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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission file number 0-19404
AMERICAN UNITED GLOBAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4359228
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11130 NE 33rd Place, Suite 250
Bellevue, Washington 98004
- -------------------- -----
(Address of principal executive offices) (Zip Code)
(425) 803-5400 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Exchange Act
Title of each class Name of exchange on which registered
- ------------------- -------------------------------------
None None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
Transitional Small Business Disclosure Format Yes |_| No |X|
Check if there is no disclosure of delinquent filers in response to
item 405 of Regulation S-K 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 9, 1998 was $453,296.
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 11, 1998 was 11,620,715 shares.
Documents incorporated by reference: None
PART I
ITEM 1. DESCRIPTION OF BUSINESS
SUMMARY
American United Global, Inc., a Delaware corporation (the "Company"),
through its operating subsidiaries, was engaged in three distinct businesses
during the fiscal year ending July 31, 1998: (i) the distribution, rental and
servicing of construction equipment (the "Distribution Business"), (ii) site
acquisition, zoning, architectural and engineering services for the wireless
communication and telecommunications industry and general construction
engineering services (the "Telecommunication and Construction Businesses") and
(iii) the design, development and
marketing of computer software and software related products and services (the
"Computer Software Businesses").
The Distribution Business
The Company's distribution business operates through the Company's
60.5%-owned subsidiary, Western Power & Equipment Corp., a Delaware corporation
("Western"). Western is engaged in the sale, rental, and servicing of light,
medium-sized, and heavy construction, agriculture, and industrial equipment,
parts and related products which are manufactured by Case Corporation ("Case")
and certain other manufacturers. The Company believes, based upon the number of
locations owned and operated, that it is the largest independent dealer of Case
construction equipment in the United States. Products sold, rented, and serviced
by the Company include backhoes, excavators, crawler dozers, skid steer loaders,
forklifts, compactors, log loaders, trenchers, street sweepers, sewer vacuums,
and mobile highway signs. Western operates out of 27 facilities located in the
states of Washington, Oregon, Nevada, California, and Alaska. The equipment
distributed by the Company is furnished to contractors, governmental agencies,
and other customers primarily for use in the construction of residential and
commercial buildings, roads, levees, dams, underground power projects, forestry
projects, municipal construction, and other projects. Westerns growth strategy
focuses on acquiring additional existing distributorships and rental operations,
opening new locations, and increasing sales at its existing locations. In such
connection, it may seek to operate additional Case or other equipment retail
distributorships, and sell, lease and service additional lines of construction
equipment and related products not manufactured by Case. Western earned net
income of approximately $1.8 million on net sales of $163 million in the fiscal
year ended July 31, 1998 and $1.0 million on net sales of $148 million in fiscal
year ended July 31, 1997, as compared to net income of approximately $2.1
million on net sales of $107 million in the fiscal year ended July 31, 1996.
The Telecommunication and Construction Business
The Company is also involved in the construction and wireless
communications consulting business through a minority owned subsidiary, IDF
International, Inc. ("IDF"). TechStar Communications, Inc. ("TechStar") a
wholly owned subsidiary of IDF, provides consulting services to the wireless
communications industry in the form of network hardware acquisition, zoning,
architectural and engineering consulting services. The Company merged
TechStar into IDF in a reverse triangular merger, resulting in the Company
owning approximately 58% of IDF. IDF, through its wholly-owned Hayden/Wegman,
Inc. subsidiary ("Hayden/Wegman") provides general construction and
engineering services to municipalities and private industry. During the year
ended July 31, 1998 IDF sold equity securities that reduced the Company's
percentage ownership of IDF voting shares to approximately 48%. As a result,
effective August 1, 1997, the Company's minority interest in IDF is accounted
for using the equity method. TechStar, acquired in December 1996, has been in
business since February 28, 1994, generated revenues of approximately $4.3
million in the 12 months ended December 31,
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1996, $3.8 million in the seven months ended July 31, 1997, and $5.2 million
in the 12 months ended July 31, 1998, respectively, and Hayden/Wegman, which
has been in business for over 50 years, generated revenues of approximately
$11.7 million in the year ended June 30, 1996, $11.2 million in the year
ended June 30, 1997, and $8.8 million in the year ended June 30, 1998,
respectively. Net loss for IDF for the year ended July 31, 1998 was
$9,930,000 including the impairment of goodwill in the amount of $7,500,000.
The Computer Software Business
The Company's attempt to penetrate and achieve profitability in the
computer software industry has not been successful. The Company experienced the
adverse effects of (i) the extensive capital required to be invested in order to
develop the Company's NTERPRISE and FreeAgent technologies, (ii) certain
strategic decisions and policy changes by Microsoft, Inc., which materially and
adversely affected the marketability for the Company's NTERPRISE software
product, (iii) a lack of market demand for certain of the software products
previously acquired and delays in anticipated customer acceptance of the
FreeAgent product, and (iv) disputes with certain key executives in such
computer software businesses. As a result of the foregoing, the Company incurred
net losses from its computer and technology businesses aggregating $17.9 million
in its fiscal year ended July 31, 1997, including write-offs of investment and
goodwill aggregating approximately $5.3 million, and an additional $2.5 million
of net losses in the six months ended January 31, 1998. Accordingly, in April
1998, the Company determined to divest and/or cease operations of the computer
software and related technology businesses.
FreeAgent. The Company, through its wholly-owned Connectsoft
Communications Corporation ("Connectsoft") subsidiary, has been developing a
unified, intelligent communications system being marketed under the name
"FreeAgent." FreeAgent is designed to unify communications into a single message
box, allow access to that message box through any telephone or online computer
and apply autonomous software processes (known as intelligent agentry) to the
data flowing in and out of the message box for the purpose of automating
communications and assisting the user in managing communications. FreeAgent is
being developed to integrate e-mail, voice mail, facsimile, paging, content from
the World Wide Web and potentially any other digital data from the Internet,
enterprise intranets, private branch exchange ("PBX") telephone systems and the
public switched telephone network.
On July 10, 1998, the Company entered into an agreement to sell
substantially all of the assets of its Connectsoft subsidiary, including the
network operations center ("NOC") to eGlobe, Inc., formerly known as Executive
TeleCard, Ltd. ("eGlobe"). As consideration for the assets, eGlobe will assume
up to $4,500,000 of Connectsoft liabilities and leases, most of which have been
guaranteed by the Company. The Company will also receive as additional
consideration from eGlobe, on the earlier of two years from the closing of the
sale to eGlobe or the resale by eGlobe of the Connectsoft business, 7.5% of the
increase in value of the Connectsoft business.
4
NTERPRISE. The Company, through its 80.4% owned subsidiary, Exodus
Technologies, Inc. ("Exodus"), has designed and developed a proprietary
application remoting software, marketed as NTERPRISE, which, when combined with
a multi-user enabling software "kernal" that modifies certain source code
instructions in the Windows operating system, allows users to run Windows
application server software programs designed for the Microsoft Windows NT
operating system on users' existing Unix workstations, X-terminals and other
X-windows devices, Macintosh terminals, Java-enabled network computers and
legacy computers. Since its July 1996 acquisition of the Exodus technology, the
Company has expended in excess of $7.0 million to develop and market its
NTERPRISE products. In September 1997, Microsoft announced that it would
incorporate its own multi-user software in future versions of Windows NT and
that only its Windows NT share client/server protocol and the application
remoting software protocol of a competitor of Exodus would be supported in the
initial releases of Windows NT 4.0 and 5.0. As a result of these material
adverse developments, the Company effectively terminated its Exodus operations
and is attempting to license to third parties its software in a manner which
would not require a license or other authorization from Microsoft. As a result
of these material adverse developments, the Company has terminated its Exodus
operations in November 1997 and has written off the Exodus goodwill and its
investment in the NTERPRISE products and system as of July 31, 1997.
InterGlobe. The Company's wholly-owned subsidiary, InterGlobe Networks,
Inc., ("InterGlobe"), provides network engineering, design and consultation
services, network security, remote network management and monitoring as well as
Intranet development. The Company incurred a loss of approximately $1.6 million
in connection with an impairment in its investment in InterGlobe and accrued
such loss at July 31, 1997. The Company discontinued the operations of
InterGlobe in fiscal year 1998 and took additional write-offs of $1.5 million in
connection therewith.
STRATEGIC GOALS
The Company is currently considering focusing its strategy on
acquisitions into other businesses, although the Company has not yet identified
any definitive acquisition candidate.
Western's growth strategy focuses on acquiring additional existing
distributorships and rental operations, opening new locations, and increasing
sales at its existing locations.
As opportunities arise, Western intends to make strategic acquisitions
of other authorized Case construction equipment retail dealers located in
established or growing markets, as well as dealers or distributors of
construction, industrial, or agricultural equipment, and related parts,
manufactured by companies other than Case.
In addition to acquisitions, Western plans to grow by opening new
retail outlets. The
5
strategy in opening addition retail outlets has been to test market areas by
placing sales, parts, and service personnel in the target market. If the results
are favorable, a retail outlet is opened with its own inventory of equipment.
This approach reduces both the business risk and the cost of market development.
The third prong of Western's growth strategy is to expand sales at its
existing locations in three ways. First, Western will continue to broaden its
product line by adding equipment and parts produced by manufacturers other than
Case. Western has already added products to its inventories produced by such
quality manufacturers as Dynapac, Champion, Link-Belt, Takeuchi, Tymco, Vactor,
Kawasaki, Kubota, Daewoo, and Stewart & Stevenson. Second, Western will seek to
increase sales of parts and service--both of which have considerably higher
margins than equipment sales. This growth will be accomplished through the
continued diversification of our parts product lines and the servicing of
equipment produced by manufacturers other than Case. Third, Western plans to
further develop its fleet of rental equipment. As the cost of purchasing
equipment escalates, short and long-term rental will become increasingly
attractive to Western's customers. Management anticipates that rental of
equipment will make up an increasing share of its revenues.
HISTORY AND RECENT ACQUISITIONS AND DIVESTITURES
The Company was initially organized as a New York corporation on June
22, 1988 under the name Alrom Corp., and completed an initial public offering of
securities in August 1990. The Company effected a statutory merger in December
1991, pursuant to which the Company was reincorporated in the State of Delaware
under the name American United Global, Inc.
Western
Effective November 1, 1992, the Company's newly-formed Western
subsidiary completed the acquisition from Case of $27.2 million of new and used
construction equipment inventory and parts inventory, and $4.5 million of
vehicles, tools, fixtures and other assets used in connection with seven
separate Case retail construction equipment distribution operations located in
the states of Washington and Oregon which are still owned and operated by
Western.
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.
In June 1995, Western completed an initial public offering of 1,495,000
shares of its common stock, which reduced the Company's interest in Western to
56.6%.
6
In February 1996, Western acquired substantially all of the operating
assets used by 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.
In June 1996, Western acquired the operating assets of GCS, Inc.
("GCS"), a California-based distributor of heavy equipment primarily marketed to
municipal and state government agencies responsible for street and highway
maintenance. The Company operates the GCS business from a location in Fullerton,
California and from the Company's existing facility in Sacramento, California.
The purchase price for the GCS assets was $1,655,000.
In January 1997, Western acquired the operating assets of Sahlberg
Equipment, Inc., a four-store Pacific Northwest distributor of construction
equipment, for $5,289,616. The purchase price consisted of $3,844,152 in
equipment inventory, $796,914 in parts inventory, $625,326 in fixed assets, and
$23,224 in work-in-process. The majority of the purchase price was financed by
the proceeds of two term loans from Case Credit Corporation.
Western operates the Sahlberg business from four locations, 2 in
Washington state, one in Oregon and one in Alaska, with all operations conducted
from facilities leased from third parties.
In fiscal 1998, Western acquired four additional facilities, located in
California and Alaska, and opened one new store in the state of Washington. On
December 11, 1997, Western acquired substantially all of the operating assets
used by Case in connection with its business of servicing and distributing Case
agricultural equipment at a facility located in Yuba City, California. The
acquisition was consummated for approximately $142,000 in cash, $628,000 in
installment notes payable to Case and the assumption of $1,175,000 in inventory
floor plan debt with Case and its affiliates.
On April 30, 1998, Western acquired substantially all of the operating
assets of Yukon Equipment, Inc. (Yukon) in connection with Yukon's business of
servicing and distributing construction, industrial, and agricultural equipment
in Alaska. Yukon has facilities in Anchorage, Fairbanks, and Juneau, Alaska. The
acquisition was consummated for approximately $4,766,000 in cash, the assumption
of approximately $2,786,000 in floor plan debt with Case and its affiliates, and
50,000 shares of Western's common stock.
National O-Ring and Stillman Seal
In January 1996, the Company sold all of the assets of its National
O-Ring and Stillman Seal businesses comprising the manufacturing business of
the Company to Hutchinson for $24,500,000, of which $20,825,000 was paid in
cash and the aggregate $3,675,000 balance was
7
paid by delivery of two 24-month non-interest bearing promissory notes due
and paid in January 1998.
Connectsoft
Effective as of July 31, 1996, the Company acquired, through a merger
with an acquisition subsidiary of the Company consummated in August 1996 (the
"Connectsoft Merger"), all of the outstanding capital stock of Connectsoft, Inc.
a private company located in Bellevue, Washington, ("Old Connecstoft") which
provided a variety of computer software products and services. In connection
with the ConnectSoft Merger, Old Connectsoft shareholders received, on a pro
rata basis, an aggregate of 976,539 shares of the Company's Series B-1 Preferred
Stock (the "Preferred Stock"). Such Preferred Stock does not pay a dividend, is
not subject to redemption, has a liquidation preference of $3.50 per share over
Company 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 976,539 shares of Company Common Stock and a maximum of 2,929,617
shares of Company Common Stock, based upon certain criteria.
On July 10, 1998, the Company entered into an agreement to sell
substantially all of the assets of its Connectsoft subsidiary, including the
network operations center to eGlobe, Inc., formerly known as Executive TeleCard,
Ltd. ("eGlobe"). As consideration for the assets, eGlobe will assume up to
$4,500,000 of Connectsoft liabilities and leases, most of which have been
guaranteed by the Company. Although eGlobe will be responsible for payment of
those assumed liabilities, the assumption of such liabilities will not relieve
the Company from its guarantees until such liabilities have been paid. The
Company will also receive as additional consideration from eGlobe, on the
earlier of two years from the closing of the sale to eGlobe or if eGlobe resells
the Connecsoft business, 7.5% of the increase in value of the Connectsoft
business. The Company anticipates that the transaction will close before
November 30, 1998, however, there can be no assurance that the transaction will
close in such time or at all.
InterGlobe
In September 1996, the Company acquired InterGlobe. 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 vest and
are exercisable over the four fiscal years ending July 31, 2000, based on
InterGlobe achieving certain pre-tax income and other factors. 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
8
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. In April 1998, the Company discontinued operations of InterGlobe.
On November 4, 1997, Artour Baganov, the former principal stockholder
of InterGlobe, tendered his resignation as a member of the Board of Directors of
the Company and InterGlobe. The Company and InterGlobe reached an agreement on
July 22, 1998 with Mr. Baganov under which he agreed to terminate his employment
agreement with InterGlobe and cancel his 698,182 performance options. In
consideration, the Company and InterGlobe paid Mr. Baganov an aggregate of
$300,000 in full settlement of obligations under his employment agreement and
released such stockholder from his non-competition agreement with InterGlobe.
Mr. Baganov also agreed to vote his 550,000 shares of Company Common Stock in
favor of management's nominees for election to the Company's Board of Directors.
Two other former stockholders of InterGlobe, who collectively own approximately
102,000 Company shares, had previously resigned as InterGlobe employees and
their employment agreements were canceled.
Exodus
The Company, through its Exodus subsidiary, has designed and
developed proprietary software, marketed as NTERPRISE-TM-, which allows users
to run Windows-TM- application server software programs designed for the
Microsoft-TM-Windows NT-TM- operating system developed by Microsoft on (i)
users' existing Unix-TM- workstations, X-terminals and other X-widows
devices, Macintosh terminals and Java-enabled network computers, which would
otherwise not be Windows compatible, and (ii) on older versions of Windows
compatible workstations which are otherwise incapable of running newer
versions of Microsoft compatible software, such as Office95-TM- or Lotus
NotesTM. The Company has discontinued its Exodus operations.
Seattle OnLine
In November 1996, the Company acquired the assets of Seattle OnLine,
Inc. ("Seattle OnLine"), a company engaged in providing a regional
Internet/Intranet telecommunication service in the form of high bandwidth
Internet connectivity and hosting for businesses in the Pacific Northwest. The
Company purchased the Seattle OnLine assets for the sum of $147,000 and 16,000
shares of the Company's Common Stock which were used to settle certain creditor
claims. The Company also issued to the former stockholders of such corporation
warrants to purchase an aggregate of 333,333 shares of the Company's Common
Stock. Seattle OnLine ceased operations in August of 1997 and its remaining
assets were sold to a privately held Company for $25,000 and 50,000 shares of
common stock of the acquiring company.
TechStar and IDF
9
Effective December 11, 1996, the Company acquired TechStar and issued
to the former TechStar shareholders an aggregate of 507,246 shares of Company
Common Stock, paid $780,000 in cash and delivered three year Company notes
aggregating $600,000. In a related transaction, in April 1997 the Company also
acquired Arcadia Consulting, Inc., a company formed by Solon L. Kandel for the
purpose of providing consulting services to clients in the wireless
telecommunications industry. The Company paid $220,000 and issued to Mr. Kandel
192,754 shares of Company Common Stock. Subsequent to such acquisitions, the
former stockholders of TechStar publicly sold an aggregate of 331,346 of their
507,246 shares of Company Common Stock and Mr. Kandel publicly sold all of his
192,754 shares of Company Common Stock.
In August 1997, the Company sold TechStar to IDF, pursuant to an
agreement and plan of merger, dated July 31, 1997, among the Company, TechStar,
IDF and an acquisition subsidiary of IDF (the "IDF Merger Agreement"). Upon
consummation of the transaction, the Company received 6,171,553 shares of IDF
common stock, representing approximately 58% of the fully diluted outstanding
IDF common stock, as a result of which, for accounting purposes, the Company was
deemed to have acquired IDF. Solon D. Kandel, Sergio Luciani and Simontov
Moskona, the senior executive officers of TechStar, received three year options
to purchase an aggregate of 856,550 shares of IDF common stock (the "IDF
Options"), representing approximately an additional 8% of such fully diluted
outstanding IDF common stock. In connection with the transaction (i) all options
granted by the Company under their employment agreements entitling Messrs.
Kandel, Luciani and Moskona to purchase an aggregate of 780,000 shares of
Company Common Stock (subject to achievement of certain financial performance
targets), and all related 120,000 performance options held by other TechStar
employees, were canceled, (ii) each of Messrs. Luciani and Kandel tendered their
resignations as directors of the Company, and (iii) Messrs. Luciani, Moskona and
Kandel utilized $600,000 of the net proceeds from the sale of their Company
shares to invest in convertible securities of IDF.
Messrs. Kandel, Luciani and Moskona are currently the senior executive
officers of IDF and have each entered into employment agreements with IDF
expiring November 30, 2000. Pursuant to such agreements, Messrs. Kandel, Luciani
and Moskona are entitled to receive, in addition to their base salaries and
annual bonuses, IDF Options which vest based upon IDF and its consolidated
subsidiaries, including TechStar and Hayden Wegman, achieving all or certain
pro-rated portions of annual pre-tax income targets in each of fiscal years
ending July 31, 1998, 1999 and 2000. In the event that any or all of such IDF
Options do not vest, the number of shares of IDF common stock that would have
been issued upon the exercise of such unvested IDF revert to the Company as
additional consideration.
Robert M. Rubin, the Chief Executive Officer and Chairman of the Board
and a Director of the Company, is also a principal stockholder and member of the
board of directors of IDF. Prior to consummation of the transactions
contemplated by the IDF Merger Agreement Mr. Rubin converted an $800,000 loan
previously made to IDF into IDF convertible preferred stock
10
convertible into an additional 400,000 shares of IDF common stock.
In October 1998, Mr. Rubin advanced IDF $250,000 and, in November 1998,
the Company advanced IDF $150,000. These advances are part of commitments
of the Company and certain stockholders of IDF to fund up to $400,000 and
$600,000, respectively, to IDF for working capital purposes.
Conese Enterprises Transaction
Effective March 24, 1998, the Company, Western and IDF entered into a
securities purchase agreement with Conese Enterprises, Ltd. ("Enterprises"),
pursuant to which Enterprises would have obtained voting control over the
Company. As a result of discussions subsequent to entering into the agreement,
the parties mutually agreed to terminate the securities purchase agreement. On
June 27, 1998, the parties entered into an agreement releasing each other from
any obligations under the securities purchase agreement. As part of the
negotiated release, the Company reimbursed Enterprises $150,000 for their
expenses relative to the proposed transactions.
THE DISTRIBUTION BUSINESS
General
Western is engaged in the sale, rental, and servicing of light,
medium-sized, and heavy construction, agricultural, and industrial equipment,
parts, and related products which are manufactured by Case Corporation ("Case")
and certain other manufacturers. The Company believes, based upon the number of
locations owned and operated, that it is the largest independent dealer of Case
construction equipment in the United States. Products sold, rented, and serviced
by the Company include backhoes, excavators, crawler dozers, skid steer loaders,
forklifts, compactors, log loaders, trenchers, street sweepers, sewer vacuums,
and mobile highway signs.
Western operates out of 27 facilities located in the states of
Washington, Oregon, Nevada, California, and Alaska. The equipment distributed by
Western is furnished to contractors, governmental agencies, and other customers,
primarily for use in the construction of residential and commercial buildings,
roads, levees, dams, underground power projects, forestry projects, municipal
construction, and other projects.
Western's growth strategy focuses on acquiring additional existing
distributorships and rental operations, opening new locations, and increasing
sales at its existing locations. In such connection, it may seek to operate
additional Case or other equipment retail distributorships, and sell, lease, and
service additional lines of construction equipment and related products not
manufactured by Case. See "Growth Strategy".
Growth Strategy
Western's growth strategy focuses on acquiring additional existing
distributorships, opening new locations and increasing sales at its existing
locations.
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As opportunities arise, Western intends to make strategic acquisitions
of other authorized Case construction equipment retail dealers located in
established or growing markets, as well as of dealers or distributors of
industrial or construction equipment, and related parts, manufactured by
companies other than Case.
In addition to acquisitions, Western plans to grow by opening new
retail outlets. The strategy in opening additional retail outlets has been to
test market areas by placing sales, parts, and service personnel in the target
market. If the results are favorable, a retail outlet is opened with its own
inventory of equipment. This approach reduces both the business risk and the
cost of market development.
The third aspect of Western's growth strategy is to expand sales at its
existing locations in three ways. First, Western will continue to broaden its
product line by adding equipment and parts produced by manufacturers other than
Case. Western has already added to its inventories products produced by quality
manufacturers such as Dynapac, Champion, Link-Belt, Takeuchi, Tymco, Vactor,
Kawasaki, Kubota, Daewoo and Stewart & Stevenson. Second, Western will seek to
increase sales of parts and service--both of which have considerably higher
margins than equipment sales. This growth will be accomplished through the
continued diversification of the parts product lines and the servicing of
equipment produced by manufacturers other than Case. Third, Western plans to
further develop its fleet of rental equipment. As the cost of purchasing
equipment escalates, short and long-term rental will become increasingly
attractive to the Western's customers. Western anticipates that rental of
equipment will make up an increasing shares of its revenues.
The Equipment
Case Construction Equipment
The construction equipment (the "Equipment") sold, rented and serviced
by Western generally consists of: backhoes (used to dig large, wide and deep
trenches); excavators (used to dig deeply for the construction of foundations,
basements, and other projects); log loaders (used to cut, process and load
logs); crawler dozers (bulldozers used for earth moving, leveling and shallower
digging than excavators); wheel loaders (used for loading trucks and other
carriers with excavated dirt, gravel and rock); roller compactors (used to
compact roads and other surfaces); trenchers (a small machine that digs trenches
for sewer lines, electrical power and other utility pipes and wires); forklifts
(used to load and unload pallets of materials); and skid steer loaders (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
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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 one month and twelve months on purchases of specified types of new
Equipment. Principal payments are generally due at the earlier of sale of the
equipment or six months from the date of shipment by Case.
Other Products
Although the principal products sold, leased and serviced by Western
are manufactured by Case, Western also sells, rents and services equipment and
sells related parts (e.g., tires, trailers and compaction equipment)
manufactured by others. Approximately 35% of Western's net sales for fiscal year
1998 resulted from sales, rental and servicing of products manufactured by
companies other than Case, significantly higher than the 25% figure for fiscal
year 1997 as Western continued its planned growth in product lines other than
Case. Manufacturers other than Case represented by Western offer various levels
of supplies and marketing support along with purchase terms that vary from cash
upon delivery to interest free 12 month floor plans.
Western's distribution business is generally divided into five
categories of activity: (i) New Equipment sales, (ii) used Equipment sales,
(iii) Equipment rentals, (iv) Equipment servicing, and (v) parts sales.
New Equipment Sales
At each of its distribution outlets, Western maintains a fleet of
various Equipment for sale. The Equipment purchased for each outlet is selected
by Western's marketing staff based upon the types of customers in the
geographical areas surrounding each outlet, historical purchases as well as
anticipated trends. Subject to applicable limitations in Western's
manufacturers' dealer contracts, each distribution outlet has access to
Western's full inventory of Equipment.
13
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.
Used Equipment Sales
Western sells used Equipment that has been reconditioned in its own
service shops. It generally obtains such used Equipment as "trade-ins" from
customers who purchase new items of Equipment and from Equipment previously
rented and not purchased. Unlike new Equipment, Western's used Equipment is
generally sold "as is" and without a warranty.
Equipment Rental
Western maintains a separate fleet of Equipment that it holds solely
for rental. Such Equipment is generally held in the rental fleet for 12 to 36
months and then sold as used Equipment with appropriate discounts reflecting
prior rental usage. As rental Equipment is taken out of the rental fleet,
Western adds new Equipment to its rental fleet as needed. The rental charges
vary, with different rates for different types of Equipment rented. In October
1998, Western opened its first rental-only store, located in the Seattle,
Washington area, under the name Western Power Rents. This store rents a wide
range of products including Equipment from Case and other manufacturers with
whom Western has dealer agreements as well as Equipment from companies with
which Western has had no prior relationship.
Equipment Servicing
Western operates a service center and yard at each retail distribution
outlet for the repair and storage of Equipment. Both warranty and non-warranty
service work is performed, with the cost of warranty work being reimbursed by
the manufacturer following the receipt of invoices from Western. Western employs
approximately 145 manufacturer-trained service technicians who perform Equipment
repair, preparation for sale, and other servicing activities. Equipment
servicing is one of the higher profit margin businesses operated by Western.
Western has expanded this business by hiring additional personnel and developing
extended warranty contracts to be purchased by customers for Equipment sold and
serviced by Western, and independently marketing such contracts to its
customers. Western services items and types of Equipment which include those
that are neither sold by Western nor manufactured by Case.
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 day terms.
14
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 18,000 customers, with most being small
business owners, none of which accounted for more than 5% of its total sales in
the fiscal year ended July 31, 1998.
For fiscal years 1998, 1997, and 1996, the revenue breakdown by source
for the business operated by the Company were approximately as follows:
FY 1998 FY 1997 FY 1996
------- ------- -------
New Equipment Sales ............... 58% 58% 58%
Used Equipment Sales .............. 11% 11% 12%
Rental Revenue .................... 8% 9% 9%
Parts Sales ....................... 18% 18% 17%
Service Revenue ................... 5% 4% 4%
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
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 a significant
backlog of orders. Although Western has commenced acceptance of orders from
customers for future delivery following manufacture by Case or other
manufacturers, during fiscal 1998 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 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 75 Equipment salespersons on July 31, 1998.
15
On July 31, 1998, Western employed 7 product support salespersons who
sell Western's parts and repair services to customers in assigned territories.
Western has no independent distributors or non-employee sales representatives.
Suppliers
Western purchases the majority of its inventory of Equipment and parts
from Case. No other supplier currently accounts for more than 5% of such
inventory purchases in fiscal 1998. While maintaining its commitment to Case to
primarily purchase Case Equipment and parts as an authorized Case dealer, in the
future Western plans to expand the number of products and increase the aggregate
dollar value of those products which Western purchases from manufacturers other
than Case in the future.
Competition
Western competes with distributors of construction, agricultural and
industrial equipment and parts manufactured by companies other than Case on the
basis of price, the product support (including technical service) that it
provides to its customers, brand name recognition for its products, the
accessibility of its distribution outlets and the overall quality of the Case
and other products that it sells. Western management believes that it is able to
effectively compete with distributors of products produced and distributed by
such other manufacturers primarily on the basis of overall product quality, and
the superior product support and other customer services provided by Western.
Case's two major competitors in the manufacture of a full line of
construction equipment of comparable sizes and quality are Caterpillar
Corporation and Deere & Company. In addition, other manufacturers produce
specific types of equipment which compete with the Case Equipment and other
Equipment distributed by Western. These competitors and their product
specialties include JCB Corporation-backhoes, Kobelco Corporation-excavators,
Dresser Industries-light and medium duty bulldozers, Komatsu Corporation-wheel
loaders and crawler dozers, and Bobcat, Inc.-skid steer loaders.
Western is currently the only Case dealer for construction equipment in
the states of Washington and Nevada and in the Northern California area, and is
one of two Case dealers in the State of Oregon. None of the Case dealers in
Western's territory are owned by Case. However, Case has the right to establish
other dealerships in the future in the same territories in which the Company
operates. In order to maintain and improve its competitive position, revenues
and profit margins, Western plans to increase its sales of products produced by
companies other than Case.
Environmental Standards and Government Regulation
16
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 rental and 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.
Insurance
The Company currently has general, product liability, and umbrella
insurance policies covering the Company with limits, terms, and conditions which
the Company believes to be consistent with reasonable business practice,
although there is no assurance that such coverage will prove to be adequate in
the future. An uninsured or partially insured claim, or a claim for which
indemnification is not available, could have a material adverse effect upon the
Company.
Employees
At July 31, 1998, Western employed 450 full-time employees. Of that
number, 32 are in corporate administration for Western, 33 are involved in
administration at the branch locations, 118 are employed in Equipment sales and
rental, 89 are employed in parts sales, and 178 are employed in servicing
construction equipment. At July 31, 1998, approximately 20 of Western's service
technicians employed in the Sacramento, California operation were being
represented by Operating Engineers Local Union No. 3 of the International Union
of Operating Engineers, AFL-CIO under the terms of a five-year contract expiring
August 31, 2001. Western believes that its relations with its employees are
satisfactory. The Company has three executive officers and one administrative
employee.
Future Performance and Risk Factors
The future performance, operating results and financial condition of
the Company's Distribution Business are subject to various risks and
uncertainties, including those described below.
17
Risk Factors Relating to the Company's Distribution Business
Competition. The Company's Distribution Business operates in highly
competitive environments, certain of which are characterized by firms having
resources and manpower significantly greater than those of Western, and in all
of which Western faces a great deal of competition on the basis of price. Such
intense price competition has the effect of holding down Western's profit
margins on product sales. The retail construction equipment industry, including
the states of Washington, Oregon, California and Nevada in which Western
operates, is highly fragmented with many brands of equipment and distributors of
such brands active in the market. Moreover, Western's dealership arrangements
with Case do not provide Western with exclusive dealerships in any territory.
Although management believes that it is unlikely that Case will create
additional independent dealers in the states of Oregon, Washington, California,
Alaska or Nevada, or will reinstitute its own proprietary dealerships in that
territory, there is no assurance that Case will not elect to do so in the
future. See "Business--The Distribution Business--Competition."
Government Regulation and Environmental Standards. 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. There is always the risk that such
materials might be mishandled, or that there might occur equipment or technology
failures, which could result in significant claims for personal injury, property
damage and clean-up or remediation. Any such claims could have a material
adverse effect on the Company. See "Business--The Distribution
Business-Environmental Standards and Government Regulation."
Risk of Termination of Case Dealership. Under the terms of the standard
Case Corporation ("Case") construction equipment sales and services agreement
with its dealers, including Western, Case reserves the right to terminate
Western as an authorized Case dealer at
18
any one or more of the nineteen retail locations, for any reason, upon 90 days
notice. In the Agreement of Purchase and Sale by and between Case and Western,
dated December 4, 1992 (the "Case Purchase Agreement"), Case acknowledged that
its corporate business policy is not to exercise such discretionary right of
termination arbitrarily, and agreed that if Western's operations at a particular
location acquired from Case are profitable and are terminated by Case for any
reason other than "for cause" (defined as any grounds which Case shall determine
in the exercise of its reasonable business judgment) it would not reinstate its
own retail operations at such location through December 1997. Should its Case
dealerships at any one or more locations be terminated by Case, the Company's
business could be materially and adversely affected. In the event of such
termination, the Company's interest in the Distribution Business segment would
be significantly affected. Western would suffer significant adverse effects to
its liquidity position and cash reserves, as all of Western's indebtedness to
Case under its various secured financing agreements would become immediately due
and payable upon termination of one or more of such dealerships. All of
Western's indebtedness to its institutional lenders could also be accelerated at
that time. Furthermore, in the event that Western accelerates growth of its
Distribution Business, dependence upon Case as its principal supplier, at least
in the near term, will increase. See "Business-The Distribution Business-The
Equipment."
Importance of Case Corporation to the Company's Operations. During
the year ended July 31, 1998 the Company's Western subsidiary accounted for
all of the Company's total net sales from continuing operations.
Approximately 65% of Western's revenues result from sales, leasing and
servicing of equipment and parts manufactured by Case. As a result, the
ability of Case to continue to manufacture products that Western can
successfully market and distribute, largely based on the quality and pricing
of such products, is of material importance to the Company. In the event that
Case should cease to manufacture equipment for the construction equipment
industry, fail to produce sufficient products to stock the Company's
inventories adequately, fail to maintain beneficial product price levels on
its products or to maintain its international reputation for quality in such
industry, the Company could be materially and adversely affected.
Effects of Downturn in General Economic Conditions, Cyclicality and
Seasonality. Demand for all of Western's construction equipment distributed
through its retail operations is significantly affected by general domestic
economic conditions. All of such products and services are either capital goods
themselves, principally sold for inclusion in capital equipment or used for the
provision of construction services by others. Sales of capital goods tend to
fluctuate widely along with trends in overall economic activity in the national
economy. A general inflationary spiral or a continuing increase in prevailing
interest rates could adversely affect new construction, and consequently result
in a significant reduction in demand for the construction equipment sold by
Western. The construction equipment business has also historically been
cyclical, and is subject to periodic reductions in the levels of construction
(especially housing starts) and levels of total industry capacity and equipment
inventory, irrespective of the effects of inflation or increasing interest
rates. In addition, housing construction in the northwest slows
19
down beginning in November and continuing through to January. Accordingly,
Western's operations may be materially and adversely affected by any general
downward economic pressures, adverse cyclical trends, or seasonal factors.
Dependence on Key Personnel. The Company's success in its Distribution
Business depends to a significant degree upon the continuing contributions of
its senior management and other key employees. The Company believes that its
future success will also depend in large part on its ability to attract and
retain highly-skilled sales and marketing personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting, integrating and retaining such personnel. Failure to
attract or retain existing and additional key personnel could have a material
adverse effect on the Company's Distribution Business, operating results or
financial condition.
Risk Factors Relating to the Company in General
Control by Management. As of November 4, 1998, the Company's directors
and executive officers as a whole beneficially owned 1,515,548 shares or 13.0%
of the Company's outstanding voting capital stock, assuming the exercise of all
outstanding stock options held by them. Insofar as the holders of voting
securities do not have cumulative voting rights under the Company's Certificate
of Incorporation, the current executive officers and directors of the Company,
acting together, are currently in a position to materially influence the outcome
of issues to be voted on by the Company's stockholders.
Volatility of Market Prices for Company's Common Stock. The market
prices for the Company's publicly traded Common Stock has been historically
volatile and there is limited liquidity in such market. Future announcements
concerning the Company's Distribution Business, or its competitors, including
operating results, government regulations, or foreign and other competition,
could have a significant impact on the market price of the Common Stock in the
future. See "Market for Common Equity and Related Stockholder Matters."
Forward Looking Statements and Associated Risks. This annual report on
Form 10-K contains certain forward-looking statements, including among others
(i) anticipated trends in the Company's financial condition and results of
operations, and (ii) the Company's business strategy. These forward-looking
statements are based largely on the Company's current expectations and are
subject to a number of risks and uncertainties. Actual results could differ
materially from these forward-looking statements. In addition to other risks
described elsewhere in this "Risk Factors" discussion, important factors to
consider in evaluating such forward-looking statements include (i) changes in
external competitive market factors or in the Company's internal budgeting
process which might impact trends in the Company's results of operations; (ii)
unanticipated working capital or other cash requirements; (iii) changes in the
Company's business strategy or an inability to execute its strategy due to
unanticipated changes
20
in the industries in which it operates; and (iv) various competitive factors
that may prevent the Company from competing successfully in the marketplace. In
light of these risks and uncertainties, many of which are described in greater
detail elsewhere in this "Risk Factors" discussion, there can be no assurance
that the events predicted in forward-looking statements will, in fact,
transpire.
ITEM 2. Properties
The following table sets forth information as to each of the properties
which the Company owns or leases:
The Distribution Business:
Location and Use Lessor Expiration Annual Size/Square Purchase
Date Rental Feet Options
- -------------------------------------------------------------------------------------------------------------------------
1745 N.E. Columbia Blvd. Carlton O. Fisher, CNJ 12/31/00 $67,500(1) Approx. 4 No
Portland, Oregon 97211 Enterprises plus CPI Acres;
(Retail sales, service, storage adjustments Building
and repair facilities) 17,622 sq.ft.
1665 Silverton Road, N.E. LaNoel Elston Myers 7/10/01 $33,600(1) Approx. 1 No
Salem, Oregon 97303 Living Trust Acre;
(Retail sales, service, storage Buildings
and repair facilities) 14,860 sq.ft.
1702 North 28th Street McKay Investment Company 6/14/01 $69,000(1) Approx. 5 No
Springfield, Oregon 97477 Acres;
(Retail sales, service, storage Building
and repair facilities) 17,024 sq.ft.
21
West 7916 Sunset Hwy. US Bank 9/30/03 $69,600(1) Approx. 5 No
Spokane, Washington 99204 Acres;
(Retail sales, service, storage Building
and repair facilities) 19,200 sq.ft.
3217 Hewitt Avenue Dick Calkins Month to $40,320(1) Approx. 2.5 No
Everett, Washington 98201 Month Acres;
(Retail sales, service, storage Building
and repair facilities) 12,483 sq.ft.
1901 Frontier Loop The Landon Group 4/30/02 $40,500(1) Approx. 7 No
Pasco, Washington 99301 Acres;
(Retail sales, service, storage Building
and repair facilities) 14,200 sq.ft.
13184 Wheeler Road, N.E. Maiers Industrial park Month to $38,400(1) Approx. 10 No
Building 4 Month Acres;
Moses Lake, Washington 98837 Building
(Retail sales, service, storage 13,680 sq.
and repair facilities) ft.
63291 Nels Anderson Road B&K Management Corp. 10/31/98 $31,800(1) Approx. 1.9 No
Bend, Oregon 97701 acres
(Retail sales, service, storage building
and repair facilities) 3,600 sq. ft.
4601 N.E. 77th Avenue Parkway Limited 4/30/01 $147,288 8,627 sq. ft. No
Suite 200 Partnership
Vancouver, Washington 98662
(Retail sales, service, storage
and repair facilities)
22
2702 W. Valley Hwy No. Avalon Island LLC 11/30/15 $204,000(1) Approx. 8 No
Auburn, Washington 98001 Acres;
(Retail sales, service, storage Building
and repair facilities) 33,000 sq.
ft.
500 Prospect Lane Frederick Peterson 9/15/02 $26,496(1) Approx. 1.9 No
Moxee, Washington 98936 Acres;
(Retail sales, service, storage Building
and repair facilities) 6,200 sq. ft.
2112 Wildwood Way James Ghia 8/31/99 $18,720 Approx. 1 No
Elko, Nevada 89431 Acre;
(Retail sales, service, storage Building
and repair facilities) 2,400 sq. ft.
1455 Glendale Avenue Owned N/A N/A Approx. 5 N/A
Sparks, Nevada 89431 Acres;
(Retail sales, service, storage Building
and repair facilities) 22,475 sq.ft.
25886 Clawiter Road Fred Kewel II, Agency 11/30/99 $110,088(1) Approx. 2.8 No
Hayward, California 94545 Acres;
(Retail sales, service, storage Building
and repair facility) 21,580 sq.ft.
3540 D Regional Parkway Soiland 2/28/99 $48,234(1) 5,140 sq. ft. No
Santa Rosa, California 95403 plus CPI approximately
(Retail sales, service, storage adjustments 1.25 acres
and repair facility)
23
1751 Bell Avenue McLain-Rubin Realty 2/2/16 $168,000(2) Approx. 8 No
Sacramento, California 95838 Company LLC(2) Acres;
(Retail sales, service, storage Buildings
and repair facility) 35,941 sq.
ft.
1041 S. Pershing Avenue Raymond Investment Corp. 3/14/01 $44,000(1) Approx. 2 No
Stockton, California 95206 plus annual Acres;
(Retail sales, service, storage CRI Buildings
and repair facility) adjustments 8,000 sq. ft.
8271 Commonwealth AvenueBuena M.E. Robinson 3/31/2001 $81,600(1) Approx. 1 No
Park, California 90621 acre;
(Retail sales, service, storage Building
and repair facility) 11,590 sq.ft.
672 Brunken Avenue R. Jay De Serpa, Ltd. 7/31/01 $28,800(1) Approx. 8 No
Salinas, California 93301 Acres;
(Retail sales, service, storage Building
and repair facility) 4,000 sq.ft.
13691 Whitaker Way D&J Enterprises 5/1/01 $77,700 Approx. 2 No
Portland, Oregon 97230 Acres;
(Retail sales, service, storage Building
and repair facility) 11,760 sq. ft.
2535 Ellis Street Hart Enterprises 2/15/02 $33,600 Approx. 2 No
Redding, Oregon 96001 Acres;
(Retail sales, service, storage Building
and repair facility) 6,200 sq. ft.
24
1702 Ship Avenue D&J Enterprises 1/18/99 $94,200(1) Approx. 4 No
Anchorage, AK 99501 Acres;
(Retail sales, service, storage Building
and repair facility) 11,800 sq.ft.
913 S. Central McLain-Rubin Realty 5/31/17 $205,200(2) Approx. 4.4 No
Kent, WA 98032 Company II, LLC (2) plus CPI Acres;
(Retail sales, service, storage adjustments Building
and repair facility) 21,400 sq.
ft.
85454 Highway 11 Eagle Enterprises month to $21,600 Approx. 0.5 No
Milton-Freewater, Oregon 97862 month Acres;
(Retail sales, service, storage Building
and repair facility) 1,000 sq. ft.
723 15TH Street Mark Flerchinger 11/02/02 $18,600 Approx. 1.2 Yes
Clarkston, WA 99403 Acres;
(Retail sales, service, storage Building
and repair facility) 3,750 sq. ft.
3199 E. Onstott Road McLain-Rubin Realty III (2) 12/31/17 $54,000 (2) Approx. 13 No
Yuba City, CA 95991 Acres;
(Retail sales, service, Building
storage and repair facility) 23,900 sq.
ft.
2020 E.Third Avenue Owned N/A N/A Approx. 4 N/A
Anchorage, AK 99501 Acres;
(Retail sales, service, Building
storage and repair facility) 15,650 sq.
ft.
3510 International Way C & N Partners 6/15/99 $30,900 Approx. 2 No
Fairbanks, AK 99701 Acres;
(Retail sales, service, Building
storage and repair facility) 4500 sq. ft.
25
2275 Brandy Lane Excaliber Drill 2/29/00 $42,000 Approx. .5 No
Juneau, AK 99801 Acres;
(Retail sales, service, Building
storage and repair facility) 1,500 sq. ft.
- ----------
(1) Net lease with payment of insurance, property taxes and maintenance
costs by Company.
(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.
Western's operating facilities are separated into nine "hub" outlets
and eighteen "sub-stores." The hub stores are the main distribution centers
located in Auburn and Spokane, Washington, Portland and Springfield, Oregon,
Sparks, Nevada, Hayward and Sacramento, California. The sub-stores are the
smaller retail facilities in Everett, Pasco, Moses Lake, Kent, Clarkston and
Yakima, Washington; Portland, Salem, Springfield, Milton-Freewater and Bend,
Oregon; Santa Rosa, Stockton, Yuba City, Fullerton, Buena Park, Redding and
Salinas, California; Elko, Nevada; and Anchorage and Fairbanks, Alaska.
ITEM 3. LEGAL PROCEEDINGS
Except as set forth below, there are no pending material legal
proceedings in which the Company or any of its subsidiaries is a party, or to
which any of their respective properties are subject, which either individually
or in the aggregate may have a material adverse effect on the results of
operations or financial position of the Company.
In May, 1998, a lawsuit was filed on behalf of the Company in a
purported shareholder derivative action against certain directors of the
Company. The lawsuit alleges that the defendant directors breached their
fiduciary responsibilities of due care and loyalty to the Company and its
stockholders in connection with a letter of credit guarantee by the Company for
ERD Waste Corp., the sale of certain businesses of the Company to Hutchinson
Corporation, and the delisting of the Company's common stock and publicly traded
warrants from the Nasdaq Stock Market. The complaint did not specify the amount
of damages sought.
26
In June, 1998 a shareholder class action was filed against the certain
directors of the Company alleging that the defendant directors breached their
fiduciary responsibilities of due care and loyalty to the Company and its
stockholders in connection with a letter of credit guarantee by the Company for
ERD Waste Corp., the sale of certain businesses of the Company to Hutchinson
Corporation, and the delisting of the Company's common stock and publicly traded
warrants from the Nasdaq Stock Market. The Company is not a defendant in this
lawsuit.
The Company is a named defendant in a matter brought by Peggy Stein in
Los Angeles County Superior Court alleging that the Company conspired with her
ex-husband to conceal community property assets from her in connection with her
recent divorce. Ms. Stein is requesting damages against the Company and the
other defendants in the approximate amount of $8,000,000 plus punitive damages.
The Company believes Ms. Stein's claim is without merit and intends to defend
the lawsuit vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not required.
27
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On February 4, 1998, the Company was notified by The Nasdaq Stock
Market, Inc. ("Nasdaq"), that its common stock and warrants were delisted from
Nasdaq for (i) failure to hold an annual stockholders meeting for fiscal year
1997 in violation of Nasdaq's rules requiring an annual stockholder meeting,
(ii) adopting a stock option plan without stockholder approval in violation of
Nasdaq's rules requiring such stockholder approval, and (iii) the issuance of
the Series B-1 Convertible Preferred Stock to the Old ConnectSoft stockholders
in August 1996 and the private placement of Series B-2 Convertible Preferred
Stock in the 1997 private placement violation of Nasdaq's rules which, in
effect, require shareholder approval for any transactions involving the present
or potential issuance of voting securities representing more than 20% of the
voting capital stock outstanding immediately before such transaction. The
principal market for trading the Company's securities is the National
Association of Securities Dealers Over-the-Counter Bulletin Board ("OTCBB"). The
following is a table that lists the high and low selling prices for shares of
the Company's Common Stock and for the Company's Public Warrants on the Nasdaq
National Market System and the OTCBB during the periods identified:
Common Stock Public Warrants
------------------------------------- ----------------------------------
High Low High Low
------ ----- ------ ----
Fiscal 1996
First Quarter.......................... 6.58 5.08 1.125 0.75
Second Quarter......................... 11.88 6.08 1.00 0.75
Third Quarter.......................... 13.25 3.37 1.56 0.875
Fourth Quarter......................... 10.25 4.19 6.75 1.625
Fiscal 1997
First Quarter.......................... 10.875 5.25 5.25 2.875
Second Quarter......................... 11.375 7.563 4.875 3.875
Third Quarter.......................... 8.1875 3.44 4.50 3.75
Fourth Quarter......................... 6.0000 4.3875 4.50 3.25
Fiscal 1998
First Quarter.......................... 7.625 1.9375 5.25 2.25
28
Second Quarter......................... 2.4375 1.375 1.75 1.00
Third Quarter.......................... 2.4375 .625 * *
Fourth Quarter......................... .875 .33 * *
Fiscal 1999
First Quarter.......................... .50 .28 * *
* The Company believes there has been no trading during this period.
The Company extended the exercise period of the Public Warrants from
July 31, 1998 to July 31, 1999. On November 10, 1998 the last sale price of the
Common Stock was $0.468 as reported on the OTCBB. As of November 9, 1998, the
Company had 115 record holders of its Common Stock and 6 record holders of its
Public Warrants.
Dividend Policy
In the foreseeable future, the Company intends to retain earnings to
assist in financing the expansion of its business. In the future, the payment of
dividends by the Company on its Common Stock will also depend on its financial
condition, results of operations and such other factors as the Board of
Directors of the Company may consider relevant. The Company does not currently
intend to pay dividends on its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following summary financial information for the fiscal years 1998,
1997, 1996, 1995 and 1994 have been derived from the audited financial
statements of the Company.
Income Statement Data (000's):
Year ended July 31,
-----------------------------------------------------------------------
1998(1) 1997(2) 1996(3) 1995 1994
------- ------- ------- ---- ----
Net sales................................ $163,478 $152,021 $106,555 $86,173 $67,370
(Loss) income from continuing operations. ( 5,121 ) (7,944) 685 1,164 1,024
------ ----- --- ----- -----
Net (loss) income........................ (9,615) (27,257) (1,835)(1) 2,268 2,287
----- ----- ----- -----
29
Basic and Diluted (Loss) Earnings Per Share:
(Loss) income from continuing operations. (0.45) (1.05) 0.12 0.20 0.18
---- ---- ---- ---- ----
Net (loss) income........................ (0.85) (2.75) (0.32) 0.40 0.43
---- ---- ------ ---- ----
Balance Sheet Data: (000's)
July 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total assets......................... $146,904 $144,723 $119,055 $76,829 $62,529
Total liabilities.................... 121,914 110,742 87,015 56,575 44,591
Working capital...................... (5,972) 2,467 17,218 10,022 11,739
Shareholders' equity................. 15,862 24,101 22,581 20,254 17,938
- -------------
(1) Includes loss from discontinued operations for Old Connectsoft,
Connectsoft, Seattle OnLine, InterGlobe, and Exodus.
(2) Includes the results of InterGlobe for the 10 months following its
acquisition in September 1996, Seattle OnLine for the nine months
following its acquisition in November 1996 and TechStar for the seven
months following its acquisition in December 1996.
(3) Includes income from discontinued operations and the gain on the sale
of the manufacturing business of $7.8 million, net of tax and the
results of operations of Old Connectsoft for the day ended July 31,
1996 of $10.0 million, net of tax.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This management discussion and analysis of financial conditions and
results of operations
30
contains certain "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Such statements relating to future
events and financial performance are forward-looking statements that involve
certain risks and uncertainties, detailed from time to time in the Company's
various commission filings. See "Description of Business--Future Performance
and Risk Factors." No assurance can be given that any such matters will be
realized.
General Overview
Western acquired its first seven retail distribution stores in November
1992. Western expanded to 18 stores in four states by the end of fiscal 1996, to
23 stores in five states by the end of fiscal 1997, and to 27 stores in five
states by the end of fiscal 1998. Western's growth has been accomplished through
a combination of new store openings, strategic acquisitions, and to a lesser
extent, comparable stores revenue increases.
Store activity for the last three years is summarized as follows:
---------- ---------------------- ----------------- ---------------- ----------------- --------------------
Fiscal No. of Stores at No. of Stores No. of Stores No. of Stores No. of Stores at
Year Beginning of Year Opened Closed Acquired End of Year
---------- ---------------------- ----------------- ---------------- ----------------- --------------------
1996 13 3 0 2 18
---------- ---------------------- ----------------- ---------------- ----------------- --------------------
1997 18 2 0 3 23
---------- ---------------------- ----------------- ---------------- ----------------- --------------------
1998 23 1 1 4 27
---------- ---------------------- ----------------- ---------------- ----------------- --------------------
Western plans to open and acquire additional distribution outlets for
Case products, as well as for products which may be manufactured by other
companies. Western's results can be impacted by the timing of, and costs
incurred in connection with, new store openings and acquisitions.
Results of Operations
Fiscal Year Ended July 31,
Percentage of Percentage of
1998 Revenues 1997 Revenues
---- -------- ---- --------
---------------------------------------------------------------
(In Thousands)
(unaudited)
---------------------------------------------------------------
Net sales.................................. $163,478 100.0% $152,021 100.0%
Cost of goods sold......................... $144,302 88.3% $134,180 88.3%
Selling, general and administrative expenses $13,523 8.3% $23,440 15.4%
31
Interest expense........................... 4,197 2.6% 2,627 1.7%
(Loss) earnings from continuing operations
before income taxes and minority interest.. 1,456 0.9% (8,226) (5.4%)
(Benefit) provision for income taxes....... 1,354 0.8% (703) (0.5)%
Loss in unconsolidated subsidiary 4,730 2.9% -- --
Minority interest in earnings of
consolidated subsidiary.................... 713 0.4% 421 0.3%
Gain on sale of subsidiary................. (220) (0.1%) -- --
Discontinued operations and gain on sale of
wholly owned subsidiaries (less applicable
income tax benefit of $1,423 and $966)
respectively............................... (4,470) (2.7%) (16,910) (11.1%)
Net loss................................... (9,591) (5.9%) (24,854) (16.3%)
Dividend on preferred stock................ 24 0.0% 2,403 1.6%
Net (loss) available for common shareholders (9,615) (5.9%) (27,257) (17.9%)
Fiscal Year 1998 as Compared with Fiscal Year 1997
The Company reported net revenue for fiscal 1998 of $163,478,000, an
increase of 9.3 percent over net revenue of $152,021,000 for fiscal 1997 and an
increase of $15,348,000 (10.4%) over comparable 1997 sales of $148,130,000
excluding TechStar's revenue. Approximately $17.4 million of revenue came from
stores opened or acquired in fiscal 1998 by Western. Stores opened prior to
fiscal 1998 showed an overall revenue decrease of 3.9% from prior year revenue
reflecting a general softening in economic conditions in the northwest,
increased competitive pressures, and some weather related business
interruptions. Also, $3,891,000 of sales from TechStar from December 11, 1996
(date of acquisition) to July 31, 1998 are included in fiscal 1997 sales, for
which no comparable amount exists for fiscal 1998 due to the merger of TechStar
and IDF which combined entities are accounted for on the equity method.
32
Overall, the Company's gross margins for fiscal 1998 and fiscal 1997
were the same at 11.7%. Western's gross margin was 11.7 percent during fiscal
1998, which is higher than their 10.7 percent gross margin during fiscal 1997.
Margins increased in fiscal 1998 on new unit sales, rental, and service
business. Western's Management continues to place a high priority on improving
overall gross margins by working to increase higher margin service, parts, and
rental revenues, focusing more sales efforts on specialty and niche product
lines, and by obtaining higher prices for new equipment. Fiscal 1997 amounts
included the gross margin of TechStar for the period of December 11, 1996 to
July 31, 1997, which contributed 50.7% or $1,971,000 to 1997 gross margin, for
which no comparable fiscal 1998 amount exists.
Selling, general, and administrative expenses were $13,523,000 or 8.3
percent of revenues for fiscal 1998 compared to $23,440,000 or 15.4 percent of
sales for fiscal 1997. The decrease is due largely to the 1997 amounts charged
for ERD totaling $4,985,000 as well as 1997 TechStar and Arcadia expenses of
$1,823,000 for the period from December 11, 1996 to July 31, 1997. The remaining
decrease in selling, general, and administrative expenses resulted in part from
significantly decreased professional fees and other corporate administrative
expenses due to the discontinuation of the technology group and from
management's cost control and efficiency improvement efforts.
Net interest expense for fiscal 1998 was $4,197,000, up $1,570,000 from
$2,627,000 in fiscal 1997. A total of $1,169,000 of this increase was due to an
increase in Western's inventory levels, particularly inventory dedicated to
rentals. In addition, effective with deliveries after July 1, 1998, Case changed
factory to dealer terms lowering from 3% to 2% the cash payment discount if the
dealer pays for the machine outright rather than utilizing the interest-free
floor planning. Western was able to take advantage of the cash discounts on a
majority of its Case purchases in fiscal 1998. In June 1997, Western obtained a
$75 million inventory flooring and operating line of credit facility through
Deutsche Financial Services. The facility is a three-year, floating rate
facility at rates as low as 50 basis points under the prime rate. Western's
management has used this facility to allow Western to take advantage of more
purchase discounts and to lower the overall interest rate on borrowings. Western
believes that the positive impact of the discounted cost of new inventory on
gross margins has more than offset the increased interest expense related to
foregoing the interest-free flooring periods. The remaining increase in net
interest expense of $401,000 is primarily due to decreases in interest income
earned on investments as a result of lower principle invested amounts in fiscal
1998.
Loss from discontinued operations of $4.5 million for the fiscal year
ended July 31, 1998 arises from the discontinuation of the operations of the Old
Connectsoft, Connectsoft, Exodus Technologies, Seattle OnLine and InterGlobe
subsidiaries. Effective during the third quarter of fiscal 1998 the Company
discontinued the operations of these subsidiaries. Losses of $2.3 million from
the discontinued operations after the measurement date of April 30, 1998 have
been offset against an anticipated gain from the sale of certain assets of
Connectsoft and Old
33
Connectsoft to eGlobe Inc. in the amount of $3.8 million, resulting in a
deferred gain of $1.5 million which will be recognized upon the close of the
asset sale in the second quarter of fiscal 1999. In fiscal year ended July 31,
1997, the Company incurred a loss from discontinued operations of $16.9 million
primarily comprised of $8.2 million from its Exodus subsidiary and a net loss
of $3.1 million from the operations of Old ConnectSoft. In addition, the
FreeAgent development and marketing activities conducted by Connectsoft
incurred an additional $2.8 million of net losses in fiscal 1997. InterGlobe
incurred a net loss of $2.224 million (including $1.6 million of write-offs of
goodwill and investment) on total revenues of $1,040,590 and Seattle OnLine
incurred a net loss of $1.575 million on total revenues of $87,000. These
losses were slightly offset by tax benefits recognized of $1.0 million.
FISCAL YEAR 1997 AS COMPARED TO FISCAL YEAR 1996
(RESTATED FOR DISCONTINUED OPERATIONS)
Fiscal Year Ended July 31,
----------------------------------------------------------------
Percentage of Percentage of
Revenues Revenues
1997 1996
---- -------------- ---- --------------
----------------------------------------------------------------
(In Thousands)
(unaudited)
----------------------------------------------------------------
Net sales.................................. $152,021 100.0% $106,555 100.0%
Cost of goods sold......................... $134,180 88.3% $93,906 88.1%
Selling, general and administrative expenses $23,440 15.4% $9,535 8.9%
Interest expense........................... 2,627 1.7% $1,137 1.1%
(Loss) earnings from continuing operations before income taxes and minority
interest..
(8,226) (5.4%) $1,977 1.9%
(Benefit) provision for income taxes.......
(703) 0.5% $890 0.8%
Minority interest in earnings of
consolidated subsidiary.................... 421 0.3% $402 0.4%
34
Discontinued operations and gain on sale of wholly
owned subsidiaries (net of income tax benefit of
($966) and income taxes of
$5,042, respectively)...................... (16,910) (11.1%) (2,520) (2.4%)
Net loss................................... (24,854) (16.3%) $(1,835) (1.7%)
Dividend on preferred stock................ 2,403 1.6% $ --
Net (loss) available for common shareholders
(27,257) (17.9%) $(1,835) (1.7%)
35
Fiscal Year 1997 As Compared to Fiscal Year 1996
Western's revenues for the fiscal year ended July 31, 1997 increased by
$41.6 million, or approximately 39% over the fiscal year ended July 31, 1996.
The increase was due primarily to the contribution of the stores acquired or
opened in the last year, accounting for $21.4 million (51%) of the increase in
sales. Western's same store revenues increased $10.2 million or 25% for the
fiscal year ended July 31, 1997, as compared to the fiscal year ended July 31,
1996. For the fiscal year ended July 31, 1997, Western's sales in all
departments were up at least 25% compared to the same period in the prior year.
Selling, general and administrative ("SG&A") expenses were $23.4
million (15.4% of sales) for the fiscal year ended July 31, 1997, compared to
$9.5 million (8.9% of sales) for the comparative prior year period. The
substantial increase in SG&A expenses of $13.9 million for the year ended July
31, 1997 were attributable to an increase at Western of $3.4 million and an
increase of $5.5 million of corporate SG&A, and included the ERD bad debt of
$5.0 million which had no comparable expense in 1996.
Interest expense for the fiscal year ended July 31, 1997 was $2.627
million compared to $1.137 million for the fiscal year ended July 31, 1996,
predominantly due to increased inventory carried by Western to support higher
equipment sales level, including a significant investment in equipment dedicated
to the rental fleet.
The effective tax rate for fiscal 1997 was approximately 6.4%, which is
lower than the 37% effective tax rate for the prior year comparative period.
This decrease is a result of the recognition of a valuation allowance against
the net operating loss carryforward and deferred tax assets.
In fiscal year ended July 31, 1997, the Company incurred a loss from
discontinued operations of $16.9 million comprised of $8.2 million from its
Exodus subsidiary and a net loss of $3.1 million from the operations of Old
ConnectSoft. In addition, the FreeAgent development and marketing activities
conducted by Connectsoft incurred an additional $2.8 million of net losses in
fiscal 1997. InterGlobe incurred a net loss of $2.224 million (including $1.6
million of write-offs of goodwill and investment) on total revenues of
$1,040,590 and Seattle OnLine incurred a net loss of $1.575 million on total
revenues of $87,000. These losses were offset by tax benefits recognized of
approximately $1.0 million. Losses from discontinued operations for 1996 of $2.5
million are comprised of the gain from the sale of the manufacturing division of
$7.8 million (net of tax of 5.0 million) offset by losses of Old Connectsoft
from the day ended July 31, 1996 in the amount of $10,295.
Although Western's sales increased, the increase in Western's operating
and interest expenses and warranty problems with Case backhoe Equipment which
Western elected to absorb,
36
resulted in net income of approximately $1.0 million in fiscal 1997, as compared
with $2.0 million in the prior year.
As a result of the foregoing, in fiscal year ended July 31, 1997, the
Company reported a consolidated net loss of $27.3 million on total net
consolidated sales of approximately $154.5 million.
Liquidity and Capital Resources
General
During the fiscal year ended July 31, 1998 the Company's cash, cash
equivalents and marketable debt securities decreased by $14,491,000 primarily
due to the repayment of its secured line of credit and the standby letter of
credit with North Fork Bank.
The Company's cash, cash equivalents and marketable debt securities of
$7,811,000 as of July 31, 1998 and available credit facilities are considered
sufficient to support current or somewhat higher levels of operations for at
least the next twelve months.
The Company seeks to provide a high current return on its investments
of cash and cash equivalents while preserving both liquidity and capital. The
established policy guidelines for its investment portfolio include investments
that include United States Treasury securities, United States government agency
obligations, deposit-type obligations of United States banking institutions,
repurchase agreements, United States denominated A1 grade commercial paper,
United States money market funds and interests in mutual funds that invest in
the above listed instruments. Concentration of the portfolio is limited to not
more than 20% of the investment portfolio in the securities of any one bank,
corporation or non-government issuer.
The investments chosen reflect this policy by investing substantially
all cash and cash equivalents in money market funds, United States Treasury
Securities and United States denominated A1 grade commercial paper.
On October 31, 1997, the Company repaid the entire balance then due to
Northfork Bank of $14,410,000. Such balance consisted of $9,999,000 under the
advised line of credit and $4,411,000 under the standby letter of credit.
Western
Western's primary needs for liquidity and capital resources are
related to its inventory for sale and its rental and lease fleet inventories,
store openings, and acquisitions of additional stores. Western's primary source
of internal liquidity has been its profitable operations. As more fully
described below, Western's primary sources of external liquidity are equipment
37
inventory floor plan financing arrangements provided to Western by the
manufacturers of the products Western sells, and Deutsche Financial Services
("DFS") and, with respect to acquisitions, secured loans from Case.
Under inventory floor planning arrangements the manufacturers of
products sold by Western provide interest free credit terms on new equipment
purchases for periods ranging from one to twelve months, after which interest
commences to accrue monthly at rates ranging from zero percent to two percent
over the prime rate of interest. Principal payments are typically made under
these agreements at scheduled intervals and/or as the equipment is rented, with
the balance due at the earlier of a specified date or sale of the equipment. At
July 31, 1998, Western was indebted under manufacturer provided floor planning
arrangements in the aggregate amount of $11,038,000. As of September 30, 1998,
approximately $10,836,000 was outstanding under these manufacturer provided
floor plan arrangements.
In order to take advantage of the cash discount offered by Case, to
provide financing beyond the term of applicable manufacturer provided floor plan
financing, or as alternatives to manufacturer provided floor plan financing
arrangements, Western had entered into a separate secured floor planning line of
credit with Seafirst Bank ("Seafirst"). The Seafirst line of credit was entered
into in June 1994 and was renewed on September 1, 1997. This was a $22,000,000
line of credit which could be used to finance new and used equipment or
equipment to be held for rental purposes. Western has had no outstanding balance
on the Seafirst line of credit since March 1998. On July 1, 1998, the term of
the credit line expired without renewal at the mutual agreement of Seafirst and
Western.
In June 1997, Western obtained a $75 million inventory flooring and
operating line of credit through Deutsche Financial Services ("DFS"). The DFS
credit facility is a three-year, floating rate facility based on prime with
rates between 0.50% under prime to 1.00% over prime depending on the amount of
total borrowing under the facility. Amounts are advanced against Western's
assets, including accounts receivable, parts, new equipment, rental fleet, and
used equipment. Western expects to use this borrowing facility to lower flooring
related interest expense by using advances under such line to finance inventory
purchases in lieu of financing provided by suppliers, to take advantage of cash
purchase discounts from its suppliers, to provide operating capital for further
growth, and to refinance some its acquisition related debt at a lower interest
rate. As of July 31, 1998, approximately $75,886,000 was outstanding under the
DFS credit facility. As of September 30, 1998, approximately $67,855,000 was
outstanding under this facility. At July 31, 1998, Western was in technical
default of the leverage covenant in the Deutsche Financial Services Loan
Agreement. Western obtained a waiver letter for the period July 31, 1998 through
September 30, 1998. There is no guarantee that Deutsche Financial Services will
not call this debt at any time after September 30, 1998. Western and DFS have
reached preliminary agreement on increasing this credit facility to
$100,000,000. Finalization of this increase is expected by November 30, 1998.
Amounts owing under the DFS credit facility are secured by inventory purchases
financed by DFS, as well as all proceeds from their sale or
38
rental, including accounts receivable thereto.
During the year ended July 31, 1998, Western's cash and cash
equivalents increased by $680,000 primarily due to the increased borrowing from
DFS. Western had positive cash flow from operating activities during the year of
$8,342,000 reflecting net income for the year after adding back depreciation and
amortization. Purchases of fixed assets during the period were related mainly to
the opening of new distribution outlets and the Yukon acquisition.
Inventory; Effects of Inflation and Interest Rates; General Economic Conditions
Distribution Business
Controlling inventory is a key ingredient to the success of an
equipment distributor because the equipment industry is characterized by long
order cycles, high ticket prices, and the related exposure to "flooring"
interest. Westerns interest expense may increase if inventory is too high or
interest rates rise. The Company manages its inventory through company-wide
information and inventory sharing systems wherein all locations have access to
Western's entire inventory. In addition, Western closely monitors inventory
turnover by product categories and places equipment orders based upon targeted
turn ratios.
All of the products and services provided by Western are either capital
equipment or included in capital equipment, which are used in the construction,
agricultural, and industrial sectors. Accordingly, Western's sales are affected
by inflation or increased interest rates which tend to hold down new
construction, and consequently adversely affect demand for the construction and
industrial equipment sold and rented by Western. In addition, although
agricultural equipment sales are less than 5% of Western's total revenues,
factors adversely affecting the farming and commodity markets also can adversely
affect Western's agricultural equipment related business.
Western's business can also be affected by general economic conditions
in its geographic markets as well as general national and global economic
conditions that affect the construction, agricultural, and industrial sectors.
An erosion in North American and/or other countries' economies could adversely
affect the Company's business. Market specific factors could also adversely
affect one or more of Western's target markets and/or products.
The Technology Business
In fiscal 1998, the Company discontinued the operations of Connectsoft,
Old Connectsoft, Seattle OnLine, InterGlobe and Exodus. On July 10, 1998, the
Company entered into an agreement to sell substantially all of the assets of its
Connectsoft subsidiary, including the network operations center to eGlobe, Inc.,
formerly known as Executive TeleCard, Ltd. ("eGlobe"). As consideration for the
assets, eGlobe will assume up to $4,500,000 of Connectsoft
39
liabilities and leases, most of which have been guaranteed by the Company.
Although eGlobe will be responsible for payment of those assumed liabilities,
the assumption of such liabilities will not relieve the Company from its
guarantees until such liabilities have been paid. The Company will also receive
as additional consideration from eGlobe, on the earlier of two years from the
closing of the sale or if eGlobe sells the Connecsoft business prior to two
years, 7.5% of the increase in value of the Connectsoft business. The Company
anticipates that the transaction will close in November 1998, however, there can
be no assurance that the transaction will close in such time or at all.
On November 4, 1997, Artour Baganov, the former principal stockholder
of InterGlobe, tendered his resignation as a member of the Board of Directors of
the Company and InterGlobe. The Company and InterGlobe reached an agreement on
July 22, 1998 with Mr. Baganov under which he agreed to terminate his employment
agreement with InterGlobe and cancel his 698,182 performance options. In
consideration, the Company and InterGlobe paid Mr. Baganov an aggregate of
$300,000 in full settlement of obligations under his employment agreement and
released such stockholder from his non-competition agreement with InterGlobe.
Mr. Baganov also agreed to vote his 550,000 shares of Company Common Stock in
favor of management's nominees for election to the Company's Board of Directors.
In September 1997, the Company agreed to pay the former principal
stockholder of Seattle OnLine $1.5 million pursuant to the settlement of an
arbitration proceeding brought by such stockholder in Seattle, Washington.
$500,000 of such amount was paid in October 1997 and the $1.0 million balance
was paid in November 1997. Under the terms of the settlement, the Company also
issued warrants to purchase 150,000 shares of Company Common Stock at $6.25 per
share to such person and his legal counsel. As part of the settlement, warrants
to purchase 305,000 Company shares issued at the time of the acquisition of
Seattle OnLine were canceled.
TechStar and Arcadia
Effective December 11, 1996, the Company acquired TechStar, formerly
known as Broadcast Tower Sites, Inc., pursuant to a merger transaction (the
"TechStar Merger"). TechStar is engaged in providing site acquisition, zoning,
architectural and engineering services, as well as consulting services, to the
wireless telecommunications industry.
Pursuant to the terms of the TechStar Merger, the former TechStar
shareholders received an aggregate of 507,246 shares of Company Common Stock,
$780,000 was paid in cash and the Company delivered three year notes aggregating
$600,000, bearing interest at the Citibank, N.A. prime rate, and payable in
installments of $100,000, $200,000 and $300,000 on each of November 30, 1997,
1998 and 1999 (the "TechStar Notes").
In a related transaction, in December 1996 the Company also entered
into an agreement to acquire 100% of the capital stock of Arcadia, a company
formed for the purpose of providing
40
consulting services to clients in the wireless telecommunications industry, and
paid $220,000 as a deposit on execution of the Arcadia agreement. The Company
completed the Arcadia acquisition in April 1997, at which time it issued an
aggregate of 192,754 shares of Company Common Stock. Following the Arcadia
acquisition, Arcadia was merged with and into the Company. Arcadia has had no
operations, and has no material assets other than its employment relationship
with Solon Kandel, its President and sole stockholder. Mr. Kandel became a
director of the Company in April 1997 and subsequently resigned his directorship
in August 1997 upon consummation of the IDF Merger.
In January 1997, Sergio Luciani, a former stockholder and currently
Executive Vice President and Chief Financial Officer of TechStar was appointed
as a member of the Board of Directors of the Company. Mr. Luciani resigned his
Company directorship upon consummation of the transaction with IDF in September
1997.
In August 1997, the Company sold TechStar to IDF in consideration for
approximately 6.1 million shares of IDF, representing approximately 63% of its
outstanding common stock, before dilution resulting from completion of a $3.0
million private placement of IDF notes convertible into IDF common stock at
$1.25 per share. As part of such transaction, the employment agreements and the
780,000 performance options of each of Messrs. Luciani, Moskona and Kandel were
canceled, as were the 120,000 performance options granted to other TechStar
employees. In addition, IDF agreed to make the $300,000 payment due in December
1999 under the TechStar Notes. Messrs. Luciani and Kandel agreed to resign as
members of the Company Board of Directors and became senior executive officers
of IDF.
During the year ended July 31, 1998, IDF sold, through GV Capital Inc.,
a total of $3,000,000 of IDF's five year Convertible Notes convertible into IDF
Series A and C Preferred Stock at $1.25 per share which were subsequently
converted into 1,400,000 shares of IDF Series A Preferred Stock and 1,080,000
shares of IDF Convertible Series C Preferred stock.
The Series A, B and C Convertible Preferred Stock of IDF have voting
rights that are the same as IDF Common Stock, thus subsequent to the conversion
of said Notes, the Company owns approximately 48% of the outstanding voting
capital stock as of July 31, 1998. As a result of the decrease in the ownership
percentage by the Company to less than 50%, the Company has accounted for the
results of the operations of IDF using the equity method.
Loss in Connection with ERD Credit Guaranty
In September 30, 1997, ERD Waste Corp. ("ERD") filed for reorganization
under Chapter 11 of the federal bankruptcy laws. In May 1996, the Company had
provided ERD with a $4.4 million standby bank letter of credit in favor of Chase
Bank (formerly, Chemical Bank), a senior secured creditor of ERD. In addition,
in February 1997, the Company advanced $500,000 in cash to ERD. Robert M. Rubin,
the Chairman and Chief Executive Officer of the Company, is also a
41
principal stockholder and Chairman of ERD. On October 29, 1997, Chase Bank drew
on the Company provided letter of credit. As a result, the Company became
directly liable to Northfork Bank, the issuer of the letter of credit, for the
$4.4 million amount of such draw; and on October 31, 1997 retired such
obligation. Although the Company is now a creditor in the ERD reorganization,
holding approximately $5.0 million of claims and holds a lien on certain ERD
assets, by reason of the affiliation of Mr. Rubin with both corporations, the
lien was not sustained in the reorganization proceeding resulting in the Company
becoming a general unsecured creditor of ERD. Although the Company does not
believe that Chase Bank acted in a commercially reasonable manner and is
currently considering its legal options, as a result of the foregoing
development, the Company recorded a $5.0 million net loss in connection with the
ERD transaction for the year ended July 31, 1997. Mr. Rubin has personally
guaranteed $1.7 million of the obligation to the Company. The matter is
currently pending in the bankruptcy court. See "Executive
Compensation-Compensation Committee Interlocks and Insider Participation."
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Western has determined that it will be required to modify or replace
significant portions of its software so that its computer systems will properly
utilize dates beyond December 31, 1999. Western presently believes that with
modifications to existing software and conversions to new software, the Year
2000 issue can be mitigated. However, if such modifications and conversions are
not made, are not timely completed, or do not work as anticipated, the Year 2000
issue could have a material impact on the operations of Western.
Western has a plan in place to contact all of its significant suppliers
to determine the extent to which Western is vulnerable to those third parties'
failure to remediate their own Year 2000 issues. There can be no guarantees that
the systems of third parties on which Western's systems rely or which influence
the business of Western's customers will be timely remediated, that any
attempted remediation will be successful, or that such conversions would be
compatible with Western's systems. Western has not yet determined the projected
costs of Western's Year 2000 project and cannot yet determine whether Western
has any exposure to contingencies related to the Year 2000 issue for the
products it has previously sold.
Western will utilize both internal and external resources to reprogram,
or replace, and test Western's software for Year 2000 modifications. Western
plans to complete its Year 2000
42
project by July 31, 1999. Funding for the costs of the program are anticipated
to come from operating cash flows.
Western's current plan to complete the Year 2000 modifications are
based on management's best estimates, which were derived using numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans, and the ability to meet projected
time lines. There can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and other uncertainties.
ITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK
Not Applicable
ITEM 8. FINANCIAL STATEMENTS
Page
Number
------
Financial Statements:
Report of Independent
Accountants..........................................................................................F - 2
Consolidated Balance Sheets as of
July 31, 1998 and 1997...............................................................................F - 3
Consolidated Statements of Operations for the years
ended July 31, 1998, 1997 and 1996...................................................................F - 4
Consolidated Statements of Stockholders' Equity for the
years ended July 31, 1998, 1997 and 1996.............................................................F - 5
Consolidated Statements of Cash Flows for the years ended
July 31, 1998, 1997 and 1996.........................................................................F - 6
Notes to Consolidated Financial Statements...........................................................F - 7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
43
None
44
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 12, 1998. 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................................. 58 Chairman of the Board of Directors, President
and Chief Executive Officer
C. Dean McLain.................................. 43 Director and Executive Vice President of the
Company; President and Chief Executive
Officer of Western
56
Howard Katz..................................... Executive Vice President Chief Operating
Officer and Director and President of
Connectsoft
David M. Barnes................................. 55 Vice President of Finance, Chief Financial
Officer and Director
Robert M. Rubin. Mr. Rubin has served as the Chairman of the Board of
Directors of the Company since May, 1991, and was its Chief Executive Officer
from May 1991 to January 1, 1994. Between October, 1990 and January 1, 1994, Mr.
Rubin served as the Chairman of the Board and Chief Executive Officer of 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
45
and institutional staffing services and health care management services. Mr.
Rubin was Chairman of the Board, Chief Executive Officer and is a stockholder of
ERD Waste Technology, Inc., a diversified waste management public company
specializing in the management and disposal of municipal solid waste, industrial
and commercial non-hazardous waste and hazardous waste. In September 1997, ERD
filed for protection under the provisions of Chapter 11 of the federal
bankruptcy act. Mr. Rubin is a former director and Vice Chairman, and currently
a minority stockholder, of American Complex Care, Incorporated, 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
the Chairman of the Board of both Western and IDF. The Company owns
approximately 60.5% of the outstanding common stock of Western and approximately
58% of the outstanding common stock of IDF. Mr. Rubin owns approximately 13% of
the fully-diluted IDF common stock. Mr. Rubin is also a director and minority
stockholder of Diplomat Direct Marketing Corporation, a public company
principally engaged in the women's apparel catalog retailing business and
Medi-Merg, Inc., a Canadian management company for hospital emergency rooms and
out-patient facilities. Mr. Rubin is a minority stockholder and was a director,
until he resigned in 1998, of Response USA, Inc., a public company engaged in
the sale and distribution of personal emergency response systems.
C. Dean McLain. Mr. McLain has served as an Executive Vice President of
the Company since March 1, 1993, as a director of the Company since March 7,
1994 and President of Western since June 1, 1993. From 1989 to 1993, Mr. McLain
served as Manager of Privatization of Case Corporation. From 1985 to 1989, Mr.
McLain served as General Manager of Lake State Equipment, a distributor of John
Deere construction equipment. Mr. McLain holds a B.S. degree in Business and
Economics, and a Master's of Business Administration, from West Texas State
University.
David M. Barnes. Mr. Barnes has 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 since
1992 has been a Director, Executive Officer 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
46
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.
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, 1998, 1997 and 1996 to each of the Company's most highly
compensated executive officers and key employees whose total compensation
exceeded $100,000, and to all executive officers and key employees of the
Company as a group.
Annual Compensation Long Term Compensation
------------------------------------ -----------------------
Other Restric
Annual -ted (Payouts All Other
Com- Stock Options LTIP Com-
Name and Principal Year Salary Bonus pensation Awards /SARs Payouts pensation
- ------------------- ---- ------- ------ ---------- ---------- -------- ------- ----------
Robert M. Rubin 1998 $350,000 $0 $0 $0 0 $0 $0
Chairman, President 1997 325,000 0 $0 $0 0 $0 $0
and Chief Executive 1996 300,000 50,000 $0 $0 450,000 $0 $0
Officer
47
Howard Katz 1998 $197,000 -- $0 $0 0 $0 $0
Executive Vice 1997 131,968 -- $0 $0 200,000 $0 $0
President and 1996 -- -- $0 $0 150,000 $0 $0
Director
David M. Barnes 1998 $156,000 -- $0 $0 0 $0 $0
Chief Financial 1997 129,807 -- $0 $0 100,000 $0 $0
Officer and Director 1996 -- -- $0 $0 100,000 $0 $0
C.Dean McLain 1998 $280,000 $68,935 $0 $0 0 $0 $0
Executive Vice 1997 268,587 18,658 $0 $0 0 $0 $0
President and 1996 250,000 84,868 $0 $0 150,000 $0 $0
Director; Chairman &
President of Western
STOCK OPTION PLANS
Option Grants in Fiscal Year 1998
No options were issued in fiscal year 1998.
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.
48
Aggregated Options Exercised
in Last Fiscal Year and Fiscal
Year-End Option Values
--------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End at FY-End
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
- ------ ------------- ----------------- ---------------------- ----------------
Robert Rubin -0- -0- 560,000 (exercisable) $0
(exercisable)
Howard Katz -0- -0- 316,667 (exercisable) $0
(exercisable)
David Barnes -0- -0- 158,333 (exercisable) $0
(exercisable)
C. Dean McLain 112,000 718,500 257,750 (exercisable) $0
(exercisable)
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
49
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 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).
On January 19, 1996, as a result of the Hutchinson Transaction, John
Shahid, former President and Chief Executive Officer 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 $815,833, representing salary
payments under his Employment Agreement though December 31, 1998, as
50
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.
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
51
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 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 received a base salary of $185,000 per annum, payable
bi-weekly. Effective July 31, 1998, Mr. Katz and the Company entered into a
severance agreement which provides for payments aggregating $225,000 over a
three year period and the continuation of certain benefits over the same period.
Mr. Katz also continues to be a director of the Company and also supervises the
operations of Connectsoft through the date of the closing of the sale of
Connectsoft's assets to eGlobe.
The Company hired David M. Barnes as its Chief Financial Officer
effective May 15, 1996. Mr. Barnes received a base salary of $150,000 per annum,
payable bi-weekly. Effective July 23, 1998, Mr. Barnes and the Company entered
into a severance agreement which provides for payments aggregating $75,000 over
a twelve month period and the continuation of certain benefits over six to
twelve months. Mr. Barnes agreed to be available during a transition period on a
consulting basis and is paid $75 per hour for such services. Mr. Barnes also
continues to be a director of the Company.
52
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
which time, the options held by individuals no longer employed by the Company or
its subsidiaries terminated. 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, 1996 in the amount of $332,293. Such amount is equal to the
product of the number of options whose exercise periods were extended and the
aggregate difference between the exercise price of each extended option and the
market price for a share of Company Common Stock on 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, 1998, 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. Mr. Rubin also entered
into a separate employment agreement with Western. See "Executive
Compensation-Employment, Incentive Compensation and Termination Agreements."
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 "Executive Compensation-Employment, Incentive
53
Compensation and Termination Agreements."
The Company's Audit and compensation committee are comprised of
Messrs. Rubin and Katz.
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.
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, who resigned as a director of the
Company in 1998. 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 $26,000 was paid to
Gro-Vest Consultants in the 1997 fiscal year and none was paid in fiscal 1998.
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 July 31, 1998. The Company agreed to waive interest on the
loan from February 23, 1998 forward. Mr. Rubin's indebtedness is secured by
his pledge of 150,000 shares of Company Common Stock and his collateral
assignment of all payments due to him under the terms of his seven-year
Consulting Agreement and
54
Non-Competition Agreement with Hutchinson, which currently aggregate $1,200,000.
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. Mr. Rubin has assigned his
rights to payments under the non-competition and consulting agreements to the
Company in satisfaction of the $1.2 million loan which payments to the
Company Mr. Rubin has guaranteed. Such assignment is subject to approval by
the Company's stockholders at the next annual or special meeting.
On February 9, 1996, the Company loaned an aggregate of $450,000 to
Diplomat Direct Marketing Corporation, formerly known as Diplomat Corporation
("Diplomat") in connection with Diplomat's acquisition of Biobottoms, Inc.
Diplomat is a public company of which Robert Rubin serves as a director. Before
the Biobottoms transaction, Mr. Rubin held approximately 22% of Diplomat's
outstanding capital stock. Such loan (i) bears interest at the prime rate of
CoreStates Bank, N.A. plus 2% and is payable monthly, (ii) is subordinated to a
$2,000,0000 revolving credit loan agreement between Diplomat and Congress
Financial Corporation, (iii) is payable in full on or before May 4, 1996 and
(iv) is secured by a second priority lien in all of the assets of Diplomat and
its wholly-owned subsidiary, Biobottoms, Inc. The loan was repaid in full in May
1996. In addition to repayment of principal and its receipt of accrued interest,
the Company received a facilities fee of $50,000.
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 (the "Letter of Credit") originally issued by Citibank
NA and later assumed by Northfork Bank in favor of Chase Bank (formerly Chemical
Bank) on behalf of ERD. Chase Bank is the principal lender to ERD and its
subsidiaries, and upon issuance of the Letter of Credit, Chase 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.
55
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 was then traded 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. ERD and the DEC have reached agreement to settle such
violations, which resulted in the closing of the Long Beach, New York facility.
As a result, the business of ERD was materially and adversely affected.
On November 8, 1996, the Company and ERD amended and restated their
agreements to provide that if and to the extent that the Letter of Credit
provided by the Company is called for payment, ERD will issue to the Company its
convertible note bearing interest at 12% per annum, payable monthly, and payable
as to principal on the earliest to occur of: (i) May 30, 1999, (ii) ERD's
receipt of the initial proceeds from any public or private placement of debt or
equity securities of ERD, or (iii) completion of any bank refinancing by ERD, to
the extent of all proceeds available after payment of other secured
indebtedness. In addition, the ERD notes, if issued, will be convertible, at any
time at the option of the Company, into ERD Common Stock at a conversion price
equal to $4.40 per share, or a maximum of 1,000,000 ERD shares if the entire
$4.4 million note is issued and converted into ERD Common Stock. In addition to
the collateral provided under the May 30, 1996 agreement, ERD also provided the
Company with a junior mortgage on the waste facility owned by ERD's subsidiary,
subordinated to existing indebtedness encumbering such facility.
In February 1997, the Company advanced an additional $500,000 to ERD,
payable on demand.
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
56
modification of the ERD agreement, on November 8, 1996, the Company's Board of
Directors (Mr. Rubin abstaining) agreed to amend the indemnity agreement with
Mr. Rubin to limit his contingent liability thereunder to the extent of 23% (Mr.
Rubin's approximate percentage beneficial ownership in the outstanding Company
Common Stock as of May 30, 1996) of all losses that the Company may incur in
connection with its having provided the Letter of Credit financial accommodation
on behalf of ERD. Mr. Rubin's reimbursement obligations are also subject to pro
rata reduction to the extent of any repayments made directly by ERD or from
proceeds received by the Company from the sale of ERD capital stock described
above. In addition, Mr. Rubin personally guaranteed the $500,000 additional
advance from the Company to ERD.
On September 30, 1997, ERD filed for reorganization under Chapter 11 of
the federal bankruptcy laws, and on October 29, 1997, Chase Bank drew on the
Company provided letter of credit. As a result, the Company became liable to
North Fork Bank, the issuer of the letter of credit, for the $4.4 million amount
of such draw; which obligation the Company paid in full on October 31, 1997. As
a result, the Company is now a creditor in the ERD reorganization, holding
approximately $5.0 million of claims and holds a lien on certain ERD assets.
However, by reason of the affiliation of Mr. Rubin with both corporations, it is
possible that such lien will not be sustained in the reorganization proceeding;
in which event the Company will be a general unsecured creditor of ERD. Although
the Company does not believe that Chase Bank acted in a commercially reasonable
manner and is currently considering its legal options, as a result of the
foregoing development, the Company recorded a $5.0 million net loss in
connection with the ERD transaction for the year ended July 31, 1997. In the
event that the Company does not recoup any portion of such loss in connection
with the ERD bankruptcy proceeding or otherwise, Mr. Rubin has personally agreed
to indemnify the Company for the first $1.6 million of such loss.
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,
were immediately exercisable. The options granted to Mr. Barnes in May 1996 and
the remaining 150,000 options granted to Mr. Katz vested 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 156,550 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.
57
Robert M. Rubin is currently a director of IDF and owns 874,659 shares
of IDF common stock, representing approximately 13.0% of the currently
outstanding IDF common stock after giving effect to the IDF Merger, including
Mr. Rubin's conversion of an $800,000 loan previously made to IDF into
convertible preferred stock convertible into an additional 400,000 shares of IDF
common stock. As a result of the completion of the IDF Merger, Mr. Rubin serves
as Chairman of the Board of Directors of IDF and received a three year
employment agreement from IDF at an annual salary of $75,000. Lawrence Kaplan, a
director of the Company through June 1998, is also a member of the Board of
Directors of IDF and directly and through affiliates owns an aggregate of
497,859 shares of IDF common stock. In addition, GV Capital, Inc., an affiliate
of Mr. Kaplan, has acted as placement agent in connection with the IDF private
placement and received additional compensation for such services, in the form of
commission of 7.5%, a 2.5% non-accountable expense allowance and 180,000 shares
of IDF common stock for nominal consideration.
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, 1998, Messrs. Rubin and McLain were both 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. Currently, Mr. Rubin is the Company's only senior executive
officer of the Company employed under a contract approved by the full Board of
Directors. See "Executive Compensation-Employment, Incentive Compensation and
Termination Agreements."
In setting levels of compensation under such employment contracts and
in approving management's compensation of all other Company employees, the Board
of Directors evaluates the Company's overall profitability, the contribution of
particular individuals to 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 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 or was responsible. See "Executive Compensation-Employment,
Incentive Compensation and Termination Agreements." The members of the Company's
Board of Directors are Messrs. Robert M. Rubin,
58
C. Dean McLain, Howard Katz and David M. Barnes.
Compliance with Section 16(a) of the Exchange Act.
To the knowledge of the Company, no officers, directors, beneficial
owner of more than 1 percent of any class of equity securities of the Company
registered pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any other person subject to Section 16 of the
Exchange Act with respect to the Company, failed to file on a timely basis
reports required by Section 16(a) of the Exchange Act during the most recent
fiscal year, which ended July 31, 1998.
59
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of November 4,
1998 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 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.
Number of Percentage of
Name and Address Office Shares Outstanding
- -------------------------------------- ------------------------------- ------------------------ --------------------
Robert M. Rubin Director, President, Chief 782,798 (1)(2)(5) 6.7%
11130 NE 33rd Place Executive Officer
Bellevue, WA 98004
C. Dean McLain Director, Executive 257,750(2)(3) 2.2%
4601 N.E. 77th Avenue Vice-President and President
Suite 200 of Western
Vancouver, WA 98662
316,667(4) 2.7%
Howard Katz Chief Operating Officer,
11130 NE 33rd Place Director and President of
Bellevue, WA 98004 Connectsoft
158,333(4) 1.4%
David M. Barnes Vice President of Finance and
11130 NE 33rd Place Director
Bellevue, WA 98004
Rubin Family Irrevocable 1,025,000(5) 8.8%
Stock Trust
25 Highland Boulevard
Dix Hills, NY 11746
All directors and executive officers 1,515,548(1)(2)(3)(4) 13.0%
as a group (4 persons)
60
- --------------
* 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 and 126,550 shares at an
exercise price of $5.125 per share issued under the Company's 1991
Stock Option Plan which are fully exercisable.
(2) Includes non-qualified options granted under the 1996 Stock Option Plan
(options to acquire 353,450 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. Options to acquire
30,000 shares were granted to Mr. Rubin on October 4, 1996 under the
1996 Stock Option Plan. The 1996 Stock Option Plan was amended in July
1996 to make options granted under the plan exercisable without
stockholder approval. Messrs. Rubin and McLain's continuing employment
by the Company is governed by the terms of their employment agreements.
(3) Includes (i) options to purchase 36,000 shares of the Company's Common
Stock at $3.125 per share granted under the Company's 1991 Stock Option
Plan, (ii) options to purchase 45,000 shares of the Company's Common
Stock at $4.875 per share under the 1991 Stock Option Plan, (iii)
options to purchase 12,500 shares of the Company's Common Stock at
$3.875 per share under the 1991 Stock Option Plan and (iv) 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) 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 (33,334
shares at an exercise price of $3.78125 per share and 25,000 at an
exercise price of $5.125 per share) and Katz (50,000 shares) at
exercise price of $3.78125, respectively, 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.
(5) Robert M. Rubin, a grantor of the Rubin Family Irrevocable Stock Trust,
disclaims beneficial ownership of the shares held by the Trust.
61
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Executive Compensation-Compensation Committee Interlocks and
Insider Participation" and "Executive Compensation-Employment, Incentive
Compensation and Termination Agreements", and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
62
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, 1998 and 1997 ............................F-3
Consolidated Statements of Operations
for the years ended July 31, 1998, 1997, and 1996.................................F-4
Consolidated Statements of Stockholders' Equity
for the years ended July 31, 1998, 1997 and 1996..................................F-5
Consolidated Statements of Cash Flows
for the years ended July 31, 1998, 1997 and 1996..................................F-6
Notes to Consolidated Financial Statements...........................................F-7
2. Schedule II - Valuation and Qualification Accounts ..................................S-1
(b) Reports on Form 8-K.
None.
(c) Exhibits.
Exhibit
Number Description
- --------- -----------
3.1 Certificate of Incorporation of Registrant.(8)
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 (Schedule omitted). (1)
10.2 Employment Agreement, by and between Western Power and C. Dean McLain. (14)
63
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 (schedule 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)
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 Janaury 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)
64
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
National 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)
10.24 Agreement of Plan and Merger, by and among American United Global, Inc. ("AUGI"), BTS
Acquisition Corp., Broadcast Tower Sites, Inc., Simantov Moskona and Sergio Luciani, dated
December 11, 1996 (Incorporated by reference from the
Company's Form 8-K filed December 24, 1996).
10.25 Agreement of Plan of Merger, dated July 31, 1997, between American United Global, Inc.,
IDF International, Inc. and TechStar Communications, Inc. (without exhibits) (15)
10.26 Asset Purchase Agreement, dated January 17, 1997, among Sahlberg Equipment, Inc., John
Sahlberg and Robert Sahlberg, R&J Partners and Western Power & Equipment Corp.
(Incorporated by reference from Western Power and
Equipment Corp.'s Form 8-K filed February 3, 1997 (File
No. 0-26230)).
10.27 Loan Agreement dated, June 5, 1997, between Deutsche Financial Services, Inc. and Western
Power and Equipment Corp. (Incorporated by reference from Western Power and Equipment
Corp.'s Form 10-Q filed June 11, 1997 (File No. 0-26230)).
65
10.28 Commercial Lease, dated June 1, 1997 between
McLain-Rubin Realty Company II, LLC and Western Power
and Equipment Corp. for Kent, Washington facility
(Incorporated by reference from Western Power and
Equipment Corp.'s Form 10-K filed October 29, 1997
(File No. 0-26230)).
10.29 Asset Purchase Agreement between eGlobe, Inc. (fka Executive Telecard Ltd.) and American
United Global, Inc., et al, dated on July 10, 1998.*
10.30 Commercial Lease dated June 1, 1997, between McLain-Rubin Realty Company II, LLC and
Western Power & Equipment Corp. for Kent, Washington Facility. (16)
10.31 Asset Purchase Agreement, dated December 11, 1997, between Case Corporation and Western
Power & Equipment Corp. and McLain-Rubin Realty Company III, LLC.(16)
10.32 Employment Agreement, by and between Western Power & Equipment Corp. and C. Dean McLain
dated January 1, 1998.(16)
10.33 Consulting Agreement, by and between Western Power & Equipment Corp. and Robert M.
Rubin.(16)
22. Subsidiaries of the Company.
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
66
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 Alrom Corp., a
New York corporation, as filed on December 10, 1991.
(10) Filed as an Exhibit to AUGI's Registration Statement on Form S-18
(Registration No. 3303330 81-NY) and incorporated herein by reference
thereto.
(11) Filed as on Exhibit to AUGI's Preliminary Proxy Materials filed 1996
Annual Meeting on June 27, 1996.
(12) Filed as an 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.
(15) Filed as an Exhibit to AUGI's Annual Report on Form 10-K for fiscal
year ended July 31, 1997.
(16) Filed as an Exhibit to Western Power Report on Form 10-K for fiscal
year ended July 31, 1998.
* Filed herewith
67
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 10, 1998
AMERICAN UNITED GLOBAL, INC.
By:./s/Robert M. Rubin
------------------------
Robert M. Rubin, Chairman
In accordance with the Securities and Exchange Commission, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Robert M. Rubin Chairman of the Board, Chief November 10, 1998
- ------------------------------ Executive Officer and Director
Robert M. Rubin
/s/ C. Dean McLain Executive Vice President and November 10, 1998
- ------------------------------- Director
C. Dean McLain
/s/ David M. Barnes Vice President--Finance and Chief November 10, 1998
- ------------------------------- Financial and Chief Accounting
David M. Barnes Officer
/s/ Howard Katz Executive Vice President and November 10, 1998
- ------------------------------ Director
Howard Katz
68
AMERICAN UNITED GLOBAL, INC.
FINANCIAL STATEMENTS
INDEX
Page
------
Report of Independent Accountants ....................... F-2
Consolidated Balance Sheets ............................. F-3
Consolidated Statements of Operations ................... F-4
Consolidated Statements of Shareholders' Equity ......... F-5
Consolidated Statements of Cash Flows ................... F-6
Notes to Consolidated Financial Statements .............. F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
American United Global, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 63 present fairly, in all
material respects, the financial position of American United Global, Inc. and
its subsidiaries at July 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended July 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Portland, Oregon
November 11, 1998
F-2
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31,
-------------------------------
1998 1997
-------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents ............................................................ $ 3,362,000 $ 12,284,000
Investment in marketable debt securities ............................................ 4,449,000 10,018,000
Trade accounts receivable, less allowance for doubtful accounts of $726,000 and
$807,000, respectively ............................................................ 23,708,000 12,473,000
Notes receivable from shareholder (Note 14) ......................................... -- 1,238,000
Inventories (Note 4) ................................................................ 73,491,000 64,918,000
Prepaid expenses and other receivables .............................................. 287,000 357,000
Deferred tax asset (Note 7) ......................................................... 1,298,000 936,000
Notes receivable (Note 14 and 9) .................................................... 1,200,000 3,503,000
------------- -------------
Total current assets ............................................................ 107,795,000 105,727,000
Property and equipment, net (Note 5) ................................................ 8,695,000 9,530,000
Rental equipment fleet, net (Note 5) ................................................ 23,080,000 18,452,000
Leased equipment fleet, net (Note 5) ................................................ 2,760,000 --
Intangibles and other assets, net of accumulated amortization of $1,263,000 and
$1,460,000, respectively (Note 12) ................................................ 3,613,000 8,582,000
Investment in unconsolidated subsidiary (Note 3) .................................... 961,000 --
Deferred tax asset (Note 7) ......................................................... -- 2,432,000
------------- -------------
$ 146,904,000 $ 144,723,000
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under floor financing lines (Note 6) ..................................... $ 11,038,000 $ 55,490,000
Short-term borrowings (Note 6) ...................................................... 76,769,000 11,751,000
Current portion of capital lease obligations (Note 10) .............................. 67,000 412,000
Accounts payable .................................................................... 18,027,000 20,150,000
Accrued liabilities ................................................................. 5,336,000 12,583,000
Income taxes payable (Note 7) ....................................................... 1,050,000 1,924,000
Net liabilities of discontinued operations (Note 9) ................................... 1,480,000 --
Deferred revenue .................................................................... -- 950,000
------------- -------------
Total current liabilities ....................................................... 113,767,000 103,260,000
Long-term borrowings (Note 6) .......................................................... 1,156,000 3,456,000
Capital lease obligations, net of current portion (Note 10) ............................ 2,827,000 4,026,000
Deferred taxes (Note 7) ................................................................ 690,000 --
Deferred lease income .................................................................. 3,474,000 --
------------- -------------
Total liabilities ............................................................... 121,914,000 110,742,000
------------- -------------
Minority interest ...................................................................... 9,128,000 9,880,000
------------- -------------
Commitments and contingencies (Note 10)
Shareholders' equity (Notes 8 and 11):
Preferred stock, 12.5% cumulative, $1.00 per share liquidation value, $.01 par
value; 1,200,000 shares authorized; none issued and outstanding ................... -- --
Series B-1 convertible preferred stock, convertible to common, $3.50 per share
liquidation value, $.01 par value; 1,000,000 shares authorized; 723,862 and 976,539
shares issued and outstanding, respectively ....................................... 7,000 10,000
Series B-2 7% convertible preferred stock; convertible into common,
$25 per share liquidation value, 500,000 shares authorized,
120,000 shares issued and outstanding in 1997 ..................................... -- 1,000
Common stock, $.01 par value; 20,000,000 shares authorized; 11,617,286 and 10,427,208
shares issued and outstanding, respectively ....................................... 116,000 104,000
Additional contributed capital ...................................................... 49,954,000 48,782,000
Deferred compensation ............................................................... -- (196,000)
Accumulated deficit ................................................................. (34,215,000) (24,600,000)
------------- -------------
Total shareholders' equity ...................................................... 15,862,000 24,101,000
------------- -------------
$ 146,904,000 $ 144,723,000
------------- -------------
------------- -------------
The accompanying notes are an integral part of this statement.
F-3
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JULY 31,
--------------------------------------------
1998 1997 1996
------------- -------------- -------------
Net revenue.............................................................. $ 163,478,000 $ 152,021,000 $ 106,555,000
Cost of revenue.......................................................... 144,302,000 134,180,000 93,906,000
------------- -------------- -------------
Gross profit...................................................... 19,176,000 17,841,000 12,649,000
Selling, general and administrative expenses............................. 13,523,000 23,440,000 9,535,000
------------- -------------- -------------
Operating income (loss)........................................... 5,653,000 (5,599,000) 3,114,000
Interest expense, net.................................................... 4,197,000 2,627,000 1,137,000
------------- -------------- -------------
Income (loss) from continuing operations before income taxes, equity
in loss of unconsolidated subsidiary and minority interest........ 1,456,000 (8,226,000) 1,977,000
Provision (benefit) for income taxes (Note 7)............................ 1,354,000 (703,000) 890,000
Equity in loss of unconsolidated subsidiary.............................. 4,730,000 - -
Gain on sale of subsidiary............................................... (220,000) - -
Minority interest in earnings of consolidated subsidiaries............... 713,000 421,000 402,000
------------- -------------- -------------
Income (loss) from continuing operations ......................... (5,121,000) (7,944,000) 685,000
-------------- -------------- -------------
Discontinued operations, net of taxes (Note 9):
Loss from operations, (net of tax benefit of $1,423,000 in 1998 and
$966,000 in 1997)..................................................... (4,470,000) (16,910,000) (9,980,000)
Gain on disposal (net of tax of $5,042,000 in 1996)................... - - 7,460,000
------------- -------------- -------------
(4,470,000) (16,910,000) (2,520,000)
-------------- --------------- --------------
Net loss ................................................................ (9,591,000) (24,854,000) (1,835,000)
Dividends on preferred stock............................................. (24,000) (2,403,000) -
-------------- --------------- -------------
Net loss available for common shareholders............................... $ (9,615,000) $ (27,257,000) $ (1,835,000)
------------- -------------- -------------
------------- -------------- -------------
Basic and diluted earnings (loss) per share:
(Loss) earnings from continuing operations............................ $ (0.45) $ (1.05) $ .12
Loss from discontinued operations..................................... (0.40) (1.70) (.44)
-------------- -------------- --------------
Basic and diluted loss per share......................................... $ (0.85) $ (2.75) $ (.32)
------------- -------------- -------------
------------- -------------- -------------
Weighted average number of shares........................................ 11,311,791 9,919,626 5,810,526
------------- -------------- -------------
------------- -------------- -------------
The accompanying notes are an integral part of this statement.
F-4
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK
-------------------------- ------------------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
------------ ----------- --------------- -------------
Balance at July 31, 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....
Deferred compensation.....................................
Stock option compensation.................................
Net collection on note receivable from shareholder........
------------- ------------- -------------- -------------
Balance at July 31, 1996.................................. - - 6,267,000 63,000
Net loss .................................................
Dividend on preferred stock...............................
Issuance of common shares................................. 1,886,000 19,000
Issuance of preferred stock............................... 1,377,000 14,000
Conversion of preferred stock to common................... (280,000) (3,000) 2,031,000 20,000
Tax benefit related to stock option plans and warrants....
Amortization of deferred compensation.....................
Exercise of stock options................................. 243,000 2,000
Stock options issued to non-employees.....................
Warrants issued in connection with acquisition............
------------- ------------- -------------- -------------
Balance at July 31, 1997.................................. 1,097,000 11,000 10,427,000 104,000
Net loss .................................................
Dividend on preferred stock...............................
Issuance of common shares................................. 250,000 3,000
Conversion of preferred stock to common................... (373,000) (4,000) 838,000 8,000
Amortization of deferred compensation.....................
Exercise of stock options................................. 102,000 1,000
------------- ------------- -------------- -------------
Balance at July 31, 1998.................................. 724,000 $ 7,000 11,617,000 $ 116,000
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
ADDITIONAL RETAINED TOTAL
CONTRIBUTED EARNINGS SHAREHOLDERS'
CAPITAL OTHER (DEFICIT) EQUITY
------------- ------------- -------------- ----------------
Balance at July 31, 1995.................................. 15,889,000 (184,000) 4,492,000 20,254,000
Net loss ................................................. (1,835,000) (1,835,000)
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
Deferred compensation..................................... (500,000) (500,000)
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 (793,000) 2,657,000 22,581,000
Net loss ................................................. (24,854,000) (24,854,000)
Dividend on preferred stock............................... 2,286,000 (2,403,000) (117,000)
Issuance of common stock.................................. 8,525,000 8,544,000
Issuance of preferred stock............................... 15,411,000 15,425,000
Conversion of preferred stock to common................... (17,000)
Tax benefit related to stock option plans and warrants.... 356,000 356,000
Amortization of deferred compensation..................... 597,000 597,000
Exercise of stock options................................. 854,000 856,000
Stock options issued to non-employees..................... 571,000 571,000
Warrants issued in connection with acquisition............ 142,000 142,000
------------- ------------- -------------- -------------
Balance at July 31, 1997.................................. 48,782,000 (196,000) (24,600,000) 24,101,000
Net loss ................................................. (9,591,000) (9,591,000)
Dividend on preferred stock............................... 141,000 (24,000) 117,000
Issuance of common stock.................................. 473,000 476,000
Conversion of preferred stock to common................... (4,000) -
Amortization of deferred compensation..................... 196,000 196,000
Exercise of stock options................................. 562,000 563,000
------------- ------------- -------------- -------------
Balance at July 31, 1998.................................. $ 49,954,000 $ - $ (34,215,000) $ 15,862,000
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
The accompanying notes are an integral part of this statement.
F-5
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JULY 31,
----------------------------------------------
1998 1997 1996
------------- --------------- --------------
Cash flows from operating activities:
Net loss from continuing operations................................... $ (5,121,000) $ (7,944,000) $ 685,000
Net loss from discontinued operations ................................ (4,470,000) (16,910,000) (2,520,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization....................................... 1,448,000 2,646,000 891,000
Long-term asset impairment.......................................... - 5,725,000 -
Gain on sale of equity securities................................... - - (34,000)
Loss on settlement.................................................. - 1,800,000 -
Loss on standby letter of credit.................................... - 4,985,000 -
Amortization of deferred compensation............................... 196,000 597,000 -
Gain on disposal of business........................................ (220,000) - (7,460,000)
Deferred tax provision.............................................. - (11,000) (781,000)
Income applicable to minority interest.............................. 713,000 421,000 402,000
Undistributed loss of affiliate..................................... 4,730,000 - -
Purchased research and development.................................. - - 10,033,000
Stock option compensation................................................ - 271,000 1,671,000
Imputed interest.................................................... - 305,000 161,000
Change in assets and liabilities, net of effects of acquisition and
dispositions:
Trade accounts receivable......................................... (10,584,000) (7,255,000) (275,000)
Inventories....................................................... (2,280,000) (17,673,000) (12,840,000)
Notes receivable.................................................. 3,503,000 - -
Intangible and other assets....................................... 1,638,000 - (686,000)
Prepaid expenses and other receivable............................. 70,000 (1,646,000) 571,000
Accounts payable.................................................. (2,122,000) 14,181,000 143,000
Accrued liabilities............................................... (5,462,000) 6,588,000 2,026,000
Income taxes payable.............................................. (2,254,000) (3,329,000) (165,000)
Change in deferred revenue........................................ (950,000) 950,000 -
Change in deferred gain on disposition of Technology Group........ 1,480,000 - -
Borrowings under term loans....................................... 67,179,000 242,000 1,268,000
Inventory floor financing......................................... (47,246,000) 1,126,000 12,411,000
Other............................................................. - - (496,000)
------------- -------------- --------------
Net cash provided by (used in) operating activities............... 248,000 (14,931,000) 5,005,000
------------- --------------- --------------
Cash flows from investing activities:
Proceeds from sale of fixed assets.................................... - - 2,075,000
Proceeds from sale of business, net................................... - - 19,099,000
Purchase of property and equipment.................................... (6,332,000) (1,222,000) (695,000)
Purchase of equity securities......................................... - - (1,051,000)
Proceeds from sale of equity securities............................... - - 1,085,000
Sale (purchase) of debt securities.................................... 5,569,000 (3,750,000) (6,268,000)
Advances to ConnectSoft, Inc. prior to acquisition.................... - - (3,289,000)
Acquisition of businesses, net of cash acquired....................... - (1,497,000) (2,342,000)
------------- -------------- -------------
Net cash (used in) provided by investing activities............... (763,000) (6,469,000) 8,614,000
-------------- -------------- -------------
Cash flows from financing activities
Net borrowings (payments) under revolving credit agreements........... (7,323,000) 7,287,000 (2,805,000)
Principal payments under capitalized lease obligations................ (348,000) (327,000) (62,000)
Proceeds from sale of stock........................................... 480,000 9,182,000 -
Subsidiary purchase of treasury stock................................. (1,816,000) - -
Decrease in receivable from underwriter............................... - - 1,102,000
Exercise of stock options............................................. 562,000 856,000 1,776,000
Collections (increase) of notes receivable from shareholder, net...... 38,000 (400,000) (688,000)
------------- -------------- --------------
Net cash (used in) provided by financing activities............... (8,407,000) 16,598,000 (677,000)
-------------- -------------- -------------
Net (decrease)increase in cash and cash equivalents...................... (8,922,000) (4,802,000) 12,942,000
Cash and cash equivalents beginning of year.............................. 12,284,000 17,086,000 4,144,000
------------- -------------- -------------
Cash and cash equivalents end of year.................................... $ 3,362,000 $ 12,284,000 $ 17,086,000
------------- -------------- --------------
------------- -------------- --------------
The accompanying notes are an integral part of this statement.
F-6
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
American United Global, Inc., a Delaware corporation (the "Company") is
engaged, through its operating subsidiary, in the distribution business.
The Company's distribution group consists of its 60.5% owned
subsidiary, Western Power & Equipment Corp. ("Western"). Western operates as a
retail distributor for the sale, servicing and leasing of light, medium and
heavy construction equipment and related parts. These sales are conducted from
27 regional distribution operations owned by Western located in the states of
Washington, Oregon, California, Alaska and Nevada. A majority of this equipment
is manufactured by Case Corporation ("Case").
The Company is also involved in the construction and wireless
communications consulting business through a minority owned subsidiary, IDF
International, Inc. ("IDF"). TechStar Communications, Inc. ("TechStar") a wholly
owned subsidiary of IDF, provides consulting services to the wireless
communications industry in the form of network hardware acquisition, zoning,
architectural and engineering consulting services. As discussed in Note 3, on
August 1, 1997 the Company merged TechStar into IDF International, Inc. ("IDF")
in a reverse triangular merger, resulting in the Company owning approximately
58% of IDF. IDF, through its Heyden/Wegman, Inc. subsidiary ("Heyden Wegman")
provides general construction and engineering services to municipalities and
private industry. During the year ended July 31, 1998 IDF sold equity securities
that reduced the Company's percentage ownership of IDF voting shares to
approximately 47.6%. As a result, the results of IDF are accounted for using the
equity method effective August 1, 1997.
The Company had been engaged in the technology business through
subsidiaries, which provided telecommunications products and services, a
proprietary intelligent communications system, as well as software and
networking products. Such products and services were provided by the Company's
wholly and majority owned subsidiaries as follows:
Connectsoft Communications Corp. ("CCC"), a wholly owned subsidiary
is developing a telephony server product that reads email and select web
content over the telephone which is being marketed under the name "Vogo
Server". See Note 9.
Exodus Technologies, Inc., an 80.4%-owned subsidiary, had developed a
proprietary application server software, marketed as NTERPRISE, allows users to
run Windows application server software programs designed for Microsoft Windows
NT operating system on users' existing Unix workstations.
InterGlobe Networks, Inc. provided network consulting services and
managed a network operations center providing internet connectivity services.
F-7
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The technology business has been accounted for as discontinued
operations for the years ending July 31, 1998, 1997 and 1996. See Note 9.
The Company had also been engaged in a manufacturing business
consisting 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 9.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned and majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Minority interest represents the minority shareholders' proportionate share of
the equity of Western, which was 39.5% and 43.4% at July 31, 1998 and 1997,
respectively.
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.
Inventory Valuation
Inventories are stated at the lower of cost or market. Cost is
determined based upon the first-in, first-out method for parts inventory and the
specific identification for equipment inventories.
Investment Securities
Investments in marketable debt securities represent primarily treasury
notes and are carried at market value as these investments have been classified
as available for sale securities at July 31, 1998 and 1997.
F-8
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and Equipment
Property, plant, and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets, ranging from 5 to 20 years.
Expenditures for replacements and major improvements are capitalized. Repairs
and maintenance costs are expensed as incurred. The cost of assets retired or
otherwise disposed of and the related accumulated depreciation are eliminated
from the accounts; any gain or loss thereon is included in the results of
operations.
Intangible Assets and Investment in Unconsolidated Subsidiary
Intangible assets acquired in business acquisitions such as goodwill,
and noncompete agreements represent value to the Company. Intangibles are
amortized using the straight-line method over the assets' estimated useful lives
ranging from 2 to 40 years. Such lives are based on the factors influencing the
acquisition decision and on industry practice.
The carrying value of intangible assets is assessed for any permanent
impairment by evaluating the operating performance and future undiscounted cash
flows of the underlying assets. Adjustments are made if the sum of the expected
future net cash flows is less than book value.
Investments in unconsolidated subsidiary represents the Company's 47.6%
ownership in IDF International, Inc. ("IDF"). Net loss for IDF for the year
ended July 31, 1998 was $9,930,000 including the impairment of goodwill in the
amount of $7,500,000. Accordingly, the Company reduced its investment in
unconsolidated subsidiary by $4,727,000 representing the Company's share of such
loss during the year ended July 31, 1998.
Income Taxes
The Company accounts for income taxes using an asset and liability
approach which requires the recognition of deferred tax liabilities and assets
for the expected future consequences of temporary differences between the
carrying amounts for financial reporting purposes and the tax bases of assets
and liabilities.
F-9
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
Revenue on equipment and parts sales is recognized upon shipment of
products and passage of title. Equipment rental and service revenue is generally
recognized over the period such services are provided.
Advertising Expense
The Company expenses all advertising costs as incurred. Total
advertising expense for the years ended July 31, 1998, 1997 and 1996 was
$434,000, $501,000 and $263,000, 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 marketable debt securities held
approximates the carrying value at July 31, 1998 and 1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the fiscal
periods presented. Actual results could differ from those estimates.
Employee Stock Options
The Company accounts for stock based employee compensation plans
under the provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." This standard defines a fair
value-based method of accounting for these equity instruments. This method
measures compensation cost based on the value of the award and recognizes
that cost over the service period. The Company elected to continue using the
rules of APB Opinion No. 25 and provides pro forma disclosures of net income
(loss) and earning per share as if Statement No. 123 had been applied.
F-10
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" has been adopted by the Company during fiscal 1998. Applying the
provisions of the statement had no material effect on the Company's earnings per
share computations for the years ending July 31, 1998, 1997 and 1996.
The following table sets forth the computations of basic and fully
diluted earnings per share for the years ending July 31, 1998, 1997 and 1996:
YEAR ENDED JULY 31,
-------------------------------------------------
1998 1997 1996
--------------- --------------- --------------
Numerators:
Net (loss) income from continuing operations.................... $ (5,121,000) $ (7,944,000) $ 685,000
Dividend on preferred stock..................................... (24,000) (2,403,000) -
---------------- ----------- --------------
Net loss after preferred dividends.............................. (5,145,000) (10,347,000) 685,000
Discontinued operations......................................... (4,470,000) (16,910,000) (2,520,000)
----------- ------------ -------------
Net loss ....................................................... (9,615,000) (27,257,000) (1,835,000)
Denominator:
Denominator for basic and diluted earnings per share -
Weighted average outstanding shares............................. 11,311,791 9,919,626 5,810,526
--------------- ------------ ------------
Basic and diluted earnings (loss) per share:
Income (loss) from continuing operations.......................... (0.45) (1.05) 0.12
Loss from discontinued operations................................. (0.40) (1.70) (0.44)
---------------- --------------- --------------
Basic and diluted net loss per share.............................. $ (0.85) $ (2.75) $ (0.32)
---------------- --------------- --------------
---------------- --------------- --------------
Diluted and basic earnings per share are the same, since the inclusion
of common stock equivalents in the computation would be antidilutive.
Recent Accounting Pronouncements
In June 1997, the Financing Accounting Standards Board issued FAS 130,
"Reporting Comprehensive Income", which establishes financial accounting and
reporting standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. The Company will adopt Statement 130 in the first
quarter of fiscal 1999.
F-11
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In June 1997, the Financial Accounting Standards Board issued FAS 131,
"Disclosures About Segments of an Enterprise and Related Information", which
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. The Company will adopt
Statement 131 in the first quarter of fiscal 1999.
Reclassifications
Certain reclassifications have been made to the fiscal year 1997 and
1996 financial statements to conform to the financial statement presentation for
fiscal 1998. Such reclassifications have had no effect on the Company's net loss
or shareholders' equity.
3. ACQUISITIONS
Distribution Business Acquisitions
Effective February 29, 1996, Western acquired the assets and operations
of two 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.
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
F-12
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (continued)
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.
On January 17, 1997, Western acquired the operating assets of Sahlberg
Equipment, Inc. ("Sahlberg"), a four-store Northwest distributor of noncompeting
lines of equipment with facilities in Kent, Washington; Portland, Oregon;
Spokane, Washington; and Anchorage, Alaska. The purchase price for the assets of
Sahlberg was approximately $5,290,000, consisting of approximately $3,844,000
for equipment inventory, $797,000 for parts inventories, 625,000 for fixed
assets and $24,000 for work in process. The acquisition has been accounted for
as a purchase.
On December 11, 1997, Western acquired substantially all of the
operating assets used by Case in connection with its business of servicing and
distributing Case agricultural equipment at a facility located in Yuba City,
California. The acquisition was consummated for approximately $142,000 in cash,
$628,000 in installment notes payable to Case and the assumption of $1,175,000
in inventory floor plan debt with Case and its affiliates. The acquisition was
accounted for as a purchase.
On April 30, 1998 Western acquired substantially all of the operating
assets of Yukon Equipment, Inc. (Yukon) in connection with Yukon's business of
servicing and distributing construction, industrial, and agricultural equipment
in Alaska. Yukon has facilities in Anchorage, Fairbanks and Juneau, Alaska. The
acquisition was consummated for approximately $4,766,000 in cash, the assumption
of approximately $2,786,000 in floor plan debt with Case and its affiliates, and
50,000 shares of Western's common stock. The acquisition was accounted for as a
purchase.
Technology acquisitions
TechStar
Effective December 11, 1996 the Company acquired all of the
outstanding stock of Broadcast Tower Sites, Inc. ("BTS"), a private company
providing site acquisition, zoning, architectural, engineering and consulting
services to the wireless communications industry. The shareholders of BTS
exchanged their shares for $780,000 in cash, 507,246 unregistered shares of
the Company's common stock and three promissory notes aggregating $600,000,
bearing interest at the Citibank, N.A. prime rate (currently 8.50%) and
payable in installments of $100,000, $200,000 and $300,000 on each of
November 30, 1997, 1998 and 1999, respectively.
The acquisition was accounted for by the purchase method. Accordingly,
the results of operations of BTS have been included with the results of
operations of the Company for periods subsequent to the date of acquisition.
Subsequent to acquisition, the Company changed the name of BTS to
TechStar Communications, Inc. ("TechStar").
A summary of the purchase price paid is as follows:
Cash paid........................................................................... $ 780,000
Value of common stock............................................................... 2,891,000
Promissory Notes given.............................................................. 600,000
Costs of acquisition................................................................ 155,000
Liabilities assumed................................................................. 941,000
--------------------
COST OF ASSETS ACQUIRED............................................................. $ 5,367,000
--------------------
--------------------
During August 1997 the Company merged TechStar into IDF, pursuant to an
agreement and plan of merger dated July 31, 1997 among the Company, IDF and an
acquisition subsidiary of IDF (the "IDF Merger Agreement"). Upon Consummation of
the transaction, the Company received 6,171,553 shares of IDF common stock,
representing approximately 63% of the then outstanding shares and approximately
58% of the fully diluted outstanding IDF common stock, as a result of which, the
Company was deemed to have acquired IDF. In connection with the transaction,(i)
all options granted by the Company under employment agreements entitling Messrs.
Kandel, Luciani and Moskona to purchase an aggregate of 780,000 shares of the
Company's common stock, and all additional authorized but ungranted employee
stock options for 120,000 shares were cancelled, (ii) Messrs. Kandel and Luciani
tendered their resignations as directors of the Company, (iii) each of Messrs.
Kandel, Luciani and Moskona publicly sold all but 174,900 of their remaining
shares of
F-13
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (continued)
Company stock and utilized $600,000 of the net proceeds to invest in convertible
securities of IDF.
Messrs. Kandel, Luciani and Moskona are the senior executives and
officers of IDF and have each entered into employment agreements with IDF
expiring November 30, 2000. In September 1998 Messrs. Luciani tendered his
resignation with IDF. Pursuant to such agreements, Messrs. Kandel, Luciani and
Moskona are entitled to receive, in addition to their base salaries and annual
bonuses, options to acquire IDF shares which vest based upon IDF and its
consolidating subsidiaries, including TechStar and Heyden Wegman, achieving all
or certain pro-rated portions of annual pre-tax income targets in each of fiscal
years ending July 31, 1998, 1999 and 2000. In the event that any or all of such
IDF Options do not vest, the number of shares of IDF common stock that would
have been issued upon the exercise of such IDF Options shall be issued to the
Company as additional merger consideration.
Messrs. Robert M. Rubin and Lawrence Kaplan, the Chief Executive
Officer and Chairman of the Board and a Former Director of the Company,
respectively, are also principal stockholders and members of the board of
directors of IDF and were such prior to the consummation of the IDF merger.
Pursuant to the terms of the IDF Merger Agreement, Mr. Rubin converted an
$800,000 loan previously made to IDF into Preferred Series B stock of IDF which
is convertible into 400,000 shares of IDF common stock. In addition, through GV
Capital Inc., an affiliate of Mr. Kaplan, IDF offered $3,000,000 of five year,
8.0% notes convertible into IDF Series A Convertible Preferred Stock at 1.25 per
share. $600,000 of such notes were purchased by Messrs. Kandel, Luciani and
Moskona. Mr. Kaplan's affiliate received separate compensation for acting as
placement agent in connection with such private offering of IDF securities.
During the year ended July 31, 1998, IDF sold, through GV Capital Inc.,
a total of $3,000,000 of IDF's five year Convertible Notes convertible into IDF
Series A and C Preferred Stock at $1.25 per share which were subsequently
converted into 1,400,000 shares of IDF Series A Preferred Stock and 1,080,000
shares of IDF Convertible Series C Preferred stock.
The Series A, B and C Convertible Preferred Stock of IDF have voting
rights that are the same as IDF Common Stock, thus subsequent to the
conversion of said Notes, the Company owns approximately 48% of the voting
capital stock as of July 31, 1998. As a result of the decrease in the
ownership percentage by the Company to less than 50%, the Company has
accounted for the results of the operations of IDF using the equity method of
accounting effective as of August 1, 1997.
F-14
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONTINUED)
The allocation of purchase price to each of TechStar's assets and
liabilities at the date of acquisition, as determined in accordance with the
purchase method of accounting is presented in the table below:
Cash ............................................................................... $ 74,000
Accounts receivable................................................................. 1,150,000
Intangible assets................................................................... 4,079,000
Property and equipment.............................................................. 50,000
Other assets........................................................................ 14,000
Accounts payable and accrued liabilities............................................ (941,000)
--------------------
NET ASSETS ACQUIRED................................................................. $ 4,426,000
--------------------
--------------------
The intangible assets acquired are being amortized using the
straight-line method over 25 years.
Pro forma financial information has not been provided relating to the
acquisition of BTS because the effect is immaterial. As discussed previously, on
August 1, 1997 the Company acquired IDF International, Inc. as a result of its
merger of TechStar into IDF.
Pro Forma
The following unaudited pro forma summary combines the consolidated
results of operations as if the aforementioned acquisitions had been acquired as
of the beginning of each period presented, including the impact of certain
adjustments.
YEAR ENDED JULY 31,
--------------------------------
1998 1997
--------------- ---------------
Net sales......................................................... $ 173,414,000 $ 175,396,000
Net loss ......................................................... $ (9,654,000) $ (25,885,000)
Basic and diluted loss per share.................................. $ (0.85) $ (2.61)
The pro forma results are not necessarily indicative of what actually
would have occurred if the acquisitions had been in effect for the entire
periods presented. In addition, they are not intended to be a projection of
future results and do not reflect any synergies that might be achieved from
combined operations.
F-15
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES
Inventories consist of the following:
JULY 31,
---------------------------------
1998 1997
--------------- ---------------
Parts ........................................................................... $ 8,535,000 $ 8,159,000
Equipment new and used.............................................................. 64,956,000 56,759,000
--------------- ---------------
$ 73,491,000 $ 64,918,000
--------------- ---------------
--------------- ---------------
At July 31, 1998 and 1997, approximately $23,080,000 and $18,452,000,
respectively, of equipment was being held for rent by Western. Equipment in the
rental fleet at Western has been classified as non-current assets. (See Note 5)
In addition, equipment in the lease fleet at Western has been reclassified as
lease equipment in non-current assets.
In fiscal year 1998, rentals of all equipment were generally charged by
Western to cost of goods sold at an amount equal to seventy percent of the
rental payments received.
Western previously used a depreciation estimate on rental fleet
equipment equal to eighty percent of the rental payments received. This change
in accounting estimate was made to more closely match the actual reduction in
the market value of rented equipment to the resulting book value after
depreciation. In fiscal 1998, this change resulted in a decrease in cost of
goods sold of $1,286,000.
5. FIXED ASSETS
Fixed assets consist of the following:
JULY 31,
----------------------------------
1998 1997
---------------- ---------------
Machinery and equipment............................................................. $ 3,236,000 $ 2,647,000
Furniture and office equipment...................................................... 2,309,000 2,490,000
Computer equipment.................................................................. 1,146,000 2,277,000
Land ........................................................................... 840,000 840,000
Building and leasehold improvements................................................. 4,280,000 3,815,000
Vehicles ........................................................................... 1,291,000 1,095,000
---------------- ---------------
13,102,000 13,164,000
Less: Accumulated depreciation..................................................... (4,407,000) (3,634,000)
---------------- ---------------
Property plant & equipment, net..................................................... $ 8,695,000 $ 9,530,000
---------------- ---------------
---------------- ---------------
Rental equipment fleet, net......................................................... $ 23,080,000 $ 18,452,000
---------------- ---------------
---------------- ---------------
Leased equipment fleet, net......................................................... $ 2,760,000 $ -
---------------- ---------------
---------------- ---------------
F-16
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equipment in the rental fleet has been reclassified as rental equipment fleet in
fixed assets. In addition, equipment in the lease fleet has been reclassified as
lease equipment in fixed assets.
6. BORROWINGS
Borrowings consist of the following:
JULY 31,
---------------------------------
1998 1997
--------------- ---------------
Borrowings under floor financing lines.............................................. $ 86,924,000 $ 55,490,000
Line of credit with bank............................................................ - 6,849,000
Term and mortgage notes payable..................................................... 2,039,000 6,766,000
Other third party borrowings........................................................ - 1,592,000
--------------- ---------------
Total borrowings............................................................. 88,963,000 70,697,000
--------------- ---------------
Less: Current portions:
Borrowings under floor financing lines........................................... 11,038,000 32,177,000
Line of credit with bank......................................................... - 6,849,000
Term and mortgage notes payable.................................................. 883,000
Short term borrowings............................................................ 75,886,000 28,215,000
--------------- --------------
Total current borrowings..................................................... 87,807,000 67,241,000
--------------- ---------------
Long term borrowings......................................................... $ 1,156,000 $ 3,456,000
--------------- ---------------
--------------- ---------------
Scheduled principal payments of all borrowings are as follows:
1999 ............................................................................... $ 87,807,000
2000................................................................................ 63,000
2001................................................................................ 68,000
2002................................................................................ 74,000
2003................................................................................ 951,000
Thereafter.......................................................................... -
----------------
$ 88,963,000
Floor Financing Lines
Western has an inventory floor financing line with Case Credit
Corporation, the financing operation of Case Corporation, to purchase Case
inventory and with other finance companies affiliated with other equipment
manufacturers. The terms of these agreements provide for a one-month to
six-month interest free term followed by a term during which interest is charged
at rates ranging from prime (8.50% at July 31, 1997) or prime plus 2% (10.50% at
July 31, 1998). Principal payments are generally due at the earlier of sale of
the equipment or eight to forty-eight months from the invoice date. At July 31,
1998 there was approximately $11,038,000 outstanding under floor financing
arrangements.
F-17
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. BORROWINGS (continued)
Western also has a credit facility with Seafirst Bank to provide up to
$22,000,000 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 (8.50% at July 31, 1998). Principal payments are generally due in
periodic installments over terms ranging from twelve months to twenty-four
months from the borrowing date. This credit facility expired July 1, 1998.
In June, 1997 Western obtained a $75,000,000 inventory flooring and
operating line of credit through Deutsche Financial Services ("DFS"). The DFS
credit facility is a three year, floating rate facility based on prime with
rates between .50% under prime to 1.00% over prime depending upon the amount of
total borrowing under the facility. Amounts may be advanced against Western's
assets including accounts receivable, parts, new and used equipment and rental
fleet. Interest payments on the outstanding balances are due monthly. Total
amounts outstanding as of July 31, 1998 under this facility were $75,886,000.
At July 31, 1998 Western was in technical default of the leverage
covenant in the Deutsche Financial Services Loan Agreement. The Company obtained
a waiver for the period July 31, 1998 through September 30, 1998. There is no
guarantee that DFS will not call this debt at any time after September 30, 1998.
The amount due to Deutsche Financial Service is already classified as current
for the year ended July 31, 1998.
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 range from 12 to 48 months, 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, 1998 and 1997,
approximately $133,000 and $2,456,000, respectively was outstanding under these
notes. 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 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.
On July 31, 1997 approximately $6,849,000 was outstanding under a line
of credit with a commercial bank, the principal of which bears interest at LIBOR
plus 1.25%. On October 31, 1997, the Company paid the total balance outstanding
on this line.
F-18
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES
The provision (benefit) for income taxes from continuing operations
comprises the following:
YEAR ENDED JULY 31,
---------------------------------------------------
1998 1997 1996
--------------- ---------------- ----------------
Current:
Federal........................................................ $ 1,227,000 $ (422,000) $ 1,429,000
State ......................................................... 162,000 119,000 242,000
--------------- --------------- ---------------
1,389,000 (303,000) 1,671,000
---------------- ---------------- ---------------
Deferred:
Federal........................................................ (32,000) (357,000) (779,000)
State ......................................................... (3,000) (43,000) (2,000)
---------------- --------------- ---------------
(35,000) (400,000) (781,000)
---------------- --------------- ---------------
$ 1,354,000 $ (703,000) $ 890,000
---------------- --------------- ---------------
---------------- --------------- ---------------
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,
---------------------------------------------------
1998 1997 1996
--------------- --------------- ----------------
Statutory federal income tax rate.................................. $ 495,000 $ (2,797,000) $ 672,000
Valuation allowance................................................ 590,000 1,966,000 -
State income taxes, net of federal income tax benefit.............. 159,000 76,000 240,000
Other .......................................................... 110,000 52,000 (22,000)
--------------- --------------- ----------------
$ 1,354,000 $ (703,000) $ 890,000
--------------- --------------- ----------------
--------------- --------------- ----------------
F-19
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES (continued)
Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities are as follows:
JULY 31,
-----------------------------------
1998 1997
--------------- -----------------
Depreciation and amortization....................................................... $ (780,000) $ (5,000)
Valuation allowance................................................................. (4,377,000) (8,156,000)
Deferred income..................................................................... - (170,000)
Other ........................................................................... - (234,000)
--------------- ---------------
Gross deferred tax liabilities...................................................... (5,157,000) (8,565,000)
---------------- ---------------
Inventory reserve................................................................... 775,000 401,000
Bad debt reserve.................................................................... 261,000 180,000
Accrued vacation and bonuses........................................................ 98,000 128,000
Other ........................................................................... 532,000 236,000
Loss carryforwards.................................................................. 3,186,000 6,541,000
Loss on Western initial public offering............................................. 131,000 131,000
Stock options....................................................................... 782,000 782,000
Operating lease..................................................................... - 190,000
Intangible assets................................................................... - 529,000
Deferred compensation............................................................... - 203,000
Impairment losses................................................................... - 2,111,000
Legal Settlement.................................................................... - 501,000
--------------- ---------------
Gross Deferred Tax Assets........................................................... 5,765,000 11,933,000
--------------- ---------------
$ 608,000 $ 3,368,000
--------------- -----------------
--------------- -----------------
At July 31, 1998, the Company had federal income tax loss carryforwards
of $9,371,000 which will begin to expire in 2011. Utilization of such net
operating losses will be subject to annual limitations in the event of a change
in ownership of the Company of more than 50%.
8. SHAREHOLDERS' EQUITY
A total of 976,539 shares of the Company's Series B-1 convertible
preferred stock were issued in September 1996 in connection with the acquisition
of ConnectSoft, Inc. Such shares have a $3.50 per share liquidation value and
are convertible into a minimum of 976,539 and a maximum of 2,929,617 shares of
the Company's common stock pursuant to achieving certain performance goals and
other criteria described in the merger agreement. The present conversion ratio
for the B-1 convertible preferred stock is one for one. During the year ended
July 31, 1998 a total of 252,677 shares were converted to common stock at the
ratio of one for one.
F-20
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SHAREHOLDERS' EQUITY (continued)
In January of 1997, the Company issued 400,000 shares of Series B-2
preferred stock in a private placement. Proceeds from the private placement
totaled $10,000,000. The Series B-2 preferred stock carry a $25 per share
liquidation preference over the Company's common stock, and pay a 7% cumulative
quarterly dividend, payable at the Company's option in cash or in additional
shares of Series B-2 preferred stock. As of July 31, 1997, a total of 280,000 of
the preferred shares had been converted into approximately 2,031,000 common
share at prices ranging from $3.31 to $3.80. All of the remaining 120,000
preferred shares outstanding at July 31, 1997 were converted into approximately
585,000 shares at a price of $5.37 per share in September, 1997, leaving no
shares outstanding at July 31, 1998.
The shares provide for a discount conversion feature which has been
accounted for as an imputed dividend to the preferred shareholders. Total
dividend expense was $24,000 and $2,403,000 for the fiscal years ending July 31,
1998 and 1997. A total of $2,121,000 was recognized as a dividend imputed by the
discount conversion feature of the preferred shares for the year ended July 31,
1997. All of the dividends were paid in additional shares of common stock
concurrent with the conversion of the preferred shares to common stock.
In addition, purchasers of the preferred shares acquired 350,000 five-year
warrants at a purchase price of $.01 per warrant, entitling the holders to
purchase 350,000 shares of Company common stock at $8.58 per share. In the event
of an initial public offering of common stock of the Company's Exodus
subsidiary, purchasers of the preferred shares shall have the right to purchase,
for $.01 each, 350,000 five year warrants to purchase up to 350,000 shares of
Exodus common stock at an exercise price equal to the initial price per share
offered to the public.
On September 30, 1997, the Company received a loan in the amount of
$500,000 from an unrelated third party. The loan carried interest at the annual
rate of 10% and was payable on demand. In November, 1997 the Company exchanged
250,000 shares of common stock in full settlement of the debt and related
accrued interest.
In May 1997, the Company issued 192,754 shares of common stock valued
at $771,000 as compensation to a director of the Company.
F-21
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SHAREHOLDERS' EQUITY (continued)
On February 25, 1994, the Company completed a public offering of
920,000 units at $5.25 per unit, each unit consisting of one share of common
stock, $.01 par value, and one redeemable common stock purchase warrant. Each
warrant entitled the holder to purchase one share of common stock until July 31,
1998, at an exercise price of $7.50. During fiscal 1998, the exercise period for
the 920,000 warrants was extended to July 31, 1999. The warrants are subject to
redemption by the Company at a redemption price of $.10 per warrant under
certain circumstances.
Western has been authorized to issue 10,000,000 shares of "blank check"
preferred stock, with respect to which all the conditions and privileges thereof
can be determined solely by action of Western's Board of Directors without
further action of its shareholders. As of July 31, 1998 none were issued and
outstanding.
9. DISCONTINUED OPERATIONS
Technology
In April, 1998, the Company approved a formal plan to dispose of or
close down the remaining operations of the Technology Group of Companies
including Exodus Technologies, Connectsoft, Inc., Connectsoft Communications
Corp. and InterGlobe Networks, Inc. Although the results of these subsidiaries
have previously been included in the consolidated financial statements, the
subsidiaries were operated as a separate line of business whose products,
activities and customers differed from other operations of the Company. Based
upon this determination, the results of operations of these subsidiaries have
been accounted for as discontinued operations and accordingly, their operating
results are segregated in the accompanying statements of operations.
All of the above mentioned Companies will either cease operations
prior to July 31, 1998, with the exception of CCC, whose asset sale
transaction is expected to close before November 30, 1998, Such asset sale
will result in a gain of approximately $3,776,000. The gain is offset by
costs and expenses of $2,296,000 representing the actual and estimated
operating losses and closure costs from the April 30, 1998 measurement date
until the time of the disposition or closure. The net gain of $1,480,000 has
been included under the caption Net liabilities of discontinued operations in
the accompanying consolidated balance sheets and will be recognized in fiscal
1999 upon the closing of the asset sale transaction.
F-22
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9.DISCONTINUED OPERATIONS (Continued)
The composition of the net liabilities of discontinued operations is as
follows:
Fixed assets, net................................................................... (949,000)
Accounts Payable and accrued liabilities ........................................... 417,000
Note Payable........................................................................ 1,500,000
Capitalized lease obligations....................................................... 2,808,000
Deferred losses through closure..................................................... (2,296,000)
-----------------
Deferred gain on discontinued operations............................................ $ 1,480,000
-----------------
-----------------
Revenues for the Technology group of companies for the years ending July 31,
1998, 1997 and 1996 were $2,108,000, $2,524,000 and $0, respectively.
On July 10, 1998, the Company entered into an agreement to sell
substantially all of the assets of its Connectsoft subsidiary, including the
network operating center to eGlobe, Inc., formally known as Executive TeleCard,
Ltd. ("eGlobe"). As consideration for the assets, eGlobe will assume up to
$4,500,000 of Connectsoft liabilities and leases, most of which have been
guaranteed by the Company. Although eGlobe will be responsible for payment of
those assumed liabilities, the assumption of such liabilities will not relieve
the Company from its guarantees until such liabilities have been paid. The
Company will also receive as additional consideration from eGlobe, on the
earlier of two years from the closing of the sale to eGlobe or the resale of the
Connectsoft business by eGlobe, 7.5% of the increase in value of the Connectsoft
business. The Company anticipates that the transaction will close in November
1998.
Sale of the Manufacturing Business
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
F-23
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. DISCONTINUED OPERATIONS (Continued)
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 $172,000 at July 31, 1997 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 of $3,503,000 at July 31, 1997 was paid in full during
the year ended July 31, 1998.
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 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 provided that the Company retained Mr. Shahid as a
consultant for a period of two years, commencing April 1, 1996, for which
consulting services he was 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 11). These charges, along with other costs of the
Hutchinson Transaction were included in determining the gain on the sale of the
Manufacturing Business.
F-24
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9.DISCONTINUED OPERATIONS (Continued)
Details of this transaction are as follows:
Sales 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.
Results of National O-Ring and Stillman Seal through the date of
disposition are as follows:
5-1/2 MONTHS
ENDED
JANUARY 19,
1996
---------------
Net sales........................................................................... $ 16,928,000
Costs and expenses.................................................................. 16,410,000
---------------
Income before taxes................................................................. 518,000
Provision for income taxes.......................................................... 203,000
---------------
Net income.......................................................................... $ 315,000
---------------
---------------
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company and Western lease certain facilities and certain computer
equipment and software under non-cancelable lease agreements. The building
portion of four 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).
F-25
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
10. COMMITMENTS AND CONTINGENCIES (continued)
The remaining facility lease agreements have terms ranging from
month-to-month 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 $1,833,000, $1,971,000 and $1,100,000 for
the fiscal years 1998, 1997 and 1996, respectively. The computer equipment
leases expire in 1999 and meet certain specific criteria to be accounted for as
capital leases.
Assets recorded under capital leases are as follows:
JULY 31,
--------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
Capitalized asset value........................................... $ 3,036,000 $ 3,836,000 $ 3,668,000
Less: Accumulated amortization................................... (315,000) (448,000) (287,000)
--------------- --------------- ---------------
$ 2,721,000 $ 3,388,000 $ 3,381,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Future minimum lease payments under all non-cancelable leases as of
July 31, 1998 are as follows:
CAPITAL OPERATING
YEAR ENDING JULY 31, LEASES LEASES
--------------- --------------
1999 .......................................................................... $ 394,000 $ 1,609,000
2000 ........................................................................... 286,000 1,346,000
2001 ........................................................................... 312,000 1,059,000
2002 ........................................................................... 338,000 608,000
2003 ........................................................................... 363,000 410,000
Thereafter.......................................................................... 6,032,000 6,400,000
--------------- --------------
Total annual lease payments......................................................... 7,725,000 $ 11,432,000
--------------- --------------
--------------- --------------
Less: Amount representing interest with imputed rates from 6% to 15%............... 4,831,000
---------------
Present value of minimum lease payments............................................. 2,894,000
Less: Current portion.............................................................. 67,000
---------------
Long-term portion................................................................... $ 2,827,000
---------------
---------------
Other Contingencies
The Company is guarantor on certain liabilities, including the capital
lease obligations and the amounts due to UPS assumed by eGlobe as described in
Note 9.
F-26
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
10. COMMITMENTS AND CONTINGENCIES (continued)
Western issues purchase orders to Case Corporation for equipment
purchases. Upon acceptance by Case, these purchases become non-cancellable by
Western. As of July 31, 1998 the total of such purchase orders was $3,789,000.
As of July 31, 1998 Western had entered into sales contracts containing
repurchase obligations totaling approximately $3,083,000. Subsequent to July 31,
1998, Western entered into additional sales contracts containing repurchase
obligations totaling approximately $1,289,000.
Legal Proceedings
Except as set forth below, there are no pending material legal proceeds
in which the Company or any of its subsidiaries is a party, or to which any of
their respective properties are subject, which either individually or in the
aggregate, may have a material adverse effect on the results of operations or
financial position of the Company.
In May, 1998, a lawsuit was filed on behalf of the Company in
a purported shareholder derivative action against certain directors of the
Company. The lawsuit alleges that the defendant directors breached their
fiduciary responsibilities of due care and loyalty to the Company and its
stockholders in connection with a letter of credit guarantee by the Company for
ERD Waste Corp., the sale of certain businesses of the Company to Hutchinson
Corporation, and the delisting of the Company's common stock and publicly traded
warrants from the Nasdaq Stock Market. The complaint did not specify the amount
of damages sought.
In June, 1998 a shareholder class action was filed against the certain
directors of the Company alleging that the defendant directors breached their
fiduciary responsibilities of due care and loyalty to the Company and its
stockholders in connection with a letter of credit guarantee by the Company for
ERD Wast Corp., the sale of certain businesses of the Company to Hutchinson
Corporation, and the delisting of the Company's common stock and publicly traded
warrants from the Nasdaq Stock Market.
The Company is a named defendant in a matter brought by an
individual in Los Angeles County Superior Court alleging that the Company
conspired with her ex-husband to conceal community property assets from her
in connection with her recent divorce. The plaintiff is requesting damages
against the Company and the other defendants in the approximate amount of
$8,000,000 plus punitive damages. The Company believes the plaintiff's claim
is without merit and intends to defend the lawsuit vigorously.
F-27
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
11. 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 per share. During fiscal 1996, 23,558 options were
exercised under the Transfer Plan. All options granted under this plan have been
exercised.
The 1991 Employee Incentive Stock Option Plan (The "1991 Stock Option
Plan")
Key employees of the Company can receive incentive options to purchase
an aggregate of 750,000 shares of common stock at initial exercise prices equal
to 100% of the market price per share of the Company's common stock on the date
of grant. The 1991 Stock Option Plan was approved by the Board of Directors and
shareholders in June 1991 and became effective from May 21, 1991. In the fiscal
year ending July 31, 1997, 126,550 options were granted to the principal
shareholder under this plan. No additional options were issued under this plan
in the fiscal year ending July 31, 1998.
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 the fiscal years ending
July 31, 1998, 1997 and 1996 a total of 0, 14,375 and 99,625 options were
exercised, respectively, under the Stock Bonus 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 9, the
Company amended the Transfer Plan, 1991 Stock Option Plan and the Stock
F-28
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
11. STOCK OPTION PLANS (continued)
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 net 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 $3.78 per share were
granted to the Company's principal 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. Options for 100,000
shares granted at $5.25 have been canceled and options for 126,550 shares issued
to the principal shareholder at an exercise price of $3.78 have been canceled.
The 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.
During the year ended July 31, 1997, a total of 605,000 options were
granted to employees under the 1996 Plan at prices ranging from $4.375 to
$5.125. All exercise prices represented the fair market value of the Company's
common stock on the date of grant. These options generally vest one third upon
issuance and one-third upon the first and second anniversary date of the
issuance. The life of the options issued under the 1996 plan is five years from
the date of the grant.
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 for 420,000 shares were outstanding at
July 31, 1998 with exercise prices ranging from $3.13-$7.00.
F-29
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
11. STOCK OPTION PLANS (continued)
During fiscal 1996, options for 100,000 shares 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 50,000 were vested at July 31, 1997.
During the year ending July 31, 1998, certain of the consultants
exercised warrants at a price of $6.30, which resulted in the issuance of 57,600
additional shares of common stock and 57,600 publicly traded warrants.
Additionally, 50,000 options were exercised at a price of 4.75 resulting in the
issuance of 50,000 shares of common stock.
Pursuant to the acquisition of Connectsoft Inc., the Company granted
300,000 options at a price of $6.625. At July 31, 1998, a total of 25,000 of
these options remain outstanding. The decrease is due to the cancellation of
275,000 options.
For the year ended July 31, 1998, the Company issued 150,000 options
to non-employees pursuant to a settlement of litigation in August of 1997.
Such settlement was accrued in the fiscal year ending July 31, 1997 in the
amount of $300,000, representing their estimated fair value using the Black
Scholes method of option valuation.
Western Stock Option Plan
In March 1995, the Company, as the sole shareholder of Western,
approved Western's 1995 Stock Option Plan, as previously adopted by the Board of
Directors (the "Plan"), under which key employees, officers, directors and
consultants of Western can receive incentive stock options and non-qualified
stock options to purchase up to an aggregate of 300,000 shares of common stock.
In December 1995, the shareholders amended the 1995 stock option plan to
increase the number of shares underlying the plan from 300,000 to 850,000
shares. In December 1996 the stockholders amended the 1985 stock option plan to
increase the number of shares underlying the plan to 1,500,000 shares. The Plan
provides that the exercise price of incentive stock options be at least equal to
100 percent of the fair market value of the common stock on the date of grant.
With respect to non-qualified stock options, the Plan requires that the exercise
price be at least 85 percent of fair value on the date such option is granted.
Upon approval of the Plan, Western's Board of Directors awarded non-qualified
stock options for an aggregate of 200,000 shares, all of which provide for an
exercise price of $6.50 per share. On December 28, 1995, the exercise price of
the options previously granted was lowered to $4.50 per share, the market price
as of that date. All options granted upon approval of the Plan are exercisable
commencing August 1, 1996 and expire on July 31, 2005.
On August 1, 1996, Western's Board of Directors approved the grant of
an additional 347,000 options to employees, directors and consultants of Western
at an exercise price of $4.375 per share, the market price as of the
F-30
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
11. STOCK OPTION PLANS (continued)
date of grant. These options vest ratably over a two-year period commencing
August 1, 1996.
In January, 1998, Western's shareholders approved an amendment to this
plan providing for the grant on August 1 of each fiscal year, a total of 5,000
options to each non-employee director of Western. The options have an exercise
price equal to the market price on the date of the grant and a term of 5 years
from the date of the grant.
During the fiscal year ended July 31, 1998 Western issued a total of
714,000 options at average exercise price of $4.62 and an expiration date of 5
years from the date of grant.
The following table includes option information for the Company's
plans:
WEIGHTED
AVERAGE
FAIR VALUE OF
NUMBER OF WEIGHTED OPTION
STOCK OPTION ACTIVITY SHARES EXERCISE PRICE GRANTED
--------------------- --------------- -------------- -------------
July 31, 1995 1,182,000 $3.70
Options granted 1,150,000 5.01
Options exercised (527,000) 3.13
Options canceled (100,000) 5.25
--------------
July 31, 1996 1,705,000 5.07
Options granted 3,015,000 5.79 3.032
Options exercised (236,000) 3.57
Options canceled (346,000) 5.39
--------------
July 31, 1997 4,138,000 5.55
Options granted 150,000 6.50 2.000
Options exercised (50,000) 4.75
Options canceled (2,366,000) 5.97
--------------
July 31, 1998 1,872,000 4.55
--------------
--------------
F-31
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
11. STOCK OPTION PLANS (continued)
The following table summarizes stock options outstanding and
exercisable for the Company at July 31, 1998:
OUTSTANDING EXERCISABLE
---------------------------------------------- ------------------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Exercise Price Range Shares Life Price Shares Price
- -------------------- -------------- -------------- ---------- ----------------- ---------
$3.13 to 3.78 857,000 2.5 $3.64 857,000 $3.64
$4.38 to 4.75 275,000 2.4 4.51 217,000 4.55
$5.13 to 5.50 407,000 2.3 5.16 270,000 5.15
$6.00 to 8.50 333,000 2.8 6.36 333,000 6.36
-------------- -----------------
$3.13 to 8.50 1,872,000 2.5 4.58 1,677,000 $4.55
-------------- -----------------
-------------- -----------------
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123. "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for options
granted to employees and directors. If compensation cost for the Company's stock
option plans had been determined based on the fair value at the grant date for
awards in fiscal 1998 and fiscal 1997 in accordance with the provisions of SFAS
No. 123, the Company's net loss per share would have changed to the pro forma
amounts indicated below:
YEAR ENDED JULY 31,
----------------------------------
1998 1997
--------------- ----------------
Net loss, as reported............................................................... $ (9,615,000) $ (27,257,000)
Net loss, pro forma................................................................. $ (10,284,000) $ (29,238,000)
Net basic and diluted loss per share, as reported................................... $ (0.85) $ (2.75)
Net basic and diluted loss per share, pro forma..................................... $ (0.91) $ (2.95)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
YEAR ENDED JULY 31,
--------------------------------
1998 1997
--------------- --------------
Expected volatility................................................................. .79 .67 - 0.73
Risk-free interest rate............................................................. 6.11% 6.08% - 6.57%
Expected life of options in years................................................... 5.0 5.0
Expected dividend yield............................................................. 0.00% 0.00%
F-32
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
12. INTANGIBLE ASSETS
Intangible and other assets consist of the following:
JULY 31,
---------------------------------
1998 1997
--------------- ---------------
Goodwill .......................................................................... $ 3,044,000 $ 8,104,000
Noncompete agreement................................................................ 42,000 175,000
Other assets........................................................................ 527,000 303,000
--------------- ---------------
$ 3,613,000 $ 8,582,000
--------------- ---------------
--------------- ---------------
Goodwill is amortized over lives ranging from 25 to 40 years and the
non-compete agreement is amortized over 2 years.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND SCHEDULE OF
NON-CASH INVESTING AND FINANCING ACTIVITIES INTANGIBLE ASSETS
The Company paid interest of $5,221,000, $4,307,000 and 1,877,000
during the fiscal years 1998, 1997, and 1996, respectively. The Company paid
$1,097,000, $1,621,000 and $2,084,000 in income taxes, net of refunds, during
fiscal 1998, 1997 and 1996, respectively.
In December 1997 a capital lease obligation of $397,000 was incurred by
Western when they entered into a 20 year lease for the Yuba City, California
facility.
In July 1997 a capital lease obligation of $292,000 was incurred by
Western when they entered into a lease for computer equipment and software.
In June 1997 a capital lease obligation of $680,000 was incurred by
Western when they entered into a 20 year lease for the Kent, Washington
facility.
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.
On July 31, 1996, the Company acquired ConnectSoft in exchange for
shares of its Series B-1 Preferred Stock valued at $6,132,000 and incurred
$1,352,000 in acquisition costs.
F-33
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND SCHEDULE OF
NON-CASH INVESTING AND FINANCING ACTIVITIES INTANGIBLE ASSETS
(continued)
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.
Capital lease obligations of $356,000 were incurred during the year
ended July 31, 1997 when the Company entered into various leases for computer
hardware and software.
Western has consummated various acquisitions using, in part, the
assumption of notes payable and the issuance of Western's common stock and
notes payable. Such non-cash transactions have been excluded from the
statement of cash flows.
14. RELATED PARTIES
The real property and improvements used in connection with the
Sacramento Operations, and upon which the Sacramento Operation is located, were
sold by Case for $1,500,000 to the McLain-Rubin Realty Company, LLC ("MRR"), a
Delaware limited liability company the owners of which are Messrs. C. Dean
McLain, the President and a director of Western, and Robert M. Rubin, the
Chairman and a director of Western. Simultaneous with its acquisition of the
Sacramento Operation real property and improvements, MRR leased such real
property and improvements to Western under the terms of a 20 year commercial
lease agreement dated March 1, 1996 with Western paying an initial annual rate
of $168,000. Under the lease, such annual rate increases to $192,000 after five
years and is subject to fair market adjustments at the end of ten years. In
addition to base rent, Western is responsible for the payment of all related
taxes and other assessments, utilities, insurance and repairs (both structural
and regular maintenance) with respect to the leased real property during the
term of the lease. In accordance with SFAS 13, the building portion of the lease
is being accounted for as a capital lease (see Note 10) while the land portion
of the lease qualifies for treatment as an operating lease.
On June 1, 1997, the real property and improvements used in connection
with the Sahlberg operation located in Kent, Washington, was purchased by
McLain-Rubin Realty Company II, LLC ("MRR II"), a Delaware limited liability
company, the owners of which are Messrs. C. Dean McLain, the President and a
director of Western, and Robert M. Rubin, the Chairman and a director of
Western. Simultaneous with its acquisition of the Kent, Washington, real
property and improvements, MRR II leased such real property and improvements to
Western under the terms of a 20-year commercial lease agreement dated June 1,
1997 with Western paying an initial annual rate of $205,000. Under the lease,
such annual rate increases to $231,000 after five years and is subject to
additional adjustments at the end of ten and fifteen years. In addition to base
rent, Western is responsible for the payment of all related taxes and other
assessments, utilities, insurance, and repairs (both structural and regular
maintenance) with respect to the leased real property
F-34
14. RELATED PARTIES (continued)
during the term of the lease. In accordance with SFAS 13, the building portion
of the lease is being accounted for as a capital lease (see Note 10) while the
land portion of the lease qualifies for treatment as an operating lease.
On December 11, 1997, the real property and improvements used in
connection with Case's Yuba City, California operation, was purchased by
McLain-Rubin Realty Company III, LLC ("MRR III"), a Delaware limited liability
company, the owners of which are Messrs. C. Dean McLain, the President and a
director of Western, and Robert M. Rubin, the Chairman and a director of
Western. Simultaneous with its acquisition of the Yuba City, California real
property and improvements, MRR III leased such real property and improvements to
Western under the terms of a 20-year commercial lease agreement dated effective
December 11, 1997 with Western paying an initial annual rate of $54,000. Under
the lease, such annual rate increases to $59,000 after five years and is subject
to additional adjustments at the end of ten and fifteen years. In addition to
base rent, Western is responsible for the payment of all related taxes and other
assessments, utilities, insurance, and repairs (both structural and regular
maintenance) with respect to the leased real property during the term of the
lease. In accordance with SFAS 13, the building portion of the lease is being
accounted for as a capital lease (see Note 10) while the land portion of the
lease qualifies for treatment as an operating lease.
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 accommodation to ERD by making available a $4.4 million
standby letter of credit expiring May 31, 1998 issued by Citibank, N.A. in favor
of Chemical Bank (the "Letter of Credit") on behalf of ERD. Chemical Bank is the
principal lender to ERD and its subsidiaries, and upon
F-35
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
14. RELATED PARTIES
issuance of the Letter of Chase Bank (formerly Chemical Bank) made available
$4.4 million of additional funding to ERD under ERD's existing lending facility.
The funding was used to refinance certain outstanding indebtedness of
Environmental Services of America, Inc. ("ENSA"), a wholly owned subsidiary of
ERD. Robert M. Rubin, the Chairman and Chief Executive Officer, and a principal
stockholder of the Company is also the Chairman, Chief Executive Officer, a
director and a principal stockholder of ERD, owning approximately 23.0% of the
outstanding ERD Common Stock.
In consideration for making the Letter of Credit available, in addition
to repayment by ERD of all amounts drawn under the Letter of Credit and the
grant of a security interest in certain machinery and equipment of ENSA to
secure such repayment, ERD agreed (i) to pay to the Company all of the Company's
fees, costs and expenses in connection with making the Letter of Credit
available, as well as the amount of all interest paid by the Company on drawings
under the Letter of Credit prior to their repayment by ERD.
In September 1996, a subsidiary of ERD which operated a waste facility
in Nassau County, New York was cited by the New York State Department of
Environmental Conservation ("DEC") for violating certain DEC regulations. Such
waste facility had accounted for approximately 13% of ERD's consolidated
revenues. The Company has been advised by ERD that under the terms of a
Settlement Agreement reached with the State of New York in November 1996, all
violations alleged by the DEC have been resolved in consideration for, among
other things, ERD's agreement to voluntarily cease incineration operations at
the waste facility on or before March 31, 1997. Such incineration operations
ceased on April 15, 1997.
On November 8, 1996, the Company and ERD amended and restated their
agreements to provide that if and to the extent that the Letter of Credit
provided by the Company is called for payment, ERD will issue to the Company its
convertible note bearing interest at 12% per annum, payable monthly, and payable
as to principal on the earliest to occur of: (i) May 30, 1999, (ii) ERD's
receipt of the initial proceeds from any public or private placement of debt or
equity securities of ERD, or (iii) completion of any bank refinancing by ERD, to
the extent of all proceeds available after payment of other secured
indebtedness. In addition, the ERD notes, if issued, will be convertible, at any
time at the option of the Company, into ERD Common Stock at a conversion price
equal to $4.40 per share, or a maximum of 1,000,000 ERD shares if the entire
$4.4 million note is issued and converted into ERD Common Stock. In addition to
the collateral provided under the May 30, 1996 agreement, ERD also provided the
Company with a junior mortgage on the waste facility owned by ERD's subsidiary,
subordinated to existing indebtedness encumbering such facility.
F-36
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
14. RELATED PARTIES (CONTINUED)
Under the terms of an indemnity agreement, dated May 30, 1996, Robert
M. Rubin agreed to indemnify the Company for all losses, if any, incurred by the
Company as a result of issuance of the Letter of Credit for the benefit of ERD.
In consideration of his negotiating the modification of the ERD agreement, on
November 8, 1996, the Company's Board of Directors (Mr. Rubin abstaining) agreed
to amend the indemnity agreement with Mr. Rubin to limit his contingent
liability thereunder to the extent of 23% (Mr. Rubin's approximate percentage
beneficial ownership in the outstanding Company Common Stock as of May 30, 1996)
of all losses that the Company may incur in connection with its having provided
the Letter of Credit financial accommodation on behalf of ERD. Mr. Rubin's
reimbursement obligations are also subject to pro rata reduction to the extent
of any repayments made directly by ERD or from proceeds received by the Company
from the sale of ERD capital stock described above.
In February of 1997, the Company loaned $500,000 to ERD Waste Corp. The
loan is secured by a short term note bearing interest at 2% above the prime
lending rate of the Company's commercial bank (8.5% at April 30, 1997) and a
second collateral and security position on all accounts receivable of ERD
subject to the primary collateral position held by Chase Bank. Principal
together with accrued interest is due October 5, 1997.
In September 1997 ERD filed for protection from creditors under
Chapter 11 of federal bankruptcy laws. In October, 1997 Chemical bank drew
the $4.4 million available on the standby letter of credit. As a result, the
Company recorded a loss of approximately $5.0 million in fiscal 1997, related
to the February Note and the September letter of credit. Mr. Rubin has
personally guaranteed approximately $1.7 million of the ERD loss.
On June 28, 1996 the Company entered into a credit agreement with
Mr. Rubin pursuant to which Mr. Rubin delivered a demand promissory note for
up to $1,200,000 and payment in full was due July 31, 1998. Mr. Rubin's
indebtedness was secured by his pledge of 150,000 shares of company common
stock and his collateral assignment of all payments to him under the terms of
his consulting and non-competition agreements with Hutchinson, in the
aggregate amount of $1,200,000. Such collateral assignment was converted to a
payment rights assignment agreement in July 1998 calling for Hutchinson to
make all payments pursuant to Mr. Rubin's consulting and non-competition
agreement directly to the company in satisfaction of the $1,200,000 loan. Mr.
Rubin has guaranteed all payments under the assignment and such assignment is
subject to approval by the Company's stockholders at the next annual or
special meeting. In addition, the Company agreed to waive interest on the
note from February 23, 1998 forward.
F-37
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
15.EMPLOYEE SAVINGS PLAN
The Company has a voluntary savings plan pursuant to Section 401(k) of
the Internal Revenue Code, whereby eligible participants may contribute a
percentage of compensation subject to certain limitations. The Company has the
option to make discretionary qualified contributions to the plan, however, no
Company contributions were made for fiscal 1998, 1997 or 1996.
16. SUBSEQUENT EVENTS
On October 2, 1998 Mr. Rubin advanced $250,000 to IDF and on
November 9, 1998 the Company advanced $150,000 to IDF. These amounts were for
working capital and represent a portion of a total commitment of up to
$1,000,000 to be funded $300,000 by Mr. Rubin; $300,000 by two other
directors of IDF and $400,000 by the Company. It is anticipated that the
funding will be structured as a purchase of equity at a price of
approximately .625 per common share.
F-38
SCHEDULE II
AMERICAN UNITED GLOBAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Years Ended July 31, 1998, 1997, and 1996
Charged to
Balance at Charged to Other Balance at
Description Beginning Costs and Accounts End of
of Period Expenses Deductions Period
- ----------------------------------------- -------------- ---------------- ------------ --------------- ---------------
Accounts Receivable Reserve:
Fiscal year ended July 31, 1998 $807,000 $825,000 $ --- $(906,000) $726,000
Fiscal year ended July 31, 1997 652,000 875,000 285,000 (1,005,000) 807,000
Fiscal year ended July 31, 1996 370,000 486,000 --- (204,000) 652,000
Inventory Reserve:
Fiscal year ended July 31, 1998 1,597,000 1,734,000 --- (498,000) 2,833,000
Fiscal year ended July 31, 1997 1,212,000 598,000 --- (213,000) 1,597,000
Fiscal year ended July 31, 1996 449,000 768,000 --- (5,000) 1,212,000
EXHIBIT LIST
------------
3.1 Certificate of Incorporation of Registrant.(8)
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 (Schedule 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 (schedule 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)
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 Janaury 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
National 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)
10.24 Agreement of Plan and Merger, by and among American United Global, Inc. ("AUGI"), BTS
Acquisition Corp., Broadcast Tower Sites, Inc., Simantov Moskona and Sergio Luciani, dated
December 11, 1996 (Incorporated by reference from the
Company's Form 8-K filed December 24, 1996).
10.25 Agreement of Plan of Merger, dated July 31, 1997, between American United Global, Inc.,
IDF International, Inc. and TechStar Communications, Inc. (without exhibits) (15)
10.26 Asset Purchase Agreement, dated January 17, 1997, among Sahlberg Equipment, Inc., John
Sahlberg and Robert Sahlberg, R&J Partners and Western Power & Equipment Corp.
(Incorporated by reference from Western Power and
Equipment Corp.'s Form 8-K filed February 3, 1997 (File
No. 0-26230)).
10.27 Loan Agreement dated, June 5, 1997, between Deutsche Financial Services, Inc. and Western
Power and Equipment Corp. (Incorporated by reference from Western Power and Equipment
Corp.'s Form 10-Q filed June 11, 1997 (File No. 0-26230)).
10.28 Commercial Lease, dated June 1, 1997 between McLain-Rubin Realty Company II, LLC and Western
Power and Equipment Corp. for Kent, Washington facility (Incorporated by reference from Western
Power and Equipment Corp.'s Form 10-K filed October 29, 1997 (File No. 0-26230)).
10.29 Asset Purchase Agreement between eGlobe, Inc. (fka Executive Telecard Ltd.) and American
United Global, Inc., et al, dated on July 10, 1998.*
10.30 Commercial Lease dated June 1, 1997, between McLain-Rubin Realty Company II, LLC and
Western Power & Equipment Corp. for Kent, Washington Facility. (16)
10.31 Asset Purchase Agreement, dated December 11, 1997, between Case Corporation and Western
Power & Equipment Corp. and McLain-Rubin Realty Company III, LLC.(16)
10.32 Employment Agreement, by and between Western Power & Equipment Corp. and C. Dean McLain
dated January 1, 1998.(16)
10.33 Consulting Agreement, by and between Western Power & Equipment Corp. and Robert M.
Rubin.(16)
22. Subsidiaries of the Company.
27. Financial Data Schedule.
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(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 Statmeent
on Form S-1, filed on February 1, 1994 and incorporated herein by
reference thereto. (Registration No. 33-72556).
(4) Filed as an Exhibit tot he 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 Alrom Corp., a
New York corporation, as filed on December 10, 1991.
(10) Filed as an Exhibit to AUGI's Registration Statement on Form S-18
(Registration No. 3303330 81-NY) and incorporated herein by reference
thereto.
(11) Filed as on Exhibit to AUGI's Preliminary Proxy Materials filed 1996
Annual Meeting on June 27, 1996.
(12) Filed as an 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.
(17) Filed as an Exhibit to Western Power Report on Form 10-K for fiscal
year ended July 31, 1996.
(18) Filed as an Exhibit to AUGI's Annual Report on Form 10-K for fiscal
year ended July 31, 1997.
(19) Filed as an Exhibit to Western Power Report on Form 10-K for fiscal
year ended July 31, 1998.
* Filed herewith