-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NdRwW1Rvi8NWazrxBbOEb76kU7tnmnW7ip89GnSmUPy6d01f2FnYsQRxFxq3SDu6 girwqY1wKUqxrCKsRYStnw== 0000912057-96-028032.txt : 19961203 0000912057-96-028032.hdr.sgml : 19961203 ACCESSION NUMBER: 0000912057-96-028032 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19961202 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN UNITED GLOBAL INC CENTRAL INDEX KEY: 0000859792 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-CONSTRUCTION & MINING (NO PETRO) MACHINERY & EQUIP [5082] IRS NUMBER: 954359228 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-19404 FILM NUMBER: 96674896 BUSINESS ADDRESS: STREET 1: 25 HIGHLAND BLVD CITY: DIX HILLS STATE: NY ZIP: 11746 BUSINESS PHONE: 5162542134 MAIL ADDRESS: STREET 1: 25 HIGHLAND BLVD CITY: DIX HILLS STATE: NY ZIP: 11746 FORMER COMPANY: FORMER CONFORMED NAME: ALROM CORP DATE OF NAME CHANGE: 19600201 10-K/A 1 10-K/A 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 - ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11130 NE 33rd Place, Suite 250 Bellevue, Washington 98004 --------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (206)803-5400 Securities registered pursuant to Section 12(b) of the Exchange Act Title of Each Class Name of Each Exchange of Which Registered - ------------------- ----------------------------------------- None None ---- ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value ----------------------------------------------------------- (Title of Class) Check whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X NO ----- ----- Transitional Small Business Disclosure Format Yes NO X ----- ----- Check if there is no disclosure of delinquent filers in response to item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ----- The aggregate market value of the voting stock held by non-affiliates of the issuer as of November 7, 1996 was $48,989,100. ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes NO ----- ----- APPLICABLE ONLY TO CORPORATE REGISTRANTS The number of shares outstanding of the registrant's Common Stock, $.01 Par Value, on November 6, 1996 was 7,266,382 shares. Documents incorporated by reference: None PART I ITEM 1. DESCRIPTION OF BUSINESS General American United Global, Inc., a Delaware corporation (the "Company"), through its operating subsidiaries, is engaged in two distinct businesses; a technology business and a distribution business. The Company's technology business provides computer software and networking as well as telecommunications products and services. Such products and services currently consist of: (a) a remote access connectivity software protocol, known as Nterprise(TM), which allows users to run Microsoft Windows(TM) applications, such as Word(TM), Excel(TM) and PowerPoint(TM), on existing UNIX workstations, X-terminals and other X-compatable devices; (b) an electronic mail communications management software product, marketed as EMail ConnectionR, and an e-mail product and Internet browser designed for children, marketed as E Mail for Kids(TM) and Kids Web(TM); (c) providing network engineering, design and consultation services; network security; remote network management and monitoring as well as Intranet development; and (d) providing a regional Internet/Intranet telecommunication service in the form of high bandwidth Internet connectivity and hosting for businesses in the Pacific Northwest. The Company has also entered into a letter of intent to acquire businesses which provide site acquisition, zoning, architectural and engineering services to the wireless communications industry. The Company's distribution business consists of the sale, service and leasing, as a retail distributor, of light and medium-sized construction equipment, parts and other products manufactured principally by Case Corporation. Such distribution business operates through the Company's 56.6%-owned subsidiary, Western Power & Equipment Corp., a Delaware corporation ("Western"). Western principally operates as an authorized Case Corporation ("Case") dealer through 19 retail distribution facilities located in the States of Washington, Oregon, California and Nevada. The construction equipment distributed by the Company is used in the construction of residential and office buildings, roads, levees, dams, underground power projects, forestry projects, municipal construction and other construction projects. Prior to January 1996, the Company also operated a manufacturing business through two operating subsidiaries: (i) the National O-Ring division of American United Products, Inc., a California corporation ("AUP"), which manufactured and distributed standard-size, low cost synthetic rubber o-ring sealing devices for use in automotive and industrial applications and (ii) the Stillman Seal division of American United Seal, Inc., a California corporation ("AUS"), which specialized in the design, manufacture and distribution of rubber-to-metal bonded sealing devices for use in commercial, aerospace, defense and communications industry applications. 2 On January 19, 1996, the Company sold all of the operating assets of the manufacturing business. See, "History and Recent Acquisitions," below. History and Recent Acquisitions The Company was initially organized as a New York corporation on June 22, 1988 under the name Alrom Corp. ("the Company"), and completed an initial public offering of securities in August 1990. Effective on May 21, 1991, the Company acquired by merger American United Global, Inc., a California corporation ("AUG"), and the AUP and AUS wholly-owned operating subsidiaries of AUG (the "AUG Merger"). As a result of the AUG Merger, AUG became the wholly-owned subsidiary of the Company, and the former shareholders of AUG gained control of the Company through the ownership of approximately 78% of the then outstanding Company Common Stock. Prior to the AUG Merger, the Company had no operations. The Company effected a statutory merger in December 1991, pursuant to which the Company was reincorporated in the State of Delaware under the name American United Global, Inc. Effective June 1, 1992, through a wholly-owned subsidiary, the Company acquired substantially all of the assets of Aerodynamic Engineering, Inc. ("Aero") and certain assets owned and used by Aero, a company engaged in the business of precision machining metal parts for the aerospace and defense industries. The Company sold the assets of its AEI subsidiary on April 29, 1994. Effective November 1, 1992, the Company's newly-formed Western subsidiary completed the acquisition from Case of certain assets used in connection with seven separate Case retail construction equipment distribution operations located in the States of Washington and Oregon. Effective September 10, 1994 Western purchased from Case two retail construction equipment distribution outlets located in Sparks, Nevada and Fremont, California. In December 1994 Western relocated the Fremont outlet to Hayward, California. Under the terms of the 1994 Case transaction, Western was obligated to open two additional distribution outlets in Northern California. In March 1995 Western opened a retail store in Santa Rosa, California. In August 1995 Western opened a retail store in Salinas, California. See Part II, Item 7, "Management's Discussion and Analysis of Results of Operations and Liquidity and Capital Resources--Liquidity and Capital Resources." In June 1995 Western completed an initial public offering of 1,495,000 shares of its common stock. This public offering reduced the Company's interest in Western to 56.6%. In January 1996, the Company and each of its AUG, AUP and AUS subsidiaries, sold all of the assets of the National O-Ring and Stillman Seal businesses comprising the manufacturing business of the Company to, and substantially all of the liabilities associated with operation of such manufacturing business were assumed by, subsidiaries of Hutchinson Corporation ("Hutchinson"). A subsidiary of Total America, Inc., a New York Stock Exchange 3 listed company ("Total"), Hutchinson produces a variety of rubber related products for three market sectors; automotive, consumer and industrial use. The purchase price paid by Hutchinson for the manufacturing business was $24,500,000, $20,825,000 of which was paid in cash and the aggregate $3,675,000 balance was paid by delivery of two 24-month non-interest bearing promissory notes. The Hutchinson notes, which have been discounted for financial statement presentation by $638,000, are guaranteed by Total. Following the sale of its manufacturing business, the Company's Board of Directors and senior management sought to refocus the business direction of the Company and determined that stockholder value could best be enhanced by entering the computing and telecommunications industries. As a result, the Company embarked upon an acquisition program and, between May and November 1996, acquired three companies and contracted to acquire a fourth. The terms of such acquisitions are summarized as follows: Effective as of May 1, 1996, the Company acquired, through a merger with an acquisition subsidiary of the Company consummated in August 1996 (the "ConnectSoft Merger"), all of the outstanding capital stock of ConnectSoft, Inc. ("ConnectSoft"), a private company located in Bellevue, Washington, which provides a variety of computer software products and services. In connection with the ConnectSoft Merger, ConnectSoft shareholders received, on a pro rata basis, an aggregate 972,351 shares of the Company's Series B Preferred Stock (the "Preferred Stock"). Such Preferred Stock does not pay a dividend, is not subject to redemption, has a liquidation preference of $3.50 per share over Company Common Stock and votes together with the Company Common Stock as a single class on a one share for one vote basis. Each share of Preferred Stock is convertible into shares of Company Common Stock at the holder's option into a minimum of 972,351 shares of Company Common Stock and a maximum of 2,917,053 shares of Company Common Stock, based upon certain criteria. The Preferred Stock may be converted into shares of Company Common Stock as follows: (i) Each share of Preferred Stock may be converted, at any time, into one share of Company Common Stock (a minimum of 972,351 shares of such Common Stock if all such shares of Preferred Stock are so converted); (ii) In the event that the "Combined Pre-Tax Income" (as defined) of any or all of the "Subject Entities" (as defined) in any one of the three fiscal years ending July 31, 1997, July 31, 1998, or July 31, 1999 (each a "Measuring Fiscal Year" and collectively, the "Measuring Fiscal Years"): (a) shall equal or exceed $3,000,000, each share of Preferred Stock may be converted into two shares of Company Common Stock (a maximum of 1,944,702 shares of such Common Stock if all such shares of Preferred Stock are so converted); or 4 (b) shall equal or exceed $5,000,000, each share of Preferred Stock may be converted into three shares of Company Common Stock (a maximum of 2,917,053 shares of such Common Stock if all such shares of Preferred Stock are so converted). The "Subject Entities" include ConnectSoft and its consolidated subsidiaries (if any) and eXodus Technologies, Inc., a direct 75%-owned subsidiary of the Company ("eXodus") which has developed and is marketing the Nterprise remote access connectivity software originated by ConnectSoft. The 25% of eXodus not owned by the Company is held by current management and employees of eXodus, some of whom were pre-ConnectSoft Merger shareholders of ConnectSoft. Such persons waived their right to receive shares of Preferred Stock in the ConnectSoft Merger in consideration of their receipt of shares of eXodus. The Company intends to change the name of eXodus to Extare Technologies, Inc. The ConnectSoft Merger Agreement also provides that each share of Preferred Stock may be converted into three shares of Company Common Stock, notwithstanding the levels of Combined Pre-Tax Income achieved, in the event that (i) the Company sells the assets or securities of any of the Subject Entities for consideration aggregating $5,000,000 or more, (ii) the Company consummates an initial public offering of the securities of any of the Subject Entities (an "IPO") resulting in gross proceeds in excess of $10,000,000, or in a market valuation for 100% of the issuer's common stock equaling or exceeding $50,000,000, or (iii) a transaction occurs with any third party (whether tender offer, merger, consolidation or other combination) with the result that no shares of Company common stock will be publicly traded on The NASDAQ Stock Market or any other national securities exchange. Prior to consummation of the ConnectSoft Merger, the Company provided interim working capital financing for ConnectSoft which aggregated approximately $3.4 million, assumed all of ConnectSoft's operating expenses and liabilities, and received proxies to vote approximately 80% of the outstanding ConnectSoft capital stock in favor of the ConnectSoft Merger. The Company also agreed to increase its aggregate funding commitments to ConnectSoft and its related companies to a minimum of $5.0 million. In September 1996, the Company acquired, through a merger with a newly formed acquisition subsidiary of the Company (the "Interglobe Merger"), all of the outstanding capital stock of Interglobe Networks, Inc. ("Interglobe"), a private company providing engineering, design and consulting services for users and providers of telecommunications facilities on the Internet and other media. Pursuant to the terms of the Interglobe Merger, the Interglobe shareholders received the aggregate sum of $400,000 plus an aggregate of 800,000 shares of the Company's Common Stock. The former stockholders of Interglobe also received four-year employment agreements with Interglobe and the Company pursuant to which they received seven-year options to purchase an additional aggregate 800,000 shares of Company Common Stock at an exercise price of $6.00 per share (the "Interglobe Options"). The Interglobe Options shall vest and be exercisable (i) 5 25% on July 31, 1997 in the event that Interglobe achieves at least $250,000 of Pre-Tax Income (as defined) in the year ending July 31, 1997, (ii) 25% on July 31, 1998 in the event that Interglobe achieves at least $1,000,000 of Pre-Tax Income (as defined) in the year ending July 31, 1998, (iii) 25% on July 31, 1999 in the event that Interglobe achieves at least $2,000,000 of Pre-Tax Income in the year ending July 31, 1999, and (iv) the balance of such Interglobe Options in the event that Interglobe achieves at least $4,500,000 of Pre-Tax Income in the year ending July 31, 2000. Alternatively, all 800,000 Interglobe Options shall vest if, during the period commencing upon closing the Merger and terminating on July 31, 2000, the accumulated Pre-Tax Income of Interglobe has equalled or exceeded $7,750,000. In the event that a change in control of the Company occurs, or the Company effects a sale of all or substantially all of the assets of Interglobe, prior to July 31, 2000, all of the Interglobe Options shall immediately vest upon such occurrence. In addition, the Interglobe agreement provides that if the Company effects a public offering of Interglobe or a sale of Interglobe prior to July 31, 2000, the Interglobe stockholders may elect (but shall not be required) to exchange two-thirds of all Company securities received by them in the Interglobe Merger for an aggregate of 25% of the common stock of Interglobe owned by the Company prior to such transaction. Following completion of the Interglobe Merger, Artour Baganov, the President and Chief Executive Officer of Interglobe, was appointed as a member of the Board of Directors of the Company. On November 8, 1996 a newly formed wholly owned subsidiary of the Company, Seattle Online Acquisition Corp. (the "Buyer") acquired the assets of Seattle Online, Inc. (the "Seller"), a privately owned company engaged in providing a local internet service in the Pacific Northwest. The purchase price for the assets was the sum of $300,000 and up to 25,000 shares of the Company's Common Stock for use by the Seller in settlement of its debts. Keith Dieffenbach, the President and principal stockholder of the Seller entered into a three-year employment agreement with the Buyer, providing him an annual salary initially set at $125,000 per year, plus a bonus based upon exceeding certain minimum sales levels. Both Mr. Dieffenbach and the other minority stockholder of Seller also entered into non-competition and non-disclosure agreements for the benefit of the Seller and Buyer. In consideration for their covenants contained in such non-competition and non-disclosure agreements, the Company issued to such individuals three year warrants to purchase an aggregate of 333,333 shares of the Company's Common Stock. Of such warrants, the minority stockholder of Seller received three year warrants to purchase an aggregate of 28,333 shares of the Company's Common Stock at an exercise price of $6.00 per share. The balance of the warrants to purchase 305,000 shares of the Company's Common Stock were issued to Mr. Dieffenbach and are initially exercisable at $8.50 per share, which exercise price drops to $6.00 per share in the event that the Buyer generates net income before taxes of at least $150,000 at the end of either the six month period ending on May 31, 1997 or the fiscal year of Acquisition ending on July 31, 1997. In the event of a public offering of securities of the Buyer, Mr. Dieffenbach is entitled under certain circumstances (but not required) to exchange his Company warrants and the underlying warrant shares (to the extent 6 of prior exercise of such warrants) for shares aggregating up to 9.15% of the common stock of the Buyer immediately prior to such initial public offering. Finally, in the event that the Buyer generates net income before taxes of at least $340,000 and $2,650,000 (such amounts, the "Pre-Tax Income Targets") in the fiscal years ending July 31, 1997 and July 31, 1998 (such years, the "Measuring Years"), respectively (or, under certain circumstances, $2,990,000 of accumulated pre-tax income during both such fiscal years), the Company has agreed to guaranty to Mr. Dieffenbach that, during the 90-day period commencing October 1, 1998 and ending December 31, 1998 the average closing price of the Company's Common Stock, as traded on the Nasdaq National Market or other national securities exchange shall equal or exceed $6.00 per share more than the exercise price for the unexercised warrants; failing which the Company shall either reduce the exercise price of the warrants or repurchase the unexercised warrants at a price to enable the holder of such warrants to make up such difference. The aggregate dollar value of such guaranty is initially $1,830,000, assuming that no warrants have been exercised when the guaranty is applied, but it is subject to pro-rata increase to the extent that the Pre-Tax Income in the two Measuring Years exceeds $2,990,000, provided that in no event shall the guaranty amount exceed $3,660,000 irrespective of the Buyer's accumulated net income before taxes. Conversely, if the net income before taxes of the Buyer in each Measuring Year fails to reach the Pre-Tax Income Targets but (i) does equal or exceed at least 50% of the Pre-Tax Income Targets for each Measuring Year and (ii) the net income before taxes of the Buyer for its fiscal year ending July 31, 1998 is at least 80% of the net income before taxes for its fiscal year ending July 31, 1997, then the guaranty shall still apply but shall be reduced prorata to reflect the shortfall. In October 1996, the Company entered into letters of intent with the stockholders of Broadcast Tower Sites, Inc. and its affiliates (the "BTS Companies"), pursuant to which it is contemplated that the Company will acquire, through a merger transaction (the "BTS Merger") the BTS Companies. The BTS Companies are engaged in providing site acquisition, zoning, architectural and engineering services as well as consulting services, to the wireless telecommunications industry. At the closing of the BTS Merger, it is contemplated that the name of the BTS Companies will be changed. Such new name has not yet been determined. Pursuant to the terms of the proposed BTS Merger, the BTS shareholders will receive an aggregate of 507,246 shares of Company Common Stock, certain of which carry registration provisions, $780,000 in cash and three year Company notes aggregating $600,000, bearing interest at the Citibank NA prime rate and payable in installments of $100,000, $200,000 and $300,000 on each of the three anniversary dates of the closing of the BTS Merger. The closing of the BTS Merger is scheduled for December 1996. In a related transaction, the Company also agreed to acquire 100% of the capital stock of Arcadia Consulting, Inc. ("Arcadia"), a company recently formed for the purpose of providing consulting services to clients in the wireless telecommunications industry. The Company has agreed to pay a purchase price of $220,000 in cash, plus a combination of shares of Company Common Stock and AUGI notes due March 15, 1998 valued (based on the 7 estimated market price of AUGI Common Stock as traded on Nasdaq on the date of closing of such acquisition) at between approximately $1.3 million and $1.6 million. The closing of the Arcadia acquisition is conditioned upon the Company's acquisition of the BTS Companies, and is scheduled to occur in or about January 1997. Following the Arcadia acquisition, Arcadia will be merged with and into the BTS Companies. Upon closing of the BTS Merger, the former stockholders of the BTS Companies and Arcadia will receive three-year employment agreements with the BTS Companies and the Company pursuant to which they will receive, in addition to their base salaries and annual bonuses based upon performance of the BTS Companies, options exercisable over a five year period entitling the holders to purchase an additional aggregate 300,000 shares of Company Common Stock (the "BTS Options"). The BTS Options shall vest and be exercisable (i) 100,000 options on November 30, 1997 in the event that the BTS Companies achieve at least $1,800,000 of Pre-Tax Income (as defined) in the 12 months ending November 30, 1997, (ii) 100,000 options on November 30, 1998 in the event that the BTS Companies achieve at least $2,200,000 of Pre-Tax Income (as defined) in the 12 months ending November 30, 1998, and (iii) 100,000 options on November 30, 1999 in the event that the BTS Companies achieve at least $3,000,000 of Pre-Tax Income in the 12 months ending November 30, 1999. Alternatively, all 300,000 BTS Options shall vest if, during the period commencing upon closing the Merger and terminating on November 30, 1999, the accumulated Pre-Tax Income of the BTS Companies has equalled or exceeded $6,500,000. In the event that a change in control of the Company occurs, or the Company effects a sale of all or substantially all of the assets of the BTS Companies, prior to November 30, 1999, all of the BTS Options shall immediately vest upon such occurrence. In addition, the BTS Merger agreement provides that if the Company effects a public offering of the BTS Companies or a sale of the BTS Companies prior to November 30, 2000, the former BTS Companies and Arcadia stockholders may elect (but shall not be required) to exchange all Company securities received by them in the BTS Merger (the "Exchange Option") for an aggregate of 16.67% of the common stock of the BTS Companies then owned by the Company prior to such transaction. Upon completion of the Arcadia acquisition, Solon L. Kandel, the President and sole stockholder of Arcadia, will be employed by the BTS Companies as its President and Chief Executive Officer, under a three year employment agreement containing terms which are substantially identical to those provided to each of the former stockholders of the BTS Companies, including 100,000 Options and an Exchange Option entitling Mr. Kandel to 8.33% of the common stock of the BTS Companies. In addition, Mr. Kandel will be nominated to serve as a member of the Board of Directors of the Company. 8 THE TECHNOLOGY BUSINESS General The Company's strategy in entering the computing and telecommunications business (the "Technology Business") is to make the Company a significant factor in the rapidly expanding and changing businesses of (i) developing remote access multi-user software and Internet software, (ii) Internet and Intranet engineering, design and consulting services, and (iii) wireless telecommunications services. Through the acquisitions of ConnectSoft, eXodus, Interglobe and Seattle On-Line, the Company is now able to provide: (a) a remote access connectivity software protocol which allows users to run Microsoft Windows(TM) applications, such as Word(TM), Excel(TM) and PowerPoint(TM), on existing UNIX workstations, X-terminals and other X-compatable devices; (b) an electronic mail communications management software product, marketed as EMail ConnectionR, and and an e-mail product and Internet browser designed for children, marketed as E Mail for Kids(TM) and Kids Web(TM); (c) engineering, design and consultation services to users and providers of telecommunications facilities on the Internet and other media; and (d) local Internet telecommunication service in the Pacific Northwest. In the event that it consummates its acquisition of the BTS Companies in December 1996, the Company will also be able to provide site acquisition, zoning, architectural and engineering services to the wireless communications industry. Products and Services Remote Computing for Multi-user Applications New information technologies have enabled businesses to provide their employees with access to business-critical information, such as sales and customer data and financial and technical data. Many of these businesses have made significant investments in information systems infrastructure incorporating a variety of software operating systems, computing platforms and communications protocols. Critical business software applications and personal computing tools have historically been supplied by a variety of different vendors, often resulting in incompatible systems and applications within and among company locations. As a result, demand has increased for computing and telecommunications systems that offer users a number of features, including a standard interface and the ability to integrate enterprise and personal computer applications to local and remote enterprise users. 9 Although a majority of personal productivity software is Microsoft Windows(TM) based, with the introduction of Windows 95 and Windows NT, Microsoft has gained industry acceptance for its 32-bit operating systems as a preferred environment for business and enterprise applications. However, the costs associated with purchasing separate desktop Windows compatable PC's for literally hundreds of workstations or "seats" in a large organization are prohibitive. Accordingly, the challenge has been to perfect a modern client- server technology to provide access to Windows applications in a diverse information systems multi-user business environment, which may include DOS systems, UNIX workstations and X-Terminals, which do not support 32-bit Windows application. The component software solution developed essentially consists of two principal elements: (i) multi-user software which enables the UNIX or X-Terminal file servers to recognize the Windows 95 and Windows NT protocol (the "Multi-user Software"), and (ii) a remote user interface technology coupled with a client/server protocol software, or language transport, which enables the server to communicate the Windows application to the remote workstations (the "Remoting Software"). The principal manufacturers of Multi-user Software are Citrix Systems, Inc. ("Citrix") and Prologue, S.A. of France ("Prologue"), both of whom sell their products, known as WinFrame(TM) and WinTimes(TM), respectively, under licenses from Microsoft. In addition to Citrix (which possesses its own proprietary Remoting Software) and Prologue, the principal producers of Remoting Software are Network Computing Devices, Inc. ("NCD"), Insignia Solutions, Inc. ("Insignia"), Tektronix Inc. ("Tekronix") and the Company through its eXodus subsidiary. Each of NCD, Insignia and Tektronix act as original equipment manufacturers under separate licenses from Citrix and market their solutions under the names WinCenterPro(TM), NTrigue(TM) and WinDD(TM), respectively. The Company licenses the WinTimes(TM) Multi-user Software from Prologue and markets its remoting solution as an OEM under the name NTerprise(TM). Distribution channels include original equipment manufacturers, direct value added resellers ("VARs") and retailers, as well as direct sales to end-users such as major corporations or government agencies. The Company believes that its NTerprise(TM) product possesses certain significant advantages over the Citrix WinFrame(TM) solution and other competing component technology, in that: * NTerprise(TM) resides entirely on the enterprises central file server and does not require desktop client modules to be loaded on the user's machine, thereby permitting the users' terminals to range from sophisticated costly workstations to inexpensive X-Terminals; * unlike competitive products, which provide only one window for all Windows applications, NTerprise(TM) has multi-window capabilities which allow users to run each Windows application in its own window, thus providing a familiar and easy to use working environment; 10 * NTerprise(TM) is not a replacement operating system for Microsoft's Windows NT and, unlike competitive solutions, does not require the customer to purchase a replacement proprietary NT operating system; * NTerprise(TM) runs on different hardware-based server platforms, such as Motorola's Power PC(TM) and Intel's Pentium Pro(TM), and, when commercially available, is anticipated to be compatable with Digital Equipment Corporation's Alpha and IBM's Power PC; * unlike Citrix's propriety client/server protocol software, ICA (Intelligent Console Architecture), which must be used with more costly intelligent desktop computers, NTerprise(TM) uses standard X-Terminal graphic commands for its client/server protocol and is executed in the server only; thereby permitting the customer the luxury of purchasing or continuing to use inexpensive or even outdated desktop technology. The Company is targeting users of UNIX workstations and X-Terminals as the primary market for its NTerprise(TM) product. Its current version supports the Windows NT 3.5 operating system. Subject to Prologue's renewal and expansion of its recently expired license with Microsoft to include the Windows NT 4.0 operating system, the Company anticipates that an NTerprise(TM) version which will support Window NT 4.0 will be available in the near future. In October 1996, Windows NT Magazine, an industry publication (not affiliated with Microsoft Corporation) awarded the Company's NTerprise(TM) product the "UNIX/Windows NT Technical Award" at the UNIX Expo Plus trade show in New York, New York. The Company is in the process of demonstrating its NTerprise(TM) solution to a number of potential end-user and distributors, including Motorola. To date, however, no firm orders have been obtained. Current pricing for a server license is $795, and $195 per terminal or "seat" connected. A complete ten-seat license is $1,995, consisting of a server license and a ten user license. Retail Software Through its ConnectSoft, Inc. subsidiary, the Company develops and sells three retail software products. EMail Connection(R) is an electronic mail communications management package which collects email from commercial online sources, such as Prodigy, America Online and many other Internet access providers. Many computer users have multiple addresses and EMail ConnectionR simplifies collecting electronic mail. In addition, it allows encrypted message transfers, supports SkyTel Pager communications and receives telecopier transmissions. The two other ConnectSoft products are children's applications - an Internet browser product as an email product designed for children between five and 10 years old. The email product, known as EMail for Kids(TM), has similar features as EMail Connection(R) in that it allows access to popular online services and the Internet. KidWeb(TM) allows children access to the 11 various Internet services and provides an easy to understand web brower using animated characters. However, the Company believes that the unique feature of its children's software products are that parents are capable of regulating the content of email messages and restrict which Web pages their child can view. Parents can create a Web "neighborhood" of pre-approved sites, and disallow access to other Web sites deemed by them objectionable or inappropriate for viewing. FIND S.V.P. User's Survey for 1995 calculated that approximately 6.5 million American personal computer family households purchased children's software in 1995 and approximately 41% of all Internet users named e-mail as the principal reason for their access to the Internet. The Company recently began marketing its retail products through distributors, such as Tech Deta, Micro Central and Navarre. Suggested retail prices are EMail Connection(R) - $49.95; KidWeb(TM) - $39.95; and EMail for Kids(TM) - $29.95. Internet Engineering, Design and Consulting Through its acquisition of InterGlobe Networks, Inc.("Interglobe"), the Company provides network system implementation and consulting for corporate Intranet and Internet communications systems. Services and software provided by InterGlobe include: Network Design and Management Services. InterGlobe provides network design and management for businesses and individuals with obsolete or deficient network structures. The rapid advance of network systems necessitates a comprehensive solution to obsolescence which includes evaluation, network design and implementation for functional effectiveness. In addition to managing ConnectSoft's existing Network Operation Center ("NOC") located in Seattle, Washington, InterGlobe has recently commenced providing consulting services for Compuserve Incorporated, which includes building a NOC in Columbus, Ohio and providing ongoing support services for the facility. Compuserve is a major online service providing business network and Internet access to its subscribers. InterGlobe provides ongoing technical support with automatic and remote monitoring for its network design systems. The Company believes that there will be considerable growth in providing ongoing support services for clients networks, as a result of which the Company is in the process of increasing its engineering and support staff. Corporate Intranet Systems and Connectivity Software InterGlobe also develops custom built Intranet systems designed for corporate clients, who desire access to a paperless intra-office and external communications email system. Its current major customer is the Eddie Bauer. Inc, retail chain. 12 Consulting and System Integration In addition to designing networks and managing systems for specific customers, InterGlobe also provides specialized Internet and Intranet consulting services for corporate clients. Its customers include GE Capital Corporation, US West, The American Automobile Association and Hewlett Packard Corporation. Regional Internet Service The Company's subsidiary, Seattle OnLine Corp. ("Seattle OnLine") is engaged in the production of regional web-sites that showcase metropolitan areas. Seattle OnLine is a full solution Internet marketing firm that designs, builds and manages corporate Inter/Intranet sites, including interactive catalogs and databases for businesses in Seattle, Washington and throughout the nation. Seattle Online has formed alliances and teamed with a number of major corporations with a major regional focus to create a comprehensive metropolitan entertainment and resources guide. Clients include the Seattle Space Needle and the Washington State Ferry System. The Company intends to use the Seattle Online concept as a prototype for expansion into other major metropolitan areas, including cities in which Seattle Online is registered to establish regional web-sites showcasing the particular metropolitan area. The Company plans to introduce the marketing program in approximately 18 additional cities in 1997. 13 Proposed Acquisition of the BTS Companies The Company intends to consummate the acquisition of the BTS Companies in December 1996. However, as a definitive BTS Merger Agreement has not, as yet, been executed, there is no assurance that this transaction will be consummated or that the Company will ever provide services to the wireless communications industry. See, "History and Recent Acquisitions," above. The BTS Companies provide consulting services to clients involved in a variety of wireless communications (cellular telephone) applications. The BTS Companies offer a variety of turnkey solutions, including site acquisition, zoning and permitting services to facilitate the location of a wireless network broadcasting system, architectural and engineering services related to the design, development and construction of wireless communcations network facilities, management of wireless network sites, and general management of wireless communications network projects. The BTS Companies locate appropriate sites for the construction of a wireless network broadcasting system, represent the client in negotiations with the owner-landlord; and provide a comprehensive preliminary site report including photographic survey, preliminary zoning analysis and access and service availabilities. Site zoning and permitting services include obtaining FAA clearing filings and preliminary site plans; obtaining zoning and permitting applications and approvals; preparation of supporting materials for presentation at public hearings; preparation of final site plans and obtaining construction permits. Architectural and engineering services provided include the conduct of site feasibility studies; providing preliminary cost estimates; development of architectural, structural, mechanical and other construction site drawings, plans and specifications (including cable and tray routing); determining of electrical requirements; structural analysis of parapets, roofs, towers, watertanks and other structures; design of heating and air conditioning systems; topographic surveys; soil investigation and reports; and furnishing final "as built" drawings and plans. With over 45 architectural, engineering and other professional employees, the BTS Companies have rendered or are rendering continuing services for clients such as American Personal Communications, AT&T Wireless Communications, Bell Atlantic, Bell South Mobility, Shenandoah Mobile Company, Trammel Crow/LCC, dextel Communications and Vanguard Cellular. Sales and Target Markets Remote Computing The Company is targeting large national and world-wide organizations using existing UNIX systems and X-Terminals as the primary customers for its remoting technology. In many large establishments, there is a heterogeneous mix of computing platforms, including DOS systems, Windows 3.x systems, UNIX workstations, X-Terminals and Macintosh computers. 14 In conjunction with its licensed WiNTimes(TM) Multi-User Software, the Company believes that its superior remoting technology will enable it to capture a significant portion of the UNIX workstation and X-Terminal markets. The Company is presently testing the NTerprise(TM) product with Motorola Corporation in connection with the introduction of a Windows NT 4.0 application to enhance access by a European country's government agency to information from police stations throughout such country. In the event that Motorola awards a contract to the Company, management believes that revenues under this agreement could equal $10 million over a period of three years. In addition to Motorola, a number of other potential customers have recently requested the Company to provide demonstrations and quotations for the NTerprise(TM) solution. To date, the Company has not been awarded a contract for NTerprise(TM) by Motorola or any other customer, and there can be no assurance that any such contract will be awarded or, if awarded, that it will prove meaningful and profitable to the Company. In addition, even if Motorola were to elect to order NTerprise(TM), the Company would not be able to fulfill such contract unless it were able to license the right to sell a software package for use with Microsoft's Windows NT 4.0 operating system. At the present time, the Company has no direct license from Microsoft for Windows NT4.0, and licenses the WiNTimes(TM) Multi-user Software from Prologue only in Windows NT 3.5 version. 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. 15 License Agreement The Company has entered into a three year license with Prologue, effective as of June 1, 1996, pursuant to which the Company was granted: (i) the exclusive right and license to sell, distribute, exploit and demonstrate WiNTimes(TM) within North America, as an original equipment manufacturer in combination with the Company's Remoting Software, for the UNIX and X-Terminal markets; and (ii) a non-exclusive license to sell such products in other markets within such territory. However, such license permits Prologue to license WiNTimes(TM) within the Company's exclusive territory to any other original equipment manufacturer ("OEM") if, after the Company has attempted to sell the WiNTimes(TM)/ NTerprise(TM) combination to a potential OEM customer, a special committee comprised of two Company designees, three Prologue designees and two independent persons shall determine, in good faith, that there is a risk that refusing to grant such a license to the OEM would result in such OEM keeping or acquiring the Citrix NT Multi-user Software in lieu of WiNTimes(TM). Prologue has recently advised the Company that it desires to license WiNTimes(TM) to NCD, a direct competitor of the Company, as NCD allegedly would not acquire the WiNTimes(TM) directly from the Company or combined with the NTerprise(TM) solution. The Company is currently considering such request. Under the terms of the license, if it is determined that Prologue is entitled to license its Multi-user Software to NCD or another OEM, the Company is entitled to receive 30% of all royalties and other payments which Prologue may receive from such OEM licensee for the UNIX and X-Terminal markets. Under the terms of the Prologue license, the Company paid Prologue initial cash payments aggregating $450,000, issued 100,000 shares of Company Common Stock and agreed to pay certain ongoing royalties or floor price payments per "seat" connection in lieu of royalties. The license agreement is currently limited to WiNTimes(TM) software for Windows NT 3.5 version. In October 1996, the Company and Prologue entered into a limited access license, pursuant to which the Company was granted limited access to Windows NT 4.0 source codes, solely for the purpose of developing NTerprise(TM) in Windows NT 4.0 version and testing and demonstrating such software for a potential customer. However, in order for the Company to sell its remoting computer software to the UNIX and X-Terminal markets in Windows NT 4.0 version, Prologue's existing license with Microsoft which expired on October 31, 1996 is required to be renewed to include such upgraded Windows NT 4.0 version. See "Future Performance and Risk Factors" below. Employees At October 31, 1996, ConnectSoft, eXodus, Interglobe and Seattle On-Line employed 84 full-time employees. Of that number, 10 are officers, 9 are involved in administration and clerical activities, 26 are involved in engineering and software development, 18 are involved in sales and marketing, and 21 are involved in customer service and support. None of such employees are covered by a collective bargaining agreement. The Company believes that its relations with its employees are satisfactory. 16 Future Performance and Risk Factors The future performance, operating results and financial condition of the Company's Technology Business are subject to various risks and uncertainties, including those described below. Competition The markets in which the Company competes are intensely competitive and are characterized by rapidly changing technology and evolving industry standards. Competitive factors in the remote computing product market include completeness of features, product quality and functionality, marketing and sales resources and customer service and support. The Company faces extensive competition from Citrix and its licensees, including Tektronics, Insignia and NCD; all of whom are significantly larger than the Company and have substantially greater financial resources. In addition, the Company's ability to provide customers with access to the new Windows NT 4.0 operating system will be adversely impacted if Prologue is unable to obtain in the near future a direct license from Microsoft to enable Prologue to provide the Company with Multi-user Software in Windows NT 4.0 version for NTerprise(TM). While the Company believes that the features available on its Remoting Software provides UNIX and X-Terminal users with the maximum flexibility to integrate Windows applications, there can be no assurance that the Company will be able to establish and maintain a market position in the face of increased competition. In addition, alternative products exist for accessing information or databases over the Internet that indirectly compete with the Company's remoting computing products. Existing or new products that extend web site software to provide database access or interactive computing can materially impact the Company's ability to sell its remoting computer products into the UNIX and X-Terminal markets. Potential competitors include all of the makers of Web server and browser software, including Microsoft, Netscape, Quarterdeck, Silicon Graphics and Sun Microsystems. Other key competitors in the multi-user graphical platform market include SunSoft, Hewlett Packard and other manufacturers of UNIX application servers, to the extent that they are able to provide a low-cost graphical computing platform for Microsoft's Windows applications. As is the case with its remoting products, the Company's EMail ConnectionR, KidsWeb(TM) and EMail for Kids(TM) software also face intense competition from other developers and marketers of personal productivity software products sold at retail. There are a number of email and Web browser products on the market, many of which are produced by companies that are significantly larger and better capitalized than the Company. Although the Company believes that its e-mail and web browser products are the only ones currently available which permit parents to monitor the content of programs accessed by their children on the Internet, a number of larger competitors are in the process of introducing a similar technology. There is no assurance that the Company will be able to establish a sufficient customer basis or market presence to withstand 17 a well financed marketing campaign from a more substantial competitor with a competing product for the children's market. The Company's businesses engaged in Internet design, engineering and consulting services, as well as the development of web sites for local advertisers, face competition from numerous regional and national computer and telecommunications consultants, as well as from many of the major software and hardware manufacturers who provide full customer support and service for their products, which often include consulting and advisory services. Significant Investment Since its effective May 1, 1996 acquisition of ConnectSoft, through October 31, 1996, the Company has expended over $6.5 million in personnel, debt and lease payments and settlements and other operating expenses associated with ConnectSoft, eXodus, InterGlobe and Seattle On-Line, exclusive of approximately $400,000 in cash paid to former stockholders of such companies in connection with the acquisition of such companies. It may be anticipated that the ConnectSoft and eXodus operations will continue to lose money and represent a negative cash flow to the Company, at least in the near term. There can be no assurance that these subsidiaries, or the Company's Technology Business as a whole, will not continue to represent a significant drain on cash resources or will ever prove to be profitable. Evolving Network Computing Market The Company's future success in developing and selling multi-user remote solutions will depend in substantial part upon increased acceptance and successful marketing of such products. There can be no assurance that the Company's remoting computer software, whether marketed with WiNTimes(TM) Multi-user Software, or as an alternate solution, will be widely adopted in the rapidly evolving desktop computer market. In addition, it is possible that Microsoft may develop its own Multi-user Software and/or Remoting Software for sale to users of UNIX and X-Terminal workstations. The failure of new markets to develop for the Company's network computing products could have a material adverse effect on the Company's business, operating results and financial condition. New Product Development and Timely Introduction of New and Enhanced Products The markets for the products and services provided by the Company's technology business are characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles. The Company's future in such businesses will depend to a considerable extent on its ability to continuously develop, introduce and deliver in quantity new software products that offer its customers enhanced performance at competitive prices, and to offer new services at competitive prices that meet the demands of a rapidly changing marketplace. The development and introduction of new products and service is a complex and uncertain process requiring substantial financial resources and high levels of innovation, accurate anticipation of technological and market trends and the successful and 18 timely completion of product development. The inability to finance important software development projects, delays in the introduction of new and enhanced products and services, the failure of such products and services to gain market acceptance, or problems associated with new products could materially and adversely affect the Company's operating results. Proprietary Technology and Dependence on Licenses The Company's success in its Remoting Software is heavily dependent upon proprietary technology. While the Company has filed [one] patent application, to date, the Company has no patents, and existing copyright laws afford only limited protection for the Company's software. Accordingly, the Company relies heavily on trade secret protection and confidentiality and proprietary information agreements to protect its proprietary technology. The loss of any material trade secret could have a material adverse effect on the Company. There can be no assurance that the Company's efforts to protect its proprietary technology rights will be successful. Despite the Company's precautions, it may be possible for unauthorized third parties to copy certain portions of the Company's software or to obtain and use information that the Company regards as proprietary. While the Company's competitive position may be affected by its ability to protect its proprietary information, the Company believes that because of the rapid pace of technological change in the industry, factors such as the technical expertise, knowledge and innovative skill of the Company's management and technical personnel, its strategic relationships, name recognition, the timeliness and quality of support services provided by the Company and its ability to rapidly develop, enhance and market software products may be more significant in maintaining the Company's competitive position. In addition, under the terms of the Company's license with Prologue, under certain conditions Prologue may license Prologue's Multi-user Software to direct competitors of the Company. See "License Agreement" above. Although the Company believes that the key element in providing enterprise customers with access to Windows NT in a UNIX or X-Terminal environment is the reliability and flexibility of the OEM's Remoting Software, as opposed to the Multi-user Software furnished primarily by Citrix and Prologue, to the extent that more well financed competitors are given access to Prologue's WiNTimes(TM) software the Company's marketing efforts could be adversely impacted. Dependence on Key Personnel The Company's success in its technology business depends to a significant degree upon the continuing contributions of its senior management and other key employees. The Company believes that its future success will also depend in large part on its ability to attract and retain highly-skilled programmers, engineers, sales and marketing personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting, integrating and retaining such personnel. Failure to attract or retain existing and 19 additional key personnel could have a material adverse effect on the Company's technology business, operating results or financial condition. THE DISTRIBUTION BUSINESS The Equipment New Case Construction Equipment. The construction equipment (the "Equipment") sold, rented and serviced by Western generally consists of: backhoes (used to dig large, wide and deep trenches); excavators (used to dig deeply for the construction of foundations, basements, and other projects); log loaders (used to cut, process and load logs); crawler dozers (bulldozers used for earth moving, leveling and shallower digging than excavators); wheel loaders (used for loading trucks and other carriers with excavated dirt, gravel and rock); roller compactors (used to compact roads and other surfaces); trenchers (a small machine that digs trenches for sewer lines, electrical power and other utility pipes and wires); forklifts (used to load and unload pallets of materials); and skid steer loaders (smaller version of a wheel loader, used to load and transport small quantities of material--e.g., dirt and rocks around a job site). The sale prices of this Equipment ranges from $15,000 to $350,000 per piece of equipment. Under the terms of standard Case dealer agreements, Western is an authorized Case dealer for sales of Equipment and related parts and services at locations in the states of Oregon, Washington, Nevada and Northern California (the "Territory"). The dealer agreements have no defined term or duration, but are reviewed on an annual basis by both parties, and can be terminated without cause at any time either by Western on 30 days' notice or by Case on 90 days' notice. Although the dealer agreements do not prevent Case from arbitrarily exercising its right of termination, based upon Case's established history of dealer relationships and industry practice, Western does not believe that Case would terminate its dealer agreement without good cause. The dealer agreements do not contain requirements for specific minimum purchases from Case. In consideration for Western's agreement to act as dealer, Case supplies to Western items of Equipment for sale and lease, parts, cooperative advertising benefits, marketing brochures related to Case products, access to Case product specialists for field support, the ability to use the Case name and logo in connection with the Western's sales of Case products, and access to Case floor plan financing for Equipment purchases. Such floor planning arrangements currently provides Western with interest free credit terms of between six months and nine months on purchases of specified types of Equipment. Principal payments are generally due at the earlier of sale of the equipment or twelve to fifteen months from the invoice date. Other Products. 20 Although the principal products sold, leased and serviced by Western are manufactured by Case, Western also sells, rents and services equipment and sells related parts (e.g., tires, trailers and compaction equipment) manufactured by Hamm and by others. Approximately 25% of Western's net sales for fiscal year 1996 resulted from sales, rental and servicing of products manufactured by companies other than Case. Western's distribution business is generally divided into four categories of activity: (i) New Equipment sales and rentals, (ii) used Equipment sales and rentals, (iii) Equipment servicing, and (iv) parts sales. New Equipment Sales and Rental. At each of its distribution outlets, Western maintains a fleet of various items of Equipment for sale or rental for periods ranging from one week to up to nine months (customarily with purchase options at the end of the rental period). The Equipment purchased for each outlet is selected by Western's marketing staff based upon the types of customers in the geographical areas surrounding each outlet, historical purchases as well as anticipated trends. Each distribution outlet has access to Western's full inventory of Equipment. Western's new Equipment rental business has historically been an adjunct to its new Equipment sales. To assist customers, any new Equipment can be rented generally for periods of up to nine months and a portion of customer rental payments may be applied to the purchase price down payment. Western provides only the standard manufacturer's limited warranty for new equipment, generally a one-year parts and service repair warranty. Customers can purchase extended warranty contracts. Western maintains a separate fleet of new Equipment that it generally holds solely for rental. Such Equipment is generally held in the rental fleet for 12 months and then sold as used Equipment with appropriate discounts reflecting prior rental usage. As rental Equipment is taken out of the rental fleet, Western adds new Equipment to its rental fleet as needed. The rental charges vary, with different rates for different items of Equipment rented. Used Equipment Sales and Rentals. Western sells and rents used Equipment that has been reconditioned in its own service shops. It generally obtains such used Equipment as "trade-ins" from customers who purchase new items of Equipment and from Equipment previously rented and not purchased. Unlike new Equipment, Western's used Equipment is generally sold "as is" and without manufacturer's warranty. Used Equipment is customarily rented only after available new Equipment has been rented. The rental charge for such used Equipment is equal to that of rented new Equipment. Used rental Equipment is first reconditioned by Western prior to being offered for rent, and is typically not more than three years old. 21 Equipment Servicing. Western operates a service center and yard at each retail outlet for the repair and storage of Equipment. Both warranty and non-warranty service work is performed, with the cost of warranty work being reimbursed by the manufacturer following the receipt of invoices from Western. Western employs approximately 100 manufacturer-trained service technicians who perform Equipment repair, preparation for sale and other servicing activities. Equipment servicing is one of the higher profit margin businesses operated by Western. Western has expanded this business by hiring additional personnel and developing extended warranty contracts for Equipment service terms, and independently marketing such contracts to its customers. Western, services items and types of Equipment which include those that are neither sold by Western nor manufactured by Case. Parts Sales. Western purchases a large inventory of parts, principally from Case, for use in its Equipment service business, as well as for sale to other customers who are independent servicers of Case Equipment. Generally, parts purchases are made on standard net 30 days terms. Western employs one or more persons who take orders from customers for parts purchases at each retail distribution outlet, the majority of such orders are placed in person by walk-in customers. Western provides only the standard manufacturer's warranty on the parts that it sells, which is generally a 90-day replacement guaranty. Sales and Marketing. Western's customers are typically residential and commercial building general contractors, road and bridge contractors, sewer and septic contractors, underground power line contractors, persons engaged in the forestry industry, equipment rental companies and state and municipal authorities. Western estimates that it has approximately 16,000 customers, with most being small business owners, alone of which accounted for more than 5% of its total sales in the fiscal year ended July 31, 1996. For the fiscal year ended July 31, 1996, the revenue breakdown by source for the business operated by Western was approximately as follows: New Equipment Sales 58% Used Equipment Sales 12% Rental Revenue 9% Parts Sales 17% Service Revenue 4% ----- 100% ===== 22 Western advertises its products in trade publications and appears at trade shows throughout its territory. It also encourages its salespersons to visit customer sites and offer Equipment demonstrations when requested. Western's sales and marketing activities do not result in an significant backlog of orders. Although Western has commenced acceptance of orders from customers for future delivery following manufacture by Case, during fiscal 1996 substantially all of its sales revenues resulted from products sold directly out of inventory, or the providing of services upon customer request. All of Western's sales personnel are employees of Western and all are under the general supervision of C. Dean McLain, the President and Chief Executive Officer of Western. Each Equipment salesperson is assigned a separate exclusive territory, the size of which varies based upon the number of potential customers and anticipated volume of sales, as well as the geographical characteristics of each area. Western employed 67 Equipment salespersons on July 31, 1996. On July 31, 1996, Western employed 5 product support salespersons who sell Western's parts and repair services to customers in assigned territories. Western has no independent distributors or non-employee sales representatives. Suppliers Western purchases approximately the majority of its inventory of Equipment and parts from Case. No other supplier currently accounts for more than 5% of such inventory purchases in fiscal 1996. While maintaining its commitment to Case to primarily purchase Case Equipment and parts as an authorized Case dealer, in the future Western plans to expand the number of products and increase the aggregate dollar value of those products which Western purchases from manufacturers other than Case. Competition Western competes with distributors of construction equipment and parts manufactured by companies other than Case on the basis of price, the product support (including technical service) that it provides to its customers, brand name recognition for its Case and other products, the accessibility of its distribution outlets, the number of its distribution outlets, and the overall quality of the Case and other products that it sells. Western management believes that it is able to effectively compete with distributors of products produced and distributed by such other manufacturers primarily on the basis of overall Case product quality, and the superior product support and other customer services provided by the Company. Case's two major competitors in the manufacture of a full line of construction equipment of comparable sizes and quality are Caterpillar Corporation and Deere & Company. In addition, other manufacturers produce specific types of equipment which compete with the Case Equipment and other Equipment distributed by Western. These competitors and their product 23 specialties include JCB Corporation--backhoes, Kobelco Corporation--excavators, Dresser Industries--light and medium duty bulldozers, Komatsu Corporation-- wheel loaders and crawler dozers, and Bobcat, Inc.--skid steer loaders. Western is currently the only Case dealer for construction equipment in the states of Washington and Nevada and in the Northern California area (other than Case-owned distribution outlets), and is one of two Case dealers in the State of Oregon. However, Case has the right to establish other dealerships in the future in the same territories in which the Company operates. In order to maintain and improve its competitive position, revenues and profit margins, Western plans to increase its sales of products produced by companies other than Case. Environmental Standards and Government Regulation Western operations are subject to numerous rules and regulations at the federal, state and local levels which are designed to protect the environment and to regulate the discharge of materials into the environment. Based upon current laws and regulations, Western believes that its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and the resultant financial liability to Western. No assurance can be given that future changes in such laws, regulations, or interpretations thereof, changes in the nature of Western's operations, or the effects of former occupants' past activities at the various sites at which Western operates, will not have an adverse impact on the Company's operations. Western is subject to federal environmental standards because in connection with its operations it handles and disposes of hazardous materials, and discharges sewer water in its equipment, servicing operations. Western internal staff is trained to keep appropriate records with respect to its handling of hazardous waste, to establish appropriate on-site storage locations for hazardous waste, and to select regulated carriers to transport and dispose of hazardous waste. Local rules and regulations also exist to govern the discharge of waste water into sewer systems. In September 1992, prior to Western becoming an authorized Case dealer, Case received an environmental report indicating certain contamination conditions which were to be rectified by Case in connection with the selling of retail outlets to the Company in connection with the 1992 Case Transaction. In addition, following the 1992 Case Transaction, additional environmental reports were prepared or obtained concerning the progress and cost of remediation projects at those facilities. Western did not assume any of Case's obligations for site remediation when it completed the acquisition from Case of certain assets used in connection with Western's retail facilities, and no accruals for such clean-up costs appear on the Company's financial statements. In July 1994, prior to Western's acquisition of the Sparks, Nevada property, Case received an environmental report indicating certain contamination conditions which were to be rectified by Case in connection with the sale of that retail outlet to Western. Such remediation was completed prior to November 22, 1994. Western did not assume any of Case's obligations for site remediation when it completed the acquisition from Case of certain assets used in 24 connection with Western's retail facilities, and no accruals for such clean-up costs appear on Western's financial statements. Employees At July 31, 1996, Western employed 298 full-time employees. Of that number, 24 are in corporate administration for Western, 17 are involved in administration at the branch locations, 77 are employed in Equipment sales and rental, 63 are employed in parts sales, and 117 are employed in servicing construction equipment. None of Western's employees are covered by a collective bargaining agreement. Western believes that its relations with its employees are satisfactory. Insurance Western currently has product liability insurance policies covering Western with $500,000 limits for each occurrence and $1,000,000 in the aggregate under the general liability and products liability policies. Western also has an umbrella liability insurance policy with an annual aggregate coverage limit of $10,000,000. Western believes that its product liability insurance coverage is reasonable in amount and consists of such terms and conditions as are generally consistent with reasonable business practice, although there is no assurance that such coverage will prove to be adequate in the future. An uninsured or partially insured claim, or a claim for which indemnification is not available, could have a material adverse effect upon Western. 25 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 -----END PRIVACY-ENHANCED MESSAGE-----