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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________ to_____________
Commission file number 0-19404
AMERICAN UNITED GLOBAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4359228
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11130 NE 33rd Place, Suite 250
Bellevue, Washington 98004
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (206)803-5400
Securities registered pursuant to Section 12(b) of the Exchange Act
Title of Each Class Name of Each Exchange of Which Registered
- ------------------- -----------------------------------------
None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(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
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Transitional Small Business Disclosure Format Yes NO X
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Check if there is no disclosure of delinquent filers in response to item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
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The aggregate market value of the voting stock held by non-affiliates
of the issuer as of November 7, 1996 was $48,989,100.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes NO
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APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of the registrant's Common Stock, $.01 Par
Value, on November 6, 1996 was 7,266,382 shares.
Documents incorporated by reference: None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
American United Global, Inc., a Delaware corporation (the "Company"),
through its operating subsidiaries, is engaged in two distinct businesses; a
technology business and a distribution business.
The Company's technology business provides computer software and
networking as well as telecommunications products and services. Such products
and services currently consist of:
(a) a remote access connectivity software protocol, known as
Nterprise(TM),
which allows users to run Microsoft Windows(TM) applications, such as
Word(TM), Excel(TM) and PowerPoint(TM), on existing UNIX workstations,
X-terminals and other X-compatable devices;
(b) an electronic mail communications management software product,
marketed as EMail ConnectionR, and an e-mail product and Internet browser
designed for children, marketed as E Mail for Kids(TM) and Kids Web(TM);
(c) providing network engineering, design and consultation services;
network security; remote network management and monitoring as well as
Intranet development; and
(d) providing a regional Internet/Intranet telecommunication service in
the form of high bandwidth Internet connectivity and hosting for
businesses in the Pacific Northwest.
The Company has also entered into a letter of intent to acquire businesses
which provide site acquisition, zoning, architectural and engineering services
to the wireless communications industry.
The Company's distribution business consists of the sale, service and
leasing, as a retail distributor, of light and medium-sized construction
equipment, parts and other products manufactured principally by Case
Corporation. Such distribution business operates through the Company's
56.6%-owned subsidiary, Western Power & Equipment Corp., a Delaware corporation
("Western"). Western principally operates as an authorized Case Corporation
("Case") dealer through 19 retail distribution facilities located in the States
of Washington, Oregon, California and Nevada. The construction equipment
distributed by the Company is used in the construction of residential and office
buildings, roads, levees, dams, underground power projects, forestry projects,
municipal construction and other construction projects.
Prior to January 1996, the Company also operated a manufacturing business
through two operating subsidiaries: (i) the National O-Ring division of American
United Products, Inc., a California corporation ("AUP"), which manufactured and
distributed standard-size, low cost synthetic rubber o-ring sealing devices for
use in automotive and industrial applications and (ii) the Stillman Seal
division of American United Seal, Inc., a California corporation ("AUS"), which
specialized in the design, manufacture and distribution of rubber-to-metal
bonded sealing devices for use in commercial, aerospace, defense and
communications industry applications.
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On January 19, 1996, the Company sold all of the operating assets of the
manufacturing business. See, "History and Recent Acquisitions," below.
History and Recent Acquisitions
The Company was initially organized as a New York corporation on June 22,
1988 under the name Alrom Corp. ("the Company"), and completed an initial public
offering of securities in August 1990. Effective on May 21, 1991, the Company
acquired by merger American United Global, Inc., a California corporation
("AUG"), and the AUP and AUS wholly-owned operating subsidiaries of AUG (the
"AUG Merger"). As a result of the AUG Merger, AUG became the wholly-owned
subsidiary of the Company, and the former shareholders of AUG gained control of
the Company through the ownership of approximately 78% of the then outstanding
Company Common Stock. Prior to the AUG Merger, the Company had no operations.
The Company effected a statutory merger in December 1991, pursuant to which the
Company was reincorporated in the State of Delaware under the name American
United Global, Inc.
Effective June 1, 1992, through a wholly-owned subsidiary, the Company
acquired substantially all of the assets of Aerodynamic Engineering, Inc.
("Aero") and certain assets owned and used by Aero, a company engaged in the
business of precision machining metal parts for the aerospace and defense
industries. The Company sold the assets of its AEI subsidiary on April 29, 1994.
Effective November 1, 1992, the Company's newly-formed Western subsidiary
completed the acquisition from Case of certain assets used in connection with
seven separate Case retail construction equipment distribution operations
located in the States of Washington and Oregon.
Effective September 10, 1994 Western purchased from Case two retail
construction equipment distribution outlets located in Sparks, Nevada and
Fremont, California. In December 1994 Western relocated the Fremont outlet to
Hayward, California. Under the terms of the 1994 Case transaction, Western was
obligated to open two additional distribution outlets in Northern California. In
March 1995 Western opened a retail store in Santa Rosa, California. In August
1995 Western opened a retail store in Salinas, California. See Part II, Item 7,
"Management's Discussion and Analysis of Results of Operations and Liquidity and
Capital Resources--Liquidity and Capital Resources."
In June 1995 Western completed an initial public offering of 1,495,000
shares of its common stock. This public offering reduced the Company's interest
in Western to 56.6%.
In January 1996, the Company and each of its AUG, AUP and AUS
subsidiaries, sold all of the assets of the National O-Ring and Stillman Seal
businesses comprising the manufacturing business of the Company to, and
substantially all of the liabilities associated with operation of such
manufacturing business were assumed by, subsidiaries of Hutchinson Corporation
("Hutchinson"). A subsidiary of Total America, Inc., a New York Stock Exchange
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listed company ("Total"), Hutchinson produces a variety of rubber related
products for three market sectors; automotive, consumer and industrial use.
The purchase price paid by Hutchinson for the manufacturing business was
$24,500,000, $20,825,000 of which was paid in cash and the aggregate $3,675,000
balance was paid by delivery of two 24-month non-interest bearing promissory
notes. The Hutchinson notes, which have been discounted for financial statement
presentation by $638,000, are guaranteed by Total.
Following the sale of its manufacturing business, the Company's Board of
Directors and senior management sought to refocus the business direction of the
Company and determined that stockholder value could best be enhanced by entering
the computing and telecommunications industries. As a result, the Company
embarked upon an acquisition program and, between May and November 1996,
acquired three companies and contracted to acquire a fourth. The terms of such
acquisitions are summarized as follows:
Effective as of May 1, 1996, the Company acquired, through a merger with
an acquisition subsidiary of the Company consummated in August 1996 (the
"ConnectSoft Merger"), all of the outstanding capital stock of ConnectSoft, Inc.
("ConnectSoft"), a private company located in Bellevue, Washington, which
provides a variety of computer software products and services. In connection
with the ConnectSoft Merger, ConnectSoft shareholders received, on a pro rata
basis, an aggregate 972,351 shares of the Company's Series B Preferred Stock
(the "Preferred Stock"). Such Preferred Stock does not pay a dividend, is not
subject to redemption, has a liquidation preference of $3.50 per share over
Company Common Stock and votes together with the Company Common Stock as a
single class on a one share for one vote basis. Each share of Preferred Stock is
convertible into shares of Company Common Stock at the holder's option into a
minimum of 972,351 shares of Company Common Stock and a maximum of 2,917,053
shares of Company Common Stock, based upon certain criteria. The Preferred Stock
may be converted into shares of Company Common Stock as follows:
(i) Each share of Preferred Stock may be converted, at any time,
into one share of Company Common Stock (a minimum of 972,351 shares of such
Common Stock if all such shares of Preferred Stock are so converted);
(ii) In the event that the "Combined Pre-Tax Income" (as defined) of
any or all of the "Subject Entities" (as defined) in any one of the three fiscal
years ending July 31, 1997, July 31, 1998, or July 31, 1999 (each a "Measuring
Fiscal Year" and collectively, the "Measuring Fiscal Years"):
(a) shall equal or exceed $3,000,000, each share of Preferred
Stock may be converted into two shares of Company Common Stock (a
maximum of 1,944,702 shares of such Common Stock if all such
shares of Preferred Stock are so converted); or
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(b) shall equal or exceed $5,000,000, each share of Preferred
Stock may be converted into three shares of Company Common Stock
(a maximum of 2,917,053 shares of such Common Stock if all such
shares of Preferred Stock are so converted).
The "Subject Entities" include ConnectSoft and its consolidated subsidiaries (if
any) and eXodus Technologies, Inc., a direct 75%-owned subsidiary of the Company
("eXodus") which has developed and is marketing the Nterprise remote access
connectivity software originated by ConnectSoft. The 25% of eXodus not owned by
the Company is held by current management and employees of eXodus, some of whom
were pre-ConnectSoft Merger shareholders of ConnectSoft. Such persons waived
their right to receive shares of Preferred Stock in the ConnectSoft Merger in
consideration of their receipt of shares of eXodus. The Company intends to
change the name of eXodus to Extare Technologies, Inc.
The ConnectSoft Merger Agreement also provides that each share of
Preferred Stock may be converted into three shares of Company Common Stock,
notwithstanding the levels of Combined Pre-Tax Income achieved, in the event
that (i) the Company sells the assets or securities of any of the Subject
Entities for consideration aggregating $5,000,000 or more, (ii) the Company
consummates an initial public offering of the securities of any of the Subject
Entities (an "IPO") resulting in gross proceeds in excess of $10,000,000, or in
a market valuation for 100% of the issuer's common stock equaling or exceeding
$50,000,000, or (iii) a transaction occurs with any third party (whether tender
offer, merger, consolidation or other combination) with the result that no
shares of Company common stock will be publicly traded on The NASDAQ Stock
Market or any other national securities exchange.
Prior to consummation of the ConnectSoft Merger, the Company provided
interim working capital financing for ConnectSoft which aggregated approximately
$3.4 million, assumed all of ConnectSoft's operating expenses and liabilities,
and received proxies to vote approximately 80% of the outstanding ConnectSoft
capital stock in favor of the ConnectSoft Merger. The Company also agreed to
increase its aggregate funding commitments to ConnectSoft and its related
companies to a minimum of $5.0 million.
In September 1996, the Company acquired, through a merger with a newly
formed acquisition subsidiary of the Company (the "Interglobe Merger"), all of
the outstanding capital stock of Interglobe Networks, Inc. ("Interglobe"), a
private company providing engineering, design and consulting services for users
and providers of telecommunications facilities on the Internet and other media.
Pursuant to the terms of the Interglobe Merger, the Interglobe shareholders
received the aggregate sum of $400,000 plus an aggregate of 800,000 shares of
the Company's Common Stock.
The former stockholders of Interglobe also received four-year employment
agreements with Interglobe and the Company pursuant to which they received
seven-year options to purchase an additional aggregate 800,000 shares of Company
Common Stock at an exercise price of $6.00 per share (the "Interglobe Options").
The Interglobe Options shall vest and be exercisable (i)
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25% on July 31, 1997 in the event that Interglobe achieves at least $250,000 of
Pre-Tax Income (as defined) in the year ending July 31, 1997, (ii) 25% on July
31, 1998 in the event that Interglobe achieves at least $1,000,000 of Pre-Tax
Income (as defined) in the year ending July 31, 1998, (iii) 25% on July 31, 1999
in the event that Interglobe achieves at least $2,000,000 of Pre-Tax Income in
the year ending July 31, 1999, and (iv) the balance of such Interglobe Options
in the event that Interglobe achieves at least $4,500,000 of Pre-Tax Income in
the year ending July 31, 2000. Alternatively, all 800,000 Interglobe Options
shall vest if, during the period commencing upon closing the Merger and
terminating on July 31, 2000, the accumulated Pre-Tax Income of Interglobe has
equalled or exceeded $7,750,000. In the event that a change in control of the
Company occurs, or the Company effects a sale of all or substantially all of the
assets of Interglobe, prior to July 31, 2000, all of the Interglobe Options
shall immediately vest upon such occurrence. In addition, the Interglobe
agreement provides that if the Company effects a public offering of Interglobe
or a sale of Interglobe prior to July 31, 2000, the Interglobe stockholders may
elect (but shall not be required) to exchange two-thirds of all Company
securities received by them in the Interglobe Merger for an aggregate of 25% of
the common stock of Interglobe owned by the Company prior to such transaction.
Following completion of the Interglobe Merger, Artour Baganov, the
President and Chief Executive Officer of Interglobe, was appointed as a member
of the Board of Directors of the Company.
On November 8, 1996 a newly formed wholly owned subsidiary of the Company,
Seattle Online Acquisition Corp. (the "Buyer") acquired the assets of Seattle
Online, Inc. (the "Seller"), a privately owned company engaged in providing a
local internet service in the Pacific Northwest. The purchase price for the
assets was the sum of $300,000 and up to 25,000 shares of the Company's Common
Stock for use by the Seller in settlement of its debts. Keith Dieffenbach, the
President and principal stockholder of the Seller entered into a three-year
employment agreement with the Buyer, providing him an annual salary initially
set at $125,000 per year, plus a bonus based upon exceeding certain minimum
sales levels. Both Mr. Dieffenbach and the other minority stockholder of Seller
also entered into non-competition and non-disclosure agreements for the benefit
of the Seller and Buyer. In consideration for their covenants contained in such
non-competition and non-disclosure agreements, the Company issued to such
individuals three year warrants to purchase an aggregate of 333,333 shares of
the Company's Common Stock.
Of such warrants, the minority stockholder of Seller received three year
warrants to purchase an aggregate of 28,333 shares of the Company's Common Stock
at an exercise price of $6.00 per share. The balance of the warrants to purchase
305,000 shares of the Company's Common Stock were issued to Mr. Dieffenbach and
are initially exercisable at $8.50 per share, which exercise price drops to
$6.00 per share in the event that the Buyer generates net income before taxes of
at least $150,000 at the end of either the six month period ending on May 31,
1997 or the fiscal year of Acquisition ending on July 31, 1997. In the event of
a public offering of securities of the Buyer, Mr. Dieffenbach is entitled under
certain circumstances (but not required) to exchange his Company warrants and
the underlying warrant shares (to the extent
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of prior exercise of such warrants) for shares aggregating up to 9.15% of the
common stock of the Buyer immediately prior to such initial public offering.
Finally, in the event that the Buyer generates net income before taxes of
at least $340,000 and $2,650,000 (such amounts, the "Pre-Tax Income Targets") in
the fiscal years ending July 31, 1997 and July 31, 1998 (such years, the
"Measuring Years"), respectively (or, under certain circumstances, $2,990,000 of
accumulated pre-tax income during both such fiscal years), the Company has
agreed to guaranty to Mr. Dieffenbach that, during the 90-day period commencing
October 1, 1998 and ending December 31, 1998 the average closing price of the
Company's Common Stock, as traded on the Nasdaq National Market or other
national securities exchange shall equal or exceed $6.00 per share more than the
exercise price for the unexercised warrants; failing which the Company shall
either reduce the exercise price of the warrants or repurchase the unexercised
warrants at a price to enable the holder of such warrants to make up such
difference. The aggregate dollar value of such guaranty is initially $1,830,000,
assuming that no warrants have been exercised when the guaranty is applied, but
it is subject to pro-rata increase to the extent that the Pre-Tax Income in the
two Measuring Years exceeds $2,990,000, provided that in no event shall the
guaranty amount exceed $3,660,000 irrespective of the Buyer's accumulated net
income before taxes. Conversely, if the net income before taxes of the Buyer in
each Measuring Year fails to reach the Pre-Tax Income Targets but (i) does equal
or exceed at least 50% of the Pre-Tax Income Targets for each Measuring Year and
(ii) the net income before taxes of the Buyer for its fiscal year ending July
31, 1998 is at least 80% of the net income before taxes for its fiscal year
ending July 31, 1997, then the guaranty shall still apply but shall be reduced
prorata to reflect the shortfall.
In October 1996, the Company entered into letters of intent with the
stockholders of Broadcast Tower Sites, Inc. and its affiliates (the "BTS
Companies"), pursuant to which it is contemplated that the Company will
acquire, through a merger transaction (the "BTS Merger") the BTS Companies.
The BTS Companies are engaged in providing site acquisition, zoning,
architectural and engineering services as well as consulting services, to the
wireless telecommunications industry. At the closing of the BTS Merger, it is
contemplated that the name of the BTS Companies will be changed. Such new
name has not yet been determined.
Pursuant to the terms of the proposed BTS Merger, the BTS shareholders
will receive an aggregate of 507,246 shares of Company Common Stock, certain
of which carry registration provisions, $780,000 in cash and three year
Company notes aggregating $600,000, bearing interest at the Citibank NA prime
rate and payable in installments of $100,000, $200,000 and $300,000 on each
of the three anniversary dates of the closing of the BTS Merger. The closing
of the BTS Merger is scheduled for December 1996.
In a related transaction, the Company also agreed to acquire 100% of the
capital stock of Arcadia Consulting, Inc. ("Arcadia"), a company recently formed
for the purpose of providing consulting services to clients in the wireless
telecommunications industry. The Company has agreed to pay a purchase price of
$220,000 in cash, plus a combination of shares of Company Common Stock and AUGI
notes due March 15, 1998 valued (based on the
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estimated market price of AUGI Common Stock as traded on Nasdaq on the date of
closing of such acquisition) at between approximately $1.3 million and $1.6
million. The closing of the Arcadia acquisition is conditioned upon the
Company's acquisition of the BTS Companies, and is scheduled to occur in or
about January 1997. Following the Arcadia acquisition, Arcadia will be merged
with and into the BTS Companies.
Upon closing of the BTS Merger, the former stockholders of the BTS
Companies and Arcadia will receive three-year employment agreements with the BTS
Companies and the Company pursuant to which they will receive, in addition to
their base salaries and annual bonuses based upon performance of the BTS
Companies, options exercisable over a five year period entitling the holders to
purchase an additional aggregate 300,000 shares of Company Common Stock (the
"BTS Options"). The BTS Options shall vest and be exercisable (i) 100,000
options on November 30, 1997 in the event that the BTS Companies achieve at
least $1,800,000 of Pre-Tax Income (as defined) in the 12 months ending November
30, 1997, (ii) 100,000 options on November 30, 1998 in the event that the BTS
Companies achieve at least $2,200,000 of Pre-Tax Income (as defined) in the 12
months ending November 30, 1998, and (iii) 100,000 options on November 30, 1999
in the event that the BTS Companies achieve at least $3,000,000 of Pre-Tax
Income in the 12 months ending November 30, 1999. Alternatively, all 300,000 BTS
Options shall vest if, during the period commencing upon closing the Merger and
terminating on November 30, 1999, the accumulated Pre-Tax Income of the BTS
Companies has equalled or exceeded $6,500,000. In the event that a change in
control of the Company occurs, or the Company effects a sale of all or
substantially all of the assets of the BTS Companies, prior to November 30,
1999, all of the BTS Options shall immediately vest upon such occurrence. In
addition, the BTS Merger agreement provides that if the Company effects a public
offering of the BTS Companies or a sale of the BTS Companies prior to November
30, 2000, the former BTS Companies and Arcadia stockholders may elect (but shall
not be required) to exchange all Company securities received by them in the BTS
Merger (the "Exchange Option") for an aggregate of 16.67% of the common stock of
the BTS Companies then owned by the Company prior to such transaction.
Upon completion of the Arcadia acquisition, Solon L. Kandel, the President
and sole stockholder of Arcadia, will be employed by the BTS Companies as its
President and Chief Executive Officer, under a three year employment agreement
containing terms which are substantially identical to those provided to each of
the former stockholders of the BTS Companies, including 100,000 Options and an
Exchange Option entitling Mr. Kandel to 8.33% of the common stock of the BTS
Companies. In addition, Mr. Kandel will be nominated to serve as a member of the
Board of Directors of the Company.
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THE TECHNOLOGY BUSINESS
General
The Company's strategy in entering the computing and telecommunications
business (the "Technology Business") is to make the Company a significant factor
in the rapidly expanding and changing businesses of (i) developing remote access
multi-user software and Internet software, (ii) Internet and Intranet
engineering, design and consulting services, and (iii) wireless
telecommunications services. Through the acquisitions of ConnectSoft, eXodus,
Interglobe and Seattle On-Line, the Company is now able to provide:
(a) a remote access connectivity software protocol which allows users to
run Microsoft Windows(TM) applications, such as Word(TM), Excel(TM) and
PowerPoint(TM), on existing UNIX workstations, X-terminals and other
X-compatable devices;
(b) an electronic mail communications management software product,
marketed as EMail ConnectionR, and and an e-mail product and Internet
browser designed for children, marketed as E Mail for Kids(TM) and Kids
Web(TM);
(c) engineering, design and consultation services to users and providers
of telecommunications facilities on the Internet and other media; and
(d) local Internet telecommunication service in the Pacific Northwest.
In the event that it consummates its acquisition of the BTS Companies in
December 1996, the Company will also be able to provide site acquisition,
zoning, architectural and engineering services to the wireless communications
industry.
Products and Services
Remote Computing for Multi-user Applications
New information technologies have enabled businesses to provide their
employees with access to business-critical information, such as sales and
customer data and financial and technical data. Many of these businesses have
made significant investments in information systems infrastructure incorporating
a variety of software operating systems, computing platforms and communications
protocols. Critical business software applications and personal computing tools
have historically been supplied by a variety of different vendors, often
resulting in incompatible systems and applications within and among company
locations. As a result, demand has increased for computing and
telecommunications systems that offer users a number of features, including a
standard interface and the ability to integrate enterprise and personal computer
applications to local and remote enterprise users.
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Although a majority of personal productivity software is Microsoft
Windows(TM) based, with the introduction of Windows 95 and Windows NT, Microsoft
has gained industry acceptance for its 32-bit operating systems as a preferred
environment for business and enterprise applications. However, the costs
associated with purchasing separate desktop Windows compatable PC's for
literally hundreds of workstations or "seats" in a large organization are
prohibitive. Accordingly, the challenge has been to perfect a modern client-
server technology to provide access to Windows applications in a diverse
information systems multi-user business environment, which may include DOS
systems, UNIX workstations and X-Terminals, which do not support 32-bit Windows
application.
The component software solution developed essentially consists of two
principal elements: (i) multi-user software which enables the UNIX or X-Terminal
file servers to recognize the Windows 95 and Windows NT protocol (the
"Multi-user Software"), and (ii) a remote user interface technology coupled with
a client/server protocol software, or language transport, which enables the
server to communicate the Windows application to the remote workstations (the
"Remoting Software"). The principal manufacturers of Multi-user Software are
Citrix Systems, Inc. ("Citrix") and Prologue, S.A. of France ("Prologue"), both
of whom sell their products, known as WinFrame(TM) and WinTimes(TM),
respectively, under licenses from Microsoft. In addition to Citrix (which
possesses its own proprietary Remoting Software) and Prologue, the principal
producers of Remoting Software are Network Computing Devices, Inc. ("NCD"),
Insignia Solutions, Inc. ("Insignia"), Tektronix Inc. ("Tekronix") and the
Company through its eXodus subsidiary. Each of NCD, Insignia and Tektronix act
as original equipment manufacturers under separate licenses from Citrix and
market their solutions under the names WinCenterPro(TM), NTrigue(TM) and
WinDD(TM), respectively. The Company licenses the WinTimes(TM) Multi-user
Software from Prologue and markets its remoting solution as an OEM under the
name NTerprise(TM). Distribution channels include original equipment
manufacturers, direct value added resellers ("VARs") and retailers, as well as
direct sales to end-users such as major corporations or government agencies.
The Company believes that its NTerprise(TM) product possesses certain
significant advantages over the Citrix WinFrame(TM) solution and other competing
component technology, in that:
* NTerprise(TM) resides entirely on the enterprises central file
server and does not require desktop client modules to be loaded on
the user's machine, thereby permitting the users' terminals to range
from sophisticated costly workstations to inexpensive X-Terminals;
* unlike competitive products, which provide only one window for all
Windows applications, NTerprise(TM) has multi-window capabilities
which allow users to run each Windows application in its own window,
thus providing a familiar and easy to use working environment;
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* NTerprise(TM) is not a replacement operating system for Microsoft's
Windows NT and, unlike competitive solutions, does not require the
customer to purchase a replacement proprietary NT operating system;
* NTerprise(TM) runs on different hardware-based server platforms,
such as Motorola's Power PC(TM) and Intel's Pentium Pro(TM), and,
when commercially available, is anticipated to be compatable with
Digital Equipment Corporation's Alpha and IBM's Power PC;
* unlike Citrix's propriety client/server protocol software, ICA
(Intelligent Console Architecture), which must be used with more
costly intelligent desktop computers, NTerprise(TM) uses standard
X-Terminal graphic commands for its client/server protocol and is
executed in the server only; thereby permitting the customer the
luxury of purchasing or continuing to use inexpensive or even
outdated desktop technology.
The Company is targeting users of UNIX workstations and X-Terminals as the
primary market for its NTerprise(TM) product. Its current version supports the
Windows NT 3.5 operating system. Subject to Prologue's renewal and expansion of
its recently expired license with Microsoft to include the Windows NT 4.0
operating system, the Company anticipates that an NTerprise(TM) version which
will support Window NT 4.0 will be available in the near future. In October
1996, Windows NT Magazine, an industry publication (not affiliated with
Microsoft Corporation) awarded the Company's NTerprise(TM) product the
"UNIX/Windows NT Technical Award" at the UNIX Expo Plus trade show in New York,
New York.
The Company is in the process of demonstrating its NTerprise(TM) solution
to a number of potential end-user and distributors, including Motorola. To date,
however, no firm orders have been obtained. Current pricing for a server license
is $795, and $195 per terminal or "seat" connected. A complete ten-seat license
is $1,995, consisting of a server license and a ten user license.
Retail Software
Through its ConnectSoft, Inc. subsidiary, the Company develops and sells
three retail software products. EMail Connection(R) is an electronic mail
communications management package which collects email from commercial online
sources, such as Prodigy, America Online and many other Internet access
providers. Many computer users have multiple addresses and EMail ConnectionR
simplifies collecting electronic mail. In addition, it allows encrypted message
transfers, supports SkyTel Pager communications and receives telecopier
transmissions.
The two other ConnectSoft products are children's applications - an
Internet browser product as an email product designed for children between five
and 10 years old. The email product, known as EMail for Kids(TM), has similar
features as EMail Connection(R) in that it allows access to popular online
services and the Internet. KidWeb(TM) allows children access to the
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various Internet services and provides an easy to understand web brower using
animated characters. However, the Company believes that the unique feature of
its children's software products are that parents are capable of regulating the
content of email messages and restrict which Web pages their child can view.
Parents can create a Web "neighborhood" of pre-approved sites, and disallow
access to other Web sites deemed by them objectionable or inappropriate for
viewing. FIND S.V.P. User's Survey for 1995 calculated that approximately 6.5
million American personal computer family households purchased children's
software in 1995 and approximately 41% of all Internet users named e-mail as the
principal reason for their access to the Internet.
The Company recently began marketing its retail products through
distributors, such as Tech Deta, Micro Central and Navarre. Suggested retail
prices are EMail Connection(R) - $49.95; KidWeb(TM) - $39.95; and EMail for
Kids(TM) - $29.95.
Internet Engineering, Design and Consulting
Through its acquisition of InterGlobe Networks, Inc.("Interglobe"), the
Company provides network system implementation and consulting for corporate
Intranet and Internet communications systems. Services and software provided by
InterGlobe include:
Network Design and Management Services.
InterGlobe provides network design and management for businesses and
individuals with obsolete or deficient network structures. The rapid advance of
network systems necessitates a comprehensive solution to obsolescence which
includes evaluation, network design and implementation for functional
effectiveness. In addition to managing ConnectSoft's existing Network Operation
Center ("NOC") located in Seattle, Washington, InterGlobe has recently commenced
providing consulting services for Compuserve Incorporated, which includes
building a NOC in Columbus, Ohio and providing ongoing support services for the
facility. Compuserve is a major online service providing business network and
Internet access to its subscribers. InterGlobe provides ongoing technical
support with automatic and remote monitoring for its network design systems. The
Company believes that there will be considerable growth in providing ongoing
support services for clients networks, as a result of which the Company is in
the process of increasing its engineering and support staff.
Corporate Intranet Systems and Connectivity Software
InterGlobe also develops custom built Intranet systems designed for
corporate clients, who desire access to a paperless intra-office and external
communications email system. Its current major customer is the Eddie Bauer.
Inc, retail chain.
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Consulting and System Integration
In addition to designing networks and managing systems for specific
customers, InterGlobe also provides specialized Internet and Intranet consulting
services for corporate clients. Its customers include GE Capital Corporation, US
West, The American Automobile Association and Hewlett Packard Corporation.
Regional Internet Service
The Company's subsidiary, Seattle OnLine Corp. ("Seattle OnLine") is
engaged in the production of regional web-sites that showcase metropolitan
areas. Seattle OnLine is a full solution Internet marketing firm that designs,
builds and manages corporate Inter/Intranet sites, including interactive
catalogs and databases for businesses in Seattle, Washington and throughout the
nation. Seattle Online has formed alliances and teamed with a number of major
corporations with a major regional focus to create a comprehensive metropolitan
entertainment and resources guide. Clients include the Seattle Space Needle and
the Washington State Ferry System.
The Company intends to use the Seattle Online concept as a prototype for
expansion into other major metropolitan areas, including cities in which Seattle
Online is registered to establish regional web-sites showcasing the particular
metropolitan area. The Company plans to introduce the marketing program in
approximately 18 additional cities in 1997.
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Proposed Acquisition of the BTS Companies
The Company intends to consummate the acquisition of the BTS Companies in
December 1996. However, as a definitive BTS Merger Agreement has not, as yet,
been executed, there is no assurance that this transaction will be consummated
or that the Company will ever provide services to the wireless communications
industry. See, "History and Recent Acquisitions," above.
The BTS Companies provide consulting services to clients involved in a
variety of wireless communications (cellular telephone) applications. The BTS
Companies offer a variety of turnkey solutions, including site acquisition,
zoning and permitting services to facilitate the location of a wireless network
broadcasting system, architectural and engineering services related to the
design, development and construction of wireless communcations network
facilities, management of wireless network sites, and general management of
wireless communications network projects.
The BTS Companies locate appropriate sites for the construction of a
wireless network broadcasting system, represent the client in negotiations with
the owner-landlord; and provide a comprehensive preliminary site report
including photographic survey, preliminary zoning analysis and access and
service availabilities. Site zoning and permitting services include obtaining
FAA clearing filings and preliminary site plans; obtaining zoning and permitting
applications and approvals; preparation of supporting materials for presentation
at public hearings; preparation of final site plans and obtaining construction
permits. Architectural and engineering services provided include the conduct of
site feasibility studies; providing preliminary cost estimates; development of
architectural, structural, mechanical and other construction site drawings,
plans and specifications (including cable and tray routing); determining of
electrical requirements; structural analysis of parapets, roofs, towers,
watertanks and other structures; design of heating and air conditioning systems;
topographic surveys; soil investigation and reports; and furnishing final "as
built" drawings and plans.
With over 45 architectural, engineering and other professional employees,
the BTS Companies have rendered or are rendering continuing services for clients
such as American Personal Communications, AT&T Wireless Communications, Bell
Atlantic, Bell South Mobility, Shenandoah Mobile Company, Trammel Crow/LCC,
dextel Communications and Vanguard Cellular.
Sales and Target Markets
Remote Computing
The Company is targeting large national and world-wide organizations using
existing UNIX systems and X-Terminals as the primary customers for its remoting
technology. In many large establishments, there is a heterogeneous mix of
computing platforms, including DOS systems, Windows 3.x systems, UNIX
workstations, X-Terminals and Macintosh computers.
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In conjunction with its licensed WiNTimes(TM) Multi-User Software, the Company
believes that its superior remoting technology will enable it to capture a
significant portion of the UNIX workstation and X-Terminal markets.
The Company is presently testing the NTerprise(TM) product with Motorola
Corporation in connection with the introduction of a Windows NT 4.0 application
to enhance access by a European country's government agency to information from
police stations throughout such country. In the event that Motorola awards a
contract to the Company, management believes that revenues under this agreement
could equal $10 million over a period of three years. In addition to Motorola, a
number of other potential customers have recently requested the Company to
provide demonstrations and quotations for the NTerprise(TM) solution.
To date, the Company has not been awarded a contract for NTerprise(TM)
by Motorola or any other customer, and there can be no assurance that any
such contract will be awarded or, if awarded, that it will prove meaningful
and profitable to the Company. In addition, even if Motorola were to elect to
order NTerprise(TM), the Company would not be able to fulfill such contract
unless it were able to license the right to sell a software package for use
with Microsoft's Windows NT 4.0 operating system. At the present time, the
Company has no direct license from Microsoft for Windows NT4.0, and licenses
the WiNTimes(TM) Multi-user Software from Prologue only in Windows NT 3.5
version. Athough the Company's agreements with Prologue provide that (subject
to certain conditions) at such time as Prologue obtains a license from
Microsoft to sell software for the Windows NT4.0 operating systems, the
Company's license with Prologue will be extended to include the Windows NT4.0
operating system, there can be assurance that Prologue will obtain a direct
license from Microsoft in the near future, if at all.
In the event that Prologue is not able to license Windows NT4.0 to the
Company in time to enable the Company to fulfill a contact which may be
awarded by Motorola or other similar customer, in the absence of the
Company's ability to obtain a direct license from Microsoft for Windows NT4.0
or a sublicense from Citrix, the business of the Company could be materially
and adversely affected.
The Company markets its retail EMail ConnectionR, EMail for Kids(TM) and
KidWeb(TM) products through three independent distributors, advertising in
magazines and trade journals, and aggressively working on product comparisons in
computer magazines. The EMail Connection is also marketed directly to customers
via on-line sales through the Worldwide Web and through electronic direct mail
campaigns to the registered customer base. EMail for Kids and KidWeb are
marketed through direct sales programs aimed at schools.
Interglobe markets its Internet engineering, design and consulting
services through advertising in trade journals and magazines customarily used by
information systems managers. In addition, Interglobe obtains a number of its
customer through client referrals.
Seattle On-Line advertises its local web site services primarily through
advertising in computer publications and trade journals.
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License Agreement
The Company has entered into a three year license with Prologue, effective
as of June 1, 1996, pursuant to which the Company was granted: (i) the exclusive
right and license to sell, distribute, exploit and demonstrate WiNTimes(TM)
within North America, as an original equipment manufacturer in combination with
the Company's Remoting Software, for the UNIX and X-Terminal markets; and (ii)
a non-exclusive license to sell such products in other markets within such
territory. However, such license permits Prologue to license WiNTimes(TM) within
the Company's exclusive territory to any other original equipment manufacturer
("OEM") if, after the Company has attempted to sell the WiNTimes(TM)/
NTerprise(TM) combination to a potential OEM customer, a special committee
comprised of two Company designees, three Prologue designees and two independent
persons shall determine, in good faith, that there is a risk that refusing to
grant such a license to the OEM would result in such OEM keeping or acquiring
the Citrix NT Multi-user Software in lieu of WiNTimes(TM). Prologue has recently
advised the Company that it desires to license WiNTimes(TM) to NCD, a direct
competitor of the Company, as NCD allegedly would not acquire the WiNTimes(TM)
directly from the Company or combined with the NTerprise(TM) solution. The
Company is currently considering such request. Under the terms of the license,
if it is determined that Prologue is entitled to license its Multi-user Software
to NCD or another OEM, the Company is entitled to receive 30% of all royalties
and other payments which Prologue may receive from such OEM licensee for the
UNIX and X-Terminal markets.
Under the terms of the Prologue license, the Company paid Prologue initial
cash payments aggregating $450,000, issued 100,000 shares of Company Common
Stock and agreed to pay certain ongoing royalties or floor price payments per
"seat" connection in lieu of royalties. The license agreement is currently
limited to WiNTimes(TM) software for Windows NT 3.5 version. In October 1996,
the Company and Prologue entered into a limited access license, pursuant to
which the Company was granted limited access to Windows NT 4.0 source codes,
solely for the purpose of developing NTerprise(TM) in Windows NT 4.0 version and
testing and demonstrating such software for a potential customer. However, in
order for the Company to sell its remoting computer software to the UNIX and
X-Terminal markets in Windows NT 4.0 version, Prologue's existing license with
Microsoft which expired on October 31, 1996 is required to be renewed to include
such upgraded Windows NT 4.0 version. See "Future Performance and Risk Factors"
below.
Employees
At October 31, 1996, ConnectSoft, eXodus, Interglobe and Seattle On-Line
employed 84 full-time employees. Of that number, 10 are officers, 9 are involved
in administration and clerical activities, 26 are involved in engineering and
software development, 18 are involved in sales and marketing, and 21 are
involved in customer service and support. None of such employees are covered by
a collective bargaining agreement. The Company believes that its relations with
its employees are satisfactory.
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Future Performance and Risk Factors
The future performance, operating results and financial condition of the
Company's Technology Business are subject to various risks and uncertainties,
including those described below.
Competition
The markets in which the Company competes are intensely competitive and
are characterized by rapidly changing technology and evolving industry
standards.
Competitive factors in the remote computing product market include
completeness of features, product quality and functionality, marketing and sales
resources and customer service and support. The Company faces extensive
competition from Citrix and its licensees, including Tektronics, Insignia and
NCD; all of whom are significantly larger than the Company and have
substantially greater financial resources. In addition, the Company's ability to
provide customers with access to the new Windows NT 4.0 operating system will be
adversely impacted if Prologue is unable to obtain in the near future a direct
license from Microsoft to enable Prologue to provide the Company with Multi-user
Software in Windows NT 4.0 version for NTerprise(TM). While the Company believes
that the features available on its Remoting Software provides UNIX and
X-Terminal users with the maximum flexibility to integrate Windows applications,
there can be no assurance that the Company will be able to establish and
maintain a market position in the face of increased competition.
In addition, alternative products exist for accessing information or
databases over the Internet that indirectly compete with the Company's remoting
computing products. Existing or new products that extend web site software to
provide database access or interactive computing can materially impact the
Company's ability to sell its remoting computer products into the UNIX and
X-Terminal markets. Potential competitors include all of the makers of Web
server and browser software, including Microsoft, Netscape, Quarterdeck, Silicon
Graphics and Sun Microsystems. Other key competitors in the multi-user graphical
platform market include SunSoft, Hewlett Packard and other manufacturers of UNIX
application servers, to the extent that they are able to provide a low-cost
graphical computing platform for Microsoft's Windows applications.
As is the case with its remoting products, the Company's EMail
ConnectionR, KidsWeb(TM) and EMail for Kids(TM) software also face intense
competition from other developers and marketers of personal productivity
software products sold at retail. There are a number of email and Web browser
products on the market, many of which are produced by companies that are
significantly larger and better capitalized than the Company. Although the
Company believes that its e-mail and web browser products are the only ones
currently available which permit parents to monitor the content of programs
accessed by their children on the Internet, a number of larger competitors are
in the process of introducing a similar technology. There is no assurance that
the Company will be able to establish a sufficient customer basis or market
presence to withstand
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a well financed marketing campaign from a more substantial competitor with a
competing product for the children's market.
The Company's businesses engaged in Internet design, engineering and
consulting services, as well as the development of web sites for local
advertisers, face competition from numerous regional and national computer and
telecommunications consultants, as well as from many of the major software and
hardware manufacturers who provide full customer support and service for their
products, which often include consulting and advisory services.
Significant Investment
Since its effective May 1, 1996 acquisition of ConnectSoft, through
October 31, 1996, the Company has expended over $6.5 million in personnel, debt
and lease payments and settlements and other operating expenses associated with
ConnectSoft, eXodus, InterGlobe and Seattle On-Line, exclusive of approximately
$400,000 in cash paid to former stockholders of such companies in connection
with the acquisition of such companies. It may be anticipated that the
ConnectSoft and eXodus operations will continue to lose money and represent a
negative cash flow to the Company, at least in the near term. There can be no
assurance that these subsidiaries, or the Company's Technology Business as a
whole, will not continue to represent a significant drain on cash resources or
will ever prove to be profitable.
Evolving Network Computing Market
The Company's future success in developing and selling multi-user remote
solutions will depend in substantial part upon increased acceptance and
successful marketing of such products. There can be no assurance that the
Company's remoting computer software, whether marketed with WiNTimes(TM)
Multi-user Software, or as an alternate solution, will be widely adopted in the
rapidly evolving desktop computer market. In addition, it is possible that
Microsoft may develop its own Multi-user Software and/or Remoting Software for
sale to users of UNIX and X-Terminal workstations. The failure of new markets to
develop for the Company's network computing products could have a material
adverse effect on the Company's business, operating results and financial
condition.
New Product Development and Timely Introduction of New and Enhanced
Products
The markets for the products and services provided by the Company's
technology business are characterized by rapidly changing technologies, evolving
industry standards, frequent new product introductions and short product life
cycles. The Company's future in such businesses will depend to a considerable
extent on its ability to continuously develop, introduce and deliver in quantity
new software products that offer its customers enhanced performance at
competitive prices, and to offer new services at competitive prices that meet
the demands of a rapidly changing marketplace. The development and introduction
of new products and service is a complex and uncertain process requiring
substantial financial resources and high levels of innovation, accurate
anticipation of technological and market trends and the successful and
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timely completion of product development. The inability to finance important
software development projects, delays in the introduction of new and enhanced
products and services, the failure of such products and services to gain market
acceptance, or problems associated with new products could materially and
adversely affect the Company's operating results.
Proprietary Technology and Dependence on Licenses
The Company's success in its Remoting Software is heavily dependent upon
proprietary technology. While the Company has filed [one] patent application, to
date, the Company has no patents, and existing copyright laws afford only
limited protection for the Company's software. Accordingly, the Company relies
heavily on trade secret protection and confidentiality and proprietary
information agreements to protect its proprietary technology. The loss of any
material trade secret could have a material adverse effect on the Company. There
can be no assurance that the Company's efforts to protect its proprietary
technology rights will be successful. Despite the Company's precautions, it may
be possible for unauthorized third parties to copy certain portions of the
Company's software or to obtain and use information that the Company regards as
proprietary.
While the Company's competitive position may be affected by its ability to
protect its proprietary information, the Company believes that because of the
rapid pace of technological change in the industry, factors such as the
technical expertise, knowledge and innovative skill of the Company's management
and technical personnel, its strategic relationships, name recognition, the
timeliness and quality of support services provided by the Company and its
ability to rapidly develop, enhance and market software products may be more
significant in maintaining the Company's competitive position.
In addition, under the terms of the Company's license with Prologue, under
certain conditions Prologue may license Prologue's Multi-user Software to direct
competitors of the Company. See "License Agreement" above. Although the Company
believes that the key element in providing enterprise customers with access to
Windows NT in a UNIX or X-Terminal environment is the reliability and
flexibility of the OEM's Remoting Software, as opposed to the Multi-user
Software furnished primarily by Citrix and Prologue, to the extent that more
well financed competitors are given access to Prologue's WiNTimes(TM) software
the Company's marketing efforts could be adversely impacted.
Dependence on Key Personnel
The Company's success in its technology business depends to a significant
degree upon the continuing contributions of its senior management and other key
employees. The Company believes that its future success will also depend in
large part on its ability to attract and retain highly-skilled programmers,
engineers, sales and marketing personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting, integrating and retaining such personnel. Failure to attract or
retain existing and
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additional key personnel could have a material adverse effect on the Company's
technology business, operating results or financial condition.
THE DISTRIBUTION BUSINESS
The Equipment
New Case Construction Equipment.
The construction equipment (the "Equipment") sold, rented and serviced by
Western generally consists of: backhoes (used to dig large, wide and deep
trenches); excavators (used to dig deeply for the construction of foundations,
basements, and other projects); log loaders (used to cut, process and load
logs); crawler dozers (bulldozers used for earth moving, leveling and shallower
digging than excavators); wheel loaders (used for loading trucks and other
carriers with excavated dirt, gravel and rock); roller compactors (used to
compact roads and other surfaces); trenchers (a small machine that digs trenches
for sewer lines, electrical power and other utility pipes and wires); forklifts
(used to load and unload pallets of materials); and skid steer loaders (smaller
version of a wheel loader, used to load and transport small quantities of
material--e.g., dirt and rocks around a job site). The sale prices of this
Equipment ranges from $15,000 to $350,000 per piece of equipment.
Under the terms of standard Case dealer agreements, Western is an
authorized Case dealer for sales of Equipment and related parts and services at
locations in the states of Oregon, Washington, Nevada and Northern California
(the "Territory"). The dealer agreements have no defined term or duration, but
are reviewed on an annual basis by both parties, and can be terminated without
cause at any time either by Western on 30 days' notice or by Case on 90 days'
notice. Although the dealer agreements do not prevent Case from arbitrarily
exercising its right of termination, based upon Case's established history of
dealer relationships and industry practice, Western does not believe that Case
would terminate its dealer agreement without good cause.
The dealer agreements do not contain requirements for specific minimum
purchases from Case. In consideration for Western's agreement to act as dealer,
Case supplies to Western items of Equipment for sale and lease, parts,
cooperative advertising benefits, marketing brochures related to Case products,
access to Case product specialists for field support, the ability to use the
Case name and logo in connection with the Western's sales of Case products, and
access to Case floor plan financing for Equipment purchases. Such floor planning
arrangements currently provides Western with interest free credit terms of
between six months and nine months on purchases of specified types of Equipment.
Principal payments are generally due at the earlier of sale of the equipment or
twelve to fifteen months from the invoice date.
Other Products.
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Although the principal products sold, leased and serviced by Western are
manufactured by Case, Western also sells, rents and services equipment and sells
related parts (e.g., tires, trailers and compaction equipment) manufactured by
Hamm and by others. Approximately 25% of Western's net sales for fiscal year
1996 resulted from sales, rental and servicing of products manufactured by
companies other than Case.
Western's distribution business is generally divided into four categories
of activity: (i) New Equipment sales and rentals, (ii) used Equipment sales and
rentals, (iii) Equipment servicing, and (iv) parts sales.
New Equipment Sales and Rental.
At each of its distribution outlets, Western maintains a fleet of various
items of Equipment for sale or rental for periods ranging from one week to up to
nine months (customarily with purchase options at the end of the rental period).
The Equipment purchased for each outlet is selected by Western's marketing staff
based upon the types of customers in the geographical areas surrounding each
outlet, historical purchases as well as anticipated trends. Each distribution
outlet has access to Western's full inventory of Equipment.
Western's new Equipment rental business has historically been an adjunct
to its new Equipment sales. To assist customers, any new Equipment can be rented
generally for periods of up to nine months and a portion of customer rental
payments may be applied to the purchase price down payment.
Western provides only the standard manufacturer's limited warranty for new
equipment, generally a one-year parts and service repair warranty. Customers can
purchase extended warranty contracts.
Western maintains a separate fleet of new Equipment that it generally
holds solely for rental. Such Equipment is generally held in the rental fleet
for 12 months and then sold as used Equipment with appropriate discounts
reflecting prior rental usage. As rental Equipment is taken out of the rental
fleet, Western adds new Equipment to its rental fleet as needed. The rental
charges vary, with different rates for different items of Equipment rented.
Used Equipment Sales and Rentals.
Western sells and rents used Equipment that has been reconditioned in its
own service shops. It generally obtains such used Equipment as "trade-ins" from
customers who purchase new items of Equipment and from Equipment previously
rented and not purchased. Unlike new Equipment, Western's used Equipment is
generally sold "as is" and without manufacturer's warranty. Used Equipment is
customarily rented only after available new Equipment has been rented. The
rental charge for such used Equipment is equal to that of rented new Equipment.
Used rental Equipment is first reconditioned by Western prior to being offered
for rent, and is typically not more than three years old.
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Equipment Servicing.
Western operates a service center and yard at each retail outlet for the
repair and storage of Equipment. Both warranty and non-warranty service work is
performed, with the cost of warranty work being reimbursed by the manufacturer
following the receipt of invoices from Western. Western employs approximately
100 manufacturer-trained service technicians who perform Equipment repair,
preparation for sale and other servicing activities. Equipment servicing is one
of the higher profit margin businesses operated by Western. Western has expanded
this business by hiring additional personnel and developing extended warranty
contracts for Equipment service terms, and independently marketing such
contracts to its customers. Western, services items and types of Equipment which
include those that are neither sold by Western nor manufactured by Case.
Parts Sales.
Western purchases a large inventory of parts, principally from Case, for
use in its Equipment service business, as well as for sale to other customers
who are independent servicers of Case Equipment. Generally, parts purchases are
made on standard net 30 days terms.
Western employs one or more persons who take orders from customers for
parts purchases at each retail distribution outlet, the majority of such orders
are placed in person by walk-in customers. Western provides only the standard
manufacturer's warranty on the parts that it sells, which is generally a 90-day
replacement guaranty.
Sales and Marketing.
Western's customers are typically residential and commercial building
general contractors, road and bridge contractors, sewer and septic contractors,
underground power line contractors, persons engaged in the forestry industry,
equipment rental companies and state and municipal authorities. Western
estimates that it has approximately 16,000 customers, with most being small
business owners, alone of which accounted for more than 5% of its total sales in
the fiscal year ended July 31, 1996.
For the fiscal year ended July 31, 1996, the revenue breakdown by source
for the business operated by Western was approximately as follows:
New Equipment Sales 58%
Used Equipment Sales 12%
Rental Revenue 9%
Parts Sales 17%
Service Revenue 4%
-----
100%
=====
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Western advertises its products in trade publications and appears at trade
shows throughout its territory. It also encourages its salespersons to visit
customer sites and offer Equipment demonstrations when requested.
Western's sales and marketing activities do not result in an significant
backlog of orders. Although Western has commenced acceptance of orders from
customers for future delivery following manufacture by Case, during fiscal 1996
substantially all of its sales revenues resulted from products sold directly out
of inventory, or the providing of services upon customer request.
All of Western's sales personnel are employees of Western and all are
under the general supervision of C. Dean McLain, the President and Chief
Executive Officer of Western. Each Equipment salesperson is assigned a separate
exclusive territory, the size of which varies based upon the number of potential
customers and anticipated volume of sales, as well as the geographical
characteristics of each area. Western employed 67 Equipment salespersons on July
31, 1996.
On July 31, 1996, Western employed 5 product support salespersons who sell
Western's parts and repair services to customers in assigned territories.
Western has no independent distributors or non-employee sales representatives.
Suppliers
Western purchases approximately the majority of its inventory of Equipment
and parts from Case. No other supplier currently accounts for more than 5% of
such inventory purchases in fiscal 1996. While maintaining its commitment to
Case to primarily purchase Case Equipment and parts as an authorized Case
dealer, in the future Western plans to expand the number of products and
increase the aggregate dollar value of those products which Western purchases
from manufacturers other than Case.
Competition
Western competes with distributors of construction equipment and parts
manufactured by companies other than Case on the basis of price, the product
support (including technical service) that it provides to its customers, brand
name recognition for its Case and other products, the accessibility of its
distribution outlets, the number of its distribution outlets, and the overall
quality of the Case and other products that it sells. Western management
believes that it is able to effectively compete with distributors of products
produced and distributed by such other manufacturers primarily on the basis of
overall Case product quality, and the superior product support and other
customer services provided by the Company.
Case's two major competitors in the manufacture of a full line of
construction equipment of comparable sizes and quality are Caterpillar
Corporation and Deere & Company. In addition, other manufacturers produce
specific types of equipment which compete with the Case Equipment and other
Equipment distributed by Western. These competitors and their product
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specialties include JCB Corporation--backhoes, Kobelco Corporation--excavators,
Dresser Industries--light and medium duty bulldozers, Komatsu Corporation--
wheel loaders and crawler dozers, and Bobcat, Inc.--skid steer loaders.
Western is currently the only Case dealer for construction equipment in
the states of Washington and Nevada and in the Northern California area (other
than Case-owned distribution outlets), and is one of two Case dealers in the
State of Oregon. However, Case has the right to establish other dealerships in
the future in the same territories in which the Company operates. In order to
maintain and improve its competitive position, revenues and profit margins,
Western plans to increase its sales of products produced by companies other than
Case.
Environmental Standards and Government Regulation
Western operations are subject to numerous rules and regulations at the
federal, state and local levels which are designed to protect the environment
and to regulate the discharge of materials into the environment. Based upon
current laws and regulations, Western believes that its policies, practices and
procedures are properly designed to prevent unreasonable risk of environmental
damage and the resultant financial liability to Western. No assurance can be
given that future changes in such laws, regulations, or interpretations thereof,
changes in the nature of Western's operations, or the effects of former
occupants' past activities at the various sites at which Western operates, will
not have an adverse impact on the Company's operations.
Western is subject to federal environmental standards because in
connection with its operations it handles and disposes of hazardous materials,
and discharges sewer water in its equipment, servicing operations. Western
internal staff is trained to keep appropriate records with respect to its
handling of hazardous waste, to establish appropriate on-site storage locations
for hazardous waste, and to select regulated carriers to transport and dispose
of hazardous waste. Local rules and regulations also exist to govern the
discharge of waste water into sewer systems.
In September 1992, prior to Western becoming an authorized Case dealer,
Case received an environmental report indicating certain contamination
conditions which were to be rectified by Case in connection with the selling of
retail outlets to the Company in connection with the 1992 Case Transaction. In
addition, following the 1992 Case Transaction, additional environmental reports
were prepared or obtained concerning the progress and cost of remediation
projects at those facilities. Western did not assume any of Case's obligations
for site remediation when it completed the acquisition from Case of certain
assets used in connection with Western's retail facilities, and no accruals for
such clean-up costs appear on the Company's financial statements.
In July 1994, prior to Western's acquisition of the Sparks, Nevada
property, Case received an environmental report indicating certain contamination
conditions which were to be rectified by Case in connection with the sale of
that retail outlet to Western. Such remediation was completed prior to November
22, 1994. Western did not assume any of Case's obligations for site remediation
when it completed the acquisition from Case of certain assets used in
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connection with Western's retail facilities, and no accruals for such clean-up
costs appear on Western's financial statements.
Employees
At July 31, 1996, Western employed 298 full-time employees. Of that
number, 24 are in corporate administration for Western, 17 are involved in
administration at the branch locations, 77 are employed in Equipment sales and
rental, 63 are employed in parts sales, and 117 are employed in servicing
construction equipment. None of Western's employees are covered by a collective
bargaining agreement. Western believes that its relations with its employees are
satisfactory.
Insurance
Western currently has product liability insurance policies covering
Western with $500,000 limits for each occurrence and $1,000,000 in the aggregate
under the general liability and products liability policies. Western also has an
umbrella liability insurance policy with an annual aggregate coverage limit of
$10,000,000. Western believes that its product liability insurance coverage is
reasonable in amount and consists of such terms and conditions as are generally
consistent with reasonable business practice, although there is no assurance
that such coverage will prove to be adequate in the future. An uninsured or
partially insured claim, or a claim for which indemnification is not available,
could have a material adverse effect upon Western.
25
<PAGE>
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 29, 1996
AMERICAN UNITED GLOBAL, INC.
By: /S/ Robert M. Rubin
-------------------------
Robert M. Rubin, Chairman
In accordance with the Securities Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated
Signatures Title Date
---------- ----- ----
/S/ Robert M. Rubin Chairman of the Board, November 29, 1996
- ----------------------- Chief Executive Officer
Robert M. Rubin and Director
/S/ C. Dean McLain Executive Vice President November 29, 1996
- --------------------- and Director
C. Dean McLain
Director
- ----------------------
Lawrence E. Kaplan
/S/ David M. Barnes Vice President-Finance November 29, 1996
- ----------------------- and Chief Financial
David M. Barnes and Chief Accounting Officer
/S/ Artour Baganov President of Interglobe November 29, 1996
- ---------------------- Networks, Inc. and Director
Artour Baganov
Executive Vice President
- ------------------- and Director
Howard Katz
