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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, 1999
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.)
11130 NE 33rd Place, Suite 250
Bellevue, Washington 98004
(Address of principal executive offices) (Zip Code)
(425) 803-5432 (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 4, 1999 was approximately $2,210,000.
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 12, 1999 was 11,921,528.50 shares.
Documents incorporated by reference: None
PART I
ITEM 1. DESCRIPTION OF BUSINESS
SUMMARY
American United Global, Inc., a Delaware corporation (the "Company"),
through its operating subsidiaries, was engaged primarily in the distribution,
rental and servicing of construction equipment (the "Distribution Business")
during the fiscal year ending July 31, 1999 ("Fiscal 1999"). The Company has
been engaged in site acquisition, zoning, architectural and engineering services
for the wireless communication and telecommunications industry and general
construction engineering services (the "Telecommunication and Construction
Businesses") through its minority-share ownership of IDF International, Inc.
("IDF") during Fiscal 1999. The Company disposed of the remaining assets
relating to its business of the design, development and marketing of computer
software and software related products and services (the "Technology Business")
during Fiscal 1999. The Company was engaged in active operations at July 31,
1999 in only the Distribution Business.
The Distribution Business
The Distribution Business operates through the Company's 60.6%-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 24 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.
3
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
Fiscal 1999 due to market conditions affecting the industry in which Western
conducts its business.
Western sustained a net loss of approximately $1.8 million on net sales of
approximately $163.7 million in the fiscal year ended July 31, 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 and $1.0 million on net
sales of approximately $148.1 million in fiscal year ended July 31, 1997. The
Distribution Business has in Fiscal 1999, Fiscal 1998 and Fiscal 1997 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.
The Technology Business
During the year ending July 31, 1999 the Company did not engage in the
Technology Business. In April 1998, the Company approved a formal plan to
dispose of, or discontinue, the remaining operations of its subsidiaries
constituting the Technology Business. In June 1999, the sale by the Company of
such assets constituting its Technology Business, which had not theretofore been
discontinued, to eGlobe, Inc. was completed. In connection with such sale, the
Company received convertible preferred stock of eGlobe, Inc. ("eGlobe
Preferred"), valued at $2,000,000, and eGlobe assumed approximately $5,182,000
in liabilities and lease obligations of subsidiaries of the Company, of which
$2,900,000 of lease obligations have been guaranteed by the Company. Although
eGlobe will be responsible for payment of those assumed liabilities, the
assumption of such liabilities will not relieve the Company from its guarantees
until such liabilities have been paid. The eGlobe Preferred carries a 5%
cumulative dividend and is convertible at $1.56 per share of common stock of
eGlobe, or, in the aggregate, into 1,920,000 shares of eGlobe common stock. The
Company has realized a remaining net gain on the sale of eGlobe (gain on sale
less total costs, expenses and closure costs) of approximately $1,989,000, which
has been reflected as a net gain on the disposal of assets in the Company's
consolidated statement of operations for Fiscal 1999.
STRATEGIC GOALS
The Company continues to engage in the Distribution Business through its
subsidiary, Western, of which the Company owns approximately 60.6% of the
outstanding Common Stock. The Company is currently considering focusing its
strategy on acquisitions into other businesses, although it has not yet
identified any definitive acquisition candidate.
Western's growth strategy focuses 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 in the industry in which Western conducts
its business. When market conditions improve and 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
dealers or distributors of construction, industrial, or agricultural 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 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 this approach reduces both the business risk and the cost of
market development.
4
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.
HISTORY AND RECENT ACQUISITIONS AND DIVESTITURES
The Company was initially organized as a New York corporation on June 22,
1988 under the name 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 holds 60.6 percent of the outstanding shares of Western
as of July 31, 1999.
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.
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.
When market 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 plans to 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.
5
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 ended Fiscal 1999 with 24 stores. The
Company has consolidated an additional four facilities in the first quarter of
Fiscal 2000 into larger stores in each region. The closures are intended to
increase efficiencies and reduce costs.
6
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.
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,
550,919 shares of Preferred Stock have been converted into an equal number of
shares of Common Stock, and 425,620 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. The transaction
was amended and closed on June 17, 1999 and was further amended in September
1999. 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 approximately
$2,900,000 are lease obligations guaranteed by the Company. Although eGlobe will
be responsible for payment of those assumed liabilities, the assumption of such
liabilities will not relieve the Company from its guarantees until such
liabilities have been paid. 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.
7
On November 4, 1997, Artour Baganov, the former principal stockholder of
InterGlobe, tendered his resignation as a member of the Board of Directors of
the Company and InterGlobe. The Company and InterGlobe reached an agreement on
July 22, 1998 with Mr. Baganov under which he agreed to terminate his employment
agreement with InterGlobe and cancel his 698,182 performance options. In
consideration, the Company and InterGlobe paid Mr. Baganov an aggregate of
$300,000 in full settlement of obligations under his employment agreement and
released such stockholder from his non-competition agreement with InterGlobe.
Mr. Baganov also agreed to vote his 550,000 shares of the Company's Common Stock
in favor of management's nominees for election to the Company's Board of
Directors. Two other former stockholders of InterGlobe had previously resigned
as InterGlobe employees and their employment agreements and InterGlobe Options
were canceled.
Exodus
The Company, through its Exodus subsidiary, had designed and developed a
proprietary software program, marketed as NTerprise. TM, which allows users to
run WindowsTM application server software programs designed for the MicrosoftTM
Windows NTTM operating system developed by Microsoft on (i) users' existing
UnixTM 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 Office95TM or Lotus NotesTM. The Company decided to
discontinue its Exodus operations in January 1998 following Microsoft's decision
not to renew its suncontractor's 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 cash and a sufficient number of shares of preferred stock of
the acquiring company so as to equal $50,000 in value on the date of receipt of
the 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. Subsequent to such acquisitions, the former stockholders of
TechStar publicly sold an aggregate of 331,346 of their 507,246 shares of
Company Common Stock and Mr. Kandel publicly sold all of his 192,754 shares of
Company Common Stock.
8
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. Solon D. Kandel, Sergio Luciani and Simontov Moskona, the senior
executive officers of TechStar, received three year options to purchase an
aggregate of 856,550 shares of IDF common stock (the "IDF Options"),
representing approximately an additional 8% of such fully diluted outstanding
IDF common stock. In connection with the transaction (i) all options granted by
the Company under their employment agreements entitling Messrs. Kandel, Luciani
and Moskona to purchase an aggregate of 780,000 shares of Company Common Stock
(subject to achievement of certain financial performance targets), and all
related 120,000 performance options held by other TechStar employees, were
cancelled, (ii) each of Messrs. Luciani and Kandel tendered their resignations
as directors of the Company, and (iii) Messrs. Luciani, Moskona and Kandel
utilized $600,000 of the net proceeds from the sale of their Company shares to
invest in convertible securities of IDF.
Messrs. Kandel, Luciani and Moskona were the senior executive officers of
IDF and each resigned their positions between January 1999 and May 1999. Each of
such officers had employment agreements with IDF pursuant to which they had been
entitled to receive, in addition to their base salaries and annual bonuses, IDF
Options which vest based upon IDF and its consolidated subsidiaries, including
TechStar and Hayden/Wegman (a subsidiary of TechStar), achieving all or certain
pro-rated portions of annual pre-tax income targets in each of fiscal years
ending July 31, 1998, 1999 and 2000. However, as none of such IDF Options have
vested as of the end of Fiscal 1999, the number of shares of IDF common stock
that would have been issued upon the exercise of such unvested IDF Options have
reverted back to the Company as additional consideration.
Robert M. Rubin, the Chief Executive Officer and Chairman of the Board and
a Director of the Company, is also a principal stockholder and 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 1999, the Company loaned IDF a total of $992,000. However,
IDF has 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 the advances of $992,000 made to IDF.
During the third fiscal quarter of Fiscal 1999, IDF discontinued the
operations of TechStar.
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 to the "break up" provisions of the
agreement which the Company reimbursed Enterprises $150,000 for their expenses
in connection with the proposed transactions.
9
THE DISTRIBUTION BUSINESS
General
The Company engages in the Distribution Business through Western, of which
it owns approximately 60.6% of its outstanding Common Stock. 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 24 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.
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.
10
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 year 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 year
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) equipment
service and support.
11
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.
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 pro
ducts 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.
Product Support and Service
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 140 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.
12
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 9,000 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, 1999.
For fiscal years 1999, 1998, and 1997, the approximate revenue breakdown by
source for the business operated by the Company were as follows:
FY 1999 FY 1998 FY 1997
------- ------- -------
Equipment Sales 60% 69% 69%
Equipment Rental 16% 8% 9%
Product Support 24% 23% 22%
--- --- ---
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 1999 substantially all of its sales revenues
resulted from products sold directly out of inventory, or the providing of
services upon customer request.
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. Western employed
approximately 70 Equipment salespersons on July 31, 1999.
On July 31, 1999, Western employed seven 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 1999. 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.
13
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. None
of the Case dealers in Western's territory are owned by Case. 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 seek 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.
14
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 business, financial condition, results
from operations and prospects.
Employees
At July 31, 1999, Western employed approximately 420 full-time employees,
or approximately 30 fewer than at July 31, 1998. Of that number, 29 are in
corporate administration, 27 are involved in administration at the branch
locations, 111 are employed in Equipment sales and rental, 86 are employed in
parts sales, and 167 are employed in servicing construction equipment. Staff
reductions during the year ending July 31, 1999 were considered to be relatively
even across all departments.
At July 31, 1999, 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. 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.
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.
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."
15
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."
Importance of Case Corporation to Operations. During Fiscal 1998 and Fiscal
1999 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.
16
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.
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.
Risk Factors Relating to the Company in General
Volatility of Market Prices for the Company's Common Stock.
The market prices for the Company's publicly traded Common Stock has been
historically volatile and there is limited liquidity in such market. 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 (i) 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; (ii) unanticipated working capital or other cash requirements; (iii)
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 (iv) 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.
17
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, 1999. The properties located in Salinas,
California; Bend and Portland (Whitaker location), Oregon; and Moxee, Washington
were closed in the first quarter of Fiscal 2000.
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 $83,649(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 7/10/20001 $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.
1901 Frontier Loop The Landon Group 4/30/2002 $40,500(1) Approx. 7 Acres; No
Pasco, Washington 99301 Building 14,200
sq.ft.
13184 Wheeler Road, N.E. Maiers Industrial park Month to $38,400(1) Approx. 10 Acres; No
Building 4 Month Building 13,680
Moses Lake, Washington sq. ft.
98837
63291 Nels Anderson Road B&K Management Corp. 10/31/99 $31,800(1) Approx. 1.9 acres No
Bend, Oregon 97701 building 3,600
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 Frederick Peterson 9/15/2002 $26,496(1) Approx. 1.9 Yes
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.
18
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
M.E. Robinson 3/31/2001
8271 Commonwealth Avenue, $81,600(1) Approx. 1 acre; Yes
Buena Park, California Building 11,590
90621 sq.ft.
672 Brunken Avenue R. Jay De Serpa, Ltd. 7/31/2001 $31,644(1) Approx. 8 Acres; No
Salinas, California 93301 Building 4,000
sq.ft.
13691 Whitaker Way D&J Enterprises 5/1/2001 $77,700 Approx. 2 Acres; No
Portland, Oregon 97230 Building 11,760
sq. ft.
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 $54,000 (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.
3510 International Way, C & N Partners 12/15/99 $46,978 Approx. 2 Acres; No
Fairbanks, AK 99701 Building 4500 sq.
ft.
2275 Brandy Lane Excaliber Drill 2/29/2000 $30,000 Approx. .5 Acres; No
Juneau, AK 99801 Building 1,500
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 lease 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.
19
Western's operating facilities are separated into nine "hub" outlets and
fourteen "sub-stores" and one "rental-only" store in Kent, Washington. The hub
stores are the main distribution centers located in Auburn, Pasco 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, Moses Lake, Kent, Clarkston and Yakima,
Washington; Portland, Salem and Bend, Oregon; Santa Rosa, Stockton Buena Park,
Redding, Yuba City and Salinas, 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.
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.
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 a
settlement of the Derivative Action was received in August 1999, pursuant to
which the Company will receive a payment (the "Rubin Payment") of $2,800,000
from Mr. Rubin.
The settlement will consist of the following: (a) the assignment by Mr.
Rubin to the Company of his right to $600,000 from Hutchinson which is due under
the Consulting Agreement and Non-Competition Agreement to Mr. Rubin, and which
Mr. Rubin believes will be immediately available upon stockholder ratification
of the Hutchinson Transaction; (b) the assignment of approximately $500,000 as
the "net present value" of the remaining payments (originally to be made in
installments through 2002) due under the Consulting Agreement and
Non-Competition Agreement to Mr. Rubin; (c) the transfer by Mr. Rubin to the
Company of a securities account (valued at approximately $941,000 as of the date
of transfer) containing both cash and unrestricted common stock of various
publicly-traded companies, with the actual value of each component common stock
to be calculated as the product of (i) the number of shares of each security
actually transferred, multiplied by (ii) the average closing price of each
security for the ten trading days preceding the date on which the Company
receives the securities account; and (d) the transfer by Mr. Rubin to the
Company of such number of shares of common stock of Response USA ("Response"), a
publicly-traded company, as equals the quotient of (i) the dollar value of the
Rubin Payment after subtracting the actual value of the payments in (a),(b) and
(c) above, divided by (ii) the average closing price of the Response common
stock during the ten trading days preceding the final judicial approval of the
Settlement. Hutchinson has withheld payments under the Consulting Agreement and
Non-Competition Agreement to Mr. Rubin pending stockholder ratification of the
Hutchinson Transaction, and has agreed to make these payments upon such
stockholder ratification. The payments by Hutchinson will constitute a
significant portion of the Rubin Payment.
20
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" transactions.
If the Hutchinson Transaction is ratified by the Company's stockholders,
the Company will release Mr. Rubin, the Company's Chairman and Chief Executive
Officer, from the obligation to repay a $1,000,000 principal amount promissory
note (the "Note") issued by Mr. Rubin to the Company. In return for such
release, Mr. Rubin will assign to the Company his rights to receive payments
under the Non-Competition Agreement and Consulting Agreement with Hutchinson,
and a portfolio of marketable securities with an approximate aggregate market
value as of June 1999 of approximately $941,000. Hutchinson has conditioned its
payments under the Consulting Agreement and Non-Competition Agreement on
stockholder ratification of the Hutchinson Transaction. In the event the Company
stockholders do not ratify the Hutchinson Transaction, Mr. Rubin will remain
responsible for repayment of the Note to the Company. In return for his
assigning to the Company his rights to receive payments from Hutchinson under
the Non-Competition Agreement and the Consulting Agreement, the Company will
agree to reduce his indebtedness under the Note by an amount equal to the
payments by Hutchinson to the Company.
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 (i) a letter of credit
guarantee by the Company for ERD Waste Corp. ("ERD"), (ii) the Hutchinson
Transaction and (iii) the delisting of the Company's Common Stock and
publicly-traded warrants from NASDAQ in February 1998. The Company has 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 will be in the amount of $2,500,000
and will be paid in the form of $600,000 in cash and $1,900,000 in common stock
of Western Power & Equipment Corp. ("Western"). The Western common stock is
presently owned by the Company and will be transferred to a segregated fund for
the benefit of the stockholder class. The Company presently owns approximately
60.6% of the outstanding common stock of Western and, after the Class Payment is
made (and assuming no subsequent ownership changes or transfers) will own
approximately 35% of the Western common stock. The number of shares of Western
common stock to be transferred will be calculated as the quotient of (i)
$1,900,000 divided by (ii) the average closing price of Western common stock
during the ten trading days preceding the final approval of the settlement of
the Class Action. Pursuant to such calculation 777,414 shares of Western owned
by the Company have been allocated. 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.
21
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 1997
- -----------
First Quarter 10.875 5.25 5.25 2.875
Second Quarter 11.375 7.563 4.875 3.875
Third Quarter 8.1875 3.44 4.50 3.75
Fourth Quarter 6.0000 4.3875 4.50 3.25
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 .78 * *
Fourth Quarter .875 .33
Fiscal 1999
- -----------
First Quarter .88 .63
Second Quarter .59 .28
Third Quarter .33 .28
Fourth Quarter .32 .25
22
* 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 5, 1999 the last sale price of the Common
Stock was $0.23. As of November 11, 1999, the Company had approximately 112
record holders of its Common Stock and 6 record holders of its Public Warrants.
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 1999,
1998, 1997, 1996 and 1995 have been derived from the financial statements of the
Company which have been audited by PricewaterhouseCoopers LLP, independent
accountants.
23
Income Statement Data (all figures in thousands):
Year ended July 31,
-------------------
1999 1998(1) 1997(2) 1996 1995
---- ------- ------- ---- ----
Net sales $163,650 $163,478 $148,130 $106,555 $86,173
(Loss) income from continuing operations (5,054) (4,901) (9,078) 685 1,164
Net (loss) income (3,065) (9,615) (27,257) (1,835)(1) 2,268
Basic and Diluted (Loss) Earnings Per Share:
(Loss) income from continuing operations (0.43) (0.43) (1.16) 0.12 0.20
Net (loss) income (0.26) (0.85) (2.75) (0.32) 0.40
Balance Sheet Data (all figures in thousands):
July 31,
--------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Total assets $142,409 $146,904 $144,723 $119,055 $76,829
Total liabilities $121,700 121,914 110,742 87,015 56,575
Working capital (deficit) (18,751) (5,972) 2,467 17,218 10,022
Stockholders' equity 12,797 15,862 24,101 22,581 20,254
(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.
24
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
In previous years the Company engaged in three distinct businesses: the
Distribution Business, the Technology Business and the Telecommunications and
Construction Businesses. The Company formerly was a stockholder of a majority of
the outstanding common stock of a subsidiary through which it engaged in the
Telecommunication and Construction Businesses, but is now only a minority
stockholder. 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 1999 consisted almost entirely of the Distribution
Business which the Company engages in through its subsidiary, Western, of which
it owns approximately 60.6% of the outstanding Common Stock. Accordingly, the
following discussion consists primarily of a discussion of Western. Western
acquired its first seven retail distribution stores in November 1992. Western
expanded to 18 stores in four states by the end of the year ending July 31, 1996
("Fiscal 1996"), to 23 stores in five states by the end of the year ending July
31, 1997 ("Fiscal 1997"), and to 27 stores in five states by the end of the year
ending July 31, 1998 ("Fiscal 1998"). However, during the year ending July 31,
1999 ("Fiscal 1999") the Company closed its Milton - Freewater, Oregon, Elko,
Nevada and Juneau, Alaska stores. At the end of Fiscal 1999 Western had 24
stores. Western's growth has been accomplished through a combination of new
store openings, strategic acquisitions, and to a lesser extent, comparable
stores revenue increases.
25
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
-------- ----------- ------ ------ -------- -----------
1997 18 2 0 3 23
1998 23 1 1 4 27
1999 27 0 3 0 24
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 1999, Western had consolidated four
additional stores into larger neighboring stores. The four stores consolidated
are Salinas, California, Bend, Oregon, Portland, Oregon and Moxee, Washington.
Western plans to 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.
Results of Operations
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.
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.
26
Selling, general, and administrative expenses were $15,175,000, or 9.3
percent of revenues for Fiscal 1999 as compared to $13,183,000, or 8.1 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 in part 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. Loss from discontinued operations of $4.7 million for Fiscal
1998 arises from the discontinuation of the operations of the Old Connectsoft,
Connectsoft, Exodus Technologies, Seattle OnLine Acquisition Corp. and
InterGlobe subsidiaries. Effective during the third quarter of Fiscal 1998 the
Company discontinued the operations of these subsidiaries. Losses of $2,320,000
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 $1,480,000. The change in the amount of gain is
due primarily to changes in the consideration given by eGlobe for the assets of
Connectsoft.
Fiscal 1998 Compared with Fiscal 1997
The Company reported net revenue for Fiscal 1998 of $163,478,000, an
increase of $15,348,000 (10.4 percent) over comparable 1997 sales of
$148,130,000. 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 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.
Selling, general, and administrative expenses were $13,183,000 or 8.1
percent of revenues for Fiscal 1998 compared to $22,605,000 or 15.3 percent of
sales for Fiscal 1997. The decrease is due largely to the 1997 amounts charged
for ERD totaling $4,985,000. 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.
27
Net interest expense for Fiscal 1998 was $4,197,000, up $1,572,000 from
$2,625,000 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 $403,000 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 $4,690,000 for Fiscal 1998 arises from
the discontinuation of the operations of the Old Connectsoft, Connectsoft,
Exodus Technologies, Seattle OnLine, InterGlobe and TechStar 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. In Fiscal 1997, the Company incurred a loss from
discontinued operations of $15,700,000 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,
Seattle OnLine incurred a net loss of $1,575,000 on total revenues of $87,000
and TechStar had net income of $1,134,000 on sales of $3,891,000. These losses
were slightly offset by tax benefits recognized of $1,000,000.
Fiscal 1997 Compared with Fiscal 1996
Western's revenues for Fiscal 1997 increased by $41.6 million, or
approximately 39% over Fiscal 1996. The increase was due primarily to the
contribution of the stores acquired or opened in the last year, accounting for
$21.4 million (51%) of the increase in sales. Western's same store revenues
increased $10.2 million or 25% for Fiscal 1997, as compared to Fiscal 1996. For
Fiscal 1997, Western's sales in all departments were up at least 25% compared to
the same period in Fiscal 1996.
Selling, general and administrative ("SG&A") expenses were $22.6 million
(15.3% of sales) in Fiscal 1997, compared to $9.5 million (8.9% of sales) for
the comparative prior year period. The substantial increase in SG&A expenses of
$13.1 million for Fiscal 1997 were attributable to an increase at Western of
$3.4 million and an increase of $4.7 million of corporate SG&A, and included the
ERD bad debt of $5.0 million which had no comparable expense in Fiscal 1996.
Interest expense for the Fiscal 1997 was $2.625 million compared to $1.137
million for Fiscal 1996, predominantly due to increased inventory carried by
Western to support higher equipment sales level, including a significant
investment in equipment dedicated to the rental fleet.
The effective tax rate for Fiscal 1997 was approximately 6.4%, which is
lower than the 37% effective tax rate for the prior year comparative period.
This decrease is a result of the recognition of a valuation allowance against
the net operating loss carryforward and deferred tax assets.
28
In Fiscal 1997, the Company incurred a loss from discontinued operations of
$16.9 million comprised of $8.2 million from its Exodus subsidiary and a net
loss of $3.1 million from the operations of Old ConnectSoft. In addition, the
free agent development and marketing activities conducted by Connectsoft
incurred an additional $2.8 million of net losses in Fiscal 1997. InterGlobe
incurred a net loss of $2.224 million (including $1.6 million of write-offs of
goodwill and investment) on total revenues of $1,040,590, Seattle OnLine
incurred a net loss of $1.575 million on total revenues of $87,000 and TechStar
had net income of $1,134,000 on sales of $3,891,000.. These losses were offset
by tax benefits recognized of approximately $1.0 million. Losses from
discontinued operations for Fiscal 1996 of $2.5 million are comprised of the
gain from the sale of the manufacturing division of $7.8 million (net of tax of
5.0 million) offset by losses of Old Connectsoft from Fiscal 1996 in the amount
of $10.3 million.
Although Western's sales increased, the increase in Western's operating and
interest expenses and warranty problems with Case backhoe equipment which
Western elected to absorb, resulted in net income of approximately $1.0 million
in Fiscal 1997, as compared with $2.0 million in the prior year.
As a result of the foregoing, in Fiscal 1997, the Company reported a
consolidated net loss of $27.3 million on total net consolidated sales of
approximately $154.5 million.
Liquidity and Capital Resources
General
During Fiscal 1999 the Company's cash, cash equivalents and marketable debt
securities decreased by $4,526,000, from $7,811,000 to $3,285,000, primarily due
to its partial fundings of the discontinued operations of Connectsoft and its
advances to IDF, losses from operations and increased selling, general and
administrative expenses.
The Company's cash and cash equivalents of $2,914,000 as of July 31, 1999
and available credit facilities of Western are considered sufficient to support
current levels of operations for at least the next twelve months. The Company
had by November 12, 1999 received securities, cash and notes with an approximate
value of $1,700,000 from Robert M. Rubin, and approximately $1,100,000 in
payments from Hutchinson are due to the Company in connection with the
settlement of the derivative stockholder litigation. The payments from
Hutchinson are contingent upon ratification by the Company stockholders of the
Hutchinson Transaction. However, there can be no assurance that such payments
will ever be received.
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.
29
Western
During the year ended July 31, 1999, Western's cash and cash equivalents
increased by $74,000 primarily due to the increased accounts receivable
collections. Western had positive cash flow from operating activities during the
year of $15,055,000 reflecting net income for the year after adding back
depreciation and amortization. Total purchases of new property and equipment and
rental equipment in Fiscal 1999 approximated $16,000,000. Purchases of fixed
assets during the period were related mainly to the ongoing replacement of aged
operating assets and the purchase of the Anchorage, Alaska facility.
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, 1999,
Western was indebted under manufacturer provided floor planning arrangements in
the aggregate amount of $17,128,000. As of September 30, 1999, approximately
$15,413,000 was outstanding under these manufacturer provided floor plan
arrangements.
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,
1999, approximately $70,863,000 was outstanding under the DFS credit facility.
As of September 30, 1999, approximately $68,443,000 was outstanding under this
facility. At July 31, 1999, 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, 1999. There is
no guarantee that Deutsche Financial Services will not call this debt at any
time. 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, 1999.
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.
30
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. The Company 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.
The Technology Business
During Fiscal 1999, the Company had no operations in its Technology
Business. During Fiscal 1999, the Company consummated the sale of certain assets
comprising the remaining Technology Business to eGlobe. Prior to such sale the
Company had either discontinued or divested itself of all assets comprising the
Technology Business.
Impact of Year 2000 Related Problems
Year 2000 related problems are the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have date sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Western has determined that it will be required to upgrade, modify or
replace significant portions of its software so that its computer systems will
properly utilize dates after December 31, 1999. Western is completing upgrades
of its enterprise application to account for and alleviate Year 2000 related
problems uncovered during internal testing of some software from vendors.
Western presently believes that with these upgrades to existing software, Year
2000 related problems can be mitigated. However, if such upgrades are not made,
are not timely completed, or do not work as anticipated, Year 2000 related
problems could have a material impact on the operations of Western.
31
Western has initiated its plan to contact all of its significant suppliers
to determine the extent to which Western is vulnerable to those third parties'
failure to remediate their own Year 2000 related problems. There can be no
guarantees that the systems of third parties on which Western's systems rely or
which influence the business of Western's customers will be timely remediated,
that any attempted remediation will be successful, or that such conversions
would be compatible with Western's systems. Western has not yet determined the
projected costs of its Year 2000 project and cannot yet determine whether
Western has any exposure to contingencies related to the Year 2000 related
problems for the products it has previously sold.
There can be no assurance that Western will finish its Year 2000
remediation efforts in time to prevent related problems whenever or if they
occur. As the Company's business consists almost entirely of the Distribution
Business which it engages in through Western, any failure by Western to have
software and systems which are Year 2000 compliant in time to prevent the
occurrence of related problems will materially adversely affect the business,
financial condition, results of operations and prospects of Western and the
Company.
Western will utilize both internal and external resources to reprogram, or
replace, and test its software for Year 2000 modifications. Western plans to
complete its Year 2000 remediation on or before December 1999. Funding for the
costs of the program are anticipated to come from operating cash flows.
Western's current plan to complete the Year 2000 modifications is based on
management's best estimates, which were derived using numerous assumptions of
future events including the continued availability of certain resources, third
party modification plans, and the ability to meet projected time lines. There
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and other uncertainties.
ITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK
Not Applicable
32
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 ................... 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, 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended July 31, 1999, in conformity with generally accepted accounting
principles. 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 generally accepted auditing standards 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
October 22, 1999
F-2
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31,
--------
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 2,914,000 $ 3,362,000
Investment in marketable debt securities............................................. 371,000 4,449,000
Trade accounts receivable, less allowance
for doubtful accounts of $724,000 and $670,000, respectively........................ 15,500,000 23,708,000
Inventories (Note 4)................................................................. 67,068,000 73,491,000
Prepaid expenses and other receivables............................................... 885,000 287,000
Deferred tax asset (Note 7).......................................................... 1,410,000 1,298,000
Receivable from Chairman (Note 10)................................................... 1,700,000 -
Notes receivable .................................................................... 1,140,000 1,200,000
--------- ---------
Total current assets............................................................. 90,988,000 107,795,000
Property and equipment, net (Note 5)................................................. 9,818,000 8,695,000
Rental equipment fleet, net (Note 5)................................................. 31,366,000 23,080,000
Leased equipment fleet, net (Note 5)................................................. 5,264,000 2,760,000
Intangibles and other assets, net of accumulated
amortization of $1,263,000 and $1,460,000, respectively (Note 12)................... 2,952,000 3,613,000
Investment in unconsolidated subsidiary (Note 3)..................................... - 961,000
Investment in preferred stock (Note 9)............................................... 2,000,000 -
Note Receivable, net of current portion ............................................. 521,000 -
---------- ---------
$ 142,909,000 $ 146,904,000
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under floor financing lines (Note 6)...................................... $ 17,128,000 $ 11,038,000
Short-term borrowings (Note 6)....................................................... 72,383,000 76,769,000
Current portion of capital lease obligations (Note 10)............................... 17,000 67,000
Accounts payable..................................................................... 13,038,000 18,027,000
Accrued liabilities.................................................................. 4,046,000 5,336,000
Income taxes payable (Note 7)........................................................ 627,000 1,050,000
Deferred gain on discontinued operations (Note 9).................................... - 1,480,000
Due to shareholders (Note 10)........................................................ 2,500,000 -
----------- -----------
Total current liabilities........................................................ 109,739,000 113,767,000
Long-term borrowings (Note 6)........................................................... 48,000 1,156,000
Capital lease obligations, net of current portion (Note 10)............................. 4,755,000 2,827,000
Deferred taxes (Note 7)................................................................. 837,000 690,000
Deferred gain........................................................................... 140,000 -
Deferred lease income................................................................... 6,181,000 3,474,000
--------- ---------
Total liabilities 121,700,000 121,914,000
Minority interest....................................................................... 8,412,000 9,128,000
Commitments and contingencies (Note 10)
Shareholders' equity (Notes 8 and 11):
Series B-1 convertible preferred stock, convertible to common, $3.50 per share
liquidation value, $.01 par value; 1,000,000 shares authorized; 425,620 and
723,862 shares issued and outstanding, respectively................................ 4,000 7,000
Common stock, $.01 par value; 40,000,000 shares authorized; 11,921,529 and 11,617,286
shares issued and outstanding, respectively........................................ 119,000 116,000
Common stock, Class B, non-voting, .01 par value, 25,000,000
shares authorized, no shares issued and outstanding ............................... - -
Additional contributed capital....................................................... 49,954,000 49,954,000
Accumulated deficit.................................................................. (37,280,000) (34,215,000)
----------- -----------
Total shareholders's equity...................................................... 12,797,000 15,862,000
---------- ----------
$ 142,909,000 $146,904,000
============== ============
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,
-------------------
1999 1998 1997
---- ---- ----
Net sales................................................................ $ 163,650,000 $ 163,478,000 $ 148,130,000
Cost of goods sold....................................................... 149,056,000 144,302,000 132,260,000
----------- ----------- -----------
Gross profit...................................................... 14,594,000 19,176,000 15,870,000
Selling, general and administrative expenses............................. 15,175,000 13,083,000 22,605,000
---------- ---------- ----------
Operating income (loss)........................................... (581,000) 6,093,000 (6,735,000)
Interest expense, net.................................................... 5,329,000 4,197,000 2,625,000
--------- --------- ---------
Income (loss) from continuing operations before income taxes, equity
in loss of unconsolidated subsidiary and minority interest........ (5,910,000) 1,896,000 (9,360,000)
Benefit (provision) for income taxes (Note 7)............................ 1,101,000 (1,354,000) 703,000
Equity in loss of unconsolidated subsidiary.............................. (961,000) (4,730,000) -
Minority interest in loss (earnings) of consolidated subsidiaries........ 716,000 (713,000) (421,000)
------- -------- --------
Loss from continuing operations .................................. (5,054,000) (4,901,000) (9,078,000)
Discontinued operations, net of taxes (Note 9):
Loss from operations, (net of tax benefit of $1,423,000 in 1998 and
$966,000 in 1997)..................................................... - (4,690,000) (15,776,000)
Gain on disposal...................................................... 1,989,000 - -
--------- ---------- ------------
1,989,000 (4,690,000) (15,776,000)
Net loss ................................................................ (3,065,000) (9,591,000) (24,854,000)
Dividends on preferred stock............................................. - (24,000) (2,403,000)
----------- ---------- ----------
Net loss available for common shareholders............................... $ (3,065,000) $ (9,615,000)$ (27,257,000)
============= ============== ==============
Basic and diluted earnings (loss) per share:
(Loss) earnings from continuing operations............................ $ (0.43) $ (0.43) $ (1.16)
Gain (loss) from discontinued operations.............................. 0.17 (0.42) (1.59)
------------- ------------- -------------
Basic and diluted loss per share......................................... $ (0.26) $ (0.85) $ (2.75)
============= ============= ============
Weighted average number of shares........................................ 11,748,210 11,311,791 9,919,626
========== ========== =========
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, 1996.................................. - $ - 6,267,000 $ 63,000
Net loss .................................................
Dividend on preferred stock...............................
Issuance of common shares................................. 1,886,000 19,000
Issuance of preferred stock............................... 1,377,000 14,000
Conversion of preferred stock to common................... (280,000) (3,000) 2,031,000 20,000
Tax benefit related to stock option plans and warrants....
Amortization of deferred compensation.....................
Exercise of stock options................................. 243,000 2,000
Stock options issued to non-employees.....................
Warrants issued in connection with acquisition............ --------- --------- ----------- ---------
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
======= ============= ========== =============
ADDITIONAL RETAINED TOTAL
CONTRIBUTED EARNINGS SHAREHOLDERS'
CAPITAL OTHER (DEFICIT) EQUITY
Balance at July 31, 1996.................................. 20,654,000 (793,000) 2,657,000 22,581,000
Net loss ................................................. (24,854,000) (24,854,000)
Dividend on preferred stock............................... 2,286,000 (2,403,000) (117,000)
Issuance of common stock.................................. 8,525,000 8,544,000
Issuance of preferred stock............................... 15,411,000 15,425,000
Conversion of preferred stock to common................... (17,000)
Tax benefit related to stock option plans and warrants.... 356,000 356,000
Amortization of deferred compensation..................... 597,000 597,000
Exercise of stock options................................. 854,000 856,000
Stock options issued to non-employees..................... 571,000 571,000
Warrants issued in connection with acquisition............ 142,000 142,000
------- -------- ----------- -------
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
============= ============ ============== =============
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,
-------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net loss from continuing operations................................... $ (5,054,000) $ (4,901,000) $ (7,944,000)
Net gain (loss) from discontinued operations ......................... 1,989,000 (4,690,000) (16,910,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization....................................... 11,779,000 1,448,000 2,646,000
Long-term asset impairment.......................................... - - 5,725,000
Loss on settlement.................................................. 310,000 - 1,800,000
Loss on standby letter of credit......................................... - - 4,985,000
Amortization of deferred compensation............................... - 196,000 597,000
Gain on disposal of business........................................ (1,989,000) (220,000) -
Gain on sale of fixed assets........................................ (45,000) - -
Deferred tax provision.............................................. - - (11,000)
(Loss) income applicable to minority interest....................... (716,000) 713,000 421,000
Undistributed loss of affiliate..................................... 1,553,000 4,730,000 -
Stock option compensation........................................... - - 271,000
Imputed interest.................................................... - - 305,000
Change in assets and liabilities, net of effects of acquisition
and dispositions:
Trade accounts receivable......................................... 8,208,000 (10,584,000) (7,255,000)
Inventories....................................................... 1,299,000 (2,280,000) (17,673,000)
Notes receivable.................................................. (500,000) 3,503,000 -
Intangible and other assets....................................... - 1,638,000 -
Prepaid expenses and other receivable............................. 1,000 70,000 (1,646,000)
Lease equipment, net.............................................. (2,504,000)
Accounts payable.................................................. (5,295,000) (2,122,000) 14,181,000
Accrued liabilities............................................... (1,290,000) (5,462,000) 6,588,000
Income taxes payable.............................................. (164,000) (2,254,000) (3,329,000)
Change in deferred revenue........................................ 2,707,000 (950,000) 950,000
Change in deferred gain on disposition of Technology Group........ - 1,480,000 -
Borrowings under term loans....................................... (4,286,000) 67,179,000 242,000
Inventory floor financing........................................... 6,090,000 (47,246,000) 1,126,000
--------- ----------- ---------
Net cash provided by (used in) operating activities............... 12,093,000 248,000 (14,931,000)
Cash flows from investing activities:
Purchase of property and equipment.................................... (2,711,000) (6,332,000) (1,222,000)
Purchase of rental equipment, net..................................... (13,315,000)
Sale (purchase) of debt securities.................................... 4,078,000 5,569,000 (3,750,000)
Proceeds on sales of fixed assets..................................... 2,235,000 - -
Acquisition of businesses, net of cash acquired....................... - - (1,497,000)
----------- ------------ ----------
Net cash used in investing activities............................. (9,713,000) (763,000) (6,469,000)
Cash flows from financing activities
Long term debt repayments............................................. (1,068,000) - -
Net borrowings (payments) under revolving credit agreements........... - (7,323,000) 7,287,000
Principal payments under capitalized lease obligations................ (60,000) (348,000) (327,000)
Proceeds from sale of stock........................................... - 480,000 9,182,000
Subsidiary purchase of treasury stock.......................... - (1,816,000) -
Exercise of stock options............................................. - 562,000 856,000
Collections (increase) of receivable from shareholder, net............ (1,700,000) 38,000 (400,000)
---------- ---------- ----------
Net cash (used in) provided by financing activities............... (2,828,000) (8,407,000) 16,598,000
---------- ---------- ----------
Net (decrease) in cash and cash equivalents.............................. (448,000) (8,922,000) (4,802,000)
Cash and cash equivalents beginning of year.............................. 3,362,000 12,284,000 17,086,000
--------- ---------- ----------
Cash and cash equivalents end of year.................................... $ 2,914,000 $ 3,362,000 $ 12,284,000
============= ============== =============
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, through its operating subsidiary, in the distribution business through
its 60.6% 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 24 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 is also involved in the engineering, design and construction
business through a minority owned subsidiary, IDF International, Inc. ("IDF").
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 have been sold to an unrelated third party as discussed in Note 9.
Exodus Technologies, Inc., an 80.4%-owned subsidiary, had developed a
proprietary application server software, marketed as NTERPRISE, allows users to
run Windows application server software programs designed for Microsoft Windows
NT operating system on users' existing Unix workstations.
InterGlobe Networks, Inc. provided network consulting services and managed
a network operations center providing internet connectivity services.
The technology business has been accounted for as discontinued operations
for the years ending July 31, 1999, 1998 and 1997.
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 39.4% at July 31, 1999 and 1998.
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.
F-7
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $724,000 and $865,000 at July 31, 1999 and 1998, respectively.
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 debt securities represent primarily treasury
notes and are carried at market value as these investments have been classified
as available for sale securities at July 31, 1999 and 1998.
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.
Intangible Assets and Investment in Unconsolidated Subsidiary
Intangible assets acquired in business acquisitions such as goodwill, and
noncompete agreements represent value to the Company. Intangibles 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 intangible assets 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.
Investments in unconsolidated subsidiary represents the Company's 38.5% and
47.6% ownership in IDF International, Inc. ("IDF") as of July 31, 1999 and 1998.
Net losses for IDF for the years ended July 31, 1999 and 1998 were approximately
$2,250,000 and $9,930,000. The loss for 1998 includes impairment of goodwill of
$7,500,000. Accordingly, the Company reduced its investment in unconsolidated
subsidiary by $866,000 and $4,727,000, representing the Company's share of such
loss during the years ended July 31, 1999 and 1998. In addition, because of
IDF's financial condition described more fully in Note 3, the Company has
written off its remaining investment in IDF of $95,000 for a total loss in
fiscal 1999 of $961,000.
F-8
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Advertising Expense
Western expenses all advertising costs as incurred. Total advertising
expense for the years ended July 31, 1999, 1998 and 1997 was $311,000, $434,000
and $501,000, 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 fair value of marketable debt securities held
approximates the carrying value at July 31, 1999 and 1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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 elected to continue using the rules of APB Opinion No. 25
and provides pro forma disclosures of net income and earning per share as if
Statement No. 123 had been applied.
Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
has been adopted by the Company during fiscal 1998. Applying the provisions of
the statement had no material effect on the Company's earnings per share
computations for the years ending July 31, 1999, 1998 and 1997.
F-9
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the computations of basic and fully diluted
earnings per share for the years ending July 31, 1999, 1998 and 1997:
YEAR ENDED JULY 31,
-------------------
1999 1998 1997
---- ---- ----
Numerators:
Net loss from continuing operations..................... $ (5,054,000) $ (4,901,000) $ (9,078,000)
Dividend on preferred stock............................. - (24,000) (2,403,000)
---------- ------------- -----------
Net loss after preferred dividends...................... (5,054,000) (4,925,000) (11,481,000)
Discontinued operations................................. 1,989,000 (4,690,000) (15,776,000)
--------- ---------- -----------
Net loss ............................................... (3,065,000) (9,615,000) (27,257,000)
========== ========== ===========
Denominator:
Denominator for basic and diluted earnings per share -
Weighted average outstanding shares..................... 11,748,210 11,311,791 9,919,626
========== ========== =========
Basic and diluted earnings (loss) per share:
Loss from continuing operations........................... (0.43) (0.43) (1.16)
Income (loss) from discontinued operations................ 0.17 (0.42) (1.59)
---- ----- -----
Basic and diluted net loss per share...................... (0.26) (0.85) (2.75)
===== ===== =====
Diluted and basic earnings per share are the same, since the inclusion of
common stock equivalents in the computation would be antidilutive.
Reclassifications
Certain reclassifications have been made to the fiscal year 1998 and 1997
financial statements to conform to the financial statement presentation for
fiscal 1999. Such reclassifications have had no effect on the Company's net loss
or shareholders' equity.
F-10
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS
Distribution Business Acquisitions
On January 17, 1997 Western acquired the operating assets of Sahlberg
Equipment, Inc. ("Sahlberg"), a four-store Northwest distributor of noncompeting
lines of equipment with facilities in Kent, Washington, Portland, Oregon,
Spokane, Washington and Anchorage, Alaska. The purchase price for the assets of
Sahlberg was an aggregate of approximately $5,290,000, consisting of $3,844,000
for equipment inventory, $797,000 for parts inventories, $625,000 for fixed
assets, and $24,000 for work-in-process. The acquisition was accounted for as a
purchase.
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.
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 among the Company, IDF and an acquisition subsidiary of IDF
(the "IDF Merger Agreement"). Upon Consummation of the transaction, the Company
received 6,171,553 shares of IDF common stock, representing approximately 63% of
the then outstanding shares and approximately 58% of the fully diluted
outstanding IDF common stock, as a result of which, the Company was deemed to
have acquired IDF. In connection with the transaction,(i) all options granted by
the Company under employment agreements entitling Messrs. Kandel, Luciani and
Moskona to purchase an aggregate of 780,000 shares of the Company's common
stock, and all additional authorized but ungranted employee stock options for
120,000 shares were cancelled, (ii) Messrs. Kandel and Luciani tendered their
resignations as directors of the Company, (iii) each of Messrs. Kandel, Luciani
and Moskona publicly sold all but 174,900 of their remaining shares of Company
stock and utilized $600,000 of the net proceeds to invest in convertible
securities of IDF.
Messrs. Kandel, Luciani and Moskona were the senior executives and officers
of IDF and had each entered into employment agreements with IDF expiring
November 30, 2000. Pursuant to such agreements, Messrs. Kandel, Luciani and
Moskona are entitled to receive, in addition to their base salaries and annual
bonuses, options to acquire IDF shares which vest based upon IDF and its
consolidating subsidiaries, including TechStar and Heyden Wegman, achieving all
or certain pro-rated portions of annual pre-tax income targets in each of fiscal
years ending July 31, 1998, 1999 and 2000. In the event that any or all of such
IDF Options do not vest, the number of shares of IDF common stock that would
have been issued upon the exercise of such IDF Options shall be issued to the
Company as additional merger consideration. In September 1998 Messr. Luciani
tendered his resignation with IDF. Messr. Kandel tendered his resignations in
January of 1999.
F-11
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Messrs. Robert M. Rubin and Lawrence Kaplan, the Chief Executive Officer
and Chairman of the Board and a Former Director of the Company, respectively,
are also principal stockholders and members of the board of directors of IDF and
were such 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 is convertible into 400,000
shares of IDF common stock. In addition, through GV Capital Inc., an affiliate
of Mr. Kaplan, IDF offered $3,000,000 of five year, 8.0% notes convertible into
IDF Series A Convertible Preferred Stock at 1.25 per share. $600,000 of such
notes were purchased by Messrs. Kandel, Luciani and Moskona. Mr. Kaplan's
affiliate received separate compensation for acting as placement agent in
connection with such private offering of IDF securities.
During the year ended July 31, 1998 IDF's five year Convertible Notes were
converted into 1,400,000 shares of IDF Series A Preferred Stock and 1,080,000
shares of IDF Convertible Series C Preferred stock at $1.25 per share.
The Series A, B and C Convertible Preferred Stock of IDF have voting rights
that are the same as IDF Common Stock, thus subsequent to the conversion of said
Notes, the Company owns 62% of the outstanding common stock, which represents
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 the past two fiscal quarters, IDF has experienced a significant
decrease in revenue and has been unable to obtain further financing. As a
result, IDF has severe cash flow and other financial difficulties and is
pursuing alternative measures which include the possible sale of Hayden-Wegman,
its New York City based operating subsidiary.
Due to the circumstances described above and the uncertainty of recovery,
the Company has taken a full reserve against the advances of $992,000 made to
IDF this fiscal year and the remaining investment in IDF.
Pro Forma
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 each period presented, including the impact of certain adjustments.
YEAR ENDED JULY 31,
-------------------
1998 1997
---- ----
Net sales............................ $ 173,414,000 $ 171,505,000
Net loss ........................... (9,654,000) (25,885,000)
Basic and diluted loss per share..... $ (.85) $ (2.61)
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.
F-12
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES
Inventories consist of the following:
JULY 31,
--------
1999 1998
---- ----
Parts ............................ $ 10,101,000 $ 8,535,000
Equipment new and used............... 56,967,000 64,956,000
---------- ----------
$ 67,068,000 $ 73,491,000
============= ==============
5. FIXED ASSETS
Fixed assets consist of the following:
JULY 31,
--------
1999 1998
---- ----
Machinery and equipment...................... $ 3,869,000 $ 3,236,000
Furniture and office equipment............... 2,291,000 2,309,000
Computer equipment........................... 1,299,000 1,146,000
Land......................................... 420,000 840,000
Building and leasehold improvements.......... 5,486,000 4,280,000
Vehicles .................................... 1,841,000 1,291,000
--------- ---------
.. 15,206,000 13,102,000
Less: Accumulated depreciation.............. (5,388,000) (4,407,000)
---------- ----------
Property plant & equipment, net.............. $ 9,818,000 $ 8,695,000
========== ==========
Rental equipment fleet....................... 36,395,000 23,080,000
Less: Accumulated depreciation.............. (5,029,000) -
----------- ----------
Rental equipment fleet, net.................. $ 31,366,000 $ 23,080,000
=========== ===========
Leased equipment fleet, net.................. $ 5,264,000 $ 2,760,000
=========== ===========
F-13
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 April 30, 1999. While in default, the note bears interest at 12%.
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.
The following table summarizes the debt and inventory floor plan
financing arrangements:
Maturity July 31,
Interest Rate Date 1999 1998
------------- ---- ---- ----
Note Payable 8%(12% default 4/30/99 $1,500,000 $1,500,000
rate)
Case Credit Corporation Prime + 2% 8 - 48 17,128,000 11,038,000
(10.00%) months
Deutsche Financial Services Prime - 0.5% 12 - 36 70,883,000 75,886,000
(7.50%) months
Other variable 12 - 48 48,000 133,000
(8.00%-10.00%) months
----------- -----------
$89,559,000 $88,557,000
=========== ===========
F-14
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At July 31, 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, 1999 and thereafter. There is no assurance
that Deutsche Financial Services will not call this debt at any time after
July 31, 1999. If DFS does call the debt, it will become immediately due
and payable in full. The amount due to Deutsche Financial Services is
therefore included as a current liability.
7. INCOME TAXES
The provision (benefit) for income taxes from continuing operations
comprises the following:
YEAR ENDED JULY 31,
-------------------
1999 1998 1997
---- ---- ----
Current:
Federal............................ $ (978,000) $ 1,227,000 $ (422,000)
State ............................. (156,000) 162,000 119,000
-------- ------- -------
(1,134,000) 1,389,000 (303,000)
Deferred:
Federal............................ 29,000 (32,000) (357,000)
State ............................. 4,000 (3,000) (43,000)
----- ------ -------
33,000 (35,000) (400,000)
------ ------- --------
$ (1,101,000) $ 1,354,000 $ (703,000)
=============== =============== ===============
F-15
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 income are as follows:
YEAR ENDED JULY 31,
-------------------
1999 1998 1997
---- ---- ----
Statutory federal income tax rate.......................... $ (2,009,000) $ 495,000 $ (2,797,000)
Valuation allowance........................................ 1,011,000 590,000 1,966,000
State income taxes, net of federal income tax benefit...... (152,000) 159,000 76,000
Other .................................................. 49,000 110,000 52,000
---------- ----------- -----------
$ (1,101,000) $ 1,354,000 $ (703,000)
Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities are as follows:
JULY 31,
1999 1998
---- ----
Depreciation and amortization................ $ (837,000) $ (780,000)
Valuation allowance.......................... (5,387,000) (4,377,000)
---------- ----------
Gross deferred tax liabilities............... (6,224,000) (5,157,000)
---------- ----------
Inventory reserve............................ 918,000 775,000
Bad debt reserve............................. 282,000 261,000
Accrued vacation and bonuses................. 96,000 98,000
Other .................................... 482,000 532,000
Loss carryforwards........................... 4,107,000 3,186,000
Loss on Western initial public offering...... 131,000 131,000
Stock options................................ 782,000 782,000
------- -------
Gross Deferred Tax Assets.................... 6,798,000 5,765,000
--------- ---------
$ 574,000 $ 608,000
=============== ===============
At July 31, 1999, the Company had federal income tax loss carryforwards of
$12,303,000 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%.
F-16
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SHAREHOLDERS' EQUITY
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 year ended July 31, 1999 a total of 550,869 shares were
converted to common stock at the ratio of one for one, leaving 425,670 shares
outstanding at July 31, 1999.
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, 1997, a total of 280,000 of the preferred shares had been converted
into approximately 2,031,000 common share at prices ranging from $3.31 to $3.80.
All of the remaining 120,000 preferred shares outstanding at July 31, 1997 were
converted into approximately 585,000 shares at a price of $5.37 per share in
September, 1997, leaving no shares outstanding at July 31, 1998.
The shares had provided for a discount conversion feature which has been
accounted for as an imputed dividend to the preferred shareholders. Total
dividend expense was $24,000 and $2,403,000 for the fiscal years ending July 31,
1998 and 1997, respectively. A total of $2,121,000 was recognized as a dividend
imputed by the discount conversion feature of the preferred shares for the year
ended July 31, 1997. All of the dividends were paid in additional shares of
common stock concurrent with the conversion of the preferred shares to common
stock.
In addition, 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.
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.
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, 1999 none were issued and
outstanding.
F-17
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
In April 1999, IDF, the minority owned subsidiary of the Company
discontinued the operations of TechStar Communications, Inc. The Company has
therefore treated the operations of TechStar for the year ended July 31, 1997 as
discontinued, since during this time TechStar was a wholly owned subsidiary of
the Company.
Revenues for the Technology group of companies for the years ending July
31, 1999, 1998 and 1997 were $67,000, $2,108,000 and $6,415,000, 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 of eGlobe Convertible Preferred Stock
valued by the Company at approximately $2,000,000. eGlobe assumed approximately
$5,182,000 of Connectsoft liabilities and leases, of which approximately
$2,900,000 are lease obligations guaranteed by the Company. Although eGlobe will
be responsible for payment of those assumed liabilities, the assumption of such
liabilities will not relieve the Company from its guarantees until such
liabilities have been paid. The Company provided eGlobe with a working capital
loan of $500,000 secured by a promissory note. The Promissory note bears
interest at prime (8.0% at July 31, 1999) and is payable in 12 monthly
installments beginning September 1, 1999 or upon eGlobe achieving certain equity
or debt financing milestones as defined in the note. The Company and eGlobe are
presently negotiating revised payment terms.
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 has been recognized in the accompanying consolidated statement of
operations for the year ended July 31, 1999.
F-18
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company and Western lease certain facilities and certain computer
equipment and software 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 $2,000,000, $1,833,000, and
$1,971,000 for the years ended July 31, 1999, 1998, and 1997, respectively. The
computer equipment lease expires August 1999 and meets certain specific criteria
to be accounted for as a capital lease.
Assets recorded under capital leases are as follows:
JULY 31,
1999 1998 1997
---- ---- ----
Capitalized asset value.................... $ 4,978,000 $ 3,036,000 $ 3,836,000
Less: Accumulated amortization............ (550,000) (315,000) (448,000)
-------- -------- --------
$ 4,428,000 $ 2,721,000 $ 3,388,000
=============== =============== ===============
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 ..........................................................................$ 442,000 $ 1,720,000
2001 ........................................................................... 459,000 1,374,000
2002 ........................................................................... 485,000 882,000
2003 ........................................................................... 510,000 726,000
2004 ........................................................................... 525,000 572,000
Thereafter..........................................................................8,875,000 6,642,000
---------- ---------
Total annual lease payments........................................................11,926,000 $ 11,916,000
===========
Less: Amount representing interest with imputed rates from 6% to 15%.............. 6,524,000
- -- ---------
Present value of minimum lease payments............................................ 4,772,000
Less: Current portion............................................................. 17,000
-----------
Long-term portion.................................................................$ 4,755,000
===========
F-19
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999 the total of such purchase orders was $5,923,000.
The Company has entered into sales contracts under which the customer may
require the Company to repurchase equipment at specified dates and specified
prices. The Company records the proceeds from such sales contracts as deferred
lease income. The difference between the sale contract amount and the repurchase
obligation is recognized as revenue over the period of the repurchase
obligation. The remaining repurchase obligation is recorded as a sale if and
when the customer does not exercise the repurchase option. At July 31, 1999,
repurchase obligations aggregated $5,602,000.
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 will consist of $600,000 in cash
from insurance proceeds and $1,900,000 in shares of Western Power common stock
owned by the Company. When the Western shares are distributed to the
stockholders, the Company will no longer own greater than 50% of Western, and
will account for Western using the equity method. In addition, on June 1, 1999
the derivative action was also settled for $2,800,000 which amount is payable by
Robert M. Rubin to the Company. This settlement consists of $1,100,000 from Mr.
Rubin's assignment of his rights to certain consulting payments from Hutchinson
Corporation and the transfer by Mr. Rubin to the Company of $1,700,000 of cash,
securities and notes in a brokerage account. Both settlement agreements were
approved by the court on August 23, 1999 and the settlements have been reflected
in the financial statements as of July 31, 1999. All amounts due from Mr. Rubin
to the Company pursuant to the derivative action settlement were received by
November 12, 1999 except for the Hutchinson payments, the receipt of which is
conditioned upon shareholder approval of the Hutchinson Transaction.
11. STOCK OPTION PLANS
The 1991 Employee Incentive Stock Option Plan (The "1991 Stock Option
Plan")
Key employees of the Company can receive incentive options to purchase an
aggregate of 750,000 shares of common stock at initial exercise prices equal to
100% of the market price per share of the Company's common stock on the date of
grant. The 1991 Stock Option Plan was approved by the Board of Directors and
shareholders in June 1991 and became effective from May 21, 1991. In the fiscal
year ending July 31, 1997, 126,550 options were granted to the principal
shareholder under this plan. No additional options were issued under this plan
in the fiscal years ending July 31, 1999 and 1998.
F-20
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1996 Employee Stock Option Plan (The "1996 Plan")
In April 1996, the Company's Board of Directors authorized and approved the
creation of the 1996 Plan for which two million shares of the Company's common
stock has been reserved. Concurrent with the 1996 Plan's adoption, options to
acquire 800,000 shares at an exercise price of $3.78 per share were granted to
the Company's principal shareholder and management. In May, 1996 options to
acquire an additional 250,000 shares at an exercise price of $5.25 were granted
to two other employees. All exercise prices represented the fair market value of
the Company's common stock on the date of grant. Options for 100,000 shares
granted at $5.25 have been canceled and options for 126,550 shares issued to the
principal shareholder at an exercise price of $3.78 have been canceled. The
250,000 shares issued to two other employees have been cancelled.
There were no additional options issued under the 1996 plan for the years
ending July 31, 1999 and 1998. During the year ended July 31, 1997, a total of
605,000 options were granted to employees under the 1996 Plan at prices ranging
from $4.375 to $5.125. All exercise prices represented the fair market value of
the Company's common stock on the date of grant. These options generally vest
one third upon issuance and one-third upon the first and second anniversary date
of the issuance. The life of the options issued under the 1996 plan is five
years from the date of the grant.
During the year ending July 31, 1998, certain of the consultants exercised
warrants at a price of $6.30, which resulted in the issuance of 57,600
additional shares of common stock and 57,600 publicly traded warrants.
Additionally, 50,000 options were exercised at a price of 4.75 resulting in the
issuance of 50,000 shares of common stock.
Pursuant to the acquisition of Connectsoft Inc., the Company granted
300,000 options at a price of $6.625. At July 31, 1999, a total of 15,000 of
these options remain outstanding. The decrease is due to the cancellation of
285,000 options.
Pursuant to the terms of a settlement agreement the Company issued 150,000
options in fiscal 1998 to non-employees resulting in a $300,000 charge which was
accrued in 1997, representing their estimated fair value using the Black Scholes
method of option valuation.
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.
F-21
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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, 1996 1,705,000 $5.07
Options granted 3,015,000 5.79 $3.032
Options exercised (236,000) 3.57
Options canceled (346,000) 5.39
-------- ----
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 4.55
Options granted - - -
Options exercised - -
Options canceled (190,000) 5.50
-------- ----
July 31, 1999 1,682,000 $4.48
========= =====
F-22
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes stock options outstanding and exercisable
for the Company at July 31, 1999:
OUTSTANDING EXERCISABLE
----------- -----------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Exercise Price Range Shares Life Price Shares Price
- -------------------- ------ ---- ----- ------ -----
$3.13 to 3.78 857,000 1.8 $3.64 857,000 $3.64
$4.38 to 4.75 175,000 2.8 4.38 175,000 4.38
$5.13 to 5.50 407,000 2.2 5.16 407,000 5.16
$6.00 to 6.63 243,000 2.5 6.37 243,000 6.37
$3.13 to 6.63 1,682,000 2.0 4.48 1,682,000 $4.48
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123. "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for options
granted to employees and directors. 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 1999 and fiscal 1998 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,
1999 1998
---- ----
Net loss, as reported...................................... $ (3,065,000) $ (9,615,000)
Net loss, pro forma........................................ $ (3,202,000) $ (10,284,000)
Net basic and diluted loss per share, as reported.......... $ (0.26) $ (0.85)
Net basic and diluted loss per share, pro forma............ $ (0.47) $ (0.91)
F-23
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
1999 1998
---- ----
Expected volatility........................ .79 .79
Risk-free interest rate.................... 6.11% 6.11%
Expected life of options in years.......... 5.0 5.0
Expected dividend yield.................... 0.00% 0.00%
12. INTANGIBLE ASSETS
Intangible and other assets consist of the following:
JULY 31,
1999 1998
---- ----
Goodwill ..................................$ 2,952,000 $ 3,044,000
Non-compete agreement...................... - 42,000
Other assets............................... - 527,000
--------- ----------
$ 2,952,000 $ 3,613,000
========= ==========
Goodwill is amortized over lives ranging from 20 to 40 years and the
non-compete agreement is amortized over 2 years.
F-24
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES INTANGIBLE ASSETS
The Company paid interest of $5,482,000, $5,221,000 and 4,307,000 during
the fiscal years 1999, 1998, and 1997, respectively. The Company received an
income tax refund of $834,000 during fiscal 1999, and paid $1,097,000 and
$1,621,000 in income taxes, net of refunds, during fiscal 1998 and 1997,
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.
In July 1997 a capital lease obligation of $292,000 was incurred by Western
when they entered into a lease for computer equipment and software.
In June 1997 a capital lease obligation of $680,000 was incurred by Western
when they entered into a 20 year lease for the Kent, Washington 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.
Capital lease obligations of $356,000 were incurred during the year ended
July 31, 1997 when the Company entered into various leases for computer hardware
and software.
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 lease.
F-25
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 9) 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.
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.
F-26
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 is 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 is 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.
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.
F-27
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
agreement were formally assigned to the Company as part of the derivative action
settlement. Shareholder approval of the Hutchinson transaction is required in
order for the Company to receive these payments and a proposal calling for such
approval will be included in the fiscal 1999 proxy and voted upon at the fiscal
1999 shareholders' meeting.
As of July 31, 1998 the Company owned 50,000 shares of common stock in a
publicly traded company that Mr. Rubin serves as a director and holds a minority
interest.
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 1999, 1998 or 1997.
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:
F-28
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business Component Year Ended Year Ended Year Ended
Net Revenues July 31, 1999 July 31, 1998 July 31, 1997
- ------------ ------------- ------------- -------------
Equipment Sales $ 98,450 $112,061 $102,349
Equipment Rental 25,771 13,389 12,464
Product Support 39,429 38,028 33,317
------ ------ ------
Totals $ 163,650 $163,478 $148,130
========= ======== ========
Gross Margins
Equipment Sales $2,591 $8,334 $7,172
Equipment Rental 5,017 3,555 2,046
Product Support 6,986 7,287 6,652
----- ----- -----
Totals $14,594 $19,176 $15,870
======= ======= =======
F-29
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999 $726,000 $732,000 $ --- $(734,000) $724,000
Fiscal year ended July 31, 1998 807,000 825,000 --- (906,000) 726,000
Fiscal year ended July 31, 1998 652,000 875,000 285,000 (1,005,000) 807,000
Inventory Reserve:
Fiscal year ended July 31, 1999 2,833,000 884,000 --- (1,204,000) 2,513,000
Fiscal year ended July 31, 1998 1,597,000 1,734,000 --- (498,000) 2,833,000
Fiscal year ended July 31, 1997 1,212,000 598,000 --- (293,000) 1,597,000
F-30
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, 1999. 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 59 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 56 Executive Vice President, Chief Operating
Officer and Director
David M. Barnes 56 Vice President of Finance, Chief Financial
Officer and Director
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, 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 both
Western and IDF, a publicly held company of which the Company is a minority
stockholder. The Company owns approximately 60.6% of the outstanding common
stock of Western. Mr. Rubin owns approximately 13% of the fully-diluted IDF
common stock. Mr. Rubin is also a director and minority stockholder of Diplomat
Direct Marketing Corporation, 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.
33
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 functioned as the chief financial officer
of the Company since May 15, 1996, and has been a director since November 8,
1996. Mr. Barnes is also presently the chief financial officer of Nextron
Communications, a privately-held Internet yellow pages designer and developer
based in San Jose, CA, and of Interactive Imagination, Inc., a privately-held
start-up video game developer based in Seattle, WA. Mr. Barnes served as a
Director of Universal Self Care, Inc., a distribution and retailer of products
and service principally for diabetes from May 1991 to June 1995. Mr. Barnes is 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 has been Executive Vice President of the Company
since April 15, 1996. 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). From January 1991 through December 1993, Mr. Katz
was the President of Katlaw Construction Corp., a company that provides general
contractor services to foreign embassies and foreign missions located in the
United States. Prior to joining Katlaw Construction Corp., Mr. Katz was employed
as a management consultant by Coopers and Lybrand, LLP and as a divisional
controller for several large public companies.
34
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 1999 375,000 -0- -0- -0- -0- -0- -0-
Chairman, 1998 350,000 -0- -0- -0- -0- -0- -0-
President and 1997 325,000 -0- -0- -0- -0- -0- -0-
Chief Executive
Officer
Howard Katz 1999 91,738 -0- -0- -0- -0- -0- -0-
Executive Vice- 1998 197,000 -0- -0- -0- -0- -0- -0-
President and 1997 131,968 -0- -0- -0- 200,000 -0- -0-
Director
David M. Barnes 1999 127,000 -0- -0- -0- -0- -0- -0-
Chief Financial 1998 156,000 -0- -0- -0- -0- -0- -0-
Officer and 1997 129,807 -0- -0- -0- 100,000 -0- -0-
Director
C. Dean McLain (1) 1999 290,000 -0- -0- -0- -0- -0- -0-
Executive Vice 1998 280,000 68,935 -0- -0- -0- -0- -0-
President and 1997 268,587 18,658 -0- -0- -0- -0- -0-
Director;
President of
Western
(1) Paid by Western.
35
STOCK OPTION PLANS
Option Grants in Fiscal Year 1999
No options were issued in fiscal year 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 of unexercised
options held by each such person.
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- 560,000 $0
Howard Katz -0- -0- 350,000 $0
David Barnes -0- -0- 200,000 $0
C. Dean McLain -0- -0- 233,000 $0
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. The Restated Agreement also provides for incentive bonuses to be paid to
Mr. Rubin of (i) $75,000 on November 1, 1997, if the net income (the
"Consolidated Net Income") of the Company, including all of its consolidated
subsidiaries other than Western, as determined by the Company's independent
auditors using generally accepted accounting principles, consistently applied,
is greater than or equal to $2,000,000 for Fiscal 1997; (ii) $100,000 on
November 1, 1998 if the Consolidated Net Income is greater than or equal to
$2,500,000 for Fiscal 1998; and (iii) $125,000 on November 1, 1999 if the
Consolidated Net Income is greater than or equal to $3,000,000 for Fiscal 1999.
Incentive compensation for each of the fiscal years ending July 31, 2000 and
July 31, 2001 shall be as determined by the Compensation Committee of the
Company's Board of Directors and ratified by a majority of the entire Board of
Directors (other than Mr. Rubin).
36
Following the amendment of Mr. Rubin's employment agreement with the
Company, which is now in effect as the Restated Agreement, Western entered into
a separate employment agreement with Mr. Rubin, effective June 14, 1995 and
which expired on July 31, 1998. Pursuant to such agreement, Mr. Rubin served as
Chairman of the Board of Western and received an annual base salary of $150,000,
payable at the rate of $12,500 per month from the effective date of such
agreement. In addition to his base annual salary, Mr. Rubin shall be entitled to
receive an annual bonus equal to $50,000 per annum, payable only in the event
that the "consolidated pre-tax income" of Western (as defined below) shall be in
excess of $3,000,000 for the fiscal year ending July 31, 1996, $3,500,000 for
the fiscal year ending July 31, 1997, and $4,000,000 for the fiscal year ending
July 31, 1998, respectively. Under the terms of his employment agreement with
Western, Mr. Rubin is only obligated to devote a portion of his business and
professional time to Western (estimated at approximately 20%). The term
"consolidated pre-tax income" is defined as consolidated net income of the
Company and any subsidiaries of Western subsequently created or acquired, before
income taxes and gains or losses from disposition or purchases of assets or
other extraordinary items.
John Shahid
John Shahid is the former president, Chief Executive Officer and director
of the Company. Upon the closing of the Hutchinson Transaction on January 19,
1996, the Company entered into a termination agreement with Mr. Shahid whereby
he resigned as an officer and director of the Company and its subsidiaries and
received severance payments totaling $815,833. These payments represented salary
payments under his employment agreement through December 31, 1998, as well as a
bonus payment for Fiscal1996 in the amount of $90,000. This agreement also
provided that the Company retained Mr. Shahid as a consultant for two years
ending April 1, 1998, for which he was paid an aggregate of $200,000 in equal
quarterly installments.
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 and $290,000 per annum in Fiscal 1999 and will receive $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.
37
Under the terms of his amended employment agreement, the 150,000 stock
options exercisable at $6.50 per share awarded in March 1995 to Mr. McLain under
Western's 1995 Stock Option Plan were canceled and on August 1, 1995 Mr. McLain
was granted options to purchase 300,000 shares of Western common stock at $6.00
per share, the closing sale price of the Company's common stock on August 1,
1995. These options were subsequently repriced at $4.50 per share in December
1995. The grant of all stock options to Mr. McLain pursuant to his amended
employment agreement was ratified at Western's 1995 Annual Meeting. In the event
that Western does not meet the accumulated consolidated pre-tax income levels
described above, Mr. McLain shall still be entitled to options to purchase the
125,000 Western shares should the accumulated consolidated pre-tax income of
Western for the five years from Fiscal 1996 through and including Fiscal 2000
equal or exceed $16,000,000. In the event such additional incentive stock
options become available to him, Mr. McLain may exercise such options during the
nine -year period ending July 31, 2005 at $4.50 per share. Mr. McLain's
employment agreement also provides for fringe benefits as are customary for
senior executive officers in the industry in which the Company operates,
including medical coverage, excess life insurance benefits and use of an
automobile supplied by the Company.
Prior to the Western IPO, C. Dean McLain served as President and Chief
Executive Officer of Western and Executive Vice President of the Company
pursuant to the terms of an employment agreement with the Company effective
March 1, 1993, which was to terminate on July 31, 1998. Such agreement entitled
Mr. McLain to scheduled increases in his base salary up to $172,300 per year
during the fiscal year ending July 31, 1998. The terms of such employment
agreement also provided for the issuance to Mr. McLain of an aggregate of 20,000
shares of the Company's Common Stock at $.01 per share. In addition, Mr. McLain
received options to acquire an aggregate of 45,000 shares of the Company's
Common Stock at fair market value ($4.75 per share) on the date of grant under
the Company's 1991 Stock Option Plan, and additional options under the Company's
1991 Stock Option Plan to purchase 150,000 shares of Company Common Stock at
fair market value ($5.50 per share) on the date of grant. These options have
since been repriced to $3.125 per share.
Howard Katz
Howard Katz is an Executive Vice President and a director of the Company.
Mr. Katz is presently receiving severance payments of approximately $75,000
annually, plus benefits, under a severance agreement which provides for payments
over a three-year period ending July 31, 2001. 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 through July 31, 1998.
David M. Barnes
David M. Barnes is a director of the Company and functions as its Chief
Financial Officer. In Fiscal 1999 Mr. Barnes received a base salary of $50,000
plus severance payments aggregating $75,000 and certain executive benefits. In
Fiscal 2000 Mr. Barnes will continue in these capacities with a base salary of
$75,000 plus certain executive benefits. Between May 15, 1996 and July 31, 1998
Mr. Barnes served as the Company's Chief Financial Officer and received an
annual salary of $150,000.
38
Amended Employee Stock Option Plans
In December 1995, the Company amended each of its then-outstanding employee
stock option plans in anticipation of the consummation of the Hutchinson
Transaction. Under the original terms of the plans, all options granted to
employees would have terminated within ninety days of such employees'
termination of employment with the Company or any of its subsidiaries. The
amended plans extended the options' expiration dates and permitted all options
to vest upon consummation of the Hutchinson Transaction. As a majority of the
Company's employees, other than those of Western, were to be terminated upon the
consummation of the Hutchinson Transaction, the Company felt that it was in its
best interests to so amend the Plans. All of these options granted under the
Plans were exercisable through January 19, 1998 (two years after the closing
date of the Hutchinson Transaction) at which time any unexercised options held
by terminated employees expired, and options held by retained Company employees
reverted back to their old vesting terms and original expiration dates. One
effect of these amendments is to change the federal income tax treatment of
incentive options held by non-employees of the Company, such that upon exercise,
these options shall be treated as non-qualified stock options for tax purposes.
As a result of such option exercise period extension, the Company incurred an
additional compensation expense for the fiscal year ended July 31, 1996 in the
amount of $332,293. Such amount is equal to the product of the number of options
whose exercise periods were extended and the aggregate difference between the
exercise price of each "extended" option and the closing bid price of the Common
Stock on January 19, 1996 (the closing date of the Hutchinson Transaction and
the effective date of the option extension).
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.
Mr. Rubin's annual compensation, identified in the Summary Compensation
Table, was determined by his employment agreements executed in August 1994, and
his amended and restated employment agreement dated as of June 3, 1996, which
were both approved by the Board of Directors. In June 1995, following completion
of Western's IPO, Mr. Rubin's 1994 employment agreement with the Company was
amended to (i) eliminate his guaranteed annual bonus, and (ii) limit his annual
incentive bonus to $50,000 for each of Fiscal 1996 and Fiscal 1997, and make it
payable only if Consolidated Net Income of the Company exceeded $1,500,000 in
each fiscal year. For information concerning Mr. Rubin's June 1996 amended and
restated employment 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."
During Fiscal 1998 and Fiscal 1999, other than Messrs. Rubin and McLain,
who during such time were officers and members of the Board of Directors, no
officers or employees of the Company or any subsidiary participated in the
Board's compensation decisions. In Fiscal 1998 and Fiscal 1999, other than Mr.
Rubin, no Compensation Committee member was an officer or employee of the
Company or any of its subsidiaries. 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 Company's Audit, Compensation and Stock Option
Committees are presently each comprised of Messrs. Rubin and Katz.
39
No director of the Company is paid to attend Board meetings, although they
are reimbursed for their actual expenses.
Upon the closing of the Hutchinson Transaction in January 1996, the
Company, Robert Rubin and Hutchinson (as guarantor) entered into a five-year
Non-Competition Agreement in favor of Hutchinson and its affiliates, pursuant to
which Mr. Rubin and the Company agreed not to compete with the businesses
acquired in the Hutchinson Transaction. Under the terms of the Non-Competition
Agreement, Mr. Rubin is to receive payments aggregating $200,000 over a seven
year period. In addition, at the Closing Hutchinson engaged Mr. Rubin as a
consultant to provide advisory services relating to the acquired manufacturing
business over a seven year period, for which services Mr. Rubin was to receive
payments aggregating $1,000,000. Such payments are pledged as collateral by Mr.
Rubin for his $1,200,000 loan. No payments have or will be made to Mr. Rubin
under his agreements with Hutchinson, unless and until the Hutchinson
Transaction and such payments are ratified by the Company's stockholders at a
special Meeting or any subsequent special or annual meeting of Company
stockholders. These payments are also necessary to effectuate the settlement of
the Derivative Action.
Transactions with Diplomat Corporation
On February 9, 1996, the Company loaned an aggregate of $450,000 to
Diplomat Corporation ("Diplomat") in connection with Diplomat's acquisition of
BioBottoms, Inc. Diplomat is a public company of which Robert Rubin serves as a
director. Before the BioBottoms transaction, Mr. Rubin held approximately 22% of
Diplomat's outstanding capital stock. Such loan (i) bears interest at the prime
rate of CoreStates Bank, N.A. plus 2% and is payable monthly, (ii) is
subordinated to a $2,000,0000 revolving credit loan agreement between Diplomat
and Congress Financial Corporation, (iii) is payable in full on or before May 4,
1996 and (iv) is secured by a second priority lien in all of the assets of
Diplomat and its wholly-owned subsidiary, BioBottoms, Inc. The loan was repaid
in full in May 1996. In addition to repayment of principal and its receipt of
accrued interest, the Company received a facilities fee of $50,000.
Transactions with ERD Waste Corp.
The Company has 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.
Robert M. Rubin, the Chairman and Chief Executive Officer and a principal
stockholder of the Company, is 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.
40
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.
41
In February 1997, the Company advanced an additional $500,000 to ERD,
payable on demand (the "Advance Loan").
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 has agreed to personally indemnify the Company for the first $1,600,000 of
such loss.
The Company's 1996 Stock Option Plan
As of November 1, 1999, the directors and executive officers listed below
hold outstanding non-qualified options to acquire shares of Common Stock granted
under the Company's 1996 Stock Option Plan, adopted on April 25, 1996 and
amended as of July 30, 1996 (the "1996 Plan"), as follows:
Recipient Date of Grant Number of Options (3) Exercise Price (1)(2)
- --------- ------------- --------------------- ---------------------
Robert M. Rubin April 25, 1996 450,000 $3.78125
October 4, 1996 30,000 $5.125
C. Dean McLain April 25, 1996 150,000 $3.78125
Howard Katz April 25, 1996 150,000 $3.78125
October 4, 1996 100,000 $5.125
May 21, 1997 100,000 $4.375
David M. Barnes May 15, 1996 100,000 $5.25
October 4, 1996 50,000 $5.125
May 21, 1997 50,000 $4.375
(1) The exercise prices of all options equal the average of the closing bid and
ask prices of the Common Stock as reported on the NASDAQ National Market on
the date of grant.
(2) As the market value of the Common Stock underlying options issued under the
1996 plan (measured as the average of the closing bid and ask price) on
November 4, 1999, which was $0.23 per share, none of the foregoing options
issued under the 1996 Plan (including unexercisable options) are
"In-the-money."
(3) These options are fully exercisable.
42
On July 30, 1996, the Board of Directors amended the terms of the 1996
Stock Option Plan to make all options granted thereunder exercisable without
stockholder approval. On that date the market price of the Company's Common
Stock was $6.0125 per share. As a result of the amendment, the Company incurred
a compensation charge equal to $1,670,667, representing the aggregate value of
such unexercised in-the-money (i.e., options for which the market price of the
underlying Common Stock is above the exercise price) options issued under such
option plan (including unexercisable options) to the named persons.
All options granted to each of Messrs. Rubin and McLain in April 1996, and
100,000 options granted to Mr. Katz at $5.125 per share in October 1996, were
immediately exercisable. The options granted to Mr. Barnes in May 1996 and the
remaining 150,000 options granted to Mr. Katz are fully vested. The options to
acquire 156,550 shares granted to Mr. Rubin and 50,000 shares granted to Mr.
Barnes in October 1996 are fully vested.
In June 1996, the Company agreed to loan Mr. Rubin up to $1,200,000, at an
interest rate equal to one percent above the fluctuating Prime Rate offered by
Citibank, N.A. All borrowings under the loan are repayable on demand and in no
event later than July 31, 1998. Mr. Rubin's indebtedness is secured by his
pledge of 150,000 shares of Common Stock and his assignment of all payments due
to him under his Consulting Agreement and Non-Competition Agreement with
Hutchinson, which currently aggregate $1,200,000.
Mr. Rubin is currently a director of IDF and owns 874,659 shares of IDF
common stock, representing approximately 13.0% of the currently 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. Subsequent
the IDF Merger, Mr. Rubin has served as Chairman of the Board of Directors of
IDF and has also received a three year employment agreement from IDF at an
annual salary of $75,000.
The Company has agreed to provide up to $1,000,000 in 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, an IDF subsidiary, and
costs related to the discontinuation of operations of TechStar. The Company has
now taken a full reserve against the $992,000 in advances to IDF due to IDF's
significant decrease in revenue and its inability to obtain further financing,
which have made recovery uncertain.
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.
The Company's 1991 Stock Option Plan
As of November 1, 1999 certain directors and executive officers of the
Company hold outstanding non-qualified options granted under the Company's 1991
Stock Option Plan (the "1991 Plan") to acquire an aggregate of 289,550 shares of
Common Stock.
The Company granted to Mr. McLain options to purchase 38,000 shares of
Common Stock at $3.125 per share and options to purchase 45,000 shares of Common
Stock at $4.875 per share, under the 1991 Plan. All such options are fully
exercisable.
The Company granted to Mr. Rubin options to purchase 80,000 shares of
Common Stock at $3.125 per share and options to purchase 126,550 shares at
$5.125 per share. All such options are fully exercisable.
43
Compensation Committee Report On Executive Compensation
The Board of Directors 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. During Fiscal 1998, Messrs.
Rubin and McLain were both under contract with the Company (Mr. McLain was no
longer under contract as of and since July 23, 1998). 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 is the
Company's only senior executive officer employed under a contract approved by
the full Board of Directors. See "Executive Compensation-Employment, Incentive
Compensation and Termination Agreements." Upon the effective date of the Western
IPO Mr. McLain's employment agreement was terminated. Mr. Shahid's employment
agreement was terminated upon consummation of the Hutchinson Transaction. See
"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, 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 the most recent
fiscal year, which ended July 31, 1999.
44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of November 1, 1999
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 782,798 (2)(3)(7)(9) 6.3
Executive Officer
C. Dean McLain Director, Executive 233,000 (4)(5) 1.9
4601 N.E. 77th Avenue Vice-President and
Suite 200 President of Western
Vancouver, WA 98662 Power and Equipment Corp.
("Western")
Howard Katz Executive Vice President 350,000 (6)(8) 2.9
and
Director
David M. Barnes Vice President of Finance 200,000 (6)(8) 1.6
and Director (6)(8)
Rubin Family Irrevocable
Stock Trust 1,025,000(7) 8.8
25 Highland Blvd. --------- ------
Dix Hills, NY 11746
All Directors and Executive 1,565,798 (2)(3)(5)(6)(9) 11.8
========= ====
Officers as a Group (4 persons)
45
* Unless otherwise indicated, the address of each such beneficial owner is
11130 NE 33rd Place, Bellevue, WA 98004.
(1) 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.
(2) Includes 222,798 shares of Common Stock owned by Mr. Rubin, and
non-qualified options to purchase 80,000 shares granted to Mr. Rubin at an
exercise price of $3.125 per share and 126,550 shares at an exercise price
of $5.125 per share issued under the Company's 1991 Stock Option Plan which
are fully exercisable.
3) Includes non-qualified options to acquire 323,450 shares granted to Mr.
Rubin under the 1996 Stock Option Plan on April 25, 1996 at an exercise
price of $3.78125 per share, the fair market value of the Common Stock on
the date of option grant. Options to acquire 30,000 shares were also
granted to Mr. Rubin on October 4, 1996 under the 1996 Stock Option Plan.
The 1996 Stock Option Plan was amended in July 1996 to make options granted
under the plan exercisable without stockholder approval. Mr. Rubin's
continuing employment by the Company is governed by the terms of his
employment agreement.
(4) Includes non-qualified options to acquire 150,000 shares granted to Mr.
McLain under the 1996 Stock Option Plan. See Note (3). Mr. McLain's
continuing employment by the Company is governed by the terms of his
employment agreement.
(5) Includes (i) options to purchase 38,000 shares of the Company's Common
Stock at $3.125 per share granted under the Company's 1991 Stock Option
Plan, (ii) options to purchase 45,000 shares of the Company's Common Stock
at $4.875 per share under the 1991 Stock Option Plan, and (iii) options to
purchase 150,000 shares of the Company's Common Stock at $3.78125 per share
granted under the 1996 Stock Option Plan, all of which are exercisable.
(6) Includes options granted to Mr. Katz under the 1996 Plan to purchase
100,000 shares at an exercise price of $5.125 per share, options to
purchase 100,000 shares at an exercise price of $4.375 per share, and
options to purchase 150,000 shares at an exercise price of $3.78125, all of
which are exercisable.
(7) Robert M. Rubin, a grantor of the Rubin Family Irrevocable Stock Trust (the
"Trust") 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."
(8) Includes options granted to Mr. Barnes to purchase 50,000 shares at an
exercise price of $4.375 per share, options to purchase 100,000 shares at
an exercise price of $5.25 per share and options to purchase 50,000 shares
at $5.125 per share, all of which are exercisable.
(9) Excludes shares of Common Stock beneficially owned by the Trust, as to
which Mr. Rubin disclaims beneficial ownership.
46
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)
10.1 Asset Purchase Agreement, dated July 10, 1998, by and among Executive
TeleCard, Ltd., American United Global, Inc., Connectsoft Communications
Corporation, Connectsoft Holding Corp., and C-Soft Acquisition Corp.*
10.2 Amendment No. 1 to Asset Purchase Agreement, dated July 30, 1998, by and
among Executive TeleCard, Ltd., American United Global, Inc., Connectsoft
Communications Corporation, Connectsoft Holding Corp., and C-Soft
Acquisition Corp.*
10.3 Amendment No. 2 to Asset Purchase Agreement, dated August _, 1998, by and
among Executive TeleCard, Ltd., American United Global, Inc., Connectsoft
Communications Corporation, Connectsoft Holding Corp., and C-Soft
Acquisition Corp.*
47
10.4 Amendment No. 3 to Asset Purchase Agreement, dated June 17, 1999, by and
among Executive TeleCard, Ltd., American United Global, Inc., Connectsoft
Communications Corporation, Connectsoft Holding Corp., and C-Soft
Acquisition Corp.*
10.5 Assignment and Assumption Agreement, dated as of June 17, 1999, by and
among Vogo Networks, LLC, Connectsoft Communications Corporation, and
Connectsoft Holding Corp.*
10.6 Certificate of Designations, Rights and Preferences of Series G Cumulative
Convertible Redeemable Preferred Stock of Executive TeleCard, Ltd.*
10.7 Form of Promissory Note payable to American United Global, Inc. in the
aggregate principal amount of $500,000.*
10.8 Form of Promissory Note payable to Connectsoft Communications Corporation
in the aggregate principal amount of $200,000.*
10.9 Registration Rights Agreement, dated as of June 17, 1999, by and between
Executive TeleCard, Ltd. and American United Global, Inc.*
10.10Security Agreement, dated as of June 17, 1999, by and between American
United Global, Inc. and Vogo Networks, LLC.*
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
48
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 12, 1999
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 12, 1999
- -------------------- Executive Officer and Director
Robert M. Rubin
/s/ C. Dean McLain Executive Vice President and November 12, 1999
- ------------------ Director
C. Dean McLain
/s/ David M. Barnes Vice President--Finance and Chief November 12, 1999
- -------------------- Financial and Chief Accounting
David M. Barnes Officer
/s/ Howard Katz Executive Vice President and November 12, 1999
- ------------------- Director
Howard Katz
49
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)
10.1 Asset Purchase Agreement, dated July 10, 1998, by and among Executive
TeleCard, Ltd., American United Global, Inc., Connectsoft Communications
Corporation, Connectsoft Holding Corp., and C-Soft Acquisition Corp.*
10.2 Amendment No. 1 to Asset Purchase Agreement, dated July 30, 1998, by and
among Executive TeleCard, Ltd., American United Global, Inc., Connectsoft
Communications Corporation, Connectsoft Holding Corp., and C-Soft
Acquisition Corp.*
10.3 Amendment No. 2 to Asset Purchase Agreement, dated August _, 1998, by and
among Executive TeleCard, Ltd., American United Global, Inc., Connectsoft
Communications Corporation, Connectsoft Holding Corp., and C-Soft
Acquisition Corp.*
10.4 Amendment No. 3 to Asset Purchase Agreement, dated June 17, 1999, by and
among Executive TeleCard, Ltd., American United Global, Inc., Connectsoft
Communications Corporation, Connectsoft Holding Corp., and C-Soft
Acquisition Corp.*
10.5 Assignment and Assumption Agreement, dated as of June 17, 1999, by and
among Vogo Networks, LLC, Connectsoft Communications Corporation, and
Connectsoft Holding Corp.*
10.6 Certificate of Designations, Rights and Preferences of Series G Cumulative
Convertible Redeemable Preferred Stock of Executive TeleCard, Ltd.*
10.7 Form of Promissory Note payable to American United Global, Inc. in the
aggregate principal amount of $500,000.*
10.8 Form of Promissory Note payable to Connectsoft Communications Corporation
in the aggregate principal amount of $200,000.*
10.9 Registration Rights Agreement, dated as of June 17, 1999, by and between
Executive TeleCard, Ltd. and American United Global, Inc.*
10.10Security Agreement, dated as of June 17, 1999, by and between American
United Global, Inc. and Vogo Networks, LLC.*
21 Subsidiaries of the Company*.
27 Financial Data Schedule*
50
(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
51