<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 The Six Months Ended January 31, 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)
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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AMERICAN UNITED GLOBAL, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets
January 31, 2000 (unaudited) and July 31, 1999.............. 1
Consolidated Statements of Operations
Three Months Ended January 31, 2000
and January 31, 1999 (unaudited)............................ 2
Consolidated Statements of Operations
Six Months Ended January 31, 2000
and January 31, 1999 (unaudited)............................ 3
Consolidated Statement of Shareholders'
Equity (unaudited)........................................... 4
Consolidated Statements of Cash Flows
Six Months Ended January 31, 2000
and January 31, 1999 (unaudited)............................ 5
Notes to the Consolidated Financial
Statements (unaudited)......................................... 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 10-11
Item 3. Quantitative and Qualitative Disclosure about
Market Risk................................................... N/A
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................... 12
Item 2. Changes in Securities................................... N/A
Item 3. Defaults Upon Senior Securities......................... 13
Item 4. Submission of Matters to a Vote of Security
Holders....................................................... N/A
Item 5. Other Information ...................................... 13
Item 6. Exhibits and Reports on Form 8-K........................ 13
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ITEM 1
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, JULY 31,
2000 1999
---- ----
(unaudited)
ASSETS
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CURRENT ASSETS:
Cash and cash equivalents................................................ $ 1,113,000 $ 2,914,000
Investment in marketable securities at market value..................... 21,996,000 371,000
Trade accounts receivable, less allowance for doubtful accounts
of $883,000 and $724,000, respectively................................. 12,180,000 15,500,000
Inventories............................................................. 59,513,000 67,068,000
Prepaid expenses and other receivables.................................. 436,000 885,000
Deferred tax asset...................................................... 1,410,000 1,410,000
Receivable from Chairman................................................ 299,000 1,700,000
Notes receivable ....................................................... 1,661,000 1,140,000
--------- ---------
TOTAL CURRENT ASSETS................................................ 98,608,000 90,988,000
Property and equipment, net ............................................ 9,487,000 9,818,000
Rental equipment, net .................................................. 30,526,000 31,366,000
Leased equipment, net .................................................. 5,082,000 5,264,000
Intangible assets, net of accumulated amortization
of $619,000 and $1,460,000, respectively ............................. 2,902,000 2,952,000
Investment in preferred stock........................................... - 2,000,000
Notes receivable........................................................ - 521,000
------- -------
TOTAL ASSETS........................................................ $ 146,605,000 $ 142,909,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under floor financing lines.................................. $ 8,848,000 $ 17,128,000
Short-term borrowings................................................... 75,341,000 72,383,000
Current portion of capital lease obligations ........................... 9,000 17,000
Accounts payable........................................................ 6,303,000 13,038,000
Accrued liabilities..................................................... 2,916,000 4,046,000
Income taxes payable.................................................... 343,000 627,000
Deferred taxes.......................................................... 2,227,000 -
Due to shareholders..................................................... 1,900,000 2,500,000
--------- ---------
TOTAL CURRENT LIABILITIES........................................... 97,887,000 109,739,000
Long-term borrowings ...................................................... 38,000 48,000
Capital lease obligations, net of current portion.......................... 4,776,000 4,755,000
Deferred taxes............................................................. 838,000 837,000
Deferred gain.............................................................. - 140,000
Deferred lease income...................................................... 6,108,000 6,181,000
--------- ---------
TOTAL LIABILITIES................................................... 109,647,000 121,700,000
Minority interest.......................................................... 8,349,000 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..................................................... (37,894,000) (37,280,000)
Accumulated unrealized gains, net ...................................... 16,426,000 -
----------- -----------
TOTAL SHAREHOLDERS' EQUITY.......................................... 28,609,000 12,797,000
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................... $ 146,605,000 $ 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
JANUARY 31,
2000 1999
---- ----
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Net revenues ...................................... $ 33,989,000 $ 41,279,000
Cost of revenues .................................. 30,123,000 36,787,000
------------ ------------
Gross profit ...................................... 3,866,000 4,492,000
Selling, general and administrative expenses ...... 3,208,000 3,198,000
--------- ---------
Operating income .................................. 658,000 1,294,000
Interest expense, net ............................. 1,296,000 1,007,000
--------- ---------
Loss (income)from continuing operations before
income taxes, equity in loss of unconsolidated
subsidiary and minority interest ............. (638,000) 287,000
(Benefit) provision for income taxes .............. (125,000) 306,000
Equity in loss of unconsolidated subsidiary ....... 120,000 215,000
Gain on sale of patent ............................ (240,000) -
Minority interest in loss (earnings) of
consolidated subsidiary ........................ 112,000 (134,000)
------- -------
Loss from continuing operations ................... (281,000) (368,000)
Loss from discontinued operations ................. - (1,925,000)
-------- --------
Net loss .......................................... $ (281,000) $ (2,293,000)
============= =============
Basic and diluted loss per share:
Loss from continuing operations $ (0.02) $ (0.03)
Loss from discontinued operations -- (0.17)
------------- -------------
Basic and diluted loss per share $ (0.02) $ (0.20)
============= =============
Weighted average number of shares 11,921,529 11,728,000
============= =============
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)
SIX MONTHS ENDED
JANUARY 31,
2000 1999
---- ----
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Net revenues ...................................... $ 76,052,000 $ 81,644,000
Cost of revenues .................................. 67,267,000 74,677,000
------------ ------------
Gross profit ...................................... 8,785,000 6,967,000
Selling, general and administrative expenses ...... 6,639,000 6,571,000
--------- ---------
Operating income .................................. 2,146,000 396,000
Interest expense, net ............................. 2,830,000 2,747,000
--------- ---------
Loss from continuing operations before
income taxes, equity in loss of unconsolidated
subsidiary and minority interest ............. (684,000) (2,351,000)
Benefit for income taxes .......................... (63,000) (574,000)
Equity in loss of unconsolidated subsidiary ....... 296,000 355,000
Gain on sale of patent ............................ (240,000) -
Minority interest in loss of
consolidated subsidiary ........................ 63,000 378,000
------- -------
Loss from continuing operations ................... (614,000) (1,754,000)
Loss from discontinued operations ................. - (2,656,000)
-------- ----------
Net loss .......................................... $ (614,000) $ (4,410,000)
============= =============
Basic and diluted loss per share:
Loss from continuing operations $ (0.05) $ (0.15)
Loss from discontinued operations -- (0.23)
------------- -------------
Basic and diluted loss per share $ (0.05) $ (0.38)
============= =============
Weighted average number of shares 11,921,529 11,673,000
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
3
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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 ...................... (614,000) (614,000)
Other comprehensive income .... 16,426,000 16,426,000
-------- -------- ---------- --------- ------------- ------------- ------------ ------------
Balance at October 31, 1999.... 426,000 $ 4,000 11,921,000 $ 119,000 $ 49,954,000 $(37,894,000) $ 16,426,000 $ 28,609,000
======= ======== ========== =========== ============= ============ ============ ===========
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)
THREE MONTHS ENDED
OCTOBER 31,
-----------
1999 1998
---- ----
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations............... $ (614,000) $ (1,754,000)
Net loss from discontinued operations............. - (2,656,000)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization................... 5,243,000 2,524,000
Loss applicable to minority interest............ (63,000) (378,000)
Undistributed loss of affiliate................. 296,000 355,000
Gain on sale of patent ......................... (240,000) -
Changes in assets and liabilities, net of
effects of acquisition and dispositions:
Accounts receivable........................... 3,320,000 7,753,000
Inventories................................... 4,494,000 9,776,000
Inventory floor plan financing................ (8,280,000) 542,000
Borrowings under term loans................... 2,958,000 (11,863,000)
Prepaid expenses and other receivables........ (151,000) 7,000
Leased equipment, net......................... 182,000 (2,625,000)
Accounts payable.............................. (6,734,000) (4,100,000)
Other accrued liabilities..................... (1,011,000) 1,022,000
Income taxes payable.......................... (276,000) (745,000)
Deferred revenue.............................. (213,000) 2,846,000
Net liabilities of discontinued operations.... - (1,480,000)
---------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES..... (1,089,000) (776,000)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment................ (384,000) (1,484,000)
Purchase of rental equipment, net................. (576,000) (354,000)
Sale of marketable securities..................... 245,000 2,382,000
------- ---------
NET CASH (USED)PROVIDED BY INVESTING ACTIVITIES...... (715,000) 544,000
---------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease............... 13,000 (33,000)
Payment of long term borrowings................... (10,000) (98,000)
------ -------
NET CASH USED BY FINANCING ACTIVITIES................ 3,000 (131,000)
------- --------
Net decrease in cash and cash equivalents............ (1,801,000) (363,000)
Cash and cash equivalents, beginning................. 2,914,000 3,362,000
--------- ---------
Cash and cash equivalents, ending.................... $ 1,113,000 $ 2,999,000
============ ============
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 January
31, 2000 and July 31, 1999.
NOTE 2 - INVENTORIES
Inventories consist of the following:
JANUARY 31, JULY 31,
2000 1999
---- ----
Parts.......................... $ 10,564,000 $ 10,101,000
Equipment, new and used........ 48,949,000 56,967,000
---------- ----------
$ 59,513,000 $ 67,068,000
=========== ===========
NOTE 3 - COMPREHENSIVE INCOME
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SIX MONTHS ENDING
JANUARY 31, JANUARY 31,
2000 1999
---- ----
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Net loss........................................ $ (614,000) $ (4,410,000)
Other comprehensive income:
Increase in fair market value of
investments, net of taxes of $2,220,000.... 16,426,000 -
---------- -----------
Total comprehensive income (loss)............... 15,812,000 (4,410,000)
========== ===========
</TABLE>
The investment in marketable securities is comprised of securities, each of
which is 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 fully
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:
January 31, July 31,
2000 1999
---- ----
Operating property, plant and equipment:
Land $420,000 $ 420,000
Buildings 5,130,000 5,126,000
Machinery and equipment 4,032,000 3,869,000
Office furniture and fixtures 2,301,000 2,291,000
Computer hardware and software 1,393,000 1,299,000
Vehicles 1,886,000 1,841,000
Leasehold improvements 419,000 360,000
---------- ----------
15,581,000 15,206,000
Less: accumulated depreciation (6,094,000) (5,388,000)
---------- ----------
Property, plant, and equipment (net) $9,487,000 $9,818,000
========= ==========
Rental equipment fleet $36,821,000 $36,395,000
Less: accumulated depreciation (6,295,000) (5,029,000)
---------- ----------
Rental equipment (net) $30,526,000 $31,366,000
========== ==========
Leased equipment fleet (net) $5,082,000 $5,264,000
========= =========
NOTE 5 - INTANGIBLE ASSETS
Intangible and other assets consist of the following:
January 31, July 31,
2000 1999
---- ----
Goodwill......................$ 2,902,000 $ 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 which is payable, net of costs, to
approved claimant shareholders. 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. When the Western shares
are distributed to the claimant stockholders, 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 April
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 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 July 2000 includes a proposal to
approve the Hutchinson transaction.
Pursuant to an amendment to the settlement agreement dated March 6, 2000,
Mr. Rubin is obligated to pay the $1,100,000 in cash to the Company, if not
previously paid by Hutchinson, no later that July 15, 2000. In addition, Mr.
Rubin is obligated to contribute $245,000 of certain publicly traded securities
to the Company no later than 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 issued new incentive stock options under the 1996 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 made a one-time grant of 250,000 incentive stock options under the 1996
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 has 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.
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 February 29, 2000, none were
issued and outstanding.
NOTE 9 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
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<CAPTION>
SIX MONTHS ENDED JANUARY 31,
2000 1999
---- ----
<S> <C> <C>
Interest................. $ 2,669,000 $ 2,725,000
Income taxes............. 190,000 365,000
</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 has
been valued at 60% of the last trading price on the day of closing for a total
of $240,000.
9
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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 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 Six Months Ended January 31, 2000 Compared to the Three and
Six Months Ended January 31, 1999
Western's revenues for the three-month period ended January 31, 2000
decreased 18% to $34 million compared with $41.3 million for the three-month
period ended January 31, 1999. Revenues were down from the prior year's second
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
economy, and the first quarter consolidation of four stores.
Western's revenues for the six-month period ended January 31, 2000
decreased $5,592,000 or approximately 7% over the six-month period ended January
31, 1999. The decrease was due primarily to the consolidation of four stores in
the past six months. For the six-month period ended January 31, 2000, revenue in
all departments except rentals were down from the same period in the prior year.
Western's gross profit margin of 11.4% for the three-month period ended
January 31, 2000 was up from the prior year comparative period margin of 10.9%.
The increase in gross profit margins was the result of higher utilization of
discount programs in acquiring new equipment. For the six-month period ended
January 31, 2000, Western's gross margin was 11.6%, up from the 8.5% gross
margin for the six-month period ended January 31, 1999.
Selling, general and administrative expenses totaled $3,208,000 and
$6,639,000 or 9.4% and 8.7% of revenues for the three and six months ended
January 31, 2000 compared to $3,198,000 and $6,571,000 or 7.7% and 8.0% of sales
for the three and six months ended January 31, 1999. For the three months and
six months ended January 31, 2000, the increases of $ 10,000 and $68,000 are
primarily due to increases in expenses at Western offset somewhat by decreased
expenses for the Company.
Interest expense for the three and six months ended January 31, 2000 of
$1,296,000 and $2,830,000 was up from the $1,007,000 and $2,747,000 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.
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
are ultimately recognized upon the sale of the securities will be offset by the
net operating loss carry-forwards. Gains 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 six months ended January
31, 2000 is based upon losses generated by the Company's Western subsidiary.
The Company had net loss for the three and six months ended January 31,
2000 of $281,000 and $614,000, respectively or $0.02 and $0.05 per (basic and
diluted) share compared with a net loss of $2,293,000 and $4,410,000 or $0.20
and $0.38 per (basic and diluted) share for the comparable prior year periods.
The six months ended January 31, 1999 included a non-recurring pre-tax charge of
$1,061,000 for used equipment inventory reserves at Western. The three and six
months ended January 31, 1999 included losses from discontinued operations of
the Company of $1,925,000 and $2,656,000, respectively.
10
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Liquidity and Capital Resources
The Company's primary needs for liquidity and capital resources are related
to Western's inventory for sale and its rental and lease fleet inventories.
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 January 31,
2000, Western was indebted under manufacturer provided floor planning
arrangements in the aggregate amount of $8,848,000.
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
January 31, 2000, approximately $73,821,000 was outstanding under the DFS credit
facility. At January 31, 2000, Western was in technical default of the minimum
tangible net worth covenant in the Deutsche Financial Services Loan Agreement.
Western requested but did not obtain a waiver for the period through January 31,
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 January 31, 2000.
During the six months ended January 31, 2000, cash and cash equivalents and
marketable and debt securities increased by $19,824,000, primarily due to the
increase in the value of the investments in eGlobe, Inc. and Graphon Corporation
in the amount of $18,646,000 and the contribution of $1,250,000 of marketable
securities by Mr. Rubin pursuant to the derivative action settlement. This is
offset by Western's decrease in operating cash flows 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 $23,055,000 and available credit facilities at Western as of January
31, 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.
11
<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 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
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. 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. The
Company anticipates that these shares will be distributed in April 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 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 July includes a proposal to approve the
Hutchinson transaction.
Pursuant to an amendment to the settlement agreement dated March 6, 2000,
Mr. Rubin is obligated to pay the $1,100,000 in cash to the Company if not
previously paid by Hutchinson, no later that July 15, 2000. In addition, Mr.
Rubin is obligated to contribute $245,000 of certain publicly traded securities
to the Company no later than 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.
12
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At January 31, 2000, Western was in technical default of the minimum
tangible net worth covenant in the DFS Loan Agreement. As of January 31, 2000,
the outstanding balance owed to DFS was approximately $73,821,000. Western
requested but did not receive a waiver of the default for the period through
January 31, 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 January
31, 2000. See Item 1, "Liquidity and Capital Resources."
ITEM 5. OTHER INFORMATION
The Company anticipates that it will hold its 1999 annual stockholders'
meeting in July 2000. A preliminary proxy has been filed with the Securities and
Exchange Commission as of December 22, 1999 and a mailing to stockholders is
anticipated on or about May 10, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN UNITED GLOBAL, INC.
March 21, 2000
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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