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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
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
incorporation or organization) Identification No.)
2495 152nd Avenue
Redmond, Washington 98052
(Address of principal executive offices) (Zip Code)
(425) 869-7410 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Exchange Act
Title of each class Name of exchange on which registered
None None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
Transitional Small Business Disclosure Format Yes |_| No |X|
Check if there is no disclosure of delinquent filers in response to item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of
the issuer as of November 2, 2000 was approximately $6,335,000.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes |_| No |_|
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of the registrant's Common Stock, $.01 Par
Value, on November 8, 2000 was 12,150,623 shares.
Documents incorporated by reference: None
PART I
ITEM 1. DESCRIPTION OF BUSINESS
SUMMARY
American United Global, Inc., a Delaware corporation (the "Company"), is a
holding company which, through its operating subsidiary, was engaged primarily
in the distribution, rental and servicing of construction equipment (the
"Distribution Business") during the fiscal year ending July 31, 2000 ("Fiscal
2000"). The Company intends to engage in businesses other than the Distribution
Business, including an Internet/new media business segment (the "New Media
Business"), and to that end during and since the end of Fiscal 2000 has made
minority investments in both a start-up diversified media business including a
website and a magazine targeted for a sophisticated audience, and a start-up
video content management company and global provider of multimedia applications.
The Company was engaged, through its one operating subsidiary, in active
operations during Fiscal 2000.
The Distribution Business
The Distribution Business operates through the Company's 59.6%-owned
subsidiary, Western Power & Equipment Corp., a Delaware corporation ("Western").
Western is engaged in the sale, rental, and servicing of light, medium-sized,
and heavy construction, agriculture, and industrial equipment, parts and related
products which are manufactured by Case Corporation ("Case") and certain other
manufacturers. The Company believes, based upon the number of locations owned
and operated, that Western is the largest independent dealer of Case
construction equipment in the United States. Products sold, rented, and serviced
by Western include backhoes, excavators, crawler dozers, skid steer loaders,
forklifts, compactors, log loaders, trenchers, street sweepers, sewer vacuums,
and mobile highway signs.
Western operates out of 20 facilities located in Washington, Oregon,
Nevada, California, and Alaska. The equipment distributed by Western is
furnished to contractors, governmental agencies, and other customers primarily
for use in the construction of residential and commercial buildings, roads,
levees, dams, underground power projects, forestry projects, municipal
construction, and other projects.
Western's strategy focuses on acquiring additional existing
distributorships and rental operations, opening new locations, and increasing
sales at its existing locations. In connection with this strategy, it may seek
to operate additional Case or other equipment retail distributorships, and sell,
lease and service additional lines of construction equipment and related
products not manufactured by Case. Western reduced its acquisition activity in
the fiscal year ending July 31, 1999 ("Fiscal 1999") due to market conditions
affecting the industry in which Western conducts its business, and has since
concentrated on consolidating its stores to improve operating efficiency and
profitability. During Fiscal 2000, Western consolidated four facilities into
larger stores in each region and sold one facility in order to increase
efficiencies and reduce costs. Western added two facilities in Southern
California to assist Case in a dealership transaction for Southern California.
During the first quarter of Fiscal 2001, the Company consolidated one branch in
Washington.
Western sustained a net loss of approximately $7.2 million on net sales of
approximately $155.7 million in Fiscal 2000, and a net loss of approximately
$1.8 million on net sales of approximately $163.7 million in the fiscal year
ended July 31, 1999, ("fiscal 1999") whereas it earned net income of
approximately $1.8 million on net sales of approximately $163.5 million in the
fiscal year ended July 31, 1998 ("Fiscal 1998"). The Distribution Business has
in Fiscal 2000, Fiscal 1999 and Fiscal 1998 accounted for 100% of the Company's
net sales due to the discontinuation of operations of all entities engaging in
the Technology Business. In all likelihood, any material adverse effect upon the
Distribution Business or Western will have a material adverse effect upon the
business, financial condition, results from operations and prospects of the
Company.
STRATEGIC GOALS
The Company continues to engage in the Distribution Business through its
subsidiary, Western, of which the Company owns approximately 59.6% of the
outstanding Common Stock. The Company is currently considering focusing its
strategy on acquisitions into other businesses, including the New Media
Business, but aside from minority investments in two companies, it has not yet
identified any definitive acquisition candidates.
1
The Distribution Business. Western's growth strategy focuses on acquiring
additional existing distributorships and rental operations, opening new
locations, and increasing sales at its existing locations. Western reduced its
acquisition activity in Fiscal 1999 due to market conditions in the industry in
which Western conducts its business, and since then has concentrated on
consolidating its stores to improve operating efficiency and profitability.
Western presently operates out of 20 facilities located in five states in the
Western United States. When market conditions improve and as opportunities
arise, Western may then elect to make strategic acquisitions of other authorized
Case construction equipment retail dealers located in established or growing
markets, as well as dealers or distributors of construction, industrial, or
agricultural equipment, and related parts, manufactured by companies other than
Case. In addition to acquisitions, Western may open new retail outlets, as in
Fiscal 2000 when it opened two facilities in Southern California. Western's
strategy has been to test market areas by placing sales, parts, and service
personnel in the target market through the efforts of salespeople. If the
results are deemed favorable, Western may open a retail outlet with its own
inventory of equipment. Western believes that, to the extent it decides to
expand, this approach reduces both the business risk and the cost of market
development.
The third prong of Western's growth strategy is to expand sales at its
existing locations, which it believes can be done in three ways. First, Western
will continue to broaden its product line by adding equipment and parts produced
by manufacturers other than Case. Western has already added products to its
inventories produced by such quality manufacturers as Dynapac, Champion,
Link-Belt, Takeuchi, Tymco, Vactor, Kawasaki, Kubota, Daewoo, and Stewart &
Stevenson. Second, Western will seek to increase sales of parts and service
fees, categories which have considerably higher margins than equipment sales.
The Company believes Western can accomplish this growth through the continued
diversification of its parts product lines and the servicing of equipment
produced by manufacturers other than Case. Third, Western plans to further
develop its fleet of rental equipment. As the cost of purchasing equipment
escalates, short and long-term rental is predicted to become increasingly
attractive to Western's customers. Western's management anticipates that rental
of equipment will make up an increasing share of revenues.
New Media Business. The Company has made two minority investments in
companies engaged in the Internet/new media business segment. EGO Magazine.com,
Inc. ("EGO") operates an Internet website and a magazine targeted for a
sophisticated audience, while New Media Technology Corp. ("NMT") is a video
content management start-up company which is also a global provider of
multimedia applications.
HISTORY AND RECENT ACQUISITIONS AND DIVESTITURES
The Company was initially organized as a New York corporation on June 22,
1988 under thename Alrom Corp., and completed an initial public offering of
securities in August 1990. The Company effected a statutory merger in December
1991, pursuant to which the Company was reincorporated in the State of Delaware
under the name American United Global, Inc.
Western
Western commenced business in November 1992 with the acquisition from Case
of seven retail distribution facilities located in Oregon and Washington.
Western became a subsidiary of the Company, simultaneously with such
acquisition. The Company held approximately 59.6 percent of the outstanding
shares of Western common stock as of July 31, 2000. Pursuant to the Company's
final settlement of a shareholder class action, the Company transferred 777,414
shares of Western common stock to the class, on November 1, 2000 and effective
on that date owns approximately 36.5% of Western's outstanding common stock.
In September 1994 and February 1996, in two different transactions, Western
acquired from Case four retail construction equipment stores located in
California and Nevada. In addition, in June 1996 and January 1997, Western made
two additional acquisitions of distributorships of predominantly non-competing
lines of equipment, with locations in California, Oregon, Washington and Alaska.
From Fiscal 1993 through Fiscal 1997, Western also opened nine new stores in the
states served by the acquired stores, ending Fiscal 1997 with 24 stores.
In Fiscal 1998, Western acquired four additional facilities through
acquisition, located in California and Alaska. The pre-existing Alaska facility
was discontinued as it was combined with the acquired Alaska facility. In
addition, in Fiscal 1998 Western opened one new store in Washington. On December
11, 1997, Western acquired substantially all of the operating assets used by
Case in connection with its business of servicing and distributing Case
agricultural equipment at a facility located in Yuba City, California.
2
Business Strategy
The Company's business strategy has focused on acquiring additional
existing distributorships and rental operations, opening new locations, and
increasing sales at its existing locations. The Company reduced its acquisition
activity in Fiscal 1999 due to market conditions and since then has concentrated
on consolidating its stores to improve operating efficiency and profitability.
Whenmarket conditions improve and opportunities arise, the Company intends to
make strategic acquisitions of other authorized Case construction equipment
retail dealers located in established or growing markets, as well as dealers or
distributors of construction, industrial, or agricultural equipment, and related
parts, manufactured by companies other than Case.
In addition to acquisitions, the Company may open new retail outlets. The
strategy in opening additional retail outlets has been to test market areas by
placing sales, parts, and service personnel in the target market. If the results
are favorable, a retail outlet is opened with its own inventory of equipment.
This approach reduces both the business risk and the cost of market development.
Western presently has 20 facilities located in five states.
The third prong of the Company's business strategy is to expand sales at
its existing locations in three ways. First, the Company will continue to
broaden its product line by adding equipment and parts produced by manufacturers
other than Case. The Company has already added products to its inventories
produced by such quality manufacturers as Dynapac, Champion, Link-Belt,
Takeuchi, Tymco, Vactor, Kawasaki, Kubota, Daewoo, and Stewart & Stevenson.
Second, the Company will seek to increase sales of parts and service - both of
which have considerably higher margins than equipment sales. This increase will
be accomplished through the continued diversification of the Company's parts
product lines and the servicing of equipment produced by manufacturers other
than Case. Third, the Company plans to further develop its fleet of rental
equipment. As the cost of purchasing equipment escalates, short and long-term
rental will become increasingly attractive to the Company's customers.
Management anticipates that rental of equipment will make up an increasing share
of the Company's revenues.
Products
Case Construction Equipment
The construction equipment (the "Equipment") sold, rented and serviced by
the Company generally consists of: backhoes (used to dig large, wide and deep
trenches); excavators (used to dig deeply for the construction of foundations,
basements, and other projects); log loaders (used to cut, process and load
logs); crawler dozers (bulldozers used for earth moving, leveling and shallower
digging than excavators); wheel loaders (used for loading trucks and other
carriers with excavated dirt, gravel and rock); roller compactors (used to
compact roads and other surfaces); trenchers (a smaller machine that digs
trenches for sewer lines, electrical power and other utility pipes and wires);
forklifts (used to load and unload pallets of materials); and skid steer loaders
(smaller version of a wheel loader, used to load and transport small quantities
of material-e.g., dirt and rocks-around a job site). Selling prices for these
units range from $15,000 to $350,000 per piece of equipment.
In Fiscal 1998, Western acquired four additional facilities, in California
and Alaska, and opened one new store in the state of Washington. The
pre-existing Alaska facility was discontinued as it was combined with the
acquired Alaska facility. On December 11, 1997, Western acquired substantially
all of the operating assets used by Case in connection with its business of
servicing and distributing Case agricultural equipment at a facility located in
Yuba City, California. On April 30, 1998, Western acquired substantially all of
the operating assets of Yukon Equipment, Inc. ("Yukon") in connection with
Yukon's business of servicing and distributing construction, industrial, and
agricultural equipment in Alaska. Yukon has facilities in Anchorage, Fairbanks,
and Juneau, Alaska.
In Fiscal 1999, the Company closed three of its smaller facilities and
began servicing the territories served by these small stores by larger
facilities in the region. The Company has consolidated an additional four
facilities in the first quarter of Fiscal 2000 into larger stores in each
region. The Company ended Fiscal 2000 with 21 facilities. The closures are
intended to increase efficiencies and reduce costs.
National O-Ring and Stillman Seal
In January 1996, the Company sold all of the assets of its National O-Ring
and Stillman Seal businesses, comprising the manufacturing business of the
Company, to Hutchinson Corporation ("Hutchinson") for $24,500,000 (the
"Hutchinson Transaction"), of which $20,825,000 was paid in cash and the
aggregate $3,675,000 balance was paid by delivery of two 24-month non-interest
bearing promissory notes due and paid in January 1998.
3
Connectsoft
Effective as of July 31, 1996, the Company acquired, through a merger with
an acquisition subsidiary of the Company consummated in August 1996 (the
"Connectsoft Merger"), all of the outstanding capital stock of Connectsoft, Inc.
a closely-held company located in Bellevue, Washington ("Old Connectsoft") which
provided a variety of computer products and services. In connection with the
Connectsoft Merger, Old Connectsoft stockholders received, on a pro rata basis,
an aggregate of 976,539 shares of the Company's Series B-1 Preferred Stock (the
"Preferred Stock"). Such Preferred Stock does not pay a dividend, is not subject
to redemption, has a liquidation preference of $3.50 per share over Company's
Common Stock and votes together with the Company's Common Stock as a single
class on a one share for one vote basis. Each share of Preferred Stock was
convertible into either one, two or three shares of Common Stock of the Company
if certain benchmarks for pre-tax income of Old Connectsoft and its consolidated
subsidiaries, and Exodus Technologies, Inc., a direct subsidiary of the Company,
were achieved. As such benchmarks were not achieved, the Preferred Stock has
been and is only convertible into Common Stock on a one-for-one basis. To date,
560,276 shares of Preferred Stock have been converted into an equal number of
shares of Common Stock, and 416,263 shares of Preferred Stock remain
outstanding.
On July 10, 1998, the Company entered into an agreement to sell
substantially all of the assets of its Connectsoft Communications Corporation
subsidiary, including the network operations center, to eGlobe. As
consideration, eGlobe issued approximately $2,000,000 (as valued) of its
convertible preferred stock to the Company and assumed approximately $5,182,000
of Connectsoft liabilities and leases, of which about $2,900,000 are lease
obligations guaranteed by the Company. The sale to eGlobe was consummated in
June 1999. Thereafter, in August 1999, the agreement with eGlobe was amended.
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. See also "Item 1 - Description
of Business-Summary-Technology Business."
InterGlobe
In September 1996, the Company acquired InterGlobe for a purchase price
paid to the InterGlobe stockholders in the aggregate of approximately $400,000,
plus 800,000 shares of the Company's Common Stock. The former stockholders of
Interglobe also received four-year employment agreements with Interglobe and the
Company, pursuant to which they received seven-year options to purchase an
additional aggregate 800,000 shares of the Company's Common Stock at an exercise
price of $6.00 per share (the "Interglobe Options"), of which all such
Interglobe Options have since been canceled. In August 1998, the Company
discontinued the operations of InterGlobe.
Exodus
The Company, through its Exodus subsidiary, had designed and developed a
proprietary software program, marketed as NTERPRISE, which allows users to run
WindowsTM application server software programs designed for the Microsoft TM
Windows NT TM operating system developed by Microsoft on (i) users' existing
Unix TM workstations, X-terminals and other X-widows devices, Macintosh
terminals and Java-enabled network computers, which would otherwise not be
Windows compatible, and (ii) on older versions of Windows compatible
workstations which are otherwise incapable of running newer versions of
Microsoft compatible software, such as Office95 TM or Lotus Notes TM. The
Company decided to discontinue its Exodus operations in January 1998 following
Microsoft's decision not to renew its license with Exodus.
Seattle OnLine
In November 1996, the Company acquired the assets of Seattle OnLine, Inc.
("Seattle OnLine"), a company engaged in providing a regional Internet/Intranet
telecommunication service in the form of high bandwidth Internet connectivity
and hosting for businesses in the Pacific Northwest. The Company purchased the
Seattle OnLine assets for the sum of $147,000 and 16,000 shares of the Company's
Common Stock which were used to settle certain creditor claims. The Company also
issued to the former stockholders of such corporation warrants to purchase an
aggregate of 333,333 shares of the Company's Common Stock. Seattle OnLine ceased
operations in August 1997 and its remaining assets were sold to a privately held
company for $25,000 and shares of preferred stock of the acquiring company
valued at approximately $50,000 on the date of receipt of such shares.
TechStar and IDF
Effective December 11, 1996, the Company acquired TechStar Communications
Corp. ("TechStar"). In connection therewith the Company issued to the former
TechStar stockholders an aggregate of 507,246 shares of Company Common Stock,
paid $780,000 in cash and delivered three year Company notes aggregating
$600,000. In a related transaction, in April 1997 the Company also acquired
Arcadia Consulting, Inc., a company formed by Solon L. Kandel for the purpose of
providing consulting services to clients in the wireless telecommunications
industry. The Company paid $220,000 and issued to Mr. Kandel 192,754 shares of
Common Stock.
4
In August 1997, the Company sold TechStar to IDF, pursuant to an agreement
and plan of merger, dated July 31, 1997 (the "IDF Merger Agreement"), among the
Company, TechStar, IDF and an acquisition subsidiary of IDF. Upon consummation
of the transaction, the Company received 6,171,553 shares of IDF common stock,
representing approximately 58% of the fully diluted outstanding IDF common
stock, and as a result, for accounting purposes, the Company was deemed to have
acquired IDF.
Robert M. Rubin, the Chief Executive Officer and Chairman of the Board and
a Director of the Company, is also a principal stockholder and was a member of
the board of directors of IDF. Prior to consummation of the transactions
contemplated by the IDF Merger Agreement, Mr. Rubin converted an $800,000 loan
previously made to IDF into preferred stock convertible into 400,000 shares of
IDF common stock.
During Fiscal 2000 and 1999, the Company advanced IDF a total of $364,000
and $992,000, respectively. However, IDF has throughout all of Fiscal 2000 and
in the last two fiscal quarters of Fiscal 1999 experienced a significant
decrease in revenue and has been unable to obtain further financing. Due to
these circumstances and the uncertainty of recovery, the Company has taken a
full reserve against all advances to and investments in IDF.
During the third fiscal quarter of Fiscal 1999, the Company discontinued
the operations of TechStar and during the first Fiscal quarter of Fiscal 2001,
the Company also discontinued the operations of Hayden/Weginan, Inc.
Conese Enterprises Transaction
Effective March 24, 1998, the Company, Western and IDF entered into a
securities purchase agreement with Conese Enterprises, Ltd. ("Enterprises"). As
a result of subsequent discussions, however, the parties mutually agreed to
terminate the securities purchase agreement. On June 27, 1998, the parties
entered into an agreement releasing each other from any obligations under the
securities purchase agreement, and pursuant which the Company reimbursed
Enterprises $150,000 for their expenses in connection with the proposed
transactions.
THE DISTRIBUTION BUSINESS
General
The Company engages in the Distribution Business through Western, of which
it owns approximately 59.6% of its outstanding Common Stock. On November 1,
2000, the Company transferred 777,414 shares of Western common stock to the
shareholder plaintiff class as part of the settlement of a class action lawsuit
against the Company, and currently owns approximately 36.5% of the outstanding
common stock of Western. Western is engaged in the sale, rental, and servicing
of light, medium-sized, and heavy construction, agricultural, and industrial
equipment, parts, and related products which are manufactured by Case and
certain other manufacturers. The Company believes, based upon the number of
locations owned and operated, that it is the largest independent dealer of Case
construction equipment in the United States. Products sold, rented, and serviced
by the Company include backhoes, excavators, crawler dozers, skid steer loaders,
forklifts, compactors, log loaders, trenchers, street sweepers, sewer vacuums,
and mobile highway signs.
Western operates out of 20 facilities located in Washington, Oregon,
Nevada, California, and Alaska. The equipment distributed by Western is
furnished to contractors, governmental agencies, and other customers, primarily
for use in the construction of residential and commercial buildings, roads,
levees, dams, underground power projects, forestry projects, municipal
construction, and other projects.
Western's growth strategy consists of acquiring additional existing
distributorships and rental operations, opening new locations, and increasing
sales at its existing locations. In such connection, it may seek to operate
additional Case or other equipment retail distributorships, and sell, lease, and
service additional lines of construction equipment and related products not
manufactured by Case. See "Growth Strategy".
Growth Strategy
Western's growth strategy focuses on acquiring additional existing
distributorships, opening new locations and increasing sales at its existing
locations. As opportunities arise, Western intends to make strategic
acquisitions of other authorized Case construction equipment retail dealers
located in established or growing markets, as well as of dealers or distributors
of industrial or construction equipment, and related parts, manufactured by
companies other than Case. In addition to acquisitions, Western plans to open
new retail outlets. Western's strategy has been to test market areas by placing
sales, parts, and service personnel in the target market. If the results are
deemed favorable, a retail outlet is opened with its own inventory of equipment.
Western believes this approach reduces both the business risk and the cost of
market development.
5
The third aspect of Western's growth strategy is to expand sales at its
existing locations in three ways. First, Western will continue to broaden its
product line by adding equipment and parts produced by manufacturers other than
Case. Western has already added to its inventories products produced by quality
manufacturers such as Dynapac, Champion, Link-Belt, Takeuchi, Tymco, Vactor,
Kawasaki, Kubota, Daewoo and Stewart & Stevenson. Second, Western will seek to
increase sales of parts and service fees, categories which the Company and
Western have found to have considerably higher margins than equipment sales. The
Company believes Western can accomplish this growth through the continued
diversification of the parts product lines and the servicing of equipment
produced by manufacturers other than Case. Third, Western plans to further
develop its fleet of rental equipment. As the cost of purchasing equipment
escalates, short and long-term rental will become increasingly attractive to the
Western's customers. Western's management anticipates that rental of equipment
will make up an increasing shares of Western's revenues.
The Equipment
Case Construction Equipment
The construction equipment (the "Equipment") sold, rented and serviced by
Western generally consists of: backhoes (used to dig large, wide and deep
trenches); excavators (used to dig deeply for the construction of foundations,
basements, and other projects); log loaders (used to cut, process and load
logs); crawler dozers (bulldozers used for earth moving, leveling and shallower
digging than excavators); wheel loaders (used for loading trucks and other
carriers with excavated dirt, gravel and rock); roller compactors (used to
compact roads and other surfaces); trenchers (a small machine that digs trenches
for sewer lines, electrical power and other utility pipes and wires); forklifts
(used to load and unload pallets of materials); and skid steer loaders (a
smaller version of a wheel loader, used to load and transport small quantities
of material such as dirt and rocks around a job site). Selling prices for this
Equipment ranges from $15,000 to $350,000 per piece of equipment.
Under the terms of standard Case dealer agreements, Western is an
authorized Case dealer for sales of equipment and related parts and services at
locations in Oregon, Washington, Nevada and Northern California (the
"Territory"). The dealer agreements have no defined term or duration, but are
reviewed on an annual basis by both parties, and can be terminated without cause
at any time either by Western on 30 days' notice or by Case on 90 days' notice.
Although the dealer agreements do not prevent Case from arbitrarily exercising
its right of termination, based upon Case's established history of dealer
relationships and industry practice, Western does not believe that Case would
terminate its dealer agreement without good cause.
The dealer agreements do not contain requirements for specific minimum
purchases from Case. In consideration for Western's agreement to act as dealer,
Case supplies to Western items of Equipment for sale and lease, parts,
cooperative advertising benefits, marketing brochures related to Case products,
access to Case product specialists for field support, the ability to use the
Case name and logo in connection with Western's sales of Case products, and
access to Case floor plan financing for Equipment purchases. Such floor planning
arrangements currently provides Western with interest free credit terms of
between one month and twelve months on purchases of specified types of new
Equipment. Principal payments are generally due at the earlier of sale of the
equipment or six months from the date of shipment by Case.
Other Products
Although the principal products sold, leased and serviced by Western are
manufactured by Case, Western also sells, rents and services equipment and sells
related parts (e.g., tires, trailers and compaction equipment) manufactured by
others. Approximately 42% of Western's net sales for Fiscal 2000 and 1999
resulted from sales, rental and servicing of products manufactured by companies
other than Case, a higher percentage than the 35% of total net sales for Fiscal
1998 from this category as Western continued its planned growth in product lines
other than Case. Manufacturers other than Case represented by Western offer
various levels of supplies and marketing support along with purchase terms that
vary from cash upon delivery to interest-free 12-month floor plans.
Western's distribution business is generally divided into three categories
of activity: (i) equipment sales, (ii) equipment rentals, and (iii) product
support.
Equipment Sales
At each of its distribution outlets, Western maintains a fleet of various
equipment for sale. The equipment purchased for each outlet is selected by
Western's marketing staff based upon the types of customers in the geographical
areas surrounding each outlet, historical purchases as well as anticipated
trends. Subject to applicable limitations in Western's manufacturers' dealer
contracts, each distribution outlet has access to Western's full inventory of
equipment. Western provides only the standard manufacturer's limited warranty
for new equipment, which is generally a one-year parts and service repair
warranty. Customers can purchase extended warranty contracts.
6
Western sells used Equipment that has been reconditioned in its own service
shops. It generally obtains such used Equipment as "trade-ins" from customers
who purchase new items of Equipment and from Equipment previously rented and not
purchased. Unlike new Equipment, Western's used Equipment is generally sold "as
is" and without a warranty.
Equipment Rentals
Western maintains a separate fleet of equipment that it holds solely for
rental. Such equipment is generally held in the rental fleet for 12 to 36 months
and then sold as used equipment with appropriate discounts reflecting prior
rental usage. As rental equipment is taken out of the rental fleet, Western adds
new equipment to its rental fleet as needed. The rental charges vary, with
different rates for different types of equipment rented. In October 1998,
Western opened its first rental-only store, located in the Seattle, Washington
area, under the name Western Power Rents. This store rents a wide range of
products including equipment from Case and other manufacturers with whom Western
has dealer agreements as well as equipment from companies with which Western has
had no prior relationship. This store was consolidated with another facility in
August 2000.
Rentals have increased to 17% of Western's revenue in Fiscal 2000 as
compared to 8% of its revenue in Fiscal 1998. See "Sales and Marketing."
Product Support
Western operates a service center and yard at each retail distribution
outlet for the repair and storage of Equipment. Both warranty and non-warranty
service work is performed, with the cost of warranty work being reimbursed by
the manufacturer following the receipt of invoices from Western. Western employs
approximately 115 manufacturer-trained service technicians who perform Equipment
repair, preparation for sale, and other servicing activities. Equipment
servicing is one of the higher profit margin businesses operated by Western.
Western has expanded this business by hiring additional personnel and developing
extended warranty contracts to be purchased by customers for Equipment sold and
serviced by Western, and independently marketing such contracts to its
customers. Western services items and types of Equipment which include those
that are neither sold by Western nor manufactured by Case.
Western purchases a large inventory of parts, principally from Case, for
use in its Equipment service business, as well as for sale to other customers
who are independent servicers of Case Equipment. Generally, parts purchases are
made on standard net 30 day terms.
Western employs one or more persons who take orders from customers for
parts purchases at each retail distribution outlet. The majority of such orders
are placed in person by walk-in customers. Western provides only the standard
manufacturer's warranty on the parts that it sells, which is generally a 90-day
replacement guaranty.
Sales and Marketing
Western's customers are typically residential and commercial building
general contractors, road and bridge contractors, sewer and septic contractors,
underground power line contractors, persons engaged in the forestry industry,
equipment rental companies and state and municipal authorities. Western
estimates that it has approximately 19,000 customers, with most being small
business owners, none of which accounted for more than three percent (3%) of its
total sales in the fiscal year ended July 31, 2000.
For fiscal years 2000,1999, and 1998 the approximate revenue breakdown by
source for the business operated by the Company were as follows:
FY 2000 FY 1999 FY 1998
Equipment Sales 59% 60% 69%
Equipment Rental 17% 16% 8%
Product Support 24% 24% 23%
-- -- --
100% 100% 100%
=== === ===
Western advertises its products in trade publications and its sales
representatives appear at trade shows throughout the Territory. It also
encourages its salespersons to visit customer sites and offer Equipment
demonstrations when requested.
Western believes its sales and marketing activities do not result in a
significant backlog of orders. Although Western has commenced acceptance of
orders from customers for future delivery following manufacture by Case or other
manufacturers, during Fiscal 2000 a majority of its sales revenues resulted from
products sold directly out of inventory, or the providing of services upon
customer request.
7
Western employed approximately 60 Equipment salespersons on July 31, 2000.
All of Western's sales personnel are employees of Western, and all are under the
general supervision of C. Dean McLain, the Executive Vice President and a
director of the Company, and the President of Western. Western assigns to each
Equipment salesperson a separate exclusive territory, the size of which varies
based upon the number of potential customers and anticipated volume of sales as
well as the geographical characteristics of each area.
On July 31, 2000, Western employed six product support salespersons who
sell Western's parts and repair services to customers in assigned territories.
Western has no independent distributors or non-employee sales representatives.
Suppliers
Western purchases the majority of its inventory of Equipment and parts from
Case. No other supplier currently accounts for more than ten percent (10%) of
such inventory purchases in Fiscal 2000. While maintaining its commitment to
Case to primarily purchase Case Equipment and parts as an authorized Case
dealer, in the future Western plans to expand the number of products and
increase the aggregate dollar value of those products which Western purchases
from manufacturers other than Case in the future.
Competition
Western competes with distributors of construction, agricultural and
industrial equipment and parts manufactured by companies other than Case on the
basis of price, the product support (including technical service) that it
provides to its customers, brand name recognition for its products, the
accessibility of its distribution outlets and the overall quality of the Case
and other products that it sells. Western management believes that it is able to
effectively compete with distributors of products produced and distributed by
such other manufacturers primarily on the basis of overall product quality, and
the superior product support and other customer services provided by Western.
Case's two major competitors in the manufacture of a full line of construction
equipment of comparable sizes and quality are Caterpillar Corporation and Deere
& Company. In addition, other manufacturers produce specific types of equipment
which compete with the Case Equipment and other Equipment distributed by
Western. These competitors and their product specialties include JCB Corporation
(backhoes), Kobelco Corporation (excavators), Dresser Industries (light and
medium duty bulldozers), Komatsu Corporation (wheel loaders and crawler dozers)
and Bobcat, Inc. (skid steer loaders).
Western is currently the only Case dealer for construction equipment in
Washington, Alaska, Nevada and in the Northern California area (other than
Case-owned distribution outlets), and is one of two Case dealers in Oregon.
However, Case has the right to establish other dealerships in the future in the
same territories in which the Company operates. In order to maintain and improve
its competitive position, revenues and profit margins, Western plans to increase
its sales of products produced by companies other than Case.
Environmental Standards and Government Regulation
Western's operations are subject to numerous rules and regulations at the
federal, state and local levels which are designed to protect the environment,
including regulating the discharge of hazardous materials into the environment.
Western is subject to federal environmental standards because, in connection
with its operations, it handles and disposes of hazardous materials and
discharges sewer water in its equipment rental and servicing operations. Western
is also subject to local rules and regulations regarding the discharge of waste
water into sewer systems. Western's internal staff is trained to keep
appropriate records with respect to its handling of hazardous waste, to
establish appropriate on-site storage locations for hazardous waste, and to
select regulated carriers to transport and dispose of hazardous waste. Based
upon current laws and regulations, Western believes that its policies, practices
and procedures are properly designed to prevent an unreasonable risk of
environmental damage and the resultant financial liability to Western. No
assurance can be given that future changes in such laws, regulations, or
interpretations thereof, changes in the nature of Western's operations, or the
effects of former occupants' past activities at the various sites at which
Western operates, will not have a material adverse effect upon the Company's
operations.
8
Western is subject to federal environmental standards because in connection
with its operations it handles and disposes of hazardous materials, and
discharges sewer water in its equipment rental and servicing operations.
Western's internal staff is trained to keep appropriate records with respect to
its handling of hazardous waste, to establish appropriate on-site storage
locations for hazardous waste, and to select regulated carriers to transport and
dispose of hazardous waste. Local rules and regulations also exist to govern the
discharge of waste water into sewer systems.
Insurance
Western currently has general, product liability, and umbrella insurance
policies with limits, terms, and conditions which Western and the Company
believe to be consistent with reasonable business practice, although there is no
assurance that such coverage will prove to be adequate in the future. An
uninsured or partially insured claim, or a claim for which indemnification is
not available, or a change in or lapse of any previously existing coverage could
have a material adverse effect upon Western, and in such event would likely
materially adversely affect the Company's financial condition, results from
operations and prospects.
Employees
At July 31, 2000, Western employed approximately 377 full-time employees,
or approximately 43 fewer than at July 31, 1999. Of that number, 22 are in
corporate administration, 25 are involved in administration at the branch
locations, 108 are employed in Equipment sales and rental, and 222 are employed
in product support. Staff reductions during Fiscal 2000 and Fiscal 1999 were
considered to be relatively even across all departments.
At July 31, 2000, approximately 19 of Western's service technicians
employed in the Sacramento, California operation were being represented by
Operating Engineers Local Union No. 3 of the International Union of Operating
Engineers, AFL-CIO under the terms of a five-year contract expiring August 31,
2001. As of May 1999, approximately 19 service technicians employed at Western's
facility in Auburn, Washington had voted to be represented in collective
bargaining by Operating Engineers Local Union Nos. 302 and 612 of the
International Union of Operating Engineers, AFL - CIO. As of January 2000
approximately five service technicians and two parts employees at the
Springfield, OR operation had voted to be represented in collective bargaining
by Operating Engineers Local Union No. 701 of the Operating Engineers. Western
and the local unions' representatives are currently in contract negotiations as
to a contract for these employees. Western believes that its relations with its
employees are satisfactory.
The Company has three executive officers and no administrative employees,
but uses some consultants to perform certain administrative duties.
Western Merger Agreement
On November 3, 2000, Western and e-Mobile, Inc. ("EMI") signed a definitive
Merger Agreement pursuant to which a newly formed holding company will acquire
both Western and e-Mobile. In addition, Western also signed an Asset Purchase
Agreement. Under the terms of the agreement, a newly formed holding company will
issue 52 million shares of its common stock to acquire the existing shares of
EMI and approximately 3.3 million shares to acquire the existing shares of
Western. The holding company will assume all outstanding options of both EMI and
Western. It is anticipated that a new board of directors will be appointed at
the closing and that the officers of EMI will become officers of the holding
company. As a condition of the merger, Western will seek shareholder approval to
allow certain members of Western's management, officers and certain directors to
purchase Western's assets and assume its liabilities for $4.1 million, which
will be paid by a secured note (the note will be subordinate to the current
security interest of DFS) over seven years at seven percent (7.0%) interest,
with interest only payments for the first year and thereafter self-amortizing
with quarterly interest payments and semi-annual principal payments. Closing of
these transactions is conditioned on approval of the transactions by the
shareholders of Western and EMI and certain other regulatory approvals and
contractual conditions.
Dependence on Key Personnel. Western's success in its Distribution Business
depends to a significant degree upon the continuing contributions of its senior
management and other key employees. The Company believes that the future
prospects and success of Western will also depend in large part on its ability
to attract and retain highly-skilled sales and marketing personnel. Competition
for such personnel is intense, and there can be no assurance that Western will
be successful in attracting, integrating and retaining such personnel. Failure
to attract or retain existing and additional key personnel could have a material
adverse effect on the Company's Distribution Business, operating results,
financial condition or prospects.
Future Performance and Risk Factors
The future performance, operating results and financial condition of the
Company's Distribution Business are subject to various risks and uncertainties,
including those described below.
9
Risk Factors Relating to the Company's Distribution Business
Competition. The Company's Distribution Business operates in a highly
competitive industry and market in which many companies have financial and
personnel resources significantly greater than those of Western, and in which
Western faces a great deal of competition on the basis of price. Such intense
price competition has the effect of holding down Western's profit margins on
product sales. The retail construction equipment industry, including the states
of Washington, Oregon, California, Alaska and Nevada in which Western operates,
is also highly fragmented with many brands of equipment and distributors of such
brands active in the market, thus presenting Western with intense competition.
Moreover, Western's dealership arrangements with Case do not provide Western
with exclusive dealerships in any territory. Although management believes that
it is unlikely that Case will create additional independent dealers in the
states of Oregon, Washington, California, Alaska or Nevada, or will reinstitute
its own proprietary dealerships in that territory, there is no assurance that
Case will not elect to do so in the future. If Western cannot adequately compete
with competing companies or adopt to changes in the marketplace or industry, the
business, financial condition, results from operations and prospects of Western
will be materially adversely affected. See "Business-The Distribution
Business-Competition."
Government Regulation and Environmental Standards. Western's operations are
subject to numerous rules and regulations at the federal, state and local levels
which are designed to protect the environment, including regulating the
discharge of certain hazardous materials into the environment. Western's
internal staff is trained to keep appropriate records with respect to its
handling of hazardous waste, to establish appropriate on-site storage locations
for hazardous waste, and to select regulated carriers to transport and dispose
of hazardous waste. There is always the risk that such materials might be
mishandled, or that there might occur equipment or technology failures, which
could result in significant claims for personal injury, property damage and
clean-up or remediation. Any such claims could have a material adverse effect on
Western. If such claims are upheld and Western is fined or sanctioned, the
business, financial condition and results from operations of Western, and the
Company, may be materially adversely affected. No assurance can be given that
future changes in such laws, regulations, or interpretations thereof, changes in
the nature of Western's operations, or the effects of former occupants' past
activities at the various sites at which Western operates, will not have a
material adverse effect upon the Company's operations, financial condition,
business or prospects. See "Business-The Distribution Business-Environmental
Standards and Government Regulation."
Risk of Termination of Case Dealership. Under the terms of the standard
Case construction equipment sales and services agreement with its dealers,
including Western, Case reserves the right to terminate Western as an authorized
Case dealer at any retail locations, for any reason, upon 90 days notice to
Western. In the Agreement of Purchase and Sale by and between Case and Western,
dated December 4, 1992 (the "Case Purchase Agreement"), Case acknowledged that
its corporate business policy is not to exercise such discretionary right of
termination arbitrarily, and agreed that if Western's operations at a particular
location acquired from Case are profitable and are terminated by Case for any
reason other than "for cause" (defined as any grounds which Case shall determine
in the exercise of its reasonable business judgment) it would not reinstate its
own retail operations at such location through December 1997. Should its Case
dealerships at any one or more locations be terminated by Case, the Company's
business, financial condition, results from operations and prospects could be
materially adversely affected. In the event of such termination, Western's
liquidity position and cash reserves would be materially adversely affected as
all of Western's indebtedness to Case under its various secured financing
agreements would become immediately due and payable. All of Western's
indebtedness to its institutional lenders could also be accelerated at that
time. Furthermore, in the event that Western accelerates growth of its
Distribution Business, dependence upon Case as its principal supplier, at least
in the near term, will increase. In the event of any of the foregoing, the
business, financial condition, results from operations and prospects of Western
will likely be materially adversely affected. See "Business-The Distribution
Business-The Equipment."
10
Importance of Case Corporation to Operations. During Fiscal 1999 and Fiscal
2000 the Company's Western subsidiary accounted for all of the Company's total
net sales from continuing operations. Approximately 58% of Western's revenues
result from sales, leasing and servicing of equipment and parts manufactured by
Case. As a result, the ability of Case to continue to manufacture products that
Western can successfully market and distribute, largely based on the quality and
pricing of such products, is of material importance to the business, financial
condition, results from operations and prospects of the Company. In the event
that Case should cease to manufacture equipment for the construction equipment
industry, fail to produce sufficient products to stock the Company's inventories
adequately, fail to maintain certain product price levels on its products or to
maintain a good reputation for quality in such industry, the Company's business,
results from operations, financial condition and prospects will be materially
adversely affected. Effects of Downturn in General Economic Conditions,
Cyclicality and Seasonality. Demand for all of Western's construction equipment
distributed through its retail operations is significantly affected by general
domestic economic conditions. All of such products and services are either
capital goods themselves, principally sold for inclusion in capital equipment or
used for the provision of construction services by others. Sales of capital
goods tend to fluctuate widely along with trends in overall economic activity in
the national economy. A general inflationary spiral or a continuing increase in
prevailing interest rates could adversely affect new construction, and
consequently result in a significant reduction in demand for the construction
equipment sold by Western. The construction equipment business has also
historically been cyclical, and is subject to periodic reductions in the levels
of construction (especially housing starts) and levels of total industry
capacity and equipment inventory, irrespective of the effects of inflation or
increasing interest rates. In addition, housing construction in the northwest
slows down beginning in November and continuing through to January. Accordingly,
Western's operations may be materially adversely affected by any general
downward economic pressures, adverse cyclical trends, or seasonal factors.
Risk Factors Relating to the Company in General
Volatility of Market Prices for the Company's Common Stock. The market
price for the Company's publicly traded Common Stock has been historically
volatile, and recently has been very depressed, and there is limited liquidity
in the market. The Common Stock is quoted on the Over-The-Counter Bulletin
Board, and stocks quoted thereon may suffer from limited liquidity. Future
announcements concerning the Company's Distribution Business, or its
competitors, including operating results, government regulations, or foreign and
other competition, could have a significant impact on the market price of the
Common Stock in the future. See "Market for Common Equity and Related
Stockholder Matters."
Forward Looking Statements and Associated Risks. This annual report on Form
10-K contains certain forward-looking statements, including among others (i)
anticipated trends in the Company's financial condition and results of
operations, and (ii) the Company's business strategy. These forward-looking
statements are based largely on the Company's current expectations and are
subject to a number of risks and uncertainties. Actual results could differ
materially from these forward-looking statements. In addition to other risks
described elsewhere in this "Risk Factors" discussion, important factors to
consider in evaluating such forward-looking statements include (a) changes in
external competitive market factors or in the Company's internal budgeting
process which might impact trends in the Company's results of operations; (b)
unanticipated working capital or other cash requirements; (c) changes in the
Company's business strategy or an inability to execute its strategy due to
unanticipated changes in the industries in which it operates; and (d) various
competitive factors that may prevent the Company from competing successfully in
the marketplace. In light of these risks and uncertainties, many of which are
described in greater detail elsewhere in this "Risk Factors" discussion, there
can be no assurance that the events predicted in forward-looking statements
will, in fact, transpire.
11
ITEM 2. Properties
The following table sets forth information as to each of the properties
which the Company owns or leases (all of which are retail sales, rental service,
storage and repair facilities expect as otherwise noted) in connection with its
Distribution Business at July 31, 2000 The store located in Kent, Washington was
closed in the first quarter of Fiscal 2001.
Location and Use Lessor Lease Annual Rental Size/Square Feet Purchase
Expiration Options
Date
1745 N.E. Columbia Blvd. Carlton O. Fisher, CNJ 12/31/2000 $84,000(1) Approx. 4 Acres; No
Portland, Oregon 97211 Enterprises plus CPI Building 17,622
adjustments sq.ft.
1665 Silverton Road, N.E. LaNoel Elston Myers 7/10/2001 $33,600(1) Approx. 1 Acre; No
Salem, Oregon 97303 Living Trust Buildings 14,860
sq.ft.
1702 North 28th Street McKay Investment 6/14/2001 $69,000(1) Approx. 5 Acres; No
Springfield, Oregon 97477 Company Building 17,024
sq.ft.
West 7916 Sunset Hwy. US Bank 9/30/2003 $69,600(1) Approx. 5 Acres; No
Spokane, Washington 99204 Building 19,200
sq.ft.
12406 Mukilteo Speedway Phil & Jana Pickering 10/31/2008 $114,000(1) Approx. 2.1 No
Mukilteo, Washington 98275 Acres; Building
13,600 sq.ft.
620 N. Oregon Avenue Dress Bros. Partnership 11/15/2000 $66,000(1) Approx. 3 Acres; No
Pasco, Washington 99301 Building 10,000
sq.ft.
4601 N.E. 77th Avenue Parkway Limited 1/31/2001 $157,200 8,627 sq. ft. No
Suite 200 Partnership
Vancouver, Washington
98662
2702 W. Valley Hwy No. Avalon Island LLC 11/30/2015 $204,000(1) Approx. 8 Acres; No
Auburn, Washington 98001 Building 33,000
sq. ft.
500 Prospect Lane Owned N/A N/A Approx. 1.9 No
Moxee, Washington 98936 Acres; Building
6,200 sq. ft.
1455 Glendale Avenue McLain-Rubin Realty 1/31/2019 $252,000(2) Approx. 5 Acres; No
Sparks, Nevada 89431 Group (3) Building 22,475
sq.ft.
25886 Clawiter Road Fred Kewel II, Agency 11/30/99 $110,088(1) Approx. 2.8 No
Hayward, California 94545 Acres; Building
21,580 sq.ft.
3540 D Regional Parkway Soiland 2/28/99 $48,234(1) 5,140 sq. ft. No
Santa Rosa, California plus CPI approximately
95403 adjustments 1.25 acres
1751 Bell Avenue McLain-Rubin Realty 2/2/2016 $168,000(2) Approx. 8 Acres; No
Sacramento, California Company LLC(2)(3) Buildings 35,941
95838 sq. ft.
1041 S. Pershing Avenue Raymond Investment 3/14/2001 $44,000(1) Approx. 2 Acres; No
Stockton, California 95206 Corp. plus annual Buildings 8,000
CRI sq. ft.
adjustments
8271 Commonwealth Avenue, M.E. Robinson 3/31/2001 $89,964(1) Approx. 1 acre; Yes
Buena Park, California Building 11,590
90621 sq.ft.
12
2535 Ellis Street Hart Enterprises 2/15/2002 $33,600 Approx. 2 Acres; Yes
Redding, Oregon 96001 Building 6,200
sq. ft.
913 S. Central McLain-Rubin Realty III 5/31/2017 $205,200(2) Approx. 4.4 No
Kent, WA 98032 (Rental (3) plus CPI Acres; Building
only) adjustments 21,400 sq. ft.
Yes
723 15TH Street 11/02/2002 $18,600 Approx. 1.2
Clarkston, WA 99403 Mark Flerchinger Acres; Building
3,750 sq. ft.
3199 E. Onstott Road 12/31/2017 $66,000 (2) Approx. 13 Acres; No
Yuba City, CA 95991 McLain-Rubin Realty Building 23,900
III (2)(3) sq. ft.
2020 E.Third Avenue Owned N/A N/A Approx. 4 Acres; N/A
Anchorage, AK 99501 Building 15,650
sq. ft.
3511 International Way, C & N Partners 11/30/09 $74,400 Approx. 1.4 Acres; No
Fairbanks, AK 99701 Building 4500 sq.
ft.
1445 Simpson Way SMA Equipment Company 11/30/02 $99,395 Approx. 1 Acre No
Escondido, CA 92029 Building 9,700 sq.
ft.
10062 Live Oaks Ave, Fruehauf Trailer 4/30/01 $120,000 Approx 1.8 Acres, No
Fontana, CA 92335 Services Bldg. 16,000 sq. ft
(1) Net lease with payment of insurance, property taxes and maintenance
costs by the Company.
(2) Net lease with payment of insurance, property taxes and maintenance
costs by the Company, which also pays for structural repairs.
(3) C. Dean McLain and Robert M. Rubin are (i) the Executive Vice
President and Director of the Company and Chief Executive Officer of
Western, and (ii) the President, Chief Executive Officer and Chairman
of the Company, respectively. Messrs. Rubin and McLain are the equity
owners of McLain-Rubin Realty Company, LLC. The terms of its leases
with McLain-Rubin Realty Company LLC provide for a "triple net"
arrangement under which Western pays, in addition to rent, all
insurance, property taxes, maintenance costs and structural and other
repairs.
Western's operating facilities are separated into ten "hub" outlets and ten
"sub-stores" and one "rental-only" store in Kent, Washington (since closed). The
hub stores are the main distribution centers located in Auburn, Buena Vista and
Spokane, Washington; Portland and Springfield, Oregon; Sparks, Nevada; Hayward
and Sacramento, California; and Anchorage, Alaska. The sub-stores are the
smaller retail facilities in Mukilteo, Pasco and Clarkston, Washington; Salem,
Oregon; Santa Rosa, Stockton, Fontana, Escondido and Redding and Yuba City,
California; and Fairbanks, Alaska.
All of the leased and owned facilities used by Western are believed to be
adequate in all material respects for the current and anticipated needs of the
Distribution Business.
13
ITEM 3. 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.
The Derivative Action In May 1998 a purported derivative lawsuit (the
"Derivative Action") was brought on behalf of the Company against Robert M.
Rubin, the Company's Chief Executive Officer, and the Company's other directors
and officers who served between November 1996 and February 1998. The Derivative
Action alleged breaches of fiduciary duty and waste of corporate assets. Final
judicial approval of the most recent amendment to a settlement of the Derivative
Action was received in July 2000, pursuant to which the Company received a
payment (the "Rubin Payment") of cash and securities with an approximate
aggregate value of $2,800,000 from Mr. Rubin. Mr. Rubin paid to the Company (a)
an account containing cash an unrestricted common stock of various
publicly-traded companies, which account was found by the Superior Court of
Washington to have a value of approximately $556,224, (b) common stock of
Response USA, Inc. and Etravnet.com, Inc., valued at $264,841 and $594,540,
respectively, by such court, and (c) unrestricted common stock of Help At Home,
Inc. and Magna Labs, Inc. valued in the aggregate at approximately $1,435,000
including interest.
In connection with the settlement of the Derivative Action, the Company has
agreed to (a) immediately appoint two new independent directors to the Board of
Directors pending stockholder approval, (b) have its chief financial officer
report on the Company's financial condition and prospects at each regular board
meeting, (c) establish an audit committee of the Board of Directors to be
comprised entirely of independent directors, (d) establish a compensation
committee to be composed of a majority of independent directors, (e) pass a
board resolution regarding the review of unsolicited bona fide offers to acquire
at least a controlling stake in the Company, and (f) pass a board resolution
regarding "related party" transaction.
The Company and Mr. Rubin previously agreed that, if the Hutchinson
Transaction were to be ratified by the Company's stockholders, the Company would
release Mr. Rubin, the Company's Chairman and Chief Executive Officer, from the
obligation to repay a $1,200,000 principal amount promissory note (the "Note")
issued by Mr. Rubin to the Company. In return for such release, Mr. Rubin
assigned to the Company his rights to receive payments under the Non-Competition
Agreement and Consulting Agreement with Hutchinson. Mr. Rubin has now paid the
amounts owed under the Note pursuant to the settlement of the derivative action
and the Company has cancelled the foregoing assignment by Mr. Rubin of his
rights to receive payments from Hutchinson under such agreements.
The Class Action
In June 1998 a stockholder class action (the "Class Action") was filed
against the Company's directors alleging breaches of fiduciary duty and loyalty
to the Company and its stockholders in connection with a letter of credit
guarantee by the Company for ERD Waste Corp. ("ERD"), and the delisting of the
Company's Common Stock and publicly-traded warrants from NASDAQ in February
1998. During Fiscal 1997 the Company paid $4,400,000 pursuant to its guarantee
for ERD, which sought protection from creditors under Chapter 11 of the federal
bankruptcy laws on September 30, 1997. Final judicial approval of a settlement,
pursuant to which the company will pay $2,500,000 (the "Class Payment") to
members of the stockholder class, was received in August 1999. The Class Payment
was paid in the form of $600,000 in cash and $1,900,000 in the form of 777,414
shares of common stock of Western. As of July 31, 2000 the Company owned
approximately 59.6% of the outstanding common stock of Western and, giving
effect to the Class Payment made on November 1, 2000 it now owns approximately
36.5% of the Western common stock. In addition, two of the officers and
directors of the Company are officers or directors of Western. As a result, the
Company will remain able to materially influence the outcome of votes by the
directors and stockholders of Western on matters before its board of directors
and stockholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not required.
14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On February 4, 1998, The Nasdaq Stock Market, Inc. ("Nasdaq") delisted the
Company's common stock and warrants (the "Public Warrants") from Nasdaq for (i)
failure to hold an annual stockholders meeting for fiscal year 1997 in violation
of Nasdaq's rules requiring an annual stockholder meeting, (ii) adopting a stock
option plan without stockholder approval in violation of Nasdaq's rules
requiring such stockholder approval, and (iii) the issuance of the Series B-1
Convertible Preferred Stock to the Old Connectsoft stockholders in August 1996
and the private placement of Series B-2 Convertible Preferred Stock in the 1997
private placement violation of Nasdaq's rules which, in effect, require
stockholder approval for any transactions involving the present or potential
issuance of voting securities representing more than 20% of the voting capital
stock outstanding immediately before such transaction. The principal market for
trading the Company's securities is the National Association of Securities
Dealers Over-the-Counter Bulletin Board ("OTCBB"). The following is a table that
lists the high and low selling prices for shares of the Company's Common Stock
and for the Company's Public Warrants on the Nasdaq National Market System and
the OTCBB during the periods identified:
Common Stock Public Warrants
------------ ---------------
High Low High Low
---- --- ---- ---
Fiscal 1998
- -----------
First Quarter 7.8125 1.9375 5.25 2.25
Second Quarter 3.625 1.75 1.75 1.00
Third Quarter 2.125 0.78 * *
Fourth Quarter 0.875 0.33
Fiscal 1999
- -----------
First Quarter 0.88 0.63
Second Quarter 0.59 0.28
Third Quarter 0.33 0.28
Fourth Quarter 0.32 0.28
Fiscal 2000
- -----------
First Quarter 0.31 0.25
Second Quarter 0.75 0.19
Third Quarter 1.50 0.41
Fourth Quarter 1.00 0.44
Fiscal 2001
- ----------
First Quarter 0.75 0.25
* Since the Public Warrants were delisted from the Nasdaq National Market
on February 4, 1998, they have been extremely thinly traded on the
Over-The-Counter Bulletin Board. It is the Company's opinion that since February
4, 1998 price information for the Public Warrants is either unreliable or
unavailable, and that trading activity since such date has been extremely
sporadic, and that for such reasons any such price information may either be
misleading, inaccurate, or not indicative of the true market price of the Public
Warrants since such date. However, according to the most recent price
information provided to the Company, the Public Warrants had a bid/ask price on
November 5, 1999 of $.25 and $.63, respectively, and that cumulative trading
volume in the Public Warrants between August 1999 and October 1999 totaled
approximately 6,500 Public Warrants.
The Company extended the exercise period of the Public Warrants from July
31, 1999 to July 31, 2001. On November 3, 2000 the last sale price of the Common
Stock was $0.54 per share. As of November 3 2000, the Company had approximately
110 record holders of its Common Stock and 6 record holders of its Public
Warrants.
15
Dividend Policy
In the foreseeable future, the Company intends to retain earnings, if any,
to assist in financing the expansion of its business. In the future, the payment
of dividends by the Company on its Common Stock will also depend on its
financial condition, results of operations and such other factors as the Board
of Directors of the Company may consider relevant. The Company does not
currently intend to pay dividends on its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following summary financial information for the fiscal years 2000,
1999, 1998, 1997, and 1996 have been derived from the financial statements of
the Company which have been audited by PricewaterhouseCoopers LLP, independent
accountants.
Income Statement Data (all figures in thousands):
Year ended July 31,
-------------------
2000 1999(1,3) 1998(1) 1997 1996(2)
---- ------- ------- ---- ----
$155,637 $163,650 $163,478 $152,021 $106,555
Net sales
(Loss) income from
continuing operations (7,030) (5,054) (5,121) (7,944) 685
Net (loss) (7,030) (3,065) (9,615) (27,257) (1,835)
Basic and Diluted (Loss)
Earnings Per Share:
(Loss) income from
continuing operations (0.59) (0.43) (0.43) (1.05) 0.12
Net (loss) (0.59) (0.26) (0.85) (2.75) (0.32)
Balance Sheet Data (all figures in thousands):
July 31,
--------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Total assets $128,549 $142,409 $146,904 $144,723 $119,055
Total liabilities $115,413 $121,700 121,914 110,742 87,015
Working capital (deficit) (17,579) (18,751) (5,972) 2,467 17,218
Stockholders' equity 7,373 12,797 15,862 24,101 22,581
(1) Includes loss from discontinued operations for Old Connectsoft,
Connectsoft, Seattle OnLine, InterGlobe, and Exodus.
(2) Includes income from discontinued operations and the gain on the sale of
the manufacturing business of $7.8 million, net of tax, the loss from
discontinued operations of Old Connectsoft for the day ended July 31, 1996
of $10.0 million, net of tax and the discontinued operations of TechStar of
$1.1 million.
(3) Includes a gain on disposal of $1,989,000.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's 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 certain risks and uncertainties, detailed from time to
time in the Company's various commission filings. Such statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected, including, but not limited to, projected sales levels,
expense reductions, reduced interest expense, and increased inventory turnover,
any one or more of which may not be realized. See "Description of Business -
Future Performance and Risk Factors." No assurance can be given that any such
matters will be realized.
General Overview
The Company is a holding company which engages in the Distribution Business
through Western and is also a minority investor in two private companies
(EgoMagazine.com, Inc. and New Media Technologies, Inc.), which engage in the
New Media Business. In previous years the Company engaged in other additional
businesses such as the Technology Business and the Telecommunications and
Construction Businesses, which it has since discontinued. The Company formerly
was a stockholder of the majority of the outstanding common stock of IDF
International, Inc. through which it engaged in the Telecommunication and
Construction Businesses, but since early fiscal 1998 has been only a minority
stockholder. TechStar and Hayden-Wegman, IDF's operating subsidiaries, ceased
operations in June 1999 and September 2000 respectively. The Company has also,
during Fiscal 1998 and Fiscal 1999, either divested itself of all assets of, or
otherwise discontinued all operations of, the Technology Business. Consequently,
the Company's current operations and its operations during Fiscal 2000 consisted
entirely of the Distribution Business which the Company engages in through
Western. Accordingly, the following discussion consists primarily of a
discussion of Western.
Store activity for the last three fiscal years is summarized as follows:
Fiscal No. of Stores at
Year Ending Beginning of No. of Stores No. of Stores No. of Stores No. of Stores at
July 31, Fiscal Year Opened Closed Acquired End of Year
-------- ----------- ------ ------ -------- -----------
1998 23 1 1 4 27
1999 27 0 3 0 24
2000 24 2 5 0 21
Western plans to open and acquire additional distribution outlets for Case
products, as well as for products which may be manufactured by other companies.
Western's results can be impacted by the timing of, and costs incurred in
connection with, new store openings and acquisitions.
Subsequent to the end of Fiscal 2000, Western had consolidated one
additional store into a larger neighboring store. Western may open and acquire
additional distribution outlets for Case products, as well as for products which
may be manufactured by other companies as circumstances permit. Western's
results can be impacted by the timing of, and costs incurred in connection with,
new store openings and acquisitions as well as the costs of closing existing
stores.
17
Results of Operations
Fiscal Year 2000, as Compared with Fiscal Year 1999
Western reported net revenue for Fiscal 2000 of $155,637,000 compared with
net revenue of $163,650,000 for Fiscal 1999. Stores opened longer than 12 months
showed an overall revenue decrease of 4.9 percent from prior year revenue
reflecting a general softening in economic conditions in the northwest along
with increased competitive pressures. Western consolidated five of its
facilities during fiscal 2000 into larger facilities in the region in order to
reduce costs and leverage existing, larger facilities in the region to cover the
territories previously served by the closed facilities.
Western had a net loss for Fiscal 2000 of $7,198,000 or $2.18 per share
compared with a net loss of $1,815,000 or $0.55 per share in Fiscal 1999. In
Fiscal 2000, Western recognized a fourth quarter pre-tax non-recurring charge of
approximately $2,547,000 to provide allowances in recognition of decreasing
market prices on aged equipment in the last half of the year. In addition,
Western recorded a valuation allowance of $2,956,000 related to its tax asset.
Other income consists primarily of net gains related to asset dispositions by
Western.
The Company's share of Western's Fiscal 2000 loss was $ 4,294,000. The
Company also accrued a loss of $1,434,000 on the transfer of 777,414 common
shares of Western pursuant to the settlement of shareholder litigation (see note
16); recorded a full reserve of $364,000 in connection with advances to and
investment in IDF and sold a patent having to do with certain technology
previously developed by eXodus for a gain of $240,000. Exclusive of Western, the
Company also incurred $940,000 of selling, general and administrative expenses
(primarily salaries, taxes and professional fees) and $238,000 of net interest
expense.
Western's gross margin was 7.4 percent during Fiscal 2000 which is lower
than its 8.9 percent gross margin during Fiscal 1999. Margins decreased in
Fiscal 2000 due mainly to competitive pressures and the fourth quarter equipment
reserve. Management continues to place a high priority on improving overall
gross margins by working to increase higher margin service, parts, and rental
revenues, focusing more sales efforts on specialty and niche product lines, and
by obtaining higher prices for new and used equipment.
Selling, general, and administrative expenses were $ 14,474,000 or 9.3
percent of revenues for Fiscal 2000 compared to $ 15,705,000 or 9.6 percent of
sales for Fiscal 1999. The decrease was primarily due to a decrease of
approximately $938,000 in expenses relative to shareholder litigation and bad
debts in 2000 compared to the amount incurred in 1999 somewhat offset by
slightly higher expenses at Western which included the costs of closing stores
during the year.
Net interest expense for Fiscal 2000 was $ 6,307,000, up from $ 5,329,000
in Fiscal 1999 primarily due to an increase in interest rates at Western and a
decrease in interest income due to lesser principle amounts having been invested
during fiscal 2000. In June 1997, Western obtained a $75 million inventory
flooring and operating line of credit facility through Deutsche Financial
Services ("DFS"). The facility is a three year, floating rate facility at rates
as low as 50 basis points under the prime rate. Prime interest rates have
increased from those in Fiscal 1999. Management has used this facility to allow
Western to take advantage of more purchase discounts and to lower overall
interest expense. The DFS credit facility expired August 18, 2000 and Western is
currently in negotiation with DFS to extend the term of the facility and modify
some of its terms. See Liquidity and Capital Resources below for a description
of the status of the DFS facility.
18
Fiscal 1999 as Compared with Fiscal 1998
The Company reported net revenue for Fiscal 1999 of $163,650,000, an
increase of 0.1 percent over net revenue of $163,478,000 for Fiscal 1998 and an
increase of $15,520,000 (10.5%) over comparable 1997 sales of $148,130,000
excluding TechStar's revenue. Approximately $17.4 million of revenue came from
stores opened or acquired in Fiscal 1998 by Western. Stores opened prior to
Fiscal 1998 showed an overall revenue decrease of 3.9% from prior year revenue
reflecting a general softening in economic conditions in the Northwest,
increased competitive pressures, and some weather-related business
interruptions.
Western's gross margin was 8.9 percent during Fiscal 1999, which was lower
than its 11.7 percent gross margin during Fiscal 1998. Margins decreased in
Fiscal 1999 due mainly to continued competitive pressures and the first quarter
equipment reserve. The Company believes that Western's management continues to
place a high priority on improving overall gross margins by working to increase
its higher margin segments such as service, parts and rental revenues, focusing
more sales efforts on specialty and niche product lines, and by obtaining higher
prices for new and used equipment.
Selling, general, and administrative expenses were $15,705,000, or 9.6
percent of revenues for Fiscal 1999 as compared to $13,879,000, or 8.5 percent
of revenues for Fiscal 1998. The increase is primarily attributable to net
expenses related to the shareholder litigation of approximately $310,000 and an
increase in bad debt expense related to advances to IDF of $992,000. The
remaining increase in selling, general, and administrative expenses as a
percentage of revenues resulted in part from Western's lower than expected
revenue levels and full year expenses for stores opened or acquired in Fiscal
1998.
Net interest expense for Fiscal 1999 was $5,329,000 up from $4,197,000 in
Fiscal 1998. This was due to the Company's decreased interest income from
decreasing cash reserves and to an increase in rental equipment levels at
Western. In addition, effective with deliveries after July 1, 1998, Case changed
factory to dealer terms, lowering from three percent (3%) to two percent (2%)
the cash payment discount if the dealer pays for the machine outright rather
than utilizing the interest-free floor planning. Western was able to take
advantage of the cash discounts on a majority of its Case purchases in Fiscal
1998.
In June 1997, Western obtained a $75 million inventory flooring and
operating line of credit facility through Deutsche Financial Services. The
facility is a three-year, floating rate facility at rates as low as 50 basis
points under the prime rate. Western's management has used this facility to
allow Western to take advantage of more purchase discounts and to lower the
overall interest rate on borrowings.
The gain on disposal of $1,989,000 in Fiscal 1999 reflects the gain from
the disposal of the remaining assets of Connectsoft Communications Corp. in June
1999 to eGlobe. The after tax loss from discontinued operations of $4.690,000
for Fiscal 1998 arises from the discontinuation of the operations of the Old
Connectsoft, Connectsoft, Exodus Technologies, Seattle OnLine and InterGlobe
subsidiaries. Effective during the third quarter of Fiscal 1998 the Company
discontinued the operations of these subsidiaries. Losses of $2,300,000 from the
discontinued operations after the measurement date of April 30, 1998 have been
offset against an anticipated gain from the sale of certain assets of
Connectsoft and Old Connectsoft to eGlobe Inc. in the amount of $3,800,000,
resulting in a deferred gain of $1,500,000. The change in the amount of gain is
due primarily to changes in the consideration given by eGlobe for the assets of
Connectsoft.
19
Fiscal 1998 Compared with Fiscal 1997
The Company reported net revenue for Fiscal 1998 of $163,478,000, an
increase of 9.3 percent over net revenue of $152,021,000 for Fiscal 1997 and an
increase of $15,348,000 (10.4 percent) over comparable 1997 sales of
$148,130,000 excluding TechStar's revenue. Approximately $17.4 million of
revenue came from stores opened or acquired in fiscal 1998 by Western. Stores
opened prior to Fiscal 1998 showed an overall revenue decrease of 3.9% from
prior year revenue reflecting a general softening in economic conditions in the
northwest, increased competitive pressures, and some weather related business
interruptions. Also, $3,891,000 of sales from TechStar from December 11, 1996
(date of acquisition) to July 31, 1998 are included in Fiscal 1997 sales, for
which no comparable amount exists for Fiscal 1998 due to the merger of TechStar
and IDF, which combined entities are accounted for on the equity method.
Overall, the Company's gross margins for Fiscal 1998 and Fiscal 1997 were
the same at 11.7 percent. Western's gross margin was 11.7 percent during Fiscal
1998, which is higher than their 10.7 percent gross margin during Fiscal 1997.
Margins increased in Fiscal 1998 on new unit sales, rental, and service
business. Western's Management continues to place a high priority on improving
overall gross margins by working to increase higher margin service, parts, and
rental revenues, focusing more sales efforts on specialty and niche product
lines, and by obtaining higher prices for new equipment. Fiscal 1997 amounts
included the gross margin of TechStar for the period of December 11, 1996 to
July 31, 1997, which contributed 50.7 percent or $1,971,000 to 1997 gross
margin, for which no comparable Fiscal 1998 amount exists.
Selling, general, and administrative expenses were $13,879,000 or 8.5
percent of revenues for Fiscal 1998 compared to $23,440,000 or 15.4 percent of
sales for Fiscal 1997. The decrease is due largely to the 1997 amounts charged
for ERD totaling $4,985,000 as well as 1997 TechStar and Arcadia expenses of
$1,823,000 for the period from December 11, 1996 to July 31, 1997. The remaining
decrease in selling, general, and administrative expenses resulted in part from
significantly decreased professional fees and other corporate administrative
expenses due to the discontinuation of the technology group and from
management's cost control and efficiency improvement efforts.
Net interest expense for Fiscal 1998 was $4,197,000, up $1,570,000 from
$2,627,000 in Fiscal 1997. A total of $1,169,000 of this increase was due to an
increase in Western's inventory levels, particularly inventory dedicated to
rentals. In addition, effective with deliveries after July 1, 1998, Case changed
factory to dealer terms lowering from 3% to 2% the cash payment discount if the
dealer pays for the machine outright rather than utilizing the interest-free
floor planning. Western was able to take advantage of the cash discounts on a
majority of its Case purchases in fiscal 1998. In June 1997, Western obtained a
$75,000,000 inventory flooring and operating line of credit facility through
Deutsche Financial Services. The facility is a three-year, floating rate
facility at rates as low as 50 basis points under the prime rate. Western's
management has used this facility to allow Western to take advantage of more
purchase discounts and to lower the overall interest rate on borrowings. Western
believes that the positive impact of the discounted cost of new inventory on
gross margins has more than offset the increased interest expense related to
foregoing the interest-free flooring periods. The remaining increase in net
interest expense of $401,000 is primarily due to decreases in interest income
earned on investments as a result of lower principle invested amounts in Fiscal
1998.
Loss from discontinued operations of $4,500,000 for Fiscal 1998 arose from
the discontinuation of the operations of the Old Connectsoft, Connectsoft,
Exodus Technologies, Seattle OnLine and InterGlobe subsidiaries. Effective
during the third quarter of Fiscal 1998 the Company discontinued the operations
of these subsidiaries. Losses of $2,300,000 from the discontinued operations
after the measurement date of April 30, 1998 have been offset against an
anticipated gain from the sale of certain assets of Connectsoft and Old
Connectsoft to eGlobe Inc. in the amount of $3,800,000, resulting in a deferred
gain of $1,500,000 which was recognized in the second quarter of Fiscal 1999. In
Fiscal 1997, the Company incurred a loss from discontinued operations of
$16,900,000 primarily comprised of $8,200,000 from its Exodus subsidiary and a
net loss of $3,000,000 from the operations of Old Connectsoft. In addition, the
Free agent development and marketing activities conducted by Connectsoft
incurred an additional $2,800,000 of net losses in Fiscal 1997. InterGlobe
incurred a net loss of $2,224,000 including $1,600,000 of write-offs of goodwill
and investment) on total revenues of $1,040,590 and Seattle OnLine incurred a
net loss of $1,575,000 on total revenues of $87,000. These losses were slightly
offset by tax benefits recognized of $1,000,000.
20
Liquidity and Capital Resources
General
During Fiscal 2000 the Company's cash, cash equivalents and marketable
securities decreased by $375,000, from $5,285,000 to $4,910,000, primarily due
to losses from operations and increased interest expense partially offset by the
$1,400,000 of securities contributed by Mr. Rubin pursuant to the Derivative
Action settlement.
The Company's cash, cash equivalents and marketable securities of
$4,910,000 as of July 31, 2000 and available credit facilities of Western are
considered sufficient to support current levels of operations for at least the
next twelve months.
The Company invests substantially all cash and cash equivalents in money
market funds, United States Treasury securities and similar instruments. The
Company seeks to provide a high current return on its investments of cash and
cash equivalents while preserving both liquidity and capital. The established
policy guidelines for its investment portfolio include investments that include
United States Treasury securities, United States government agency obligations,
deposit-type obligations of United States banking institutions, repurchase
agreements, United States denominated A1 grade commercial paper, United States
money market funds and interests in mutual funds that invest in the above listed
instruments. Concentration of the portfolio is limited to not more than 20% of
the investment portfolio in the securities of any one bank, corporation or
non-government issuer.
Western
During Fiscal 2000, Western's cash and cash equivalents decreased by
$1,805,000 primarily due to required debt payments. Western had positive cash
flow from operating activities during the year of $3,539,000 reflecting net
income for the year after adding back depreciation and amortization. Purchases
of fixed assets during the period were related mainly to the ongoing replacement
of aged operating assets.
Western's primary needs for liquidity and capital resources are related to
its 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 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 by Deutsche Financial Services ("DFS") and, with
respect to acquisitions, secured loans from Case.
Under inventory floor planning arrangements the manufacturers of products
sold by Western provide interest free credit terms on new equipment purchases
for periods ranging from one to twelve months, after which interest commences to
accrue monthly at rates ranging from zero percent to two percent over the prime
rate of interest. Principal payments are typically made under these agreements
at scheduled intervals and/or as the equipment is rented, with the balance due
at the earlier of a specified date or sale of the equipment. At July 31, 2000,
Western was indebted under manufacturer provided floor planning arrangements in
the aggregate amount of $14,768,000.
21
In June 1997, Western obtained a $75,000,000 inventory flooring and
operating line of credit through DFS. The DFS credit facility is a three-year,
floating rate facility based on prime with rates between 0.50% under prime to
1.00% over prime depending on the amount of total borrowing under the facility.
Amounts are advanced against Western's assets, including accounts receivable,
parts, new equipment, rental fleet, and used equipment. Western expects to use
this borrowing facility to lower flooring related interest expense by using
advances under such line to finance inventory purchases in lieu of financing
provided by suppliers, to take advantage of cash purchase discounts from its
suppliers, to provide operating capital for further growth, and to refinance
some of its acquisition related debt at a lower interest rate. As of July 31,
2000 and July 31, 1999, approximately $67,671,000 was outstanding under the DFS
credit facility. At July 31, 2000, Western was in technical default of the
leverage covenant in its loan agreement with DFS, and has requested, but not
obtained, a waiver letter regarding its default for the period since July 31,
2000. There is no guarantee that Deutsche Financial Services will not call this
debt at any time. Although the credit facility expired on August 18, 2000, DFS
and Western are negotiating an extension of the credit facility and a revision
of certain leverage covenants. If an extension is not negotiated and Western
does not cure the defaults, DFS may call the loan, in which case Western's
ability to continue operations may be adversely affected. Assuming a successful
renegotiation with DFS, Western's cash and cash equivalents of $824,000 as of
July 31, 2000 and available credit facilities are considered sufficient to
support the current levels of operations by Western for at least the next twelve
months. Western and DFS have reached a preliminary agreement to revise certain
leverage covenants and provide for financial penalties for violations of such
covenants. Finalization of this increase is expected by November 30, 2000.
Amounts owing under the DFS credit facility are secured by inventory purchases
financed by DFS, as well as all proceeds from their sale or rental, including
accounts receivable thereto.
Inventory; Effects of Inflation and Interest Rates; General Economic
Conditions
Distribution Business
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 two percent (2%) of Western's total
revenues, factors adversely affecting the farming and commodity markets also can
adversely affect Western's agricultural equipment related business.
Western's business can also be affected by general economic conditions in
its geographic markets as well as general national and global economic
conditions that affect the construction, agricultural, and industrial sectors.
An erosion in North American and/or other countries' economies could adversely
affect the Company's business. Market specific factors could also adversely
affect one or more of Western's target markets and/or products.
22
The Technology Business
During Fiscal 2000 and1999, the Company had no operations in its Technology
Business. During Fiscal 1999, the Company consummated the sale of certain assets
comprising the Technology Business to eGlobe. Prior to such sale the Company had
either discontinued or divested itself of all assets comprising the Technology
Business.
The New Media Business
During Fiscal 2000, the Company began its involvement in this business by
making minority equity investments in two startup, closely-held companies
EgoMagazine.com, Inc. (EGO) and New Media Technologies, Inc. (NMT). The Company
has invested approximately $175,000 in EGO and approximately $250,000 in NMT.
The Company intends to explore other opportunities to invest in the New Media
Business or invest additional amounts in either EGO or NMT. The Company
considers the New Media Business to include, among other things, new or emerging
technologies or infrastructure in the Internet, audio and video streaming,
multimedia and communications industries.
Proposed Western Merger
On November 3, 2000, Western and e-Mobile, Inc. ("EMI") signed a definitive
Merger Agreement pursuant to which a newly formed holding company will acquire
both Western and e-Mobile. In addition, Western also signed an Asset Purchase
Agreement. Under the terms of the agreement, a newly formed holding company will
issue 52 million shares of its common stock to acquire the existing shares of
EMI and approximately 3.3 million shares to acquire the existing shares of
Western. The holding company will assume all outstanding options of both EMI and
Western. It is anticipated that a new board of directors will be appointed at
the closing and that the officers of EMI will become officers of the holding
company. As a condition of the merger, Western will seek shareholder approval to
allow certain members of Western's management, officers and certain directors to
purchase Western's assets and assume its liabilities for $4.1 million, which
will be paid by a secured note (the note will be subordinate to the current
security interest of DFS) over seven years at seven percent (7.0%) interest,
with interest only payments for the first year and thereafter self-amortizing
with quarterly interest payments and semi-annual principal payments. Closing of
these transactions is conditioned on approval of the transactions by the
shareholders of Western and EMI and certain other regulatory approvals and
contractual conditions. There is no assurance that either transaction will be
consummated.
ITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK
Not Applicable
23
ITEM 8. FINANCIAL STATEMENTS
AMERICAN UNITED GLOBAL, INC.
FINANCIAL STATEMENTS
INDEX
Page
Report of Independent Accountants ....................... F-2
Consolidated Balance Sheets ............................. F-3
Consolidated Statements of Operations and
Comprehensive Income (Loss)............................. F-4
Consolidated Statements of Shareholders' Equity ......... F-5
Consolidated Statements of Cash Flows ................... F-6
Notes to Consolidated Financial Statements .............. F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
American United Global, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive income (loss),
of shareholders' equity and of cash flows present fairly, in all material
respects, the financial position of American United Global, Inc. and its
subsidiaries at July 31, 2000 and 1999, and the results of their operations and
their cash flows for each of the three years in the period ended July 31, 2000,
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Portland, Oregon
November 7, 2000
F-2
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31,
--------
2000 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 1,281,000 $ 2,914,000
Investment in marketable debt securities............................................. 3,629,000 2,371,000
Trade accounts receivable, less allowance
for doubtful accounts of $563,000 and $724,000, respectively........................ 17,347,000 15,500,000
Inventories (Note 4)................................................................. 58,297,000 67,068,000
Prepaid expenses and other receivables............................................... 478,000 885,000
Deferred tax asset (Note 7).......................................................... 2,273,000 1,410,000
Receivable from Chairman (Note 10)................................................... 299,000 1,700,000
Notes receivable (Note 10)........................................................... 1,161,000 1,140,000
--------- ---------
Total current assets............................................................. 84,765,000 92,988,000
Property and equipment, net (Note 5)................................................. 9,450,000 9,818,000
Rental equipment fleet, net (Note 5)................................................. 26,076,000 31,366,000
Leased equipment fleet, net (Note 5)................................................. 4,975,000 5,264,000
Intangibles and other assets, net of accumulated
amortization of $1,263,000 and $1,460,000, respectively (Note 12)................... 2,858,000 2,952,000
Other assets......................................................................... 425,000 -
Note Receivable, net of current portion ............................................. - 521,000
---------- ---------
$ 128,549,000 $ 142,909,000
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under floor financing lines (Note 6)...................................... $ 14,768,000 $ 17,128,000
Short-term borrowings (Note 6)....................................................... 69,171,000 72,383,000
Current portion of capital lease obligations (Note 10)............................... 17,000 17,000
Accounts payable..................................................................... 10,810,000 13,038,000
Accrued liabilities.................................................................. 5,097,000 4,046,000
Income taxes payable (Note 7)........................................................ 581,000 627,000
Due to shareholders (Note 10)........................................................ 1,900,000 2,500,000
----------- -----------
Total current liabilities........................................................ 102,344,000 109,739,000
Long-term borrowings (Note 6)........................................................... 28,000 48,000
Capital lease obligations, net of current portion (Note 10)............................. 4,786,000 4,755,000
Deferred taxes (Note 7)................................................................. 2,273,000 837,000
Deferred gain........................................................................... - 140,000
Deferred lease income................................................................... 5,982,000 6,181,000
--------- ---------
Total liabilities 115,413,000 121,700,000
Minority interest....................................................................... 5,763,000 8,412,000
Commitments and contingencies (Note 10)
Shareholders' equity (Notes 8 and 11):
Series B-1 preferred stock, convertible to common, $3.50 per share
liquidation value, $.01 par value; 1,000,000 shares authorized; 416,263 and
425,620 shares issued and outstanding, respectively................................ 4,000 4,000
Common stock, $.01 par value; 40,000,000 shares authorized; 12,143,385 and 11,921,529
shares issued and outstanding, respectively........................................ 121,000 119,000
Common stock, Class B, non-voting, .01 par value, 25,000,000
shares authorized, no shares issued and outstanding ............................... - -
Additional contributed capital....................................................... 50,274,000 49,954,000
Accumulated deficit.................................................................. (44,310,000) (37,280,000)
Accumulated other comprehensive income............................................... 1,284,000 -
----------- -----------
Total shareholders's equity...................................................... 7,373,000 12,797,000
---------- ----------
$ 128,549,000 $142,909,000
============== ============
The accompanying notes are an integral part of this statement.
F-3
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JULY 31,
-------------------
2000 1999 1998
---- ---- ----
Net sales................................................................ $ 155,637,000 $ 163,650,000 $ 163,478,000
Cost of goods sold....................................................... 144,099,000 149,056,000 144,302,000
----------- ----------- -----------
Gross profit...................................................... 11,538,000 14,594,000 19,176,000
Selling, general and administrative expenses............................. 14,474,000 15,705,000 13,879,000
---------- ---------- ----------
Operating income (loss)........................................... (2,936,000) (1,111,000) 5,297,000
Gain on sale of patent................................................... 240,000 - -
Loss on transfer of Western shares....................................... (1,434,000) - -
Other income............................................................. 1,646,000 530,000 796,000
Interest expense, net.................................................... (6,307,000) (5,329,000) (4,197,000)
--------- --------- ---------
Income (loss) from continuing operations before income taxes, equity
in loss of unconsolidated subsidiary and minority interest........ (8,791,000) (5,910,000) 1,896,000
Benefit (provision) for income taxes (Note 7)............................ (779,000) 1,101,000 (1,354,000)
Equity in loss of unconsolidated subsidiary.............................. (364,000) (961,000) (4,730,000)
Minority interest in loss (earnings) of consolidated subsidiaries........ 2,904,000 716,000 (713,000)
------- -------- --------
Loss from continuing operations .................................. (7,030,000) (5,054,000) (4,901,000)
Discontinued operations, net of taxes (Note 9):
Loss from operations, net of tax benefit of $1,423,000 ................ (4,690,000)
Gain on disposal...................................................... - 1,989,000
--------- ---------- ------------
- 1,989,000 (4,690,000)
Net loss ................................................................ (7,030,000) (3,065,000) (9,591,000)
Dividends on preferred stock............................................. - - (24,000)
----------- ---------- ----------
Net loss available for common shareholders............................... $ (7,030,000) $ (3,065,000)$ (9,615,000)
============= ============== ==============
Basic and diluted earnings (loss) per share:
(Loss) earnings from continuing operations............................ $ (0.59) $ (0.43) $ (0.43)
Gain (loss) from discontinued operations.............................. - 0.17 (0.42)
------------- ------------- -------------
Basic and diluted loss per share......................................... $ (0.59) $ (0.26) $ (0.85)
============= ============= ============
Weighted average number of shares........................................ 11,948,368 11,748,210 11,311,791
========== ========== ==========
Comprehensive income (loss):
Net loss............................................................ $ (7,030,000) $ (3,065,000) $ (9,615,000)
Unrealized gain on marketable securities............................ 1,284,000 - -
----------- ------------- --------------
- -
Comprehensive loss.................................................. $ (5,746,000) $ (3,065,000)$ (9,615,000)
============= ============== ==============
The accompanying notes are an integral part of this statement.
F-4
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK
--------------- ------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Balance at July 31, 1997................................. 1,097,000 11,000 10,427,000 104,000
Net loss ................................................
Dividend on preferred stock..............................
Issuance of common shares................................ 250,000 3,000
Conversion of preferred stock to common.................. (373,000) (4,000) 838,000 8,000
Amortization of deferred compensation....................
Exercise of stock options................................ 102,000 1,000
---------- -------- ----------- ----------
Balance at July 31, 1998................................. 724,000 7,000 11,617,000 116,000
Net loss ................................................
Conversion of preferred stock to common.................. (298,000) (3,000) 304,000 3,000
-------- ------ ------- -----
Balance at July 31, 1999................................. 426,000 $ 4,000 11,921,000 $ 119,000
119,000
Net loss ................................................
Issuance of common stock................................. 213,000 2,000
Stock option compensation................................
Accumulated unrealized gains, net........................
Conversion of preferred stock to common.................. (9,000) 9,000
------ -------- ----------- -----------
Balance at July 31, 2000................................. 417,000 4,000 12,143,000 121,000
======= ===== ========== =======
ACCUMULATED
ADDITIONAL OTHER RETAINED TOTAL
CONTRIBUTED COMPREHENSIVE EARNINGS SHAREHOLDERS'
CAPITAL OTHER INCOME (LOSS) (DEFICIT) EQUITY
------- ----- ------------- --------- ------
Balance at July 31, 1997.................. $48,782,000 $(196,000) $(24,600,000) $24,101,000
Net loss ................................. (9,591,000) (9,591,000)
Dividend on preferred stock............... 141,000 (24,000) 117,000
Issuance of common stock.................. 473,000 476,000
Conversion of preferred stock to common... (4,000) -
Amortization of deferred compensation..... 196,000 196,000
Exercise of stock options................. 562,000 563,000
------- --------- ------------ ------------- -------------
Balance at July 31, 1998.................. 49,954,000 - (34,215,000) 15,862,000
Net loss ................................. (3,065,000) (3,065,000)
----------- --------- ------------ -- ---------- ----------
Balance at July 31, 1999.................. $ 49,954,000 $ - $ (37,280,000) $ 12,797,000
Net loss ................................. (7,030,000) (7,030,000)
Issuance of common stock.................. 83,000 85,000
Stock option compensation................. 237,000 237,000
Accumulated unrealized gains, net......... - - 1,284,000 1,284,000
----------- ----------- --------- ------------ -------------
Conversion of preferred stock to common...
Balance at July 31, 2000.................. $ 50,274,000 $ - 1,284,000 $ (44,310,000) $ 7,373,000
============= ============= =========== ============= ============
The accompanying notes are an integral part of this statement.
F-5
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JULY 31,
-------------------
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net loss from continuing operations................................... $ (7,030,000) $ (5,054,000) $ (4,901,000)
Net gain (loss) from discontinued operations ......................... - 1,989,000 (4,690,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization....................................... 11,712,000 11,779,000 1,448,000
Loss on settlement.................................................. - 310,000 -
Amortization of deferred compensation.................................... - - 196,000
Gain on disposal of business........................................ - (1,989,000) (220,000)
Gain on sale of fixed assets........................................ (59,000) (45,000) -
(Loss) income applicable to minority interest....................... (2,904,000) (716,000) 713,000
Undistributed loss of affiliate..................................... 364,000 1,553,000 4,730,000
Stock option compensation........................................... 236,000
Gain on sale of patent.............................................. (240,000) - -
Gain on sale investments............................................ (52,000) - -
Change in assets and liabilities, net of effects of acquisition
and dispositions:
Trade accounts receivable......................................... (1,847,000) 8,208,000 (10,584,000)
Inventories....................................................... 2,903,000 1,299,000 (2,280,000)
Notes receivable.................................................. 500,000 (500,000) 3,503,000
Intangible assets................................................. - - 1,638,000
Prepaid expenses and other receivable............................. (192,000) 1,000 70,000
Lease equipment, net.............................................. 289,000 (2,504,000) -
Accounts payable.................................................. (2,416,000) (5,295,000) (2,122,000)
Accrued liabilities............................................... 1,051,000 (1,290,000) (5,462,000)
Income taxes payable.............................................. 817,000 (164,000) (2,254,000)
Change in deferred revenue........................................ (339,000) 2,707,000 (950,000)
Change in deferred gain on disposition of Technology Group........ - - 1,480,000
---------- ------------ ------------
Net cash provided by (used in) operating activities............... 2,793,000 10,289,000 (19,685,000)
--------- ---------- -----------
Cash flows from investing activities:
Purchase of property and equipment.................................... (1,254,000) (2,711,000) (6,332,000)
Purchase of rental equipment, ........................................ (9,531,000) (27,984,000)
Sales of rental equipment............................................. 10,574,000 14,669,000
Sale of marketable securities......................................... 1,268,000 4,078,000 5,569,000
Purchase of other assets.............................................. (18,000) - -
Purchase of equity and debt investments............................... (425,000) - -
Proceeds on sales of fixed assets..................................... 189,000 2,235,000 -
------- --------- ----------
Net cash provided by (used in) investing activities............... 803,000 (9,713,000) (763,000)
------- ---------- ---------
Cash flows from financing activities
Long term debt repayments............................................. (20,000) (1,068,000) -
Net borrowings (payments) under revolving credit agreements........... - - (7,323,000)
Borrowings under term loans........................................... (2,390,000) (4,286,000) 67,179,000
Inventory floor financing............................................ (3,192,000) 6,090,000 (47,246,000)
Principal payments under capitalized lease obligations................ 32,000 (60,000) (348,000)
Proceeds from sale of stock........................................... 85,000 - 480,000
Subsidiary sale/purchase of treasury stock..................... 256,000 - (1,816,000)
Exercise of stock options............................................. - - 562,000
Collections (increase) of receivable from shareholder, net............ - (1,700,000) 38,000
----------- ---------- ----------
Net cash provided by (used in) financing activities............... (5,229,000) (1,024,000) 11,526,000
---------- ---------- ----------
Net (decrease) in cash and cash equivalents.............................. (1,633,000) (448,000) (8,922,000)
Cash and cash equivalents beginning of year.............................. 2,914,000 3,362,000 12,284,000
--------- --------- ----------
Cash and cash equivalents end of year.................................... $ 1,281,000 $ 2,914,000 $ 3,362,000
============= ============== =============
The accompanying notes are an integral part of this statement.
F-6
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
American United Global, Inc., a Delaware corporation (the "Company") is
engaged in the distribution business through its 59.6% owned subsidiary, Western
Power & Equipment Corp. ("Western"). Western is engaged in the sale, rental and
service of light, medium and heavy construction, industrial and agricultural
equipment and related parts. These sales are conducted from 21 regional
distribution operations owned by Western located in the states of Washington,
Oregon, California, Alaska and Nevada. A majority of this equipment is
manufactured by Case Corporation ("Case").
The Company was previously involved in the engineering, design and
construction business through a minority owned subsidiary, IDF International,
Inc. ("IDF"). IDF ceased business operations in September 2000.
The Company had been engaged in the technology business through
subsidiaries, which provided telecommunications products and services, a
proprietary intelligent communications system, as well as software and
networking products. Such products and services were provided by the Company's
wholly and majority owned subsidiaries as follows:
Connectsoft Communications Corp. ("CCC"), a wholly owned subsidiary had
been developing a telephony server product that reads email and select web
content over the telephone which was marketed under the name "Vogo Server". The
assets of CCC were sold to an unrelated third party on June 15, 1999 as
discussed in Note 9.
Exodus Technologies, Inc., an 80.4%-owned subsidiary, had developed a
proprietary application server software, marketed as NTERPRISE, which allowed
users to run Windows application server software programs designed for Microsoft
Windows NT operating system on users' existing non-windows enabled workstations.
Exodus ceased operations in January 1998
InterGlobe Networks, Inc.(Interglobe) provided network consulting services
and managed a network operations center providing internet connectivity
services. Interglobe ceased operations in November 1997.
The technology business has been accounted for as discontinued operations
for the years ending July 31, 1999 and 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
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, which was 40.4% at July 31, 2000 and 39.4% 1999.
Cash Equivalents
For financial reporting purposes, the Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. Cash and cash equivalents consist of bank demand deposits with
three financial institutions. At times, demand deposits may exceed amounts
insured by the Federal Deposit Insurance Corporation.
Restricted Cash
In accordance with Western's borrowing agreement with Deutsche Financial
Services ("DFS"), Western has a cash account restricted by DFS for the purpose
of paying down the line of credit. Restricted cash included in the cash balances
totaled $543,000 and $724,000 at July 31, 2000 and 1999, respectively. (See note
6.)
F-7
Inventory Valuation
Inventories are stated at the lower of cost or market. Cost is determined
based upon the first-in, first-out method for parts inventory and the specific
identification for equipment inventories.
Investment Securities
Investments in marketable securities represent primarily common shares of
publicly traded companies and are carried at market value. These investments
have been classified as available for sale securities at July 31, 2000 and 1999.
Unrealized gains and losses are excluded from earnings and are included as a
component of accumulated other comprehensive income(loss) in shareholders'
equity, net of applicable taxes, until realized.
Property and Equipment
Property, plant, and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets, ranging from 5 to 20
years. Expenditures for replacements and major improvements are capitalized.
Repairs and maintenance costs are expensed as incurred. The cost of assets
retired or otherwise disposed of and the related accumulated depreciation are
eliminated from the accounts; any gain or loss thereon is included in the
results of operations.
Goodwill
Intangible assets acquired in business acquisitions such as goodwill, are
amortized using the straight-line method over the assets' estimated useful lives
ranging from 20 to 40 years. Such lives are based on the factors influencing the
acquisition decision and on industry practice.
The carrying value of goodwill is assessed for any permanent impairment by
evaluating the operating performance and future undiscounted cash flows of the
underlying assets. Adjustments are made if the sum of the expected future net
cash flows is less than book value.
Income Taxes
The Company accounts for income taxes using an asset and liability approach
which requires the recognition of deferred tax liabilities and assets for the
expected future consequences of temporary differences between the carrying
amounts for financial reporting purposes and the tax bases of assets and
liabilities.
Revenue Recognition
Revenue on equipment and parts sales is recognized upon shipment of
products and passage of title. Equipment rental and service revenue is generally
recognized over the period such services are provided.
F-8
Advertising Expense
Western expenses all advertising costs as incurred. Total advertising
expense for the years ended July 31, 2000, 1999 and 1998 was $320,000, $311,000
and $434,000, respectively.
Fair Value of Financial Instruments
The recorded amounts of cash and cash equivalents, accounts receivable,
short term borrowings, accounts payable and accrued liabilities as presented in
the consolidated financial statements approximate fair value based on the
short-term nature of these instruments. The recorded amount of long-term debt
approximates fair value as the actual interest rates approximate current
competitive rates. The recorded value of marketable securities held at July 31,
2000 and 1999 is the market value as quoted on the respective exchange on which
each security trades.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the fiscal periods presented. Actual results could differ from those estimates.
Employee Stock Options
The Company accounts for stock based employee compensation plans under the
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." This standard defines a fair value-based method
of accounting for these equity instruments. This method measures compensation
cost based on the value of the award and recognizes that cost over the service
period. The Company has elected to continue using the rules of APB Opinion No.
25 and provides pro forma disclosures of net income and earnings (loss) per
share as if Statement No. 123 had been applied.
Earnings Per Share
The following table sets forth the computations of basic and fully diluted
earnings per share for the years ended July 31, 2000, 1999 and 1998:
YEAR ENDED JULY 31,
2000 1999 1998
---- ---- ----
Numerators:
Net loss from continuing operations............................. $ (7,030,000) $ (5,054,000) $ (4,901,000)
Dividend on preferred stock..................................... - - (24,000)
----------- ----------- ----------
Net loss after preferred dividends.............................. (7,030,000) (5,054,000) (4,925,000)
Discontinued operations......................................... - 1,989,000 (4,690,000)
----------- --------- ----------
Net loss ....................................................... (7,030,000) (3,065,000) (9,615,000)
========== ========== ==========
Denominator:
Denominator for basic and diluted earnings per share -
Weighted average outstanding shares............................. 11,948,368 11,748,210 11,311,791
========== ========== ==========
Basic and diluted earnings (loss) per share:
Loss from continuing operations................................... (0.59) (0.43) (0.43)
Income (loss) from discontinued operations........................ - 0.17 (0.42)
-------- ---------- ---------
Basic and diluted net loss per share.............................. $ (0.59) $ (0.26) $ (0.85)
=============== ============== ==============
Diluted and basic earnings per share are the same, since the inclusion of
common stock equivalents in the computation would be antidilutive.
F-9
Reclassifications
Certain reclassifications have been made to the fiscal year 1998 and 1999
financial statements to conform to the financial statement presentation for
fiscal 2000. Such reclassifications have had no effect on the Company's net
loss, shareholders' equity or cash flows.
3. ACQUISITIONS
Distribution Business Acquisitions
On December 11, 1997, Western acquired substantially all of the operating
assets used by Case in connection with its business of servicing and
distributing Case agricultural equipment at a facility located in Yuba City,
California. The acquisition was consummated for approximately $142,000 in cash,
$628,000 in installment notes payable to Case and the assumption of $1,175,000
in inventory floor plan debt with Case and its affiliates. The acquisition was
accounted for as a purchase.
On April 30, 1998, Western acquired substantially all of the operating
assets of Yukon Equipment, Inc. (Yukon) in connection with Yukon's business of
servicing and distributing construction, industrial, and agricultural equipment
in Alaska. Yukon has facilities in Anchorage, Fairbanks, and Juneau, Alaska. The
acquisition was consummated for approximately $4,766,000 in cash, the assumption
of approximately $2,786,000 in floor plan debt with Case and its affiliates, and
50,000 shares of Western's common stock. The acquisition was accounted for as a
purchase.
The following unaudited pro forma summary combines the consolidated results
of operations as if the aforementioned acquisitions had been acquired as of the
beginning of fiscal 1998, including the impact of certain adjustments.
YEAR ENDED JULY 31, 1998
------------------------
Net sales.....................................$ 173,414,000
Net loss .....................................$ (9,654,000)
Basic and diluted loss per share............... $ (.85)
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisitions had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results of combined operations.
Technology acquisitions
During the year ended July 31, 1997, the Company acquired InterGlobe
Networks, Inc. and the assets of Seattle OnLine, Inc. These operations were
discontinued in the year ended July 31, 1998. See Note 9.
During August 1997 the Company merged TechStar Communications Corp, a
wholly owned subsidiary, into IDF, pursuant to an agreement and plan of merger
dated July 31, 1997. The Company received 6,171,553 shares of IDF common stock,
representing approximately 62% of the then outstanding shares as a result of
which, the Company was deemed to have acquired IDF. TechStar ceased operations
in April 1999.
F-10
Messrs. Robert M. Rubin and Lawrence Kaplan, the Chief Executive Officer
and Chairman of the Board and a Former Director of the Company, respectively,
were also principal stockholders and members of the board of directors of IDF
prior to the consummation of the IDF merger. Pursuant to the terms of the IDF
Merger Agreement, Mr. Rubin converted an $800,000 loan previously made to IDF
into Preferred Series B stock of IDF which was subsequently converted into
400,000 shares of IDF common stock. GV Capital Inc., an affiliate of Mr. Kaplan,
offered $3,000,000 of IDF five year, 8.0% notes convertible into IDF Series A
Convertible Preferred Stock at $1.25 per share. GV Capital received separate
compensation for acting as placement agent in connection with such private
offering. During fiscal 1998, IDF's Convertible Notes were converted into
2,480,000 shares of IDF Convertible Preferred Stock at $1.25 per share and the
Preferred Stock was subsequently converted to 2,480,000 shares of common stock.
The IDF Convertible Preferred Stock had voting rights that were the same as
IDF Common Stock voting rights, thus, subsequent to the conversion of said
Notes, although the Company owned 62% of the outstanding common stock, it only
represented 47.6% of the voting capital stock as of July 31, 1998. As a result
of the decrease in the ownership percentage by the Company to less than 50%, the
Company has accounted for the results of the operations of IDF using the equity
method of accounting effective as of August 1, 1997.
During late fiscal 1999 and throughout fiscal 2000, IDF experienced a
significant decrease in revenue and was unable to obtain further financing. As a
result, IDF had severe cash flow problems and other financial difficulties and
therefore pursued alternative measures. Such measures included the shut down of
TechStar in April 1999, as well as downsizing Hayden-Wegman, its New York City
based operating subsidiary. In addition, attempts to sell Hayden-Wegman were
unsuccessful. Due to the circumstances described above and the uncertainty of
recovery, the Company recorded a full reserve against the advances and
investments of $992,000 and $364,000 made to IDF during fiscal 1999 and 2000
respectively. In September 2000, Hayden-Wegman ceased operations.
4. INVENTORIES
Inventories consist of the following:
JULY 31,
--------
2000 1999
---- ----
Equipment (net of allowances of $4,770,000 and
$1,671,000, respectively):
New equipment........................................................... $ 40,148,000 $ 49,325,000
Used equipment.......................................................... 7,442,000 7,642,000
Parts (net of allowances of $22,000 and $42,000, respectively)......... 10,707,000 10,101,000
---------- ----------
. $ 58,297,000 $ 67,068,000
============= ==============
F-11
5. FIXED ASSETS
Fixed assets consist of the following:
JULY 31,
--------
2000 1999
---- ----
Machinery and equipment.................... $ 4,030,000 $ 3,869,000
Furniture and office equipment............. 2,360,000 2,291,000
Computer hardware and software............. 1,869,000 1,299,000
Land .................................. 500,000 420,000
Building and leasehold improvements........ 5,334,000 5,126,000
Leasehold improvements..................... 550,000 360,000
Vehicles .................................. 1,428,000 1,841,000
--------- ---------
16,071,000 15,206,000
Less: Accumulated depreciation............ (6,621,000) (5,388,000)
---------- ----------
Property plant & equipment, net............ $ 9,450,000 $ 9,818,000
=============== ===============
Rental equipment fleet..................... 32,493,000 36,395,000
Less: Accumulated depreciation............ (6,417,000) (5,029,000)
---------- ----------
Rental equipment fleet, net................ $ 26,076,000 $ 31,366,000
=============== ===============
Leased equipment fleet..................... 5,481,000 5,481,000
Less: Accumulated depreciation............ (506,000) (217,000)
-------- --------
Leased equipment fleet, net................ $ 4,975,000 $ 5,264,000
=============== ===============
6. BORROWINGS
The Company is in default on an unsecured note payable in the amount of
$1,500,000 to an unrelated third party. The note bore interest at 8% through its
original due date of April 30, 1999. While in default, the note bears interest
at 10%.
Western has inventory floor plan financing arrangements with Case Credit
Corporation, an affiliate of Case, for Case inventory and with other finance
companies affiliated with other equipment manufacturers. The terms of these
agreements generally include a one-month to six-month interest free term
followed by a term during which interest is charged. Principal payments are
generally due at the earlier of sale of the equipment or twelve to forty-eight
months from the invoice date.
In June 1997, Western obtained a $75,000,000 inventory flooring and
operating line of credit through 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 may be advanced against Western's assets, including accounts receivable,
parts, new equipment, rental fleet, and used equipment. Interest payments on the
outstanding balance are due monthly.
All floor plan debt is classified as current since the inventory to which
it relates is generally sold within twelve months of the invoice date.
F-12
The following table summarizes the debt and inventory floor plan financing
arrangements:
Maturity July 31,
Interest Rate Date 2000 1999
------------- ---- ---- ----
Note Payable 8%(12% default 4/30/99 $1,500,000 $1,500,000
rate)
Case Credit Corporation Prime + 2% 8 - 48 14,738,000 17,128,000
(10.00%) months
Deutsche Financial Services Prime - 0.5% 12 - 36 67,671,000 70,883,000
(7.50%) months
Other variable 12 - 48 - 48,000
(8.00%-10.00%) months
----------- -----------
$83,939,000 $89,559,000
=========== ===========
At July 31, 2000 and 1999, Western was in technical default of the leverage
covenant and the minimum tangible net worth covenant in the Deutsche Financial
Services Loan Agreement. Western asked for but did not obtain a waiver letter as
of July 31, 2000 and thereafter. The credit facility expired on August 18, 2000,
however, Western and DFS are negotiating an extension of the credit facility and
a revision of certain leverage covenants. There is no assurance that Deutsche
Financial Services will not call this debt at any time after July 31, 2000. If
DFS were to call the debt, it would become immediately due and payable in full
and Western may not be able to continue operations. The amount due to Deutsche
Financial Services is therefore included as a current liability.
F-13
7. INCOME TAXES
The provision (benefit) for income taxes from continuing operations
comprises the following:
YEAR ENDED JULY 31,
-------------------
2000 1999 1998
---- ---- ----
Current:
Federal............................ $ 179,000 $ (978,000) $ 1,227,000)
State ............................. 26,000 (156,000) 162,000
-------- ------- -------
205,000 (1,134,000) 1,389,000
Deferred:
Federal............................ 500,000 29,000 (32,000)
State ............................. 74,000 4,000 (3,000)
---------- ------ -------
574,000 33,000 (35,000)
---------- ------- --------
$ 779,000 $ (1,101,000) $ 1,354,000
=============== =============== ===============
The principal reasons for the variation from the customary
relationship between income taxes at the statutory federal rate and that
shown in the consolidated statement of operations are as follows:
YEAR ENDED JULY 31,
-------------------
2000 1999 1998
---- ---- ----
Statutory federal income tax rate.......................... $ (2,989,000 $ (2,009,000) $ 495,000
Valuation allowance........................................ 4,101,000 1,011,000 590,000
State income taxes, net of federal income tax benefit...... (334,000) (152,000) 159,000
Other .................................................. 1,000 49,000 110,000
---------- ----------- -----------
$ 779,000 $ 1,101,000 $ (703,000)
============================== ===============
F-14
Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities are as follows:
JULY 31,
2000 1999
---- ----
Depreciation and amortization................ $ (2,273,000) $ (837,000)
---------- ----------
Gross deferred tax liabilities............... (2,273,000) (837,000)
---------- ----------
Inventory reserve............................ 1,739,000 918,000
Bad debt reserve............................. 219,000 282,000
Accrued vacation and bonuses................. 127,000 96,000
Other .................................... 444,000 482,000
Loss carryforwards........................... 8,227,000 4,107,000
Loss on Western initial public offering...... 131,000 131,000
Stock options................................ 874,000 782,000
------- -------
Gross Deferred Tax Assets.................... 11,761,000 6,798,000
Less valuation allowance..................... (9,488,000) (5,387,000)
--------- ---------
Net deferred tax asset 2,273,000 1,411,000
--------- ---------
$ - $ 574,000
=============== ===============
At July 31, 2000, the Company had federal income tax loss carryforwards of
$21,094,000 which will begin to expire in 2011. Utilization of such net
operating losses will be subject to annual limitations in the event of a change
in ownership of the Company of more than 50%. As the Company cannot anticipate
future income with reasonable certainty and because Western is in technical
default of its borrowing agreement with DFS and may not be able to continue
operations should DFS call the debt, a valuation allowance of $9,488,000 has
been recorded.
8. SHAREHOLDERS' EQUITY
On February 25, 1994, the Company completed a public offering of 920,000
units at $5.25 per unit, each unit consisting of one share of common stock, $.01
par value, and one redeemable common stock purchase warrant. Each warrant
entitled the holder to purchase one share of common stock until July 31, 1998,
at an exercise price of $7.50. During fiscal 1999, the exercise period for the
920,000 warrants was extended to July 31, 2001. The warrants are subject to
redemption by the Company at a redemption price of $.10 per warrant under
certain circumstances.
A total of 976,539 shares of the Company's Series B-1 convertible preferred
stock were issued in September 1996 in connection with the acquisition of
ConnectSoft, Inc. Such shares have a $3.50 per share liquidation value and are
convertible into shares of the Company's common stock at a conversion ratio of
one for one. Through the four fiscal years ended July 31, 2000 a total of
560,276 shares were converted to common stock at the ratio of one for one,
leaving 416,263 shares outstanding at July 31, 2000.
F-15
In January of 1997, the Company issued 400,000 shares of Series B-2
preferred stock in a private placement. Proceeds from the private placement
totaled $10,000,000. The Series B-2 preferred stock carried a $25 per share
liquidation preference over the Company's common stock, and paid a 7% cumulative
quarterly dividend in additional shares of Series B-2 preferred stock. As of
July 31, 1998, all of the preferred shares had been converted into approximately
2,616,000 common shares at prices ranging from $3.31 to $5.37. Purchasers of the
preferred shares acquired 350,000 five-year warrants at a purchase price of $.01
per warrant, entitling the holders to purchase 350,000 shares of Company common
stock at $8.58 per share.
During the fourth quarter of fiscal 2000, the Company sold 212,500 shares
of common stock at $0.40 per share pursuant to a private placement memorandum.
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 Western's Board of Directors without
further action of its shareholders. As of July 31, 2000 and 1999 none were
issued and outstanding.
9. 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. and
InterGlobe Networks, Inc. Although the results of these subsidiaries have
previously been included in the consolidated financial statements, the
subsidiaries 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.
Revenues for the Technology group of companies for the years ending July
31, 1999 and 1998 were $67,000 and $2,108,000 respectively.
Sale of the assets of Connectsoft Communications Corporation
On July 10, 1998, the Company entered into an agreement to sell
substantially all of the assets of its Connectsoft subsidiary, including the
network operations center ("NOC") to eGlobe, Inc., formerly known as Executive
TeleCard, Ltd. ("eGlobe"). The agreement, as amended June 17 and September, 1999
provided consideration for the assets acquired to be paid with eGlobe
Convertible Preferred Stock initially valued by the Company at approximately
$2,000,000. Such Preferred Stock was converted into 1,923,077 shares of eGlobe
common stock in Fiscal 2000. In addition, eGlobe assumed approximately
$5,182,000 of Connectsoft liabilities and leases, of which approximately
$2,900,000 were lease obligations guaranteed by the Company. Although eGlobe is
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 in full. The Company provided eGlobe with a working
capital loan of $500,000 secured by a promissory note bearing interest at prime.
The promissory note and all accrued interest were paid in full in January 2000.
For the year ending July 31, 1998, the net deferred gain of $1,480,000 had
been included under the caption Deferred gain on discontinued operations in the
accompanying consolidated balance sheets and the final gain on disposal of
$1,989,000 was recognized in the accompanying consolidated statement of
operations for the year ended July 31, 1999.
F-16
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Western leases certain facilities under non-cancelable lease agreements. As
more fully described in Note 14, the building portion of five of the Western's
facility leases qualify under SFAS 13 as "capital leases" (i.e., an acquisition
of an asset and incurrence of a liability). The remaining facility lease
agreements have terms ranging from month-to-month to nine years. Certain of the
facility lease agreements provide for options to renew and generally require the
Company to pay property taxes, insurance, and maintenance and repair costs.
Total rent expense under all operating leases aggregated $2,129,000, $2,000,000,
and $1,833,000 for the years ended July 31, 2000, 1999 and 1998, respectively.
Assets recorded under capital leases included in fixed assets are as follows:
JULY 31,
2000 1999 1998
---- ---- ----
Capitalized asset value.................... $ 4,553,000 $ 4,978,000 $ 3,036,000
Less: Accumulated amortization............ (667,000) (550,000) (315,000)
-------- -------- --------
$ 3,886,000 $ 4,428,000 $ 2,721,000
=============== =============== ===============
Future minimum lease payments under all non-cancelable leases as of July
31, 1999 are as follows:
CAPITAL OPERATING
YEAR ENDING JULY 31, LEASES LEASES
- -------------------- ------ ------
2000 ..........................................................................$ 459,000 $ 1,664,000
2001 ........................................................................... 485,000 1,224,000
2002 ........................................................................... 510,000 1,166,000
2003 ........................................................................... 525,000 977,000
2004 ........................................................................... 538,000 810,000
Thereafter..........................................................................8,336,000 5,382,000
---------- ---------
Total annual lease payments........................................................10,853,000 $ 11,243,000
===========
Less: Amount representing interest with imputed rates from 6% to 15%.............. 6,050,000
- -- ---------
Present value of minimum lease payments............................................ 4,803,000
Less: Current portion............................................................. 17,000
-----------
Long-term portion.................................................................$ 4,786,000
===========
F-17
Other Contingencies
The Company is guarantor on certain liabilities, including the capital
lease obligations assumed by eGlobe as described in Note 9.
Western issues purchase orders to Case Corporation for equipment purchases.
Upon acceptance by Case, these purchases become non-cancellable by Western. As
of July 31, 2000 the total of such purchase orders was $11,130,000.
Legal Proceedings
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 Mr. Rubin and certain other directors of
the Company. 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 the
class action was settled for $2,500,000 which is payable, net of costs, to
approved claimant shareholders. The settlement consisted of $600,000 in cash
from insurance proceeds and $1,900,000 by 777,414 shares of Western common stock
owned by the Company. The $600,000 was paid to the claims administrator for the
benefit of claimants during fiscal 2000 and the common shares of Western were
distributed to the claimant stockholders on November 1, 2000. As a result, the
Company no longer owns greater than 50% of Western, and will account for Western
using the equity method effective November 1, 2000. A loss of $1,434,000 was
accrued at July 31, 2000 representing the difference between the book value of
the Western shares transferred and their market value pursuant to the settlement
agreement. In addition, on June 1, 1999 the derivative action was settled for
$2,800,000 which amount is payable by Robert M. Rubin to the Company. This
settlement originally consisted of $1,100,000 from Mr. Rubin's assignment of his
rights to certain consulting payments from Hutchinson Corporation and the
transfer by Mr. Rubin to the Company of $1,700,000 of cash, securities and notes
in a brokerage account. Both settlement agreements were approved by the court on
August 23, 1999 and the settlements were reflected in the financial statements
as of July 31, 1999. All amounts due from Mr. Rubin to the Company pursuant to
the derivative action settlement were received by February 11, 2000, except for
the Hutchinson payments, the receipt of which is conditioned upon shareholder
approval of the Hutchinson Transaction, and $299,000 of publicly traded
securities. Mr. Rubin was nonetheless obligated to pay both the $1,100,000, if
not previously paid by Hutchinson, as well as the $299,000 plus interest no
later than July 31, 2000. An amendment to the settlement agreement had extended
Mr. Rubin's obligation to pay until September 30, 2000 and on September 21, 2000
Mr. Rubin contributed publicly traded securities to the Company valued at
$1,435,000. Such amount included interest of $36,000. As a result, the
Hutchinson payments will revert to being payable by Hutchinson to Mr. Rubin.
Payments by Hutchinson to Mr. Rubin will not be made until approval of the
Hutchinson transaction, effective January 19, 1996, is obtained from American
United Global, Inc. shareholders.
F-18
11. STOCK OPTION PLANS
The 1991 and 1996 Stock Option Plans
The 1991 Plan was approved by the Board of Directors and shareholders in
June 1991 and the 1996 Plan was approved by the Board of Directors in April
1996. Both of these plans were cancelled in December 1999 when the Board of
Directors approved the 2000 Employee Incentive Stock Option Plan (The 2000
Plan). All outstanding stock options under the 1991 and 1996 Plans were
cancelled and replaced with the same number of stock options under the 2000
Plan.
The 2000 Plan
The 2000 Plan was approved by the Board of Directors on December 7, 1999
and 1,375,000 stock options were simultaneously granted to replace those
cancelled from the 1991 and 1996 Plans. The Company granted 415,000 additional
stock options to certain Board members as well as 250,000 options to each of two
nominees for election to the Board and 10,000 options to a consultant for
services rendered. The exercise price of all 2,300,000 options granted under the
2000 Plan on December 7, 1999 was $0.21 per share (110% of the market value on
such date).
On April 27, 2000 the Company granted 1,650,000 stock options to a newly
elected director, 500,000, 100,000 and 50,000 respectively to certain special
consultants to the Company, 250,000 to a third nominee for election to the Board
and 300,000 and 250,000 respectively to two law firms for services rendered and
to be rendered. The exercise price of all 3,100,000 options granted on April 27,
2000 was $0.3485 per share (85% of the fair market value on such date).
Compensation in connection with these option grants has been accounted for by
the Black-Scholes method where applicable.
The 2001 Plan
Subsequent to year end, on October 3, 2000, the Board of Directors
cancelled the 2000 Plan and approved the 2001 Stock Option Plan. All 5,400,000
options previously granted under the 2000 Plan were cancelled and replaced by
the same number of options in the 2001 Plan. The Company also granted 500,000
options to a special consultant, 50,000 additional options to a law firm and
10,000 options to a financial consultant.
On April 3, 2000 the FASB issued FASB Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation - an Interpretation of
Accounting Principles Board Opinion No. 25" (FIN 44). FIN 44 clarifies the
application of Opinion 25 for certain issues including the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award. In accordance with FIN 44, effective July 31, 2000, any of
these options which are not exercised or cancelled, will be accounted for
pursuant to a variable stock option plan. Accordingly, compensation expense will
be recorded to the extent that the quoted market price of the Company's common
stock exceeds the revised exercise price of the repriced options.
F-19
Western Stock Option Plan
In March 1995, the Company, as the sole shareholder of Western, approved
Western's 1995 Stock Option Plan, as previously adopted by the Board of
Directors (the "Plan"), under which key employees, officers, directors and
consultants of Western can receive incentive stock options and non-qualified
stock options to purchase up to an aggregate of 300,000 shares of common stock.
In December 1995, the shareholders amended the 1995 stock option plan to
increase the number of shares underlying the plan from 300,000 to 850,000
shares. In December 1996 the stockholders amended the 1985 stock option plan to
increase the number of shares underlying the plan to 1,500,000 shares. The Plan
provides that the exercise price of incentive stock options be at least equal to
100 percent of the fair market value of the common stock on the date of grant.
With respect to non-qualified stock options, the Plan requires that the exercise
price be at least 85 percent of fair value on the date such option is granted.
Upon approval of the Plan, Western's Board of Directors awarded non-qualified
stock options for an aggregate of 200,000 shares, all of which provide for an
exercise price of $6.50 per share. On December 28, 1995, the exercise price of
the options previously granted was lowered to $4.50 per share, the market price
as of that date. All options granted upon approval of the Plan are exercisable
commencing August 1, 1996 and expire on July 31, 2005.
On August 1, 1996, Western's Board of Directors approved the grant of an
additional 347,000 options to employees, directors and consultants of Western at
an exercise price of $4.375 per share, the market price as of the date of grant.
These options vest ratably over a two-year period commencing August 1, 1996.
In January, 1998, Western's shareholders approved an amendment to this plan
providing for the grant on August 1 of each fiscal year, a total of 5,000
options to each non-employee director of Western. The options have an exercise
price equal to the market price on the date of the grant and a term of 5 years
from the date of the grant.
During the fiscal year ended July 31, 1998 Western issued a total of
714,000 options at average exercise price of $4.62 and an expiration date of 5
years from the date of grant.
During Western's fiscal year ended July 31, 2000, 50,000 options were
exercised, 1,453,000 were surrendered and at July 31, 2000 there were a total of
10,000 options remaining outstanding at an exercise price of $4.375 per share.
F-20
The following table includes option information for the Company's plans:
WEIGHTED AVERAGE
FAIR VALUE OF
NUMBER OF WEIGHTED OPTION
STOCK OPTION ACTIVITY SHARES EXERCISE PRICE GRANTED
--------------------- ------ -------------- -------
July 31, 1997 4,138,000 5.55
Options granted 150,000 6.50 2.000
Options exercised (50,000) 4.75
Options canceled (2,366,000) 5.97
-----------
July 31, 1998 1,872,000
Options granted - - -
Options exercised - -
Options canceled (190,000) 5.50
-----------
July 31, 1999 1,682,000 4.48
Options granted 5,350,000 0.29 0.29
Options exercised -
Options canceled (1,412,000) 4.25
------------
July 31, 2000 5,620,000 0.76
============
The following table summarizes stock options outstanding and exercisable
for the Company at July 31, 2000:
OUTSTANDING EXERCISABLE
----------- -----------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Exercise Price Range Shares Life Price Shares Price
- -------------------- ------ ---- ----- ------ -----
$0.21 to 0.34 5,350,000 4.6 $0.29 3,108,000 $0.27
$3.20 to 3.78 70,000 1.0 3.62 70,000 3.62
$6.13 to 6.50 200,000 0.5 6.41 200,000 6.41
- ----- ---- ------- -------
$0.21 to 6.50 5,620,000 4.4 0.55 3,378,000 $0.70
===== ==== ========= =========
F-21
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123. "Accounting for Stock-Based
Compensation." If compensation cost for the Company's stock option plans had
been determined based on the fair value at the grant date for awards in fiscal
2000 and fiscal 1999 in accordance with the provisions of SFAS No. 123, the
Company's net loss per share would have changed to the pro forma amounts
indicated below:
YEAR ENDED JULY 31,
2000 1999
---- ----
Net loss, as reported...................................... $ (7,030,000) $ (3,065,000)
Net loss, pro forma........................................ $ (8,041,000) $ (3,202,000)
Net basic and diluted loss per share, as reported.......... $ (0.59) $ (0.26)
Net basic and diluted loss per share, pro forma............ $ (0.67) $ (0.47)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
YEAR ENDED JULY 31,
2000 1999
---- ----
Expected volatility........................ 3.82 .79
Risk-free interest rate.................... 5.25% 6.11%
Expected life of options in years.......... 5.0 5.0
Expected dividend yield.................... 0.00% 0.00%
12. INTANGIBLE ASSETS
Goodwill arose pursuant to acquisitions by Western and is amortized over
lives ranging from 20 to 40 years.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
The Company paid interest of $5,922,000, $5,482,000 and 5,221,000 during
the fiscal years 2000, 1999 and 1998 respectively. The Company received an
income tax refund of $834,000 during fiscal 1999, and paid $219,000 and
$1,097,000 in income taxes, net of refunds, during fiscal 2000 and 1998,
respectively.
In December 1997 a capital lease obligation of $397,000 was incurred by
Western when they entered into a 20 year lease for the Yuba City, California
facility.
Western has consummated various acquisitions using, in part, the assumption
of notes payable and the issuance of Western common stock and notes payable.
Such non-cash transactions have been excluded from the statements of cash flows.
F-22
14. RELATED PARTIES
The real property and improvements used in connection with the Sacramento
Operations, and upon which the Sacramento Operation is located, were sold by
Case for $1,500,000 to the McLain-Rubin Realty Company, LLC ("MRR"), a Delaware
limited liability company the owners of which are Messrs. C. Dean McLain, the
President and a director of Western, and Robert M. Rubin, the Chairman and a
director of Western. Simultaneous with its acquisition of the Sacramento
Operation real property and improvements, MRR leased such real property and
improvements to Western under the terms of a 20 year commercial lease agreement
dated March 1, 1996 with Western paying an initial annual rate of $168,000.
Under the lease, such annual rate increases to $192,000 after five years and is
subject to fair market adjustments at the end of ten years. In addition to base
rent, Western is responsible for the payment of all related taxes and other
assessments, utilities, insurance and repairs (both structural and regular
maintenance) with respect to the leased real property during the term of the
lease. In accordance with SFAS 13, the building portion of the lease is being
accounted for as a capital lease (see Note 9) while the land portion of the
lease qualifies for treatment as an operating leas
On June 1, 1997, the real property and improvements used in connection with
the Sahlberg operation located in Kent, Washington, was purchased by
McLain-Rubin Realty Company II, LLC ("MRR II"), a Delaware limited liability
company, the owners of which are Messrs. C. Dean McLain, the President and a
director of Western, and Robert M. Rubin, the Chairman and a director of
Western. Simultaneous with its acquisition of the Kent, Washington, real
property and improvements, MRR II leased such real property and improvements to
Western under the terms of a 20-year commercial lease agreement dated June 1,
1997 with Western paying an initial annual rate of $205,000. Under the lease,
such annual rate increases to $231,000 after five years and is subject to
additional adjustments at the end of ten and fifteen years. In addition to base
rent, Western is responsible for the payment of all related taxes and other
assessments, utilities, insurance, and repairs (both structural and regular
maintenance) with respect to the leased real property during the term of the
lease. In accordance with SFAS 13, the building portion of the lease is being
accounted for as a capital lease (see Note 10) while the land portion of the
lease qualifies for treatment as an operating lease.
On December 11, 1997, the real property and improvements used in connection
with Case's Yuba City, California operation, was purchased by McLain-Rubin
Realty Company III, LLC ("MRR III"), a Delaware limited liability company, the
owners of which are Messrs. C. Dean McLain, the President and a director of
Western, and Robert M. Rubin, the Chairman and a director of Western.
Simultaneous with its acquisition of the Yuba City, California real property and
improvements, MRR III leased such real property and improvements to Western
under the terms of a 20-year commercial lease agreement dated effective December
11, 1997 with Western paying an initial annual rate of $54,000. Under the lease,
such annual rate increases to $59,000 after five years and is subject to
additional adjustments at the end of ten and fifteen years. In addition to base
rent, Western is responsible for the payment of all related taxes and other
assessments, utilities, insurance, and repairs (both structural and regular
maintenance) with respect to the leased real property during the term of the
lease. In accordance with SFAS 13, the building portion of the lease is being
accounted for as a capital lease (see Note 9) while the land portion of the
lease qualifies for treatment as an operating lease.
F-23
In February, 1999, the real property and improvements used in connection
with 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 Western, and Robert M. Rubin, a director of Western. The sale price
was $2,210,000 in cash at closing. Subsequent to the closing of the sale,
Western entered into a 20-year commercial lease agreement with MRR for the
Sparks, Nevada facility at an initial rental rate of $252,000 per year with
increases at five, ten, and fifteen years resulting in a maximum annual rental
rate of $374,000. The present value of the minimum lease payments at the
commencement of the lease back transaction aggregated $3,052,000. The lease is a
net lease with payment of insurance, property taxes and maintenance costs paid
by Western. The sale resulted in a deferred gain which will be amortized over
the life of the lease pursuant to generally accepted accounting principles. In
accordance with SFAS 13, the building portion of the lease is being accounted
for as a capital lease (see Note 10) while the land portion of the lease
qualifies for treatment as an operating lease.
Pursuant to an Agreement, dated May 30, 1996 (the "ERD Agreement") between
the Company and ERD Waste Corp. ("ERD"), the Company agreed to provide certain
financial accommodation to ERD by making available a $4.4 million standby letter
of credit expiring May 31, 1998 issued by Citibank, N.A. in favor of Chemical
Bank (the "Letter of Credit") on behalf of ERD. Chemical Bank was the principal
lender to ERD and its subsidiaries, and upon issuance of the Letter of Chase
Bank (formerly Chemical Bank) made available $4.4 million of additional funding
to ERD under ERD's existing lending facility. The funding was used to refinance
certain outstanding indebtedness of Environmental Services of America, Inc.
("ENSA"), a wholly owned subsidiary of ERD. Robert M. Rubin, the Chairman and
Chief Executive Officer, and a principal stockholder of the Company was also the
Chairman, Chief Executive Officer, a director and a principal stockholder of
ERD, owning approximately 23.0% of the outstanding ERD Common Stock.
In consideration for making the Letter of Credit available, in addition to
repayment by ERD of all amounts drawn under the Letter of Credit and the grant
of a security interest in certain machinery and equipment of ENSA to secure such
repayment, ERD agreed (i) to pay to the Company all of the Company's fees, costs
and expenses in connection with making the Letter of Credit available, as well
as the amount of all interest paid by the Company on drawings under the Letter
of Credit prior to their repayment by ERD.
In September 1996, a subsidiary of ERD which operated a waste facility in
Nassau County, New York was cited by the New York State Department of
Environmental Conservation ("DEC") for violating certain DEC regulations. Such
waste facility had accounted for approximately 13% of ERD's consolidated
revenues. The Company has been advised by ERD that under the terms of a
Settlement Agreement reached with the State of New York in November 1996, all
violations alleged by the DEC have been resolved in consideration for, among
other things, ERD's agreement to voluntarily cease incineration operations at
the waste facility on or before March 31, 1997. Such incineration operations
ceased on April 15, 1997.
F-24
On November 8, 1996, the Company and ERD amended and restated their
agreements to provide that if and to the extent that the Letter of Credit
provided by the Company is called for payment, ERD will issue to the Company its
convertible note bearing interest at 12% per annum, payable monthly, and payable
as to principal on the earliest to occur of: (i) May 30, 1999, (ii) ERD's
receipt of the initial proceeds from any public or private placement of debt or
equity securities of ERD, or (iii) completion of any bank refinancing by ERD, to
the extent of all proceeds available after payment of other secured
indebtedness. In addition, the ERD notes, if issued, will be convertible, at any
time at the option of the Company, into ERD Common Stock at a conversion price
equal to $4.40 per share, or a maximum of 1,000,000 ERD shares if the entire
$4.4 million note is issued and converted into ERD Common Stock. In addition to
the collateral provided under the May 30, 1996 agreement, ERD also provided the
Company with a junior mortgage on the waste facility owned by ERD's subsidiary,
subordinated to existing indebtedness encumbering such facility.
Under the terms of an indemnity agreement, dated May 30, 1996, Robert M.
Rubin agreed to indemnify the Company for all losses, if any, incurred by the
Company as a result of issuance of the Letter of Credit for the benefit of ERD.
In consideration of his negotiating the modification of the ERD agreement, on
November 8, 1996, the Company's Board of Directors (Mr. Rubin abstaining) agreed
to amend the indemnity agreement with Mr. Rubin to limit his contingent
liability thereunder to the extent of 23% (Mr. Rubin's approximate percentage
beneficial ownership in the outstanding Company Common Stock as of May 30, 1996)
of all losses that the Company may incur in connection with its having provided
the Letter of Credit financial accommodation on behalf of ERD. Mr. Rubin's
reimbursement obligations are also subject to pro rata reduction to the extent
of any repayments made directly by ERD or from proceeds received by the Company
from the sale of ERD capital stock described above.
In February of 1997, the Company loaned $500,000 to ERD Waste Corp. The
loan was secured by a short term note bearing interest at 2% above the prime
lending rate of the Company's commercial bank (8.5% at April 30, 1997) and a
second collateral and security position on all accounts receivable of ERD
subject to the primary collateral position held by Chase Bank and was personally
guaranteed by Mr. Rubin. Principal together with accrued interest was due
October 5, 1997.
In September 1997 ERD filed for protection from creditors under Chapter 11
of federal bankruptcy laws. In October, 1997 Chemical bank drew the $4.4 million
available on the standby letter of credit. As a result, the Company recorded a
loss of approximately $5.0 million, related to the February Note and the
September letter of credit. Mr. Rubin had personally guaranteed approximately
$1.6 million of the ERD loss.
On June 28, 1996 the Company entered into a credit agreement with Mr. Rubin
pursuant to which Mr. Rubin delivered a demand promissory note for up to
$1,200,000 and payment in full was due July 31, 1998. Mr. Rubin's indebtedness
was secured by his pledge of 150,000 shares of company common stock and his
collateral assignment of all payments to him under the terms of his consulting
and non-competition agreements with Hutchinson, in the aggregate amount of
$1,200,000. Such collateral assignment was converted to a payment rights
assignment agreement in July 1998 calling for Hutchinson to make all payments
pursuant to Mr. Rubin's consulting and non-competition agreement directly to the
company. Simultaneously the due date of the note was extended from July 31, 1998
to the earlier of shareholder approval of the Hutchinson transaction or July 31,
1999. On June 1, 1999 all payments due to Mr. Rubin pursuant to the consulting
agreements were formally assigned to the Company as part of the derivative
action settlement and further amendments to the settlement agreement required
Mr. Rubin to pay the present value of the Hutchinson payments ($1,100,000) to
the Company by September 30, 2000 if not previously paid by Hutchinson. On
September 21, 2000, Mr. Rubin contributed certain publicly traded securities to
the Company the value of which included the $1,100,000. As a result, the
Hutchinson payments revert to being due to Mr. Rubin. The payments to Mr. Rubin
by Hutchinson can not be made until approval of the Hutchinson Transaction by
American United Global shareholders is obtained.
F-25
15.EMPLOYEE SAVINGS PLAN
The Company has a voluntary savings plan pursuant to Section 401(k) of the
Internal Revenue Code, whereby eligible participants may contribute a percentage
of compensation subject to certain limitations. The Company has the option to
make discretionary qualified contributions to the plan, however, no Company
contributions were made for fiscal 2000, 1999 or 1998.
16. SEGMENT INFORMATION
In fiscal 1999, the Company 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, management believes that all of the Company's operations consist of
one segment. However, the Company 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 Year Ended Year Ended Year Ended
Net Revenues July 31, 2000 July 31, 1999 July 31, 1998
- ------------ ------------- ------------- -------------
Equipment Sales $ 92,513 $ 98,450 $ 112,061
Equipment Rental 26,334 25,771 13,389
Product Support 36,790 39,429 38,028
------ ------ ------
Totals $ 155,637 $ 163,650 $ 163,478
========= =========== ==========
Business Component Year Ended Year Ended Year Ended
Gross Margins July 31, 2000 July 31, 1999 July 31, 1998
Equipment Sales $ ( 66) $ 2,591 $ 8,334
Equipment Rental 5,556 5,017 3,555
Product Support 6,048 6,986 7,287
----- ----- -----
Totals $ 11,538 $ 14,594 $ 19,176
============ ============ ===========
There are no inter-segment revenues. Asset information by reportable
segment is not reported, since the Company does not produce such information
internally.
F-26
17. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
Quarter Total
First Second Third Fourth Year
----- ------ ----- ------ ----
Fiscal 2000:
- ------------
Net sales $42,063 $33,988 $35,340 $44,246 $155,637
Gross Profit 4,920 3,865 3,236 (483) 11,538
Net income (loss) (333) (281) (799) (5,617) (7,030)
Basic income (loss) per share (0.03) (0.02) (0.07) (0.47) (0.59)
Diluted income (loss) per share (0.03) (0.02) (0.07) (0.47) (0.59)
Quarter Total
First Second Third Fourth Year
----- ------ ----- ------ ----
Fiscal 1999:
- ------------
Net sales $40,365 $41,279 $40,371 $41,635 $163,650
Gross Profit 2,475 4,492 4,094 3,533 14,594
Loss from continuing operations (1,386) (368) (1,360) (1,940) (5,054)
Income (loss) from
discontinued operations (731) (1,925) 2,656 1,989 1,989
Net income (loss) (2,117) (2,283) 1,296 (796) (3,065)
Loss from continuing operations (0.12) (0.03) (0.11) (0.17) (0.43)
Income (loss) from
discontinued operations (0.06) (0.17) 0.22 0.18 0.17
Basic earnings per share (0.18) (0.20) 0.11 0.01 0.26
Basic earnings per share (0.18) (0.20) 0.11 0.01 0.26
16. SUBSEQUENT EVENTS
On October 3, 2000, the Board of Directors of the Company cancelled the
2000 Stock Option Plan and approved the 2001 Stock Option Plan. All options that
had been granted under the 2000 Plan were cancelled and replaced with the same
number of options under the 2001 Plan.
On November 1, 2000, 777,414 shares of Western common stock were
distributed pursuant to the final court approved settlement of the shareholder
class action. Effective on that date, the Company's percentage ownership of
Western became 36.5%. Accordingly, Western's results of operations will no
longer be consolidated with those of the Company and will be accounted for on
the equity method as of November 1, 2000. A loss of $1,434,000 has been accrued
at July 31, 2000 representing the difference between the book value of the
Western shares transferred and their market value pursuant to the settlement
agreement.
On November 3, 2000, Western and e-Mobile, Inc. ("EMI") signed a definitive
Merger Agreement pursuant to which a newly formed holding company will acquire
both Western and e-Mobile. In addition, Western also signed an Asset Purchase
Agreement. Under the terms of the agreement, a newly formed holding company will
issue 52 million shares of its common stock to acquire the existing shares of
EMI and approximately 3.3 million shares to acquire the existing shares of
Western. The holding company will assume all outstanding options of both EMI and
Western. It is anticipated that a new board of directors will be appointed at
the closing and that the officers of EMI will become officers of the holding
company. As a condition of the merger, Western will seek shareholder approval to
allow certain members of Western's management, officers and certain directors to
purchase Western's assets and assume its liabilities for $4.1 million, which
will be paid by a secured note (the note will be subordinate to the current
security interest of DFS) over seven years at seven percent (7.0%) interest,
with interest only payments for the first year and thereafter self-amortizing
with quarterly interest payments and semi-annual principal payments. Closing of
these transactions is conditioned on approval of the transactions by the
shareholders of Western and EMI and certain other regulatory approvals and
contractual conditions. There is no assurance that either transaction will be
consummated.
F-27
SCHEDULE II
AMERICAN UNITED GLOBAL INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Years Ended July 31, 1999 and 1998
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
----------- --------- -------- -------- ---------- ------
Accounts Receivable Reserve:
Fiscal year ended July 31, 2000 $724,000 $690,000 $ --- $(851,000) $563,000
Fiscal year ended July 31, 1999 670,000 732,000 --- (678,000) 724,000
Inventory Reserve:
Fiscal year ended July 31, 2000 2,513,000 2,188,000 --- (591,000) 5,292,000
Fiscal year ended July 31, 1999 2,833,000 884,000 --- (1,204,000) 2,513,000
F-28
To the Board of Directors and
Stockholders of American United Global, Inc.
Our Audits of the consolidated financial statements referred to in our
report dated November 7, 2000 appearing on page F-28 of this annual report on
Form 10K also included an audit of the financial statement schedules listed in
Item 14(a)(2)of this Form 10K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related financial statements.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
November 7, 2000
F-29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Officers, Directors and Key Employees
The following table sets forth information with respect to directors,
nominees for directors, executive officers and key employees of the Company as
of November 1, 2000. Except for matters discussed in Item 3 of this Annual
Report, there are no pending legal proceedings to which any director, nominee
for director or executive officer of the Company is a party adverse to the
Company.
Name Age Position
Robert M. Rubin 60 Chairman of the Board of Directors, President
and Chief Executive Officer
C. Dean McLain 44 Director and Executive Vice President of the
Company; President and Chief Executive
Officer of Western
Howard Katz 57 Director
Vice President of Finance, Chief Financial
David M. Barnes 57 Officer and Director
Jeffrey Berman 39 Director
Stephen Byers 46 Nominee for Director (1)
Seymour Kessler 68 Nominee for Director (1)
Allen Perres 48 Nominee for Director (1)
Eric Staffin 33 Nominee for Director (1)
(1) Nominee for election as a Director at the Company's 2000 Annual
Meeting.
24
Robert M. Rubin. Mr. Rubin has served as the Chairman of the Board of
Directors of the Company since May 1991, and was its Chief Executive Officer
from May 1991 to January 1, 1994. Between October 1990 and January 1, 1994, Mr.
Rubin served as the Chairman of the Board and Chief Executive Officer of the
Company and its subsidiaries; from January 1, 1994 to January 19, 1996, he
served only as Chairman of the Board of the Company and its subsidiaries. From
January 19, 1996 to the present, Mr. Rubin has served as Chairman of the Board,
President and Chief Executive Officer of the Company. Mr. Rubin was the founder,
President, Chief Executive Officer and a Director of Superior Care, Inc. ("SCI")
from its inception in 1976 until May 1986. Mr. Rubin continued as a director of
SCI (now known as Olsten Corporation ("Olsten") until the latter part of 1987.
Olsten, a New York Stock Exchange listed company, is engaged in providing home
care and institutional staffing services and health care management services.
Mr. Rubin was Chairman of the Board and Chief Executive Officer and is a
stockholder of ERD Waste Technology, Inc., a diversified waste management public
company specializing in the management and disposal of municipal solid waste,
industrial and commercial non-hazardous waste and hazardous waste. In September
1997, ERD filed for protection under the provisions of Chapter 11 of the federal
bankruptcy act. Mr. Rubin is a former director and Vice Chairman, and currently
a minority stockholder, of American Complex Care, Incorporated ("ACC"), a public
company formerly engaged in providing on-site health care services, including
intra-dermal infusion therapies. In April 1995, ACC, operating subsidiaries made
assignments of their assets for the benefit of creditors without resort to
bankruptcy proceedings. Mr. Rubin is also the Chairman of the Board of Western.
The Company owns approximately 59.6% of the outstanding common stock of Western.
Mr. Rubin owns approximately 6% of the common stock of IDF. Mr. Rubin is also a
director of Western, StyleSite Marketing, Inc., a public company principally
engaged in the women's apparel catalog retailing business and Med-Emerg, Inc., a
publicly-held Canadian management company for hospital emergency rooms and
out-patient facilities. Mr. Rubin devotes approximately 35 hours per week to the
business of the Company.
C. Dean McLain. Mr. McLain has served as an Executive Vice President of the
Company since March 1, 1993, as a director of the Company since March 7, 1994
and President of Western since June 1, 1993. From 1989 to 1993, Mr. McLain
served as Manager of Privatization of Case Corporation. From 1985 to 1989, Mr.
McLain served as General Manager of Lake State Equipment, a distributor of John
Deere construction equipment. Mr. McLain holds a B.S. degree in Business and
Economics, and a Master's of Business Administration from West Texas State
University.
David M. Barnes. Mr. Barnes has served as the Chief Financial Officer of
the Company since May 15, 1996, and has been a director since November 8, 1996.
Mr. Barnes is presently the Chief Financial Officer of EGOMagazine.com,Inc., a
privately-held Internet and diversified media company based in Beverly Hills,
CA, and a member of the Advisory Board of Interactive Imagination, Inc., a
privately-held start-up video game developer based in Seattle, WA. Mr. Barnes
has been a director, the President and a minority stockholder of ACC. In April
1995, ACC's operating subsidiaries made assignments of their assets for the
benefit of creditors without resort to bankruptcy proceedings.
Howard Katz. Mr. Katz was Executive Vice President of the Company from
April 15, 1996 through July 31, 1998 and has been a director since April 15,
1996. Since August 1998 to the present Mr. Katz has been the Chief Executive
Officer of Imagine Networks, LLC., which engages in advanced technology and
software development. From December 1995 through April 15, 1996, Mr. Katz was a
consultant for, and from January 1994 through December 1995 he held various
executive positions, including Chief Financial Officer from December 1994
through December 1995, with National Fiber Network (a fiber optics
telecommunications company).
Jeffrey Berman. Mr. Berman has been a Director of the Company since June,
2000. Mr. Berman has been an employee to the Company since April, 2000. Between
January 1998 and April 2000 Mr. Berman was the Director of Investment Banking
for Gruntal & Co., LLC ( "Gruntal") and had held the same position with
Hampshire Securities, Inc., from 1994 until January 1998 when it was acquired by
Gruntal. Mr. Berman has been involved in investment banking since 1991.
Stephen Byers. Mr. Byers is a nominee for Director of the Company . Since
January 2000 Mr. Byers has been the Director of the Investment Division of the
Dreyfus Corporation, the investment management company ("Dreyfus"). Between May
1997 and November 1999 Mr. Byers was the Executive Vice-President of capital
Markets, Chief Financial officer and Treasurer of Gruntal, after which he did
not begin his new position at Dreyfus until January 2000. Prior to May 1997, Mr.
Byers had been a managing director at PaineWebber, Inc.
25
Seymour Kessler. Dr. Kessler is a nominee for Director of the Company. From
January 1999 to the present Dr. Kessler has been co-Managing Director of RKP
Capital Partners, a holding company for publicly and privately-held companies.
Between 1996 and the present Dr. Kessler has been an active investor in various
publicly and privately-held companies. From 1992 through 1996 Dr. Kessler was a
founder, Chief Executive Officer and a director of Princeton Dental Management
Corporation. Between 1982 and 1997 Dr. Kessler served on the Board of Trustees
of University of Health Science Center, in Des Moines, IA. Dr. Kessler also has
been a director of four nationally-chartered banks, including serving as Vice
Chairman of the Board of Directors of Peterson Bank. Dr. Kessler is a former
podiatric surgeon who since 1975 has held majority and minority interests and
actively served in over 85 partnerships, privately-held and publicly-owned
companies and institutions.
Allen Perres. Mr. Perres is a nominee for Director of the Company. From
January 1999 to the present Mr. Perres has been co-Managing Director of RKP
Capital Partners, a holding company for publicly and privately-held companies.
Mr. Perres is a partner in RB Partners, Inc., an investment banking firm for
homebuilders, and has served in such capacity from 1994 to the present. Mr.
Perres co-founded and managed that firm's commercial and residential mortgage
unit, First Dearborn Mortgage Company, Inc., during such period.
Eric Staffen is a nominee for director of the Company and has been an
employee since September, 2000. From July 1999 to through August 2000 Mr.
Staffin was Vice President of e-Citi's internet tools and services group, a
division of Citigroup. From June 1989 through July 1999 Mr. Staffin held various
executive positions with Bankers Trust Company including Director of Bankers
Trust Global Institutional Services Internet Management Group.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the amount of all compensation paid by the
Company for services rendered during each of the three fiscal years of the
Company ended July 31, 1999, 1998, and 1997 to each of the Company's most highly
compensated executive officers and key employees whose total compensation
exceeded $100,000, and to all executive officers and key employees of the
Company as a group.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
AWARDS
------
NAME AND FISCAL SALARY BONUS OTHER RESTRICTED SECURITIES LTIP ALL OTHER
PRINCIPAL YEAR ($) ANNUAL STOCK UNDER-LYING PAYOUTS COMPEN-SATION
POSITION COMPEN-SATIONAWARD(S) OPTIONS/ ($) SATION ($)
- -------- ----- ------- ------- --------------------- -------- --- ----------
($) ($) SARS(#)
Robert M. Rubin 2000 400,000 -0- -0- -0- -0- -0- -0-
Chairman, 1999 375,000 -0- -0- -0- -0- -0- -0-
President and 1998 350,000 -0- -0- -0- -0- -0- -0-
Chief Executive
Officer(1)
David M. Barnes 2000 140,000 -0- -0- -0- -0- -0- -0-
Chief Financial 1999 125,000 -0- 2,000 -0- -0- -0- -0-
Officer and 1998 156,000 -0- -0- -0- -0- -0- -0-
Director
C. Dean McLain (2) 2000 300,000 -0- -0- -0- -0- -0- -0-
Executive Vice 1999 290,000 -0- -0- -0- -0- -0- -0-
President and 1998 280,000 68,935 -0- -0- -0- -0- -0-
Director;
President of
Western
(1) Includes $150,000 paid under Mr. Rubin's Consulting Agreement with
Western during Fiscal 1999 and Fiscal 2000 and $150,000 paid under Mr.
Rubin's now-expired employment agreement with Western during Fiscal
1997 and Fiscal 1998. See "Employment Agreements."
(2) Paid by Western.
26
STOCK OPTION PLANS
OPTION GRANTS IN FISCAL 2001
The Company has granted a total of 5,910,000 options under the 2001 Plan
during Fiscal 2001. This amount includes 5,400,000 options which replace those
issued as of various dates during Fiscal 2000 under the 2000 Plan, all of which
options were cancelled on October 3, 2000. The 2001 Plan was adopted on October
3, 2000 and also as of such date the 2000 Plan was cancelled. As of November 8,
2000, a total of 5,910,000 options have been granted and all such options were
granted under the 2001 Plan subsequent to the end of Fiscal 2000.
The Board of Directors amended the employment agreement of Robert M. Rubin
as of October 3, 2000, pursuant to which the Company made a one-time grant of
250,000 incentive stock options under the 2001 Plan to Mr. Rubin exercisable for
five years after issuance at $0.275 per share. See "Employment Agreements."
The Company also on October 3, 2000 granted 500,000 non-qualified stock
options to each of Michael Sweeney, and Eric Staffin 250,000 non-qualified stock
options to Stephen Byers (a nominee for Director) and 100,000 non-qualified
stock options to Michael Metter, all in consideration for services rendered and
to be rendered by such persons who have agreed to be engaged as consultants to
the Company, and 250,000 non-qualified stock options to Gersten, Savage &
Kaplowitz, LLP ("GSK") and 250,000 non-qualified stock options to Stephen Berger
in consideration for legal services. Except for the options issued to GSK which
vested fully upon issuance and the 100,000 options to Mr. Metter vesting
one-third at issuance and at each of the two years thereafter, the foregoing
options vest in one-fifth (20%) increments at issuance and each of the four
years thereafter. The Company also issued 50,000 non-qualified stock options, on
such date and on the same terms, to Bert Gusrae in consideration of corporate
finance consulting services rendered to the Company, which options vested upon
issuance. The Company also issued 1,650,000 incentive stock options to Jeffrey
Berman, which options vest one-half at issuance and the remaining one-half May
27, 2001. All of the foregoing options are exercisable for five years after
issuance at $0.275, 110 % of the fair market value on the date of grant. The
Company also issued a total of 1,790,000 incentive stock options, vesting
immediately upon granting, to Messrs. Rubin (840,000), Katz (350,000), McLain
(300,000) and Barnes (300,000) to replace an equal number of options under the
2000 Plan that were cancelled, and such options are exercisable for five years
after issuance for $0.275 per share. Except for Mr. Staffin's options, all of
the preceding options granted replace an identical number of options granted to
such persons under the 2000 Plan and since cancelled.
As of December 7, 1999 the Company cancelled all outstanding options issued
under the 1996 Plan (the "1996 Plan") and 1991 Stock Option Plan, (the "1991
Plan") adopted the 2000 Plan and issued new incentive stock options under the
2000 Plan for an identical number of shares of Common Stock as was issuable upon
exercise of all such cancelled options under the 1996 Plan and 1991 Plan. These
options were 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 following table provides information concerning the exercise of stock
options during the last completed fiscal year by each executive officer named in
the Summary Compensation Table, and the fiscal year-end value (as of July 31,
2000) of unexercised options held by each such person. None of these options
have been exercised as of November 7, 2000.
27
Aggregated Options Exercised
in Last Fiscal Year and Fiscal
Year-End Option Values
Value of
Number of Unexercised
Unexercised In-the-Money
Shares Options/SARs Options/SARs
Acquired on Value at FY-End at FY-End
Name Exercise (#) Realized Exercisable Exercisable
Robert Rubin -0- -0- 840,000 $453,600
David Barnes -0- -0- 300,000 $162,000
C. Dean McLain -0- -0- 300,000 $162,000
THE 2001 STOCK OPTION PLAN
The 2001 Plan was adopted on October 3, 2000 and as of such date 5,910,000
options were granted. Previously the Company's Board of Directors cancelled as
on October 3, 2000 all options outstanding under the Company's 2000 Plan,
adopted on December 7, 1999, adopted as of such date the 2001 Plan and issued
new stock options under the 2001 Plan for an identical number of shares of
Common Stock as were issuable upon exercise of the cancelled options. As of
November 8, 2000 the Company has granted an aggregate of 5,910,000 options under
the 2001 Plan.
As of November 8, 2000, the directors, nominees and executive officers
listed below hold outstanding non-qualified options to acquire shares of Common
Stock granted under the Company's 2001 Plan, as follows:
Recipient Date of Grant Number of Options Exercise Price (2)(3)
Robert M. Rubin October 3, 2000 840,000 (1)(4) $0.275
C. Dean McLain October 3, 2000 300,000 (1)(4) $0.275
Howard Katz October 3, 2000 350,000 (1)(4) $0.275
David M. Barnes October 3, 2000 300,000 (1)(4) $0.275
Jeffrey Berman October 3, 2000 1,650,000 (4)(6) $0.275
Stephen Byers October 3, 2000 250,000 (5)(7) $0.275
Allen Perres October 3, 2000 250,000 (5)(7) $0.275
Seymour Kessler October 3, 2000 250,000 (5)(7) $0.275
Eric Staffin October 3, 2000 500,000 (4)(6) $0.275
(1) These options are fully exercisable
(2) As the market value of the Common Stock underlying options issued
under the 2001 plan (measured as the average of the closing bid and
ask price) on November 3, 2000, was $0.593 per share, the foregoing
options issued under the 2001 Plan (including unexercisable options)
are "In-the-money."
(3) The exercise prices of all options equal 110% of the closing price of
the Common Stock as reported on the OTC Bulletin Board on the date of
grant.
(4) These are incentive stock options.
(5) These are non-qualified stock options.
(6) These options vested one-half upon granting and one-half on May 27,
2001.
(7) These options will vest only upon their election to the Board of
Directors.
28
Employment, Incentive Compensation and Termination Agreements
Robert M. Rubin Mr. Rubin is employed by the Company as the Chairman of the
Board of Directors of the Company and of its subsidiaries. Mr. Rubin is so
employed pursuant to an amended and restated employment agreement, dated as of
June 3, 1998 (the "Restated Agreement") for a term expiring July 31, 2001. The
Restated Agreement was amended in connection with the initial public offering of
Western (the "Western IPO"). The Restated Agreement provides for a base salary
payable to Mr. Rubin of $175,000 for the fiscal year ending July 31, 1997,
$200,000 for the fiscal year ending July 31, 1998, $225,000 for the fiscal year
ending July 31, 1999, and a base salary for the fiscal years ending July 31,
2000 and July 31, 2001 as determined by the Compensation Committee of the
Company's Board of Directors and ratified by a majority of the entire Board of
Directors of the Company (other than Mr. Rubin). The base salary in each of the
fiscal years ending July 31, 2000 and 2001 will not be less than the annual base
salary in effect in the immediately preceding fiscal year, as adjusted for any
increase in the annual cost of living as published by the Bureau of Labor
Statistics of the United States Department of Labor for wage earners in the New
York City metropolitan area measured over the course of the immediately
preceding fiscal year.
Mr. Rubin also received as compensation under the Restated Agreement a
one-time grant of 250,000 incentive stock options under the 2001 Plan, which
options are immediately exercisable at $0.275 per share (110% of the closing bid
price of the Common Stock on October 3, 2000, the date of grant).
The Restated Agreement also provides for incentive bonuses consisting of
10% of the sale price in excess of the Company's basis, up to a maximum
aggregate bonus of $3,000,000, to be paid to Mr. Rubin contingent upon the
Company's ability to dispose of its holdings of the common stock of either
eGlobe, Inc. or Western and receive net aggregate proceeds in excess of
$3,000,000 from the sale of the shares of either eGlobe or Western shares. In
addition, Mr. Rubin, Mr. McLain and Western have contemplated their acquisition
of certain of the assets of Western, but there is no agreement with regards to
such acquisition.
Mr. Rubin is also engaged by Western, the Company's 59.5%-owned subsidiary,
pursuant to a two-year Consulting Agreement, effective August 1, 1998 and
extended for seven years from August 1, 2000 under which starting in Fiscal 2001
he is now paid $200,000 annually plus reimbursment for his business expenses.
C. Dean McLain C. Dean McLain serves as the President and Chief Executive
Officer of Western pursuant to a ten-year employment agreement expiring July 31,
2005. This employment agreement superseded Mr. McLain's earlier employment
agreement with the Company, which is further described below and which was
terminated upon the execution of his employment agreement with Western. Pursuant
to such agreement, Mr. McLain received an annual base salary, payable monthly,
of $250,000 through the end of Fiscal 1996, $265,000 per annum in Fiscal 1997,
$280,000 per annum in Fiscal 1998, $290,000 per annum in Fiscal 1999 and
$300,000 per annum in Fiscal 2000. For each of the fiscal years ending 2001,
2002, 2003, 2004 and 2005, Mr. McLain's base salary shall be determined by the
Compensation Committee of Western and ratified by the full Board of Directors of
Western. In each of the five fiscal years from 2001 through 2005, such base
salary shall not be less than the annual base salary in effect in the
immediately preceding fiscal year plus a cost of living adjustment. In addition,
Mr. McLain has been entitled to receive bonus payments in each of the fiscal
years from Fiscal 1996 through and including Fiscal 2000, inclusive, equal to
five percent (5%) of such fiscal year consolidated pre-tax income of Western in
excess of $1,750,000 in each such fiscal year (the "Incentive Bonus"); provided,
that the maximum amount of the Incentive Bonus payable by Western to Mr. McLain
shall not exceed $150,000 in any such fiscal year, without regard to the amount
by which Western's consolidated pre-tax income shall exceed $1,750,000 in each
of such fiscal years. For each of the fiscal years ending 2001 through 2005, Mr.
McLain's incentive bonus shall be determined by the Compensation Committee of
Western's Board of Directors and ratified by Western's full Board of Directors.
The maximum annual incentive bonus which Mr. McLain shall be entitled to receive
under his Employment Agreement shall not be less than $150,000. As used in Mr.
McLain's Employment Agreement, the term "consolidated pre-tax income" is defined
as consolidated net income of Western and any subsidiaries of Western
subsequently created or acquired, before the Incentive Bonus, income taxes and
gains or losses from disposition or purchases of assets or other extraordinary
items. Mr. McLain was also granted 300,000 incentive stock options on October 3,
2000 under the 2001 Plan, which options are immediately exercisable for five
years at $0.275 per share.
29
Howard Katz Howard Katz is a director of the Company. Mr. Katz is presently
receiving severance payments of approximately $78,000 annually, under a
severance agreement which provides for payments over a three-year period ending
July 31, 2001. Mr. Katz received $78,000 in Fiscal 2000 and $91,738 in salary
severance and other compensation during Fiscal 1999. Prior to July 31, 1998, Mr.
Katz served as the Company's Executive Vice President since April 15, 1996 and
received an annual base salary of $185,000 for Fiscal 1998. In addition, on
October 3, 2000 Mr. Katz received 350,000 stock options under the 2001 Plan,
which are immediately exercisable for five years at $0.275 per share.
David M. Barnes David M. Barnes is a director and Chief Financial Officer
of the Company. In Fiscal 2000 Mr. Barnes received total compensation of
$140,000. In Fiscal 1999 Mr. Barnes received a base salary of $125,000 and
certain executive benefits which brought his total Fiscal 1999 compensation to
$127,000. In Fiscal 2001 Mr. Barnes will continue in these capacities with a
base salary of $150,000 plus certain executive benefits. Between May 15, 1996
and July 31, 1998 Mr. Barnes received an annual salary of $150,000. In addition
on October 3, 2000 Mr. Barnes received 300,000 incentive stock options under the
2001 Plan, which options are immediately exercisable for five years at $0.275
per share.
Compensation Committee Interlocks and Insider Participation
During Fiscal 1998 and Fiscal 1999 the Board of Directors' Compensation
Committee (the "Compensation Committee") did not meet. During this time the
Company's Board of Directors decided all compensation matters relating to the
Company's executive officers. The Compensation Committee has met in June 2000,
to discuss, ratify and approve Mr. Rubin's employment agreement, and discuss
other matters.
Mr. Rubin's annual compensation, identified in the Summary Compensation
Table, was determined by his employment agreements with the Company, which were
approved by the Board of Directors. Mr. Rubin's employment agreement was amended
in December 1999 and is now for a five year term expiring December 7, 2004. For
information concerning Mr. Rubin's Restated Agreement, see "Employment,
Incentive Compensation and Termination Agreements." Mr. Rubin also entered into
a separate employment agreement with Western. Mr. McLain's annual compensation
was set by his amended employment agreement with Western. See "Employment,
Incentive Compensation and Termination Agreements."
No director of the Company is paid to attend Board meetings, although they
are reimbursed for their actual expenses. During the first nine months of Fiscal
2000 the Company has held two meetings of the Board of Directors at which all
directors were present telephonically. During Fiscal 1999 there were no meetings
of the Board of Directors and actions of the Board were taken pursuant to
resolutions approved by the unanimous written consent of the directors (not
counting abstentions). During Fiscal 1999, there were no meetings of the
Compensation Committee and all matters regarding compensation were resolved or
handled by the entire Board of Directors. During Fiscal 2000, the Compensation
Committee has only met once in June 2000 to discuss, ratify and approve Mr.
Rubin's employment agreement and the 2000 Plan, and other matters. While Mr.
Rubin serves on the Compensation Committees of the Boards of Directors of other
publicly held corporations, no executive officers or directors of such companies
serve on the Company's Compensation Committee. The Compensation Committee
reviews the compensation for all employees and the granting of options under all
of the Company's employee stock option plans that may exist and be in effect
from time to time, and presently consists of Messrs. McLain, Berman and Katz. If
Mr. Byers is elected to the Board, it is anticipated that he will replace Mr.
McLain on the Compensation Committee.
Transactions with ERD Waste Corp.
The Company incurred a loss of approximately $5,000,000 as a result of
certain transactions it entered into with ERD Waste Corp. ("ERD") in Fiscal
1997. On September 30, 1997, ERD filed for reorganization under Chapter 11 of
the federal bankruptcy laws. The Company has recorded a $5,000,000 net loss in
connection with these transactions, which included making available for ERD's
benefit a $4,400,000 letter of credit and making an additional $500,000 loan,
for Fiscal 1997.
30
Robert M. Rubin, the Chairman and Chief Executive Officer and a principal
stockholder of the Company, was previously also the Chairman, Chief Executive
Officer, a director and a principal stockholder of ERD, and owns approximately
25.1% of the outstanding ERD Common Stock.
Pursuant to an agreement dated May 30, 1996 (the "ERD Agreement") between
the Company and ERD, the Company agreed to provide certain financial
accommodations to ERD by making available a $4,400,000 standby letter of credit
(the "Letter of Credit") originally issued by Citibank, N.A. ("Citibank") and
later assumed by North Fork Bank in favor of Chase Bank ( "Chase Bank") on
behalf of ERD. Chase Bank was the principal lender to ERD and its subsidiaries,
and upon issuance of the Letter of Credit, Chase Bank made available to ERD
$4,400,000 of additional funding under ERD's existing lending facility. The
funding was used to refinance certain outstanding indebtedness of Environmental
Services of America, Inc. ("ENSA"), a wholly-owned subsidiary of ERD.
In consideration for the Company making the Letter of Credit available, ERD
agreed that, in addition to repaying all amounts drawn under the Letter of
Credit and granting to the Company a security interest in certain machinery and
equipment of ENSA to secure such repayment, it would (i) pay all the Company's
fees, costs and expenses payable to Citibank, N.A. and others in connection with
making the Letter of Credit available, as well as all interest paid by the
Company on monies drawn upon the Letter of Credit prior to repayment by ERD, and
(ii) issue to the Company an aggregate of 25,000 shares of ERD common stock for
each consecutive period of 90 days or any portion thereof, commencing August 1,
1996, that the Letter of Credit remains outstanding. Pursuant to the foregoing
agreement, ERD paid nothing in fees and expenses to Citibank on behalf of the
Company, but issued 100,000 shares of ERD Common Stock to the Company. ERD
Common Stock was then traded on the NASDAQ National Market and, at the time of
closing of the transaction with ERD, the closing price of ERD Common Stock, as
traded on NASDAQ was $9.25 per share.
Under the terms of an indemnity agreement, dated May 30, 1996, Robert M.
Rubin agreed to indemnify the Company for any and all of its losses resulting
from issuance of the Letter of Credit to ERD. In consideration of his
negotiating the modification of the ERD agreement, on November 8, 1996, the
Company's Board of Directors (Mr. Rubin abstaining) agreed to amend the
indemnity agreement with Mr. Rubin to limit his contingent liability thereunder
to the extent of 23% (Mr. Rubin's approximate percentage beneficial ownership in
the outstanding Company Common Stock as of May 30, 1996) of any and all losses
incurred by the Company in connection with the Letter of Credit to ERD. Mr.
Rubin's reimbursement obligations are also subject to pro rata reduction to the
extent of any repayments made directly by ERD or from proceeds received by AUGI
from the sale of ERD capital stock described above. In addition, Mr. Rubin
personally guaranteed the $500,000 additional advance from the Company to ERD.
In August 1996, a subsidiary of ERD that operated a waste facility in Long
Beach, New York was cited by the New York State Department of Environmental
Conservation ("DEC") for violating certain DEC regulations. ERD and the DEC
reached an agreement in November 1996 to settle such violations, which resulted
in the closing of the Long Beach, New York facility on April 15, 1997. As a
result, the business of ERD was materially and adversely affected.
On November 8, 1996, the Company and ERD amended and restated their
agreements to provide that if and to the extent that the Company demands payment
on the Letter of Credit, ERD will issue to the Company its $4,400,000 principal
amount convertible note bearing interest at 12% per annum, payable monthly, and
payable as to principal on the earliest to occur of: (i) May 30, 1999, (ii)
ERD's receipt of the initial proceeds from any public or private placement of
debt or equity securities of ERD, or (iii) completion of any bank refinancing by
ERD, to the extent of all proceeds available after payment of other secured
indebtedness. In addition, the ERD Notes, if issued, will be convertible, at any
time at the option of the Company, into ERD Common Stock at a conversion price
equal to $4.40 per share, or a maximum of 1,000,000 ERD shares if the entire
$4,400,000 principal amount of the convertible note is issued and converted into
ERD Common Stock. In addition to the collateral provided under the ERD
Agreement, ERD also provided the Company with a junior mortgage on the waste
facility owned by ERD's subsidiary, subordinated to existing indebtedness
encumbering such facility.
In February 1997, the Company advanced an additional $500,000 to ERD,
payable on demand (the "Advance Loan").
31
The Advance Loan is secured by a short-term promissory note, due October 5,
1997, bearing interest at two percent (2%) above the prime lending rate of the
Company's commercial bank (which was 8.5% on April 30, 1997) and a second
collateral and security position on all accounts receivable of ERD, subject to
the priority interests of Chase Bank.
On September 30, 1997, ERD filed for reorganization under Chapter 11 of the
federal bankruptcy laws. On October 29, 1997, Chase Bank drew $4,400,000 from
the Letter of Credit. As a result, the Company became liable to North Fork Bank,
the issuer of the Letter of Credit, for such amount, which obligation the
Company paid in full on October 31, 1997. As a result, the Company is now a
creditor in the ERD reorganization, holding approximately $5,000,000 of claims
and a lien on certain ERD assets. However, the federal bankruptcy courts will
not sustain or honor this lien on the basis of the common control between the
Company and ERD resulting from Mr. Rubin's offices with each. If the lien is not
sustained, the Company will be only a general unsecured creditor of ERD. As a
result of the foregoing development, the Company recorded a $5,000,000 net loss
in connection with the Letter of Credit and Advance Loan to ERD for the year
ended July 31, 1997. In the event that the Company does not recoup any portion
of such loss in connection with the ERD bankruptcy proceedings or otherwise, Mr.
Rubin had agreed to personally indemnify the Company for the first $1,600,000 of
such loss. See "The Class Action." pursuant to the settlement agreement Mr.
Rubin has agreed to pay this amount regardless of whether it is recouped from
ERD. (See note 10)
Mr. Rubin was a director of IDF until August 1999 and owned 874,659 shares
of IDF common stock, representing approximately 9.0% of the then outstanding IDF
common stock after giving effect to the IDF Merger, and including Mr. Rubin's
conversion of an $800,000 loan previously made to IDF into preferred stock
convertible into an additional 400,000 shares of IDF common stock, prior to his
transfer of such shares to the Rubin Family Irrevocable Stock Trust. Subsequent
the IDF Merger, Mr. Rubin has served as Chairman of the Board of Directors of
IDF until August 1999 and received a three year employment agreement from IDF at
an annual salary of $75,000. However, Mr, Rubin has not received payments
thereunder since IDF'S fiscal year ended July 31, 1998.
During Fiscal 1999 and Fiscal 2000 the Company provided financing to IDF, a
minority-owned subsidiary. As of June 18, 1999, the Company had provided IDF
with $992,000. These funds were used for working capital, the payment of certain
delinquent taxes and other liabilities of Hayden/Wegman, Inc. an IDF subsidiary
("Hayden\Wegman"), and costs related to the discontinuation of operations of the
TechStar subsidiary. The Company took a full reserve against the $992,000 and
$364,000 in advances to IDF in fiscal 1999 and 2000 respectively due to IDF's
significant decrease in revenue and its inability to obtain further financing.
In September 2000, IDF discontinued the operations of Hayden / Wegman.
Lawrence Kaplan, a former director of the Company, is also a member of the
Board of Directors of IDF and directly and through affiliates owns an aggregate
of 497,859 shares of IDF common stock. In addition, GV Capital, Inc., an
affiliate of Mr. Kaplan, has acted as placement agent in connection with the IDF
private placement and received additional compensation for such services, in the
form of commission of 7.5%, a 2.5% non-accountable expense allowance and 180,000
shares of IDF common stock for nominal consideration.
32
Compensation Committee Report On Executive Compensation
The Board of Directors has been largely responsible for the Company's
executive compensation policy as the Compensation Committee did not meet during
Fiscal 1999 and only met once during Fiscal 2000. The Board believes that
offering its senior executive officers employment agreements is the best way to
attract and retain highly capable employees on a basis that will encourage them
to perform at increasing levels of effectiveness and to use their best efforts
to promote the growth and profitability of the Company and its subsidiaries. The
Board believes this enabled it to concentrate on negotiating particular
employment contracts rather than establishing more general compensation policies
for all management and other personnel. The Company believes that its
compensation levels as to all of its employees were comparable to industry
standards. Currently, Mr. Rubin and Mr. Jeffrey Berman are the Company's only
senior executive officers employed under a contract approved by the full Board
of Directors. See "Executive Compensation-Employment, Incentive Compensation and
Termination Agreements."
In setting levels of compensation under such employment contracts and in
approving management's compensation of all other Company employees, the Board of
Directors evaluates the Company's overall profitability, the contribution of
particular individuals to the Company's performance and industry compensation
standards. A significant percentage of the compensation paid to each of Messrs.
Rubin and McLain under their respective employment agreements is tied to the
Company's achievement of prescribed levels of pre-tax income of the Company as a
whole or of the subsidiary for which each such executive is responsible. See
"Employment, Incentive Compensation and Termination Agreements," above.
Compliance with Section 16(a) of the Exchange Act.
To the knowledge of the Company, with the exception of Messrs. Rubin, Mc
Lain, Barnes and Katz, who did not timely file a Form 4 reflecting the
cancellation of their 1996 Plan options and granting of their new options under
the 2000 Plan, and Mr. Berman who did not timely file a Form 3 upon his election
to the Board, no officers, directors, beneficial owner of more than 1 percent of
any class of equity securities of the Company registered pursuant to Section 12
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any
other person subject to Section 16 of the Exchange Act with respect to the
Company, failed to file on a timely basis reports required by Section 16(a) of
the Exchange Act during Fiscal 2000.
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of November 1, 2000
with respect to the beneficial ownership of the Common Stock of the Company by
each beneficial owner of more than five percent (5%) of the total number of
outstanding shares of the Common Stock of the Company, each director and all
executive officers and directors of the Company as a group. Unless otherwise
indicated, the owners have sole voting and investment power with respect to
their respective shares. The table does not include options or SARs that have
not yet vested or are not exercisable within 60 days of the date hereof.
Name and Address* Number of Shares Percentage of
of Beneficial Owner Office(s) Beneficially Owned(1) Common Stock (1)
- ------------------- --------- --------------------- ----------------
Robert M. Rubin Director, President, Chief 1,062,798(2)(3)(7)(9) 7.9
Executive Officer and
Chairman of the Board
C. Dean McLain Director, Executive 300,000(3) 2.4
4601 N.E. 77th Avenue Vice-President and
Suite 200 President of Western
Vancouver, WA 98662 Power and Equipment Corp.
("Western")
Howard Katz Director 350,000 (4) 2.8
David M. Barnes Chief Financial Officer 300,000 (5) 2.4
Vice President of Finance
and Director
Rubin Family Irrevocable 1,025,000 (6) 8.3
Stock Trust
25 Highland Blvd.
Dix Hills, NY 11746
Jeffrey Berman Director 825,000 (7) 5.9
Stephen Byers Nominee for Director 250,000 (8) 2.0
Seymour Kessler Nominee for Director 250,000 (9) 2.0
Allen Perres Nominee for Director 250,000 (9) 2.0
All Directors and Executive 2,837,798 (11) 17.3
Officers as a Group (5 persons)
* Unless otherwise indicated, the address of each such beneficial
owner is Buiding 17, 2489 152nd Avenue, Redmond, WA 98052.
** Pursuant to the rules and regulations of the Securities and
Exchange Commission, shares of Common Stock that an individual or
group has a right to acquire within 60 days pursuant to the
exercise of options or warrants are deemed to be outstanding for
the purposes of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the
purposes of computing the percentage ownership of any other
person shown in the table.
34
The Company has two classes of voting securities:
(1) Common Stock (12,143,885 shares outstanding) and Series B-1
Preferred Stock (416,263 shares outstanding)
(2) Includes 222,798 shares of Common Stock owned by Mr. Rubin, and
840,000 incentive stock options to purchase shares of Common
Stock granted to Mr. Rubin at an exercise price of $0.275 per
share under the Company's 2001 Plan which are fully exercisable.
(3) Includes 300,000 incentive stock options granted to Mr. McLain
under the 2001 Plan on October 3, 2000 to acquire Common Stock,
exercisable at $0.275 per share.
(4) Includes 350,000 incentive stock options to purchase Common Stock
at $0.275 per share under the 2001 Plan, all of which are
exercisable.
(5) Includes 300,000 incentive stock options granted to Mr. Barnes
under the 2001 Plan to purchase Common Stock at an exercise price
of $0.275 per share.
(6) Robert M. Rubin, a grantor of the Rubin Family Irrevocable Stock
Trust (the "Trust") does not have any voting power over, and
disclaims beneficial ownership of the shares held by the Trust.
See "Insider Participation," "Executive Compensation-Employment,
Incentive Compensation and Termination Agreements" and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(7) Includes 825,000 incentive stock options to purchase Common Stock
granted to Mr. Berman under the 2001 Plan on October 3, 2000 in
consideration of past and anticipated services, which are
immediately exercisable for five years at $0.275 per share. Does
not include 825,000 incentive stock options which will vest on
May 7, 2001.
(8) Includes 250,000 non-qualified options to purchase Common Stock
granted under the 2001 Plan as of October 3, 2000 to Mr. Byers in
consideration for his anticipated services as a director of the
Company. These options shall be exercisable at $0.275 per share
only upon, and for five years after, his election to the Board of
Directors.
(9) Includes 250,000 non-qualified options to purchase Common Stock
granted under the 2000 Plan as of October 3, 2000 to each of Dr.
Kessler and Mr. Perres in consideration for their anticipated
services as directors of the Company, which options shall be
exercisable at $0.2125 per share only upon, and for five years
after their election to the Board of Directors.
(10) Excludes Dr. Kessler and Mr. Perres and Mr. Byers, who are
nominees for Director.
(11) See Notes (2) through (7), and Note (10).
35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Executive Compensation-Compensation Committee Interlocks and Insider
Participation" and "Executive Compensation-Employment, Incentive Compensation
and Termination Agreements", and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements are included in Part II Item 8 beginning at page
F-1.
2. Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
(b) Reports on Form 8-K.
None.
(c) Exhibits.
Exhibit
Number Description
3.1 Certificate of Incorporation of Registrant.(1)
3.2 By-laws of Registrant. (2)
4.1 Specimen Certificate of Common Stock. (3)
4.2 1991 Employee Stock Option Plan. (1)
21 Subsidiaries of the Company*.
27 Financial Data Schedule*
(1) Included with the filing of the Company's Registration Statement on Form
S-1 on October 18, 1991, as amended by Amendment No. 1, dated December 18,
1991, Amendment No. 2, dated January 9, 1990, Amendment No. 3, dated
January 24, 1992 and Amendment No. 4, dated January 28, 1992.
(2) Filed as an Exhibit to the Definitive Proxy Materials of Alrom Corp., a New
York corporation (the Company's predecision), as filed on December 10,
1991.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-18
(Registration No. 3303330 81-NY) and incorporated herein by reference
thereto.
* Filed herewith
36
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 13, 2000
AMERICAN UNITED GLOBAL, INC.
By:./s/ Robert M. Rubin
-----------------------
Robert M. Rubin, Chairman
In accordance with the Securities and Exchange Commission, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature Title Date
/s/ Robert M. Rubin Chairman of the Board, Chief November 13, 2000
- -------------------- Executive Officer and Director
Robert M. Rubin
/s/ C. Dean McLain Executive Vice President and November 13, 2000
- ------------------ Director
C. Dean McLain
/s/ David M. Barnes Vice President--Finance and Chief November 13, 2000
- -------------------- Financial and Chief Accounting
David M. Barnes Officer
/s/ Howard Katz Director November 13, 2000
- -------------------
Howard Katz
/s/ Jeffrey Berman Director November 13, 2000
- -------------------
Jeffrey Berman
37
EXHIBIT LIST
3.1 Certificate of Incorporation of Registrant.(1)
3.2 By-laws of Registrant. (2)
4.1 Specimen Certificate of Common Stock. (3)
4.2 1991 Employee Stock Option Plan. (1)
21 Subsidiaries of the Company*.
27 Financial Data Schedule*
(1) Included with the filing of the Company's Registration Statement on Form
S-1 on October 18, 1991, as amended by Amendment No. 1, dated December 18,
1991, Amendment No. 2, dated January 9, 1990, Amendment No. 3, dated
January 24, 1992 and Amendment No. 4, dated January 28, 1992.
(2) Filed as an Exhibit to the Definitive Proxy Materials of Alrom Corp., a New
York corporation, as filed on December 10, 1991.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-18
(Registration No. 3303330 81-NY) and incorporated herein by reference
thereto.
* Filed herewith