<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
October 21, 1996 (August 8, 1996)
---------------------------------
AMERICAN UNITED GLOBAL, INC.
Delaware 0-19404 95-4359228
- ------------------- ---------------- -------------
(State or other (Commission File (IRS Employer
jurisdiction of No.) ID No.)
incorporation)
25 Highland Boulevard, Dix Hills, New York 11746
------------------------------------------------
(Address of principal executive offices)
(516) 254-2134
--------------------------------------------------
Registrant's telephone number, including area code
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 2 - ACQUISITION OR DISPOSITION OF ASSETS.
ACQUISITION OF CONNECTSOFT, INC.
On August 8, 1996, the Company acquired, through a merger with an
acquisition subsidiary of the Company (the "Merger"), all of the outstanding
capital stock of ConnectSoft, Inc. ("ConnectSoft"), a private company providing
communications software applications and services for persons seeking access to
and utilization of resources and information available on the Internet.
ConnectSoft shareholders received, on a pro rata basis, an aggregate 1,000,000
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 the Company's common stock, $.01
par value (the "Company Common Stock"), and votes together with the Company
Common Stock as a single class on the basis of one vote for one share. Each
share of Preferred Stock is convertible into shares of Company Common Stock at
the holder's option into a minimum of 1,000,000 shares of Company Common Stock
and a maximum of 3,000,000 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 (1) share of Company Common Stock (a minimum of 1,000,000 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 2,000,000 shares of such Common
Stock if all such shares of Preferred Stock are so
converted); or
(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 3,000,000 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., as a direct majority-owned subsidiary of the
Company, which has developed certain remote access computer software originated
by ConnectSoft.
The conversion ratio of the Preferred Stock shall be adjusted, such
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
<PAGE>
$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 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 Merger. The Company will increase its aggregate funding
commitments to ConnectSoft and its related companies to a minimum of $5.0
million.
ITEM 7 - FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
(i) Report of Independent Accountants.
(ii) Balance Sheets of ConnectSoft, Inc., dated December 31, 1995 and
December 31, 1994.
(iii) Statements of Operations for the Years ended December 31, 1995,
1994 and 1993.
(iv) Statements of Shareholders' Equity (Deficit) for the Years ended
December 31, 1993, 1994 and 1995.
(v) Statments of Cash Flow for the Years ended December 31, 1995,
1994 and 1993.
(vi) Notes to Financial Statements
(b) PRO FORMA FINANCIAL STATEMENTS
None.
(c) EXHIBITS
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
AMERICAN UNITED GLOBAL, INC.
(Registrant)
Dated: October 21, 1996 By: /S/ DAVID M. BARNES
------------------------------------
David M. Barnes, Vice President
and Chief Financial Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
AMERICAN UNITED GLOBAL, INC.
(Registrant)
Dated: October 21, 1996 By:
--------------------------------------
David M. Barnes, Vice President
and Chief Financial Officer
<PAGE>
CONNECTSOFT, INC.
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
AS OF DECEMBER 31, 1995
AND 1994 AND FOR EACH OF THE THREE
YEARS ENDED DECEMBER 31, 1995
<PAGE>
TABLE OF CONTENTS
PAGE
Report of Independent Accountants 1
Balance Sheets 2
Statements of Operations 3
Statements of Shareholders' Equity (Deficit) 4
Statements of Cash Flows 5
Notes to Financial Statements 6 - 15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
ConnectSoft, Inc.
We have audited the accompanying balance sheets of ConnectSoft, Inc. as of
December 31, 1995 and 1994 and the related statements of operations,
shareholders' equity (deficit) and cash flows for each of the three years ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ConnectSoft, Inc. as of
December 31, 1995 and 1994 and the results of its operations and its cash flows
for each of the three years ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 12 to the financial statements, in 1996 the Company was
acquired by American United Global, Inc.
COOPERS & LYBRAND L.L.P.
Seattle, Washington
October 19, 1996
<PAGE>
CONNECTSOFT, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
ASSETS
<S> <C> <C>
Current assets:
Cash $ 68,623 $ -
Restricted cash - 105,683
Accounts receivable, net of allowance for doubtful accounts of $134,279
and $4,000, respectively 303,281 1,796,633
Inventories, net 135,325 210,757
Prepaid expenses 34,246 35,056
------------ -------------
Total current assets 541,475 2,148,129
Property and equipment, net 2,340,550 881,805
Restricted cash - 430,812
Capitalized software costs, net of accumulated amortization of $979,221 and $213,180,
respectively 926,690 1,390,173
Operating lease deposits 153,793 132,459
Other assets 514,277 30,367
------------ -------------
Total assets $ 4,476,785 $ 5,013,745
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 2,413,665 $ 1,699,490
Billings in excess of revenues earned 412,288 588,810
Accrued liabilities 485,967 278,748
Current portion, capital lease obligations 825,844 196,960
Current portion, long-term debt - 108,052
Line of credit 4,109,122 -
------------ -------------
Total current liabilities 8,246,886 2,872,060
------------ -------------
Long-term debt, less current portion - 400,000
Capital lease obligations, less current portion 1,279,033 352,586
------------ -------------
------------ -------------
Total long-term obligations 1,279,033 752,586
------------ -------------
Total liabilities 9,525,919 3,624,646
------------ -------------
Commitments and contingencies
Shareholders' equity (deficit):
Convertible preferred stock:
Series A, $0.001 par value; 1,796,873 shares authorized, issued and outstanding 1,797 1,797
Series B, $0.001 par value; 600,000 shares authorized; no shares issued or - -
outstanding
Series C, $0.001 par value; 2,412,625 shares authorized; 1,832,632 shares issued
and outstanding 1,832 1,832
Series D, $0.001 par value; 5,667,368 shares authorized; no shares issued or
outstanding - -
Common stock, no par value; 30,000,000 shares authorized; 6,119,773 and 5,772,895
issued and outstanding at December 31, 1995 and 1994, respectively 474,075 453,580
Additional paid-in capital 2,057,960 2,057,960
Accumulated deficit (7,584,798) (1,126,070)
------------ -------------
Total shareholders' equity (deficit) (5,049,134) 1,389,099
------------ -------------
Total liabilities and shareholders' equity (deficit) $ 4,476,785 $ 5,013,745
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
CONNECTSOFT, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Revenues:
Contract services $ 3,201,437 $ 4,418,859 $ 1,967,830
Retail products 8,429,564 3,307,016 201,187
------------- ---------------- ---------------
Total revenues 11,631,001 7,725,875 2,169,017
------------- ---------------- ---------------
Cost of sales:
Contract services 3,848,269 2,726,879 1,577,167
Retail products 1,296,470 340,650 81,269
------------- ---------------- ---------------
Total cost of sales 5,144,739 3,067,529 1,658,436
------------- ---------------- ---------------
Gross profit 6,486,262 4,658,346 510,581
------------- ---------------- ---------------
Operating expenses:
Product development 4,834,843 479,148 464,137
Sales and marketing 3,158,010 1,606,162 406,369
General and administrative 3,211,772 1,904,238 857,847
------------- ---------------- ---------------
Total operating expenses 11,204,625 3,989,548 1,728,353
------------- ---------------- ---------------
Operating income (loss) (4,718,363) 668,798 (1,217,772)
------------- ---------------- ---------------
Other income (expense):
Interest expense (628,045) (121,519) (103,241)
Loss on factored receivables (190,117) (94,566) (26,826)
Other (922,203) - 4,686
------------- ---------------- ---------------
Total other expense (1,740,365) (216,085) (125,381)
------------- ---------------- ---------------
Net income (loss) $ (6,458,728) $ 452,713 $ (1,343,153)
------------- ---------------- ---------------
------------- ---------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
CONNTECTSOFT, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
Class A Convertible
Preferred Stock Preferred Stock Common Stock
------------------ --------------------- ------------------------
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1993 50,000 $ 100,000 - $ - 231,367 $ 83,860
Dividends paid to Class A
Preferred shareholders - - - - - -
Conversion of Class A
Preferred Stock to Common Stock (50,000) (100,000) - - 50,000 100,000
Exercise of Common Stock options - - - - 43,113 425
Common Stock issued to
independent contractors - - - - 2,804 11,200
Conversion of promissory notes to
Common Stock - - - - 18,500 39,000
Conversion of employee deferred
wages notes payable to
Common Stock - - - - 13,787 55,149
Sale of Common Stock 13,525 129,945
Increase in the number of common
shares outstanding resulting
from 15 for 1 stock split - - - - 5,223,352 -
Sale of Series A Convertible
Preferred Stock, net of $61,420
issuance costs - - 1,347,655 1,348 - -
Net loss - - - - - -
--------- ----------- ------------ ---------- -------------- -------------
Balance at December 31, 1993 - - 1,347,655 1,348 5,596,448 419,579
Exercise of Common Stock options - - - - 176,447 34,001
Sale of Series A Convertible
Preferred Stock, net of $7,293
issuance costs - - 449,218 449 - -
Sale of Series C Convertible
Preferred Stock, net of $91,513
issuance costs - - 1,832,632 1,832 - -
Dividends paid to Series A
Preferred Shareholders - - - - - -
Net income - - - - - -
--------- ----------- ------------ ---------- -------------- -------------
Balances at December 31, 1994 - - 3,629,505 3,629 5,772,895 453,580
Exercise of Common Stock options - - - - 346,878 20,495
Net loss - - - - - -
--------- ----------- ------------ ---------- -------------- -------------
Balances at December 31, 1995 $ 3,629,505 $ 3,629 6,119,773 $ 474,075
--------- ----------- ------------ ---------- -------------- -------------
--------- ----------- ------------ ---------- -------------- -------------
Additional Total
Paid-In Accumulated Shareholders'
Capital Deficit Equity (Deficit)
Balances at January 1, 1993 $ - $ (218,806) $ (34,946)
Dividends paid to Class A
Preferred shareholders - (5,184) (5,184)
Conversion of Class A
Preferred Stock to Common Stock - - -
Exercise of Common Stock options - - 425
Common Stock issued to
independent contractors - - 11,200
Conversion of promissory notes to
Common Stock - - 39,000
Conversion of employee deferred
wages notes payable to
Common Stock - - 55,149
Sale of Common Stock - - 129,945
Increase in the number of common
shares outstanding resulting
from 15 for 1 stock split - - -
Sale of Series A Convertible
Preferred Stock, net of $61,420
issuance costs 687,232 - 688,580
Net loss - (1,343,153) (1,343,153)
------------ --------------- --------------
Balance at December 31, 1993 687,232 (1,567,143) (458,984)
Exercise of Common Stock options - - 34,001
Sale of Series A Convertible
Preferred Stock, net of $7,293
issuance costs 242,258 - 242,707
Sale of Series C Convertible
Preferred Stock, net of $91,513
issuance costs 1,128,470 - 1,130,302
Dividends paid to Series A
Preferred Shareholders - (11,640) (11,640)
Net income - 452,713 452,713
------------ --------------- --------------
Balances at December 31, 1994 2,057,960 (1,126,070) 1,389,099
Exercise of Common Stock options - - 20,495
Net loss - (6,458,728) (6,458,728)
------------ --------------- --------------
Balances at December 31, 1995 $ 2,057,960 $ (7,584,798) $ (5,049,134)
------------ --------------- --------------
------------ --------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
CONNECTSOFT, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) $ (6,458,728) $ 452,713 $ (1,343,153)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for doubtful accounts 130,279 (22,950) 26,950
Depreciation and amortization 1,902,006 336,862 95,555
Inventory allowance 89,956 - -
Changes in:
Accounts receivable 1,221,682 (2,079,090) 84,131
Inventories (14,524) (187,413) (10,916)
Prepaid expenses 811 (13,540) 34,631
Operating lease deposits (21,334) (110,849) (8,232)
Other assets (220,000) (10,000) 31,079
Accounts payable 375,675 1,392,438 240,007
Accrued liabilities 207,219 87,664 395,441
Billings in excess of revenue earned (176,522) 588,810 -
-------------- -------------- --------------
Net cash provided by (used in) operating activities (2,963,480) 434,645 (454,507)
-------------- -------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (118,095) (346,749) (48,213)
Capitalized software development costs (733,708) (1,164,440) (361,694)
-------------- -------------- --------------
Net cash used in investing activities (851,803) (1,511,189) (409,907)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from line of credit 4,109,122 200,000 185,911
Payment of line of credit - (420,000) -
Proceeds from shareholder note payable - 545,000 40,032
Payment of notes payable to shareholders - (585,032) (193,082)
Proceeds from long-term debt - 800,000 -
Payment of long-term debt (500,000) (666,532) -
(Increase) decrease in restricted cash 536,495 (536,495) -
Bank overdrafts - 10,335 -
Payment of capital lease obligations (415,545) (86,089) (26,398)
Payments of notes payable to employees (8,052) - -
Issuance of convertible preferred stock, net of issuance costs - 1,373,009 688,580
Issuance of common stock 20,495 34,001 141,570
Payment of dividends - (11,640) (5,184)
Net proceeds from factored receivables 141,391 399,937 -
-------------- -------------- --------------
Net cash provided by financing activities 3,883,906 1,056,494 831,429
-------------- -------------- --------------
Net increase in cash 68,623 (20,050) (32,985)
Cash, beginning of year - 20,050 53,035
-------------- -------------- --------------
Cash, end of year $ 68,623 $ - $ 20,050
-------------- -------------- --------------
-------------- -------------- --------------
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 398,512 $ 240,011 $ 94,466
-------------- -------------- --------------
-------------- -------------- --------------
Noncash investing and financing activities:
Property and equipment acquired with capital lease obligations $ 1,970,876 $ 571,806 $ 44,200
-------------- -------------- --------------
-------------- -------------- --------------
Unpaid employee compensation converted to promissory notes $ - $ 5,625 $ -
-------------- -------------- --------------
-------------- -------------- --------------
Accounts and notes payable exchanged for common stock $ - $ - $ 94,149
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
CONNECTSOFT, INC.
NOTESS TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF THE COMPANY
Connectsoft, Inc., previously Adonis Corporation (the "Company") was
founded in 1988. The Company has been engaged in two primary business
activities as follows:
CONTRACT SERVICES: The contract services business was founded in 1988
and the Company grew to be one of the premier providers of MicroSoft
Windows-based contract programming services. These services were
marketed directly to the PC industry, peripheral manufacturers and
corporate information services departments. In 1996, the Company
discontinued this business.
RETAIL PRODUCTS: In 1990, the Company expanded the scope of its
business with the publication of Company developed application
software. Through retail products divisions, the Company markets a
family of Windows-based telecommunication programs for accessing on-
line information services. Included in the Company's line of products
are E-mail connection software and children's E-mail and internet
connection products.
PROPERTY AND EQUIPMENT
Furniture and equipment are stated at cost and depreciated using the
straight-line method over estimated useful lives ranging from 3 to 5 years.
Tenant improvements are depreciated over the term of the facility lease or
useful life, whichever is shorter. Expenditures for additions and
improvements are capitalized; expenditures for maintenance and repairs are
expensed as incurred. Gains and losses on assets, retired or otherwise
disposed of, are reflected in operations.
INVENTORIES
Inventories are stated at the lower of first-in, first-out ("FIFO") cost
or market and consist of the following at December 31:
1995 1994
Materials $ 211,124 $ 164,914
Finished goods 14,157 45,843
Obsolescence allowance (89,956) -
----------- ------------
$ 135,325 $ 210,757
----------- ------------
----------- ------------
6
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
RESTRICTED CASH
At December 31, 1994 the Company had a certificate of deposit in the amount
of $500,000 plus accrued interest which was pledged as collateral on long-
term debt. The CD had an interest rate of 4.75% and it matured on April
10, 1995. At December 31, 1994 the Company also had a certificate of
deposit in the amount of $30,812 plus accrued interest which was pledged as
collateral on a capital lease. The CD had an interest rate of 3.50% for
the first three months and was adjusted every three months thereafter and
matured on June 10, 1995. All of the Company's restricted cash was held at
one financial institution.
SOFTWARE DEVELOPMENT COSTS
Software development costs incurred in conjunction with product development
are charged to product development expense until technological feasibility
is established. Thereafter, all software product development costs are
capitalized and reported at the lower of unamortized cost or net realizable
value of each product. The establishment of technological feasibility and
the on-going assessment of the recoverability of costs require considerable
judgment by the Company with respect to certain external factors,
including, but not limited to, anticipated future gross product revenues,
estimated economic life and changes in software and hardware technology.
After consideration of the above factors, the Company amortizes capitalized
software costs for each software product using the straight-line method
over the estimated economic life of the software.
INCOME TAXES
Deferred tax assets and liabilities are recorded for differences between
the financial statement and tax bases of the assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is recorded for the amount of income tax
payable or refundable for the period increased or decreased by the change
in deferred tax assets and liabilities during the period.
FINANCIAL INSTRUMENTS
The carrying amounts of cash and accounts receivable approximate fair value
due to their short-term maturities. The carrying value of the Company's
line of credit balance approximates its estimated fair value because the
rate of interest on the line of credit approximates current interest rates
for similar obligations with like maturities.
7
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
REVENUE RECOGNITION
CONTRACT SERVICES: During the years ended December 31, 1995, 1994 and
1993, the Company entered into both "Time and Materials" and "Fixed
Bid" contracts with customers. Revenue on these contracts is
recognized using the percentage-of-completion contract accounting
method, or on a completed contract basis, in accordance with the
American Institute of Certified Public Accountant's statement of
position SOP 91-1, Software Revenue Recognition ("SOP 91-1").
RETAIL PRODUCTS: Revenue from sales of software products to end-users
and distributors is recognized upon product shipment, net of an
allowance for returns. The Company permits customers to return
products within certain specified periods. The Company also licenses
products to original equipment manufacturers ("OEM") and recognizes
royalties in accordance with SOP 91-1.
CONCENTRATION OF CREDIT RISK
The Company provides contract services to PC users and manufacturers, and
corporate information services departments who are located primarily in the
United States. Concentrations of credit risk with respect to trade
receivables are limited to the Company's diverse customer base. The
Company closely monitors extensions of credit and has never experienced
significant credit losses.
PRIVATE PLACEMENT AND ACQUISITION COSTS
During 1995 the Company incurred $441,623 associated with certain abandoned
equity offering and financing transactions. Such costs have been charged
to operations. Also, during 1995 the Company incurred $487,726 associated
with an abandoned acquisition transaction. Such costs have been charged to
operations.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ from
those estimates and assumptions.
It is reasonably possible that the estimates of anticipated future gross
revenues and the remaining estimated economic life of the Company's
products used to calculate amortization of software development costs may
be reduced significantly in the near term. As a result, the carrying
amount of the capitalized software costs may be reduced materially in the
near term.
8
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
RECLASSIFICATIONS
Certain balances in the 1994 financial statements have been reclassified to
conform to the 1995 presentation. These reclassifications had no effect on
the net income (loss) or shareholder's equity (deficit) as previously
reported.
2. ACCOUNTS RECEIVABLE:
At December 31, accounts receivable consisted of the following:
1995 1994
Receivables assigned to factor $ 182,833 $ 769,200
Less advances from factor (141,391) (399,938)
Funds in excess of reserve
requirements 3,125 24,595
----------- ------------
Due from factor 44,567 393,857
Accounts receivable 392,993 1,406,776
Allowance for doubtful accounts (134,279) (4,000)
----------- ------------
$ 303,281 $ 1,796,633
----------- ------------
----------- ------------
In May 1993, the Company entered into an agreement with an investment
company to secure short-term financing by factoring accounts receivable.
Under this agreement, the Company is permitted to receive up to 80% of pre-
approved receivables and 65% of retail product receivables assigned on a
recourse basis. The remaining balances are retained by the investment
company as a reserve against losses and are refunded to the Company
following receipt of Company's payment. Receivables sold are
collateralized by all owned assets of the Company and are personally
guaranteed by an officer of the Company. Approximately $2,775,000 and
$2,015,000 of accounts receivable were sold during 1995 and 1994,
respectively.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31:
1995 1994
Computer equipment $ 219,820 $ 126,184
Computer and other equipment under
capital leases 2,586,882 646,930
Furniture and fixtures 204,253 184,657
Tenant improvements 144,993 140,128
----------- ------------
3,155,948 1,097,899
Less accumulated depreciation and
amortization (includes
accumulated amortization of
capital leases of $565,153
and $115,212 for 1995 and 1994,
respectively) (815,398) (216,094)
------------ ------------
$ 2,340,550 $ 881,805
------------ ------------
------------ ------------
9
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. OTHER ASSETS:
During 1995 the Company entered into software license agreements with two
software development companies to use their software in products the
Company develops. The license fees under the agreements were $510,000 and
are amortized on a straight-line method over the estimated economic life of
the software products. The Company is also required to pay certain other
license and maintenance fees under the agreements which are expensed when
incurred.
5. LINE OF CREDIT:
On September 20, 1995, the Company entered into a $3,000,000 line of credit
agreement with a major customer, with interest at 17% and principal and
accrued interest due on December 31, 1995. At December 31, 1995, the
Company had borrowed $3,000,000 under this loan agreement.
On November 1, 1995, the Company entered into another loan agreement with
the major customer for additional borrowings up to a maximum of $3,000,000
with interest at 17% and principal and accrued interest due January 1996.
The note was personally guaranteed by the President and majority
shareholder of the Company and collateralized by a first lien on all of the
capital stock of the Company owned by the President and majority
stockholder. At December 31, 1995, the Company had borrowed $1,109,122
under this loan agreement.
In connection with the acquisition of the Company discussed in Note 12, the
line of credit debt was settled for $2,000,000 which resulted in debt and
interests forgiveness of $2,558,246.
6. LONG-TERM DEBT:
At December 31, 1994 long-term debt was as follows:
Term loan payable to bank, monthly interest
only payments bearing interest at the CD rate
plus 2% (6.75% at December 31, 1994) $ 500,000
Notes payable to employees, bi-weekly
principal and interest payments, bearing
interest at 18%, due in June 1995 8,052
----------
508,052
Less current portion (108,052)
----------
$ 400,000
----------
----------
10
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. COMMITMENTS AND CONTINGENCIES:
LEASE OBLIGATIONS
At December 31, 1995, the Company was obligated under capital leases for
computer hardware and other capital equipment and furniture utilized in its
operations. The Company also is obligated under operating leases for its
office space. Subsequent to December 31, 1995, the Company entered into
new operating lease agreements and modified the terms on other operating
leases. Future minimum lease payments under capital and operating leases,
including the new and revised leases, are as follows:
CAPITAL OPERATING
LEASES LEASES
1996 $ 1,068,865 $ 668,289
1997 971,018 661,720
1998 454,279 525,198
1999 15,204 394,564
2000 - 400,143
Thereafter - 349,492
------------- -------------
Total minimum lease payments 2,509,366 $ 2,999,406
------------- -------------
-------------
Less amount representing
interest (404,489)
-------------
Present value of net minimum
lease payments $ 2,104,877
-------------
-------------
Rent expense for 1995, 1994 and 1993 was $615,143, $299,537 and $139,820,
respectively.
CONTINGENCIES
The Company is involved in various legal matters arising in the normal
course of business. Although the outcome of these matters is not
determinable at this time, management believes that the ultimate outcomes
will not have a material adverse effect on the Company's financial position
or results of operations.
8. INCOME TAXES:
Due to net taxable losses incurred, the Company did not record any Federal
income tax expense or benefit for 1995, 1994 or 1993. Deferred income
taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
11
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. INCOME TAXES, CONTINUED:
The significant components of the Company's deferred income tax assets and
liabilities are as follows:
DECEMBER 31
-----------------------------
1995 1994
-----------------------------
Deferred income tax assets:
Tax loss carryforwards $ 2,177,727 $ 754,988
Capitalized software costs 276,045 -
Accrued liabilities 47,413 36,818
Allowance for doubtful accounts
receivable 45,655 -
Inventory 42,779 46,880
Other 8,290 5,938
-------------- -------------
Deferred income tax assets 2,597,909 844,624
-------------- -------------
Deferred income tax liability:
Depreciation (48,332) (5,400)
Capitalized software costs - (454,859)
-------------- -------------
Deferred income tax
liability (48,332) (460,259)
-------------- -------------
Valuation allowance (2,549,577) (384,365)
-------------- -------------
Net deferred income tax assets $ - $ -
-------------- -------------
-------------- -------------
As a result of the acquisition of the Company by American United Global,
Inc. in 1996 (see Note 12), there is a limitation of use on the Company's
tax loss carryforwards. Because of the limitation and because of the
Company's prior operating results, full valuation allowances have been
recorded at December 31, 1995 and 1994. The net deferred tax asset will be
realized when future taxable income is earned.
The Company has net operating loss carryforwards of approximately
$6,406,000 with expiration dates through fiscal year 2010.
9. CAPITAL STOCK:
RECAPITALIZATION: Effective September 23, 1993, the shareholders approved
a recapitalization of the Company's capital structure and increased
authorized shares of common stock to 30,000,000 shares. In addition, a 15-
for-1 stock split was authorized for all outstanding securities. The
recapitalization resulted in the conversion of 50,000 shares of Class A
preferred stock into common stock on a one-for-one basis and authorized
payment of dividends totaling $11,640 to the preferred shareholders.
12
<PAGE>
CONNECTSOFT, INC.
NOTES TO UFINANCIAL STATEMENTS, CONTINUED
9. CAPITAL STOCK, CONTINUED:
PREFERRED STOCK: On November 12, 1993, the shareholder's authorized
1,796,873 shares of Series A Convertible Preferred Stock and 600,000 shares
of Series B Convertible Preferred Stock. A shareholder has an option to
purchase the 600,000 shares of Series B Convertible Preferred Stock at
approximately $0.83 per share for a total investment of $500,000.
On December 14, 1993, the Company issued 1,347,655 shares of Series A
Convertible Preferred Stock to a corporate investor at approximately $0.55
per share.
On August 9, 1994, the shareholders authorized 2,412,625 shares of Series C
Convertible Preferred Stock and 5,667,368 shares of Series D Convertible
Preferred Stock. On August 9, 1994, a corporate investor purchased
1,832,632 shares of Series C Convertible Preferred Stock at approximately
$0.67 per share. In connection with the Series C Convertible Preferred
Stock financing, the Company issued 579,993 options to acquire Series C
Preferred Stock at $.67 per share to an existing shareholder, and extended
the expiration date of the 600,000 Series B options from June 30, 1994 to
60 days after the delivery of the 1994 financial statements. The Series C
options expire 60 days after the delivery of the 1995 financial statements.
The Board of Directors has the authority to issue Series D stock without
the consent of Series A and B stockholders. The Series D stock must be
issued for consideration of not less than $0.8333 per share, and is
convertible into not more than 5,667,368 shares of common stock as
determined by the Board of Directors.
The Preferred Series A, B and C Shares are convertible at the holders'
option any time up to December 31, 1999 into common stock of the Company on
a 1-to-1 basis. The conversion ratio will be adjusted under certain
circumstances, as defined by the agreements. Terms of the Preferred Stock
Purchase Agreement limit dividend payments, provide anti-dilution
protection, provide right of first negotiation on proposed equity and debt
financing and prohibit authorization of any senior class of equity
instrument without approval. Series A and B have the right, voting as a
class separate from the holders of common stock, to elect a director. The
holders of Series C, voting as a class, have the right to elect a director.
Series A, B and C have equal rights and rights ahead of Series D Preferred
Stock with respect to liquidation. In the event of liquidation, Series A,
B and C preferred shareholders will be entitled to receive an amount equal
to the purchase price for each share owned, dividends declared but unpaid,
and a premium amount equal to 12%, compounded annually, from date of
issuance on the purchase price of the preferred shares. Any assets
remaining after payment of the preferred liquidation preference, if any,
will be distributed to the holders of the preferred and common stock in
proportion to the number of common shares held after conversion
adjustments.
13
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. CAPITAL STOCK, CONTINUED:
On January 13, 1994, the same corporate investor purchased an additional
449,218 shares of Series A Convertible Preferred Stock at approximately
$0.55 per share.
EMPLOYEE STOCK OPTION PLAN
The Company has stock option plans which provide for nonqualified and
incentive stock options for officers, employees, directors and consultants.
Shares of common stock reserved for the plan total 5,750,000. Options
granted under the plan generally become exercisable, at a rate of 33% per
year from the date of grant, are dependent on the optionee's continuous
employment, and expire 10 years from the date of grant or three months
subsequent to termination. Stock options are issued at prices equal to the
estimated fair market value at the date of grant. Proceeds received upon
the exercise of stock options are credited to the common stock account.
Stock option activity and option price information for the years ended
December 31, 1995, 1994 and 1993, is summarized as follows:
OUTSTANDING STOCK OPTIONS
-------------------------
NUMBER OF OPTION PRICE
SHARES RANGE
Balance, January 1, 1993 2,449,875 $ 0.01 - 0.18
Granted 710,125 $ 0.20 - 0.67
Exercised (646,695) $ 0.01 - 0.20
Canceled (265,500) $ 0.13 - 0.27
-------------
Balance, December 31, 1993 2,247,805 $ 0.01 - 0.67
Granted 195,000 $ 0.67 - 0.83
Exercised (176,447) $ 0.13 - 0.67
Canceled (152,708) $ 0.13 - 0.67
-------------
Balance, December 31, 1994 2,113,650 $ 0.01 - 0.83
Granted 563,350 $ 2.80
Exercised (346,878) $ .01 - .83
Canceled (364,652) $ .20 - 2.80
-------------
Balance, December 31, 1995 1,965,470 $ 0.01 - 2.80
14
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. CAPITAL STOCK, CONTINUED:
EMPLOYEE STOCK OPTION PLAN, CONTINUED
At December 31, 1995 and 1994, 1,860,097 and 58,795 shares are available
for future grant. Total shares exercisable at December 31, 1995 and 1994
are 1,796,062 and 1,815,395, respectively.
10. 401(k) PROFIT SHARING PLAN:
Effective May 1, 1994, the Company adopted a 401(k) Retirement and Profit
Sharing Plan (the "Plan"). The Plan covers all full time employees who
have completed three consecutive months of service and are at least 18
years of age. Under the terms of the Plan, participants may contribute up
to 15% of gross wages up to the statutory limits. The Company made no
contributions to the Plan during 1995 and 1994.
11. MAJOR CUSTOMERS:
The Company's largest contract services customer accounted for
approximately 23% and 55% of total revenues in 1995 and 1994, respectively.
The Company's largest retail products customer accounted for approximately
63% and 29% of total revenues during 1995 and 1994, respectively. Revenues
from three principal customers from contract services in 1993 accounted for
16.1%, 17.2%, and 20% of total revenues.
12. SUBSEQUENT EVENTS:
In April 1996, the Company entered into a letter of intent agreement and
plan of merger with American United Global, Inc., a Delaware corporation
("AUGI"). The merger was completed with a final merger agreement dated June
28, 1996 and approved by the Company's shareholders on July 31, 1996.
Under the merger agreement, the record owners of all outstanding fully
diluted equity of the Company will receive a proportional amount of
1,000,000 shares of Series B Convertible Preferred stock of AUGI. The
record owners of all outstanding fully diluted equity of the Company prior
to the merger will be all stockholders of the Company after giving effect
to the conversion and exercises of warrants and vested stock options. The
AUGI preferred shares have a par value of $.01, do not pay a dividend, are
not subject to redemption, have a liquidation preference over AUGI's common
stock of $3.50 per share, vote together with AUGI common stock and are
convertible into AUGI common stock at a variable conversion rate depending
upon future income earned by AUGI from business operations engaged in by
the Company at the time of acquisition. The conversion rate can vary from
one-to-one to one-to-three.
In connection with the acquisition, AUGI paid certain debt of the Company
and agreed to make advances to the Company totaling $5 million including
amounts advanced at the time of the acquisition.
15
