Back to GetFilings.com
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1996
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)
Registrant's telephone number, including area code (206)803-5400
Securities registered pursuant to Section 12(b) of the Exchange Act
Title of Each Class Name of Each Exchange of 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 7, 1996 was $48,989,100.
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 6, 1996 was 7,266,382 shares.
Documents incorporated by reference: None
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
American United Global, Inc., a Delaware corporation (the "Company"),
through its operating subsidiaries, is engaged in two distinct businesses; a
technology business and a distribution business.
The Company's technology business provides computer software and
networking as well as telecommunications products and services. Such products
and services currently consist of:
(a) a remote access connectivity software protocol, known as
Nterprise(TM),
which allows users to run Microsoft Windows(TM) applications, such as
Word(TM), Excel(TM) and PowerPoint(TM), on existing UNIX workstations,
X-terminals and other X-compatable devices;
(b) an electronic mail communications management software product,
marketed as EMail ConnectionR, and an e-mail product and Internet browser
designed for children, marketed as E Mail for Kids(TM) and Kids Web(TM);
(c) providing network engineering, design and consultation services;
network security; remote network management and monitoring as well as
Intranet development; and
(d) 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 has also entered into a letter of intent to acquire businesses
which provide site acquisition, zoning, architectural and engineering services
to the wireless communications industry.
The Company's distribution business consists of the sale, service and
leasing, as a retail distributor, of light and medium-sized construction
equipment, parts and other products manufactured principally by Case
Corporation. Such distribution business operates through the Company's
56.6%-owned subsidiary, Western Power & Equipment Corp., a Delaware corporation
("Western"). Western principally operates as an authorized Case Corporation
("Case") dealer through 19 retail distribution facilities located in the States
of Washington, Oregon, California and Nevada. The construction equipment
distributed by the Company is used in the construction of residential and office
buildings, roads, levees, dams, underground power projects, forestry projects,
municipal construction and other construction projects.
Prior to January 1996, the Company also operated a manufacturing business
through two operating subsidiaries: (i) the National O-Ring division of American
United Products, Inc., a California corporation ("AUP"), which manufactured and
distributed standard-size, low cost synthetic rubber o-ring sealing devices for
use in automotive and industrial applications and (ii) the Stillman Seal
division of American United Seal, Inc., a California corporation ("AUS"), which
specialized in the design, manufacture and distribution of rubber-to-metal
bonded sealing devices for use in commercial, aerospace, defense and
communications industry applications.
2
On January 19, 1996, the Company sold all of the operating assets of the
manufacturing business. See, "History and Recent Acquisitions," below.
History and Recent Acquisitions
The Company was initially organized as a New York corporation on June 22,
1988 under the name Alrom Corp. ("the Company"), and completed an initial public
offering of securities in August 1990. Effective on May 21, 1991, the Company
acquired by merger American United Global, Inc., a California corporation
("AUG"), and the AUP and AUS wholly-owned operating subsidiaries of AUG (the
"AUG Merger"). As a result of the AUG Merger, AUG became the wholly-owned
subsidiary of the Company, and the former shareholders of AUG gained control of
the Company through the ownership of approximately 78% of the then outstanding
Company Common Stock. Prior to the AUG Merger, the Company had no operations.
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.
Effective June 1, 1992, through a wholly-owned subsidiary, the Company
acquired substantially all of the assets of Aerodynamic Engineering, Inc.
("Aero") and certain assets owned and used by Aero, a company engaged in the
business of precision machining metal parts for the aerospace and defense
industries. The Company sold the assets of its AEI subsidiary on April 29, 1994.
Effective November 1, 1992, the Company's newly-formed Western subsidiary
completed the acquisition from Case of certain assets used in connection with
seven separate Case retail construction equipment distribution operations
located in the States of Washington and Oregon.
Effective September 10, 1994 Western purchased from Case two retail
construction equipment distribution outlets located in Sparks, Nevada and
Fremont, California. In December 1994 Western relocated the Fremont outlet to
Hayward, California. Under the terms of the 1994 Case transaction, Western was
obligated to open two additional distribution outlets in Northern California. In
March 1995 Western opened a retail store in Santa Rosa, California. In August
1995 Western opened a retail store in Salinas, California. See Part II, Item 7,
"Management's Discussion and Analysis of Results of Operations and Liquidity and
Capital Resources--Liquidity and Capital Resources."
In June 1995 Western completed an initial public offering of 1,495,000
shares of its common stock. This public offering reduced the Company's interest
in Western to 56.6%.
In January 1996, the Company and each of its AUG, AUP and AUS
subsidiaries, sold all of the assets of the National O-Ring and Stillman Seal
businesses comprising the manufacturing business of the Company to, and
substantially all of the liabilities associated with operation of such
manufacturing business were assumed by, subsidiaries of Hutchinson Corporation
("Hutchinson"). A subsidiary of Total America, Inc., a New York Stock Exchange
3
listed company ("Total"), Hutchinson produces a variety of rubber related
products for three market sectors; automotive, consumer and industrial use.
The purchase price paid by Hutchinson for the manufacturing business was
$24,500,000, $20,825,000 of which was paid in cash and the aggregate $3,675,000
balance was paid by delivery of two 24-month non-interest bearing promissory
notes. The Hutchinson notes, which have been discounted for financial statement
presentation by $638,000, are guaranteed by Total.
Following the sale of its manufacturing business, the Company's Board of
Directors and senior management sought to refocus the business direction of the
Company and determined that stockholder value could best be enhanced by entering
the computing and telecommunications industries. As a result, the Company
embarked upon an acquisition program and, between May and November 1996,
acquired three companies and contracted to acquire a fourth. The terms of such
acquisitions are summarized as follows:
Effective as of May 1, 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.
("ConnectSoft"), a private company located in Bellevue, Washington, which
provides a variety of computer software products and services. In connection
with the ConnectSoft Merger, ConnectSoft shareholders received, on a pro rata
basis, an aggregate 972,351 shares of the Company's Series B 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 Common Stock and votes together with the Company Common Stock as a
single class on a one share for one vote basis. Each share of Preferred Stock is
convertible into shares of Company Common Stock at the holder's option into a
minimum of 972,351 shares of Company Common Stock and a maximum of 2,917,053
shares of Company Common Stock, based upon certain criteria. The Preferred Stock
may be converted into shares of Company Common Stock as follows:
(i) Each share of Preferred Stock may be converted, at any time,
into one share of Company Common Stock (a minimum of 972,351 shares of such
Common Stock if all such shares of Preferred Stock are so converted);
(ii) In the event that the "Combined Pre-Tax Income" (as defined) of
any or all of the "Subject Entities" (as defined) in any one of the three fiscal
years ending July 31, 1997, July 31, 1998, or July 31, 1999 (each a "Measuring
Fiscal Year" and collectively, the "Measuring Fiscal Years"):
(a) shall equal or exceed $3,000,000, each share of Preferred
Stock may be converted into two shares of Company Common Stock (a
maximum of 1,944,702 shares of such Common Stock if all such
shares of Preferred Stock are so converted); or
4
(b) shall equal or exceed $5,000,000, each share of Preferred
Stock may be converted into three shares of Company Common Stock
(a maximum of 2,917,053 shares of such Common Stock if all such
shares of Preferred Stock are so converted).
The "Subject Entities" include ConnectSoft and its consolidated subsidiaries (if
any) and eXodus Technologies, Inc., a direct 75%-owned subsidiary of the Company
("eXodus") which has developed and is marketing the Nterprise remote access
connectivity software originated by ConnectSoft. The 25% of eXodus not owned by
the Company is held by current management and employees of eXodus, some of whom
were pre-ConnectSoft Merger shareholders of ConnectSoft. Such persons waived
their right to receive shares of Preferred Stock in the ConnectSoft Merger in
consideration of their receipt of shares of eXodus. The Company intends to
change the name of eXodus to Extare Technologies, Inc.
The ConnectSoft Merger Agreement also provides that each share of
Preferred Stock may be converted into three shares of Company Common Stock,
notwithstanding the levels of Combined Pre-Tax Income achieved, in the event
that (i) the Company sells the assets or securities of any of the Subject
Entities for consideration aggregating $5,000,000 or more, (ii) the Company
consummates an initial public offering of the securities of any of the Subject
Entities (an "IPO") resulting in gross proceeds in excess of $10,000,000, or in
a market valuation for 100% of the issuer's common stock equaling or exceeding
$50,000,000, or (iii) a transaction occurs with any third party (whether tender
offer, merger, consolidation or other combination) with the result that no
shares of Company common stock will be publicly traded on The NASDAQ Stock
Market or any other national securities exchange.
Prior to consummation of the ConnectSoft Merger, the Company provided
interim working capital financing for ConnectSoft which aggregated approximately
$3.4 million, assumed all of ConnectSoft's operating expenses and liabilities,
and received proxies to vote approximately 80% of the outstanding ConnectSoft
capital stock in favor of the ConnectSoft Merger. The Company also agreed to
increase its aggregate funding commitments to ConnectSoft and its related
companies to a minimum of $5.0 million.
In September 1996, the Company acquired, through a merger with a newly
formed acquisition subsidiary of the Company (the "Interglobe Merger"), all of
the outstanding capital stock of Interglobe Networks, Inc. ("Interglobe"), a
private company providing engineering, design and consulting services for users
and providers of telecommunications facilities on the Internet and other media.
Pursuant to the terms of the Interglobe Merger, the Interglobe shareholders
received the aggregate sum of $400,000 plus an aggregate of 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 Company
Common Stock at an exercise price of $6.00 per share (the "Interglobe Options").
The Interglobe Options shall vest and be exercisable (i)
5
25% on July 31, 1997 in the event that Interglobe achieves at least $250,000 of
Pre-Tax Income (as defined) in the year ending July 31, 1997, (ii) 25% on July
31, 1998 in the event that Interglobe achieves at least $1,000,000 of Pre-Tax
Income (as defined) in the year ending July 31, 1998, (iii) 25% on July 31, 1999
in the event that Interglobe achieves at least $2,000,000 of Pre-Tax Income in
the year ending July 31, 1999, and (iv) the balance of such Interglobe Options
in the event that Interglobe achieves at least $4,500,000 of Pre-Tax Income in
the year ending July 31, 2000. Alternatively, all 800,000 Interglobe Options
shall vest if, during the period commencing upon closing the Merger and
terminating on July 31, 2000, the accumulated Pre-Tax Income of Interglobe has
equalled or exceeded $7,750,000. In the event that a change in control of the
Company occurs, or the Company effects a sale of all or substantially all of the
assets of Interglobe, prior to July 31, 2000, all of the Interglobe Options
shall immediately vest upon such occurrence. In addition, the Interglobe
agreement provides that if the Company effects a public offering of Interglobe
or a sale of Interglobe prior to July 31, 2000, the Interglobe stockholders may
elect (but shall not be required) to exchange two-thirds of all Company
securities received by them in the Interglobe Merger for an aggregate of 25% of
the common stock of Interglobe owned by the Company prior to such transaction.
Following completion of the Interglobe Merger, Artour Baganov, the
President and Chief Executive Officer of Interglobe, was appointed as a member
of the Board of Directors of the Company.
On November 8, 1996 a newly formed wholly owned subsidiary of the Company,
Seattle Online Acquisition Corp. (the "Buyer") acquired the assets of Seattle
Online, Inc. (the "Seller"), a privately owned company engaged in providing a
local internet service in the Pacific Northwest. The purchase price for the
assets was the sum of $300,000 and up to 25,000 shares of the Company's Common
Stock for use by the Seller in settlement of its debts. Keith Dieffenbach, the
President and principal stockholder of the Seller entered into a three-year
employment agreement with the Buyer, providing him an annual salary initially
set at $125,000 per year, plus a bonus based upon exceeding certain minimum
sales levels. Both Mr. Dieffenbach and the other minority stockholder of Seller
also entered into non-competition and non-disclosure agreements for the benefit
of the Seller and Buyer. In consideration for their covenants contained in such
non-competition and non-disclosure agreements, the Company issued to such
individuals three year warrants to purchase an aggregate of 333,333 shares of
the Company's Common Stock.
Of such warrants, the minority stockholder of Seller received three year
warrants to purchase an aggregate of 28,333 shares of the Company's Common Stock
at an exercise price of $6.00 per share. The balance of the warrants to purchase
305,000 shares of the Company's Common Stock were issued to Mr. Dieffenbach and
are initially exercisable at $8.50 per share, which exercise price drops to
$6.00 per share in the event that the Buyer generates net income before taxes of
at least $150,000 at the end of either the six month period ending on May 31,
1997 or the fiscal year of Acquisition ending on July 31, 1997. In the event of
a public offering of securities of the Buyer, Mr. Dieffenbach is entitled under
certain circumstances (but not required) to exchange his Company warrants and
the underlying warrant shares (to the extent
6
of prior exercise of such warrants) for shares aggregating up to 9.15% of the
common stock of the Buyer immediately prior to such initial public offering.
Finally, in the event that the Buyer generates net income before taxes of
at least $340,000 and $2,650,000 (such amounts, the "Pre-Tax Income Targets") in
the fiscal years ending July 31, 1997 and July 31, 1998 (such years, the
"Measuring Years"), respectively (or, under certain circumstances, $2,990,000 of
accumulated pre-tax income during both such fiscal years), the Company has
agreed to guaranty to Mr. Dieffenbach that, during the 90-day period commencing
October 1, 1998 and ending December 31, 1998 the average closing price of the
Company's Common Stock, as traded on the Nasdaq National Market or other
national securities exchange shall equal or exceed $6.00 per share more than the
exercise price for the unexercised warrants; failing which the Company shall
either reduce the exercise price of the warrants or repurchase the unexercised
warrants at a price to enable the holder of such warrants to make up such
difference. The aggregate dollar value of such guaranty is initially $1,830,000,
assuming that no warrants have been exercised when the guaranty is applied, but
it is subject to pro-rata increase to the extent that the Pre-Tax Income in the
two Measuring Years exceeds $2,990,000, provided that in no event shall the
guaranty amount exceed $3,660,000 irrespective of the Buyer's accumulated net
income before taxes. Conversely, if the net income before taxes of the Buyer in
each Measuring Year fails to reach the Pre-Tax Income Targets but (i) does equal
or exceed at least 50% of the Pre-Tax Income Targets for each Measuring Year and
(ii) the net income before taxes of the Buyer for its fiscal year ending July
31, 1998 is at least 80% of the net income before taxes for its fiscal year
ending July 31, 1997, then the guaranty shall still apply but shall be reduced
prorata to reflect the shortfall.
In October 1996, the Company entered into letters of intent with the
stockholders of Broadcast Tower Sites, Inc. and its affiliates (the "BTS
Companies"), pursuant to which it is contemplated that the Company will
acquire, through a merger transaction (the "BTS Merger") the BTS Companies.
The BTS Companies are engaged in providing site acquisition, zoning,
architectural and engineering services as well as consulting services, to the
wireless telecommunications industry. At the closing of the BTS Merger, it is
contemplated that the name of the BTS Companies will be changed. Such new
name has not yet been determined.
Pursuant to the terms of the proposed BTS Merger, the BTS shareholders
will receive an aggregate of 507,246 shares of Company Common Stock, certain
of which carry registration provisions, $780,000 in cash and three year
Company notes aggregating $600,000, bearing interest at the Citibank NA prime
rate and payable in installments of $100,000, $200,000 and $300,000 on each
of the three anniversary dates of the closing of the BTS Merger. The closing
of the BTS Merger is scheduled for December 1996.
In a related transaction, the Company also agreed to acquire 100% of the
capital stock of Arcadia Consulting, Inc. ("Arcadia"), a company recently formed
for the purpose of providing consulting services to clients in the wireless
telecommunications industry. The Company has agreed to pay a purchase price of
$220,000 in cash, plus a combination of shares of Company Common Stock and AUGI
notes due March 15, 1998 valued (based on the
7
estimated market price of AUGI Common Stock as traded on Nasdaq on the date of
closing of such acquisition) at between approximately $1.3 million and $1.6
million. The closing of the Arcadia acquisition is conditioned upon the
Company's acquisition of the BTS Companies, and is scheduled to occur in or
about January 1997. Following the Arcadia acquisition, Arcadia will be merged
with and into the BTS Companies.
Upon closing of the BTS Merger, the former stockholders of the BTS
Companies and Arcadia will receive three-year employment agreements with the BTS
Companies and the Company pursuant to which they will receive, in addition to
their base salaries and annual bonuses based upon performance of the BTS
Companies, options exercisable over a five year period entitling the holders to
purchase an additional aggregate 300,000 shares of Company Common Stock (the
"BTS Options"). The BTS Options shall vest and be exercisable (i) 100,000
options on November 30, 1997 in the event that the BTS Companies achieve at
least $1,800,000 of Pre-Tax Income (as defined) in the 12 months ending November
30, 1997, (ii) 100,000 options on November 30, 1998 in the event that the BTS
Companies achieve at least $2,200,000 of Pre-Tax Income (as defined) in the 12
months ending November 30, 1998, and (iii) 100,000 options on November 30, 1999
in the event that the BTS Companies achieve at least $3,000,000 of Pre-Tax
Income in the 12 months ending November 30, 1999. Alternatively, all 300,000 BTS
Options shall vest if, during the period commencing upon closing the Merger and
terminating on November 30, 1999, the accumulated Pre-Tax Income of the BTS
Companies has equalled or exceeded $6,500,000. In the event that a change in
control of the Company occurs, or the Company effects a sale of all or
substantially all of the assets of the BTS Companies, prior to November 30,
1999, all of the BTS Options shall immediately vest upon such occurrence. In
addition, the BTS Merger agreement provides that if the Company effects a public
offering of the BTS Companies or a sale of the BTS Companies prior to November
30, 2000, the former BTS Companies and Arcadia stockholders may elect (but shall
not be required) to exchange all Company securities received by them in the BTS
Merger (the "Exchange Option") for an aggregate of 16.67% of the common stock of
the BTS Companies then owned by the Company prior to such transaction.
Upon completion of the Arcadia acquisition, Solon L. Kandel, the President
and sole stockholder of Arcadia, will be employed by the BTS Companies as its
President and Chief Executive Officer, under a three year employment agreement
containing terms which are substantially identical to those provided to each of
the former stockholders of the BTS Companies, including 100,000 Options and an
Exchange Option entitling Mr. Kandel to 8.33% of the common stock of the BTS
Companies. In addition, Mr. Kandel will be nominated to serve as a member of the
Board of Directors of the Company.
8
THE TECHNOLOGY BUSINESS
General
The Company's strategy in entering the computing and telecommunications
business (the "Technology Business") is to make the Company a significant factor
in the rapidly expanding and changing businesses of (i) developing remote access
multi-user software and Internet software, (ii) Internet and Intranet
engineering, design and consulting services, and (iii) wireless
telecommunications services. Through the acquisitions of ConnectSoft, eXodus,
Interglobe and Seattle On-Line, the Company is now able to provide:
(a) a remote access connectivity software protocol which allows users to
run Microsoft Windows(TM) applications, such as Word(TM), Excel(TM) and
PowerPoint(TM), on existing UNIX workstations, X-terminals and other
X-compatable devices;
(b) an electronic mail communications management software product,
marketed as EMail ConnectionR, and and an e-mail product and Internet
browser designed for children, marketed as E Mail for Kids(TM) and Kids
Web(TM);
(c) engineering, design and consultation services to users and providers
of telecommunications facilities on the Internet and other media; and
(d) local Internet telecommunication service in the Pacific Northwest.
In the event that it consummates its acquisition of the BTS Companies in
December 1996, the Company will also be able to provide site acquisition,
zoning, architectural and engineering services to the wireless communications
industry.
Products and Services
Remote Computing for Multi-user Applications
New information technologies have enabled businesses to provide their
employees with access to business-critical information, such as sales and
customer data and financial and technical data. Many of these businesses have
made significant investments in information systems infrastructure incorporating
a variety of software operating systems, computing platforms and communications
protocols. Critical business software applications and personal computing tools
have historically been supplied by a variety of different vendors, often
resulting in incompatible systems and applications within and among company
locations. As a result, demand has increased for computing and
telecommunications systems that offer users a number of features, including a
standard interface and the ability to integrate enterprise and personal computer
applications to local and remote enterprise users.
9
Although a majority of personal productivity software is Microsoft
Windows(TM) based, with the introduction of Windows 95 and Windows NT, Microsoft
has gained industry acceptance for its 32-bit operating systems as a preferred
environment for business and enterprise applications. However, the costs
associated with purchasing separate desktop Windows compatable PC's for
literally hundreds of workstations or "seats" in a large organization are
prohibitive. Accordingly, the challenge has been to perfect a modern client-
server technology to provide access to Windows applications in a diverse
information systems multi-user business environment, which may include DOS
systems, UNIX workstations and X-Terminals, which do not support 32-bit Windows
application.
The component software solution developed essentially consists of two
principal elements: (i) multi-user software which enables the UNIX or X-Terminal
file servers to recognize the Windows 95 and Windows NT protocol (the
"Multi-user Software"), and (ii) a remote user interface technology coupled with
a client/server protocol software, or language transport, which enables the
server to communicate the Windows application to the remote workstations (the
"Remoting Software"). The principal manufacturers of Multi-user Software are
Citrix Systems, Inc. ("Citrix") and Prologue, S.A. of France ("Prologue"), both
of whom sell their products, known as WinFrame(TM) and WinTimes(TM),
respectively, under licenses from Microsoft. In addition to Citrix (which
possesses its own proprietary Remoting Software) and Prologue, the principal
producers of Remoting Software are Network Computing Devices, Inc. ("NCD"),
Insignia Solutions, Inc. ("Insignia"), Tektronix Inc. ("Tekronix") and the
Company through its eXodus subsidiary. Each of NCD, Insignia and Tektronix act
as original equipment manufacturers under separate licenses from Citrix and
market their solutions under the names WinCenterPro(TM), NTrigue(TM) and
WinDD(TM), respectively. The Company licenses the WinTimes(TM) Multi-user
Software from Prologue and markets its remoting solution as an OEM under the
name NTerprise(TM). Distribution channels include original equipment
manufacturers, direct value added resellers ("VARs") and retailers, as well as
direct sales to end-users such as major corporations or government agencies.
The Company believes that its NTerprise(TM) product possesses certain
significant advantages over the Citrix WinFrame(TM) solution and other competing
component technology, in that:
* NTerprise(TM) resides entirely on the enterprises central file
server and does not require desktop client modules to be loaded on
the user's machine, thereby permitting the users' terminals to range
from sophisticated costly workstations to inexpensive X-Terminals;
* unlike competitive products, which provide only one window for all
Windows applications, NTerprise(TM) has multi-window capabilities
which allow users to run each Windows application in its own window,
thus providing a familiar and easy to use working environment;
10
* NTerprise(TM) is not a replacement operating system for Microsoft's
Windows NT and, unlike competitive solutions, does not require the
customer to purchase a replacement proprietary NT operating system;
* NTerprise(TM) runs on different hardware-based server platforms,
such as Motorola's Power PC(TM) and Intel's Pentium Pro(TM), and,
when commercially available, is anticipated to be compatable with
Digital Equipment Corporation's Alpha and IBM's Power PC;
* unlike Citrix's propriety client/server protocol software, ICA
(Intelligent Console Architecture), which must be used with more
costly intelligent desktop computers, NTerprise(TM) uses standard
X-Terminal graphic commands for its client/server protocol and is
executed in the server only; thereby permitting the customer the
luxury of purchasing or continuing to use inexpensive or even
outdated desktop technology.
The Company is targeting users of UNIX workstations and X-Terminals as the
primary market for its NTerprise(TM) product. Its current version supports the
Windows NT 3.5 operating system. Subject to Prologue's renewal and expansion of
its recently expired license with Microsoft to include the Windows NT 4.0
operating system, the Company anticipates that an NTerprise(TM) version which
will support Window NT 4.0 will be available in the near future. In October
1996, Windows NT Magazine, an industry publication (not affiliated with
Microsoft Corporation) awarded the Company's NTerprise(TM) product the
"UNIX/Windows NT Technical Award" at the UNIX Expo Plus trade show in New York,
New York.
The Company is in the process of demonstrating its NTerprise(TM) solution
to a number of potential end-user and distributors, including Motorola. To date,
however, no firm orders have been obtained. Current pricing for a server license
is $795, and $195 per terminal or "seat" connected. A complete ten-seat license
is $1,995, consisting of a server license and a ten user license.
Retail Software
Through its ConnectSoft, Inc. subsidiary, the Company develops and sells
three retail software products. EMail Connection(R) is an electronic mail
communications management package which collects email from commercial online
sources, such as Prodigy, America Online and many other Internet access
providers. Many computer users have multiple addresses and EMail ConnectionR
simplifies collecting electronic mail. In addition, it allows encrypted message
transfers, supports SkyTel Pager communications and receives telecopier
transmissions.
The two other ConnectSoft products are children's applications - an
Internet browser product as an email product designed for children between five
and 10 years old. The email product, known as EMail for Kids(TM), has similar
features as EMail Connection(R) in that it allows access to popular online
services and the Internet. KidWeb(TM) allows children access to the
11
various Internet services and provides an easy to understand web brower using
animated characters. However, the Company believes that the unique feature of
its children's software products are that parents are capable of regulating the
content of email messages and restrict which Web pages their child can view.
Parents can create a Web "neighborhood" of pre-approved sites, and disallow
access to other Web sites deemed by them objectionable or inappropriate for
viewing. FIND S.V.P. User's Survey for 1995 calculated that approximately 6.5
million American personal computer family households purchased children's
software in 1995 and approximately 41% of all Internet users named e-mail as the
principal reason for their access to the Internet.
The Company recently began marketing its retail products through
distributors, such as Tech Deta, Micro Central and Navarre. Suggested retail
prices are EMail Connection(R) - $49.95; KidWeb(TM) - $39.95; and EMail for
Kids(TM) - $29.95.
Internet Engineering, Design and Consulting
Through its acquisition of InterGlobe Networks, Inc.("Interglobe"), the
Company provides network system implementation and consulting for corporate
Intranet and Internet communications systems. Services and software provided by
InterGlobe include:
Network Design and Management Services.
InterGlobe provides network design and management for businesses and
individuals with obsolete or deficient network structures. The rapid advance of
network systems necessitates a comprehensive solution to obsolescence which
includes evaluation, network design and implementation for functional
effectiveness. In addition to managing ConnectSoft's existing Network Operation
Center ("NOC") located in Seattle, Washington, InterGlobe has recently commenced
providing consulting services for Compuserve Incorporated, which includes
building a NOC in Columbus, Ohio and providing ongoing support services for the
facility. Compuserve is a major online service providing business network and
Internet access to its subscribers. InterGlobe provides ongoing technical
support with automatic and remote monitoring for its network design systems. The
Company believes that there will be considerable growth in providing ongoing
support services for clients networks, as a result of which the Company is in
the process of increasing its engineering and support staff.
Corporate Intranet Systems and Connectivity Software
InterGlobe also develops custom built Intranet systems designed for
corporate clients, who desire access to a paperless intra-office and external
communications email system. Its current major customer is the Eddie Bauer.
Inc, retail chain.
12
Consulting and System Integration
In addition to designing networks and managing systems for specific
customers, InterGlobe also provides specialized Internet and Intranet consulting
services for corporate clients. Its customers include GE Capital Corporation, US
West, The American Automobile Association and Hewlett Packard Corporation.
Regional Internet Service
The Company's subsidiary, Seattle OnLine Corp. ("Seattle OnLine") is
engaged in the production of regional web-sites that showcase metropolitan
areas. Seattle OnLine is a full solution Internet marketing firm that designs,
builds and manages corporate Inter/Intranet sites, including interactive
catalogs and databases for businesses in Seattle, Washington and throughout the
nation. Seattle Online has formed alliances and teamed with a number of major
corporations with a major regional focus to create a comprehensive metropolitan
entertainment and resources guide. Clients include the Seattle Space Needle and
the Washington State Ferry System.
The Company intends to use the Seattle Online concept as a prototype for
expansion into other major metropolitan areas, including cities in which Seattle
Online is registered to establish regional web-sites showcasing the particular
metropolitan area. The Company plans to introduce the marketing program in
approximately 18 additional cities in 1997.
13
Proposed Acquisition of the BTS Companies
The Company intends to consummate the acquisition of the BTS Companies in
December 1996. However, as a definitive BTS Merger Agreement has not, as yet,
been executed, there is no assurance that this transaction will be consummated
or that the Company will ever provide services to the wireless communications
industry. See, "History and Recent Acquisitions," above.
The BTS Companies provide consulting services to clients involved in a
variety of wireless communications (cellular telephone) applications. The BTS
Companies offer a variety of turnkey solutions, including site acquisition,
zoning and permitting services to facilitate the location of a wireless network
broadcasting system, architectural and engineering services related to the
design, development and construction of wireless communcations network
facilities, management of wireless network sites, and general management of
wireless communications network projects.
The BTS Companies locate appropriate sites for the construction of a
wireless network broadcasting system, represent the client in negotiations with
the owner-landlord; and provide a comprehensive preliminary site report
including photographic survey, preliminary zoning analysis and access and
service availabilities. Site zoning and permitting services include obtaining
FAA clearing filings and preliminary site plans; obtaining zoning and permitting
applications and approvals; preparation of supporting materials for presentation
at public hearings; preparation of final site plans and obtaining construction
permits. Architectural and engineering services provided include the conduct of
site feasibility studies; providing preliminary cost estimates; development of
architectural, structural, mechanical and other construction site drawings,
plans and specifications (including cable and tray routing); determining of
electrical requirements; structural analysis of parapets, roofs, towers,
watertanks and other structures; design of heating and air conditioning systems;
topographic surveys; soil investigation and reports; and furnishing final "as
built" drawings and plans.
With over 45 architectural, engineering and other professional employees,
the BTS Companies have rendered or are rendering continuing services for clients
such as American Personal Communications, AT&T Wireless Communications, Bell
Atlantic, Bell South Mobility, Shenandoah Mobile Company, Trammel Crow/LCC,
dextel Communications and Vanguard Cellular.
Sales and Target Markets
Remote Computing
The Company is targeting large national and world-wide organizations using
existing UNIX systems and X-Terminals as the primary customers for its remoting
technology. In many large establishments, there is a heterogeneous mix of
computing platforms, including DOS systems, Windows 3.x systems, UNIX
workstations, X-Terminals and Macintosh computers.
14
In conjunction with its licensed WiNTimes(TM) Multi-User Software, the Company
believes that its superior remoting technology will enable it to capture a
significant portion of the UNIX workstation and X-Terminal markets.
The Company is presently testing the NTerprise(TM) product with Motorola
Corporation in connection with the introduction of a Windows NT 4.0 application
to enhance access by a European country's government agency to information from
police stations throughout such country. In the event that Motorola awards a
contract to the Company, management believes that revenues under this agreement
could equal $10 million over a period of three years. In addition to Motorola, a
number of other potential customers have recently requested the Company to
provide demonstrations and quotations for the NTerprise(TM) solution.
To date, the Company has not been awarded a contract for NTerprise(TM)
by Motorola or any other customer, and there can be no assurance that any
such contract will be awarded or, if awarded, that it will prove meaningful
and profitable to the Company. In addition, even if Motorola were to elect to
order NTerprise(TM), the Company would not be able to fulfill such contract
unless it were able to license the right to sell a software package for use
with Microsoft's Windows NT 4.0 operating system. At the present time, the
Company has no direct license from Microsoft for Windows NT4.0, and licenses
the WiNTimes(TM) Multi-user Software from Prologue only in Windows NT 3.5
version. The Company's agreements with Prologue provide that (subject to
certain conditions) at such time as Prologue obtains a license from Microsoft
to sell software for the Windows NT4.0 operating system, the Company's
license with Prologue will be extended to include the Windows NT4.0 version.
On November 8, 1996 Prologue notified the Company that it had been granted a
license for Microsoft Windows NT 4.0, and management of the Company has made
arrangements to meet with Prologue to finalize such a license extension
agreement.
In the event that Prologue and the Company are not able to reach an
agreement in time to enable the Company to fulfill a contract which may be
awarded by Motorola or another similar customer, in the absence of the
Company's ability to obtain a direct license from Microsoft for Windows NT4.0,
or a sublicense from Citrix, the business of the Company could be materially
and adversely affected.
The Company markets its retail EMail ConnectionR, EMail for Kids(TM) and
KidWeb(TM) products through three independent distributors, advertising in
magazines and trade journals, and aggressively working on product comparisons in
computer magazines. The EMail Connection is also marketed directly to customers
via on-line sales through the Worldwide Web and through electronic direct mail
campaigns to the registered customer base. EMail for Kids and KidWeb are
marketed through direct sales programs aimed at schools.
Interglobe markets its Internet engineering, design and consulting
services through advertising in trade journals and magazines customarily used by
information systems managers. In addition, Interglobe obtains a number of its
customer through client referrals.
Seattle On-Line advertises its local web site services primarily through
advertising in computer publications and trade journals.
15
License Agreement
The Company has entered into a three year license with Prologue, effective
as of June 1, 1996, pursuant to which the Company was granted: (i) the exclusive
right and license to sell, distribute, exploit and demonstrate WiNTimes(TM)
within North America, as an original equipment manufacturer in combination with
the Company's Remoting Software, for the UNIX and X-Terminal markets; and (ii)
a non-exclusive license to sell such products in other markets within such
territory. However, such license permits Prologue to license WiNTimes(TM) within
the Company's exclusive territory to any other original equipment manufacturer
("OEM") if, after the Company has attempted to sell the WiNTimes(TM)/
NTerprise(TM) combination to a potential OEM customer, a special committee
comprised of two Company designees, three Prologue designees and two independent
persons shall determine, in good faith, that there is a risk that refusing to
grant such a license to the OEM would result in such OEM keeping or acquiring
the Citrix NT Multi-user Software in lieu of WiNTimes(TM). Prologue has recently
advised the Company that it desires to license WiNTimes(TM) to NCD, a direct
competitor of the Company, as NCD allegedly would not acquire the WiNTimes(TM)
directly from the Company or combined with the NTerprise(TM) solution. The
Company is currently considering such request. Under the terms of the license,
if it is determined that Prologue is entitled to license its Multi-user Software
to NCD or another OEM, the Company is entitled to receive 30% of all royalties
and other payments which Prologue may receive from such OEM licensee for the
UNIX and X-Terminal markets.
Under the terms of the Prologue license, the Company paid Prologue initial
cash payments aggregating $450,000, issued 100,000 shares of Company Common
Stock and agreed to pay certain ongoing royalties or floor price payments per
"seat" connection in lieu of royalties. The license agreement is currently
limited to WiNTimes(TM) software for Windows NT 3.5 version. In October 1996,
the Company and Prologue entered into a limited access license, pursuant to
which the Company was granted limited access to Windows NT 4.0 source codes,
solely for the purpose of developing NTerprise(TM) in Windows NT 4.0 version and
testing and demonstrating such software for a potential customer. However, in
order for the Company to sell its remoting computer software to the UNIX and
X-Terminal markets in Windows NT 4.0 version, Prologue's existing license with
Microsoft which expired on October 31, 1996 is required to be renewed to include
such upgraded Windows NT 4.0 version. See "Future Performance and Risk Factors"
below.
Employees
At October 31, 1996, ConnectSoft, eXodus, Interglobe and Seattle On-Line
employed 84 full-time employees. Of that number, 10 are officers, 9 are involved
in administration and clerical activities, 26 are involved in engineering and
software development, 18 are involved in sales and marketing, and 21 are
involved in customer service and support. None of such employees are covered by
a collective bargaining agreement. The Company believes that its relations with
its employees are satisfactory.
16
Future Performance and Risk Factors
The future performance, operating results and financial condition of the
Company's Technology Business are subject to various risks and uncertainties,
including those described below.
Competition
The markets in which the Company competes are intensely competitive and
are characterized by rapidly changing technology and evolving industry
standards.
Competitive factors in the remote computing product market include
completeness of features, product quality and functionality, marketing and sales
resources and customer service and support. The Company faces extensive
competition from Citrix and its licensees, including Tektronics, Insignia and
NCD; all of whom are significantly larger than the Company and have
substantially greater financial resources. In addition, the Company's ability to
provide customers with access to the new Windows NT 4.0 operating system will be
adversely impacted if Prologue is unable to obtain in the near future a direct
license from Microsoft to enable Prologue to provide the Company with Multi-user
Software in Windows NT 4.0 version for NTerprise(TM). While the Company believes
that the features available on its Remoting Software provides UNIX and
X-Terminal users with the maximum flexibility to integrate Windows applications,
there can be no assurance that the Company will be able to establish and
maintain a market position in the face of increased competition.
In addition, alternative products exist for accessing information or
databases over the Internet that indirectly compete with the Company's remoting
computing products. Existing or new products that extend web site software to
provide database access or interactive computing can materially impact the
Company's ability to sell its remoting computer products into the UNIX and
X-Terminal markets. Potential competitors include all of the makers of Web
server and browser software, including Microsoft, Netscape, Quarterdeck, Silicon
Graphics and Sun Microsystems. Other key competitors in the multi-user graphical
platform market include SunSoft, Hewlett Packard and other manufacturers of UNIX
application servers, to the extent that they are able to provide a low-cost
graphical computing platform for Microsoft's Windows applications.
As is the case with its remoting products, the Company's EMail
ConnectionR, KidsWeb(TM) and EMail for Kids(TM) software also face intense
competition from other developers and marketers of personal productivity
software products sold at retail. There are a number of email and Web browser
products on the market, many of which are produced by companies that are
significantly larger and better capitalized than the Company. Although the
Company believes that its e-mail and web browser products are the only ones
currently available which permit parents to monitor the content of programs
accessed by their children on the Internet, a number of larger competitors are
in the process of introducing a similar technology. There is no assurance that
the Company will be able to establish a sufficient customer basis or market
presence to withstand
17
a well financed marketing campaign from a more substantial competitor with a
competing product for the children's market.
The Company's businesses engaged in Internet design, engineering and
consulting services, as well as the development of web sites for local
advertisers, face competition from numerous regional and national computer and
telecommunications consultants, as well as from many of the major software and
hardware manufacturers who provide full customer support and service for their
products, which often include consulting and advisory services.
Significant Investment
Since its effective May 1, 1996 acquisition of ConnectSoft, through
October 31, 1996, the Company has expended over $6.5 million in personnel, debt
and lease payments and settlements and other operating expenses associated with
ConnectSoft, eXodus, InterGlobe and Seattle On-Line, exclusive of approximately
$400,000 in cash paid to former stockholders of such companies in connection
with the acquisition of such companies. It may be anticipated that the
ConnectSoft and eXodus operations will continue to lose money and represent a
negative cash flow to the Company, at least in the near term. There can be no
assurance that these subsidiaries, or the Company's Technology Business as a
whole, will not continue to represent a significant drain on cash resources or
will ever prove to be profitable.
Evolving Network Computing Market
The Company's future success in developing and selling multi-user remote
solutions will depend in substantial part upon increased acceptance and
successful marketing of such products. There can be no assurance that the
Company's remoting computer software, whether marketed with WiNTimes(TM)
Multi-user Software, or as an alternate solution, will be widely adopted in the
rapidly evolving desktop computer market. In addition, it is possible that
Microsoft may develop its own Multi-user Software and/or Remoting Software for
sale to users of UNIX and X-Terminal workstations. The failure of new markets to
develop for the Company's network computing products could have a material
adverse effect on the Company's business, operating results and financial
condition.
New Product Development and Timely Introduction of New and Enhanced
Products
The markets for the products and services provided by the Company's
technology business are characterized by rapidly changing technologies, evolving
industry standards, frequent new product introductions and short product life
cycles. The Company's future in such businesses will depend to a considerable
extent on its ability to continuously develop, introduce and deliver in quantity
new software products that offer its customers enhanced performance at
competitive prices, and to offer new services at competitive prices that meet
the demands of a rapidly changing marketplace. The development and introduction
of new products and service is a complex and uncertain process requiring
substantial financial resources and high levels of innovation, accurate
anticipation of technological and market trends and the successful and
18
timely completion of product development. The inability to finance important
software development projects, delays in the introduction of new and enhanced
products and services, the failure of such products and services to gain market
acceptance, or problems associated with new products could materially and
adversely affect the Company's operating results.
Proprietary Technology and Dependence on Licenses
The Company's success in its Remoting Software is heavily dependent upon
proprietary technology. While the Company has filed [one] patent application, to
date, the Company has no patents, and existing copyright laws afford only
limited protection for the Company's software. Accordingly, the Company relies
heavily on trade secret protection and confidentiality and proprietary
information agreements to protect its proprietary technology. The loss of any
material trade secret could have a material adverse effect on the Company. There
can be no assurance that the Company's efforts to protect its proprietary
technology rights will be successful. Despite the Company's precautions, it may
be possible for unauthorized third parties to copy certain portions of the
Company's software or to obtain and use information that the Company regards as
proprietary.
While the Company's competitive position may be affected by its ability to
protect its proprietary information, the Company believes that because of the
rapid pace of technological change in the industry, factors such as the
technical expertise, knowledge and innovative skill of the Company's management
and technical personnel, its strategic relationships, name recognition, the
timeliness and quality of support services provided by the Company and its
ability to rapidly develop, enhance and market software products may be more
significant in maintaining the Company's competitive position.
In addition, under the terms of the Company's license with Prologue, under
certain conditions Prologue may license Prologue's Multi-user Software to direct
competitors of the Company. See "License Agreement" above. Although the Company
believes that the key element in providing enterprise customers with access to
Windows NT in a UNIX or X-Terminal environment is the reliability and
flexibility of the OEM's Remoting Software, as opposed to the Multi-user
Software furnished primarily by Citrix and Prologue, to the extent that more
well financed competitors are given access to Prologue's WiNTimes(TM) software
the Company's marketing efforts could be adversely impacted.
Dependence on Key Personnel
The Company's success in its technology business depends to a significant
degree upon the continuing contributions of its senior management and other key
employees. The Company believes that its future success will also depend in
large part on its ability to attract and retain highly-skilled programmers,
engineers, sales and marketing personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting, integrating and retaining such personnel. Failure to attract or
retain existing and
19
additional key personnel could have a material adverse effect on the Company's
technology business, operating results or financial condition.
THE DISTRIBUTION BUSINESS
The Equipment
New 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 (smaller
version of a wheel loader, used to load and transport small quantities of
material--e.g., dirt and rocks around a job site). The sale prices of 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 the states of 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 the 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 six months and nine months on purchases of specified types of Equipment.
Principal payments are generally due at the earlier of sale of the equipment or
twelve to fifteen months from the invoice date.
Other Products.
20
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
Hamm and by others. Approximately 25% of Western's net sales for fiscal year
1996 resulted from sales, rental and servicing of products manufactured by
companies other than Case.
Western's distribution business is generally divided into four categories
of activity: (i) New Equipment sales and rentals, (ii) used Equipment sales and
rentals, (iii) Equipment servicing, and (iv) parts sales.
New Equipment Sales and Rental.
At each of its distribution outlets, Western maintains a fleet of various
items of Equipment for sale or rental for periods ranging from one week to up to
nine months (customarily with purchase options at the end of the rental period).
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. Each distribution
outlet has access to Western's full inventory of Equipment.
Western's new Equipment rental business has historically been an adjunct
to its new Equipment sales. To assist customers, any new Equipment can be rented
generally for periods of up to nine months and a portion of customer rental
payments may be applied to the purchase price down payment.
Western provides only the standard manufacturer's limited warranty for new
equipment, generally a one-year parts and service repair warranty. Customers can
purchase extended warranty contracts.
Western maintains a separate fleet of new Equipment that it generally
holds solely for rental. Such Equipment is generally held in the rental fleet
for 12 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 items of Equipment rented.
Used Equipment Sales and Rentals.
Western sells and rents 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 manufacturer's warranty. Used Equipment is
customarily rented only after available new Equipment has been rented. The
rental charge for such used Equipment is equal to that of rented new Equipment.
Used rental Equipment is first reconditioned by Western prior to being offered
for rent, and is typically not more than three years old.
21
Equipment Servicing.
Western operates a service center and yard at each retail 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
100 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 for Equipment service terms, 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.
Parts Sales.
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 days terms.
Western employs one or more persons who take orders from customers for
parts purchases at each retail distribution outlet, the majority of such orders
are placed in person by walk-in customers. Western provides only the standard
manufacturer's warranty on the parts that it sells, which is generally a 90-day
replacement guaranty.
Sales and Marketing.
Western's customers are typically residential and commercial building
general contractors, road and bridge contractors, sewer and septic contractors,
underground power line contractors, persons engaged in the forestry industry,
equipment rental companies and state and municipal authorities. Western
estimates that it has approximately 16,000 customers, with most being small
business owners, alone of which accounted for more than 5% of its total sales in
the fiscal year ended July 31, 1996.
For the fiscal year ended July 31, 1996, the revenue breakdown by source
for the business operated by Western was approximately as follows:
New Equipment Sales 58%
Used Equipment Sales 12%
Rental Revenue 9%
Parts Sales 17%
Service Revenue 4%
-----
100%
=====
22
Western advertises its products in trade publications and appears at trade
shows throughout its territory. It also encourages its salespersons to visit
customer sites and offer Equipment demonstrations when requested.
Western's sales and marketing activities do not result in an significant
backlog of orders. Although Western has commenced acceptance of orders from
customers for future delivery following manufacture by Case, during fiscal 1996
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 President and Chief
Executive Officer of Western. Each Equipment salesperson is assigned 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 67 Equipment salespersons on July
31, 1996.
On July 31, 1996, Western employed 5 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 approximately the majority of its inventory of Equipment
and parts from Case. No other supplier currently accounts for more than 5% of
such inventory purchases in fiscal 1996. 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.
Competition
Western competes with distributors of construction 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 Case and other products, the accessibility of its
distribution outlets, the number 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 Case product quality, and the superior product support and other
customer services provided by the Company.
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
23
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
the states of Washington and Nevada and in the Northern California area (other
than Case-owned distribution outlets), and is one of two Case dealers in the
State of Oregon. However, Case has the right to establish other dealerships in
the future in the same territories in which the Company operates. In order to
maintain and improve its competitive position, revenues and profit margins,
Western plans to increase its sales of products produced by companies other than
Case.
Environmental Standards and Government Regulation
Western operations are subject to numerous rules and regulations at the
federal, state and local levels which are designed to protect the environment
and to regulate the discharge of materials into the environment. Based upon
current laws and regulations, Western believes that its policies, practices and
procedures are properly designed to prevent 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 an adverse impact on the Company's operations.
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, servicing operations. Western
internal staff is trained to keep appropriate records with respect to its
handling of hazardous waste, to establish appropriate on-site storage locations
for hazardous waste, and to select regulated carriers to transport and dispose
of hazardous waste. Local rules and regulations also exist to govern the
discharge of waste water into sewer systems.
In September 1992, prior to Western becoming an authorized Case dealer,
Case received an environmental report indicating certain contamination
conditions which were to be rectified by Case in connection with the selling of
retail outlets to the Company in connection with the 1992 Case Transaction. In
addition, following the 1992 Case Transaction, additional environmental reports
were prepared or obtained concerning the progress and cost of remediation
projects at those facilities. Western did not assume any of Case's obligations
for site remediation when it completed the acquisition from Case of certain
assets used in connection with Western's retail facilities, and no accruals for
such clean-up costs appear on the Company's financial statements.
In July 1994, prior to Western's acquisition of the Sparks, Nevada
property, Case received an environmental report indicating certain contamination
conditions which were to be rectified by Case in connection with the sale of
that retail outlet to Western. Such remediation was completed prior to November
22, 1994. Western did not assume any of Case's obligations for site remediation
when it completed the acquisition from Case of certain assets used in
24
connection with Western's retail facilities, and no accruals for such clean-up
costs appear on Western's financial statements.
Employees
At July 31, 1996, Western employed 298 full-time employees. Of that
number, 24 are in corporate administration for Western, 17 are involved in
administration at the branch locations, 77 are employed in Equipment sales and
rental, 63 are employed in parts sales, and 117 are employed in servicing
construction equipment. None of Western's employees are covered by a collective
bargaining agreement. Western believes that its relations with its employees are
satisfactory.
Insurance
Western currently has product liability insurance policies covering
Western with $500,000 limits for each occurrence and $1,000,000 in the aggregate
under the general liability and products liability policies. Western also has an
umbrella liability insurance policy with an annual aggregate coverage limit of
$10,000,000. Western believes that its product liability insurance coverage is
reasonable in amount and consists of such terms and conditions as are generally
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,
could have a material adverse effect upon Western.
25
ITEM 2. Properties
The following table sets forth information as to each of the properties
which the Company owns or leases:
The Distribution Business:
- -----------------------------------------------------------------------------------------------------------------------
Expiration Annual Size/ Purchase
Location and Use Lessor Date Rental Square Feet Options
- -----------------------------------------------------------------------------------------------------------------------
1745 N.E. Columbia Blvd. Carlton O. Fisher, 12/31/2000 $54,000(1) Approx. 4 No
Portland, Oregon 97211 Nancy A. Harrison & plus CPI Acres; Building
(Retail sales, service, storage Jane G. Whitbread adjustments 17,622 sq. ft.
and repair facilities)
- -----------------------------------------------------------------------------------------------------------------------
1665 Silverton Road, N.E. LaNoel Elston Myers 7/10/98 $27,480(1) Approx. 1 Acre; No
Salem, Oregon 97303 Living Trust Buildings 14,860
(Retail sales, service, storage sq. ft.
and repair facilities)
- -----------------------------------------------------------------------------------------------------------------------
1702 North 28th Street McKay Investment 6/14/2001 $69,000(1) Approx. 5 No
Springfield, Oregon 97477 Company Acres; Building
(Retail sales, service, storage 17,024 sq. ft.
and repair facilities)
- -----------------------------------------------------------------------------------------------------------------------
West 7916 Sunset Hwy. Case Corporation 9/30/98 $58,404(1) Approx. 5 No
Spokane, Washington 99204 Acres; Building
(Retail sales, service, storage 19,200 sq. ft.
and repair facilities)
- -----------------------------------------------------------------------------------------------------------------------
3217 Hewitt Avenue Dick Calkins 3/31/97 $40,320(1) Approx. 2.5 No
Everett, Washington 98201 Acres; Building
(Retail sales, service, storage 12,483 sq. ft.
and repair facilities)
- -----------------------------------------------------------------------------------------------------------------------
1901 Frontier Loop The Landon Group Month to $29,625(1) Approx. 7 No
Pasco, Washington 99301 Month Acres; Building
(Retail sales, service, storage 14,200 sq. ft.
and repair facilities)
- -----------------------------------------------------------------------------------------------------------------------
13184 Wheeler Road, N.E. Maiers Industrial Park Month to $38,400(1) Approx. 10 No
Building 4 Month Acres; Building
Moses Lake, Washington 13,680 sq. ft.
98837
(Retail sales, service, storage
and repair facilities)
- -----------------------------------------------------------------------------------------------------------------------
63291 Nels Anderson Road B&K Management 10/31/98 $27,600(1) Approx. 3,600 No
Bend, Oregon 97701 Corp. sq. ft.
(Retail sales, service, storage
and repair facilities)
- -----------------------------------------------------------------------------------------------------------------------
- --------
(1) Net lease with payment of insurance, property taxes and maintenance costs
by Company.
26
- -----------------------------------------------------------------------------------------------------------------------
Expiration Annual Size/ Purchase
Location and Use Lessor Date Rental Square Feet Options
- -----------------------------------------------------------------------------------------------------------------------
4601 N.E. 77th Avenue Parkway Limited 2/15/99 $93,456 6,100 sq. ft. No
Suite 200 Partnership
Vancouver, Washington
98662
(Executive Offices)
- -----------------------------------------------------------------------------------------------------------------------
2702 W. Valley Hwy No. Avalon Island LLC 11/30/2015 $204,0001 Approx. 8 No
Auburn, Washington 98001 Acres; Building
(Retail sales, service, storage 33,000 sq. ft.
and repair facilities)
- -----------------------------------------------------------------------------------------------------------------------
13 West Washington Avenue Bob and Pat Schneider 1/14/97 $12,0001 Approx. 15,600 No
Yakima, Washington 98903 sq. ft.; Building
(Retail sales, service, storage 4,320 sq. ft.
and repair facilities)
- -----------------------------------------------------------------------------------------------------------------------
2112 Wildwood Way James Ghia 5/31/98 $18,720 Approx. 1 Acre; No
Elko, Nevada 89431 Building 3,000
(Retail sales, service, storage sq. ft.
and repair facilities)
- -----------------------------------------------------------------------------------------------------------------------
1455 Glendale Ave. Owned N/A N/A Approx. 5 acres; N/A
Sparks, Nevada 89431 Building 22,475
(Retail sales, service, storage sq. ft.
and repair facilities)
- -----------------------------------------------------------------------------------------------------------------------
25886 Clawiter Road Fred Kewel II, 11/30/99 $96,000(1) Approx. 2.8 No
Hayward, California 94545 Agency acres; Building
(Retail sales, service, storage 21,580 sq. ft.
and repair facility)
- -----------------------------------------------------------------------------------------------------------------------
3540 D Regional Parkway Soiland 2/28/98 $35,400(1) 5,140 sq. ft. No
Santa Rosa, California plus CPI
95403 adjustments
(Retail sales, service, storage
and repair facility)
- -----------------------------------------------------------------------------------------------------------------------
1751 Bell Avenue McLain-Rubin Realty 3/1/2016 $168,000(2) Approx. 8 No
Sacramento, California Company LLC2 Acres; Buildings
95838 35,941 sq. ft.
(Retail sales, service, storage
and repair facility)
- -----------------------------------------------------------------------------------------------------------------------
1041 S. Pershing Avenue Raymond Investment 3/14/2001 $36,000(1) Approx. 2 No
Stockton, California 95206 Corp. Acres; Buildings
(Retail sales, service, storage 5,000 sq. ft.
and repair facility)
- -----------------------------------------------------------------------------------------------------------------------
1126 E. Truslow Avenue D. June Brecht, Glen 6/30/97 $22,524(1) Building 4,800 No
Fullerton, California 92631 Brecht and Marshal sq. ft.
(Retail sales, service, storage Brecht
and repair facility)
- -----------------------------------------------------------------------------------------------------------------------
- --------
(2) 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 is "triple net", under which Western pays, in addition
to rent, all insurance, property taxes, maintenance costs and structural
and other repairs.
27
- -----------------------------------------------------------------------------------------------------------------------
Expiration Annual Size/ Purchase
Location and Use Lessor Date Rental Square Feet Options
- -----------------------------------------------------------------------------------------------------------------------
672 Brunken Avenue R. Jay De Serpa, Ltd. 7/31/98 $28,800(1) 4,000 sq. ft. No
Salinas, CA 93301
(Retail sales, service, storage
and repair facility)
=======================================================================================================================
The Technology Business:
- -----------------------------------------------------------------------------------------------------------------------
Expiration Annual Size/ Purchase
Location and Use Lessor Date Rental Square Feet Options
- -----------------------------------------------------------------------------------------------------------------------
11130 NE 33rd Place Koll Management 11/22/01 $350,000(1) 17,200 sq. ft. No
Bellevue, Washington 98004
(Principal executive offices,
ConnectSoft and eXodus
offices and software
production facility)
- -----------------------------------------------------------------------------------------------------------------------
1520 Fourth Avenue, Metropolitan Federal 7/31/98 $48,000(1) 4,031 sq. ft. No
Suite 200 Savings and Loan
Seattle, Washington 98101 Association
(InterGlobe Networks offices
and operating facilities)
- -----------------------------------------------------------------------------------------------------------------------
6th and Virginia 6th and Virginia 9/30/00 $25,000(1) 1,000 sq. ft. No
Seattle, Washington 98121 Properties
(Network operations center)
- -----------------------------------------------------------------------------------------------------------------------
1417 Fourth Avenue Collier Management 2/9/00 $54,000(1) 8,000 sq. ft. No
Seattle, Washington 98101
(Seattle On-Line offices and
operating facilities)
- -----------------------------------------------------------------------------------------------------------------------
All of the leased and owned facilities used by the Company are believed to
be adequate in all material respects for the needs of the Company's current and
anticipated business operations.
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.
On October 18, 1996, the Company was informed by Prudential Securities
Incorporated ("Prudential") that they are entitled to an investment banking fee
of approximately $550,000 in connection with the Company's acquisition of
ConnectSoft. The Company believes that, although Prudential had originally been
engaged by ConnectSoft as an investment banker, Prudential did not directly or
indirectly introduce the Company to ConnectSoft and abandoned efforts to finance
ConnectSoft well prior to the Company's involvement. Accordingly, the Company
does not believe that Prudential is entitled to any fee, and if litigation is
commenced, will vigorously defend any such action and assert against Prudential
what it believes are meritoreous counterclaims on behalf of ConnectSoft.
- --------
28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not required.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The principal market for trading the Company's securities is the NASDAQ
National Market System. The following is a table that lists the high and low
selling prices for shares of the Company's Common Stock on the Nasdaq National
Market System during the periods identified:
High Low
---- ---
Fiscal year 1995
First Quarter.......................................... $6.58 $3.50
Second Quarter......................................... 5.42 4.00
Third Quarter.......................................... 5.00 3.75
Fourth Quarter......................................... 5.92 4.25
Fiscal year 1996
First Quarter.......................................... 6.58 5.08
Second Quarter......................................... 11.88 6.08
Third Quarter.......................................... 13.25 3.37
Fourth Quarter ........................................ 10.25 4.19
=================
On November 7, 1996, the last sale price of the Common Stock was $9.25 as
reported on the Nasdaq National Market System, and the Company estimates that it
had over 1,000 beneficial holders of its common stock on that date.
Dividend Policy
In the foreseeable future, the Company intends to retain earnings 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.
29
ITEM 6. SELECTED FINANCIAL DATA
AMERICAN UNITED GLOBAL, INC.
(in thousands, except per share data)
Income statement data:
Year ended July 31,(1)
1993(2) 1994 1995 1996(4)
---- ---- ---- ----
Net sales $30,386 $67,370 $86,173 $ 106,831
(Loss) income from
continuing operations 417 1,024 1,164 (11,475)
Net (loss) income 1,575 2,201 2,268 (3,700)(3)
Per share:
(Loss) income from
continuing
operations $ 0.06 $ 0.18 $ 0.20 $ (1.98)
Net (loss) income $ 0.34 $ 0.43 $ 0.40 $ (0.64)
Balance Sheet data:
July 31,(1)
1993 1994 1995 1996
---- ---- ---- ----
Total assets $42,383 $55,779 $76,829 $115,176
Long-term debt 2,714 3,234 0 2,968
- ----------
(1) No amounts are presented for the years ended July 31, 1992 as the
Company consisted solely of the manufacturing business which has been
reclassified as a discontinued operation.
(2) Represents nine months of Western's results following its Acquisition in
November 1992.
(3) Reflects the gain on the sale of the manufacturing business of
$7.46 million, net of tax.
(4) Includes three months of ConnectSoft's results following its
acquisiton effective May 1, 1996.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDTION AND
RESULTS OF OPERATIONS
This management discussion and analysis of financial conditions and
results of operations contains certain "forward-looking statements" as
defined in the Private Securities Litigation Reform Act of 1995. Such
statements relating to future events and financial performance are
forward-looking statements that involve risks and uncertainties, detailed from
time to time in the Company's various Securities and Exchange Commission
filings.
GENERAL OVERVIEW
Management of the Company carefully considered, both prior and immediately
subsequent to consummation of the Hutchinson transaction, the best utilization
of the cash resources that would result therefrom. It was determined that
stockholder value would best be enhanced by directing the Company's future into
the computing and telecommunications industries, by acquiring proprietary
technologies, unique niche software products and selective expertise that could
be marketed on a national scale.
The Company acquired ConnectSoft, Inc. on August 8, 1996. However,
effective May 1, 1996 the Company assumed financial and operational control of
ConnectSoft and the closing of the acquisition was assured by virtue of the
Company obtaining proxies voted in favor of the transaction by certain
ConnectSoft shareholders owning more than 80 percent of the shares. ConnectSoft
provides electronic mail communications management software products and through
the eXodus division (now a separate corporation - eXodus Technologies) provides
a remote access connectivity software protocol (NTerprise) (TM) which allows
users to run Microsoft Windows (TM) applications such as Word (TM), Excel
(TM) and Power Point (TM) on existing UNIX workstations, X-Terminals and other
X-Compatible devices. The Company has treated ConnectSoft as having been
acquired by the Company as of May 1, 1996 for both tax and financial reporting
purposes.
Effective September 20, 1996, the Company acquired InterGlobe Networks,
Inc. InterGlobe provides engineering, design and consulting services for users
and providers of telecommunications facilities on the Internet and other media.
Effective November 8, 1996, the Company acquired the assets of Seattle
Online, Inc. which engages in providing a local Internet service in the Pacific
Northwest.
As a result of its acquisitions of ConnectSoft, InterGlobe and Seattle
Online and the development of the eXodus Remoting Software for Windows
applications on UNIX and X-Terminal workstations, the Company believes that it
is positioned to participate in the growth in these market segments.
31
RESULTS OF OPERATIONS
Years Ended July 31,
Fiscal Year 1996, as Compared with Fiscal Year 1995
% of % of
1996 Revenues 1995 Revenues
Net Sales $106,831,000 100% $86,173,000 100%
Cost of Goods Sold $ 94,095,000 88.1% $76,145,000 88.4%
Selling, General and
Administrative Expenses $ 9,168,000 8.6% $ 6,228,000 7.2%
Research and
Development Expenses $ 9,764,000 9.1% -- 0%
Interest Expense,
Net $ 1,394,000 1.3% $ 1,421,000 1.6%
Income (loss) from Continuing
Operations Before Taxes
and minority interest $ (9,832,000) N/A $ 1,993,000 2.3%
Provision for
Income Taxes $ 741,000 0.7% $ 711,000 0.8%
Income from
Discontinued Operations $ 7,775,000 7.3% $ 1,104,000 1.3%
Net (loss) income $ (3,700,000) N/A $ 2,268,000 2.6%
32
On a consolidated basis, revenues for fiscal 1996 were up by
approximately $20,658,000, or 24.0% over the fiscal 1995.
Western reported net sales for the fiscal 1996 of $106,555,000 which is
an increase of $20,383,000 or 24% over net sales of $86,172,000 for fiscal
1995. Same store revenues increased 13.8 percent over the prior year results
reflecting a continuation of generally good economic conditions, increased
market acceptance of Western's products, increased housing starts, as well as
revenues realized from the addition of numerous new parts and equipment lines
to Western's product offerings. ConnectSoft reported revenue of $276,000
during the three months ended July 31, 1996. Only one of its titles was
available for the sale as of May 1, 1996, and a total of three were available
subsequent to July 31, 1996.
Cost of goods sold as a percentage of Western's sales was 88.1% during
fiscal 1996 which is consistent with the prior year results. Western's
management has placed a high priority on improving overall gross margins by
working to increase higher margin service and parts revenues and by obtaining
higher prices for new equipment. Cost of goods sold for ConnectSoft's
revenues amounted to $189,000 or 68.5% of its revenues.
33
Selling , general and administrative expenses totaled $9,168,000 or
8.6% of sales for fiscal 1996 compared to $6,228,000 or 7.2% of sales for
fiscal 1995. The increase in selling, general and administrative expenses as
a percent of sales resulted mainly from administrative costs associated with
Western's acquisition and integration of the Sacramento Case operations and
the GCS operations and $1,304,000 of selling, general and administrative
costs incurred by ConnectSoft during the three months ended July 31, 1996.
Included in fiscal 1996 selling, general and administrative expenses are
costs associated with the Company's acquisition activity and reorganizing
ConnectSoft's operations which management estimates at $1,500,000. The
restructuring charge of $571,000 represents the cost of vacating certain
leased office space that was previously utilized by ConnectSoft.
Stock option compensation expense of $1,671,000 relates to options granted
to certain key employees under the Company's 1996 stock option plan.
During the three month period ended July 31, 1996 ConnectSoft continued
development activities related to its NTerprise software product and to a lesser
extent its e-mail software products for the retail market. Research and
development expense for fiscal 1996 amounted to $9,764,000 or 9.1% of
consolidated revenue. Included in this amount is $8,472,000 representing an
allocation of the cost of acquiring ConnectSoft to software development
costs for the NTerprise product which were charged to operations because
technological feasibility of NTerprise had not been achieved at the effective
acquisition date. Subsequent to July 31, 1996 technological feasibility was
achieved and future development costs for NTerprise will be capitalized.
The $27,000 decrease in net interest expense for fiscal 1996 is
primarily attributable to an increasing balance of inventory purchased under
Western's various floor plan lines of credit to stock the new outlets, an
increase of inventory dedicated to rental from approximately $5,000,000 in
fiscal 1995 to more than $12,000,000 in fiscal 1996, as well as changes in
floor plan terms by Case. Effective January 1, 1996, Case changed factory to
dealer terms in a program they have named "Focus 2000". While interest free
floor plan terms for Case's most expensive units--wheel loaders and
excavators--remains at six to eight months, the terms on Case's smaller units
were shortened from six months to four months interest free. For the first
time, Case is also granting a 4% cash 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 for some of its
purchases in fiscal 1996, which had an immediate effect on interest expense.
The interest free floor planning period was not utilized, however.
Nevertheless, management believes that the positive impact of the discounted
cost as these units are sold will more than offset the increased interest
expense. Additionally, the Company incurred $257,000 of interest costs during
the three months ended July 31, 1996 associated with debt assumed in the
ConnectSoft acquisition. These increases in expense are offset by increased
interest income from investments in cash and marketable debt securities
which amounted to $754,000 during fiscal 1996, an increase of $583,000 over
fiscal 1995, resulting from a significant increase in investable funds from the
proceeds of the sale of the Manufacturing Businesses in January 1996.
The provision for income taxes from continuing operations for fiscal 1996
of $741,000 increased $30,000 from fiscal 1995. The increase in the amount and
as a percentage of pre tax income from continuing operations resulted primarily
from valuation allowances provided for expenses related to purchased software
development costs.
The Company recognized a gain of $12,502,000 ($7,460,000, net of
applicable taxes) in connection with the sale of its Manufacturing Businesses to
Hutchinson which was consummated in January 1996. Income from continuing
operations of the Manufacturing Businesses for the period of August 1, 1995 to
January 19, 1996, the date of sale, amounted to $315,000 as compared to
$1,104,000 for the full year for fiscal 1995.
34
Fiscal Year 1995, as Compared with Fiscal Year 1994
Years Ended July 31,
(In Thousands)
% of % of
1995 Revenues 1994 Revenues
Net Sales $86,173 100% $67,370 100%
Costs of Goods Sold $76,145 88.4% $59,138 87.8%
Selling, General and
Administrative Expenses $ 6,228 7.2% $ 5,696 8.5%
Interest Expense, Net $ 1,421 1.6% $ 830 1.2%
Income from Continuing
Operations Before Taxes $ 1,993 2.3% $ 1,706 2.5%
Provision for
Income Taxes $ 711 0.8% $ 682 1.0%
Income from
Discontinued Operations $ 1,104 1.3% $ 1,095 1.6%
Net Income $ 2,268 2.6% $ 2,287 3.3%
Continuing operations for fiscal 1995 and 1994 consist primarily of the
Company's Distribution Group activities comprising Western.
The Company reported net sales for fiscal 1995 of $86,173,000 which is an
increase of 28% over net sales of $67,370,000 for fiscal 1994. Included
in the fiscal 1995 amount are revenues of approximately $15,000,000 related to
Western's acquisition of the Sparks, Nevada and Hayward, California stores and
the opening of the Santa Rosa, California store. Same store revenues increased
5.6% over the prior year results reflecting a continuation of generally
good economic conditions, increased housing starts, as well as revenues realized
from the addition of numerous new parts and equipment lines to Western's product
offerings.
Cost of goods sold as a percentage of sales was 88.4% during fiscal
1995 which is consistent with the prior year results. Management has placed a
high priority on improving overall gross margins by increasing higher margin
service and parts revenues and by obtaining higher prices for new equipment.
Selling, general and administrative expenses were $6,228,000 or 7.2% of
sales for fiscal 1995 compared to $5,696,000 or 8.5% of sales for fiscal 1994.
The decrease in selling, general and administrative expenses as a percent of
sales primarily reflects the spreading of Western's fixed overhead costs over an
increased revenue base which was partially offset by $108,000 in certain
one-time administrative costs associated with the integration of the Sparks,
Nevada and Hayward, California outlets.
35
The $591,000 increase in net interest expense in fiscal 1995, over that
incurred in fiscal 1994, is primarily attributable to increased borrowings under
Western's floor plan lines of credit with Case and other lenders, rising
interest rates in general, and to financing costs relating to Western's initial
public offering.
The provision for income taxes from continuing operations for fiscal 1995
of $711,000 increased by $29,000 from fiscal 1994 primarily due to increased pre
tax income and remained relatively consistent as a percentage of pre tax income.
Income from the discontinued operations of the Manufacturing Businesses
amounted to $1,104,000 for fiscal 1995 compared to $1,762,000 for fiscal
1994. Additionally, during fiscal 1994 the Company incurred a loss of
$365,000, net of tax, on disposition of its Aerodynamic Engineering
subsidiary and operating losses for that subsidiary of $302,000 prior to its
disposition.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the Hutchinson Transaction the Company significantly
increased its liquidity and capital resources. The Company has used, and
intends to use in the future, the proceeds of the Hutchinson Transaction, to
acquire and fund the working capital needs of additional businesses. The
Company has been granted a $13,000,000 secured demand line of credit from its
commercial bank. This line is uncommitted and secured by the Company's
portfolio of cash and marketable securities held by the bank. On October 31,
1996 approximately $11,475,000 was outstanding under such line of credit, the
principal of which bears interest at the banks 90 day LIBOR rate (currently
5.25%) plus 1%.
Western's primary source of internal liquidity has been its profitable
operations since its inception in November 1992. As more fully described below,
Western's primary sources of external liquidity were contributions to Western by
the Company, and equipment inventory floor plan financing arrangements provided
to Western by Case Credit Corporation, Seattle-First National Bank ("SeaFirst
Bank"), Associates Commercial Corporation ("Associates") and Orix Commercial
Credit ("Orix"). In addition, in fiscal 1995, WPE, the immediate parent of
Western, completed an initial public offering of 1,495,000 shares of common
stock at $6.50 per share, generating net proceeds of $7,801,000. The net
proceeds of the offering were utilized to repay amounts due to the Company and
to Case, the acquisition and opening of additional outlets, as well as to reduce
floor plan debt.
Under its inventory floor plan finance arrangements Case provides
Western with interest free credit terms on new equipment purchases for four to
six months, with the exception of the Model 1818 skid steer loader for which the
interest free credit terms are three months and the
36
Model 90B Series special application excavator for which the interest free
credit terms are eight months, after which interest commences to accrue monthly
at the rate per annum equal to 2% over the prime rate of interest. At September
30, 1996, Western was indebted to Case in the aggregate amount of approximately
$36,912,024 under such inventory floor plan finance arrangements.
In order to take advantage of a 4% cash discount offered by Case under its
new Focus 2000 program, to provide financing beyond the term of applicable Case
floor plan financing or as alternatives to Case floor plan financing
arrangements for inventory purchased other than from Case, Western has entered
into separate secured floor planning lines of credit with SeaFirst, Associates,
Orix, and the CIT Group.
The Associates line of credit was entered into in August 1993, and allows
Western to borrow up to $2,250,000 to finance the purchase of new equipment, to
finance up to $2,000,000 of installment sales of equipment to customers approved
by Associates (without recourse to Western), and to finance up to $1,000,000 of
installments sales of equipment to other customers (with recourse to Western in
the event of default). There are no material obligations outstanding under the
recourse line of credit. On September 30, 1996, approximately $906,898 was
outstanding under these lines, the principal of which bears interest at 2% over
the prime rate announced by the U.S. National Bank of Oregon.
The SeaFirst line of credit was entered into in June 1994 and provides a
$17,500,000 line of credit which can be used to finance new and used equipment
or equipment to be held for rental purposes. On September 30, 1996,
approximately $15,225,944 was outstanding under such line of credit, the
principal of which bears interest at .25% over Seattle-First National Bank's
prime rate and is subject to annual review and renewal on June 1, 1997.
Western also buys a portion of its equipment from Hamm Compactors ("Hamm")
under a floor plan financing agreement with Orix. The Orix floor plan agreement
calls for repayment of principal and interest over periods ranging from thirty
to forty-eight months, with a balloon payment for the remaining outstanding
balance. At September 30, 1996, the aggregate indebtedness owed to Orix was
$820,190. The Orix notes bear interest at the highest prevailing prime rates of
certain major United States banks, plus 2% per annum. Amounts owing under these
floor plan financing agreements are secured by inventory purchases financed by
these lenders, as well as all proceeds from their sale or rental, including
accounts receivable thereto.
On October 19, 1995, Western entered into a purchase and sale agreement
with an unrelated party for the Auburn, Washington facility subject to the
execution of a lease. Under the terms of this agreement, which closed on
December 1, 1995, Western sold the property and is leasing it back from the
purchaser. In accordance with Statement of Financial Accounting Standards No. 13
(SFAS 13), the building portion of the lease is being accounted for as a capital
lease while the land portion of the lease qualifies for treatment as an
operating lease. See Note 6 to the accompanying consolidated financial
statements for more information. The proceeds
37
from the Auburn facility sale leaseback transaction were sufficient to retire
the related note payable to Case.
Effective February 29, 1996, Western acquired substantially all of the
operating assets used by Case Corporation ("Case") in connection with its
business of servicing and distributing Case construction equipment at a facility
located in Sacramento, California (the "Sacramento Operation"). The acquisition
was consummated for approximately $630,000 in cash, $1,590,000 in installment
notes payable to Case and the assumption of $3,965,000 in inventory floor plan
debt with Case and its affiliates. The acquisition is being accounted for as a
purchase.
The real property and improvements used in connection with the Sacramento
Operation, 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 the Company and Western, and Robert M. Rubin, the
Chairman and a director of the Company and 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 as of March 1, 1996. In accordance with
SFAS 13, the building portion of the lease is being accounted for as a capital
lease while the land portion of the lease qualifies for treatment as an
operating lease. See Note 11 to the accompanying consolidated financial
statements for more information.
On October 10, 1995, using proceeds from its initial public offering,
Western retired the $2,175,000 real estate note given to Case for the purchase
of the Sparks, Nevada real estate in September 1994. In March 1996 Western
consummated an agreement with an institutional lender for a conventional
mortgage on the property in the amount of $1,330,000 secured by the Sparks,
Nevada real estate. The agreement calls for the principal and interest payments
over a seven year term using a fifteen year amortization period. The note cannot
be prepaid during the first two years of its term.
On June 11, 1996, Western acquired the operating assets of GCS, Inc.
("GCS"), a California-based, closely held distributor of heavy equipment
primarily marketed to municipal and state government agencies responsible for
street and highway maintenance. Western will operate the GCS business from an
existing location in Fullerton, California and from Western's existing facility
in Sacramento, California. The Purchase price for the GCS assets was $1,655,000.
This transaction is being accounted for as a purchase.
In May 1996 approximately 427,000 options granted under the Company's
employee stock option plans were exercised and $1,776,000 of net proceeds were
received by the Company. The Company has used these funds to reduce its short
term bank borrowings. The dilutive effect of the exercise of these options on
earnings per share has already been reflected in the weighted average earnings
per share stated in this report.
38
Effective May 1, 1996 the Company acquired ConnectSoft, Inc., a
business involved with providing computer software products and services.
Accordingly, the Company's consolidated operating results for fiscal 1996
include significant software development expenses, including $8,472,000
related to purchased in-process software development. By August 8, 1996
ConnectSoft had three products for e-mail users in production for the
retail and OEM marketplace and eXodus had begun marketing its connectivity
software protocol known as NTerprise Version 1.1 to businesses using UNIX
workstations, X-Terminals and other X-Compatible devices. Fiscal 1997
revenues from the retail products appear to be slower than expected.
Sales of NTerprise to businesses typically involve extensive evaluation
by customers. The Company is in the process of demonstrating its NTerprise
solution to a number of potential end-user and distributors, including
Motorola. To date, however, no firm orders have been obtained. However,
management believes that firm orders from NTerprise will be received
during 1997. For further information concerning the terms of the
ConnectSoft acquisition, see "ITEM 1., DESCRIPTION OF BUSINESS".
Under the terms of the Company's acquisition of Interglobe, the Interglobe
shareholders received the aggregate sum of $400,000 plus an aggregate of 800,000
shares of the Company's Common Stock. Following consummation of the Interglobe
acquisition, the Company became obligated to fund Interglobe's operations and
working capital needs in the form of intercompany loans and advances based upon
annual budgets and forecasts provided to and approved by the Company. For
further information concerning the terms of the Interglobe acquisition, see
"Item 1., DESCRIPTION OF BUSINESS."
During the year ended July 31, 1996, cash and cash equivalents
increased by $12,942,000 primarily due to the Hutchinson Transaction. The
Company had $1,521,000 cash flow from operations during the period reflecting
an increase of $5,023,000 over the prior year.
Purchases of fixed assets during the period were related mainly to the
opening of new distribution outlets by Western. The Company's cash and cash
equivalents of $17,086,000 as of July 31, 1996 and available credit
facilities are considered sufficient to support current or higher levels of
operations for at least the next twelve months.
39
ITEM 8. FINANCIAL STATEMENTS
Page
Number
Financial Statements:
Report of Independent
Public Accountants F - 1
Consolidated Balance Sheets as of
July 31, 1996 and 1995 F - 2
Consolidated Statements of Operations for the years
ended July 31, 1996, 1995 and 1994 F - 4
Consolidated Statements of Stockholders' Equity for the
years ended July 31, 1996, 1995 and 1994 F - 5
Consolidated Statements of Cash Flows for the years ended
July 31, 1996, 1995 and 1994 F - 6
Notes to Consolidated Financial Statements F - 7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
40
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 8, 1996. 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 56 Chairman of the Board of Directors,
President and Chief Executive Officer
Lawrence E. Kaplan 53 Director
C. Dean McLain 41 Director and Executive Vice President of
the Company; President and Chief Executive
Officer of Western
Artour Baganov 30 President of Interglobe and Director
David M. Barnes 53 Vice President of Finance, Chief Financial
Officer and Director
Howard Katz 54 Executive Vice President 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 AUG and
its subsidiaries; from January 1, 1994 to January 19, 1996, he served only as
Chairman of the Board of AUG and its subsidiaries. From January 19, 1996, Mr.
Rubin has served as Chairman of the Board and 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 is Chairman of
the Board, Chief Executive Officer and a
41
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. Mr. Rubin is
a former director and Vice Chairman, and currently a minority stockholder, of
American Complex Care, Incorporated, a public company formerly engaged in
providing on-site health care services, including intra-dermal infusion
therapies. In April 1995, American Complex Care, Incorporated's operating
subsidiaries made assignments of their assets for the benefit of creditors
without resort to bankruptcy proceedings. Mr. Rubin is also Chairman of the
Board and a minority stockholder of Universal Self Care, Inc., a public company
engaged in the sale of products used by diabetics. Mr. Rubin is also the
Chairman of the Board of Western Power & Equipment Corp. ("Western"), a public
company engaged in the distribution of construction equipment, principally
manufactured by Case Corporation, which is a subsidiary of the Company. The
Company owns approximately 56.6% of the outstanding common stock of Western. Mr.
Rubin is also a director and a minority stockholder of Response USA, Inc., a
public company engaged in the sale and distribution of personal emergency
response systems; Diplomat Corporation, a public company engaged in the
manufacture and distribution of baby products; Help at Home, Inc., a public
company which provides home health care personnel; Arzan International (1991)
Ltd.; and Kay Kotts Associates, Inc., a public company engaged in providing tax
preparation and assistance services.
LAWRENCE E. KAPLAN. Mr. Kaplan has served as a director of the Company
since February, 1993. Since January, 1987, Mr. Kaplan has been an officer,
director and principal stockholder of Gro-Vest Management Consultants, Inc., an
investment banking firm located on Long Island, New York. Mr. Kaplan is also a
registered representative, officer, director and principal stockholder of G-V
Capital, a brokerage firm. He is also a director of Andover Equities, Inc. and
PARK Group, both blank check companies which are looking for merger
opportunities. He is also an officer and director of Saratoga Standardbreds
Inc., a blank check company which is looking for a merger opportunity.
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.
ARTOUR BAGANOV. Mr. Baganov has served as a director of the Company since
November 1, 1996. He is a co-founder of interGlobe Networks, Inc. and has served
as a director of interGlobe since its inception in December 1994. From March
1996 Mr. Baganov has served as Chairman of the Board, President and Chief
Executive Officer of interGlobe. Prior to co-founding interGlobe, Mr. Baganov
was a network engineer at the University of Washington, specializing in TCP/IP
network topology design and engineering in addition to network management. Mr.
Baganov holds a Masters Degree in Engineering from Kalinin
42
Polytechnical Institute, Russia, and a BS in Computer Engineering from the
University of Washington. In addition, he has been actively involved in the
graduate studies in Computer- Communications Networks area at the University of
Washington. Mr. Baganov is also on the Board of Directors of the Greater Seattle
Chamber of Commerce.
DAVID M. BARNES Mr. Barnes has been Chief Financial Officer of the Company
since May 15, 1996, and Vice President Finance and director since November 8,
1996. Mr. Barnes has been a director of Consolidated Stainless, Inc., a
manufacturer and distributor of stainless steel products, since June 21, 1994.
From April 1990 until July 1990, Mr. Barnes also served as an officer and
director of Intelcom Data Systems, Inc., which engages in the design and
development of software for the foreign currency exchange and banking
industries. From October 1987 until May 1989, Mr. Barnes was Vice President of
Finance at U.S. Home Care Corp., a home health care provider. From April 1983
until September 1987, Mr. Barnes was Vice President of Finance and
Administration of Lifetime Corporation. From 1975 to 1983, Mr. Barnes was
Executive Vice President of Beefsteak Charlies, Inc. Mr. Barnes served as a
Director of Universal Self Care, Inc., a distributor and retailer of products
and services principally for diabetics, from May 1991 to June 1995 and he is a
director, President and a minority stockholder of American Complex Care,
Incorporated, a public company formerly engaged in providing on-site health care
services, including intradermal infusion therapies. In April 1995, American
Complex Care, Incorporated'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.
43
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, 1996, 1995 and 1994 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.
Long-Term Compensation
====================================================================================================================================
Annual Compensation Awards Payouts
-------------------------------------------------------------------------------------------
Other All Other
Annual Restricted Compen-
Name and Principal Compen- Stock Options/ LTIP sation
Position Year Salary Bonus sation Awards SARs(#) Payouts
- ------------------------------------------------------------------------------------------------------------------------------------
Robert M. Rubin 1996 $300,000 $50,000 $ 0 $ 0 530,000 $ 0 $ 0
Chairman, President, 1995 $168,750 $50,000 $ 0 $ 0 80,000(4) $ 0 $ 0
Director and acting 1994 $125,000 $69,600 $ 0 $ 0 0 $ 0 $ 0
CFO(1)
John Shahid 1996 250,000 90,000 $ 0 $ 0 0 $ 0 $815,833
Former President, 1995 $237,411 $75,000 $ 0 $ 0 215,000(4) $ 0 $ 0
Chief Executive 1994 $190,585 $30,000 $ 0 $ 0 0 $ 0 $ 40,525(2)
Officer and Director
C. Dean McLain(3) 1996 $250,000 $84,868 $ 0 $ 0 150,000 $ 0 $ 0
Executive Vice 1995 $170,709 $75,000 $ 0 $ 0 195,000(4) $ 0 $ 29,250(5)
President and 1994 $141,879 $30,000 $ 0 $ 0 0 $ 0 $ 62,470(5)
Director; President
of Western
====================================================================================================================================
- ----------------
(1) On June 15, 1995, Western entered into a separate employment agreement
with Robert Rubin. Mr. Rubin's 1995 salary includes $18,750 paid through
Western (See "Employment, Incentive Compensation and Termination
Agreements").
(2) Pursuant to the terms of Mr. Shahid's Employment Agreement dated as of
January 1, 1994, Mr. Shahid was permitted to and did purchase from the
Company 10,000 shares of the Company's common stock at a price of $.01 per
share on August 1, 1994. On August 1, 1994, the closing price for a share
of the Company's common stock as reported by NASDAQ was $4-1/16. The value
of the 10,000 shares of common stock held by Mr. Shahid as of July 31,
1995 was $48,750. Mr. Shahid resigned as President, CEO and a director of
the Company effective January 19, 1996 in connection with the sale of the
Company's manufacturing business to subsidiaries of Hutchinson
Corporation.
(3) Mr. McLain joined the Company in March 1993. Effective as of August 1,
1995, Mr. McLain's employment agreement with the Company was terminated
and he entered into an amended employment agreement with Western Power &
Equipment Corp. (See "Employment, Incentive Compensation and Termination
Agreements").
44
(4) On May 5, 1995 the Board of Directors canceled the named person's
outstanding stock options to acquire an equal number of shares and issued
new stock options at the then current market price of $3.125.
(5) Pursuant to the terms of Mr. McLain's Employment Agreement, dated February
12, 1993, during the Fiscal Year 1993 Mr. Mclain received $38,095 from the
Company as reimbursement for certain expenses that he incurred in
connection with his move to Washington State, and the sale of his former
residence, in order to permit his assuming his employment duties on behalf
of the Company. In addition, under the terms of his Employment Agreement
on March 1, 1993, July 31, 1994, and August 1, 1995 Mr. McLain was
permitted to and did purchase from the Company 8,000, 6,000, and 6,000
shares of the Company's common stock, respectively, at a price of $.01 per
share. On March 1, 1993, August 1, 1994, and on August 1, 1995, the
closing prices for a share of the Company's common stock as reported by
NASDAQ was $5-3/4, $4-1/16 and $4 7/8, respectively. The value of the
20,000 shares of common stock held by Mr. McLain as of July 31, 1995 was
$97,500.
45
Stock Option Plans
Option Grants in Fiscal Year 1996
The following table identifies individual grants of stock options made during
the last completed fiscal year to the executive officers named in the Summary
Compensation Table:
Realizable
Value at
Assumed Annual
Rates of Stock
Price
Appreciation
Individual Grants for Option Term
- ----------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
Options Exercise
Options Granted to of Base
Granted Employees in Price Expiration
Name (#) Fiscal Year ($/Sh) Date 5% ($) 10%($)
---- ----- ----------- -------- ------ ------ ------
Robert Rubin 450,000 40.9% $3.78125 4/25/01 $1,786,640 $1,871,719
John Shahid -0- -0- N/A N/A N/A N/A
C. Dean McLain 150,000 13.6% $3.78125 4/25/01 $ 595,547 $ 623,906
46
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
- ------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of Unexercised Value of Unexercised In-
Value Options at Fiscal Year- the-Money Options at
Shares Acquired on Realized End Fiscal Year-End
Name Exercise (#) ($) (#) ($)
---- ------------ ----- ---- ---
Exercisable/ Exercisable/
Unexercisable Unexercisable
Robert Rubin -0- -0- 80,000 (exercisable) $240,000 (exercisable)
450,000 (exercisable) $646,875 (exercisable)
John Shahid 226,546 $696,900 -0- -0-
C. Dean McLain -0- -0- 195,000 (exercisable) $566,719 (exercisable)
150,000 (exercisable) $337,500 (exercisable)
12,750 (exercisable) $ 14,742 (exercisable)
47
Employment, Incentive Compensation and Termination Agreements
In November 1994, Robert M. Rubin entered into a three-year employment and
bonus compensation agreement with the Company, retroactive to August 1, 1994.
Under the terms of that agreement, Mr. Rubin serves as Chairman of the Board of
the Company and its subsidiaries through and including July 31, 1997. Mr. Rubin
receives an annual base salary of $150,000 per annum. Such base salary shall be
increased by $10,000 for the fiscal year ending July 31, 1996 and by $15,000 for
the fiscal year ending July 31, 1997. In addition, Mr. Rubin was entitled to a
guaranteed bonus of $50,000 plus an additional annual incentive bonus payment
equal to (i) $5,000 for each $.01 increase in net earnings per share above $.55
per share for the fiscal year ending July 31, 1995, (ii) $5,000 for each $.01
increase in net earnings per share above $.60 per share for the fiscal year
ending July 31, 1996 and (iii) $5,000 for each $.01 increase in net earnings per
share above $.65 per share for the fiscal year ending July 31, 1997.
Upon completion of Western's initial public offering, Mr. Rubin's
employment agreement with the Company was amended to (i) eliminate his
guaranteed annual bonus, and (ii) limit his annual incentive bonus to $50,000
per annum for each of fiscal years ended July 31, 1996 and 1997, and made it
payable only in the event that the consolidated net income of the Company,
excluding the net income of Western, shall exceed $1,500,000 in each of such
fiscal years.
Following the amendment of his employment agreement with the Company,
Western entered into a separate employment agreement with Mr. Rubin, effective
June 14, 1995 and expiring July 31, 1998. Pursuant to such agreement, Mr. Rubin
serves as Chairman of the Board of Western and shall receive 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)
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.
The Company has entered into an amended and restated employment agreement
with Mr. Rubin, dated as of June 3, 1996, to extend the term of Mr. Rubin's
employment through July 31, 2001 (the "Restated Agreement"). 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 the
employee). The base salary in each
48
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, plus an
amount equal to the 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 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 of the Company, including all of its consolidated subsidiaries
other than Western Power & Equipment Corp., as determined by the Company's
independent auditors using generally accepted accounting principles,
consistently applied (the "Corporations' Net Income"), is greater than or equal
to $2,000,000 for the fiscal year ended July 31, 1997; (ii) $100,000 on November
1, 1998 if the Corporations' Net Income is greater than or equal to $2,500,000
for the fiscal year ended July 31, 1998; and (iii) $125,000 on November 1, 1999
if the Corporations' Net Income is greater than or equal to $3,000,000 for the
fiscal year ended July 31, 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 of the Company (other than the
employee).
John Shahid served as President and Chief Executive Officer of the
Company, AUG California, Inc. and each of its American United Products, Inc. and
American United Seal, Inc. operating subsidiaries, pursuant to the terms of an
Employment Agreement, dated as of January 1, 1994, which was to terminate on
December 31, 1998. Under that Employment Agreement, Mr. Shahid received a base
salary starting at $190,000 per year, which was to escalate to as high as
$265,000 per year during the last year of such agreement. His Employment
Agreement provided for payment of bonuses and for such other fringe benefits as
are paid to other executive officers of the Company. Such fringe benefits took
the form of medical coverage, excess life insurance benefits and an automobile
allowance. Mr. Shahid's Employment Agreement also provided for (i) bonus
payments based on the Company achieving prescribed levels of pre-tax profits
(commencing at a maximum of $30,000 bonus for the fiscal year 1994 and rising to
a maximum of $110,000 bonus for fiscal year 1998); (ii) the granting of options
to acquire 12,500 shares of Company's Common Stock at fair market value on the
date of grant under the Company's 1991 Stock Option Plan, with respect to each
fiscal year of the Employment Agreement in which the maximum Bonus is paid, and
(iii) the sale to Mr. Shahid of shares of Company Common Stock (ranging in
amounts from 10,000 shares to 15,000 shares) at $.01 per share, with respect to
each year in which the Company achieved prescribed levels of pre-tax profits.
On January 19, 1996, as a result of the Hutchinson Transaction, Mr. Shahid
and the Company entered into a Termination Agreement whereby Mr. Shahid resigned
as an officer and director of the Company and each of its subsidiaries in
consideration for the payment of an aggregate of $815,833, representing
salary payments under his Employment Agreement though December 31, 1998, as well
as a bonus payment for fiscal year 1996 in the amount of $90,000. The
Termination Agreement also provides that the Company shall retain Mr. Shahid as
a consultant for a period of three years, commencing April 1, 1996, for which
consulting services he will be paid an aggregate of $200,000 in equal quarterly
installments.
49
Prior to the Western 1995 initial public offering, C. Dean McLain served
as President and Chief Executive Office 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. Pursuant to
his employment agreement, in fiscal year 1995 Mr. McLain received a base salary
of $148,837 and the maximum $75,000 bonus provided for in such fiscal year. 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.
Effective as of August 1, 1995, Mr. McLain's employment agreement with the
Company was terminated and he entered into an amended employment agreement with
Western, expiring July 31, 2005. Pursuant to such agreement, Mr. McLain serves
as President and Chief Executive Officer of Western and will receive an annual
base salary, payable monthly, of $250,000 through the end of fiscal 1996,
$265,000 per annum in fiscal 1997, $280,000 per annum in fiscal 1998, $290,000
per annum in fiscal 1999, and $300,000 per annum in fiscal 2000. For each of the
fiscal years ending 2001, 2002, 2003, 2004 and 2005, inclusive, 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 will be entitled to receive bonus
payments in each of the five fiscal years ending 1996 through 2000, inclusive,
equal to 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 the Company'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.
Under the terms of his amended employment agreement, the 150,000 stock
options, exercisable at $6.50 per share, awarded to Mr. McLain under Western's
1995 Stock Option Plan in March 1995, were canceled and on August 1, 1995 Mr.
McLain was granted options to
50
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. As the number of
shares underlying Western's 1995 Stock Option Plan was at that time insufficient
for the full granting of such options, the options to purchase 300,000 shares
were granted on August 19, 1995 subject to stockholder approval of the amendment
of the 1995 Stock Option Plan (the "Plan"), which was approved by the
stockholders of Western on December 6, 1995. Such amendment to the Plan added
550,000 shares of Common Stock to be available for option grants under the Plan.
The granting of all stock to Mr. McLain pursuant to his amended employment
agreement was ratified at Western's 1995 Annual Meeting. The Western options
granted to Mr. McLain were repriced to $4.50 per share in December 1995.
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 fiscal years ending 1996
through 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
beginning August 1, 1996 and 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.
The Company hired Howard Katz as Executive Vice President effective April
15, 1996. Mr. Katz currently receives a base salary of $130,000 per annum,
payable monthly, until July 31, 1997, at which point the Company's Board of
Directors will review Mr. Katz's compensation arrangements. Mr. Katz does not
have an employment agreement with the Company.
The Company hired David M. Barnes as its Chief Financial Officer effective
May 15, 1996. Mr. Barnes receives a base salary of $125,000 per annum, payable
bi-monthly. Mr. Barnes does not have an employment agreement with the Company.
The Company entered into an employment agreement with Robert Marcus
("Marcus"), dated as of May 15, 1996, pursuant to which Marcus was hired for the
period expiring July 31, 1999 to be the President and Chief Executive Officer of
ConnectSoft. See "Recent Developments." As compensation for his services, Marcus
will receive a base salary of $125,000 per annum, and normal fringe benefits
available to other employees. The Company also entered into a stock option
agreement with Marcus pursuant to which he was granted a five-year option to
acquire up to 100,000 shares of Company Common Stock at an exercise price of
$5.25 per share, the fair market value of a share of Common Stock on the date of
option grant. Under the terms of the Marcus option, the option vests 25% in July
1996, and 25% in each successive July through July 1999.
In connection with the Interglobe Merger, the Company and Interglobe
entered into an employment agreement with Artour Baganov, a director of the
Company and President of
51
Interglobe, expiring July 31, 2000. Under the terms of such agreement, Mr.
Baganov receives an annual base salary of $150,000, annual cost of living
increases (not to exceed 5% in any one year) and an annual bonus equal to 4.5%
of the amount of any, by which the Pre-Tax Income (as defined) of Interglobe
exceeds $250,000, $1,000,000, $2,000,000 and $4,500,000 in each of fiscal years
ending 1997 through 2000, respectively. In addition, the 698,182 Company stock
options issued to Mr. Baganov become exercisable at [$5.50] per share
immediately upon the occurrence of certain events, and otherwise on a cumulative
basis at the rate of 25% in each of fiscal year 1997 through 2000, provided that
Interglobe meets or exceeds the Pre-Tax Income thresholds described above.
By agreement dated August 10, 1995, the Company agreed to pay severance to
certain specified employees, including John Palumbo (its former Chief Financial
Officer), in the event that such persons' employment by the successor to the
Company's manufacturing business was terminated prior to the first anniversary
of the closing date of the sale of the manufacturing business. Such severance
payment shall be equal to any terminated employee's salary, at the level last
paid by the Company for the 12 months succeeding the closing date, minus any
severance received from the successor company. Mr. Palumbo has informed the
Company that his employment by such successor, Hutchinson, was terminated
effective March 15, 1996, and that his severance compensation from Hutchinson
would terminate on April 19, 1996. As a result, Mr. Palumbo is entitled to
receive approximately $66,000 in severance compensation, plus the availability
of certain benefits from the Company, through January 19, 1997 under the
Company's severance program. To date, Mr. Palumbo is the only person taking
advantage of the Company's severance program.
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 old 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. 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 amend the Plans in order to extend the
expiration dates of these options and to allow for such options to immediately
vest in full upon the consummation of the Hutchinson transaction. All of the
options granted under the Plans became exercisable until January 19, 1998. At
such time, the options held by individuals no longer employed by the Company or
its subsidiaries shall immediately terminate. Options which continue to be held
by Company employees shall revert 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. Upon
exercise, these options shall be treated as non-qualified stock options for
federal income tax purposes. As a result of such option exercise period
extension, the Company incurred additional compensation expense for the fiscal
year ended July 31, 1995 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
market price for a share of Company Common Stock on
52
January 19, 1996 (the closing date of the Hutchinson Transaction, the day that
the option extension became effective).
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended July 31, 1996, the Compensation Committee of
the Company's Board of Directors (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 provided for under
his employment agreements entered into in July 1991 and August 1994, and his
amended and restated employment agreement dated as of June 3, 1996, which were
approved by the Company's Board of Directors. In June 1995, following completion
of Western's initial public offering, 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 per annum for each of fiscal years
ended July 31, 1996 and 1997, and payable only in the event that the
consolidated net income of the Company, excluding the net income of Western,
shall exceed $1,500,000 in each of such fiscal years. For information concerning
Mr. Rubin's June 1996 amended and restated employment agreement, see
"Employment, Incentive Compensation and Termination Agreements", above. Mr.
Rubin also entered into a separate employment agreement with Western. Mr.
Shahid's annual compensation was provided for under his employment contracts
which were entered into in January, 1991 and as of January 1, 1994, and which
were approved by votes of the Company's Board of Directors. See, "Employment,
Incentive Compensation and Termination Agreements," above. Mr. McLain's annual
compensation was provided for under his employment agreement dated February 12,
1993, which was approved by vote of the Company's Board of Directors. Effective
as of August 1, 1995, Mr. McLain's employment agreement with the Company was
terminated and he entered into an amended employment agreement with Western. See
"Employment, Incentive Compensation and Termination Agreements", above.
During the last fiscal year, other than Messrs. Rubin, Shahid and McLain,
who were then officers of the Company and members of the Board of Directors, no
officers or employees of the Company or any subsidiary participated in the
Board's compensation decisions.
Of the Compensation Committee members, only Mr. Rubin was at any time 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 comprised of Messrs. Rubin and Kaplan.
No director of the Company receives any directors fees for attendance at
Board meetings, although they do receive reimbursement for actual expenses of
such attendance.
53
In October 1991, Mr. Rubin agreed to waive rights inherent in his
ownership of the Company's Series A Preferred Stock to designate a majority of
the members of the Company's Board of Directors and to use his best efforts to
cause the Company to amend its Certificate of Incorporation so as to eliminate
all rights of Mr. Rubin or any other holder of the Series A Preferred Stock to
designate a majority of the members of the Board of Directors. In partial
consideration for his agreement to waive and modify such rights and privileges,
the Company issued to Mr. Rubin for $200,000 ($2.63 per share) an aggregate of
76,000 additional shares of Company Common Stock. Mr. Rubin paid for such shares
by delivering to the Company his full recourse 10% promissory note, which note
is secured by collateral other than the shares acquired (certain marketable
securities in corporations other than the Company) which has a fair market value
in excess of $200,000. This note was payable over five years, commencing March
31, 1992, together with accrued interest, in twenty equal quarterly principal
installments of $10,000 each. In March 1993, the Company agreed to amend Mr.
Rubin's note to be payable in a single payment 36 months from the date of
issuance at 8% interest per annum. In connection with such amendment, Mr. Rubin
agreed to apply no less than 50% of any bonus received by him against the
outstanding principal of the installment note. On November 7, 1996, the Board of
Directors of the Company agreed to extend the maturity date of such note to
March 31, 1999.
On January 26, 1994, the Company entered into a month-to-month public
relations consulting agreement with Gro-Vest Management Consultants, Inc.
("Gro-Vest Consultants"), a company one of whose principal stockholders,
directors and officers is Lawrence Kaplan. Commencing on March 1, 1994, the
Company became obligated to pay $3,000 per month to Gro-Vest Consultants for its
services under such agreement, subject to termination of the agreement on 30
days' notice provided by either party thereto. An aggregate of $43,000 was paid
to Gro-Vest Consultants in the 1996 fiscal year.
At the closing of the Hutchinson Transaction, 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 will
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 will receive payments aggregating
$1,000,000.
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
54
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.
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 accommodations to ERD by making available a $4.4 million standby
letter of credit expiring May 31, 1997 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
Credit 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 25.1% 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 payable to Citibank and others 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 and (ii)
to 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. ERD Common Stock trades on
the NASDAQ National Market and, at the time of closing of the transaction with
ERD, its the closing price of ERD Common Stock, as traded on Nasdaq was $9.25
per share.
In August 1996, a subsidiary of ERD which operates 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 currently accounts for approximately 13% of ERD's
consolidated revenues. As a result of the uncertainties surrounding ERD's
waste facility operations, the per share price of ERD Common Stock closed at
$2.875 per share on November 8, 1996. Although the Company has been advised
by ERD that it and the DEC have reached agreement in principle to settle on
acceptable terms such violations and pending charges alleged against ERD and
one of the employees of the ERD subsidiary, to date, no such settlement has
been finalized. If an acceptable settlement is not reached, the business of
ERD could be 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 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
55
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 AUGI from
the sale of ERD capital stock described above.
As of October 31, 1996, the directors and executive officers listed below
hold outstanding non-qualified options to acquire shares of Company Common Stock
granted under the Company's 1996 Stock Option Plan, adopted on April 25, 1996
and amended as of July 30, 1996, as follows: options were granted on April 25,
1996 to Robert M. Rubin (450,000 options), C. Dean McLain (150,000 options) and
Howard Katz (150,000 options) at an exercise price of $3.78125 per share;
options were granted on May 15, 1996 to David M. Barnes (100,000 options) at an
exercise price of $5.25 per share; and options were granted to Robert M. Rubin
(30,000 options), Howard Katz (100,000 options) and David M. Barnes (50,000
options) at an exercise price of $5.125 on October 4, 1996. The exercise prices
of all such options equals the average of the closing bid and asked prices for a
share of Company Common Stock as reported on The Nasdaq National Market on the
date of option grant.
On July 30, 1996, the Board of Directors of the Company amended the terms
of the 1996 Stock Option Plan to make all options granted under the 1996 Stock
Option Plan exercisable without shareholder approval. On the date the 1996 Stock
Option Plan was amended, the market price of the Company's Common Stock was
$6.0125 per share, as a result of which the Company incurred a compensation
charge equal to $1,670,667, representing the aggregate value of such unexercised
in-the-money 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, are
immediately exercisable. The options granted to Mr. Barnes in May 1996 and the
remaining 150,000 options granted to
56
Mr. Katz vest immediately as to 33-1/3% and as to 33-1/3% at the end of each of
various fiscal periods ending 1997 and 1998, subject to their continued
employment with the Company. The options to acquire 30,000 shares granted to Mr.
Rubin and 50,000 shares granted to Mr. Barnes in October 1996 vest 50% on the
first anniversary of the option grant and 50% on the second anniversary of the
option grant.
In June 1996, the Company agreed to loan to 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 a demand basis,
when and if requested by the Company, but in no event later than January 31,
1998. Mr. Rubin's indebtedness will be 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 seven-year Consulting Agreement and Non-Competition
Agreement with Hutchinson, which currently aggregate $1,200,000.
Board Compensation Committee Report on Executive Compensation
The Board of Directors of the Company has decided that 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, is
to enter into employment agreements with its senior executive officers. During
the fiscal year ended July 31, 1995, Messrs. Rubin, Shahid and McLain were all
under contract with the Company. This had enabled the Board to concentrate on
the negotiation of particular employment contracts rather than on the
formulation of more general compensation policies for all management and other
personnel. Upon the effective date of the initial public offering of Western,
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" above. The
Company believes that its compensation levels as to all of its employees were
comparable to industry standards. As of January 19, 1996, Mr. Rubin was the
Company's only senior executive officer of the Company employed under a contract
approved by the full Board of Directors. See "Employment, Incentive Compensation
and Termination Agreements," above.
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 Company performance and industry compensation
standards. A significant percentage of the compensation paid to each of Messrs.
Shahid, McLain and Rubin in the past under their respective employment
agreements and payable to Mr. Baganov under his agreement was and 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 such executive is responsible. See,
"Employment, Incentive Compensation and Termination Agreements," above. The
members of the Company's Board of Directors are Messrs. Robert M. Rubin, C. Dean
McLain, Lawrence E. Kaplan, Howard Katz, Artour Baganov and David M. Barnes.
57
ROBERT M. RUBIN LAWRENCE E. KAPLAN C. DEAN MCLAIN
HOWARD KATZ ARTOUR BAGANOV DAVID M. BARNES
Compliance with Section 16(a) of the Exchange Act.
To the knowledge of the Company, no officers, directors, beneficial owners
of more than 10 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, 1996, other than Howard Katz who failed
timely to file a Form 3 and Form 4 for activities occurring in the month
of April 1996.
58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of October 31, 1996
with respect to the beneficial ownership of the Common Stock of the Company by
each beneficial owner of more than 5% of the total number of outstanding shares
of the Common Stock of the Company, each director and nominee for 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.
Robert M. Rubin Director, President, Chief 1,775,798(1)(2) 20.3%
6060 King's Gate Circle Executive Officer
Del Ray Beach, FL 33484
Lawrence E. Kaplan Director 14,283 --*
330 Vanderbilt Motor Pkwy
Hauppauge, NY 11788
C. Dean McLain Director, Executive Vice- 269,750(2)(3) 3.2%
4601 N.E. 77th Avenue President and President of
Suite 200 Western Power
Vancouver, WA 98662
Artour Baganov Director and President
1520 Fourth Avenue, of InterGlobe 698,182(4) 8.5%
Suite 200
Seattle, Washington 98101
Associated Capital L.P.(5) 570,000 6.9%
477 Madison Avenue
14th Floor
New York, NY 10022
David M. Barnes Vice President of Finance 33,333(6) --*
11130 NE 33rd Place and Director
Bellevue, WA 98004
Howard Katz Executive Vice President 150,000(6) 1.8%
300 East 56th Street and Director
New York, NY 10022
All directors and
executive officers as a
group (6 persons) 2,941,346(1)(2)(3)(4)(6) 31.7%
59
- ----------
* Less than one percent (1%)
(1) Includes non-qualified options to purchase 80,000 shares granted to Mr.
Rubin at an exercise price of $3.125 per share under the Company's 1991
Stock Option Plan which are fully exercisable.
(2) Includes non-qualified options granted under the 1996 Stock Option Plan
(options to acquire 450,000 shares to Mr. Rubin; options to acquire
150,000 shares to Mr. McLain). Such options were granted 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. The 1996 Stock Option Plan was
amended in July 1996 to make options granted under the plan exercisable
without stockholder approval. Messrs. Rubin and McLain's continuing
employment by the Company is governed by the terms of their employment
agreements. Does not include 30,000 options granted to Mr. Rubin on
October 4, 1996 under the 1996 Stock Option Plan, which options are not
yet exercisable.
(3) Includes (i) options to purchase 95,000 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 12,750 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.
(4) Does not include Interglobe Options to purchase a maximum of 698,182
shares of Company Common Stock at $5.50 per share which are exercisable
only under certain conditions specified in connection with the Interglobe
merger.
(5) The General partner of Associated Capital, L.P., a Delaware limited
partnership ("Associated"), is A Cap, Inc., a New York corporation ("A
Cap"). Under Rule 13d-3 promulgated under the Securities Exchange Act of
1934, as amended, A Cap may be deemed to be a direct beneficial owner of
the shares of Company Common Stock owned by Associated by virtue of its
interest in, and control over, Associated. Jay H. Zises, as President of A
Cap, has the sole power to vote and to direct the voting of, and to
dispose and to direct the disposition of, the shares of the Company's
Common Stock deemed to be beneficially owned by A Cap. Under Rule 13d-3,
Mr. Zises may be deemed to be an indirect beneficial owner of the Company
Common Stock owned by Associated.
(6) Includes options to purchase 100,000 shares granted to Mr. Katz at an
exercise price of $5.125 per share and options to purchase 50,000 shares
granted to Mr. Katz at an exercise price of $3.78125 under the 1996 Plan
which are immediately exercisable. Does not include options granted under
the 1996 Stock Option Plan to Messrs. Barnes (66,667 shares at an exercise
price of $3.78125 per share and 50,000 at an exercise price of $5.125 per
share) and Katz (100,000 shares) at exercise price of $3.78125,
respectively,
60
which are not yet exercisable. The options issuable to each of Messrs.
Barnes and Katz which are not yet exercisable are only exercisable under
certain conditions related to their continued employment with the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Item 11, Executive Compensation - Compensation Committee Interlocks
and Insider Participation" and "Employment, Incentive and Termination
Agreement", and "Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations," above.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements.
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of
July 31, 1995 and 1994..................................... F-3
Consolidated Statements of Operations for
the years ended July 31, 1995, 1994, and 1993.............. F-4
Consolidated Statements of Stockholders'
Equity for the years ended July 31, 1995, 1994
and 1993.................................................. F-5
Consolidated Statements of Cash Flows for
the years ended July 31, 1995, 1994 and 1993............... F-7
Notes to Consolidated Financial Statements.................. F-9
2. Schedule II -- Valuation and Qualifying Accounts ............... S-1
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on July 24, 1996, with
respect to the acquisition of ConnectSoft.
(c) Exhibits.
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of Registrant. (8)
61
3.2 By-laws of Registrant. (9)
4.1 Specimen Certificate of Common Stock. (10)
4.2 1991 Employee Stock Option Plan. (8)
4.3 1996 Stock Option Plan, as amended
10.1 Agreement of Purchase and Sale, dated December 4, 1992, by
and between Case and Western Power (Schedules omitted) (1)
10.2 Employment Agreement, by and between Western Power and C.
Dean McLain. (14)
10.3 Financing Agreement with Associates Commercial Corporation
and Western Power. (3)
10.4 Asset Purchase Agreement, dated as of September 22, 1994, by
and between Case and Western Power (schedules omitted). (4)
10.5 Management Agreement between Western Power and American
United Global, Inc. (6)
10.6 Revised Financing Agreement with Seattle-First National Bank
and Western Power. (14)
10.7 Auburn Facility Real Estate Purchase and Sale Agreement,
dated October 19, 1995, by and between Western Power and
Ford Kiene. (14)
10.8 Western Power Lease Agreement--Sacramento, California. (7)
10.9 Sacramento Acquisition Agreement with Western Power
a. Asset Purchase Agreement (7)
b. Used Equipment Note (7)
c. Parts Note (7)
d. Accounts Receivable Note (7)
e. Goodwill Note (7)
f. Real Estate Note from MRR to Case (7)
g. Deed to Secure Debt of MRR to Case (7)
h. Security Agreement (7)
i. C. Dean McLain's Personal Guaranty (7)
10.10 GCS Acquisition Agreement with Western Power (14)
62
Exhibit
Number Description
------ -----------
10.11 Amended and Restated Employment Agreement with Robert M.
Rubin (11)
10.12 Asset Purchase Agreement, dated as of November 22, 1995, by
and among Hutchinson Corporation, American United Global,
Inc. ("AUGI"), AUG California, Inc. ("AUG-Ca"), American
United Products, Inc. ("AUP"), and American United Seal,
Inc. ("AUS") (Schedules and Exhibits omitted). (12)
10.13 Non-Competition Agreement, dated January 19, 1996, among
Hutchinson Seal Corporation, AUGI, AUG-Ca, AUP and AUS. (12)
10.14 Non-Competition Agreement, dated January 19, 1996, between
Hutchinson Seal Corporation and Robert M. Rubin. (12)
10.15 Agreement of Hutchinson Corporation to guaranty payments
under Non- Competition and Consulting Agreements. (12)
10.16 Consulting Agreement, dated January 19, 1996, between
Hutchinson Seal Corporation and Robert M. Rubin (12)
10.17 $2,625,000 Purchase Note from N O-Ring Corporation to AUGI.
(12)
10.18 $1,050,000 Purchase Note from Stillman Seal Corporation to
AUGI. (12)
10.19 Guaranty of Hutchinson Corporation of the Purchase Notes,
aggregating $3,675,000 of N O-Ring Corporation and Stillman
Seal Corporation. (12)
10.20 January 19, 1996, amendment to certain provisions of Asset
Purchase Agreement. (12)
10.21 Agreement and Plan of Merger, dated June 28, 1996, by and
among AUGI, ConnectSoft, Inc., and certain shareholders of
ConnectSoft, Inc. (without exhibits) (13)
10.22 Agreement and Plan of Merger, dated August 22, 1996, by and
among AUGI, Interglobe Networks, Inc. and certain
shareholders of Interglobe Networks, Inc. (without exhibits)
63
Exhibit
Number Description
------ -----------
10.23 Asset Purchase Agreement, dated October 17, 1996 by and
among AUGI, Seattle Online, Inc. and certain shareholders of
Seattle Online, Inc., including amendments (without
exhibits).
21. Subsidiaries of the Company.
23. Consent of Price Waterhouse LLP.
27. Financial Data Schedule.
- ----------
(1) Filed as an Exhibit to the Current Report on Form 8-K of American United
Global, Inc. ("AUGI"), as filed on December 19, 1992 and incorporated
herein by reference thereto.
(2) Filed as an Exhibit to the AUGI Annual Report on Form 10-K, as filed on
October 29, 1993 and incorporated herein by reference thereto.
(3) Filed as an Exhibit to Amendment No.1 to AUGI's Registration Statement on
Form S-1, filed on February 1, 1994 and incorporated herein by reference
thereto. (Registration No. 33-72556)
(4) Filed as an Exhibit to the Current Report on Form 8-K of AUGI, as filed on
September 23, 1994 and incorporated herein by reference thereto.
(5) Filed as an Exhibit to Amendment No. 1 to the Western Power & Equipment
Corp. ("Western Power") Registration Statement on Form S-1, filed on May
16, 1995 and incorporated herein by reference thereto. (Registration No.
33-89762).
(6) Filed as an Exhibit to the Western Power Registration Statement on Form
S-1, filed on February 24, 1995 (Registration No. 33-89762).
(7) Filed as an Exhibit to the Current Report on Form 8-K of Western Power as
filed on March 6, 1996 and incorporated herein by reference thereto.
(8) Included with the filing of AUGI'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.
(9) Filed as an Exhibit to the definitive Proxy Materials of Atrom Corp., a
New York corporation, as filed on December 10, 1991.
(10) Filed as on Exhibit to AUGI's Registration Statement on Form S-18
(Registration No. 330330 81-NY)_ and incorporated herein by reference
thereto.
64
(11) Filed as on Exhibit to AUGI's Preliminary Proxy Materials filed 1996
Annual Meeting on June 27, 1996.
(12) Filed as on Exhibit to AUGI's Current Report on Form 8-K, dated February
2, 1996.
(13) Filed as an Exhibit to AUGI's Current Report on Form 8-K, dated July 24,
1996.
(14) Filed as an Exhibit to Western Power Report on Form 10-K for fiscal year
ended July 31, 1996.
65
AMERICAN UNITED GLOBAL, INC.
AND SUBSIDIARIES
REPORT AND CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
November 8, 1996
To the Board of Directors and Shareholders of
American United Global, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of American
United Global, Inc. and its subsidiaries at July 31, 1996 and 1995 and the
results of their operations and their cash flows for each of the three years
in the period ended July 31, 1996 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.
As discussed in Note 8 to the consolidated financial statements, the Company
changed its method of accounting for income taxes during the year ended July 31,
1994.
PRICE WATERHOUSE LLP
Portland, Oregon
November 8, 1996
F-2
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JULY 31,
1996 1995
------------- -------------
ASSETS
Current assets:
Cash $ 17,086,000 $ 4,144,000
Investment in marketable debt securities 6,268,000 -
Trade accounts receivable, less allowance for doubtful accounts
of $652,000 and $370,000, respectively 6,628,000 6,008,000
Other receivables - 1,102,000
Note receivable from shareholder 838,000 -
Inventories (Note 4) 65,697,000 46,413,000
Prepaid expenses 476,000 22,000
Deferred tax asset (Note 8) 1,528,000 -
------------- -------------
Total current assets 98,521,000 57,689,000
Property and equipment, net (Note 5) 8,878,000 7,062,000
Note receivable (Note 10) 3,198,000 -
Intangibles and other assets, net of accumulated amortization
of $1,272,000 and $823,000, respectively 4,579,000 2,526,000
Net assets held for sale (Note 10) - 9,552,000
------------- -------------
$ 115,176,000 $ 76,829,000
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under floor financing lines (Note 7) $ 54,364,000 $ 37,072,000
Short-term borrowings (Note 7) 4,660,000 6,023,000
Current portion of capital lease obligations (Note 11) 1,119,000 51,000
Accounts payable 4,252,000 2,171,000
Accrued liabilities 5,387,000 1,454,000
Income taxes payable (Note 8) 5,104,000 896,000
------------- -------------
Total current liabilities 74,886,000 47,667,000
Long-term borrowings (Note 7) 2,968,000 -
Capital lease obligations, net of current portion (Note 11) 2,083,000 47,000
Other non-current liabilities - 305,000
Purchased business obligations (Notes 3 and 6) 4,564,000 -
Minority interest (Note 9) 9,459,000 8,556,000
------------- -------------
Total liabilities 93,960,000 56,575,000
------------- -------------
Commitments and contingencies (Note 11)
Shareholders' equity (Notes 9 and 12):
Preferred stock, 12.5% cumulative, $1.00 per share liquidation
value, $.01 par value; 1,200,000 shares authorized; none issued
and outstanding - -
Series B convertible preferred stock, convertible to common,
$3.50 per share liquidation value, $.01 par value; 1,500,000 shares
authorized; none issued and outstanding - -
Common stock, $.01 par value; 20,000,000 shares authorized;
6,266,382 and 5,654,479 shares issued and outstanding, respectively 63,000 57,000
Additional contribution capital 20,654,000 15,889,000
Note receivable from shareholder - (184,000)
Deferred compensation (293,000) -
Retained earnings 792,000 4,492,000
------------- -------------
Total shareholders' equity 21,216,000 20,254,000
------------- -------------
$ 115,176,000 $ 76,829,000
------------- -------------
------------- -------------
The accompanying notes are an integral part of this statement.
F-3
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JULY 31,
1996 1995 1994
-------------- ------------- -------------
Net sales $ 106,831,000 $ 86,173,000 $ 67,370,000
Cost of goods sold 94,095,000 76,145,000 59,138,000
-------------- ------------- -------------
Gross profit 12,736,000 10,028,000 8,232,000
Selling, general and administrative expenses 9,168,000 6,228,000 5,696,000
Stock option compensation 1,671,000 - -
Restructuring charge 571,000 - -
Research and development expenses (Note 3) 9,764,000 - -
-------------- ------------- -------------
Operating (loss) income (8,438,000) 3,800,000 2,536,000
Interest expense, net 1,394,000 1,421,000 830,000
Loss on Western Power & Equipment initial public offering (Note 9) - 386,000 -
-------------- ------------- -------------
(Loss) income from continuing operations before income taxes
and minority interest (9,832,000) 1,993,000 1,706,000
Provision for income taxes (Note 8) 741,000 711,000 682,000
Minority interest in earnings of consolidated subsidiaries 902,000 118,000 -
-------------- ------------- -------------
(Loss) income from continuing operations (11,475,000) 1,164,000 1,024,000
-------------- ------------- -------------
Discontinued operations, net of taxes (Note 10):
Income from operations, net of tax 315,000 1,104,000 1,460,000
Gain (loss) on disposal (net of tax of $5,042,000 and $244,000 in
1996 and 1994) 7,460,000 - (365,000)
-------------- ------------- -------------
7,775,000 1,104,000 1,095,000
-------------- ------------- -------------
Extraordinary item - Gain on early debt extinguishment, less applicable
income taxes - - 30,000
-------------- ------------- -------------
Cumulative effect of a change in accounting principle (Note 8) - - 138,000
-------------- ------------- -------------
Net (loss) income (3,700,000) 2,268,000 2,287,000
Dividends on preferred stock - - (86,000)
-------------- ------------- -------------
Net (loss) income available for common shareholders $ (3,700,000) $ 2,268,000 $ 2,201,000
-------------- ------------- -------------
-------------- ------------- -------------
(Loss) earnings per common and common equivalent share:
(Loss) income from continuing operations $ (1.98) $ 0.20 $ 0.18
Discontinued operations 1.34 0.20 0.21
Extraordinary item - - 0.01
Cumulative effect of change in accounting principle - - 0.03
-------------- ------------- -------------
Net (loss) income per share $ (0.64) $ 0.40 $ 0.43
-------------- ------------- -------------
-------------- ------------- -------------
Weighted average number of shares 5,810,526 5,729,852 5,170,175
-------------- ------------- -------------
-------------- ------------- -------------
The accompanying notes are an integral part of this statement.
F-4
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK
--------------------- -------------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
--------- ---------- ---------- ----------
Balance at July 31, 1993 1,200,000 $ 12,000 4,817,000 $ 48,000
Net income
Dividends paid on preferred stock
Public offering, net of $968,000
in expenses 920,000 9,000
Shares repurchased (100,000) (1,000)
Conversion of preferred stock
to subordinated note payable (1,200,000) (12,000)
Exercise options 2,000
--------- ---------- ---------- ----------
Balance at July 31, 1994 - - 5,639,000 56,000
Net income
Issuance of common shares as
compensation 16,000 1,000
Net collection on note receivable
from shareholder
--------- ---------- ---------- ----------
Balance at July 31, 1995 - - 5,655,000 57,000
Net loss
Issuance of common shares
as compensation 12,000
Stock issued under stock option
plans and warrants 600,000 6,000
Tax benefit related to stock option
plans and warrants
Stock option compensation
Net collection on note receivable
from shareholder
--------- ---------- ---------- ----------
Balance at July 31, 1996 - $ - 6,267,000 $ 63,000
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
ADDITIONAL TOTAL
CONTRIBUTION RETAINED SHAREHOLDERS'
CAPITAL OTHER EARNINGS EQUITY
-------------- ------------- ---------- --------------
Balance at July 31, 1993 $ 13,650,000 $ (200,000) $ 23,000 $ 13,533,000
Net income 2,287,000 2,287,000
Dividends paid on preferred stock (86,000) (86,000)
Public offering, net of $968,000
in expenses 3,855,000 3,864,000
Shares repurchased (462,000) (463,000)
Conversion of preferred stock
to subordinated note payable (1,188,000) (1,200,000)
Exercise options 3,000 3,000
-------------- ------------- ---------- --------------
F-5
Balance at July 31, 1994 15,858,000 (200,000) 2,224,000 17,938,000
Net income 2,268,000 2,268,000
Issuance of common shares as
compensation 31,000 32,000
Net collection on note receivable
from shareholder 16,000 16,000
-------------- ------------- ---------- --------------
Balance at July 31, 1995 15,889,000 (184,000) 4,492,000 20,254,000
Net loss (3,700,000) (3,700,000)
Issuance of common shares
as compensation 15,000 15,000
Stock issued under stock option
plans and warrants 1,770,000 1,776,000
Tax benefit related to stock option
plans and warrants 510,000 510,000
Stock option compensation 2,470,000 (293,000) 2,177,000
Net collection on note receivable
from shareholder 184,000 184,000
-------------- ------------- ---------- --------------
Balance at July 31, 1996 $ 20,654,000 $ (293,000) $ 792,000 $ 21,216,000
-------------- ------------- ---------- --------------
-------------- ------------- ---------- --------------
The accompanying notes are an integral part of this statement.
F-6
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED JULY 31,
1996 1995 1994
--------- --------- ----------
Cash flows from operating activities:
Net (loss) income $ 3,700,000 $ 2,268,000 $2,287,000
Adjustments to reconcile net (loss) income to net cash used by
operating activities:
Cumulative effect of change in accounting principle - - (138,000)
Shares issued in lieu of compensation - 32,000 -
Depreciation and amortization 1,194,000 1,068,000 633,000
(Gain) Loss on disposal of business (7,460,000) - 365,000
Loss on Western Power & Equipment initial public offering - 386,000 -
Loss on sale of fixed assets 4,000 35,000
Deferred tax provision (781,000) (267,000) (200,000)
Gain on debt extinguishment - (30,000)
Income applicable to minority interest 902,000 118,000 -
Purchased research and development 8,472,000 - -
Stock option compensation 1,671,000 - -
Imputed interest 161,000 - -
Write-off capitalized software costs 262,000 - -
Change in assets and liabilities, net of effects of acquisitions
and dispositions:
Accounts receivable (267,000) (2,420,000) (94,000)
Inventories (12,830,000) (5,181,000) (5,736,000)
Prepaid expenses, other receivables and other assets 544,000 (1,196,000) 116,000
Other assets (149,000) - -
Inventory floor financing 12,411,000 - -
Accounts payable (665,000) 261,000 749,000
Accrued liabilities 2,566,000 273,000 251,000
Income taxes payable (314,000) 324,000 (348,000)
Other non-current liabilities - 223,000 135,000
Discontinued operations - 605,000 (1,253,000)
Other (496,000) - -
--------- --------- ----------
Net cash provided by (used in) operating activities 1,521,000 (3,502,000) (3,228,000)
--------- --------- ----------
Cash flows from investing activities:
Proceeds from sale of fixed assets 2,075,000 6,000 26,000
Proceeds from sale of business, net 19,099,000 - 500,000
Purchase of property and equipment (695,000) (332,000) (309,000)
Purchase of debt securities (6,268,000) - -
Purchase of distribution outlets (2,325,000) - -
Acquisition of businesses, net of cash acquired (105,000) (557,000) -
---------- --------- ----------
Net cash provided by (used in) investing activities 11,781,000 (883,000) 217,000
---------- --------- ----------
Cash flows from financing activities:
Net borrowings (payments) under revolving credit agreements (3,424,000) 4,187,000 1,467,000
Net borrowings (payments) under term loans 1,268,000 (1,623,000) (314,000)
Principal payments under capitalized lease obligations (394,000) (52,000) (20,000)
Proceeds from Company public offerings - 7,801,000 3,401,000
Net (payments) borrowings under notes payable to shareholders - (2,575,000) (800,000)
Dividends paid on preferred stock - - (86,000)
Decrease in receivable from underwriter 1,102,000 - -
Exercise of stock options 1,776,000 - 3,000
Collections (increase) of notes receivable from shareholder, net (688,000) 16,000 -
--------- --------- ----------
Net cash provided by financing activities (360,000) 7,754,000 3,651,000
--------- --------- ----------
Net increase in cash 12,942,000 3,369,000 640,000
Cash at beginning of year 4,144,000 775,000 135,000
--------- --------- ----------
F-7
Cash at end of year $ 17,086,000 $4,144,000 $ 775,000
The accompanying notes are an integral part of this statement.
F-8
1. DESCRIPTION OF BUSINESS
American United Global, Inc. (the "Company") has been engaged in two
distinct businesses consisting of a distribution operation and a
manufacturing operation. Through its Western Power & Equipment Corp.
("Western") subsidiary, the Company operates as a retail distributor for
the sale, servicing, and leasing of light to medium-sized construction
equipment and parts (the "Distribution Service Group"). Substantially all
of this equipment is manufactured by Case Corporation ("Case"). The
Company's manufacturing business consisted of two units, National O-Ring,
which manufactured and distributed a full range of standard-size, low-cost,
synthetic rubber o-ring sealing devices for use in automotive and
industrial applications, and Stillman Seal, which specialized in the
design, manufacture and distribution of rubber-to-metal bonded sealing
devices and molded rubber shapes for use in commercial aerospace, defense
and communications industry applications (collectively the "Manufacturing
Group"). The Manufacturing Group was sold pursuant to the terms of an
Asset Purchase Agreement dated as of November 22, 1995. The effect of the
sale on the results of operations of the Company has been included in
discontinued operations in the accompanying consolidated statements of
operations for the year ended July 31, 1996 as more fully described in
Note 10. In accordance with the rules and regulations of the Securities
and Exchange Commission, previously reported financial statements of the
Company have been restated to present National O-Ring/Stillman Seal as a
discontinued operation. The net assets of National O-Ring/Stillman
Seal are presented as assets held for sale in the restated balance sheet
for fiscal 1995.
The Manufacturing Group also included Aerodynamic Engineering, Inc. which
performed precision machining of close tolerance parts primarily for use
in the commercial aerospace and defense industries until its disposal in
fiscal 1994. This subsidiary was sold in April 1994 as further discussed
in Note 10.
As discussed in Note 3, the Company acquired ConnectSoft, Inc.
("ConnectSoft"), effective May 1, 1996. ConnectSoft provides
communications software applications and services for persons seeking
access to and utilization of resources and information available on the
Internet.
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 43% at July 31,
1996. There is also a 25% minority interest held in eXodus Technologies,
Inc. ("eXodus"), a former division of Connectsoft, but no minority interest
is presented due to accumulated losses.
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-9
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 specific
identification for construction equipment.
INVESTMENT SECURITIES
Investments in marketable debt securities represent primarily treasury
notes which are carried at amortized cost as these investments have been
classified as held-to-maturity securities. Held-to-maturity securities
represent those securities that the Company has both the positive intent
and ability to hold until maturity.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives
of the assets, ranging from 3 to 30 years. Expenditures for additions 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
Intangible assets acquired in business acquisitions such as name
recognition, existing technology, geographical location and presence
and noncompete agreements represent value to the Company. Intangibles
are amortized using the straight-line method over the assets' estimated
useful lives ranging from 5 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. Statement
of Financial Accounting Standards ("SFAS") No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of, requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. SFAS No. 121 is required to be implemented
by the Company for the fiscal year beginning August 1, 1996 and is not
expected to have a significant impact on the Company's financial
statements.
INCOME TAXES
Effective August 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. The
adoption of SFAS No. 109 changed the Company's method of accounting for
income taxes from the deferral method to 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. The cumulative effect of the adoption in fiscal
1994 was an increase in net income of $138,000, resulting primarily from
the recognition of certain net operating
F-10
loss carryforwards.
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 at the time such services are provided. Software
related contract service revenue is recognized on either the
percentage-of-completion contract accounting method or on a completed
contract basis, depending on the structure of the contract. Revenue from
sales of software products to end-users and distributors is recognized upon
product shipment, net of an allowance for returns.
SOFTWARE DEVELOPMENT COSTS
The Company acquired certain software development costs in connection with
the acquisition of ConnectSoft as more fully described in Note 3. Software
development costs incurred in conjunction with product development are
charged to product development expense until technological feasibility is
established. Thereafter, all software product development costs are
capitalized and reported at the lower of unamortized cost or net realizable
value of each product. The establishment of technological feasibility and
the on-going assessment of the recoverability of costs require considerable
judgment by the Company with respect to certain external factors,
including, but not limited to, anticipated future gross product revenues,
estimated economic life and changes in the software and hardware
technology. After consideration of the above factors, the Company
amortizes capitalized software costs at the greater of the amount computed
using (a) the ratio of current revenues for a product to the total of
current and anticipated future revenues or (b) the straight-line method over
the remaining estimated economic life of the product. Capitalized software
development costs are included in intangible and other assets in the
accompanying consolidated balance sheet.
RESEARCH AND DEVELOPMENT
Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred.
ADVERTISING EXPENSE
The Company expenses all advertising costs as incurred. Total advertising
expense for the years ended July 31, 1996, 1995 and 1994 was $263,000,
$274,000 and $134,000, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
short-term borrowings, accounts payable and accrued liabilities as
presented in the consolidated financial statements approximates 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
investment securities held is approximately $179,000 less than the
carrying value at July 31, 1996.
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
F-11
differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued FAS 123,
"Accounting for Stock-Based Compensation", which establishes financial
accounting and reporting standards for stock-based employee compensation
plans and for the issuance of equity instruments to acquire goods and
services from non-employees. The Company has not determined its method of
adoption for fiscal 1997.
EARNINGS PER SHARE
Net income (loss) per share is computed by dividing the net income available
for common shareholders by the weighted average number of shares of common
stock and common stock equivalents outstanding during the period using the
treasury stock method. The Company's preferred stock that has been granted
in connection with the ConnectSoft acquisition (see Note 3) has not been
included in the loss per share calculation for the year ended July 31, 1996,
as their effect is antidilutive. The additional shares to be potentially
issued to the ConnectSoft shareholders upon occurrence of certain events
(see Note 3) have not been included in the determination of loss per share
for the year ended July 31, 1996. Fully diluted earnings (loss) per share
is not presented as it is considered to be the same as primary earnings per
share.
3. ACQUISITIONS
Effective November 1, 1992, the Company's newly formed Western subsidiary
completed the acquisition from Case of certain assets used in connection
with seven separate Case retail construction equipment distributorships
located in the states of Washington and Oregon (the "Western Acquisition").
The purchase included approximately $33,000,000 of various assets,
including inventories of new and used Case construction equipment and spare
parts, as well as the land and building at one of the locations. The
purchase price paid was approximately $1,937,000 in cash and approximately
$31,000,000 was financed, primarily through inventory floor planning dealer
finance agreements with Case and its affiliates. In addition, the Company
incurred approximately $2,000,000 in other related acquisition costs in
connection with the transaction. The obligations of Western to Case and
its affiliates under the various purchase notes and related financing and
security agreements with Case and its affiliates are guaranteed by the
Company.
Effective September 10, 1994, Western acquired the assets and operations of
two additional factory-owned stores of Case in the states of California and
Nevada. The purchase price paid was approximately $557,000 in cash,
$4,153,000 in installment notes payable to Case and the assumption of
$5,019,000 in inventory floor planning dealer finance agreements with Case
and its affiliates.
The acquisitions were accounted for as purchases, and the net assets and
the results of operations of the businesses acquired are included in the
consolidated accounts from their respective acquisition dates.
F-12
The following unaudited pro forma summary presents the consolidated results
of operations of the Company as if the two additional stores had been
acquired as of August 1, 1993. Pro forma results for the year ended July
31, 1995 are not presented as the results are not materially different than
actual results.
YEAR ENDED
JULY 31,
1994
--------------
Net sales $ 81,833,000
Net income 2,053,000
Earnings per share 0.40
Effective February 29, 1996, Western acquired the assets and operations of
two additional factory-owned stores of Case in the state of California.
The acquisition was consummated for approximately $630,000 in cash,
$1,590,000 in installment notes payable to Case and the assumption of
$3,965,000 in inventory floor plan debt with Case and its affiliates. The
results of operations of these two stores have been included in the
consolidated results of operations from the effective date of the
acquisition. The acquisition was accounted for as a purchase and resulted
in the recording of approximately $150,000 in goodwill which is included in
intangible and other long-term assets in the accompanying consolidated
financial statements and is being amortized on a straight-line basis over
20 years.
On May 1, 1996, the Company acquired control of ConnectSoft, Inc. Pursuant
to the terms of the merger agreement, the ConnectSoft shareholders
received, on a pro rata basis, approximately 972,000 unregistered shares of
the Company's Series B convertible preferred stock. This preferred stock
does not pay dividends, is not subject to redemption, has a liquidation
preference of $3.50 per share over the Company's common stock and shares
voting rights with the Company's common stock with restrictions on the
shareholders' ability to vote the shares until December 31, 1999. Each
share of Series B preferred stock is convertible into shares of the
Company's common stock at the shareholders' option on a one-for-one basis.
However, the conversion ratio may be increased to one-for-two or
one-for-three if certain criteria are met by ConnectSoft. In the event
that the "Combined Pre-Tax Income", as defined in the merger documents of
any of the "Subject Entities", as defined as in the merger document, in any
one of the three fiscal years ending July 31, 1997, 1998 or 1999 equals or
exceeds $3,000,000, each share of preferred stock may be converted into two
shares of the Company's common stock. If the "Combined Pre-Tax Income"
equals or exceeds $5,000,000, each share of preferred stock may be
converted into three shares of the Company's common stock. Additionally,
the conversion ratio of the preferred stock shall be adjusted, such that
each share of preferred stock is convertible into three shares of the
Company's common stock, notwithstanding the levels of "Combined Pre-Tax
Income" achieved, if on or before December 31, 1999 (1) the Company sells
the assets or securities of any of the "Subject Entities" for consideration
aggregating $5,000,000 or more, (2) the Company consummates an initial
public offering of any of the "Subject Entities" resulting in gross
proceeds in excess of $10,000,000 or in a market valuation of 100% of the
issuer's common stock equaling or exceeding $50,000,000, or (3) a
transaction occurs with any third party with the result that no shares of
the Company's common stock will be publicly traded on a national securities
exchange.
F-13
The acquisition of ConnectSoft was not closed until August 8, 1996.
However, utilizing the purchase method of accounting, the operating results
from ConnectSoft have been included in the consolidated operating results
commencing May 1, 1996 because the Company assumed operational and
financial control effective May 1, 1996. The purchase price plus direct
costs of acquisition have been initially allocated to the assets acquired
and the liabilities assumed based on management's estimates and a valuation
of the Company's preferred stock issued and the assets and liabilities
obtained. Adjustments to the initial purchase price allocation will occur,
if necessary, during fiscal 1997. Issuance of the Company's preferred
stock to the ConnectSoft shareholders had not occurred as of July 31, 1996
and, accordingly, these shares are not reflected as outstanding as of July
31, 1996. For purposes of computing earnings per share, these preferred
shares have not been included as their effect is antidilutive. The fair
value of the preferred stock is reflected as purchased business obligations
in the accompanying consolidated balance sheet.
A summary of assets acquired, liabilities assumed and purchase price paid
is as follows:
Value of preferred stock $ 3,989,000
Costs of acquisition 430,000
Liabilities assumed 8,690,000
--------------
Cost of assets acquired $ 13,109,000
--------------
--------------
This convertible preferred stock has been valued at fair market value at
May 1, 1996. The valuation technique utilized has considered that the
conversion ratio increases based on the earnings of the "Subject Entities".
Accordingly, the acquisition price based on this value has been determined
at acquisition, and, therefore, this preferred stock is not viewed as
contingent securities. The purchase price has been allocated to the assets
acquired, including certain intangible assets such as purchased computer
software, covenant not to compete, name recognition and research and
development in process.
The cost initially allocated to each of ConnectSoft's assets and
liabilities at the date of the acquisition, as determined in accordance
with the purchase method of accounting, is presented in the table below:
Accounts receivable $ 130,000
Prepaid and other current assets 301,000
Intangible assets:
Goodwill/trademark 900,000
Software technology - complete 700,000
Software technology - in progress
(charged to research and
development expense) 8,472,000
Non-compete agreement 500,000
Property and equipment 2,015,000
Other long-term assets 91,000
Accounts payable and accrued
liabilities (3,769,000)
Debt and capital lease
obligations (4,921,000)
------------
Net assets acquired $ 4,419,000
------------
------------
F-14
In connection with the purchase of ConnectSoft, the Company entered into an
agreement with a creditor of ConnectSoft whereby the Company purchased from
the creditor a note payable due from ConnectSoft for cash and a $1,500,000
promissory note payable due on April 30, 1999. This creditor was also a
shareholder of ConnectSoft and, accordingly, received the Company's
preferred stock as consideration for its shares of ConnectSoft. As part of
this agreement, the former creditor granted to the Company an irrevocable
right and option to purchase all or any portion of the Company's securities
owned by the creditor during the period December 31, 1996 to December 31,
1999. These shares will be purchased at the highest closing price 30 days
prior to date of exercise. If the Company exercises its option, the
creditor shall receive at a minimum $4,000,000 from the Company
irrespective of whether or not the purchase price payable for these
shares based on the exercise price shall equal $4,000,000. If the net
proceeds are greater than $4,000,000, the first $1,000,000 greater than
$4,000,000 shall be applied to reduce the then outstanding principal
amount of the note payable to the creditor, and to the extent such note
payable shall have then been fully paid, any remaining amounts shall be
allocated 50% to the Company and 50% to the creditor.
The following unaudited pro forma summary combines the consolidated results
of operations as if ConnectSoft and the factory owned stores of Case had
been acquired as of the beginning of the periods presented, including the
impact of certain adjustments.
YEAR ENDED
JULY 31,
1996 1995
------------- --------------
Net sales $ 122,096,000 $ 110,231,000
Net loss $ (8,340,000) $ (10,724,000)
Loss per share $ (1.44) $ (1.87)
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 and do not reflect any synergies that might be achieved from
combined operations.
In addition, effective June 11, 1996, Western acquired the assets and
operations of GCS, Inc. ("GCS"), a California-based closely held
distributor of heavy equipment primarily marketed to municipal and state
government agencies responsible for highway maintenance. The acquisition
was consummated for approximately $1,655,000 in cash. The acquisition was
accounted for as a purchase and resulted in goodwill of approximately
$400,000 which is included in intangible and other long-term assets in
the accompanying consolidated financial statements and is being amortized
on the straight-line basis over 20 years. Pro forma financial information
relating to this acquisition has not been provided because its effect is
immaterial. The results of operations of the GCS stores have been included
in the consolidated results of operations of the Company from the effective
date of the acquisition.
F-15
4. INVENTORIES
Inventories consist of the following:
JULY 31,
1996 1995
--------------- ---------------
Parts $ 6,320,000 $ 5,290,000
Equipment new and used 59,377,000 41,123,000
--------------- ---------------
$ 65,697,000 $ 46,413,000
--------------- ---------------
--------------- ---------------
At July 31, 1996 and 1995, approximately $12,079,000 and $4,756,000,
respectively, of equipment was being held for rent and, in accordance with
standard industry practice, is included in new and used equipment
inventory. Such equipment is generally being depreciated at an amount
equal to 80% of the rental payments received.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JULY 31,
1996 1995
------------ ----------
Machinery and equipment $ 2,092,000 $1,574,000
Furniture and office equipment 1,925,000 1,892,000
Computer system 2,328,000 -
Land 840,000 1,903,000
Building 3,042,000 2,347,000
Construction in progress 892,000 596,000
------------ ----------
11,119,000 8,312,000
Less: Accumulated depreciation
and amortization (2,241,000) (1,250,000)
------------ ----------
$ 8,878,000 $7,062,000
------------ ----------
------------ ----------
6. LICENSE AGREEMENT
Effective May 4, 1996, the Company entered into a software licensing
agreement for technology to be utilized in a software product being
developed by the Company. The term of this license agreement is for three
years commencing June 1, 1996. In consideration for the license granted,
the Company will make a $450,000 nonrefundable advance minimum royalty
payment to the licensor. Royalties due under this agreement are 15% of the
sales price to third parties subject to a minimum payment due on each sale.
Additionally, the Company has agreed to sell 100,000 unregistered shares of
its common stock for $1,000 to the licensor which were issued subsequent to
July 31, 1996. Other provisions of the agreement grant the licensor the
right to designate one member of the board of directors of one of
F-16
the Company's subsidiaries and certain rights to receive options to purchase
shares of the subsidiary's common stock in the event that the subsidiary
completes an initial public offering. The value assigned to the shares to be
issued was $250,000. The full cost of the license was expensed as research
and development during fiscal 1996.
7. BORROWINGS
Borrowings consist of the following:
JULY 31,
1996 1995
------------- ------------
Borrowings under floor financing lines $ 54,364,000 $37,072,000
Line of credit with bank 2,927,000 -
Term and mortgage notes payable 3,201,000 6,023,000
Note payable to creditor (Note 3) 1,500,000 -
-------------- -----------
Total borrowings 61,992,000 43,095,000
Less current portions:
Borrowings under floor financing lines 54,364,000 37,072,000
Other third-party borrowings 4,660,000 6,023,000
-------------- -----------
$ 2,968,000 $ -
-------------- -----------
-------------- -----------
Scheduled principal payments of all borrowings
are as follows:
1997 $ 59,024,000
1998 204,000
1999 1,658,000
2000 63,000
2001 68,000
Thereafter $ 975,000
--------------
$ 61,992,000
--------------
--------------
FLOOR FINANCING LINES
Western has an inventory floor financing line with Case Credit
Corporation, the financing operation of Case Corporation, to purchase new
equipment and attachments. The Case credit floor plan line provides for a
four-month to eight-month interest free term followed by a term during
which interest is charged at prime plus 2% (10.25% at July 31, 1996).
Principal payments are generally due at the earlier of sale of the
equipment or twelve to forty-eight months from the invoice date. At July
31, 1996 there was approximately $38,501,000 outstanding under floor
financing arrangements.
F-17
Western also has a credit facility with Seafirst Bank to provide up to
$17,500,000 for the purchase of new and used equipment held for sale as
well as equipment held for rental. The credit line calls for monthly
interest payments at prime plus .25% (8.5% at July 31, 1996). Principal
payments are generally due in periodic installments over terms ranging from
twelve months to twenty-four months from the borrowing date. At July 31,
1996, approximately $14,352,000 was outstanding under this facility.
In addition to the Case and Seafirst Bank credit lines, Western has
entered into floor plan financing arrangements with other equipment
manufacturers and commercial credit companies. These credit facilities
provide for interest free terms ranging up to six months and require
monthly principal and interest payments over terms ranging up to
forty-eight months. The interest rate paid on these credit facilities are
prime plus 2%. The total amount outstanding under these other financing
arrangements was $1,511,000 at July 31, 1996.
OTHER BORROWINGS
Western entered into various term notes with Case for the purchase of
used equipment, parts, shop tools, furniture and fixtures and accounts
receivable. The terms of these notes provide for interest charges at
various rates up to prime plus 2% and are collateralized by the related
equipment, parts and fixed assets. As of July 31, 1996, approximately
$963,000 was outstanding under these notes.
On October 10, 1995, using proceeds from its initial public offering,
Western retired the $2,175,000 real estate note given to Case for the
purchase of the Sparks, Nevada real estate in September 1994. In March
1996, Western consummated an agreement with an institutional lender for
a conventional mortgage on the property in the amount of $1,330,000,
secured by the Sparks, Nevada real estate. The agreement calls for
principal and interest payments over a seven year term using a fifteen year
amortization period. The note cannot be prepaid during the first two years
of its term.
In connection with the acquisition of the original seven stores,
Western entered into a purchase agreement for the Auburn, Washington
facility subject to the completion by Case of certain environmental
remediation. In December 1995, after completion of the remediation,
Western entered into a sale-leaseback transaction with an unrelated party
regarding the Auburn facility which resulted in no gain or loss to
Western. Using the proceeds of the sale-leaseback, Western repaid a
$2,075,000 collateralized mortgage with Case. The term of the lease is 20
years at an initial annual rate of $204,000. In addition to base rent,
Western is responsible for the payment of all related taxes and other
assessments, utilities, insurance and repairs 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 11) while the land portion of the lease qualifies for treatment
as an operating lease.
During fiscal 1996, the Company obtained a $10,000,000 secured demand line
of credit from a commercial bank. This line is secured by the Company's
portfolio of cash and marketable securities held by the bank. On July 31,
1996 approximately $2,927,000 was outstanding under this line of credit,
the principal of which bears interest at the bank's base rate plus 1% or 90
day LIBOR plus 1%.
F-18
The applicable rate is elected upon issuance of each advance on the line of
credit. Effective October 1996, the secured demand line of credit was
increased to $13,000,000 of which $4,400,000 may be in the form of letters
of credit.
During May 1993, ConnectSoft entered into a financing arrangement whereby
it requested advances from a financing company and pledged receipts on
accounts receivable to repay these advances. The interest rate charged to
ConnectSoft amounts to 48% per year. The advances made under this
arrangement are collateralized by the accounts receivable and other assets
of ConnectSoft. At July 31, 1996, ConnectSoft had a total liability under
this arrangement of $585,000 and was in default with respect to one of its
covenants. As a result, the total amount due is classified as a short-term
liability.
8. INCOME TAXES
Effective August 1, 1993, the Company adopted SFAS No. 109, Accounting for
Income Taxes. The cumulative effect of adoption was an increase in net
income of $138,000, or $.03 per share.
The provision (benefit) for income taxes from continuing operations before
extraordinary items comprises the following:
YEAR ENDED JULY 31,
1996 1995 1994
------------ ------------ -------------
Current:
Federal $ 1,280,000 $ 918,000 $ 672,000
State 242,000 60,000 210,000
------------ ------------ ------------
1,522,000 978,000 882,000
------------ ------------ ------------
Deferred:
Federal (779,000) (252,000) (153,000)
State (2,000) (15,000) (47,000)
------------ ------------ ------------
(781,000) (267,000) (200,000)
------------ ------------ ------------
$ 741,000 $ 711,000 $ 682,000
------------ ------------ ------------
------------ ------------ ------------
The principal reasons for the variation from the customary relationship
between income taxes at the statutory federal rate and that shown in the
consolidated statement of income are as follows:
YEAR ENDED JULY 31,
1996 1995 1994
------- ------- --------
Statutory federal income
tax rate $ (3,343,000) $ 677,000 $ 580,000
State income taxes, net
of federal income tax
benefit 82,000 74,000 68,000
Purchased research and
development 3,627,000
Valuation allowance 271,000
Other 104,000 (40,000) 34,000
------------ ------------ ----------
$ 741,000 $ 711,000 $ 682,000
------------ ------------ ----------
------------ ------------ ----------
F-19
Temporary differences and carryforwards which give rise to a significant portion
of deferred tax assets and liabilities are as follows:
JULY 31,
1996 1995
------------ -----------
Depreciation and amortization $ (587,000) $ (488,000)
Deferred income (117,000) -
------------ -----------
Gross deferred tax liabilities (704,000) (488,000)
------------ -----------
Inventory reserve 258,000 193,000
Bad debt reserve 222,000 159,000
Accrued vacation and bonuses 127,000 92,000
State taxes 124,000 53,000
Loss carryforwards 88,000 -
Loss on Western initial public offering 131,000 154,000
Stock options 1,127,000 -
Operating lease 194,000 -
Intangible assets 150,000 -
Other 186,000 27,000
------------ -----------
Gross deferred tax assets 2,607,000 678,000
Valuation allowance (375,000) -
------------ -----------
Net deferred tax assets 2,232,000 678,000
------------ -----------
$ 1,528,000 $ 190,000
------------ -----------
------------ -----------
At July 31, 1996, the Company had federal income tax loss carryforwards of
$260,000 which will begin to expire in 2010. Utilization of such net
operating losses will be subject to annual limitations due to the Company's
acquisition of ConnectSoft in May 1996.
9. SHAREHOLDERS' EQUITY
On February 25, 1994, the Company completed a public offering of 920,000
units at $5.25 per unit, each unit consisting of one share of common stock,
$.01 par value, and one redeemable common stock purchase warrant. Each
warrant entitled the holder to purchase one share of common stock until
February 16, 1996, at an exercise price of $7.50. During fiscal 1996, the
exercise period for these warrants was extended to February 16, 1997. The
warrants are subject to redemption by the Company at a redemption price of
$.10 per warrant. Simultaneous with the offering, the Company purchased an
aggregate of 100,000 shares of its issued and outstanding common stock from
certain shareholders of the Company for $4.625 per share. The net proceeds
of the offering after the purchase of the selling shareholders' shares were
approximately $3,401,000.
In addition, during fiscal 1994, all outstanding shares of the Company's
preferred stock, along with an existing $1,375,000 note payable, were
exchanged for a new subordinated note payable to a related party totaling
F-20
$525,000 that were incurred in connection with the Western Acquisition and
used the balance of the proceeds to pay down the Company's revolving credit
facility with Congress Financial Corporation.
During fiscal 1995, Western completed an initial public offering of
1,495,000 shares of common stock at $6.50 per share. The net proceeds of
the offering were approximately $7,801,000 including $1,102,000 from the
exercise of an over allotment option which was received subsequent to July
31, 1995.
Prior to the offering, Western issued promissory notes totaling $250,000
(the "Bridge Loans"), and 38,462 shares of its common stock to certain
investors. The shares were valued at the estimated offering price and
recorded as deferred debt issuance costs. Such costs were written off in
June 1995 when the Bridge Loans were retired using proceeds from the
offering.
The net proceeds per share from Western's offering and the Bridge Loans
were lower than the Company's per share basis in Western at the time of the
offering. Accordingly, the Company recognized a $386,000 pretax loss in
connection with the transaction during the year ended July 31, 1995.
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, 1996 none were
issued and outstanding.
10. DISCONTINUED OPERATIONS
Pursuant to the terms of an Asset Purchase Agreement, dated as of November
22, 1995, on January 19, 1996 all of the assets of the National O-Ring and
Stillman Seal businesses (the "Manufacturing Business") were sold to, and
substantially all of the liabilities associated with operation of the
Manufacturing Business were assumed by, subsidiaries of Hutchinson
Corporation (the "Hutchinson Transaction").
The Purchase Price for the Manufacturing Business was $24,500,000,
$20,825,000 of which was paid in cash and the aggregate $3,675,000 balance
was paid by delivery of two 24-month non-interest bearing promissory notes
(the "Notes" ) issued by Hutchinson. The Notes, which have been discounted
for financial statement presentation by $638,000, are non-interest bearing
and guaranteed by Total America, Inc., the parent corporation of
Hutchinson, whose securities are listed on the New York Stock Exchange.
The discounted note balance aggregates $3,198,000 at July 31, 1996.
At the closing of the Hutchinson Transaction, the Company, Hutchinson (as
guarantor) and Robert Rubin, who is the chairman and a director of the
Company, 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 business acquired in the Hutchinson
Transaction. Under the terms of the Non-Competition Agreement, Mr. Rubin
will receive payments aggregating $200,000 over a seven-year period. In
addition, Hutchinson engaged Mr. Rubin as a consultant to provide advisory
services
F-21
relating to the acquired Manufacturing Business over a seven-year period,
for which services Mr. Rubin will receive payments aggregating $1,000,000.
On January 19, 1996, as a result of the Hutchinson Transaction, Mr. John
Shahid, the former president, chief executive officer and director of the
Company and the Company entered into a Termination Agreement whereby Mr.
Shahid resigned as an officer and director of the Company and each of its
subsidiaries in consideration for the payment of an aggregate of $816,000,
representing salary payments under his Employment Agreement through
December 31, 1998, as well as a bonus payment for fiscal year 1996 in the
amount of $90,000. The Termination Agreement also provides that the
Company shall retain Mr. Shahid as a consultant for a period of two years,
commencing April 1, 1996, for which consulting services he will be paid
quarterly an aggregate of $200,000. Benefits under the termination
agreement as well as the two-year consulting agreement were fully expensed
during fiscal 1996. Additionally, the Company recognized $506,000 in
compensation expense resulting from amendments made to its employee stock
option plans (see Note 12). These charges, along with other costs of the
Hutchinson Transaction were included in determining the gain on the sale of
the Manufacturing Business.
Details of this transaction are as follows:
Sale price $ 23,862,000
Basis of net assets sold (9,634,000)
Expenses of sale (1,726,000)
------------
Gain on sale before income taxes 12,502,000
------------
Income tax provision (5,042,000)
------------
Gain on sale of
wholly-owned subsidiaries $ 7,460,000
------------
------------
Although the results of National O-Ring and Stillman Seal subsidiaries have
previously been reported in the consolidated financial statements, these
subsidiaries were operated as a separate line of business whose products,
activities and class of customers differed from other operations of the
Company. Based upon this determination, the disposal of these two
subsidiaries has been accounted for as discontinued operations and
accordingly, their operating results are segregated in the accompanying
statement of operations.
F-22
Results of National O-Ring and Stillman Seal for each of the three prior
fiscal years through the date of disposition are as follows:
5-1/2 MONTHS
ENDED
JANUARY 19, YEAR ENDED JULY 31,
1996 1995 1994
------------- ------------- -----------
Net sales $ 16,928,000 $ 37,441,000 $34,820,000
Costs and expenses 16,410,000 35,511,00 32,147,000
------------- ------------- -----------
Income before taxes 518,000 1,930,000 2,673,000
Provision for income taxes 203,000 826,000 911,000
------------- ------------- -----------
Net income 315,000 $ 1,104,000 $ 1,762,000
------------- ------------- -----------
------------- ------------- -----------
On April 29, 1994, the Company sold its Aerodynamic Engineering, Inc.
("AEI") subsidiary to Mayer Eisel, Inc., a company owned and operated by
the former owners of Aerodynamics, Inc. The Company had originally
purchased AEI from Aerodynamics, Inc.
In consideration for the sale of AEI, the Company received $500,000 in
cash, a four-year $500,000 promissory note from Mayer Eisel, Inc.
(prepaid at a discount in October 1995), equipment valued at $100,000
and the cancellation of the remaining outstanding balance of notes
totaling $875,000. The Company also assumed indebtedness of
Aerodynamic, Inc. due to Congress Financial Corporation in the
amount of $958,000 and entered into a five-year noncompete agreement
with Mayer Eisel, Inc.
Although the results of AEI have previously been reported as part of the
Manufacturing Group, the subsidiary was operated as a separate line of
business whose products, activities and class of customers differed from
the other Manufacturing Group operations. Based upon this determination,
the disposal of AEI has been accounted for as a discontinued operation and,
accordingly, its operating results are segregated in the accompanying
consolidated statement of operations for the year ended July 31, 1994.
Results of AEI's operations through its date of disposal are as follows:
YEAR ENDED
JULY 31,
1994
----------------
Net sales $ 1,648,000
Costs and expenses 2,151,000
----------------
(Loss) before income taxes (503,000)
Income tax benefit 201,000
----------------
Net (loss) $ (302,000)
----------------
----------------
F-23
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company and Western lease certain facilities and certain computer
equipment and software under noncancelable lease agreements. The
building portion of two 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 one to five years. Certain of the facility
lease agreements provide for options to renew and generally require the
Company and Western to pay property taxes, insurance, and maintenance
and repair costs. Total rent expense under all operating leases
aggregated $1,100,000, $733,000 and $435,000 for the fiscal years 1996,
1995 and 1994, respectively. The computer equipment lease expires
February 1997 and meets certain specific criteria to be accounted for as
a capital lease. In connection with the acquisition of ConnectSoft, the
Company acquired certain capital lease obligations. These lease
obligations were valued at the acquisition date at fair market value
which was based on a refinancing agreement for these leases that the
Company is currently negotiating. The terms of the refinancing have not
been finalized and, accordingly, the specific payment terms have not
been determined, however the anticipated terms of the new leases are for
a thirty-six month period. As the terms of these leases have not been
finalized, the payments associated with these leases are not disclosed
over the next five years on an annual basis.
Assets recorded under capital leases are as follows:
JULY 31,
1996 1995 1994
----------- ---------- ---------
Capitalized asset value $ 3,668,000 $ 170,000 $ 170,000
Less accumulated amortization (287,000) (54,000) (20,000)
----------- ---------- ---------
$ 3,381,000 $ 116,000 $ 150,000
----------- ---------- ---------
----------- ---------- ---------
F-24
Future minimum lease payments under all noncancelable leases as of July 31,
1996, are as follows:
YEAR ENDING CAPITAL OPERATING
JULY 31, LEASES LEASES
----------- ----------- -----------
1997 $ 26,000 $1,493,000
1998 (23,000) 1,324,000
1999 (26,000) 1,087,000
2000 (30,000) 896,000
2001 (8,000) 444,000
Thereafter 1,765,000 2,793,000
----------- -----------
Total annual lease payments 1,704,000 $8,037,000
Refinanced leases 1,500,000 ----------
Less amount representing interest 2,000 ----------
----------
Present value of minimum lease payments 3,202,000
Less: Current portion 1,119,000
----------
Long-term portion $2,083,000
----------
LEGAL PROCEEDINGS
The Company is involved in certain legal proceedings that have arisen
in the normal course of business. Based on the advice of legal counsel,
management does not anticipate that these matters will have a material
effect on the Company's consolidated financial condition or results
of operations.
12. STOCK OPTION PLANS
EMPLOYEE STOCK BONUS PLAN (THE "TRANSFER PLAN")
In March 1991, the Company granted incentive options under the Transfer
Plan to purchase an aggregate of 38,496 shares of common stock at purchase
prices of $1.63 and $6.50. During fiscal 1994 and 1996, 1,780 and 23,558
options, respectively, were exercised under the Transfer Plan. No options
were exercised during fiscal 1995. There are currently outstanding options
to purchase 770 shares of common stock under the Transfer Plan, all of
which are exercisable at $1.63.
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.
F-25
Set out below is a summary of the activity of the 1991 Stock Option Plan:
YEAR ENDED JULY 31,
1996 1995 1994
-------- -------- -------
Beginning balance 623,450 623,450 461,050
Granted - 170,000
Exercised 427,450 - -
Expired or canceled - - 7,600
-------- -------- -------
Ending balance 196,000 623,450 623,450
-------- -------- -------
-------- -------- -------
STOCK OPTION BONUS PLAN (THE "STOCK BONUS PLAN")
The Stock Bonus Plan was established in October 1991, and granted certain
key employees non-qualified options to acquire 171,000 shares of stock,
which options were only exercisable in the event that the Company realized
certain targeted annual earnings in fiscal years 1992-1994. The Company
did not meet its annual earnings target in 1992; however, it met its annual
earnings targets in 1993 and 1994 and 114,000 options were granted at
exercise prices equal to the market price at the date of grant. During
1996, 99,625 options were exercised under the Stock Bonus Plan. At July
31, 1996, 14,375 options were exercisable and outstanding under this plan.
AMENDMENTS TO THE PLANS
On May 5, 1995, the Company's Board of Directors approved the re-pricing of
options outstanding under all three plans. With the exception of the
$1.63 options under the Transfer Plan, all outstanding options were
repriced to $3.125, which was the closing market price on May 5, 1995.
In connection with the Hutchinson Transaction described in Note 10, the
Company amended the Transfer Plan, 1991 Stock Option Plan and the Stock
Bonus Plan by accelerating the vesting period and extending the exercise
term for all options under these plans. The amendment was subject to the
consummation of the Hutchinson Transaction and affected 761,008 options
outstanding on the closing date. The difference between the fair market
price on the date of closing and the respective exercise prices applied to
the options totaled $506,000 which was included as an expense in
determining the gain on Hutchinson Transaction.
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 $3.76 per share
were granted to the Company's principle shareholder and management. In
May, 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. Of these options granted 100,000 options granted at $5.25 have
been canceled.
F-26
The 1996 Plan as originally adopted required shareholder approval which had
not been obtained by the end of the fiscal year. On July 30, 1996, the
Board amended the 1996 Plan so that shareholder approval was not required.
The difference between the fair market value on the date of the amendment
and the respective exercise prices applied to the options was recognized as
compensation expense based on the options' vesting schedule. This resulted
in a fiscal 1996 expense of approximately $1,671,000 and $293,000 of
deferred compensation to be recognized over the next two fiscal years.
OTHER OPTIONS AND WARRANTS GRANTED
Prior to fiscal 1996, the Company granted warrants and options to certain
consultants of the Company in consideration for services rendered to the
Company. Of these warrants and options, 522,500 were outstanding at July
31, 1996 with exercise prices ranging from $3.13-$7.00. During fiscal
1996, 100,000 options with an exercise price of $5.25 were granted to the
president of one of the Company's subsidiaries. Of these options, all were
unexercised and 25,000 were vested at July 31, 1996.
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. 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 outstanding options are exercisable
commencing August 1, 1996 and expire on July 31, 2005.
Subsequent to July 31, 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.
EXODUS STOCK OPTION COMMITMENT
In connection with the Company's acquisition of ConnectSoft, employees of
eXodus are entitled to receive stock options, under terms similar to the
Company's 1996 Plan, of not less than 15% of the outstanding shares of
eXodus immediately prior to an initial public offering of eXodus.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
The Company paid interest of $1,998,000, $1,091,000 and $795,000 during
the fiscal years 1996,
F-27
1995, and 1994, respectively. The Company paid $2,084,000, $1,575,000 and
$1,268,000 in income taxes during fiscal 1996, 1995 and 1994, respectively.
In September 1994, Western acquired the assets and operations of two
stores in California and Nevada for approximately $557,000 in cash
(including $108,000 of indirect expenses), $4,153,000 in installment
notes payable and the assumption of $5,019,000 in inventory floor
plan debt.
In February 1996, Western acquired the assets and operations of two
stores in California for approximately $630,000 in cash, $1,590,000 in
installment notes payable and the assumption of $3,965,000 in inventory
floor plan debt. In addition, a capital lease obligation of $740,000
was incurred related to the lease of the Sacramento facility.
Effective June 11, 1996, Western acquired the assets and operations of GCS,
Inc, for approximately $1,655,000 in cash.
In May 1996, the Company acquired ConnectSoft by issuing shares of its
Series B Preferred Stock valued at $3,989,000 and incurred $430,000 in
acquisition costs.
A capital lease obligation of $926,000 was incurred in fiscal 1996 when the
Company consummated a sale-leaseback transaction. A note receivable of
$3,037,000 arose due to the sale of the Manufacturing Group in fiscal 1996.
As discussed in Note 10, the Company sold AEI to Mayer Eisel, Inc. In
partial consideration of the sale, the Company received a four-year
$500,000 promissory note, which was prepaid at a discount in October
1995 equipment valued at $100,000 and the cancellation of the
remaining outstanding balance of the convertible notes totaling
$875,000. The remaining consideration was received in cash. As discussed
in Note 9, concurrent with the Company's public offering in February 1994,
all outstanding Preferred Stock, along with an existing $1,375,000 note
payable was exchanged for a new subordinated note totaling $2,575,000.
14. RELATED PARTIES
The real property and improvements used in connection with the Sacramento
Operations of Western, 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 of Western and a director of
Western, and Robert M. Rubin, the chairman, chief executive officer,
a director and principal shareholder of the Company. 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, the Company 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 11) while the
land portion of the lease qualifies for treatment as an operating lease.
F-28
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, Inc. transaction, Mr. Rubin
held approximately 22% of Diplomat's outstanding capital stock. The loan
to Diplomat earned interest at the prime rate plus 2% and was repaid in May
1996.
In connection with the above transaction, Mr. Rubin personally made a
secured loan to Diplomat in the aggregate principal amount of $2,353,100
which matures in February 1999, and committed to make available a stand-by
loan of up to $300,000 aggregate principal. In consideration for making
his loan to Diplomat and committing to make this stand-by commitment, Mr.
Rubin received shares of Diplomat convertible preferred stock.
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 accommodations to ERD by making available a $4.4 million
standby letter of credit expiring May 31, 1997 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 Credit 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 is the chairman, chief executive officer, a
director and principal shareholder of ERD. Under the terms of a
separate Indemnity Agreement, Mr. Rubin has agreed to a limited
indemnification to the Company for certain losses or liabilities that
it may incur in connection with its having provided the Letter of
Credit financial accommodation on behalf of ERD.
In consideration for making the Letter of Credit available, in addition to
repayment by ERD of all amounts drawn under the Letter of Credit by the
delivery of notes convertible into ERD unregistered common stock in the
aggregate principal amount of all drawings under the Letter of Credit,
ERD granted the Company a security interest in certain machinery and
equipment of ENSA to secure such repayment, and agreed to pay to the
Company all of the Company's fees, costs and expenses payable to Citibank,
N.A. and others in connection with making the Letter of Credit available.
No provision for loss on this guarantee has been recorded at July 31, 1996
as management believes that the Company's exposure to loss on this
guarantee is minimal. There can be no assurance, however, that the
Company will not be required to make payments on behalf of ERD in
accordance with the terms of this guarantee. Loss, if any, will be
recorded when determinable.
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. The note is payable on demand no later than July 31,
1997. At July 31, 1996, $838,000 was outstanding on the promissory note.
15. OPERATING BUSINESS GROUPS
As described in Note 1, the Company historically has been engaged in two
distinct businesses consisting of the Manufacturing Group and the
Distribution Service Group. During fiscal 1996, as more fully described in
Note 3, through the acquisition of ConnectSoft the Company added a
Technology Group to its businesses. Total revenue by segment represents
sales to unaffiliated
F-29
customers. Inter-segment sales are not material. Operating profit (loss)
represents total revenue less operating expenses. In computing operating
profit (loss) none of the following items has been added or deducted:
general corporate expenses, interest expense, income taxes or extraordinary
gains.
Identifiable assets are those assets used in the operations of each
industry segment. Corporate assets primarily consist of cash,
investments and certain prepaid expenses.
As discussed in Note 10, the Manufacturing Business was sold during fiscal
1996. All operating results of the Manufacturing Business have been
included in the gain on discontinued operations.
The Company has no foreign assets and export sales amount to less than 1%
of the Company's total sales. No material amounts of the Company's sales
are dependent upon a single customer; however, substantially all the
Distribution Service Group's revenues resulted from sales, leasing and
servicing of equipment and parts manufactured by Case.
Summarized financial information by business group for fiscal 1996, 1995
and 1994 is as follows:
DISTRIBUTION
TECHNOLOGY SERVICE
GROUP GROUP CORPORATE TOTAL
---------- ------------- ---------- ------------
1996:
Revenue $ 276,000 $ 106,555,000 $ - $106,831,000
Operating (loss) profit (10,527,000) 5,201,000 (3,112,000) (8,438,000)
Identifiable assets 4,170,000 85,290,000 25,716,000 115,176,000
Depreciation and
amortization 374,000 820,000 - 1,194,000
Capital expenditures - 695,000 - 695,000
DISTRIBUTION
SERVICE
GROUP CORPORATE TOTAL
-------------- ---------- ------------
1995:
Revenue $ 86,173,000 $ - $86,173,000
Operating profit (loss) 3,983,000 (183,000) 3,800,000
Identifiable assets 66,852,000 425,000 67,277,000
Depreciation and amortization 1,068,000 - 1,068,000
Capital expenditures 332,000 - 332,000
1994:
Revenue 67,370,000 - 67,370,000
Operating profit (loss) 2,880,000 (344,000) 2,536,000
Identifiable assets 45,000,000 1,311,000 46,311,000
Depreciation and
amortization 633,000 - 633,000
Capital expenditures 309,000 - 309,000
F-30
16. 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 1996, 1995 or 1994.
17. SUBSEQUENT EVENTS
Effective September 20, 1996, the Company acquired all of the outstanding
capital stock of Interglobe Networks, Inc. ("Interglobe"), a private
company providing engineering, design and consulting services for users and
providers of telecommunications facilities on the Internet and other media.
The shareholders of Interglobe exchanged their shares for $400,000 and
800,000 unregistered shares of the Company's common stock. Additionally,
options were granted to certain employees to purchase up to an additional
800,000 shares of the Company's common stock upon the achievement of
certain anticipated profits. The acquisition will be accounted for by the
purchase method. Accordingly, the results of operations of Interglobe will
be included with the results of operations of the Company for periods
subsequent to the date of acquisition. Interglobe had revenue of $937,000
(unaudited) and net income of $269,000 (unaudited) for the year ended July
31, 1996.
The unaudited pro forma combined results of operations of the Company and
Interglobe for the year ended July 31, 1996 are as follows:
Revenue $ 107,768,000
Net loss $ (3,431,000)
Loss per share $ (0.59)
In November 1996, the Company completed the acquisition of the
assets of Seattle On-Line, a company engaged in the production of
regional websites that showcase metropolitan areas and sale of
advertising on these websites. The purchase price of Seattle On-Line
consisted of $300,000 cash and up to 25,000 unregistered shares of the
Company's common stock. Additionally, the Company issued warrants to
purchase 333,333 shares of the Company's common stock at specified
prices for a period of three years commencing with the effective date
of the acquisition. The warrants carry certain provisions that affect
the warrants' exercise price based on future profitability of
Seattle On-Line. Pro-forma financial information has not been provided
relating to this acquisition because the effect is immaterial.
In October 1996, the Company entered into letters of intent with the
stockholders of Broadcast Tower Sites, Inc. and its affiliates (the "BTS
Companies"), pursuant to which it is contemplated that the Company will
acquire, through a merger transaction (the "BTS Merger") the BTS
Companies. The BTS Companies are engaged in providing site acquisition,
zoning, architectural and engineering services as well as consulting
services, to the wireless telecommunications industry. At the closing
of the BTS Merger, it is contemplated that the name of the BTS Companies
will be changed. Such new name has not yet been determined.
Pursuant to the terms of the proposed BTS Merger, the BTS shareholders
will receive an aggregate of 507,246 shares of Company Common Stock,
certain of which carry registration provisions, $780,000 in cash and
three year Company notes aggregating $600,000, bearing interest at the
Citibank NA prime rate and payable in installments of $100,000, $200,000
and $300,000 on each of the three anniversary dates of the closing of the
BTS Merger. The closing of the BTS Merger is scheduled for December 1996.
In a related transaction, the Company also agreed to acquire 100% of the
capital stock of Arcadia Consulting, Inc. ("Arcadia"), a company recently
formed for the purpose of providing consulting services to clients in the
wireless telecommunications industry. The Company has agreed to pay a
purchase price of $220,000 in cash, plus a combination of shares of
Company Common Stock and AUGI notes due March 15, 1998 valued (based on
the
estimated market price of AUGI Common Stock as traded on Nasdaq on the
date of closing of such acquisition) at between approximately
$1.3 million and $1.6 million. The closing of the Arcadia acquisition
is conditioned upon the Company's acquisition of the BTS Companies, and
is scheduled to occur in or about January 1997. Following the Arcadia
acquisition, Arcadia will be merged with and into the BTS Companies.
Upon closing of the BTS Merger, the former stockholders of the BTS
Companies and Arcadia will receive three-year employment agreements with
the BTS Companies and the Company pursuant to which they will receive, in
addition to their base salaries and annual bonuses based upon
performance of the BTS Companies, options exercisable over a five year
period entitling the holders to purchase an additional aggregate
300,000 shares of Company Common Stock (the "BTS Options"). The BTS
Options shall vest and be exercisable (i) 100,000 options on
November 30, 1997 in the event that the BTS Companies achieve at least
$1,800,000 of Pre-Tax Income (as defined) in the 12 months ending
November 30, 1997, (ii) 100,000 options on November 30, 1998 in the
event that the BTS Companies achieve at least $2,200,000 of Pre-Tax
Income (as defined) in the 12 months ending November 30, 1998, and
(iii) 100,000 options on November 30, 1999 in the event that the BTS
Companies achieve at least $3,000,000 of Pre-Tax Income in the 12 months
ending November 30, 1999. Alternatively, all 300,000 BTS Options shall
vest if, during the period commencing upon closing the Merger and
terminating on November 30, 1999, the accumulated Pre-Tax Income of
the BTS Companies has equalled or exceeded $6,500,000. In the event that
a change in control of the Company occurs, or the Company effects a sale
of all or substantially all of the assets of the BTS Companies, prior to
November 30, 1999, all of the BTS Options shall immediately vest upon
such occurrence. In addition, the BTS Merger agreement provides that if
the Company effects a public offering of the BTS Companies or a sale of
the BTS Companies prior to November 30, 2000, the former BTS Companies
and Arcadia stockholders may elect (but shall not be required) to
exchange all Company securities received by them in the BTS Merger (the
"Exchange Option") for an aggregate of 16.67% of the common stock of
the BTS Companies then owned by the Company prior to such transaction.
Upon completion of the Arcadia acquisition, Solon L. Kandel, the President
and sole stockholder of Arcadia, will be employed by the BTS Companies as
its President and Chief Executive Officer, under a three year employment
agreement containing terms which are substantially identical to those
provided to each of the former stockholders of the BTS Companies,
including 100,000 Options and an Exchange Option entitling Mr. Kandel to
8.33% of the common stock of the BTS Companies. In addition, Mr. Kandel
will be nominated to serve as a member of the Board of Directors of the
Company.
F-31
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JULY 31, 1996 (000'S)
- --------------------------------------------------------------------------
BALANCE AT CHARGED AT CHARGED TO BALANCE
BEGINNING OF COSTS AND OTHER AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ------------ ------------ --------- --------- ----------- ----------
Accounts
receivable
reserve:
1996 $ 370 $ 353 $ - $ (204) $ 519
1995 233 215 - (78) 370
1994 74 165 - (6) 233
Inventory
reserve:
1996 449 470 - (5) 914
1995 439 50 - (40) 449
1994 500 - - (61) 439
S-1
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 __, 1996
AMERICAN UNITED GLOBAL, INC.
By:
-------------------------
Robert M. Rubin, Chairman
In accordance with the Securities Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated
Signatures Title Date
---------- ----- ----
Chairman of the Board, November __, 1996
- ----------------------- Chief Executive Officer
Robert M. Rubin and Director
Executive Vice President November __, 1996
- --------------------- and Director
C. Dean McLain
Director November __, 1996
- ----------------------
Lawrence E. Kaplan
Vice President-Finance November __, 1996
- ----------------------- and Chief Financial
David M. Barnes and Chief Accounting Officer
President of Interglobe November __, 1996
- ---------------------- Networks, Inc. and Director
Artour Baganov
Executive Vice President November __, 1996
- ------------------- and Director
Howard Katz
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, 1996
AMERICAN UNITED GLOBAL, INC.
By: /S/ Robert M. Rubin
-------------------------
Robert M. Rubin, Chairman
In accordance with the Securities Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated
Signatures Title Date
---------- ----- ----
/S/ Robert M. Rubin Chairman of the Board, November 12, 1996
- ----------------------- Chief Executive Officer
Robert M. Rubin and Director
/S/ C. Dean McLain Executive Vice President November 12, 1996
- --------------------- and Director
C. Dean McLain
/S/ Lawrence E. Kaplan Director November 12, 1996
- ----------------------
Lawrence E. Kaplan
/S/ David M. Barnes Vice President-Finance November 12, 1996
- ----------------------- and Chief Financial
David M. Barnes and Chief Accounting Officer
/S/ Artour Baganov President of Interglobe November 12, 1996
- ---------------------- Networks, Inc. and Director
Artour Baganov
/S/ Howard Katz Executive Vice President November 12, 1996
- ------------------- and Director
Howard Katz