 shares may be sold pursuant to this offering.
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's 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 engineering and construction business
through IDF International, Inc. ("IDF"), a 40% minority owned subsidiary.
RESULTS OF OPERATIONS
The Three and Nine Months Ended April 30, 2000 Compared to the Three and Nine
Months Ended April 30, 1999
Western's revenues for the three-month period ended April 30, 2000
decreased 13% to $35.3 million compared with $40.4 million for the three-month
period ended April 30, 1999. Revenues were down from the prior year's third
quarter in all departments except rentals which have been positively affected by
the increase in rental equipment fleet and utilization. Equipment sales were
negatively affected by continued competitive pressures, a slower northwest
construction economy, and the closure of four stores over the past year.
Western's revenues for the nine-month period ended April 30, 2000 decreased
$10,625,000 or approximately 8.7% from the nine-month period ended April 30,
1999. The decrease was due primarily to the closure of four stores in the past
twelve months. For the nine-month period ended April 31, 2000, revenue in all
departments except rentals were down from the same period in the prior year.
Western's gross profit margin of 9.2% for the three-month period ended
April 30, 2000 was down from the prior year comparative period margin of 10.1%.
The decrease in gross profit margins was the result of continued pressure to
decrease inventory levels in a slow market. For the nine-month period ended
April 30, 2000, Western's gross margin was 10.8%, up from the 9.1% gross margin
for the nine-month period ended April 30, 1999. The fiscal 1999 year-to-date
gross margin was negatively affected by a non-recurring charge for used
equipment in the first fiscal quarter of that year.
Selling, general and administrative expenses totaled $3,278,000 and
$9,918,000 or 9.3% and 8.9% of revenues for the three and nine months ended
April 30, 2000 compared to $3,764,000 and $10,335,000 or 8.9% and 8.5% of sales
for the three and nine months ended April 30, 1999. For the three months and
nine months ended April 30, 2000 the decreases of $676,000 and $417,000 are due
to settlement of certain liabilities at less than face value and
decreased expenses for the Company somewhat offset by increases in expenses at
Western.
Interest expense for the three and nine months ended April 30, 2000 of
$1,659,000 and $4,488,000 was up from the $1,191,000 and $3,834,000 in the prior
year comparative period. The increases are the result of higher average
borrowings at higher average rates by Western under the Deutsche Financial
Services facility (more fully described below under Liquidity and Capital
Resources).
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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. However, portions of the unrealized gain on investments that
may be ultimately recognized upon the sale of the securities will be offset by
the net operating loss carry-forwards. Gains, if any, in excess of the net
operating loss carry-forwards will be taxable at the federal rate in effect at
the time of sale. The tax benefit recognized for the quarter and nine months
ended April 30, 2000 is based upon losses generated by the Company's Western
subsidiary.
The Company had net (loss) for the three and nine months ended April 30,
2000 of ($799,000) and $(1,413,000), respectively or ($0.07) and ($0.12) per
(basic and diluted) share compared with a net income (loss) of $1,296,000 and
($3,010,000) or $0.11 and ($0.26) per (basic and diluted) share for the
comparable prior year periods. The nine months ended April 30, 1999 included a
non-recurring pre-tax charge of $1,061,000 for used equipment inventory reserves
at Western. The three and nine months ended April 30, 1999 included income from
discontinued operations of the Company of $2,656,000 and $0, respectively.
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 and
store operations. Western's primary source of internal liquidity has been its
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 April 30, 2000,
Western was indebted under manufacturer provided floor planning arrangements in
the aggregate amount of $11,169,000.
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Western maintains 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 its acquisition related debt at a lower interest rate. As of
April 30, 2000, approximately $70,318,000 was outstanding under the DFS credit
facility. At April 30, 2000, Western was in technical default of the tangible
net worth and interest coverage ratio financial covenants in the Deutsche
Financial Services Loan Agreement. Western did not obtain a waiver for the
period through April 30, 2000. 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 April 30, 2000. In addition, by its terms, the DFS credit facility expires
on June 30, 2000. Western is currently in negotiations with DFS regarding the
default and renewal/extension of the credit facility. Although Western currently
has no contingency plan in the event that DFS calls the debt due to the default
or does not renew the credit facility, Western would seek replacement credit
facilities, although the availability, terms, and conditions of any such
facility cannot be determined at this time. In the event that adequate
replacement credit facilities could not be obtained, DFS could exercise any of
its rights under the Loan Agreement including, but not limited to, foreclosing
its security interest in Western's assets.
During the nine months ended April 30, 2000, cash and cash equivalents and
marketable and debt securities increased by $8,977,000, primarily due to the net
increase in the value of the investments in eGlobe, Inc. and Graphon Corporation
in the amount of $8,341,000 and the contribution of $1,455,000 of marketable
securities by Mr. Rubin pursuant to the derivative action settlement. These
increases were offset by Western's decrease in cash due to a decrease in short
term floor-plan financing and accounts payable and purchases of fixed assets and
rental equipment at Western.
The Company's cash and cash equivalents and marketable securities at market
value of $12,262,000 and available credit facilities at Western (assuming the
DFS facility is renewed on terms acceptable to Western) as of April 30, 2000 are
considered sufficient to support current levels of operations for the next
twelve months.
Impact of the Year 2000 Issue
The Company has not experienced any material adverse effects as a result of
the Year 2000 computer issues.
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.
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.
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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 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. The settlement consists of $600,000 in
cash which has been paid 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. The Company
and Western have agreed to file a registration statement with the Securities and
Exchange Commission by September 30, 2000 covering these shares. When the
Western shares are distributed to the claimant shareholders, the Company will no
longer own greater than 50% of Western, and will then account for Western using
the equity method. The Company anticipates that these shares will be distributed
in November 2000. 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 (included
in short term notes receivable) and the transfer by Mr. Rubin to the Company of
$1,700,000 of cash and securities. 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 January 31, 2000,
except for the Hutchinson payments of $1,100,000, the receipt of which is
conditioned upon shareholder approval of the Hutchinson Transaction and
approximately $245,000 of securities. The agenda for the shareholders meeting
anticipated to be held in September 2000 includes a proposal to approve the
Hutchinson transaction.
The Company, Mr. Rubin and plaintiff's counsel are negotiating a new
amendment to the settlement agreement. Pursuant to this proposed amendment, Mr.
Rubin is obligated to pay the $1,100,000 in cash to the Company, if not
previously paid by Hutchinson, no later that September 30, 2000 instead of July
15, 2000. In addition, Mr. Rubin is obligated to contribute $245,000 of certain
publicly traded securities to the Company no later than September 30, 2000
instead of July 15, 2000. The entire amount of $1,345,000 has been
collateralized by other specific assets owned by Mr. Rubin and Mr. Rubin agreed
to pay interest of $55,000.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At April 30, 2000, Western was in technical default of the Deutsche
Financial Services ("DFS") Loan Agreement. As of April 30, 2000, the outstanding
balance owed to DFS was approximately $70.3 million. Western did not receive a
waiver of the default for the period through April 30, 2000. 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 April 30, 2000. For a further explanation of
the default and the potential effects thereof, see Item 2, "Liquidity and
Capital Resources."
ITEM 5. OTHER INFORMATION
The Company anticipates that it will hold its 1999 annual shareholders'
meeting in September 2000. A preliminary proxy has been filed with the
Securities and Exchange Commission as of December 22, 1999 and anticipates
filing an amended preliminary proxy by June 20, 2000. A mailing to shareholders
is anticipated on or about July 31, 2000.
On April 18, 2000, Western announced that it had entered into a letter of
intent to merge with e-Mobile, Inc., a Delaware corporation, and sell Western's
existing business to Western management. If the transaction is consummated,
shares of Western's common stock would be converted into shares of the surviving
corporation in the merger, subject to any applicable dissenters' rights. Closing
of the transaction is conditioned on approval of the transaction by shareholders
of Western and certain other regulatory approvals. Completion of the transaction
is also subject to the satisfaction of a number of contractual conditions,
including but not limited to Western repurchasing or retiring outstanding
options. Western is continuing to negotiate the terms of a definitive agreement
and proceeding to satisfy conditions of the merger agreement. There is no
assurance that the transaction will be consummated.
In May 2000, Western sold its business in Moses Lake, Washington to another
equipment dealer and no longer has a physical presence in that area. In
connection with such sale, Case Corporation has assigned its dealer contract for
that area to the purchasing dealer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
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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 15, 2000
By: /s/ Robert M. Rubin
--------------------
Robert M. Rubin
Chief Executive Officer
By: /s/ David M. Barnes
--------------------
David M. Barnes
Chief Financial Officer
